Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Lannett Inc (NYSE:LCI)
Q2 2020 Earnings Call
Feb 5, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Lannett Company Fiscal 2020 Second Quarter Financial Results Conference Call. My name is Adrian, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded.

I'll now turn the call over to Robert Jaffe. Robert Jaffe, you may begin.

Robert Jaffe -- Investor Relations

Thanks operator. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2020 second quarter financial results. On the call today are Tim Crew, our Chief Executive Officer and John Kozlowski, the company's Chief Financial Officer. This call is being broadcast live at www.lannett.com, and a playback will be available for at least three months on Lannett's website.

I'd 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 the US 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 2020 second 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.

This afternoon, Tim will provide brief remarks on the company's financial results as well as comments on recent developments and associated initiatives. Then John will discuss the financial results in more detail, including the company's fiscal 2020 guidance. We will then open the call for questions.

With that said, I will now turn the call over to Tim Crew. Tim?

Timothy C. Crew -- Chief Executive Officer

Thanks, Robert and good afternoon everyone. In some ways our second quarter performance serves as a microcosm of how we manage our business in our competitive industry, let me explain. Two years ago, we implemented a strategy designed to improve our in line product performance and supplement our internal product development efforts, with product acquisitions in licensing agreements. This strategy has helped expand our portfolio, add new revenue streams and diversify our product offering. In short, we injected near-term sales and profits into our business. The strategy has helped mitigate the impact of regular competitive pressures and we continue to demonstrate the success of our strategy, with well above market revenue growth.

With that as a backdrop, let's take a closer look at our fiscal 2020 second quarter financial results. Net sales of $136 million, or higher than expected, yet adjusted gross margin percentage for the second quarter was lower than we expected. Nevertheless, with our higher sales, gross profit dollars were only slightly lower than anticipated. Now comparing the second quarter results to our first quarter, both the top line and net income grew meaningfully. This is largely due to a full quarter of sales of Posaconazole, a key product that we launched late in our fiscal 2020 first quarter, as well as well as the launch of seven new products during the second quarter. The adjusted gross profit was lower in part due to a changing mix of sales, including lower fluphenazine related to the timing of customer orders and lost sales related to the Ranitidine recall in our cocaine solution withdrawal. The puts and take in this quarter illustrate on one hand, our success in launching new products and on the other hand, the various challenges inherent to our industry.

Turning briefly to our full year guidance. We have revised several elements in our outlook. The changes include higher net sales guidance and lower gross margin. Our expected adjusted EBITDA however remains unchanged. This guidance is based on certain assumptions, including first, the continuing durability of fluphenazine and Posaconazole sales. You may recall that we previously expected to see new competitors for both products sometime during the second half of our current fiscal year. We have reassessed the market for fluphenazine and now believe no new competitors are likely until the beginning of our next fiscal year. While for Posaconazole, we are forecasting competition to occur late in the fiscal year. Another item of note to our guidance is the planned launch of 10 or so additional products through the remainder of this year. John will discuss our financials, as well as our revised guidance in more detail shortly.

Regarding our "launch parade" as we have said our calendar launch year was back end loaded for this fiscal year. After single, but important Posaconazole launch in Q1 we have launched seven products in Q2, including prednisone, cyproheptadine, Clobazam, venlafaxine ER, Lidocaine 4%, and two dosage strengths of ABC capsules, excuse me BAC Capsules. And as just noted, over the balance of the fiscal year, we are planning to launch an additional 10 or so products.

Now for an update on some of the key products in our pipeline. About three weeks ago, we received FDA approval of our 505(b)(2) NDA for Numbrino, a branded local anesthetic product. Note, we have seen new stories that incorrectly described the product as a nasal spray. In fact, the product is a nasal solution. Numbrino is the first NDA approval in the company's history to include both safety and efficacy clinical trials. This is a major achievement for Lannett, I'd like to acknowledge our product development teams, regulatory teams, and operation teams for the perseverance and hard work over many years. We are producing the product at our Carmel, New York facility and expects to ship the product shortly. Our near-term goal is to regain customers that used our previously sold cocaine hydrochloride product, positioning ourselves as a consistent and reliable supplier. And we are now of course analyzing marketing and managed care opportunities based on our approved label.

We further expect to launch generic Adderall XR for [Indecipherable] and methadone [Phonetic] oral concentrate in the coming months. We expect these and several other products to continue to contribute to our aggregate results.

Now regarding our internal pipeline. We have been working hard at improving our effectiveness and tuning our product selection process. We are now choosing products with notably more expected future value based on our expanding capabilities and we currently have more than 20 products in development. We also have about 14 additional products that Lannett has earlier filed with the FDA, plus another seven or so products that are approved and pending launch. Encouraging hidden statistic in our recent average FDA submission to approval timelines, for approved ANDAs has been a reduction by more than 50% to 15 months. The statistic relates to just three files are approved in FY '19 from those filed in just FY excuse me, the statistics relates to just three files that are approved in FY '19 from those files submitted in FY '18 and as compared to a larger set of approvals that occurred in earlier years. But we believe that is an indicator of our improving quality in R&D throughput.

Turning to some of the larger and more sustainable products in our partnered pipeline. In December, we announced positive results from a human PK/PD clinical trial or insulin biosimilar project, with our partner HEC. As a reminder HEC is making substantial operational investments in global insulin platform. Insulin glargine is one of the largest addressable US markets in which Lannett has ever potentially participated, with reported sales greater than $6 billion. The study which compared HEC's insulin glargine to US Lantus met all primary endpoints. We expect to send the FDA our briefing book over next few weeks and meet with them later this fiscal year to review the development plan for what additional studies are needed, based on an in-depth review of the biosimilar data we have in hand. As you may be aware, the FDA has made several announcements this past year that seek to facilitate biosimilar filings. So we look forward to sitting down with them soon.

We also remain excited about the other significant and sustainable product opportunities that are progressing in our pipeline. Generic ADVAIR, another project with our partner Respirent is investing heavily in their global program, is another one of the largest US markets in which Lannett has potentially participated. The product is currently a confirmatory PK/PD trials, which are proceeding nicely. We expect to file that product ANDA later this year. And last but not least, we currently expect to launch an approved levothyroxine product currently sold by another party no later than August of 2022.

In a slightly different vein, we have been pleased with our progress on some litigation matters and have a brief update. First is related to a class action lawsuit filed in October of 2018 against the company and two of its officers. The court granted preliminary approval of the settlement in July of 2019 and the hearing is scheduled in a few days to request the court's final approval to settle the litigation. Under the proposed settlement, the company has agreed to pay $300,000 without the admission of liability. The second update is related to some shareholder derivative lawsuits filed last summer against certain former and current officer and Board members of the company. In this matter, we have reached an agreement in principle to resolve the consolidated and related cases. The settlement, which is subject to court approval proposes Lannett adopt some new corporate policies and pay $600,000 legal fees in exchange for release of all liability. Bringing these cases to conclusion should help reduce some recent growth in our legal fees and we continue to look for ways to resolve other pending litigation on terms acceptable to the company.

Now looking beyond our quarterly variances, daily operational discipline and recent growth. The company has begun to refresh its five year strategic plan on where and how to compete as a midsized company in the large and growing US generic medicines market. We have set for ourselves an ambitious goal to become a $1 billion healthcare company. This means we need to grow at about a 15% CAGR. As we estimate the future value of the products we have now and what we expect of our existing pipeline, particularly if we are successful, with a more sustainable assets in development and what more we need to do, when we add all of that up, we believe we are well on our way to achieving our goal. We believe we are positioned for success with our dynamic teams, our creative partnerships, our operational discipline and especially our organizational nimbleness and reliability, which is greatly facilitated by a Made in America Foundation far less encumbered by the global complexity that plagues many of our competitors.

To sum up, we reported net sales and net income growth in our second quarter versus the preceding first quarter based on strong sales across multiple product categories. We successfully introduced eight new products in the first half of fiscal 2020 and expect to launch approximately 10 more in the second half of the year. The planned launches include Numbrino, our first NDA approved product to include full clinical trials. Our adjusted EBITDA outlook for the full fiscal year 2020 remains unchanged. We have raised net sales guidance based on the strength of our existing product offering and expect new product launches. We've also slightly lowered our expectations for gross margin based on our emerging sales mix and competitive pressure for certain products. We continue to advance our pipeline of sustainable large market opportunity products and we continue to work on additional opportunities to build strategic alliances with partners that have complementary products and capabilities. Again, our goal is to become a $1 billion healthcare company and achieve top line compounded annual growth rates well in excess of the industry.

With all of that. I turn the call over to John. John?

John Kozlowski -- Vice President of Finance and Chief Financial Officer

Thanks Tim, and good afternoon everyone. As was mentioned earlier, I will be referring to non-GAAP financial measures, the reconciliation of the GAAP to non-GAAP numbers can be found in today's press release. A quick note before I begin, as most of you know, in March of last year our supply agreement with Jerome Stevens for Levothyroxine expired. So in addition to providing year-over-year comparisons, I'll include some color comparing our second quarter financial results to our fiscal 2020 first quarter.

Now for the financial results on a non-GAAP adjusted basis. For the 2020 second quarter, net sales were $136.1 million compared with net sales for the second quarter of last year of $193.7 million. Excluding Levothyroxine, net sales in Q2 of last year were $105.2 million. Q2 net sales increased by $8.8 million over Q1 net sales of $127.3 million, largely due to a full quarter of sales of Posaconazole as well as higher sales across several other product categories.

As Tim mentioned, we launched seven new products during Q2, generating only a partial quarter of sales. Fluphenazine sales were lower in Q2 than Q1 due to the timing of orders. However, we expect Q3 and Q4 sales of our anti-psychosis product category to be closer to Q1 sales of approximately $28 million. Gross profit was $50.2 million or 37% of net sales compared with $86.0 million or 44% of net sales for the prior year's second quarter. Again, the second quarter of the prior fiscal year included significant sales of Levothyroxine, a product that had a higher than average gross margin. Compared with the first quarter gross margin of 41%, our gross margin in Q2 declined largely due to sales mix with lower sales of fluphenazine and no sales of our withdrawn cocaine topical and Ranitidine products. All three of these products are high gross margin products. Gross profit dollars were down only slightly.

Interest expense decreased to $13.1 million from $17.1 million dollars in last year's second quarter, due to repayments of Term A and Term B loans as well as the lower fixed interest rate on our senior convertible notes.

Net income was $11.7 million, or $0.27 per diluted share. This compares with net income of $33.6 million or $0.86 per diluted share for the fiscal 2019 second quarter. Compared with the first quarter net income of $8.8 million, net income for the second quarter increased by approximately $2.9 million. And Q2 adjusted EBITDA was $35.8 million, an increase from $35.1 million in Q1.

Turning to our balance sheet. At December 31, 2019 cash and cash equivalents totaled approximately $119 million. Our outstanding debt at the end of the quarter was as follows. Total debt was approximately $741 million, and debt net of cash was $622 million, and net secured debt was $536 million. We continue to expect to be within our financial covenants, up to the maturity date of the Term A loans.

Regarding our refinancing activities. We continue to evaluate opportunities and market conditions to refinance our secured debt. As a reminder, this past September, we completed a senior convertible notes transaction, which among other things enhanced our capital structure and provided greater financial flexibility. In addition, our current cash position exceeds the outstanding balance of our Term A loans, which mature later this year in November. As of December 31, 2019 the balance of the Term A loans was approximately $63 million. At June 30, it will drop down to approximately $49 million and by the maturity date the outstanding balance of the Term A loans will be approximately $42 million.

Turning to our guidance. We have raised our net sales and lowered our gross margin estimates for the full fiscal year. We also revised slightly downward our interest expense and tax rate. The net result of these changes is not expected to have an impact on our estimated adjusted EBITDA for the full fiscal year. Our guidance is as follows: net sales in the range of $530 million to $550 million, up from $525 million to $545 million; adjusted gross margin as a percentage of net sales of approximately 39% to 41%, down from approximately 40% to 42%; adjusted R&D expense in the range of $34 million to $36 million, unchanged; adjusted SG&A expense ranging from $63 million to $66 million, unchanged; adjusted interest expense in the range of $51 million to $53 million, down from $54 million to $56 million. The full year adjusted effective tax rate in the range of 21% to 22%, down from 22% to 23%, adjusted EBITDA in the range of $145 million to $160 million, unchanged; and lastly, capital expenditures to be approximately $20 million to $25 million, unchanged.

Regarding the phasing of the quarters, we expect net sales in Q3 to be flat slightly lower than Q2 and increasing in Q4, due to new product launches. With regard to gross margin, we expect Q3 to be slightly higher than Q2 based on product mix. We expect EPS and adjusted EBITDA in Q3 to be in line with Q2 and increasing in Q4.

With that overview, we would now like to address any questions you may have. Operator?

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Matt Hewitt from Craig Hallum Capital, your line is open.

Matt Hewitt -- Craig Hallum -- Analyst

Good afternoon and thanks for providing the update and especially the guidance cadence here for the back half of the year. I guess my first couple of questions regarding Numbrino, the launch is pending soon, how quickly do you think you can get back to where you were prior to pulling the product from the market? And then follow-up to that is, given your success with the trial process and in some of the nuances of getting that product to market, does that give you confidence to seek other similar type markets where you would have to go through a similar process?

Timothy C. Crew -- Chief Executive Officer

Good evening, Matt. Thanks for the follow-up. We expect to launch Numbrino in the next few weeks, long end of the range and our target as we indicated in the prepared remarks is the recovery of former customers that used to purchase the unapproved product, again focusing on our long history of reliable supply and high product quality. We will look to explore other opportunities afforded by the approved label in due course, but our expectations in the fairly near-term is to get back into the range of perhaps $1 million a month for that product.

As it relates to other sorts of 505(b)(2) products, we are primarily focused in the oral generic space as we have often discussed and have been looking to work with partners for other technologies and other capabilities. For example, the biosimilar filings that we're working with on HEC. So I'd expect on a go-forward basis, we're open to products that are outside the traditional oral generics, which is the mainstay of therapy here in the United States, but we'll do it very carefully and probably only with the partner in areas that have a retail orientation to that brand.

Matt Hewitt -- Craig Hallum -- Analyst

That's very helpful. Thank you and then maybe one more for me and I'll hop back in the queue. Obviously, there has been a ton of news here recently about coronavirus. I'm just wondering if you could detail for us maybe any exposure that you have either on the revenue side, where you -- either from a hit perspective or more importantly, I guess, whether or not there's some opportunities for you to take advantage of -- to kind of help with the situation and from the API supply standpoint, whether or not there is any potential for impact there? Thank you.

Timothy C. Crew -- Chief Executive Officer

We're in touch with all of our key suppliers, both finished dose and API. We, of course, start with an expression of sympathy and support regarding the situation in their home market. But while there has been some travel restrictions, including our own teams all of our suppliers have indicated no concerns with any delivery interruptions over the near term under current expectations. As a practical matter these outbreaks is awful as they may be typically will have some number of weeks, but our inventories last some number of months. And those inventories exist, in fact at some level, to be able to cover such sporadic and unpleasant events like these.

We will notice in terms of helping the other direction. We have the only ANDA of [Indecipherable] solution in the market, but it's a fairly small market, we have a partner considering it for import, but on a global stage, there are obviously numerous forms of these act is available globally. And so I wouldn't expect to see any material change to our opportunities from this outbreak. We are more interested in supporting our partners and continue to supply the products we have in market.

Matt Hewitt -- Craig Hallum -- Analyst

Understood. Thank you very much.

Operator

And your next question comes from Gary Nachman from BMO Capital. Your line is open.

Gary Nachman -- BMO Capital Markets -- Analyst

Hi guys, good afternoon. Tim, first, what's the status of Ranitidine, when you might be able to bring that product back to market? Are you assuming it will be this year? And are you on track for the $75 million contribution from new products this year? And then, how much did Posaconazole contribute in the quarter? You gave us that number last quarter, that would be helpful.

Timothy C. Crew -- Chief Executive Officer

So good evening Gary. For Ranitidine, we are still evaluating API that would meet the FDA requirements. But quite frankly, we don't have expectations of relaunching that product anytime soon. We think that the market may move a bit to other therapies, we'll continue to monitor that based on the FDA's guidance and expectations and the underlying chemical structure of that product. So it's not something that we anticipate returning to the market under the current conditions and situation.

Regarding our new product launch goal, we have often stated that we look to launch 20 or so products a year with $70 million, $75 million of value. We're clearly well on target for that goal this year. We're launching numerous single digit million dollar products, but we've also launched a much larger Posaconazole. So we're pretty comfortable that we'll be well within that achievement this year, it's why we remain on track for our guidance despite other challenges that occur.

Gary Nachman -- BMO Capital Markets -- Analyst

And Posaconazole?

Timothy C. Crew -- Chief Executive Officer

Posaconazole itself is around --.

John Kozlowski -- Vice President of Finance and Chief Financial Officer

This is John. It's always around $40 million. You can see the infectious diseases increased in Q2 from a full quarter of Posaconazole.

Gary Nachman -- BMO Capital Markets -- Analyst

Okay. And are you expecting that it's going to stay sort of at that level over the course of the year so, I mean if I do the quick math, it seems like a big chunk of that $75 million is coming from Posaconazole this year, is that the right way to think about it?

Timothy C. Crew -- Chief Executive Officer

It is a big chunk of the total. There are 20 products that have single to mid-digit, single-to upper single digit millions of contribution over the course of a 12-month horizon. Certainly for this year, Posaconazole will be the largest contributor to that $75 million product goal we've always talked about a portfolio of launches that have those puts and takes. Regarding its forward looking expectation, we are currently in our guidance expecting a competitor late in the fiscal year. I should be clear, we don't have any knowledge of an imminent competitive threat, but from the risk adjusting to doing our forecast that's where we placed it. If that forecast assumption is optimistic, we'll have more pressure. If that forecast assumption is conservative, we'll have upside.

Gary Nachman -- BMO Capital Markets -- Analyst

Okay. And then just last question, Tim. With your target of a 15% revenue CAGR over the next five years or so, how should we think about gross margin trending over that period of time, to the extent that a portion, probably a decent portion of that growth is going to come from partnerships. So we saw a little bit more weakness in gross margin than we thought in the second quarter. So how are you thinking about balancing that revenue growth with the gross margin and just making sure that you maintain it at a certain level? Thanks.

Timothy C. Crew -- Chief Executive Officer

Yes. As we've stated on numerous calls, we always try to focus fundamentally on gross margin dollars. That being said, we obviously prefer to have more wiggle room with our gross margin percentages, but in general, over the planning period we would think that our gross margins with the percentage of partner products of some scale, would be in the 30s at some point over a protective [Phonetic] period of time. I think that sort of margin, to my mind is reflective of industry of a balanced portfolio. And again the margin dollars could be substantial in some of these partnered products, even if the margin percentage is not as high as some of the historical gross margins we've delivered.

Gary Nachman -- BMO Capital Markets -- Analyst

Okay. And I mean, can I push you a little bit, when you say the 30s, is mid 30s, the place where it could settle over the course of time. Is that a reasonable place to think about it?

Timothy C. Crew -- Chief Executive Officer

I think if we're a $1 billion healthcare company, with a 35% gross margin, we'd be pretty pleased, yes.

Gary Nachman -- BMO Capital Markets -- Analyst

Okay. All right, great. Thank you.

Operator

And your next question comes from Gregg Gilbert from SunTrust. Your line is open.

Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst

Thanks, good afternoon guys. I want to start with gross margin percentage. Recognizing there is a mix effect that affected the quarter. John, can you talk about anything else going on in gross margin, that might be more permanent in nature not related to mix, permanent or temporary let's say, writedowns on inventory temporary or more permanent sort of pricing that you won't get back maybe talk a little more about the non-mix effect within gross margin.

John Kozlowski -- Vice President of Finance and Chief Financial Officer

Hi, Gregg. Well, when we look at Q2, it really was sales mix, declined from 41% in Q1 was related to the fluphenazine, which we talked about, but also the removal of the cocaine solution and the Ranitidine. As we talked a little bit earlier, we expect gross margins actually to come up a little bit in Q3 and then again in Q4. So when we look at Q2, it really was just a -- overall a result of our mix of products.

Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst

Okay. And then Tim on your billion dollar comment, I want to ask you about gross margin, but I will ask you about the $1 billion. Maybe you could further characterize how you get there? You know I'm sure folks are wanting to understand how much of that is bird in hand stuff you have or agreements you have, maybe you could put a little more meat on the bones, as it relates to your ability to get to a $1 billion in five years, which is surely much higher than most folks are modeling.

Timothy C. Crew -- Chief Executive Officer

I'd hope that I was maybe clear enough in the prepared remarks, but listen we are running ahead of the 15% CAGR as we noted for this year. And the pressure on that CAGR is really on the outer years as you start compounding, which is the same time, some very large market [Indecipherable] products that we have in our portfolio believe will come online. I mean we are not going to assume it's the only way to get there, but the contribution of an insulin glargine, if successful makes that CAGR conversation pretty much not a consideration or concern. It's really more about building out diversified portfolio in terms of that CAGR or that product taking longer than you might think. We are looking to add additional products in that space, with our partners in that arena.

As we said in the prepared remarks, when we look at what we have in hand, what we look at in our development pipeline. The quality of that development pipeline, the progression of pipeline, this isn't taking a swag at some percent of the total market. It's built on a product by product basis, with some gaps to go to achieve those goals along the way. Some of those gaps involve products we have not yet filed that we will file over the three years or four years, that need to come into our portfolio and launch and get some shares. So we feel it's a rallying cry for the organization that is reflective of the capabilities we're building, the size of the market we operate in and the number of projects we have in hand and the number products we see line of sight to. So that's why we put that out there as our goal.

Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst

Okay. Maybe Tim, I can get you lastly to just comment on industry conditions at the moment after a couple of years of extreme consolidation of the buyer set. What's the latest tone that you're sensing in terms of the intensity of pricing pressure and frequency of bids, etc.? Thanks.

Timothy C. Crew -- Chief Executive Officer

Well, I've made the comment on several occasions that we don't feel that we observe in our portfolio is indicative or useful to an industry statistic. We've always believed and continue to believe that the pricing pressures we experience are relevant to the products in our mix in the portfolio and I believe that pricing pressure has always been related to the number of competitors that are on the products in which you compete with. So we haven't seen any change in that dynamic. We have better quarters and worst quarters based on competitive activity or lack thereof as it relates to that portfolio.

On the other side of it in terms of more strategic conversations, we still don't see a lot of strategic buyers in that market or at least not sellers willing to provide their assets at the price point a buyer might be interested in and we see perhaps even fewer strategic partners. So from our perspective, our offering continues to resonate well with both existing and new partners. And I note that most of our partners are looking to do more with us, which means less with somebody else, which further helps our relative outperformance in the market. So at the end of the day, I think the market looks similar and it's always been tied to competitors. You point to a supply disruption, I will point to improved pricing. You point to a supply glut, I will point to supply declines and that is a portfolio by product conversation to my view.

Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks a lot for the color.

Operator

And your next question comes from Elliot Wilbur from Raymond James. Your line is open.

Elliot Wilbur -- Raymond James & Associates -- Analyst

Thanks, good afternoon. Tim, just want to go back to your earlier commentary around the outlook for fluphenazine. Just curious what gives you increased confidence that you're not going to see additional competitive entries before the end of your fiscal year? Is that based on feedback from customers or is there something more related to API or the regulatory pathway that maybe gives you that visibility? And then just extend that a little bit and sort of talk about, are there any potential more significant longer term barriers to entry that might limit the number of eventual competitors in that particular product?

Timothy C. Crew -- Chief Executive Officer

All right. Good evening, Elliot. I want to restress that we have a smooth sailing today with fluphenazine remain the only end on the market. Our competitive intelligence is tied to competitive intelligence, it's not based on some underlying got you, relative to structural inability for competitors to compete. It is based on, we're sitting here in January, we are constantly searching and trying to understand the status of other files and our vision to that is not being pushed out many months, we're talking June, July, as opposed to where we sit here today in January. So again we're not aware of an imminent threat, but we don't see enough structural reasons to preclude people from coming in due course and there is always some drumbeat out there of potential players. We just don't see them in the immediate near term.

The product by the way does have some high handling requirements. That is a little bit different in our plant. We're gowned up and there is oxygen masks right for that product. So it's not just simply made in a regular oral room, but it doesn't have any sort of inordinate technological barriers. So we are, pragmatically expecting as we've always done. That our goal to grow is to launch new product launches because inevitably we'll have a decline of our in-line portfolio. We see that coming in the relatively near term, but not tomorrow.

Elliot Wilbur -- Raymond James & Associates -- Analyst

Okay, thanks. And I want to ask an additional competitive intelligence question around the ADVAIR opportunity and specifically with respect to Sandoz recent decision to withdraw their filing and terminate that program. I guess quite surprising to many of us who follows that for several years now considering their investment and we seem to be sort of well past kind of go no-go decision on that, not knowing of course what the FDA asked for, but just wondering based on the limited amount of time and the information that is probably emerged since that announcement, if there has been anything from your perspective that might lead to some learning lessons around what you may do with your filing going -- going forward?

Timothy C. Crew -- Chief Executive Officer

So with regard to ADVAIR, we are working with incredibly experienced team on the Respirent side. And they're working with a team that's looked at a lot of applications from a lot of different companies over the years. So we feel we have a pretty good sense of the pinch points in what's required to develop this asset. We may be a small company, but Respirent is investing very heavily in the infrastructure issues that were necessary and we are impressed with the progress that they understand. I think we've talked earlier that the clinical programs are always a little less of the trick here, and I think the European filing that Sandoz had out there was based more on the clinical efforts they have done in terms of efficacy clinicals. It's always been the PK/PD that has been the challenge and the guidance that's come from the FDA in these sorts of products. We have always felt since we've signed up with these folks that they are one of the players and we're pleased to see that market tightening. We believe we may continue to gain ground in some of the folks that are in front of us. We don't think we are next up in the market, but we think we could be much closer to the competitive sets that are more pronounced and more visible. So we're excited about the position we hold. We'll hopefully have some good news to report in the coming quarter regarding our PK/PD and then we'll be able to better assess what our position is in the competitive line up, but we're feeling pretty good that we've got the right partner, and the right product, and the right plan, but time will tell.

Elliot Wilbur -- Raymond James & Associates -- Analyst

Okay, thanks. And just one final question. Going back to some of your earlier commentary around the Numbrino relaunch and the opportunity there, just the last couple of quarters you guys have consistently sort of gauged expectations around the asset in terms of your ability to essentially recapture the sales that the company was generating from the -- the unapproved product. At various points along the way during the development of this asset, the company had indicated that there were potentially much larger opportunity around the product via some form of promotional strategy and you guys -- doesn't seem to be something you guys have kind of [Indecipherable] as of yet. So I'm wondering if you -- you really had kind of a chance to sort of fully vet a potential direct sales force, enhanced promotional strategy, tied to -- tied to this asset versus just what you have talked about more recently in terms of just kind of getting back to where you were?

Timothy C. Crew -- Chief Executive Officer

So Elliot, I think some of the higher potential number that someone might speak to in the past has looked at the number of uses of this sort of product in that sort of space, but as an approved product you need the label to support it and I think to get to the more significant percentages that have been one point in the company's history been considered, you need to invest very heavily in clinical trials that would be successful to achieve an indication to allow promotion that would achieve this higher penetration of a share of market. So we're a bit more pragmatic again on existing use at a fairly low share basis, focused initially on our trading partners that we believe will appreciate our history of a liable supply and a high quality product to recover something that for us is still a high margin product that has durability to it. So we're pleased about that sort of component of the opportunity. We do think there can be some opportunities to think about how this product is used within its label, how it gets reimbursed at the operating level of the hospitals, or the surgeons that are using the product that might facilitate an easier utilization of the product, but we are early in the stages and our forecasts are currently tied to a number that is more reflective of our historical past. And once we have that wrapped up and locked and loaded, we will look to for incremental investments, but we do want to modify those expectations over time.

Elliot Wilbur -- Raymond James & Associates -- Analyst

All right, thanks for taking the questions.

Operator

And your next question comes from Scott Henry from Roth Capital. Your line is open.

Scott Henry -- Roth Capital Partners -- Analyst

Thank you and good afternoon. A couple of questions, starting with some of the line items, anti-psychosis was a little weaker than it has been or in the past couple of quarters, how should we think about that going forward, do you expect it to -- and I'm just talking about this year, I recognize that fluphenazine is in their longer-term, but how should we think about that sequentially the next couple of quarters.

Timothy C. Crew -- Chief Executive Officer

So for the anti-psychosis that came down in Q2, we talked about that being really about the timing of orders. We expect Q3 and Q4 to be more in line with Q1 and around $28 million.

Scott Henry -- Roth Capital Partners -- Analyst

Okay, thank you. And then other lines that jumped out at me gastrointestinal, stronger than any of the past five quarters and it was strong in Q1 and it is even stronger Q2, how should we think about that for the rest of the year? Should it maintain those levels or drop back down?

John Kozlowski -- Vice President of Finance and Chief Financial Officer

That actually we will be dropping back down slightly. We saw some strong sales specifically from like Pantoprazole in Q2, but we're modeling that to come down in Q3 and Q4.

Scott Henry -- Roth Capital Partners -- Analyst

Okay and then just logistical question as far as how you calculate the EPS with the convert in there or the interest add back, what kind of adjustment, are you making to adjusted net income to get to your EPS? And should that be relatively constant going forward?

John Kozlowski -- Vice President of Finance and Chief Financial Officer

Yes, on the EPS calculation it's -- the adjustments are really on the overall share count, adding back the effect of the convert and then backing out the interest associated with the convertible note. We can -- we could actually go through that if you like in some greater detail, but that's essentially how you get to the adjusted EPS.

Scott Henry -- Roth Capital Partners -- Analyst

Yeah, and I expect to see that in the 10-Q, obviously, but could you just tell me what the back out of interest is just for calculations, just to get a sense --?

John Kozlowski -- Vice President of Finance and Chief Financial Officer

For the quarter?

Scott Henry -- Roth Capital Partners -- Analyst

Generally, yes.

John Kozlowski -- Vice President of Finance and Chief Financial Officer

It's about $1 million.

Scott Henry -- Roth Capital Partners -- Analyst

Okay, great. That should do it for me. Thank you for taking the questions.

Operator

And this concludes the question-and-answer session. I'll now turn the call back over to management for final remarks.

Timothy C. Crew -- Chief Executive Officer

All right, it's Tim again. I'll close out with our customary shout out to our employees, customers and partners, who are working hard -- so hard to provide high quality, low cost medicines for patients. We look forward to sharing our progress on our next call. Good night.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Robert Jaffe -- Investor Relations

Timothy C. Crew -- Chief Executive Officer

John Kozlowski -- Vice President of Finance and Chief Financial Officer

Matt Hewitt -- Craig Hallum -- Analyst

Gary Nachman -- BMO Capital Markets -- Analyst

Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst

Elliot Wilbur -- Raymond James & Associates -- Analyst

Scott Henry -- Roth Capital Partners -- Analyst

More LCI analysis

All earnings call transcripts

AlphaStreet Logo