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Lannett Company, inc (NYSE:LCI)
Q1 2022 Earnings Call
Nov 3, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Lannett Company Fiscal 2022 First Quarter Financial Results Conference Call. My name is Hilda, and I will be your operator for today. [Operator Instructions]

I will now turn the call over to Mr. Robert Jaffe, Investor Relations for Lannett. Mr. Jaffe, you may begin.

Robert Jaffe -- Principal and Senior Vice President

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 three 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?

Timothy C. Crew -- Chief Executive Officer

Thanks, Robert, and good afternoon, everyone. Thank you for joining the call. We have a couple of items of news to report today. In addition to issuing our fiscal 2022 first quarter financial results, we also announced a 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, 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, have been deteriorating more quickly than the declines we had anticipated.

This environment certainly reverses our pivot toward 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, first, consolidating our manufacturing footprint from two facilities to 1. This includes transferring liquid drug production to our main plant in Seymour, Indiana from our facility in Carmel, New York. And closing the Carmel plant once relevant products are transferred and pursuing its sale. We are already in active discussions with several potential parties.

Our Seymour plant will be strengthened in this process by increasing the technologies it supports and expanded its portfolio with smaller volume but decent margin liquid products, thus further optimizing our overall network. The second element of the restructuring plan involves the R&D function. This includes reducing headcount and eliminating development formerly dedicated to the Carmel site and discontinuing future development programs targeting liquid generic medications as we no longer see adequately scaled returns in that sector. We will also raise product threshold requirements and start internally developed products and API selection earlier. The goal of which is to focus on fewer, potentially larger market opportunity products and come to market as part of the so-called first wave of generics. We will continue to be a targeted generic manufacturer focused on attractive, select internal development areas where we believe we can successfully compete. But we will scale those investments to what the business can support today and continue to augment our pipeline with durable partnered assets like generic ADVAIR and insulin. And the third element of the restructuring plan is further rationalizing over time as we have in the past, certain lower-margin products.

This particular exercise primarily involves scaling back or phasing out some low-margin and low-volume OTC products that were made at Carmel and two very low-margin prescription products. Ultimately, the plan is expected to result in a workforce reduction of approximately 11% from current levels. Another 3% or so of the workforce, mainly at the plant, we expect not to replace as attrition occurs. Other existing vacancies will also not be filled. In total, we anticipate cost savings approximately $20 million annually. So now let's turn to our pipeline. While we tend to focus on the potentially transformational value of our durable pipeline, there are a number of interesting pipeline assets that could be launched before the end of next fiscal year, including subflooring, sulfate oral solution, sumatriptan and flutamide. And our business development team is hard at work to secure more. We currently have approximately 12 ANDAs pending at the FDA, including partner products, plus three additional products that are approved and pending launch. We also have more than 20 products in development and expect to add more from both external and internal efforts. With regard to our large, durable partnered product pipeline, I'll provide an update on two of the 5, starting with our generic ADVAIR DISKUS product.

The FDA provided mid-cycle disciplined review comments on the pending ANDA. And we are working to address the FDA's helpful comments and intend to respond to as many of the agency's request as possible before the FDA due dates. We expect to receive additional comments from the FDA on the FDA assigned goal date of January 31, 2022. As previously disclosed, we expect the product to undergo more than one review cycle. We believe and we're planning for a launch that is possible next fiscal year. I'd note the application approval is also contingent on a successful FDA inspection of the overseas facilities involved. The CRO site that conducted the bioequivalence and clinical studies has already been inspected by the FDA and the observations they shared, we believe are addressable. Given inspection backlogs due to COVID-19, we appreciate the parent -- priority FDA has assigned to these inspections. We have formally asked the FDA to schedule an inspection of the manufacturing site and look forward to their visit in the near future. Regarding our biosimilar insulin glargine product. We remain on track for submitting the investigational new drug IND application next month and commencing the pivotal trial around March 2022.

While there are always execution risks, we expect to launch this product in fiscal year 2024. In terms of our expectations for next year's clinical trial, we are not aware of a U.S. trial failure of a well-characterized biosimilar. And at this point, we believe our product is well characterized and highly similar based on the results of our structural and functional assays. Those assays have been early reviewed by the FDA. We are also seeing positive trends in formulary decisions for 2022, demonstrating payers continued effort to pursue affordable insulin. Express scripts has added Viatris' biosimilar and interchangeable insulin glargine, Semglee as a preferred product for 2022 on one of their formularies. In addition, Florida, Illinois and Texas have included Walmart's ReliOn insulin as a preferred product on their 2022 state medicaid formularies. We will continue to monitor how payers adopt biosimilar and interchangeable insulins as we develop our go-to-market plans. All five of the durable products in our pipeline are differentiated from the average oral generic product that are under the aforementioned industry pressures because of the significant technical expertise required for development and the substantial and largely dedicated plant investments needed to manufacture them.

So for all of these products, we expect only a handful of competitors and thus more durable value. Also, as noted on the last call, we are evaluating and in negotiations for additional market and product opportunities for insulin and drug device inhalation products. There continues to be additional multibillion dollar markets to pursue in these areas with both current and future partners. When combined with our targeted internal development efforts, we believe we have built and continue to expand an exciting pipeline of opportunities. One brief comment on legal matters. We have earlier reached a settlement agreement with Genus Lifesciences related to our Numbrino product. While the terms of the settlement are confidential, the various court challenges levied by Genus related to the product and our right to market it have all been dismissed. To sum up today's remarks, we have reported better-than-expected top line for the quarter. We have revised down our fiscal 2022 guidance to reflect the increasingly competitive environment for a base oral generics portfolio. However, our cash levels remain substantial. Our core strategies remain in place, and we have begun implementing restructuring plans to become a leaner, more focused organization. The plan is expected to be completed in approximately 18 months and generate annual cost savings of approximately $20 million.

Our pending generic ADVAIR DISKUS ANDA continues to make its way through the FDA review process. We expect to submit an IND application for biosimilar insulin glargine next month and commenced the pivotal trial around March of 2022. We anticipate both these and our other durable assets can contribute significantly to our future sales. And one final comment. We appreciate the frustrations our investors may have over the pressures we are now forecasting in our near-term results. We are keenly aware of our current stock and bond valuations. However, our optimism on future expectations remains quite high. Our durable pipeline of exciting opportunities are steadily progressing, and we believe we have the capabilities, discipline and resources to get them to market over the next few years. With that in mind, our management and our Board will continue to carefully consider various options looking to enhance investor value across the near, immediate and longer term.

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

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

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: first, as a result of our refinancing earlier this year, we did not have any required debt interest or principal payments in Q1; the second relates to timing of certain inflows and outflows of cash; and the third was the receipt of a prescription drug fee refund. Looking ahead, we expect to receive additional income tax refunds, continue to benefit from initiatives to improve our working capital, and we have no mandatory principal payments on our debt until maturity. Accordingly, we expect to maintain a healthy cash position of $80 million plus through the end of fiscal 2022.

As for our liquidity, we also have access to our $45 million credit facility, which to date, we have not drawn upon. Turning to our revised guidance. For fiscal 2022, we now expect net sales in the range of $370 million to $400 million, down from $400 million to $440 million. Adjusted gross margin, as a percentage of net sales, of approximately 19% to 21%, down from approximately 23% to 25%. Adjusted R&D expense in the range of $25 million to $28 million, down from $26 million to $29 million. Adjusted SG&A expense ranging from $55 million to $58 million, down from $58 million to $61 million. Adjusted interest expense of approximately $52 million, unchanged. The full year adjusted effective tax rate in the range of 22% to 23%, up from 21% to 22%. Adjusted EBITDA in the range of $22 million to $32 million, down from $40 million to $55 million. And lastly, capital expenditures to be approximately $10 million to $14 million, down from $12 million to $18 million. Regarding the phasing of the quarters, we expect net sales and adjusted EBITDA in Q2 to be lower than Q1, ramping up slightly in the second half of fiscal 2022, with Q4 net sales and adjusted EBITDA to approximate Q1. This reflects the new product launches we've previously discussed combined with the initial benefits from the cost restructuring. Gross margin to decline slightly in Q2 and Q3 from Q1. We expect Q4 gross margin to be higher than Q1 as the restructuring plan begins to take effect. And R&D expected to increase from Q1 and SG&A to decrease from Q1.

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

Questions and Answers:

Operator

[Operator Instructions] We have a question from Scott Henry from ROTH Capital.

Scott Henry -- ROTH Capital -- Analyst

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 -- Vice President of Finance and Chief Financial Officer

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 -- ROTH Capital -- Analyst

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

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

Again, the downside 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 -- ROTH Capital -- Analyst

Okay. And then contract manufacturing, not that 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 -- Vice President of Finance and Chief Financial Officer

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.

Timothy C. Crew -- Chief Executive Officer

I would note, Scott, it's Tim here, that toward 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 -- ROTH Capital -- Analyst

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 -- Vice President of Finance and Chief Financial Officer

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 -- in 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 -- ROTH Capital -- Analyst

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 -- Vice President of Finance and Chief Financial Officer

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 -- ROTH Capital -- Analyst

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 -- Vice President of Finance and Chief Financial Officer

Well, Scott, we'll 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.

Timothy C. Crew -- Chief Executive Officer

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 it comes into full effect later this year.

Operator

Our next question comes from Elliot Wilbur from Raymond James.

Tim Smith -- Raymond James -- Analyst

This is Tim Smith [Phonetic] 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 three to five years?

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

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 -- were 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 and 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.

Tim Smith -- Raymond James -- Analyst

Okay. Great. 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?

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

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.

Operator

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

Timothy C. Crew -- Chief Executive Officer

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

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Robert Jaffe -- Principal and Senior Vice President

Timothy C. Crew -- Chief Executive Officer

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

Scott Henry -- ROTH Capital -- Analyst

Tim Smith -- Raymond James -- Analyst

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