Lannett Company Inc (LCI) Q4 2021 Earnings Call Transcript

Lannett Company Inc (NYSE: LCI) Q4 2021 earnings call dated Aug. 25, 2021.

Corporate Participants:

Robert Jaffe — Owner

Timothy C. Crew — Chief Executive Officer

John Kozlowski — Vice President of Finance and Chief Financial Officer

Analysts:

Michael Parolari — Raymond James — Analyst

Matthew Hewitt — Craig-Hallum Capital Group — Analyst

Presentation:

Operator

Welcome to the Lannett Company Fiscal 2021 Fourth Quarter and Full Year Financial Results Conference Call. My name is Adrianne, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note this conference call is being recorded.

I’ll now turn the call over to Robert Jaffe, Investor Relations for Lannett Company. Robert Jaffe, you may begin.

Robert Jaffe — Owner

Good afternoon, everyone. And thank you for joining us today to discuss Lannett Company’s fiscal 2021 fourth quarter and full year 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 insulin biosimilar 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 will refer to non-GAAP financial measures that are not prepared in accordance with US Generally Accepted Accounting Principles and maybe different from non-GAAP financial measures used by other companies.

Investors are encouraged to review Lannett’s press release announcing its fiscal 2021 fourth quarter and full year 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 hope you remain safe and well as we all manage through the persistency of the pandemic. I’ll start today reviewing some of the highlights of the past year that are relevant to our future before turning to the key elements we see in that future.

First and foremost, in 2021, we continued to launch products and build our future portfolio. We launched about a dozen new products, highlighted by a few significant contributors, including Levothyroxine tablets, Levothyroxine capsules and Clarithromycin. The products we launched last year added new revenue streams and further diversified offerings, reducing our exposure and reliance on key products. We also grew our base product pipeline with continued investment in a robust internal product development program. For example, our recent Mycophenolate approval was achieved in just under 10 months, the third such product we developed to achieve so called first cycle approval in the past few years.

We have made great strides in our internal efforts including significant changes to our portfolio selection. Such changes take time to be fully reflected in our financials, but we believe meaningful value is being built. Further, we are working on our existing strategic alliance partners to expand our agreements to include new products. For example, this past year Insulin Aspart was added to our HEC agreement, and more recently, generic Spiriva, Handihaler was added to our Respirent agreements. Together these products represent multi-billion dollar markets with relatively few competitors expected. We also formed a new strategic alliance partnership to launch Sevoflurane, a product with relatively few competitors and a market size of about $190 million based on IQVIA data. We look to launch Sevoflurane in the back half of the fiscal year.

The second key accomplishment last year was even while we launched new products and grew our pipeline, we also maintained firm control over expenses and exhibited operating discipline. We implemented and completed the cost reduction plan that included consolidating our R&D functions to a single location and lowered operating costs by approximately $15 million annually.

The third key accomplishment was that we significantly improved our capital structure. This last year, we paid off our Term A loans with cash on hand and later successfully completed a full refinancing transaction of the Term B loans.

The refinancing transaction as we have often highlighted was significant for several reasons. First, we extended the maturity of our debt to 2026 from 2022, which is now after several of our larger and more meaningful pipeline assets are expected to launch and contributed to a reduction in our debt. Second, we upsize our credit facility and substantially freed up cash flow, primarily due to the elimination of mandatory principal payments until maturity. Third, the new debt does not have any leverage covenants. Fourth, as a result of this refinancing, in combination with working capital initiatives, we have improved our cash position. Thus, we now have more ready resources to invest in growth opportunities.

Of course, another accomplishment to note was in our teams, particularly in our plants and labs, showed up to work every day throughout the pandemic and maintained a reliable supply of our affordable medicines. This, of course, despite all the extra challenges we have been doing so this past year. We are quite proud of all of these accomplishments. Of course, there are also real challenges. Well, competition is a fact of life in the generic industry. The competitive environment we encountered last year was particularly impactful because it involved some of our most profitable products. We offset some of these pressures with the aforementioned new product launches and cost reductions, but the decline significantly exceeded the offsets.

On top of a particularly competitive environment, COVID-19 continued to impact our financial performance with more downstream influences. For example, as we have said, the pandemic resulted in fewer elective medical procedures being performed, this reduction in limited sales and use of our cocaine-based product. As a branded product, our Numbrino NDA carries a higher than average gross margin for us, so changes up or down in sales have a disproportionate impact on our bottom line. Fortunately, we believe many of the negative past year are beginning to attenuate while the positive factors continue to foretell meaningful opportunities.

With that as a background and leaving John to note the specific financial results, I will turn to our outlook for the upcoming years. We expect our overall net sales and gross margin to continue to face pressure by recent and anticipated competitive pricing of certain key products, partially offset again by the benefit of new product launches. We also expect sales of our Numbrino NDA to be impacted by a continuation of further elective surgeries being performed. Once the pandemic subsides, we would expect to see an increase in these types of procedures and along with that, an increase in sales.

While we are forecasting a down year in sales and profits, we see fiscal ’22 as a trough year. Our key products have already been impacted by notable competitive pricing pressure, thus, those products have less further downside. At the same time, the relative future potential of our pipeline continues to increase.

I also want to note that while we believe our generic ADVAIR DISKUS product has the potential to launch in calendar year 2022, we did not include any sales of the product in our FY ’22 guidance. Similarly, zolmitriptan is also not contemplated in our FY 2022 forecast, as a result of ongoing delays from our API supplier. Nevertheless, we do expect both products to be meaningful contributors in fiscal 2023.

So now let’s turn to our pipeline. We continue to launch products [Indecipherable] approximately 13 ANDAs pending at the FDA including partner products, plus four 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. We continue to target more valuable products than has been our historical average.

With regard to our large durable product pipeline, we currently have five disclosed assets. First, with our partner HEC, we have two insulin assets, Insulin Aspart, a fast acting insulin product and Insulin Glargine, a long-acting insulin product. Combined, the two products participate in a double-digit billion dollar US market as reported by IQVIA. Second, our drug device respiratory portfolio with their partner Respirent now has three assets, generic ADVAIR DISKUS, which is filed with the FDA, along with generic Flovent Diskus, and most recently, generic Spiriva Handihaler. Combined sales of these products also represent a multi-billion dollar US market as reported by IQVIA. As we have said, all of these products are differentiated from traditional generic products because of the significant technical expertise required for development and substantial plant investments made by our partners that needed to manufacture them. So for all of these products, we expect only a handful of competitors.

I will discuss next the significant progress we are making advancing these large durable product opportunities. With regard to generic ADVAIR DISKUS, we have been in regular contact with the FDA regarding this priority application since it was accepted in May of this year. We are encouraged by their level of engagement. We anticipate a mid-cycle review update from the FDA sometime in the next few months. Thus, we expect to provide a better sense of how the application is progressing on our next investor call in November. Currently, we continue to participate more than one FDA cycle and believe, as just noted, an approval in US launch of the product is possible in calendar year 2022. For those new to Lannett story, generic ADVAIR DISKUS is one of the larger assets in our filed pipeline. It is also currently the closest to expected commercialization in our partnered respiratory portfolio.

The second most advanced product in our respiratory portfolio is generic Flovent Diskus. The last patient for the pivotal clinical trial for this product has been dosed and we anticipate the analysis of the trial to be completed within a few months. We are currently planning for an ANDA submission before the end of the current fiscal year and a possible launch in calendar year 2023.

Next, as noted, we recently expanded our opportunities with Respirent to include generic Spiriva Handihaler. The development arc for this product should be approximately 12 months to 18 months behind the generic Flovent Diskus product. However, as there were various IP matters involved, we’re not commenting today on the specific launch timing expectations.

Finally, as we have previously said, we’re evaluating and in negotiations for additional product opportunities in inhalation respiratory space, particularly dry powder inhalers, and metered dose inhalers. There continues to be additional multi-billion dollar market opportunities to pursue with both current and future partners.

Now turning to our two biologic insulin products, starting with biosimilar Insulin Glargine. Clinical material for the drug product has now been manufactured in the new dedicated manufacturing site, which is a very significant milestone. We still expect to submit an IND around the end of the calendar year and commence the pivotal clinical trial early next calendar year. However, we have recently added a few months to the clinical timeline, due to current COVID-19 restrictions at the study site in South Africa. We have also added a few more months to our timelines to address interchangeability with the FDA, which I’ll discuss in a moment. Thus, we currently think the biologics license application will be filed in the first half of calendar year 2023 and we would expect to launch in the first half of calendar year 2024.

Also note, China’s version of the FDA, the NMPA has approved HEC’s Insulin Glargine for China. That product is made in the same new plant, where we have now just made our Insulin Glargine for clinical trials. [Indecipherable] we have added to the development plan to address the interchangeability with the FDA is related to an important recent FDA approval of the first biosimilar and interchangeable Insulin Glargine, the [Indecipherable]. We believe that interchangeability approval is good news for Lannett and HEC’s insulin. It demonstrates the FDA will approve interchangeable insulin products, which over-time should improve affordable access to these important medications.

Regarding biosimilar Insulin Aspart, the development of the product continues and we currently anticipate a potential launch of the product about 15 months following Insulin Glargine. Again, Insulin Aspart was produced in the same facilities, working with the same teams and technologies as Insulin Glargine, so we are able to leverage may be earlier Glargine investments in development and manufacturing that have been made by both Lannett and HEC.

Like our respiratory portfolio, we see several opportunities to leverage our insulin assets. There are other dosage forms of both Glargine and Aspart, such as vials and other distinct insulin products. These opportunities again represent multi-billion dollar markets, as reported by IQVIA. We also see opportunities to leverage our USA clinical data, 10 development and related IP, along with the manufacturing capacity at HEC to form a strategic alliance with third parties looking to accelerate their access to insulin products in international markets such as Europe. Well, discussions on such opportunities are very preliminary, such relationships could yield meaningful value for both ourselves and our partners.

Finally, a few brief comments on Made in America [Phonetic] and ESG. While we see a future that includes several high technology products from overseas sources, today, we are mainly a US domiciled generic medicines company. Lannett adheres to strict US laws and US environmental guidelines with regard to development and manufacturing compliance for our US made products. Most of our large generic competitors are already based overseas and don’t face the same set of regulations and ship most of their products from the far side of the globe. We are proud that today, we serve the US market from the US market and do so with an enviable track record and reputation for being a high quality and reliable manufacturer. We point out these characteristics that make Lannett increasingly unique as a generic supplier so that our investors and customers think of Lannett when they consider Made in America in various ESG related initiatives.

To sum-up today’s remarks, our accomplishments in fiscal 2021 were significant. We faced head on a highly competitive market environment. We launched new products and made important advances in the development of key products in our pipeline. We expanded existing agreements that added three large durable assets to our respiratory and insulin franchises. We refinanced our debt, improving free cash flow and extended our maturities beyond the expected launch dates of our large pipeline assets. We continue to believe that the exciting products in our advancing and expanding pipeline still have the potential to transform our firm into $1 billion company by 2025.

With all of that, I will 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 2021 fourth quarter, net sales were $106.0 million, compared with $137.9 million for the fourth quarter of last year. Gross profit was $26.4 million or 25% of net sales, compared with $48.9 million or 35% of net sales for the prior year fourth quarter. R&D expenses declined to $6.0 million from $6.6 million. SG&A expenses declined to $15.5 million from $15.6 million. Operating income was $4.9 million, compared with $26.7 million. Interest expense increased to $12.1 million from $11.3 million in last year’s fourth quarter. Net loss was $7.4 million or $0.19 per share versus net income of $13.4 million or $0.31 per diluted share. Adjusted EBITDA was $12.1 million.

Turning to our balance sheet. At June 30, 2021, cash and cash equivalents totaled approximately $93 million, up from $81 million at March 31. Cash increased during the fourth quarter due to a few factors. First, as a result of the refinancing, we did not have a principal payment on our debt. Second, relates to working capital improvements that continued from the third quarter. And the third, was the receipt of income tax refunds.

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 throughout the year and end fiscal 2022 with approximately $80 plus million. As for our liquidity, we also have access to our $45 million credit facility, which today we have not drawn upon.

Turning to our guidance, which as Tim mentioned earlier, does not include sales of generic ADVAIR DISKUS or zolmitriptan. For fiscal 2022, we expect net sales in the range of $400 million to $440 million, adjusted gross margin as a percentage of net sales of approximately 23% to 25%, adjusted R&D expense in the range of $26 million to $29 million, adjusted SG&A expense ranging from $58 million to $61 million, adjusted interest expense of approximately $52 million, the full year adjusted effective tax rate in the range of 21% to 22%, adjusted EBITDA in the range of $40 million to $55 million, and lastly, capital expenditures to be approximately $12 million to $18 million.

Regarding the phasing of the quarters, we expect net sales and adjusted EBITDA in Q1 to be lower than Q4, ramping up slightly in Q2 and continue to ramp-up more in the second half of fiscal 2022. The increase is related to expected new product launches. Gross margin in the first half of the fiscal year to be in the lower range of our outlook, ramping up to the upper end of the range in the second half of fiscal 2022 and operating expenses to remain relatively consistent throughout the year, though, we expect Q1 to be slightly higher than the other quarters, as they include certain compensation related expenses that are only recorded at the beginning of our fiscal year.

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] And our first question comes from Elliot Wilbur from Raymond James. Your line is open.

Michael Parolari — Raymond James — Analyst

Hi, guys. This is actually Michael Parolari in for Elliot. Thanks for taking my questions. So first one to get started, just wondering if you could talk a little bit about price and volume pressures on the base business in light of the FDA slowdown of approvals and then the limited dollars go into new launches.

And then my second question is just, I saw that you guys were guiding to an adjusted gross margin of 23% to 25%, wondering if the aspirational gross margin target given the expected contribution of the respiratory drugs and insulin is expected to be meaningfully higher moving forward. I know that prior target was low, mid or low-to-mid 30%s on a three-year to five-year basis. So just wondering if that’s how we should still be thinking about it? Thank you.

Timothy C. Crew — Chief Executive Officer

Good evening, Michael. It’s Tim. I’ll start and then I’ll have John fill in for some of the questions in the back end there. First of all, as related to price and volume, volume is pretty consistent in the market over many years, generic prescriptions, although, there’s been a bit of a dip relative to some of the COVID-19 elements. Overall, the vast volume is larger in place. However there has been price pressures, as noted in some of our organization’s analytics. There has been increasing number of approvals, particularly older products that has put some pressure on our prices of the older portions of our portfolio. On top, of course, the pressures we felt on our major products which really impacted this most notably this past year.

Going forward, we do expect to have significantly improved margins, more in the out-years as those more bespoke larger volume, larger value products. We’ve talked about expecting net of our partnership royalties to be north of 30% gross margin, that is unchanged and unaffected by the turbulence as it relates to the older products in the portfolio.

Robert Jaffe — Owner

Michael, anything else you want to follow up on that?

Michael Parolari — Raymond James — Analyst

No. That’s it from me. Thanks for taking the questions.

Robert Jaffe — Owner

Thank you.

Operator

And our next question comes from Matt Hewitt from Craig-Hallum. Your line is open.

Matthew Hewitt — Craig-Hallum Capital Group — Analyst

Good afternoon. Thanks for taking the questions and for providing the update on the pipeline. Kind of following up on the price pressures in particular, it appears that your guidance implies that things have kind of stabilized here. As we look out over the next 12 months, what are you anticipating from a competitive standpoint? I mean, given that you’re seeing some competition enter some of these older markets, are you still anticipating more of that, in which case, we should be looking at the lower-end of your range for this upcoming year or is the midpoint considering that you didn’t include ADVAIR in the guidance range, is that kind of the right starting point? Thank you.

Timothy C. Crew — Chief Executive Officer

Good afternoon, Matt. It’s Tim. The stabilization that you reflect is more structure related to the fact that the very largest products in our portfolio have already experienced significant price pressures, some volume decline and share relinquishment. So the relative declines of those products as it relates to the ongoing launch parade as well as other cost measures that we take in our ongoing production activities results in a little bit more stability. I think that’s the first part of your question.

On the second part of the question, ADVAIR is not in this year’s guidance. And again, as I just noted, when those products do come in our portfolio, we expect them to net after partnership royalties in the 30% or more gross margin range.

Matthew Hewitt — Craig-Hallum Capital Group — Analyst

Understood. All right. Thank you.

Operator

And we have no further questions. I will 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 working extra hard in these continuing challenging times, provide high quality, low cost medicines for patients. We look forward to sharing our progress on the next call. Good evening.

Operator

[Operator Closing Remarks]