Lannett Company, Inc. (NYSE:LCI) Q2 2023 Earnings Call Transcript February 1, 2023
Operator: Greetings and welcome to the Lannett Company Fiscal 2023 Second Quarter Financial Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Robert Jaffe, Investor Relations for Lannett Company.
Robert Jaffe: Good afternoon, everyone and thank you for joining us today to discuss Lannett Company’s fiscal 2023 second quarter financial results. On the call today are Tim Crew, Chief Executive Officer; John Kozlowski, the company’s Chief Financial 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 3 months on Lannett’s website. I would like to make the cautionary statement and remind everyone that forward-looking information discussed on today’s call is covered under the Safe Harbor provisions of the Private Securities 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 due to several factors, including those discussed in our earnings release.
Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent Forms 10-Q and 8-K filed with the Securities and Exchange Commission. 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 maybe different from non-GAAP financial measures used by other companies. Investors are encouraged to review Lannett’s press release announcing its fiscal 2023 second quarter financial results for the company’s reasons for presenting non-GAAP financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to 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. We will then open the call for questions. With that said, I would like to turn the call over to Tim Crew. Tim?
Tim Crew: Thanks, Robert and good afternoon everyone. As many of you know, the Farber family has been involved with Lannett for a long time and I will begin today acknowledging Jeff Farber, who served as a member of Lannett’s Board of Directors for the last 16 years, including Chairman from 2012 to 2018. Jeff decided not to seek reelection to the Board this year. However, we will continue to benefit from his experience and insights as Chairman Emeritus. I personally thank Jeff for his support and counsel over the last several years as we have navigated through a number of significant challenges. As Chairman Emeritus, he will continue to be an advocate for the company and an appreciated voice for the Board and management team.
Next, as most of you are aware, last week, we held our Annual Meeting of Stockholders. I am pleased to report that all of the formal proposals contained in the proxy were approved by our stockholders, including the reverse stock split of Lannett’s issued and outstanding shares of common stock. The Board authorized 1-for-4 reverse stock split will become effective at 5:00 p.m. Eastern Time on February 6, 2023 and beginning the next day, February 7, 2023, the company’s common stock will trade on a split-adjusted basis. The reverse stock split is primarily intended to bring the company into compliance with the minimum bid price requirements for maintain its listing on the New York Stock Exchange. Now turning to the business overview. First, our financial results thus far in fiscal 2023 have exceeded our expectations in part due to some stabilization of our base business, welcome news after the challenging and particularly competitive environment over the last couple of years.
For the second quarter, net sales, GAAP gross margin, adjusted gross margin and adjusted EBITDA were all above our expectations. Moreover, I am pleased to note that these measures increased over each of the preceding two quarters. We are also pleased to receive, as expected, an income tax refund of approximately $19 million. A bit later, John will provide additional color on our results as well as our cash position. On the operating front, we implemented last quarter another restructuring and cost saving plan to further streamline and realign our operations. These actions will result in a workforce reduction of approximately 60 additional staff positions along with approximately 40 recently vacant positions and will be implemented in phases over the remainder of the company’s current fiscal year.
We also anticipate exiting our State Road and Torresdale facilities in Philadelphia, Pennsylvania by the end of this year. Once fully implemented, the plan is expected to generate cost savings of approximately $11 million annually. A key element of that plan involved the restructuring of our R&D operations. We have begun the process of transitioning this function from an internal development department to one that partners with specialized external development and technology providers. We believe that in addition to the expected cost savings, which are largely related to overhead and other more fixed cost expenses, this model allows us to broaden the scope and more efficiently invest in more valuable pipeline products. I think it’s important to point out that our plan is to maintain our level of direct investment in actual product pipeline development.
I will now turn to our pipeline and begin with updates on the biosimilar insulin glargine and biosimilar insulin aspart products. Overall, the timelines for these products remain largely on track. The annualized commercial market for these insulins continues to represent an estimated aggregate value in the billions of dollars and thus potentially transformational for our firm. For both our biosimilar insulin glargine and insulin aspart products as well as potentially other products, we entered into a supply agreement with Ypsomed AG for a pen injector delivery device in the U.S. and certain other territories. Recently, we also acquired a sublicense to a licensing arrangement between Ypsomed and Sanofi-Aventis, the holder of various patents related to the pen injector device used in the reference products.
The sublicense agreement, among other things, avoids certain device litigation under the Biologics Price Competition and Innovation Act for our biosimilar insulin glargine product and improves our ability to freely market our products once approved. For our long-acting insulin glargine program, as earlier disclosed, we have completed the subject dosing of our healthy volunteer pivotal study and no serious adverse events were reported. We continue to expect top line data and analytics to be available during the current quarter. Following an FDA pre submission meeting intended to increase the likelihood of a first pass approval and potentially shorten review time, we anticipate filing the Biologics License Application around the middle of the current calendar year.
Thus, a potential launch of the product mid-calendar year 2024 remains in range. Next, biosimilar insulin aspart, a fast-acting insulin. As we have said, this product generally trailed the timing of our insulin glargine program by approximately 12 to 15 months. Last month, we announced positive results from an animal study of our biosimilar insulin aspart versus the reference biologic U.S. NovoLog. The study indicated that the products were highly comparable. Following a biosimilar biologic product development Type 2 meeting later this fiscal year, we anticipate filing an investigational new drug or IND application this summer. We would then commence the pivotal trial by the fall of this year and complete the pivotal trial in the summer of 2024.
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If successful, we anticipate filing the BLA towards the end of calendar year 2024 and potentially launching the product in the back half of calendar year 2025. Turning to our respiratory franchise. I’ll start with generic Flovent Diskus. The FDA earlier granted our request for competitive generic therapy status and following the complex product development meeting with the FDA scheduled for April, the filling of the abbreviated new drug application, or ANDA, is expected around the middle of the current calendar year. For a generic ADVAIR DISKUS product, we continue to anticipate providing additional responses to the complete response letter from the FDA over the current of the current calendar year, that will include results from a new clinical trial that has been initiated.
New pharmacokinetic studies intended to address other matters raised in the CRL will be initiated by mid-calendar year. A launch remains possible around mid next calendar year. Finally, for generic Spiriva Handihaler, we expect that our partner will commence a pilot PK study later this year, but note that for now, they have prioritized their efforts around the generic Advair and generic Flovent development programs. We are particularly pleased to see these valuable insulin and respiratory programs advanced despite recent challenges associated with COVID in China. We thank, acknowledge and appreciate the dedication of our overseas colleagues who continue to work diligently to help bring these critical and more affordable medications to patients that need them.
Turning now to near-term product opportunities, particularly those that have the potential to be more meaningful contributors to our financial results moving forward. Three partnered products remain on track for launch during the current fiscal year. Fludarabine, an improved injectable product currently in short supply is now available through our partner. We expect to launching our Fludarabine label later this fiscal year. Also on deck is sevoflurane and inhaled anesthetic product, and Mesalamine delayed release tablets 1.2 grams. Sevoflurane and Mesalamine reflect IQVIA sales of approximately $190 million and $490 million, respectively. Although actual generic market sales will be lower, both products currently reflect just three active ANDA approvals.
So we believe the markets will be attractive. With regard to Sucralfate, we now anticipate a possible launch outside the current calendar year in order to respond to a recent CRL. Turning to our contract development and manufacturing business. We are on track to achieve above the midpoint of our forecasted sales range of $22 million to $26 million, which is a substantial increase over the previous year. We are also engaged with nearly two dozen parties that have expressed potential interest in working with us. So we continue to believe there is ample opportunity to further grow this business. Now related to our forward expectations, and as we noted last quarter, we continue to assume new competitors for certain in-line and pipeline products even where that competition has not yet materialized.
Further, for new product launches, excluding Fludarabine, we have forecasted sales of around $6 million in the back half of this fiscal year. And finally, over the past year or so, as plant inspections picked up post the pandemic, significant FDA actions, including warning letters and import alerts, have been announced related to poor manufacturing standards at several major competitors. We are proud that at Lannett, there are only a few observations, none of them critical from an inspection at our Seymour plant in October 2022. We certainly intend to continue our exemplary record of operating in compliance with FDA standards. While we have not built upside into our forward plan based on the quality and reliability of our supply and that of our partners, we believe some of the recent stabilization of our business can be attributed to this long history of a credible and high-quality supply of the medicines we provide.
To sum up today’s remarks. For the second consecutive quarter, we reported better-than-expected financial results with net sales, gross margin, adjusted gross margin and adjusted EBITDA all above our estimates. For biosimilar insulin glargine, we anticipate top line results from the pivotal clinical trial during the current quarter and anticipate filing the BLA around the middle of the current calendar year. For biosimilar insulin aspart, last month, we announced positive results from an animal study that indicated our biosimilar insulin aspart was highly comparable to the reference biologic U.S. NovoLog. We recently implemented a restructuring and cost reduction plan that we estimate will generate annualized savings of approximately $11 million once fully implemented.
And finally, we raised our full year 2023 guidance, reflecting our better-than-expected first half financial results related in part to what we believe to be an improving customer receptivity to the value of our reliable, high-quality supply of affordable medicines. With that, I will now turn the call over to John to review the financials more closely. John?
John Kozlowski: Thanks Tim and good afternoon everyone. Turning to our financial performance, I will focus my discussion on our non-GAAP adjusted measures. For the 2023 second quarter, net sales were $80.9 million. This compares with $86.5 million for the second quarter of last year and $75.1 million in the 2023 first quarter. Gross profit increased to $15.7 million, or 19% of net sales from $9.7 million or 11% of net sales for the prior year second quarter. On a sequential quarterly basis, both gross profit and gross margin increased from the preceding two quarters. Interest expense rose to $13.3 million from $12.9 million. Net loss narrowed to $14 million or $0.34 per share from $15.9 million or $0.39 per share. We reported positive adjusted EBITDA of $1 million.
Turning to our balance sheet, at December 31, 2022, cash and cash equivalents totaled approximately $56 million, which includes the receipt of the income tax refunds of approximately $19 million. Our cash balance was reduced by scheduled interest payments and unfavorable working capital changes, most notably, an increase in accounts receivable, which was impacted by the timing of receipts. At December 31st, total debt was approximately $659.4 million, comprised of first lien senior secured notes of $350 million, second lien notes of $223.1 million and convertible notes of $86.3 million. As Tim mentioned, we recently implemented a restructuring and cost reduction plan. We expect the plan will begin generating savings in the current fiscal year, rising to approximately $11 million annually once fully implemented.
In addition, we estimate that the transition to the outsourced R&D function will result in the liquidity preservation of approximately $5 million to $8 million over the next 18 months to 24 months. Turning to our outlook for fiscal 2023, based in part on our better-than-expected financial results for the first half of the year, we have raised full year guidance. Specifically, we expect net sales in the range of $285 million to $305 million, up from $275 million to $300 million. Adjusted gross margin as a percentage of net sales of approximately 17% to 19%, up from approximately 15% to 17%. Adjusted R&D expense in the range of $21 million to $23 million, down from $23 million to $25 million. Adjusted SG&A expense ranging from $61 million to $63 million, up from $56 million to $59 million.
Adjusted interest expense of approximately $53 million, unchanged. The full year adjusted effective tax rate in the range of approximately 20% to 22% down from approximately 23.5% to 24.5%. Adjusted EBITDA in the range of negative $5 million to positive $1 million, changed from negative $12 million to breakeven. And lastly, capital expenditures to be approximately $8 million to $10 million, changed from approximately $8 million to $12 million. Regarding the phasing of the quarters, we expect net sales, gross margin and total operating expenses in Q3 and Q4 to be comparable with net sales and gross margins coming down from Q2 levels. And total operating expenses in the second half of the year to be comparable to the total operating expenses in the first half.
With that overview, we would now like to address any questions. Operator?
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Operator:
Tim Crew: Alright. It’s Tim again. Thank you for joining the call and as always, thanks to our employees, customers and partners, all working very hard to provide high-quality, low-cost medicines for patients. We look forward to sharing our progress on our next call. Have a good evening.
Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.