Lannett Company, Inc. (NYSE:LCI) Q1 2023 Earnings Conference Call November 2, 2022 4:30 PM ET
Company Participants
Robert Jaffe – Investor Relations
Tim Crew – Chief Executive Officer
John Kozlowski – Chief Financial Officer
Conference Call Participants
Scott Henry – ROTH Capital
Operator
Thank you for standing by. This is the conference operator. Welcome to the Lannett Company’s Fiscal 2023 First Quarter Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there’ll be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Robert Jaffe, Investor Relations for Lannett. Please go ahead.
Robert Jaffe
Thank you, operator. Good afternoon everyone and thank you for joining us today to discuss Lannett Company’s fiscal 2023 first 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 three 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 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 2023 first quarter financial results for the company’s reasons for presenting non-GAAP financial measures.
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 will now turn the call over to Tim Crew. Tim?
Tim Crew
Thanks, Robert, and good afternoon, everyone. I’ll begin today, with a few comments on our financial results. Q1 net sales adjusted gross margin and adjusted EBITDA were all above our expectations. Moreover, I’m pleased to note that, all three measures increased over the preceding fiscal Q4.
A few factors drove this performance, including increased sales during the quarter of generic Adderall, as a result of the current market shortage where we were able to maintain our supply. The sale of certain products under a private label agreement at a better than company average gross margin, and a continuing normalization of our product return rates and a more favorable pricing environment than we had anticipated.
We were also pleased with our bottom line performance in context to Q1 research and development expenses that were higher than recent quarters due to incremental investment that was made related to the progression of our durable assets. We are now approximately six to seven months from filing the BLA for our partnered biosimilar insulin glargine product and approximately 18 months from the potential approval.
We are of course also advancing other durable assets. Meanwhile, we continue to focus on our liquidity and we recently announced the sale of several discontinued ANDAs for approximately $3 million to a privately held pharmaceutical company. In a separate transaction, with the same company, we sold certain products under our private label agreement, which as I mentioned above helped support the better-than-expected first quarter financial results.
The private company has the option to purchase additional batches of products this fiscal year, and we expect they will. John will address our cash balance and liquidity later in this call, but we certainly believe our liquidity position to be sufficient throughout this fiscal year.
Finally, on the operating front and as previously announced, related to our 2021 restructuring and cost reduction plan, we received FDA approval to manufacture our branded topical anesthetic product Numbrino at our main plant in Seymour, Indiana. This FDA approval was received well ahead of schedule and is important for a couple of reasons.
First, it facilitates the continuing transfer of other liquid products to our Seymour plant. Second, it opens the door for expansion of our contract development and manufacturing efforts for liquid products. And third, we expect our overall manufacturing efficiencies can be enhanced as we ramp up production of Numbrino and other liquid drugs at the Seymour plant, which we are consolidating from our former Carmel production site.
Now, I’ll turn to our pipeline and begin with updates of the biosimilar insulin glargine and biosimilar aspart products. Overall, the time lines for these products remain largely on track.
As a quick reminder, these products target commercial markets with an estimated aggregate annualized value in the billions of dollars and represent for a company of our size very large and in fact transformational opportunities.
For our long-acting insulin glargine program as earlier discussed, we have completed the subject dosing in our healthy volunteer pivotal study and no serious adverse events were reported. We continue to expect top line data and analytics to be available next month. And as we have said we believe the trial will be successful in meeting its clinical endpoints, given the notably high historical success rates of such biosimilar medicine trials.
We further expect to avail ourselves to an FDA pre-submission meeting in the early part of next calendar year to increase the likelihood of a first-pass approval and potentially shorten the review time. We currently anticipate filing the biologic license application in the spring of next year which is just months from now. Ultimately as noted previously we are working towards an approval and launch of the product by mid-calendar year 2024.
Next Biosimilar Insulin Aspart, a fast-acting insulin. This product generally trails the timing of our insulin glargine program by approximately 12 to 15 months. We are already producing Insulin Aspart at commercial scale and will be requesting a Type II, meeting with the FDA in about three months. If that meeting proceeds as expected, we’d anticipate filing an IND shortly thereafter, looking to initiate the clinical study next summer and completing the study in the spring of calendar year 2024.
If approved, we are looking at a potential launch of the product mid-calendar year 2025. Interestingly, we have and continue to assume we will be the second Biosimilar Insulin Aspart approval. Whereas for biosimilar insulin glargine, we expect to be the next and thus to third approval. However today there is no biosimilar Aspart product on the market and there are a few emerging, it’s still unlikely scenarios where we could have the next and therefore the first Biosimilar Aspart approval.
Turning to our eventual commercialization expectations. And as I mentioned on our last call there has been extensive reporting on state and national initiatives to make insulin more accessible and more affordable for millions of patients. We are delighted to be in active discussions with a few states and other entities to collaborate and provide solutions regarding their important initiatives.
We believe such approaches play well to our strengths as Lannett and our partner HEC Group had the philosophy, flexibility, capacity and competitive cost structure to support these initiatives.
Turning to our respiratory franchise. I’ll start with generic Flovent Diskus. The FDA earlier granted the company’s request for a CGT status and the filing of ANDA is still expected earlier next calendar year.
Our partner has completed the human clinical and PK trials. We expect to avail ourselves to a pre-submission meeting in the first quarter of 2023 to get FDA feedback prior to a submission of this complex development project. If that feedback is encouraging and we have learned a lot in related feedback related to generic ADVAIR DISKUS, a launch would then be possible in the first half of 2024.
For our generic ADVAIR DISKUS product we responded to the CRL just last month. We anticipate additional responses to another CRL in the second half of calendar year 2023 that will include results from a new clinical trial and new Pharmacokinetic studies scheduled to begin in the next few months. If all work remains on track, a launch would then be possible around midyear 2024. Finally, for generic Spiriva Handihaler, we expect our partner will commence the pilot PK study by early next calendar year.
Turning now to our near-term product opportunities, particularly those that have a potential to be more meaningful contributors to our financial results that, we have mentioned on our last call. First, over the course of the current fiscal year, we anticipate launching four notable products with respect to potential value, Sucralfate and Oral Suspension product and three additional partnered products. Fludarabine an injectable product currently in short supply, Sevoflurane an inhaled anesthetic product and Mesalamine delayed-release tablets 1.2 grams.
Next, we continue to make good progress in growing our contract development and manufacturing business. We appear on track to achieve the higher end of our forecasted sales range of $22 million to $26 million, which is a substantial increase over the previous year. We also are currently engaged with nearly two dozen parties that have expressed potential interest in working with us. Of these, based on prior experience, we would anticipate three to four of these leads to eventually evolve into development and/or commercial agreements. So, we continue to believe there is ample opportunity to further grow this business over the next couple of years.
Now, as we noted last quarter, I’d like to address a few opportunities that are not included in fiscal 2023 guidance. First, we are currently working with outside experts to achieve new incremental company-wide annualized cost savings of at least $10 million. Moreover, we continue to assess additional optimization and rationalization of selected products in our offering to both generate and free up more cash.
Second, for our sales guidance, we have assumed new competitors for certain in-line key products even where that competition has not yet materialized. So to the extent the competitive products are delayed for entering the market, we obviously could see higher sales for those products.
And third, in a similar vein for new products, we hope to launch this year, we could see higher sales than we have estimated because we generally assume we are not the next new entrant to these markets. If we are the next new entrant then we could again have upside to our forecast.
Overall, we currently have approximately 10 ANDAs pending at the FDA including partner products plus four additional products that are approved and pending launch. We further have about a dozen products in development or early development and expect to add more from external and internal efforts.
To sum up today’s remarks, we reported better-than-expected financial results with net sales, adjusted gross margin and adjusted EBITDA, all above our estimates. We sold several discontinued ANDAs for about $3 million. We completed dosing of subjects in the pivotal biosimilar insulin glargine clinical trial and we anticipate top line results next month. Thus we believe the BLA filing is on track for spring of next year.
We engaged outside experts to help drive continued cost reductions throughout the company. Based on the preliminary review, we have estimated the annualized savings to be at least $10 million. We continue to expect our contract manufacturing business to approximately double this year over last year. The recent FDA approval to move the manufacturing of Numbrino to our Seymour plant, facilitates additional liquid transfers, improves our efficiencies and adds to our contract development and manufacturing offerings. We believe there is ample room for further growth in this area over the next few years. And finally, our liquidity position is expected to be more than sufficient throughout this fiscal year.
With that I’ll 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’ll focus my discussion on our non-GAAP adjusted measures. For the 2023 first quarter, net sales were $75.1 million, compared with $101.5 million for the first quarter of last year. On a sequential quarterly basis, net sales rose from $74.2 million in 2022 fourth quarter. Gross profit was $13.8 million or 18% of net sales, compared with $20.6 million or 20% of net sales for the prior year first quarter.
On a sequential quarterly basis, both gross profit and gross margin increased from $10.4 million or 14% of net sales in the 2022 fourth quarter. Interest expense increased to $13.3 million from $12.8 million. Net loss was $17.1 million or $0.42 per share compared with $10.6 million or $0.27 per share. We reported positive adjusted EBITDA of $0.3 million.
Turning to our balance sheet. At September 30, 2022 cash and cash equivalents totaled approximately $78 million. Within the next few months, we continue to expect to receive a sizable income tax refund of approximately $20 million. We also expect to receive additional income tax refunds, though now we anticipate receipt outside of the current fiscal year.
At September 30, total debt was approximately $656.7 million comprised of first lien senior secured notes of $350 million; second lien notes of $220.4 million and convertible notes of $86.3 million. As Tim mentioned, we are working closely with outside experts to help us identify operational improvements and cost efficiencies.
Our preliminary analysis suggests, that there are at least $10 million of incremental annualized cost savings that we believe can be implemented over the near term. These initial efficiencies will be achieved largely through improving our procurement process, ongoing recalibration of our production schedules and some other operational adjustments. We expect to share our findings on this front soon.
Turning to our outlook for fiscal 2023. While we have reiterated our full year guidance, given the better-than-expected Q1 results, we now believe our adjusted gross margin will be closer to the top end of our range. Specifically, we expect net sales in the range of $275 million to $300 million.
Adjusted gross margin as a percentage of net sales of approximately 15% to 17%; adjusted R&D expense in the range of $23 million to $25 million, adjusted SG&A expense ranging from $56 million to $59 million; adjusted interest expense of approximately $53 million. The full year adjusted effective tax rate in the range of 23.5% to 24.5%, adjusted EBITDA in the range of negative $12 million to breakeven. And lastly, capital expenditures to be approximately $8 million to $12 million.
Regarding the phasing of the quarters, we expect net sales in Q2 to be comparable to Q1 coming down in Q3 based on forecasted competition on a couple of key products and ramping up in Q4 based on expected new product launches. Gross margin to be lower in Q2 compared with Q1 ramping up in Q3 and then ramping up again in Q4. Operating expenses to decline lightly in Q2 compared with Q1 and declined further in the back of the year.
With that overview, we would now like to address any questions. Operator?
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Scott Henry of ROTH Capital. Please go ahead.
Scott Henry
Thank you and good afternoon. A couple of questions. First, the generic Adderall market shortage has that normalized, or could we see any benefit in further quarters?
Tim Crew
Good afternoon, Scott, this is Tim. The shortage in that market continues to persist. It’s not clear how long it will persist. Recall, these markets have some stickiness relative to DEA quotas that are underlying. We believe there’s some potential upside, but that upside of course is captured in the guidance we provided.
Scott Henry
Okay. Now you had strong numbers for Q1, but you maintained the full year guidance. Do you feel more comfortable in the full year guidance, or do you anticipate offsets later in the year to make up for the upside in the first quarter?
John Kozlowski
Hi, Scott, this is John. So the answer is, yes, we feel more comfortable with the guidance. Having good first quarter derisk Q2 through Q4. So that’s the easy answer.
Scott Henry
Okay. And then in the press release it talks about a more favorable pricing environment. I guess the question from a big picture is could things actually be improving? Could the worst be over in the generic environment, or do you think it’s just natural variability?
Tim Crew
Again, Scott, this is Tim. I think, what I said was a more favorable pricing environment than we anticipated. I don’t know if I want to characterize that pricing environment is on some absolute standard. We expect erosion in the space on a portfolio-by-portfolio basis.
So we are pleased that have less erosion than we are anticipating. We clearly have fewer products in our portfolio now that can come down as far as they did in the previous periods. So we think there’s some asymptotic element to declines to our existing base portfolio, but I’m not really making a comment on the broader industry.
Scott Henry
Okay. I — just balance sheet. It mentions the approximately $20 million in income tax refunds. Has that number changed at all? I seem to — I thought it was a little more than that, but I don’t know if you’ve brought in some of those already or if the numbers changed?
John Kozlowski
So the number that we had discussed back in the August call the year end call was around $26 million. That actually was two refunds the $20 million that we were referencing today. And then there was an additional $6 million refund that we’re now expecting sometime next fiscal year. So through our context with the IRS and communications we’ve pushed that one out in our forecast.
Scott Henry
Okay. Great. And then the final question, I think, on page 2 you referenced launching four notable products; Sucralfate, Sevoflurane, Mesalamine and Fludarabine. Could you talk about either individually or in total the magnitude of revenues that they could generate in kind of the first year and somewhat at peak sales? Thank you.
John Kozlowski
Well I’ll take the first part about fiscal 2023. The — we had talked about before our launches being in the back half of the year. So its impact to the year itself has really determined whether we see some favorability and a quicker launch with that market condition would be. So we’ve held our expectations in terms of our launch revenue for the year. Tim, I don’t know if you want to address the — any additional full year impact.
Tim Crew
In terms of the shape of those expectations two of the products Mesalamine delayed release tablets 1.2 grams and Sevoflurane in a fairly large markets. And so the annualized numbers would be quite a bit higher than the quarterly expectations.
However, on the other side of that Fludarabine, which we hope to launch relatively soon is more of a shortage product and we’d expect the near-term expectation to be higher than the annualized ones over time. So I think it will be some stability to these numbers as you look into 2024.
Scott Henry
Okay. Great. Thank you for taking the questions.
Tim Crew
Thank you.
End of Q&A
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Crew for any closing remarks.
Tim Crew
All right. It’s Tim, again. Thanks for joining the call, and as always thanks to our employees, customers and partners all working hard to provide high-quality, low-cost medicines for patients. We look forward to sharing our progress on our next call. Have a good night.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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