Welcome to the Lannett 2013 Second Quarter Financial Results Conference Call. My name is Trish, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Roger Pondel. You may begin. Roger S. Pondel: Thank you, Trish, and good afternoon, everyone, thank you for joining us today to discuss Lannett company's fiscal 2013 second quarter financial results. On the call today are Arthur Bedrosian, President and CEO; and Marty Galvan, Chief Financial Officer. The call is being broadcast live on the Internet at www.lannett.com. A playback of will be available for 3 months, accessible 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 today will include forward-looking information reflecting management's current forecasts of certain aspects of the company's future, and actual results could differ materially from those stated or implied. This afternoon, Arthur will provide a brief overview and Marty will discuss the financial results for the quarter in more detail, followed by Arthur's concluding remarks. And we will then open the call for questions. So with that said, I'm happy to turn the call over to Arthur Bedrosian. Arthur? Arthur P. Bedrosian: Thank you, Roger, and good afternoon, everyone. As you're probably aware, today, we reported outstanding results for our fiscal second quarter, with a continuation of the momentum we achieved over recent quarters and significantly improved performance in all areas of measurement. Net sales for the quarter rose significantly, up 32% over the prior-year period to $36.6 million. Operating income for the second quarter rose dramatically to $4.7 million, and net income increased more than fourfold to $2.9 million. Marty will review the numbers and the comparisons in detail momentarily. The quarter exceeded our expectations and was much better than originally anticipated, which was why we preannounced preliminary results a week ago. The performance signifies that virtually all areas of the company are doing well, for which I want to congratulate our entire team. With our press release today, we also announced that we are increasing our guidance for this fiscal year and Marty will provide the detail shortly. The growth we achieved reflects solid sales of our base products and market penetration from our newer lines. Additionally, gross margin in the quarter was positively impacted, as compared with the prior-year period, by favorable sales mix and price increases, as well as enhanced manufacturing efficiencies, in part attributable to our newer product launches. In December, we presented at the Annual Oppenheimer Healthcare Conference, and last month we were in San Francisco for the JPMorgan Healthcare Conference. Marty and I will continue to reach out to the investment community. And next month, we will be presenting at the Roth Capital Growth Conference. Our strategy for vertical integration is solid. We believe it provides opportunities to, over time, grow sales and improve our margins. We have also refreshed our strategic plan and it provides a clearer roadmap to drive future growth. I'd like now to introduce our CFO, Marty Galvan, to review the second quarter financials in more detail. Then I will provide a brief operational review and we'll open the call to questions. Marty? Martin P. Galvan: Thank you, Arthur, and good afternoon, everyone. As Arthur mentioned, we posted an excellent fiscal second quarter in all respects. Starting with the top line, net sales for the quarter ended December 31, 2012 increased 32% to $36.6 million from $27.7 million in last year's fiscal second quarter. I want to note that the sales growth for the most recent quarter was achieved despite essentially no sales of oxycodone, for which we soon expect FDA approval of our ANDA. We had approximately $1.0 million of oxycodone sales in last year's second quarter. Net sales for our largest product category, Thyroid Deficiency, grew to $14.5 million or 40% of our total net sales. Our 2 other largest categories, Cardiovascular and Pain Management, had net sales of $7.3 million and $4.2 million, respectively, representing 20% and 12% of our total net sales. As to net sales of our remaining categories: Antibiotic was $1.1 million or 3% of total net sales; Gallstone was $1.7 million or 5%; Obesity was $1.1 million or equal to 3%; Migraine was $1.4 million or 4%; Glaucoma was $1.6 million or 4%; and all other represented $3.6 million or 10% of our total net sales. Continuing with the income statement, gross profit for the fiscal 2013 second quarter rose significantly to $13.4 million from $7.4 million in last year's second quarter. As a percentage of net sales, gross margin for the second quarter increased to 37% from 27% for the fiscal second quarter of last year. The increase was primarily due to favorable sales mix and price increases, along with enhanced manufacturing efficiencies that are partially attributable to recent product launches. R&D expense for the second quarter rose to $3.6 million from $2.5 million a year ago. As we discussed on our last conference call, we have ramped up our investment in R&D in order to drive future growth. We continue to expect R&D expense to be weighted towards the second half of the current fiscal year, though by less than we originally anticipated. Some planned expenses we now expect will be incurred in the first half of fiscal 2014. SG&A expense amounted to $5.2 million, compared with $4.4 million for the same quarter of last year. The increase over the corresponding prior-year period was primarily due to higher employee-related costs. Operating income for the quarter increased sharply to $4.7 million from $495,000 for the comparable quarter last year. All of these metrics resulted in net income attributable to Lannett of $2.9 million or $0.10 per diluted share, compared with $609,000 or $0.02 per diluted share for last year's fiscal second quarter. Our balance sheet at December 31, 2012 remained strong with cash, cash equivalents and investment securities of $38.1 million, up from $29.2 million at the close of the prior fiscal year. As Arthur mentioned, and as we stated in today's press release, we are revising our guidance upward for the fiscal 2013 full year. We now see net sales of $140 million to $142 million, compared with previous guidance of $132 million to $136 million. Gross margin, as a percentage of sales of approximately 36% to 37%, compared with previous guidance of 34% to 35%. R&D expense in the range of $17 million to $18 million, compared with previous guidance of $18 million to $20 million. SG&A expense ranging from $24 million to $25 million, compared with previous guidance of $21 million to $23 million. The increase is primarily related to our sea topical product. Our pilot test market has shown favorable results and we have included in our guidance the expense associated with an expanded sales detailing effort. Other income of approximately $1.5 million, essentially equal to the litigation settlement we achieved in the first quarter. Lastly, we continue to anticipate capital spending for the fiscal full year to be in the range of $10 million to $12 million, unchanged from previous guidance. With respect to the timing of operating expenses for the remainder of the fiscal year, we expect both R&D and SG&A expenses to be more heavily weighted to the fiscal fourth quarter, primarily due to operational initiatives anticipated to begin at that time. With that, I will now turn the call back over to Arthur. Arthur P. Bedrosian: Thank you, Marty. We are pleased with the second quarter performance, as well as our near and long-term outlook. As I said at the beginning of this call, we are moving forward on all fronts. We are growing the company and continue to build on our solid foundation. That foundation includes a solid history of regulatory compliance with having never received an FDA warning letter in 71 years of operation. We benefit from a strong management team, hardworking employees and a deep understanding of our industry and its evolution. We are stepping up our product development initiatives with products that we believe can generate more revenue and higher margins than we have typically experienced in the past. We have submitted our first Paragraph 4 filing and additional Paragraph 4 product candidates are in the later stages of development. As some of you may have noticed, 3 directors recently retired from our Board of Directors. We thank them for their service to the company. The Board is currently interviewing candidates to help guide the company as we enter our next stage of growth and development. We expect that a new director will be added before the end of the current fiscal year. Our current pipeline includes 17 products -- 16 product applications pending at the FDA, and an additional 30 products in various stages of development. As you can see, this is an exciting time for Lannett. In addition to our excellent financial results, we are developing a strong pipeline, making changes to our Board and investing in the company's future. We look forward to continuing to report on our progress. Marty and I would now like to address any questions you may have. Operator?

[Operator Instructions] Our first question comes from Randall Stanicky from Canaccord.

I just have a couple of questions. Arthur, first, can you just comment on the status of the JSP renewal and how we should be thinking about that, perhaps from a timing perspective? Arthur P. Bedrosian: Well, we have started negotiations and they've been, let's say, they've been ongoing for the past couple of months and I'm still optimistic that we will continue with that relationship. It's very strong. Sales of their products continue to increase in the market. So I don't see any reason that, that contract will not be renegotiated to either an extension, renewal or some other collaboration.

And should we be thinking about a potential announcement there over the near-term or in this current fiscal year? Arthur P. Bedrosian: Well, I hate to make a promise, but it has to be weighed in on by Jerome Stevens. But yes, I believe we'll be expecting something shortly.

Okay, that's great. And then just, you talked about your strategic plan in the prepared comments. Marty, you also talked about the $38 million in cash and equivalents and obviously, the business has some momentum, and I know, Arthur, you've been looking at opportunities, can you comment on where those opportunities are, where your interest level is and how we should be thinking about the opportunity for you guys from a deal or an M&A perspective? Arthur P. Bedrosian: Well, we actually have been very active in that area. We did actually take a look at a few opportunities. One recently, let's just say it's a neighbor of ours, was part of an acquisition and there was a divesture of some parts of that business, Goldman Sachs was handling that one. But we've turned that down, we didn't think it really fit in with our plans. We are talking to 2 other manufacturing companies. And we are, let's say, at the second stage of discussions with one of them and at the early stages with another. So we are anxiously trying to make an acquisition, but we want it to be the right acquisition, that it fits in with the company and not an acquisition just to please Wall Street. What we're looking at really are product lines and companies that complement what we're doing. They're in the generic drug industry and an industry that we understand well and will enhance our sales growth. So I would say we hope to be able to announce something within the next few months if things go our way.

Okay. Well, that's great, and we'll watch that. And then the final question. Just can you update us on your thoughts and timing for cocaine topical? Arthur P. Bedrosian: Yes, we were pleased with the results we received. Remember, we started the test market on June 12, and it ended around December 13, it was a 6-month test. After reviewing the results in December, we agreed to extend that test through to March 15, and also we've been negotiating with some contract sales organizations in the event we want to go that way in expanding the detail for us versus engaging and hiring people directly. The product really didn't show so much of a benefit in unit sales like you might expect, what we did see is a lack of decline in sales on the products. And more importantly, the enthusiasm of the physician market that we're targeting for this product. And as a result, we believe putting additional salespeople out on the road will enhance the sales of the product. However, this is a product that has quota issues, and we need to make sure that we don't get ahead of ourselves where we have the sales force doing a great job and the quotas and the manufacturing doesn't keep up with it. So we're trying to work with the DEA in terms of our expectations to make sure that they understand them, they're agreeable to them and that we'll get the quota for them before we embark on adding roughly 17 more salespeople. We have 2 detail people out on the road currently. They're the same ones that started with us in June. We're very pleased with their performance. And I believe they're very pleased with the product and the acceptance of the marketplace. Branding is something new for us. As you know, we're a generic drug company inherently. And we certainly have a learning curve here. While we have engaged some consultants who have the experience and the background in branding that are working with us to guide us in this direction. We believe the specialty pharma portion of our business will be enhanced by C-topical and additional products that we plan to brand in the future.

Arthur, what timing should we be thinking about in terms of that, just as we think about the model and that opportunity? Arthur P. Bedrosian: I really couldn't say because the IND did go down to the agency, so -- I'm sorry, the final protocol for which we'll start the clinical studies, that's at the agency, we're waiting to hear from the FDA, sometimes they don't change a protocol, sometimes they do. We certainly answered all their questions. And if we get the go ahead, we'll know within 30 days, then the clinical study literally will begin. The recruiting has already begun in that area. And then the sales force, we're really just taking a look at the quotes and we'll wait to see what the results are in March as to what territories and where we're going to launch the initiative with that product. Clearly, the product has a tremendous use. It's a really very good product. Unfortunately, it happens to be a product that's abused in some other form. We're certainly looking at that aspect of the product because we want to make sure that we don't introduce anything in the market that might contribute to the abuse problem in this country. Nevertheless, this product, because of the form it's in, it's not likely to be abused, and we're certainly looking at all of the opportunities for this drug. It's sold to surgeons, it's sold to hospitals, it's not prescribed, so it's a rather limited market in terms of the -- for selling. We're really dealing with no more than 20 salespeople for the entire country. So we'll know a little bit more in March. And in March, we certainly can probably give some guidance as to what we expect from the detailing effort. By then, we'll hopefully have met with the DEA. We'll already know what the FDA's position is on our protocol. and if everything is a go, then I could be a little more upfront about my prospects for it than I am right now.

Our next question comes from George Gaspar [ph], he's a private investor.

Got a couple of questions here. One is on the Cody plant. Can you go through the development status and the progress that you've been working on there? And what you're trying to do currently and what you intend to do the remainder of this fiscal year out in Cody? Arthur P. Bedrosian: Sure, I'll kind of repeat what I said at the shareholders meeting. Cody Laboratories has achieved all their CapEx goals and they brought in a lot of the projects on time, on budget, with regards to the operations. However, with regards to product development, there has been some shortfall there in meeting our expectations. I would say that our subsidiary is not running like a Swiss clock, where I would say Lanette's operations tends to operate like a Swiss clock, and that's something I'm addressing with the Cody staff. It's really about getting them on board to understand our goals, make sure the integration of the 2 groups is well underway so that there's no confusion as to what our expectations are. And a little less optimism you might say, on their part, I would rather they anticipate some of the concerns and some of the difficulties you have when you're scaling up certain products. But overall, I'm very pleased with their progress. I don't like to minimize some of the weaknesses there, but they're not insurmountable. And we are getting the cooperation from the team on site there to help us achieve these goals. They are having a -- we've had a couple of meetings with them in terms of the integration. When I say integration, I want to make sure that everybody there understands exactly what we're trying to achieve here at Lannett. After all, we're one company and everybody has to be on the same page. And we're working diligently to resolve that. So I would expect over the next 6 months, I'll see a lot more of an improvement in the delivery end of the dosages, the raw material for our dosage forms and less shortfalls in that area. The rest of the operation is doing well. All the investments we made are ready to be used and are being used. So from that standpoint, they've met all their goals. So I'm overall pleased with Cody. And I believe that the next 6 months, they'll be running as well as we are.

Okay. Got an additional plant question, this is on the Philadelphia operation. Arthur, as you look forward, and you start looking at expanding your volume and how do you view the capacity situation that you might be -- have the opportunity to expand into the next 6 months to 1 year? Would that require making an acquisition of a facility to give you more production facility or can you do it in Philadelphia? Arthur P. Bedrosian: No, we wouldn't be able to do it. What we could do in Philadelphia, we would expand our facilities here. We've been looking at 2 things over the past few years. We tend to plan very well here, what our needs will be, and we've been starting -- well, 2 years ago, looking at facilities. It's a lot cheaper to buy an existing facility that someone is abandoning than to purchase a new one and it's a lot faster because those facilities tend to be already FDA-approved and all you have to do is modify them to our particular needs, I would say. Starting in the green field scenario, we're looking at expanding on our building here in Townsend Road. We have 7 acres here. We can double the size of this building. We're also looking at an option to work with some buildings in the surrounding area that are already built because that might expedite the production needs of our company. The problem with planning and the delays at the FDA is really goes hand-in-hand. It's hard to plan. You don't want to have the facilities up sitting idle with big investment made and no approvals coming. on the other hand, you don't want the approvals to come and you don't have the capacity. With all the approvals we've been getting, we are running at close to capacity on our facilities. We've increased our packaging by putting in a second shift in that department. We already have a second shift in our manufacturing operations. But there are some ways to resolve those issues short-term. But clearly, if we can acquire another company that has the capacity to solve our needs, that would be the ideal situation. And quite frankly, some of the targets we've been looking at bring that benefit to us. It will be unfortunate if I don't make the acquisition and then I expand my facility and then I make an acquisition where I pick up the expansion. Hopefully, we won't run into that. But we're all looking at both avenues. Clearly, acquiring another facility is in our mind and what you call it in, and in our focus. And we have looked at quite a number of them. We're looking at some even as we speak today, that are just R&D facilities that have suddenly become available. There is some consolidation going on in the manufacturing arena and there are some plants that have become available and we're still putting in offers on those facilities. So in the next few months, I'll let you know which way we ended up going. It will be whatever is best for us in terms of the investment and the money. It takes a long time to make profits. We don't want to spend all of our money buying facilities if we can pick them up cheaply because someone else is liquidating their excess capacity.

Okay. And if I could be permitted to ask a third one, otherwise I'll get in line here, but let me try this. In terms of the progress that you're making on the revenue side at this point in time, can you add a little color to the possible changes in the marketplace in your product lines that are helping create the market environment and build your margins? Is there something going on in your favor versus being negative for competitors? Arthur P. Bedrosian: Well, yes. Actually, both are happening. We've certainly picked up market share because of some difficulties our competitors have had. But actually, what's happening is we're selling more of every one of the products that we make because we're capturing more market share for our products. As you know, there's a finite number of customers out there. So we're not creating any new customers, but we're certainly selling more to our existing customers. And we are seeing an increase in market share, which means some of that loss is coming from our competitors. So that's really what's happening here.

Our next question comes from Angad Verma from Oppenheimer. Angad S. Verma: I just want to start with the gross margins. You said that it was a combination of price increases and favorable sales mix and manufacturing efficiencies. If you could just provide some details as to what products you actually took the price increase in and what recent launches you might be referring to? Arthur P. Bedrosian: The -- I wouldn't want to do that because it brings attention to opportunities for my competitors to disrupt. I could just say that we're very capable of raising prices and we tend to sometimes lead the market. We see opportunities to raise a price, we take it. We don't sit back and wait for someone else to do it. So you might say we're a little more aggressive in the pricing arena. I'd Just rather not focus on which products they were, which could negatively impact us and send the wrong message to my competitors who might think they can get my customers away by lowering the price. Traditionally, that doesn't seem to happen in the marketplace because everybody has rights of first refusal but it does reduce your margins when your competitors try to capture market away from you. If you don't mind, I'd rather skip the answer on that one specifically. Angad S. Verma: And the recent products that were launched in the quarter? Arthur P. Bedrosian: The recent products were more profitable. Just to give you one example, one of the products that we were going to launch was in the market at originally a $5.95 per 100 price. That product is selling in the $18 range. Because just before we got the approval, all of the competitors, including the innovator company had production problems or raw material problems and weren't supplying the product. Then when one of them came back into the market, they came back at roughly $22 per bottle versus having left the market at $5.95 a bottle. So just as we entered the market expecting to sell the product for $5.95 or thereabouts, we found ourselves selling the product at almost triple that price, or actually tripling that price. So that's part of the benefit we receive. I mean, keep in mind, we were smart enough to file for that product. We also were able to work with the shortage side of the FDA, and we appreciate their cooperation in helping us get this product to the market so that there wasn't any more shortage in the United States. We've helped the FDA in a number of shortages quite frankly, and they've been very helpful to us in cooperating with us to help eliminate these shortages. That really played into this one as well. So one of our newer products was launched at a higher price than we anticipated, which certainly brought in a nice revenue. But there have been some smaller increases on our regular products, believe it or not. Nothing great, but each one adds up when you total them together. Angad S. Verma: And I guess the next question I have is, I mean, just circling back to C-Topical, I understand what you were saying with the comments that you made earlier, but I just wanted to confirm that just as to where things stand right now, that you guys are still on track to submit for approval by year-end of fiscal 2013? I believe that's what the comments you've made historically were? Arthur P. Bedrosian: The approval of filing, you mean. Angad S. Verma: Filing for approval. Arthur P. Bedrosian: Filing by end of calendar year -- I think we did say fiscal 2013. We're pushing that out to the calendar year 2013. We're giving ourselves an additional 6 months because we've fallen to some delays that we weren't anticipating. For example, when we signed the contract for the recruitment of the patients, that firm had to sign another contract with a firm that masks the 2 products, the brand from the generic you might say. This case, of course, it's really one product. So it would be a placebo and the product, the active product. And there was a delay in getting those contract negotiations executed between our needs, the company, PAREXEL, that we signed the contract with for the clinical studies and their subcontractor. So some of these things that fell behind were really things we didn't anticipate. And I'm just giving myself to the end of calendar year. Again, I'm presuming the FDA will approve everything in 30 days. If they do, then that might come in faster. If they asked some questions, it might get delayed. So I'm a little more comfortable saying the end of the calendar year than fiscal year. We'll be late for June 2013 filing. Angad S. Verma: Okay. Great. And just on THALOMID then, I believe you historically commented that you're anticipating filing for approval in May? I just wanted to confirm that, that's still on track? Arthur P. Bedrosian: Yes, for the thalidomide product. Angad S. Verma: Yes. Arthur P. Bedrosian: Yes. The thalidomide is still on track.

[Operator Instructions] Our next question [Audio Gap]

What do you anticipate the stock will be on June 30, that in anticipation [ph]? Arthur P. Bedrosian: If I do that, I'd be investing in the stock market all my money. I really couldn't tell you, but I think it should be higher than it is here if we -- with the guidance we've given out, I certainly would expect the stock to reflect that positive news. And we certainly have traded behind the other generic competitors. So I think we'll probably catch up with them. But I really -- I'd be really guessing to put a number out there. And I hate someone to say you said this number but I will say it will be higher. I have some wishes if you want to know what I'm wishing for.

Are there any possibilities of selling the company? Arthur P. Bedrosian: No. We actually feel that we're undervalued at the stock price level, considerably undervalued. So we would dissuade anybody from making any offers here unless they were prepared to seriously exceed the market price. And I don't mean by 30%, I mean, seriously exceed the market price. We are -- when we look at our strategic plan and our net present values, we certainly are finding a lot of hidden value that isn't reflected in the stock market price. And certainly, some of our competitors will probably be aware of that and would love to take advantage of that and buy them at cheap, but my shareholders would be very upset if I would entertain any offers here. We're executing our plan. The more we execute the plan, the more you'll see a reflection in our stock price and it will start to approach what we consider a real value for Lannett. So no, we're not -- we do get approached now and then but nothing serious has been provided to us.

We have no further questions at this time. I'll now turn it back for any closing remarks. Arthur P. Bedrosian: Well, thank you, again, everyone, for joining us today. We are always available to answer further questions, and I look forward to reporting on our continued progress on the next call. Thanks again.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, you may now disconnect.