Welcome to the Lannett Announces Fiscal 2014 First Quarter Financial Results Conference Call. My name is Vanessa, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. And I will now turn the call over to Robert Jaffe, Investor Relations for Lannett Company. You may begin.

Thanks, Vanessa. Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company's fiscal 2014 first quarter financial results. On the call today are Arthur Bedrosian, President and CEO; and Marty Galvan, Chief Financial Officer. This call is being broadcast live on the Internet at www.lannett.com. A playback will be available for 3 months and is 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 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. 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. We will then open the call for questions. With that said, I will now turn the call over to Arthur Bedrosian. Arthur? Arthur P. Bedrosian: Thanks, Robert, and good afternoon, everyone. Today, I have the pleasure of reporting another quarter of record financial results. Our positive momentum continued into our fiscal 2014 first quarter with net sales increasing 30% to $46 million from $35 million in the first quarter of last year, and excluding a charge related to the contract extension with Jerome Stevens Pharmaceuticals, our first quarter adjusted net income of $6.7 million or $0.22 per diluted share was significantly higher than expectations. The primary drivers for our outstanding first quarter performance was a combination of strong sales of existing products, a favorable product mix and price increases on key products. I'm pleased to report that we believe these positive trends will continue throughout fiscal 2014. Accordingly, we have raised our guidance for fiscal 2014, which Marty will address in more detail shortly. With that brief overview, I'd like now to turn the call over to Marty to review the financials in more detail, then I'll provide an operational update and we'll open the call to questions. Marty? Martin P. Galvan: Thank you, Arthur, and good afternoon, everyone. As Arthur mentioned, we are off to a strong start in fiscal 2014. For our first quarter, net sales rose 30% to $45.8 million from $35.3 million in last year's first quarter. Net sales for our largest product category, thyroid deficiency, grew to $20 million or 44% of our total net sales. Our 2 other largest categories, pain management and cardiovascular, had net sales of $5.2 million and $4.5 million, respectively, representing 11% and 10% of our total net sales, respectively. As to net sales of our remaining categories: antibiotic was $3.4 million or 7% of total net sales; migraine was $2.7 million or 6%; gout was $2.0 million or 4%; glaucoma was $1.5 million or 3%; gallstone was $1.4 million equal to 3%; obesity was $1.1 million or 2%; and other represented $4.0 million or 10% of our total net sales. As previously announced, we issued 1.5 million shares of our common stock in connection with the signing of a contract extension with Jerome Stevens Pharmaceuticals to continue as the exclusive distributor in the United States of 3 of their products. As a result, cost of sales for the fiscal 2014 first quarter included a nonrecurring pretax charge of $20.1 million related to this contract extension. Continuing with the remainder of the income statement and for completeness and comparative purposes, I will provide both GAAP and adjusted amounts for gross profit, operating income and net income. Gross profit on a GAAP basis was $1.3 million or 3% of net sales. Excluding the JSP contract renewal charge, gross profit was $21.4 million or 47% of net sales. This compares with last year's first quarter gross profit of $13.6 million or 39% of net sales. This improvement reflects an 8 percentage point increase. Research and development expenses increased to $4.7 million compared with $3.8 million. Selling, general and administrative expenses increased to $7.2 million compared with $6.2 million in the same quarter of the prior year. Operating loss reported in accordance with GAAP was $10.6 million for the first quarter of fiscal 2014. Excluding the JSP contract renewal charge, operating income more than doubled to $9.5 million from $3.7 million in the first quarter of fiscal 2013. For the fiscal 2014 first quarter, GAAP to net loss attributable to Lannett Company was $6.0 million or $0.20 per share. Adjusted net income, which excludes the impact of the JSP contract renewal charge, equal to $12.7 million after tax, was $6.7 million or $0.22 per diluted share. This compares with fiscal 2013 first quarter net income attributable to Lannett Company of $2.9 million or $0.10 per diluted share. Adjusted diluted earnings per share is based on approximately 30.7 million weighted average common shares outstanding. Last year's first quarter included a favorable pretax litigation settlement of $1.3 million equal to $0.02 per diluted share. Our balance sheet at September 30, 2013, remained strong with cash, cash equivalents and investment securities of $45.8 million. This amount does not include the $71.5 million of net proceeds related to our stock offering which was completed subsequent to quarter end. Now turning to our guidance for our fiscal 2014 full year. As Arthur noted, we have raised our guidance for the year due to anticipated strong sales of our existing product portfolio and improved gross profit resulting from favorable sales mix and price increases. It is important to note that our guidance for fiscal 2014 does not include the impact of the Jerome Stevens contract extension, which we expensed in the first quarter of fiscal 2014. With that said, we expect net sales in the range of $245 million to $255 million, up approximately 35% from the previous guidance of $181 million to $186 million. Gross margin as a percentage of net sales of approximately 57% to 59%, up 15 percentage points from 43% to 44%. R&D expense in the range of $27 million to $29 million, up from $24 million to $26 million in the previous guidance. SG&A expense ranging from $35 million to $37 million, up from $28 million to $30 million. And the full year effective tax rate to be in the range of 36% to 38%, up from the previous guidance of 34% to 36%. Weighted average common shares outstanding for fiscal 2014 to be approximately 35.4 million, the increase reflecting the impact of the recently completed public offering of 4.3 million shares. Regarding our quarters in fiscal 2014, we expect a significant increase in net sales and EPS in Q2 versus Q1 and anticipate modest sequential growth in net sales and EPS through the remaining quarters. Capital expenditures in fiscal 2014 are expected to be in the range of $28 million to $32 million, unchanged from previous guidance. The outlook includes $20 million for the purchase and partial fit out related to a new facility. In our last earnings call, we announced that we entered into an agreement to purchase a building in Philadelphia. However, we are currently exploring alternate expansion sites due to an unresolvable issue that arose during our diligence. With that, I will now turn the call back over to Arthur. Arthur P. Bedrosian: Thank you, Marty. I could not be happier with our financial performance and the progress we have made growing our company. As I've mentioned before, we continue to step up our product development initiatives with products that we believe can generate more revenue and higher margins than we have typically experienced historically. Accordingly, our current pipeline includes 58 product applications pending at the FDA and an additional 58 products in various stages of development, which is a significant increase from just a few months ago. We submitted our first Paragraph IV ANDA filing, which is now past the time for the innovator company to file suit, and additional Paragraph IV candidates are in the later stages of the development. We continue to wait approval of our oxycodone hydrochloride solution which we expect in the third quarter of fiscal 2014. We continue to lay the groundwork to expand our detailing effort for our C-Topical solution products and are finalizing a contract that will add at least 10 additional sales representatives over the next 2 quarters. We expect to commence our Phase III clinical trial in January, and the target date for our new drug application submission remains December 2014. Regarding our ANDA for the thalidomide, we have successfully passed both the fast and fed bioequivalence studies and is on track for FDA filing in the third quarter of fiscal 2014. Last month, we successfully closed on a public offering of 5.9 million shares of our common stock. The offering included 4.3 million shares offered by the company with the remaining shares offered by certain selling shareholders of the company. We received net proceeds of approximately $71.5 million and intend to use those net proceeds for potential acquisitions, strategic partnerships and general corporate purposes. We continue to evaluate several potential acquisition candidates. Our team is looking at products, as well as companies that are a strategic fit and accretive to our business. We're extremely pleased with our first quarter results and excited about the opportunities that lie ahead. We look forward to reporting on our progress and we're grateful to the 345 employees of Lannett Company. Marty and I would now like to address any questions you may have. Vanessa?

[Operator Instructions] And our first question comes from Sumant Kulkarni with Bank of America Merrill Lynch. Sumant S. Kulkarni: The first one is on your significant top line guidance and please, could you perhaps break that out into how much of that is related to price increase versus some other things? Arthur P. Bedrosian: Increase in the guidance, probably a significant portion is the price increases that we've talked about previously that have now really hit us in a beneficial way. Sumant S. Kulkarni: And how sustainable do you think those are, especially because a large competitor could potentially return on the thyroid product sometime in the calendar first quarter of 2014? Arthur P. Bedrosian: I believe you're referring to the innovator -- one of the innovator companies. We don't really expect them to return to the market, and if they did, we would expect them to have to put a detailing effort behind that innovator brand name because without it all the products that have been switched to other companies now. So they have to regain that market, I see that as an uphill battle for them quite, frankly. So we're not concerned about remainder of this fiscal year with regards to that product. Sumant S. Kulkarni: And one more before I hop back into the queue. On your growth margins, how sustainable are they beyond the fiscal quarter -- year? Arthur P. Bedrosian: That's hard to say, but I would believe they are sustainable because we're not expecting any changes that we anticipate at this point. But we're in the commodity business, so it's always hard to determine point when you're going to get additional competition or when prices will erode as they generally do.

And our next question comes from Steven Crowley with Craig-Hallum. Steven F. Crowley: In terms of the phenomenon leading up to your price increase or right after your announced price increases, there's a buy-in period in which customers can buy in, at least some of them, at prior prices. I assume given your guidance, most of that's already been reflected and you are now in the new paradigm? Arthur P. Bedrosian: That's correct. There are a number of contracts that we have with certain customers that they can avail themselves of certain notification about any price increases. That's all been concluded now. Steven F. Crowley: Excellent. Now in terms of some of your efforts in the pain management space. In terms of C-Topical and how it has been performing in the limited number of geographic markets where you've been detailing, can you talk to us about those efforts and how quickly you can bring on this contract sales force and see I guess a positive reaction to those efforts? Arthur P. Bedrosian: Well, the contract sales organization is actually engaging and hiring people at the moment. So we are moving along on that. We would expect that they'll be fielded on to the marketplace by January. And as far as whether we'll see an uptick, we're starting to find that the marketplace really wants and desires this particular product. A recent organization of ear, nose and throat surgeons actually recommended the use of the product for surgery. So we believe just by merely getting the product into the formulary of those hospitals that discontinued the powder version of this product and letting the surgeons know that the product's available if they want to use it in their practice will bring an uptick in the performance of the sales of this product that will continue. As you recall, our products have been selling well without any really effort on the part of the company to detail it. We have 2 people in a test market. We found the results to be strong enough that we felt that we increased that number to 12 to 20 people that we would see a significant uptick. And our goal now is to get that out here quickly and we are planning to make, even increase the additional 10 to an additional 18 people. So we have the full complement of 20 sales reps in the marketplace this year -- by our fiscal year end, I'm talking about. Steven F. Crowley: And in terms of your guidance increase, did it include any changed assumptions in the performance the C-Topical at this point? Or if you're going to revise -- I guess, that's the question, were there any positive revisions yet to C-Topical in your guidance change? Martin P. Galvan: Yes, Steve. This is Marty. So, on the guidance, at this stage we have not put in anything significant for that uplift with the detailing effort. Steven F. Crowley: Okay. And then one more for me. I'll hop back in the queue. In terms of Cody, and its efforts to provide more of your API needs, what can you tell us, Arthur, about progress in objectives as we stand here today? Arthur P. Bedrosian: Well, I hate to be -- of course, we're optimistic, let's say that. They will appear to be meeting all their goals and objectives for the fiscal year ending June 30. So I'm expecting to receive 4 additional APIs that we can start to use and they seem to be on track to deliver them. So currently, I think everything is working well there at the moment.

And our next question comes from Rohit Vanjani with Oppenheimer.

So just a couple of modeling questions. What happened to the amortization of intangibles and product royalties lines? Is that absorbed somewhat? Martin P. Galvan: Yes, we've -- it's in cost of goods sold at the stage. There is only 3 more quarters of it left, but for this fiscal year, we moved it up into that number.

Okay. And then is there a tax adjustment to the reported $4.242 million because of the JSP agreement? Martin P. Galvan: Well, there isn't an adjustment. I mean, there is -- we talked about adjusted EPS and GAAP EPS the 4 -- or the negative $4.242 million. That's a GAAP number. So if you want to go to the adjusted number, once you pull out the charge, your adjusted number would be -- the adjusted number would be $3.202 million.

$3.202 million. Okay, that's what I was after. And then on the price increase for the Digoxin, have you gotten any push back from formularies or anything like that? I mean do you see that, I'm assuming it's a Tier 1 product, is that right? Arthur P. Bedrosian: It's a Tier what -- say, Tier 1 product?

Yes, it's preferred tiering or the lowest tiering in a formulary plan because it's a generic. I'm guessing that's probably the case, is that true? Arthur P. Bedrosian: No, I wouldn't say -- when you say, "lowest," I'm just not sure we're both understanding the question the right way. The brand products are usually the ones that are preferred by surgeons, let's say, and then everybody reimburses from prescriptions they prefer the generic because they have to pay for it. We still see a tremendous use of generics for this product. We don't see that changing. We do see a decline overall in the market for the Digoxin, brand and generic because the physicians that are prescribing this to new patients, these are the products that continually used on older patients, are those who already been placed on the product. And I'm presuming that because the kind of heart failure that the older people had is not the same that they are experiencing, as you know, they have made a lot of strides in preventing heart attacks. So the decline of the Digoxin in prescription volume continues every year. However, we've been successful in benefiting from the difficulties of our competitors who have left the market and as a result, our market share has continued to grow. We've had a recent price increase on the product as well because we are now only 1 of 2 people in the market. And as a result, I expect that product to do very well. We do believe some of the other competitors may come back into the market. We're anticipating that, but we're not expecting any particular difficulties with the product because they have to face their -- the ASUs and make sure that their products, when they are reintroduced in the market are not going to cause any harm. This is a very serious drug. It's a Narrow Therapeutic Index Drug, and has been allegations again some of those companies with the obese tablets that they have caused the deaths of some people. So this is a serious drug for these companies to reintroduce. So I believe that the FDA will be scrutinizing those companies very carefully. So I don't see any particular issues in that particular product going forward except a general decline in prescription volume. Steven F. Crowley: And maybe I didn't ask it right. I was more asking about the -- so I understand everything that you said, and I agree with it. But I was just asking more of the formularies. Have you seen any formulary pushback because of the -- I think it's more than 5x price increase? Have you seen them... Arthur P. Bedrosian: No, you never would because their alternative is to go to the brand and the brand significantly raised their price. Steven F. Crowley: I just wanted to make sure that didn't to a worse tiering for you guys because of that pricing. Arthur P. Bedrosian: No, no. We're still 50% of the brand price in the marketplace. So the alternative is to use my product or pay more and use the brand. They're still saving a significant amount of money and we have to face the increased cost of doing business that the FDA's going to be expecting from us when those stability studies going in effect the product development and the additional commercial batches. So these price increases that are going on in the industry, I think they're going to stick for all the companies.

Okay. And then the last question for me and this again is on the guidance. Is that reflective -- so are future price increases also reflected in your guidance? Or is it only the price increases that you have right now on Levo and Digoxin that are primarily included in there, along with the quarterly beat that's in there? Martin P. Galvan: Yes, Rohit. We had some of the price increase on Levo and Digoxin there. They are in the guidance. We've been a little bit on the conservative side in our outlook for the year only because this is the earlier days of the increase, particularly on Digoxin. So there is some of the price increases in the guidance, yes.

And we have our next question from Scott Henry with Roth Capital Partners. Scott R. Henry: Just a couple of questions. I apologize, Marty, but could you just give me the pain, cardiovascular and thyroid numbers again. I wanted to make sure I had them correct. Martin P. Galvan: Let me just find that page here. Which one did you want, Scott? I'm sorry. Scott R. Henry: The big 3: pain, cardiovascular and thyroid. Martin P. Galvan: All right. So pain is $5.2 million; cardiovascular is $4.5 million; and thyroid was $20.0 million. Scott R. Henry: Okay. I guess the next question, and I don't know if you want to give this granularity or not, but as we look at the revenue guidance, it would seem that it's heavily dependent on thyroid and perhaps cardiovascular. Could you give any color on what can of magnitude, I guess, thyroid is probably a little easier to ballpark given Q1, but how should we think about that cardiovascular section? Martin P. Galvan: Well, cardiovascular, in that section there is 2 products there. First of all, it's the generic Dyazide product which we launched in December of 2011, and the other piece of it is the Digoxin product. So as far as modeling it, it's to decide on the part of the -- on your part to how much the price increase that's out there right now, to what extent it will hold and for how long. But it is the Digoxin price increase that would have a significant impact on the cardiovascular category. Scott R. Henry: Okay. I think that's certainly fair. And then we would expect some incremental I guess in the thyroid as well, but it seems like Digoxin will be more notable in Q2. It doesn't seem like that had really any affect in Q1, is that fair? Martin P. Galvan: Yes. Arthur P. Bedrosian: Yes, that's fair. Scott R. Henry: Okay. And I noticed the antibiotic and migraines were trending pretty strong as well. Anything going on there, timing or just simply better trends there? Arthur P. Bedrosian: No. We expect those to continue to grow in the marketplace as well, both of them. Scott R. Henry: Okay. I guess another kind of strategy question and particularly relevant these days, is that tax rate 36% to 38% is certainly pretty painful to stomach. Any thoughts on ideas to bring that down in the long-term? It certainly takes it's time, but would you look at trying to get assets overseas or different avenues to get that number down? Arthur P. Bedrosian: We have looked at that. Marty and I interviewed some people that we're very expert in that particular area and we are exploring those possibilities. We understand what we need to do to qualify and it's not something we can resolve right away, unfortunately, certainly not this year. But we are actively looking to do something about that tax rate. It does pain us to know that some of our bigger competitors are paying rates that are 12% to 14% below what we're paying. Scott R. Henry: Okay. Certainly makes sense something to follow. And just quickly on the pipeline, the Cocaine topical marketing that you were going to do, did I hear you said that, that launch would be in January? Arthur P. Bedrosian: Yes. Physically the salespeople will be on the road in January and we'll be tracking their progress from January on. The recruiting and the training is all going on now and we've had some success in finding additional information to train them on. Because apparently a recent organization of ear, nose and throat surgeons, I don't have the exact proper name handy, but I can get it to you by email, actually endorsed the use of this product. Not C-Topical, not by brand name but the use of Cocaine topical for ear, nose and throat surgery. And as a result, we expect a lot more physicians looking for information on that. And we're now training the staff to reflect that information. It's a very promising aspect. We didn't expect it and we discovered it when we attended a recent meeting of ear, nose and throat surgeons in October. So this [indiscernible] great drug. Scott R. Henry: Okay, great. Okay, I'll look forward to that. And then it looks like the other Cocaine topical trials are on track. The thalidomide, finally, I was juggling some things earlier. Have you filed that product yet? Arthur P. Bedrosian: No, that's -- the pass [ph] studies are done. We're assembling the applications as we speak. And it should go in the next quarter. Scott R. Henry: Okay. So in Q1 or in Q4? Arthur P. Bedrosian: No, in our Q -- well, we're past Q1. In our Q3 at the latest. Because of the holidays, we're a little unsure whether we'll get it in by December. So let's say, for sure, Q3 with the agency. Scott R. Henry: Okay. That's helpful. And then I thought I heard you mention that you did submit your first Paragraph IV. Can you give us any comments about the market size for that product, how we should think about that? Arthur P. Bedrosian: Yes, that was around -- it's a little over $200 million in the marketplace. There's 2 other competitors in the market. As we were not sued by the innovator company and the patent holders, so once we get the product approved, we have clear sailing. And -- but that product is with agency now. But it is being reviewed as we speak, because we've already received some comments on it. So we know that application should get approved. Remember on the GDUFA, they're supposed to do things quickly, and that was a GDUFA application.

[Operator Instructions] Our next question comes from Dan Trang with Stonegate Securities.

Regarding the capital raise of $71.5 million, can you give any light as far as breakdown as to what you're going to spend it on or kind of time frame around that? Arthur P. Bedrosian: Yes. We were looking -- and continue to talk to 3 potential acquisition candidates. Our concern in the spring, of course, was that if we concluded any one of these transactions, we have to ask then what the cost would be to us and we felt we didn't have enough money to conclude a transaction, especially if any one of the sellers wanted to cash out. And since these were second generation companies, that was a possibility. So as a result, we felt we needed to raise money, so that if they go through with allowing us to acquire them, we wouldn't have the problem of then having to go out to find out the money and maybe not being successful. So having the money handy puts us in a better position to do some or all the acquisitions, presuming all of them are not going to want cash out. But if they did, we estimated we might need $260 million. We only had projected $50 million by June 30. So we have to do something and raising equity was one of the choice -- selling equities, of course, was one of the choices. Now we are closer and discussing one of the transactions a little in more detail, let's say, but again, we're not married yet or engaged. It's a very early stage, but we're hoping one of them will agree to merge with us and let us acquire them. And then we'll start to show you. That's really the bulk of what we wanted that money for. It wasn't for anything else other than really acquisitions that we needed before. We are looking at some product licenses. We made some offers to one of the larger generic competitors that's liquidating about 30 ANDAs. And we've put in a bid there. And that was in the substantial, let's say teens of millions, the offer was. So, we certainly knew that we're going to need money, to acquire licenses, we would need money, to do acquisitions and those were the drivers behind that raise.

And we now have a follow-up question from Sumant Kulkarni with Bank of America Merrill Lynch. Sumant S. Kulkarni: What level of new product launch activity have you built into this fiscal year, other than oxycodone? Arthur P. Bedrosian: We had the anorexia prospects we talked about. We have the cytotoxic drug, we expected around February. We have another product, a pain product that the agency we expected this year and the fifth product escapes my recollection. But we were expecting 5 products to be approved by June 30 of 2014. And in a small degree they're in some of our numbers, but we tend not to make any projections until we get the approvals. Sumant S. Kulkarni: And this is a bigger picture question, all the stars seem to be aligning in a good way for the company, but what keeps you up at night in terms of risks? Arthur P. Bedrosian: In terms of risks, I'll be frank with you, nothing. I don't see any -- we have so many pokers in the fireplace that any one product or any one thing really is not going to harm this company. Would we be as successful as we are today as we're sitting here today? No, of course not. But we would far and ahead of where we used to be regardless of anything terrible happening. We are cautious. We have a lot of concerns about facilities. We have -- we make sure we're complying with FDA requirements. We always try to stay ahead of those things so that we don't have to worry about them. And quite frankly, those are the things I worry about in that sense. I worry that I'm not ahead of the curve enough when it comes to compliance. We have a lot of government agencies that regulate us and we always try to make sure we are ahead of all of them. And so far, knock wood, we have maintained a very good compliance record. But I worry about never being compliant enough. It's a tough environment we're in, and the FDA is getting very tough on all companies during their normal inspections. Nothing that we can't handle, but it certainly makes me stay on my toes, let's say. But I really have to admit, there is really nothing that we worry about here. The company yes, it's a perfect alignment. A lot of things we've been saying would happen, happened finally. And it's good. And some of them happened, coincidentally, with other good things happening. For example, the company is a strong company, but having price increases on some of our products wasn't anticipated. So certainly that was beneficial to us. But I don't really see anything significant on the horizon that could cause us any pain, quite frankly. We're still conservatively run. We're still careful how we spend money. We still realize we're in a commodity business. While we're enjoying the success of the company, it's not getting to our heads in anyway.

And we have now up follow-up question from Rohit Vanjani with Oppenheimer.

Along those lines, just had a question on that Form 483 observations. I think you sent the resolutions in mid-August. Have you received the response from the FDA or is there an exit interview expected in near timeline? Or when do you expect the conclusion of that? Arthur P. Bedrosian: No, unfortunately, with their furlough -- they were part of the furlough, so they lost a lot of time and this district is very busy. So we don't really know when they're going to come around. We've tried to anticipate that and contact them, but they don't know themselves when they're going to be able to follow up. We do believe our responses were very strong though and there wasn't much room for controversy as we were following up on all agreements we made. So if they were to come in for an exit interview, they'll find everything we told them we're going to do we've undertaken to do or completed already.

And we have no further questions at this time. I will now turn the call over to Mr. Bedrosian for closing remarks. Arthur P. Bedrosian: Well thank you, again, for joining us today. We're always available to answer further questions and look forward to reporting on our continued progress on our next call. Thank you, everyone.

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