Welcome to the Lannett Company Fiscal 2016 First Quarter Financial Result Conference Call. My name is Katie and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I will now turn the call over to Robert Jaffe. Robert, you may begin.

Thanks, Katie. Good afternoon everyone and thank you for joining us today to discuss Lannett Company’s fiscal 2016 first quarter financial results. On the call today are Arthur Bedrosian, Chief Executive Officer; and Marty Galvan, Chief Financial Officer. This call is being broadcast live at www.lannett.com. A playback will be available for three months on Lannett’s website. I’d like to make the cautionary statement and remind everyone that all of the information discussed on today’s call is covered under the Safe Harbor provisions of the Litigation Reform Act. The company’s discussion will include forward-looking information, reflecting management’s current forecast of certain aspects of the company’s future and actual results could differ materially from those stated or implied. In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with US Generally Accepted Accounting Principles and that may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Lannett’s press release announcing its fiscal 2016 first quarter financial results. For the company’s reasons, we’re including those non-GAAP financial measures in its earnings announcement. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in our earnings press release issued today. This afternoon, Arthur will provide a brief overview of the quarter. Then, Marty will discuss the financial results in more detail, followed by Arthur’s concluding remarks, which will include an update on the status of the pending acquisition of Kremers Urban Pharmaceuticals. We will then open the call for questions. With that said, I’ll now turn the call over to Arthur Bedrosian. Arthur?

Thanks, Robert, and good afternoon everyone. I hope you enjoyed our latest theme song Danger Zone by Kenny Loggins. Turning to our fiscal 2016 first quarter financial results, we reported another solid quarter, driven by strong sales across multiple product categories. Our financial results for the fiscal 2016 first quarter included a full quarter of operation for Silarx. We completed the acquisition of Silarx on June 1, 2015. I’ll talk more about Silarx in a moment. For fiscal 2016 first quarter, net sales were $106 million, with gross margin of 73%. GAAP net income was $33 million, equal to $0.89 per diluted share. Adjusted net income was $37 million, equal to $0.99 per diluted share. With our positive year-over-year results, we have now reported 15 consecutive quarters in which net sales and adjusted earnings per share exceeded the comparable prior-year period. We have made excellent progress integrating Silarx, the major elements of the integration are complete and we are very pleased that the acquisition is already paying dividends. Since mid-August, Silarx has received approvals for two products; Memantine Hydrochloride oral solution and Aripiprazole oral solution. These products expand our portfolio of generic drugs and liquid dosage form and were launched immediately upon approval. I’d like to recognize the Silarx team for their outstanding efforts. With that brief overview, I’d like to now turn the call to Marty to review the financials in more detail. Then, I’ll provide an update and will open the call for questions. Marty?

Thank you, Arthur, and good afternoon everyone. As Arthur mentioned, we reported a solid fiscal 2016 first quarter with net sales increasing 14% to $106.4 million from $93.4 million in last year’s first quarter. Net sales for our largest product category, thyroid deficiency, grew to $41.1 million or 39% of our total net sales. Our two of the largest categories, gallstone and cardiovascular, had net sales of $20 million and $8.3 million, respectively, representing 19% and 8% of our total net sales. As to net sales of our remaining categories, pain management was $8.1 million, glaucoma was $6.8 million, migraine was $5.5 million, antibiotic was $2.7 million, muscle relaxant was $1.7 million, obesity was $1 million, and other represented $11.2 million. Continuing with the remainder of the income statement and for completeness and comparative purposes, I will first provide GAAP amounts and then provide the non-GAAP adjusted amounts for gross profit, SG&A, operating income and net income. The adjustments primarily include Kremers Urban acquisition related expenses, which totaled approximately $3.9 million and separation payments due to retirement of an executive officer of approximately $1.7 million. Adjusted net income excludes the after-tax effects of these items. Gross profit rose to $77.4 million or 73% of net sales from $71.6 million or 77% of net sales. Research and development expenses increased slightly to $6.5 million from $6.4 million in the same quarter of the prior year. SG&A expenses increased to $15.5 million from $10.5 million. The increase was primarily attributable to compensation-related items. In connection with the KU transaction, acquisition related expenses were $3.9 million in the first quarter of fiscal 2016. This compares with acquisition-related expenses of $70,000 in the first quarter of last year. Operating income was $51.4 million compared with $54.7 million. The effective tax rate was 34% compared to 36% for last year’s first quarter. The lower effective tax rate was due primary to changes in the Philadelphia local tax laws as well as higher federal domestic manufacturing deductions recorded in fiscal 2016 related to a shift in our product mix. Net income attributable to Lannett Company was $33.2 million or $0.89 per diluted share compared with $34.9 million or $0.94 per diluted share. Now, I’ll provide the non-GAAP adjusted amounts. Adjusted gross profit increased to $77.8 million or 73% of net sales from $71.6 million or 77% of net sales. Adjusted SG&A was $13.9 million compared with $10.5 million. Adjusted operating income increased to $57.3 million from $54.7 million and adjusted net income attributable to Lannett Company increased to $37.1 million or $0.99 per diluted share from $35 million or $0.95 per diluted share. Our balance sheet at September 30, 2015 remained strong, with cash, cash equivalents and investment securities totaling $222.7 million. At this time, we are not updating our guidance for fiscal 2016 and expect to provide a revised outlook shortly after closing the Kremers Urban transaction. With that, I will now turn the call back over to Arthur.

Thank you, Marty. With regard to the pending acquisition of Kremers Urban Pharmaceuticals, which we announced in early September, we anticipate closing the transaction shortly. We believe the acquisition solidifies us as a major player in our industry. We continue to be excited about the strategic benefits of the combination, which include both companies have substantial product portfolios that are highly complementary with little to no overlap. Both companies have exciting pipelines, including a large number of applications pending at the FDA and a number of products with significant potential to meaningfully contribute to future growth. And our respective product development and manufacturing teams have complementary strengths and capabilities. In addition, the transaction provides a significant tax benefit as a result of a 338(h)(10) election as well as the opportunity for enhanced efficiencies and economies of scale. Shortly after we announced the proposed transaction, we formed a transition team to oversee and prioritize the many tasks related to combining the two companies. We also engaged external advisers to provide support and assist the team with the integration activities. Once the transaction is complete, the integration process will kick into high gear. We will focus on moving quickly and efficiently to join forces and build on the promise of the combining company. As you may have seen, we just filed an 8-K regarding the pending acquisition of KU. The sellers have informed us that a key customer has taken steps to transition its purchases of certain product lines from Kremers Urban Pharmaceuticals. These product lines represented approximately $87 million of Kremers Urban’s revenues and approximately $45 million of Lannett’s pro forma combined adjusted EBITDA during the 12 months ended June 30, 2015. Lannett’s preliminary plan to mitigate the potential impact of this action is focused on a combination of additional cost saving measures and obtaining additional customers to replace the revenue from this customer. There are no assurances as to the timing and ultimate success in securing additional customers. Lannett continues to expect the acquisition of Kremers Urban to be accretive in the first year following the closing. The Kremers Urban acquisition does not eliminate the potential for other transactions. We continue to evaluate potential acquisitions that are strategic fit and accretive to our business. We are particularly interested in opportunities that expand and complement our existing product portfolio and further vertically integrate our operations. With regard to our pipeline, we currently have 27 ANDAs, including nine with a Paragraph IV certification pending at the FDA. We continue to develop a number of other products, which are in various stages of development. We expect to submit several additional product applications in the near future. Our plans call for continued significant investments in research and development. We remain very positive about Lannett’s future and look forward to reporting on our progress. Marty and I would now like to address any questions you may have. Operator?

[Operator Instructions] Our first question comes from Matt Hewitt of Craig-Hallum Capital.

I’ve got a couple of questions. First off, the debt status, there has been rumors circulating here over the past couple weeks, we saw it was rated and then it’s taking a little bit longer here. What has prompted the delay and where does that debt currently sit? I mean, it sounds like you’re going to get this closed soon, but have you had to sweeten the offering a little bit to get the holders involved?

The best way to answer that is, anyone who is following or has invested in the pharma industry, depending on whether it’s big pharma, biotech or generic drugs, knows the turmoil that the whole industry has been going under with the reaction to some of my competitors in the marketplace and their business practices, some people that have bought brands and raised prices. So there’s been a lot of negative activity and discussion concerning the industry. And the sad thing is, while the industry is made up of quite a number of companies, their focus seems to be on a few black sheep, let’s say, in the industry. And for that reason, there certainly has been some concern I’m trying to get this deal transaction dealt with. I have to compliment my bankers for working very diligently and dealing with this tough circumstance in this environment, because while this company and our transaction is an accretive deal, it’s also very leverage light, you might say, should not have been a difficult transaction to close on. But there was some concern in the marketplace about pharma in general and I do think that the delay, let’s say, in getting this thing closed quicker was probably attributable to those other competitors in mind. So we want to take the high route here and not talk about our competitors and just focus on Lannett. We’re continuing to do a great job here. We believe in this acquisition, it is very similar to us in terms of the two companies almost mirror images and we think together combining the companies is where our future lies. And as we have said previously, we were concerned about making sure that we did some acquisitions this year as part of our growth strategy and that’s exactly what we’re going to conclude and just move on. The industry and all the turmoil that’s going on, as we all know, will dissipate over the next few weeks or months.

Regarding the FDA and your pipeline, several of your peers have received target action dates for their old pipeline, that is those applications prior to GDUFA Year 3, I’m curious if you have seen a similar type of action from the FDA on your older applications and maybe if you could give us some color as to when those, not specific dates, but the bulk of when those target action dates will hit for you guys?

We have seen some action, but talk to me to be optimistic, because I would say it’s still in a lot of long delays and certainly the cooperation could get better, but we have seen some improvement and some of the targeting. We certainly have seen some activity from the Agency on some of our applications. So we are getting some correspondence from them. And I would say things are moving forward on our applications at this time. I hope that best answers this is the target action dates, yes, we have received some of them and that means they’ll respond with a date.

One last one from me, the 8-K that you just filed, can you give us a little bit more color, who was the customer? Why did you lose him? The last one regarding that is, is there any ability to adjust the purchase price, because that’s a healthy chunk of the revenues and EBITDA?

As far as adjusting the purchasing price, you are going to have ask the seller about that, I don’t think he is too willing to do that, but I really can’t answer those questions. Remember, we don’t own the company. We haven’t closed on the transaction and I don’t want to identify any customers with regards to their business, but it is a customer that has a significant, one of their top three customers I describe it as. And our goal really is to replace that business. They have indicated on their side that their sales people feel comfortable they can replace that business very shortly and we’re just going to move forward. This is a normal occurrence in our business with all the consolidating that goes on. You tend to lose a customer, you go out and you replace him with another customer. So for us at Lannett, or in the generic industry, it’s really business as usual.

And our next question comes from Scott Henry of ROTH Capital.

Arthur, I can’t help but ask you a little bit more about the Kremers situation. I mean, before the deal is even closed, it looks like 25% of the revenues are at risk, because that certainly like looks like a material adjustment from the time you made the deal. I would think the first thing you want to do is to make sure that risk was properly disclosed and I’d be looking at are there areas of recourse. Could you just give me any thoughts on that because it seems like a pretty big deal?

I’m not going to say that it’s not a big deal. I mean, I’d be lying if I said that 25% of the revenue loss isn’t a big deal, but it’s not something that changes the value of the transaction. And I have to focus on why did I make this acquisition in the first place, and what was I going to do with this asset that we acquired? And so I’m the kind of guy, if you ask me if the cup is half empty, half full, I’d tell you to pour them into a smaller cup, So I’m going to look at the bright side of this. We do lose customers in our business and we trade from one customer to another as the acquisition seems take place in the market. To me, the change in this business is not something I could have predicted and do I think it harms? I’m certainly not going to sit here and tell you I’m happy about losing the revenue, but nevertheless it’s not something so serious that we couldn’t recover from it. Quite frankly, I don’t see this as really harming this transaction going forward. And while I’m not going to discount the value of the revenue we’re losing and of course the profits that we are going to lose, I don’t see this as something that can’t be easily replaced. There is plenty of market share out there. We have a lot of customers who like to do business with us. And if I were to just speak to the Lannett side, because I can speak to my own staff, they’re confident that we have customers that will step up and replace this loss to us and start switching products to us rather quickly. On the other side, the sales people have indicated that in 30 to 60 days, they will be able to replace this business. So it’s hard for me to be negative about it other than the timing issue, it’d have been nice if it didn’t happen before – it’d nice if it never happen, of course, but I’m not concerned that it happened and it’s just part of our business, we deal with this sort of thing and in my 47-year career, I have the say, I’ve dealt with it. So it’s [indiscernible] business, Scott.

Yes, I guess, Arthur, but typically in a transaction like this, there will be enough language in there to talk about material adverse events and recourse under those between the time of the announcement. You’re still doing due diligence in the completion of the deal. I guess I’m a little surprised that you’re not pursuing recourse more, but I guess I’ll take it as it is. But to be honest with you, that’s really the only question I had this afternoon. But thank you for taking it.

Scott, I just have to tell you, you had a lot of confidence and you’ve certainly watched Lannett grow under my management team here. You just have to trust me that when I tell you this is not something we are very concerned about, while I’m not belittling it, I’m not trying to ignore it, I’m just not as concerned as you are and sometimes the answer is not in repercussions or looking for fault. It’s just looking at the future of the company. But bear in mind, when we looked at this company, we realized that there was going to be decline in some of these existing products. Our modeling actually accounted for a decline. And all of that was done when we went into this transaction, nothing has changed, except you might see the acceleration of some of the decline we already had in our numbers. So we’re very conservative and we’ve tried to tell the street, we’re conservative in everything we do, including acquisitions. So this is just an acceleration of what we’re already anticipating from this transaction to occur anyway. We’re not optimists when we’re buying a company. We look at worst case scenarios and this fit that bill. So did the timing of it hurt? Yes, what I want to walk away today because of that. No, I wouldn’t. This is still a great acquisition. It’s still going to be great for Lannett and allow me to grow dramatically. And I got to look at the positive side of this what does it contribute versus what could it have contributed? So it’s going to contribute a little bit less than I was hoping to have, but that could have happened anyway in time. And my goal isn’t to look at the things that have happened, but what am I going to do about it? And we have a plan to fix this to go forward and grow the business. So, yes, there’s a lot of work on my plate quicker than I anticipated, another issue to deal with rather quickly, but nothing that we’re not prepared to deal with.

First of all, as we’ve said on the prepared remarks, we’re going to be doing another call to talk about guidance going forward after we close the transaction. So they’ll come in the next few weeks, somewhere in the month of November likely, I imagine. But as Arthur said, I want to just reiterate that. On the baseline business, you know how we approach the Lannett side of our business that we’re pretty conservative on our existing product line and the growth is primarily coming from the pipeline. And in our own modeling, we’ve taken a similar approach on the KU side. So inherently in our numbers, this part of business is decreasing. So over time and in fact within about three years or so, the dual fact that assumption that sales will decrease generally speaking of existing business and sales growing on the top line because of, primarily driven by the pipeline, the significance of this impact three years out is cut by more than half. So that’s in our favor. And the other piece is that with synergies, we’ll talk more about this when we give guidance, but the synergies are looking more favorable than we spoke to or spoke about back on September 2 when we announced the transaction. So as Arthur said, this will be manageable.

And I believe in your prepared remarks, correct me if I’m wrong, you do still expect immediate accretion and...

We referred to that as accretive in the first year, yes.

In the first year you’ll expect an accretion and would you still expect significant accretion in 2017, fiscal 2017?

Yes. We will provide more guidance and more of a perspective on that on our second call, but right now, yes, in the first as we’ve said in the 8-K, in the first 12 months, the transaction will be accretive. We expect them to be accretive.

Our next question comes from Rohit Vanjani from Oppenheimer & Company.

Just wondering when did you actually lose the customer? Because I guess, IMS data is indicating down revenues in calendar 3Q 2015. Is that because of the customer loss or is that – is the customer loss on top of that downward trend?

We don’t own the company, so I’m not capable of answering this question comfortably, because I don’t know the answers and I don’t want to mislead you with what I think, but we know that the transition occurred just recently. So it couldn’t have had anything to do with the prior year. But if you remember, the loss of that rating is what really brought about a decline in business as far as we could tell and it continues to decline as the refills or the new prescriptions no longer could be filled with the product and at best only some of those refills can be. So we expected this product and it has been declining and we projected it to decline further. So one product is a significant part of their revenue clearly. And I believe that might be the product you’re referring to. I don’t know why IMS doesn’t show anything, but the new change probably won’t be in full effect till may be January, because they’ve just told us about it. So I’m presuming that there is not going to be a significant change for the next couple of months. So I would think that what you’re talking about happened previously over the AB rating.

So I guess I have that confused. I thought that you thought that it was stable now [indiscernible] stable and then the overall business was stable, but you continue to see declines and then you’ll see this customer loss hit in the beginning of the next year?

Yes. What we said it was stable and we did feel that the stability of the decline on those – the major declines, let’s be clear, when we say stable, the major declines occurred already and then we expected to see a leveling off, but in our projections we had it continuing to decline. We knew that there will be potential competitors in the marketplace. So in our modeling, this product was going to decline further and that was known to us before we made this acquisition.

So when you gave – I think it was the last call, it was at $240 million of revenue from Kremers Urban. That includes the decline that you already baked in and then there should be an additional $87 million on top of that, from the revenue contribution of KU?

The numbers we gave previously were before any change we speak of now [indiscernible] September 2, Rohit?

Yes, the $240 million was – then that didn’t include any decline in that base business?

Correct. Hold on, included the decline that we were projecting in that particular product. This is sort of incremental on that, but because we already assumed a decrease, the impact on our numbers isn’t that great. We assumed a decrease for a different reason, put it that way.

You said that the very least go down, that $240 million should go down by the $87 million now, because that $240 million you are saying baked in some decline?

It is, exactly.

But then the $87 million is on top of that decline now?

No, not completely, because you’re just also misunderstanding. As you said, that number had some decline in there already, not significant in the first year. We had – in the first couple of years, the product was...

You know that, it might be the seasonality. If you remember this product falls off in the summer months, maybe that’s what you’re seeing. When kids start going to school, there is usually a general decline in the use of this one product and that maybe what you are dealing with.

Maybe I’ll follow-up after the call and may be some more details. And I know you said you’re still interested in the KU deal, but is there a break-up fee? And if there is, how much is it?

No, there was no break-up fee.

And I think Matt tried to ask this question before, but initially you were saying the debt was 5% to 6%. Are you still thinking around that range?

No, we’re thinking a bit higher now. As Arthur said, the market has changed since we started the project and since we announced back on September 2. As Arthur said, the market has changed now, so we’re expecting a higher number. We’ll talk more to that when we give guidance.

And then as far as the base business Ursodiol, Digoxin and Levo, do you still anticipate kind of the revenues being in line with whatever you had said before. I think Ursodiol was something like $75 million to $80 million, Levo $150 million to $155 million and Digoxin at $30 million. Do you still anticipate those products being in that range for fiscal 2016?

Correct, yes.

[Operator Instructions] And it looks like we have another question from Matt Hewitt of Craig Hallum Capital.

Just a quick update or a follow-up on the Levo, I think it looks like you got one more competitor into the market here this past quarter. Do you have any sense for how many more maybe in queue and I know that you guys, as you’ve mentioned a few times, you look at your numbers and your guidance pretty conservatively. How much have you factored in from new competitors entering that market over the course of the next year?

Well, first of all, I’m curious what new competitor you are referring to and to this quarter.

I’ll see if I can find it in the e-mail, hold on a second. I had seen that someone else had gotten an approval here earlier this quarter, but I’ll keep digging. If I don’t find it, I’ll talk to you about it on the call back, but so there is no new competitors have entered?

No, we’re not dealing with any competitors that have entered the market except for the – there is an oral solution that entered the market. You might be referring to that product?

Yes, I’m sorry.

That’s okay. So no, nothing in solid oral dosage area.

And as far as the pricing and the shares have been relatively consistent, I mean, obviously you just reaffirmed your guidance for that product. But that’s been relatively stable relative to your expectations?

Yes, stable to up.

And it looks as though we have no further audio questions at this time.

I’d like to thank everyone for joining the call and look forward to speaking to you next week when we will give guidance post the close. Marty is looking forward to that night.

I’m not sure it will be next week, but it will be soon.

Thank you ladies and gentlemen. This concludes today’s conference. Thank you very much for participating. You may now disconnect.