Welcome to the Lannett Company Fiscal 2018 Second Quarter Fiscal Results Conference Call. My name is Sheryl, 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. [Operator Instructions] Please note that this conference call is being recorded. I would now like to turn the call over to your host, Robert Jaffe, Investor Relations at Lannett. Sir, you may begin.

Good afternoon everyone and welcome to the Home of the Superable Champaign Philadelphia Eagles. Thank you for joining us today to discuss Lannett Company’s Fiscal 2018 Second Quarter Financial Results. On the call today are Tim Crew, our recently appointed Chief Executive Officer; and Marty Galvan, the company’s Chief Financial Officer. 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’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 refer to non-GAAP financial measures that are not prepared in accordance with U.S. 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 2018 second quarter financial results for the company’s reasons for including 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 the company’s press release issued earlier today. This afternoon, Tim will provide opening remarks on the business, some brief comments on the quarter and conclude the thoughts on Lannett’s past forward. Then Marty will discuss the financial results in more detail, including the company’s revised fiscal 2018 guidance. We will then open the call for questions. With that said, I will now turn over the call to Tim Crew. Tim?

Thank you, Robert and good afternoon everyone. Welcome to Lannett’s fiscal 2018 second quarter financial results conference call. My first conference call with the company’s new CEO, I’m delighted to be here. I’ll discuss the second quarter financial results in just a moment, but before I do I’ll share so my initial thought is join the company about five minutes to go. As some of you may know and may have read, I have been part the function of industry for more than 25 years and have held senior level positions at Cipla, Teva, Dr. Reddy's, Bristol-Myers Squibb. In those roles, I've experienced across virtually all functional areas. Every company has its strengths. So, my first priority was to connect with as many employees and colleagues as possible. I've been with our teams at our facilities throughout the countries with the objective of evaluating the company to learn what's working and of course what might be improved. I’ve also met and spoken with other key constituents, including customers and partners, many of whom I know from my role in previous companies. I am pleased to say that I have learned we have a great team of dedicate professionals committed to the reliable supply of high quality medicines. Not surprisingly then I found Lannett to be lowering company with a fundamentally sound strategy focused on managing the base business building out a pipeline while remaining open to opportunistic drivers of value. I acknowledge the good work my predecessor and the team has done in building this business. Moving forward however, we will pursue shares of adjustments. First, we plan to achieve more financial flexibility by paying down our debt even more quickly than we have so far and continue to pursue certain refinancing options. As evidenced of our commitment to paying down the debt we made a voluntary 25 million payments yesterday with some addition to the 27 million in principal payments made thus far in fiscal 2018. The recently enacted tax reform, will provide added cash flows that can help with this effort Second, we are recalibrating and looking at the timing of our operations estimates to better support our strategies. We plan a slower rate of plan growth in certain long-term CapEx and in certain product development projects to make more resources available for in licensing and product acquisition. Because of our resources, systems and operations, Lannett has long proved itself to be an attractive and ready for-business partner in ways smaller companies reflect abilities or larger companies with more lacking portfolios cannot. Obviously, the increased focus and the growth of our current sales base with new partner products and new customer awards will help further diversify the revenue streams and improve our financial flexibility to do even more. We have already taken actions with the new partner products and new customer awards of in-licensing of Metoprolol XL, generic Toprol, which we launched a few weeks ago. Also, as we've said in the second quarter release, we have just completed the acquisition of bio products UCB including some mature brands and ANDAs. We plan to launch three new products which are currently being market in the current fiscal year. On an annualized basis we expect the three products to generate approximately $10 million in combined revenues with a gross margin percentage is slightly below our historical average. As I've said earlier we are looking to do more of these kinds of transactions because they diversify our revenue streams and generate cash and continues to further pay down debt and invest still more in our future. Sales and the total loss in the products I just mentioned are included in our guidance which Martin will discuss in more detail shortly. It's important to point out that although licensed products typically have a lower gross margin percentage and they show our overall average, these are expectations products to add to top and bottom lines. The last adjustment to our strategic plan that I'll mention today is increasing our efforts to achieve operating efficiency. The company has experienced tremendous growth in recent years and as a result there are several areas where we see opportunities to further increase efficiencies, increase the output of our plans to support recently improved products. I'll now turn to our financial results. For fiscal 2018, second quarter, we are very pleased to report record revenues and a 19% increase over the first quarter. The higher revenues were primarily driven by increased demand for couple of key products. Please recall that in November, we raised our guidance largely based on our expectations of higher sales of Levothyroxine, when a hurricane led to widespread power outages in Puerto Rico. Our competitor suppliers destructed during that period, the competitors resumed production earlier than we anticipated. As a result, the increase we did achieve in the second quarter was less than anticipated. Turning to the bottom line our second quarter earnings also significantly benefited from tax reform. We are proud to be a U.S. company that makes its products, employees and staff and generates its sales in this country. As such tax forms has had and we expect continue to have a very positive impact. Martin will discuss reforms in more detail shortly. Looking ahead over the next few months my focus will be to continue to align the team, the organizations and our investments along the lines of our strategies. As I mentioned earlier, we will be particularly looking for new products to launch and expand our offerings. Before turning the call over the Martin, I'm pleased to say that Arthur Bedrosian our former CEO has agreed to a strategic advisory role of the company. He will be focused on transitioning and strengthening our relationships with our key alliance partners of JSP and HTC among others. I'm happy to have him on board and look forward to continue to work together. So, to summarize, we had a great quarter and I'm delighted to be aboard. Our plans and goals are to pay down debt faster to increase financial flexibility and to in-license and acquire products more aggressively to diversify our revenues and of course enhance efficiencies to drive our bottom line. Finally, on a personal note, I want to thank all of my new colleagues at Lannett for the warm and very patient welcome. With that I'll turn the call over to Martin. Martin?

Thank you, Tim and good afternoon, everyone. As was mentioned earlier I'll be referring to non-GAAP financial measures. The reconciliation of the GAAP to non-GAAP numbers can be found in today's press release. Our earnings release also includes a schedule of our net sales by medical indication. Now for the financial results on a non-GAAP adjusted basis. For the fiscal 2018 second quarter, net sales were $184.3 million, compared with $170.9 million for the second quarter of fiscal 2017. Gross profit was $96.7 million or 52% of net sales compared with $96.2 million or 56% of net sales for the prior year second quarter. R&D expenses were $10.7 million compared with $9.9 million. SG&A expenses were $20.9 million compared with $17.0 million. Operating income was $65.1 million compared with $69.3 million for the prior year second quarter. Interest expense decreased to $16.2 million from $17.9 million. Income tax expense decreased to $10.5 million from $17.5 million, which represents an effective tax rate of 20.5% and 33.7% respectively. The decrease reflects the favorable impact of the recently enacted tax reform. Net income attributable to Lannett was $40.6 million or $1.06 per diluted share, compared with $34.5 million or $0.92 per diluted share for the second quarter of fiscal 2017. Turning to our balance sheet. At December 31, 2017, cash, cash equivalents and investment securities, totaled $167.7 million, and our debt was $886.1 million. As a reminder the debt balance I just mentioned was further reduced by voluntary payment of $25 million we made yesterday. And we remain well within our required debt covenant ratio. Turning now to our guidance. Reflecting our modified strategies, the expected launch of several recently acquired products and an updated estimate on sales of a key product, we have revised guidance for fiscal 2018 full year on an adjusted basis as follows. Net sales in the range of $680 million to $700 million, down from $710 million to $720 million; adjusted gross margin as a percentage of net sales in the range of 48% to 49%, down from approximately 51% to 52%; adjusted R&D expense in the range of $36 million to $38 million, down from $46 million to $48 million; adjusted SG&A expense ranging from $71 million to $73 million, down from $77 million to 79 million; adjusted interest expense and other in the range of $62 million to $63 million down from $66 million to $67 million. The full year adjusted effective tax rate to be approximately 27%, down from 35% as a result of recent tax reform. Based on the midpoint of the guidance above we expect tax expense will be reduced by $13 million. Our fiscal 2019 effective tax rate will be further reduced to approximately 21%, as a result of full year impact of tax reforms. And lastly, capital expenditures in fiscal 2018 in the range of $45 million to $55 million, down from $65 million to $75 million. Regarding the phasing of the remaining quarters of fiscal 2018, we expect our third quarter net sales and profitability to be slightly higher than the fourth. As a reminder, our guidance does not include sales from product applications currently pending at the FDA. Nor this our outlook include sales of pending ANDAs of our strategic partners or benefit from any potential acquisitions, strategic alliances or possible further pay downs of debt. With that overview, we'd now like to address any questions you may have. Operator?

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Andrew Finkelstein from Susquehanna Financials. Please state your question.

I was hoping you could talk a bit more about the environment for some of these licensing deals, in terms of the level of competition you're seeing for transactions maybe how the structure maybe different than deals that have historically been in the space if at all how you're approaching maybe differently than Lannett has done over time? And then if you could talk a bit more specifically about the timing on some of the upcoming launches and how we should think about that in terms of our quarterly revenue progression? Thanks.

One of the things that really attracted me to joining Lannett which as referenced in my opening statements is I love the mid-market position of the company, the company had lots of shots on goals and been built up over the past several years and as we look forward out there, there was quite a bit of people calling me every day, some I know, some I don't, that are offering up product opportunities, we're not in a position to consider something subsequent in terms of acquisitions but from in-licensing perspective of the products and portfolio affections, receptors, we're a great partner, we have the sort of the capabilities that make us most relevant that some of the smaller companies that can't have, don't have and our portfolio is not at the scale here yet that it has a number of overlapping situations that a big company would have and these products as we bring them in, which is the as the two groups of products we mentioned on the call today move the dime for us as an organization, so we're -- I see lots of opportunities and there is lot of folks developing products across the globe quite frankly, they have a lot of expertise but they don't necessarily have the infrastructure necessary to bring to market and not everybody has the appetite to bring into their firms. We are not the only people doing that but are a much smaller subset in the overall number of players in current space.

And from restructuring perspective, I mean do you think of mainly competing on your ability to maximize the products or do you look to take on some amount of financial risk in the deals. How do you balance that with the margin profile of what you’re getting?

Yes. So obviously we into the days look at margin dollars, not margin percentages, I’m always thoughtful especially in the world where China look down to our debt diversify our sales base. But as it relates to the structure there is a lot to the product, right and there are quite a few products that are ready to go and then Boston simply has shown the margin and yes, the margin percentage will be down but we're adding dollars to our pocket. And there are also development deals out there where we do pay some portion of that development expense to get a higher percentage of that participation. And that’s fine too, for the same reason that just discuss increases our margin dollars but equally this is important that it diversifies how we are investing our money, balancing what we do internally for own capabilities with the capabilities and technologies and capacities of other firms out there that are looking at the front-end and the operating capabilities of new brand.

Thanks. And on launches?

Yes. Andrew the launches in terms of timing, our guidance right now, they’re essentially in the both company in the fourth quarter at this stage. There is a, piece of it in our third but it’s almost all the fourth quarter for now.

Our next question comes from Greg Gilbert from Deutsche Bank. Please state your question.

First, Tim, can you talk about how your vision for the future of the company is different from the one you inherited in a little more detail, I know you talked about ramping up in-licensing activity but perhaps you have some other comments about your commitments to paying and other partnerships and other changes you want us to know about your vision? And secondly, where do you stand on locking down an arrangement with JSP to secure your most important for now product over the longer term? And lastly Marty, can you help us with tax rate just pushes and pulls beyond this year. I know you’re not guiding beyond this year. But is 27 sorts of a good rate to use longer term based on your structure and your product mix as it is now? Thanks.

Thanks Greg. Let me start with the JSP, first obviously it’s a critical important relation we look forward to expanding that relationship overtime. We obviously have a very long mutually beneficial relationship with the JSP, they are a significant shareholder and would be happy to add that to their share base. I’m optimistic, because of the number of things we have going on between the two companies that there is a big need for us to continue to partner as we have in the past. Please note as we’ve announced earlier and I noted in my remarks, we have retained Arthur to facilitate and guide exactly such transactions and conversations and transitions and look forward to doing that with them. The timeline of these sorts of transactions have their own pacing. But it's clearly a priority and we’re optimistic that we’ll come to a good position in a relatively not too distant future. Stepping back at that more broadly to the sort of nuances of strategy, as I noted, the fundamentals of pursing the base business and adding products to our pipeline and pursuing opportunistic value remains, I think, relevant for the firm. I’m thinking a little bit more about rate and speed, both with respect to a timing of the investment, making sure some of our R&D investments are near-term partnering. I think we need to do both long-term and the short-term. I think short-term drives at the end of the day long-term, so I am looking to recalibrate a bit how we spend that money. Some of the guidance I guess that Martin just spoke to, you hear about down. But we're not decreasing R&D spending at all. We've a very high level of R&D spend, we're going to continue to make that spend. But the ramp-up we're thinking about again getting more financial flexibility, paying down that debt and generating more near-term revenue with partnerships that not only generate near-term revenue but again from a risk perspective provide access to different technologies, different resources, different points of view. We want to spend those resources wisely. So those are the two big portions. And you asked about vertical integration, we are still quite committed in that space. It's an exciting space. It's a big space. It’s a few years out before we have a material impact on the scale of that work. But we're continuing to drive forward in that relationship and looking for ways to again optimize it's like everything else we're doing here.

So, as far as the tax rate goes, as you said we're reflecting a 27% effective tax for this year, next year in 2019, fiscal 2019 we expect that to be 21%, next year, so I would say worth of that at this stage.

And sorry one more Marty can you provide the cash flow from operations you generated in the quarter if you have that handy?

Yes, just give me one second here. Yes, in the quarter its 78 million, or I'll give you a better number, $77.7 million.

Our next question comes from Dana Flanders. Your line is open.

My first one here can you talk a little bit about just revenue guidance and why that's moving lower, I would have thought with Toprol coming in and some of the other products you mentioned, revenue guidance would be moving higher is that all Levo or are there other parts of the business that you're adjusting for, as well? And then my second one here on C-Topical just in light of the competitor approval, can you just maybe share how you're thinking about that opportunity now long-term? Thank you very much.

I'll start with the first part, as far as the revenue guidance goes, yes, you're right, the main driver of the reduction in the guidance is the Levothyroxine, which as Tim indicated to me over anticipated. The other part is -- and that's the majority of the decrease also there's some other parts, when we reflected some smaller, or less large decreases, one other operational point as we in our guidance we've actually delayed a bit -- further delayed some of the products which have been approved but not yet launched. We approved those in and moved them beyond another quarter or so. So as these factors legal delay in the products, approved not launched and just some other operational -- smaller operational changes.

On the cocaine side, there's quite a few moving parts here obviously first and foremost we want to note that the FDA continues to review our 505B2 NDA and we've FDUFA today and we're working hard to see that product comes through the system. We also continue to market our existing products, in that space and we expect to be able to do so for about a year, so what you may have heard in terms of exclusivity that have not been granted to the 50 capacity products. So, we are pursuing our pending energy A with the same rigor and we continue to mark our own perhaps just some validation to safe that our people are looking at it. I would also note that as of today, we have not seen the launch of that competitive product and again the exclusivity is nothing we’ll certainly book as of, I guess February the most recent update. And so, we’re currently value options leaving the changing landscape to figure out the best way to invest behind the opportunity in this asset.

Our next question comes from Elliot Wilbur from Raymond James. Sir, your line is open.

Just want to start out with a few specific product questions going back to the alteration and expectations for levothyroxine. Assume at this point that’s primarily based on market share and those reacquiring customers that were maybe lost during the disruption and there really hasn’t been much of the change in price? And second part of the question is how reasonable is it to assume that some of the incremental business that you’ve acquired, at least what's showing up at this point in terms of RX market share. How sticky do you think that is at this point?

Yes, the market is really returning back to where it was prior to the guidance. I want to, start certainly a good year. Certainly, ahead or we start our unit's projections add and just as, we called anomaly. But the same opportunities at the partnership did a great job producing product to marketable customers have means. We’re pleased to have performance but it was not a sustained market situation and looking forward we see things returning largely to where they were prior to the most recent tech in that second quarter. In terms of stickiness, there are people where concerns around this Narrow Therapeutic Index we may pick-up some incremental volume around that sort of space. But by and large our expectation is now or to maintain the good year, we’re having on the rates we are having more around the first quarter versus the second.

Okay. So, I want to follow-up with just a couple of other product specific questions maybe just or category specific I guess. Anti-psychosis, looks like it outperformed expectations substantially just wondering if you could comment there on some of the underlying trends or product dynamics that drove that. Certainly C&S also I think short of where external expectations were and just kind of wondering what sort of the key underlying driver there. And if you could also comment on the migraine market category, specifically sumatriptan nasal spray product. It looks like Sandoz has begun to reacquire shares. So, I just want to get your sense on that.

So, Elliot, I’ll kick off on that one. On the anti-psychosis, that category is -- [indiscernible] basically. It’s 90% of the category. We do have a strong quarter. We are not expecting to continue with that level, that we saw in the second quarter. Just our intelligence of the supply in the market we think made in some excess for their purchase. So, we’re not continuing with that high spike as seen in the second quarter. So that's anti-psychosis. On central nervous system, predominantly, the methylphenidate products. The decrease you're seeing there is really the mezzanine products, which we have stopped selling at this stage, that essentially is the decrease that you're seeing there, both in the quarter and in the year-to-date numbers. The next category was migraine. I believe you asked about sumatriptan. Sumatriptan is about two thirds of that category. Product continues to do well. In the past we've talked about the supply, circumstance in the market where competitive products are not able to source the product there is a challenge in manufacturing, I won't go too much in detail with other company's problems that's what you're seeing there in the migraine. For the first -- for the next -- for the short term, foreseeable future we are expecting that to continue.

And if I could just add a little color I think in -- I think it's important to note and congratulate the company on, there was a fairly significant engagement here to convert the broader elements of the company to SAP. And when you do that, certain customers will think a little bit ahead and add to the inventory in this particular product as that sort of space. I guess specific question now on the migraine products, we do understand the competitive results coming back on the market there as well, and we were expecting to be fairly stable again back to original trends before they have some of the disruption.

Okay, again last question for you Tim more of a strategic question and specifically thinking about the control subs in this market, obviously it's an area the company has talked about a lot over the years, you have suggested that longer term that would be a significant component of long term growth and there's been a lot of investment made there. But I am just wondering sort of how you're thinking about that opportunity in light of what we're seeing within certain control substance categories, whether or not you're still as committed to it and whether there's things that you believe you can do based on your assessment at this point, to sort of accelerate revenue realization in that area of investment?

So again, I think I stated earlier, we are maintaining our R&D and CapEx investments the rate and speed doesn’t matter to me and so we're thinking about how we pace these things to optimize and manage our returns. That future space is extraordinarily large, with lots of important patient utilization, now currently there's a number of concerns about proper using and we respect and support initiatives in that space to be a part of the solution not part of the problem, but at the end of the day it's very-very good category which we expect to grow, there's unfortunately lot of patients in the America and even if that category has continuation as people think about more of the appropriate uses, a very big category for us and so I still like it relative to both our finish those capabilities and the integration back to a vertical side. The vertical side again takes time, we've been investing money there and we continue to invest money there, vertical integration is in one part typically considered around issues of cost of goods or lower costs, or better margins but the optic guide have primarily in that space, it's about guaranteeing your supply, which is incredibly important to our customer set, for many-many years. And we've seen it in this portfolio and lots of others. Success in this marketplace has often been who can continue to reliably supply product, and so vertical integration to any category. And this one is good for us because we have so much in the finished dose side I think helps us with that core commitment that is so important to driving engagement and share with our customers. So, I like it very much in that space. Getting to scale on that will take some time, and thinking that through is we’re doing that on a weekly basis. But I like it and we’re committed to it. And we’ll figure out any nuances to it as we go forward.

Our next question comes from Gary Nachman from BMO Capital Markets. Sir, your line is open.

Tim, when you think of the C-Topical opportunity, are you just as bullish as Arthur I guess has been getting on this recently? And will you try and leverage that branded business to bring in more brands at some point? How do you think, from a big picture perspective, in terms of maybe having a branded business together with the generic business down the road?

So, I don’t know exactly what has been set up and said on the records of what degree of bullishness is out there. I do think this is a very logical extension of the space that we’re in. This is not developing a new chemical entity. This is leveraging both API and finished those capabilities in the space that has enormous volumes as people deal with that space. I think as we get started here as we think through what the opportunity looks like, obviously has to be somewhat smaller. In fact, that there is a competitor in that space. So that should cause an obvious moderation of expectation. But in terms of what we do now versus over time, all companies, most all generic companies, are nibbling in this sort of area, I think it’s important to find the balance where we have competencies to do that and to develop a product and distinguish it a bit from the commercialization side. So, I’m open to thinking through how we best commercialize this product, which could be in our hands or with somebody else if they share our views of its opportunity. I think that’s an ongoing process today. Is there another question in there?

Well, just like longer term. Do you think it's important for a generic company to also have a branded business alongside it like some of your peers do?

I think it’s important for some people and on our shareholder call that continuous and solid and steady growth. Clearly, there are elements of the brand space, which is a little bit more expensive to go into, takes longer to build. But once it is in place its more sustainable. And there are some natural affiliations between a lot of what a company does in generic space, in the brand space. But, I do think, it’s important think we are quite a bit of differences between them. So, one of the things I guess as we talk about the strategy is going to a little bit more focused on perhaps a narrow set of initiatives. Opportunistically, we’ll chase a bunch of things that makes sense to us, but I do think as it relates for Lannett today, the bulk of our revenues will be on that generic side for a period of time and I would love to find branded opportunities that make sense that don’t cost too much money and don’t present too much risk. But have a probable ability of growing. So, that’s a bit of a generalizing answer, but the question is of an issue that it's kind of by product-by-product opportunity and we pursue that, I think opportunistically as opposed to a core strategy at this point of the revolution.

Okay. And then on the generic pipeline. And I know you're trying to maybe diversify the portfolio a little bit more and have some partnerships that are going to complement what you do internally. But you have a goal for how many ANDAs that you want to file every year that you will be generating internally. I mean, it does seem like you're scaling back off a little bit in terms of the expenses. But you made a point that you're not really changing the investment behind a lot of the programs. I just wanted to reconcile how you think about the pipeline and what you can be able to turn out of it?

It is a really important question, spent a lot of time on this and we'll continue to do because there's really product by product engagement, while I clearly want to see more products, sooner than later in our portfolio, it's really question of quality not necessarily quantity, there's lots of legs bringing a whole bunch of products, very surely but they wouldn't be actually contributing to my margin dollar equations as opposed to top line piece, we do want both. So definitely more we want to be efficient, that we want better yield out of our investments, there's absolute true, it's important to be thoughtful about what is our capability in terms of ability to execute when we ramped up R&D so much in the last couple of years, and how long it takes things to the equation, so I want more, I want a blend of risk, I don't want to be all invested in the great teams that we're building here in Lannett today. I want to think about a lot of expertise that exist across the industry and my background has extensive amount of BD experience and I think most all the portfolios, most all of the major generic companies have significant business with all, whether there's an acquisition or licensing issues, there's very few companies that I can think off that has this portion there, now their internal sales have been internally developed, right? So, I think this recalibration is a natural evolution of our scale and size. And I'm committed to doing so, and we'll come back to you with time as we think about levels of investment, man invested, time invested, right now we're not backing them at all we're just recalibrating what is internal and what is external and willing to take a lower margin profile for sure and certain revenue than last year than this.

Okay. And last question for Marty. Just explain a little bit whiter gross margin is coming down as much as it is in terms of the guidance given what you did in the first half of the year? And I get the pieces there but maybe you could just help us quantify it a little bit. How much is the lower Levo versus, I guess, these new partnerships that have been contributing lower margin revenue?

So, yes, I mean our second half of the year gross margin is lower, as highlighted in the guidance, there's two key factors there, the decrease in the levothyroxine business which is a gross margin higher than our company average that's coming down that's an unfavorable gross margin percentage, the other piece is the addition of the overall product, it brings us good topline sales and good profit and albeit in lower margin as other products. So, it's logical that the margin there will not be as good as our company average as to say, so those are the two peak drivers there that are bringing down the gross margin in the second half of the year.

Our next question comes from Matt Hewitt from Craig-Hallum Capital. Sir your line is open.

Just I guess three questions for me, first would it be possible to get an update on Methylphenidate, I believe there was still an outside chance that, that product could get the AB rating back if we can get an update on that? Secondly, if we can get an update on the large customer that started to come back last year, where that sits today. And then lastly, if we could get an update on your current and the pipeline and maybe the TAM that goes with that? Thank you.

On the first question, methylphenidate. It remains a good product, with a good margin, but I think the last for me patents a lot in that space it looks a new entrant. And so, as we look forward, we see our position is drifting down. Our share has been and we hope to remain in the mid-single-digit. So, I don’t think we have a huge risk profile around that. But it is, what it is. We are certainly continuing to pursue the FDA. We did file a petition for hearing regarding the status of the product, probably it would take up to a year before that petition is heard regarding to the U.S. regular product but we continue to market. And it’s a good product but it’s less than it used to be. The second question was on what was the customer question?

The large customer that started to comeback last year. I believe it was CVS. Where is that relationship today, do you continue to add new product through that channel and how do you see that developing going forward?

Well, I learned long ago not to drop names with large customers. We care about all of them, they care less about each other. So, it's always little bit and delicate to get too much a detail in that space. One of the things I found when I joined the company that was both sort of yin and yang it's a surprise in an upside is that we are on the developed, we’ve got good customer relationships across the industry but those currently areas to expand our depth and breadth of those relationships in some areas more than others. I have been selling to all of these key customers in various capacities in scale and size both in their organization’s growth and their personal growth as people in the organization and I’m optimistic that we will see growth and development in that space that will help to diversify our sales base and grow the sales. We need to earn the trust of all of those customers to do so. And that’s important context. And I think at some level, I am quite comfortable, you can ask the customer how they feel about us. I think our reputation is strong and even stronger and quite confident that there are opportunities to add sales and dollars as we keep in that trust and add more new product launches to the portfolio that we offer.

That’s great. And regarding the pipeline and the possible TAM if you got it?

The possible, excuse me?

The TAM, the market size of that and the pipeline?

Yes. We have, I don’t know dozen or so products that are pending at the FDA. There are, I think the generic market size and my guess is 500 million or something like that. So again, I think, much as the customer question that I see a lot of opportunity for expansion again to diversify, add revenues and grow the business/ I would say the same size on the pipeline perspective, right? We basically launched -- we'll be launching four or so products in the next -- we have in-license products for the last six weeks right, that we think has good value for us and growth. So, I think the size of the upside there is really my focus as opposed to where we are which is great and is going to progress, but there's a lot of opportunities, we're a midcap player and they are building out there for us to work on.

And our final question comes from Scott Henry, from Roth Capital. Sir, your line is open.

I will try to be quick. First Marty, could you talk at all about the trajectory for revenues in the rest of the year. I know there is only a couple of quarters but any color you can give us on how that should trend out?

Sure Scott. The two quarters are fairly similar in revenue -- in total revenue although we think it's slightly weighted more to the third quarter, than the fourth quarter at this stage. The key driver there is as levothyroxine settles back down to the normalized levels, that is what is causing that movement or that trends from the third to the fourth quarter.

So, we should think about Levo is perhaps still having a little tail benefit in third quarter and then really be normalized in Q4?

That's relevant, yes.

Just another question on Levo, I think when you did the deal I recall it was a five-year deal with JSP with an option for another five years, could you talk about how that option factors into the negotiations, if at all, are you pretty much starting from scratch or how does that factor in?

Again on -- there's two parties to the negotiation, we're going to have that conversation with them in terms of things that matter to them and things that matter to us. I want to stress that as a long-term relationship with a lot of moving parts, shareholder relationships, share purchase opportunities which I think is disclosed in all of our documents and again working with doctors to find the way that makes sense for them and us in the way we move forward, as quickly as possible. So there's a renewal component as it relates to the current contract, but we just sit down with them and find out whether the things that they most care about in order to make the productive conversation, so I won't speculate here on those moving parts but just please trust that that it is an incredibly high priority for us and we are working with all the folks in the company before I came and a while I am here to make sure that comes through a great outcome for both parties.

A final question a very quick one, contract manufacturing I know it's not a huge lever but it's been bouncing around a lot, it's been strong in the first half of both years, is there just noise there or how do I think about that line?

So, Scott, principally as you know it's never been a core focus of the company from a strategic perspective, we had some weaker sales in the last several quarters, but I do not expect that line to deteriorate where we are right now, so I think it's safe that for now at least to say that this slippage has stopped, and we've taken a step -- the second quarter is still representative of what we think the next two quarters will be.

And speakers we have no further question.

Well then, thank you everyone for joining the call. I look forward to sharing our progress on our next scheduled conference call. Again, thank you for joining us today.

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