Welcome to the Lannett Company's Fiscal 2021 Third Quarter Financial Results Conference Call. My name is Hilda and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this in conference is being recorded. I will now turn the call over to Mr. Robert Jaffe, Investor Relations for Lannett. Mr. Jaffe, you may begin.

Good afternoon, everyone, and thank you for joining us today to discuss Lannett Company’s fiscal 2021 third quarter financial results.

Thanks, Robert, and good afternoon, everyone. We trust you all remain safe and well. Despite the pandemic and ongoing headwinds specific to our industry and our company, we are proud of our significant progression on several strategic fronts these past months. First, we refinanced our debt providing significant balance sheet runway to execute on our growth plan. Second, we advanced the development of key large pipeline assets, third, we expanded our pipeline of key assets and more such assets are being actively pursued and fourth, we maintained our operating discipline and are tracking to our near-term goals. I thank our Lannett team twice over actually, along with our partners, suppliers, customers and advisors for helping us navigate and move forward through all the turbulence over the last year.

Thanks, Tim, and good afternoon, everyone. I will begin with our financial results on a non-GAAP adjusted basis. For the 2021 third quarter, net sales were $112.4 million, compared with $144.4 million for the third quarter of last year. Gross profit was $30.4 million or 27% of net sales, compared with $52.3 million or 36% of net sales for the prior year third quarter. Our gross margin for the quarter grew from the previous quarter largely due to improved manufacturing efficiencies, and to a lesser extent sales mix. More specifically, increased sales of certain higher margin products. Net sales for the quarter were lower than expected, primarily due to the competitive market pressure for both Levothyroxine tablets and capsules. Research and development expenses declined to $6.0 million from $7.4 million. SG&A expenses declined to $14.4 million from $17.7 million. Interest expense decreased to $9.8 million from $12.7 million in last year’s third quarter.

We have a question from Gregg Gilbert from Truist Securities.

Good afternoon. Tim, I was hoping you could comment on generic ADVAIR. Is the need for more than review cycle always been the plan in this case? Or did you get clarification?

Thanks, Gregg. No, we all – expect at least one review cycle given the complexity of this filed drug device combination along with micrograms and all sorts of FDA requirements. So we are assuming at last one review cycle and with any good fortune of we’ll be launching in calendar year 2022, but we need to firm that up post from FDA feedback which we have not yet received.

Okay. When might you get that feedback?

Well, the first issue is that we have to file an acceptance and the disciplined review of letters that occur within four, five months.

Okay. And then, for the existing generic players, the penetration has been as live. Do you think that it takes a few more players to really not close the environment there in a while for more share capture for the generics including yourselves?

So far, until it was most recent reentry with an incomplete line I believe, I think only had two of the three strengths. It was really just in the former – approval, which means the pricing typically is a little higher and that has constrained, we think a little bit of substitution. Once more players come in, we would expect more normalized substitution rates.

Okay. And then, in terms of the generic environment in the U.S., and maybe this is for Maureen or you said that, has there been any notable changes in the pricing environment recently in sorts of the pace of RPs or any other structural changes, every rate portfolio-specific for every company that asking more about the environment and this is possible to pine on that?

Well, good, I think we’ve heard you say these before as you just alluded the portfolio is really about your company and your competitive environment, the supply and demand of what’s in your portfolio. I think overall, portfolios broadly have been declined in the upper single-digits for very long time, plus or minus based on any sort of particular change in supply and demand. The question is always about for your company, what’s the step function associated with those products that have fewer competitors and from a Lannett perspective, we unfortunately – or fortunately, unfortunately had a number of the larger step functions this last year and now quite a bit more diversified. So from our perspective, things are looking better. And our long-term aspiration in this generic space as most folks are launching new products and get some of that concentration back, now think more durable products. But overall, I think it’s a supply and demand question not an RFP question.

Okay. And lastly, is there anything tangible that you are doing to secure business or seek to secure business with particular customers or channels that would lead to your U.S. centric model? I know you’ve talked about it as a – an important trace of the company. I am wondering if that links to anything specific of the – sort of taking share broadly. Thanks.

Yes. We still see opportunities in that space. The new administration along with the previous one are certainly looking to bring back more medicine manufacturing to U.S. shores. It is an area of fairly where I would say, bipartisan agreement. I would note however, we have nothing resident in our forward forecasts related to specific initiatives in that sort of space. We believe they will occur. We think it is hard to measure and monetize and we are doing the pretty good job with existing rules around favorable treatment to U.S. manufacturing of products in the government arena. But I think, ultimately whatever does transpire given that we are U.S. domiciles and our U.S. manufacturing base will benefit from it. But it’s - I think, it’s a pragmatic that is what that looks like before we would plan for it in our numbers. We don’t see any downside here. We see upside, but it’s not significant enough or material enough at this point to plan for it.

Okay. Thank you.

Thank you. Our next question comes from Elliot Wilbur from Raymond James.

Hi, how are you? This is Lucas Lee on for Elliot. I have couple questions. I think, you said the EBITDA, gross profit and EPS were ahead of your expectations but revenue came in slightly below. Was adjusted gross margin better due to overall mix or was it more of a favorable pricing? That’s my first question and second question is, pending ANDAs have declined from roughly 20s to around 11 today. Given the best and reach into the development network, when should we expect that number to begin to increase? And should we fully expect new deals to have margins in the 30% to 35% range? Thank you.

Good afternoon, Lucas. This is John. I’ll take the first part of that. So, the improved margins were really based on our improved manufacturing efficiencies. So, we had larger outputs for the quarter and we saw that call rates is online. The sales mix had less of an impact. It was impactful, but less of an impactful. And I anti-psychosis was down Q2 into Q3 but it was up slightly more than what we had originally been modeling, so if anything came in a little bit stronger. That did help with our overall margins, but again, mostly around the manufacturing expenses.

Alright. And Lucas, relative to the pipeline, a couple of contextual pieces. We currently have, as we referred in our comments order of magnitude 20 in development kind of little bit more in with the FDA and another three or four that are approved pending launch. That’s comfortably over 30. For a company of our size that means our pipeline is a third of our inline market that’s pretty significant again relative to where we are in industry in terms of portfolio. But we’ve also spoken to a desire to put a little bit more emphasis on all our products are quality, but higher product launches as we’ve articulated with our more durable partnered products along with what we are developing internally. So we are committed to the sort of $75 million year-on-year of annualized value from new product launches. We’d like to do it on the back of a few – fewer launches and we are targeted more durable and we believe therefore more valuable. So that’s the context for our pipeline situation. We certainly see, what we call that big erosion of generics. There is thousands of products out there. We still have a 100 in our end-market portfolio and we have plenty of partners and plenty of capabilities internally to continue to drive where we see sustainable value which is a bit of a shift from when we first got go in our launch for every kind of launch, but we had our hands on those anymore time trying to target things that we see sustainable value for. Regarding the sort of margin component moving forward, we have been consistently saying something in the 30s is where we would expect to be as we approach our $1 billion aspiration in 2025. That is largely driven of course by higher in-market margins of these more durable, high-value assets that showing back a chunk of those profits with our partners. We have plenty of products that are well above that sort of company range. But they tend to be small products. We also have plenty of products below it - that range. So there is quite a continuum out there in the marketplace, but as we see our pipeline mature, the blend that what we do internally, probably higher than that number offset by in-market products that are lower and then the addition of those partnered products. That’s the mix number that we expect in the outer years.

Thank you.

Thank you. Our next question comes from Gary Nachman from BMO.

Hi guys. Good afternoon. The additional free cash flow you’ll have from the refinancing, what are your priorities came for use of that cash? What types of deals that you are focusing on? Are you still keeping with the strategy of looking aggressively for distributed partnerships? Or maybe now focused more on high value pipeline like you were just talking about? Just want to get a way of the lens there?

It’s Tim, Gary. The way forward is not so different from the way in the past that is we are looking for some balance between internal products, which typically have higher margins that we fully capture and have a little bit more control over the development cycles in combination with opportunistic issues that pop up which is Pantoprazole or Danazol or the results from the last few years combined with more selective partnering on some of these more of the bespoke relationships, particularly in high value and durable assets. We are very pleased that the additional cash flows that that will be available to us it gives more flexibility. We still want to be extremely disciplined in how we invest that money. When we talk about quite frankly the issue of three of leverage covenants that’s kind of what we are getting at. We have some room to make an investment that otherwise we would have been unable to do if the covenant had gone in the way of that investments and when it takes the income statement. So, we are – we have gone along on that list. We’ve maintained it open if you will on that list of new opportunities and we are able to now explore those. There is a little bit more resources and – in our pocket relative to our scale, not a huge buck of money. But we do have more latitude to pursue those opportunities. And I am suggesting they will be in the same sort of mix that’s balanced internal near-term opportunistic long term as both partnerships. That message is still selling to our partners and still selling to our internal organization. We continue to maintain that launch parade with a little bit more latitude to raise up that value over time as we will be discussing in more larger assets come online.

Okay. And then, are you still going through the process of looking through the portfolio and rationalizing products that may not make sense to keep from a profitability standpoint. You did a bunch last year, I think it was like 22 or so that you had mentioned. I am curious if there is more to go on that front and if that could help accelerate the margin profile for the company in anyway?

Yes, Gary, that we are constantly looking at portfolio optimization, lifecycle management, what we just call it and it’s always a mix of factors. As you noted, we did remove about 20 products from a portfolio. We don’t do that likely those products that customers who want ongoing continuity in supply, at the same time, they also have choices. We get to a point where your economic development vis-à-vis somebody else would sell. That process won’t be continuing. We do still have a large footprint our manufacturing base that we are thoughtful about how do we keep those plants operating efficiently and it’s a mix of all of these factors that result in the pruning, right. We launched 50 products in the last three years. We still have around 100 products which is about where when we started. So, I think that ebb and flow you could expect to continue over time. And for sure, we have other lower margin assets in our portfolio that if we can’t find a way that puts the cost down that is – I mean, rationalize it full, if we don’t rationalize it ourselves.

Okay. And what’s the status of Numbrino? I had – that was supposed to launch maybe later this year. Does that’s still going to be a decent product for you guys do you think? We haven’t mentioned that in a while.

Yes, we relaunched Numbrino right in the middle of, I guess, the pandemic. It’s impact has been muted to our expectations. We’ve been averaging a little under $1 million a quarter for that product this fiscal year. And that lower result is largely related to a substantial reduction in elective surgeries if this product is – I think is permanently in. So, it’s primary news and until those elective surgeries pick back up and we are hopeful that occurs next fiscal year, we think the sales there will in fact be constrained, but our longer term target is sort of closer to $1 million a month as opposed to $1 million a quarter remains a very high margin product for us and one of the things that will help anchor our growth as we get into next year.

Okay. And then, just last question. It seems like you may have cut back a little bit in SG&A in this last quarter. So I am just curious, do you expect that to ramp up again? Or will it stay at that level? I know you are managing expenses quarter-to-quarter, but just want to get a sense of what that runrate is going to look like? Thanks.

Yes. No. This is John. So, the runrate for the SG&A expense for this quarter is actually a pretty good runrate. It has actually ticked up a bit from the first half of the year and Q4 should be similar.

And maybe on the operating expenses, you are seeing a little bit lower number, and so the R&D number being slightly lower on timing.

Okay. Well, and what about just thinking into next year. I know, you are not giving guidance for next year, but just do you feel comfortable with where the expense base is based on this last quarter?

For the SG&A line, yes. The SG&A line is a good number for us. It supports our base.

And growth.

Okay. Okay. But R&D will likely tick up, I am assuming, going into next year.

Yes, the R&D for this quarter – the R&D for this quarter is similar to last quarter, but still a little light versus our expectations. Some of that’s going to push into Q4 and then, we would expect to continue to invest into next fiscal year.

Okay. Great. Thank you.

Thank you.

Thank you. The next question comes from Matt Hewitt from Craig Hallum Capital.

Good afternoon. Thanks for taking the questions. Actually, to follow on the Numbrino question there a little bit. We have noticed an uptick in elective procedures here this spring as people getting vaccinated, offices are opening back up. I am just curious if you have seen, at least the initial steps in an uptick in Numbrino?

Well, - looks to our patients, the cosmetic needs, we are seeing some preliminary signs, but early to call them all again from a calling perspective, we’ve been pretty flat around $800,000 or so and would expect to see some recovery as we get into really next fiscal year.

Okay. Fair enough. And then, I am curious, this is more high level, but as you continue to look for distribution agreements, I mean, potentially assets to acquire, how have those discussions changed today, versus where we were pre-pandemic? Are you seeing a more desire for upfront cash? Is it a change in the profitability? Or the profit share. Just how have those discussions changed over the past year-and-a-half?

Well, I think on average, the discussions haven’t changed that much, right? We have a very explicit and defined offering which is to say partners are looking for help across a variety of functional support we are particularly well suited to. We have a very experienced team that’s worked across the industry for – unfortunately, fortunately decades. And we bring that experience and the money that has made across many of the companies to bear on those partnerships. And that’s also well. As you know, the industry has been somewhat possessed by a lot of the challenges and headwinds as you might say. But we’ve been bespoke in our ongoing commitment to the safety. We do think it is incredibly affordable part of medicines and we see lots of opportunities for us to go forward. And that obviously is the message that partners who may find their markets overseas more challenging than the average day here in the U.S. respond well to. So, from both an opportunistic perspective, transparency perspective and experience perspective, those transactions that pop up on a regular basis continue to avail themselves to. And I am sure you will hear more of them in the coming quarters. And then, specifically to the more of bespoke assets, the larger more durable assets, which take off from a lot of capital and a lot of technology often coming from overseas partners, we are particularly strong in that offering again, given that same cross-functional experience up and down the organization our willingness to embrace those products and prove differentiated from our internal portfolio. And I think the proof of that putting is, A, our success with the launches we’ve had and that so many of our partners come back for additional and engage with us even if we haven’t yet launched all the products. So we feel pretty good about that flow of opportunity. We are actively pursuing many number of transactions similar from the bespoke down to the opportunistic as we speak. I do think it on a plane, have in a meal, and breaking bread as they say helps deepen those relationships and cements on perhaps a little bit faster in more enduringly than purely a Zoom meeting that we’ve done a pretty good job on the computer advancing assets that we discussed pitches on this call and expect to see more of it as this year proceeds.

That’s very helpful. Thank you

Thank you.

Thank you. At this moment, we show no further questions in queue. I would like to turn the call back to management for final remarks.

Alright. It's Tim again. I'll close out with our customary shutout to all of our employees, customers and partners working extra hard to provide high-quality, low-cost medicine for our patients. We look forward to sharing our progress on our next call and good night.

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