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Edited Transcript of LCI earnings conference call or presentation 4-Nov-15 9:30pm GMT

Q1 2016 Lannett Company Inc Earnings Call

PHILADELPHIA Nov 5, 2015 (Thomson StreetEvents) -- Edited Transcript of Lannett Company Inc earnings conference call or presentation Wednesday, November 4, 2015 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robert Jaffe

Robert Jaffe Co. LLC - President

* Arthur Bedrosian

Lannett Company, Inc. - President, CEO

* Marty Galvan

Lannett Company, Inc. - VP, CFO

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Conference Call Participants

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* Matt Hewitt

Craig-Hallum Capital - Analyst

* Scott Henry

ROTH Capital - Analyst

* Rohit Vanjani

Oppenheimer & Company - Analyst

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Presentation

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Operator [1]

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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. But, later, we will conduct a question-and-answer session.

I will now turn the call over to Robert Jaffe. Robert, you may begin.

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Robert Jaffe, Robert Jaffe Co. LLC - President [2]

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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 will now turn the call over to Arthur Bedrosian. Arthur?

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Arthur Bedrosian, Lannett Company, Inc. - President, CEO [3]

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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 1st, 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?

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Marty Galvan, Lannett Company, Inc. - VP, CFO [4]

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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 $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 $1.0 million, and other represented a $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 reductions recorded in fiscal 2016 related to 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 $35.0 million or $0.95 per diluted share.

Our balance sheet at September 30, 2013 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.

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Arthur Bedrosian, Lannett Company, Inc. - President, CEO [5]

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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 transmission 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?

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Questions and Answers

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Operator...


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