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Text: On the call today are Tim Crew, Chief Executive Officer; John Kozlowski, the company's Chief Financial Officer; Maureen Cavanaugh, our Chief Commercial Operations Officer; and Steve Lehrer, who leads our biosimilar insulin initiatives.
A playback will be available for at least three months on Lannett's website.
In a moment, Tim will provide brief remarks on the company's financial results as well as recent developments and initiatives.
Then John will discuss the financial results in more detail.
We have a couple of items of news to report today.
In addition to issuing our fiscal 2022 first quarter financial results, we also announced a substantial restructuring and cost reduction plan.
I'll discuss both matters in turn.
Overall, first quarter results were on track.
Our top line and bottom line were respectively, above and at our expectations, largely due to solid sales of several key products.
Our gross margin, however, was lower than anticipated, primarily due to growing competitive pressures on our base portfolio.
Turning to our balance sheet.
Our cash position increased to more than $105 million as of September 30, 2021, up from approximately $93 million at June 30, 2021.
We continue to emphasize the importance of our cash position as we believe it affords a strategic flexibility in how we run our business, maintaining adequate cash levels to support our operational needs, the launch of our durable product pipeline remains a key focus.
Meanwhile, as often mentioned across the industry, we are operating in a particularly competitive environment, especially for oral generics.
The market generally and some of our products such as probenecid, esomeprazole, levothyroxine tablets and chlorpromazine specifically, have been deteriorating more quickly than the declines we had anticipated.
This environment certainly reverses our pivot toward expanding our portfolio to include more durable assets, such as the three respiratory and two insulin products in our pipeline.
However, we do not expect the current competitive environment to abate in the near term.
While we are disappointed in the accelerating declines, we are taking actions to address the current competitive environment: first, we have revised down our fiscal 2022 guidance; and second, while preserving our core portfolio strategies, we are taking immediate and proactive steps to make Lannett a leaner and more focused organization.
So with that, let's turn to the restructuring and cost reduction plan we announced earlier today.
Again, our plan retains our core strategies while further optimizing our operations, improving efficiencies and reducing costs.
The plan will be implemented in phases, and we expect we will be completed in about 18 months.
Key elements of the plan include, first, consolidating our manufacturing footprint from two facilities to 1.
This includes transferring liquid drug production to our main plant in Seymour, Indiana from our facility in Carmel, New York.
And closing the Carmel plant once relevant products are transferred and pursuing its sale.
We are already in active discussions with several potential parties.
Our Seymour plant will be strengthened in this process by increasing the technologies it supports and expanded its portfolio with smaller volume but decent margin liquid products, thus further optimizing our overall network.
The second element of the restructuring plan involves the R&D function.
This includes reducing headcount and eliminating development formerly dedicated to the Carmel site and discontinuing future development programs targeting liquid generic medications as we no longer see adequately scaled returns in that sector.
We will also raise product threshold requirements and start internally developed products and API selection earlier.
The goal of which is to focus on fewer, potentially larger market opportunity products and come to market as part of the so-called first wave of generics.
We will continue to be a targeted generic manufacturer focused on attractive, select internal development areas where we believe we can successfully compete.
But we will scale those investments to what the business can support today and continue to augment our pipeline with durable partnered assets like generic ADVAIR and insulin.
And the third element of the restructuring plan is further rationalizing over time as we have in the past, certain lower-margin products.
This particular exercise primarily involves scaling back or phasing out some low-margin and low-volume OTC products that were made at Carmel and two very low-margin prescription products.
Ultimately, the plan is expected to result in a workforce reduction of approximately 11% from current levels.
Another 3% or so of the workforce, mainly at the plant, we expect not to replace as attrition occurs.
Other existing vacancies will also not be filled.
In total, we anticipate cost savings approximately $20 million annually.
So now let's turn to our pipeline.
While we tend to focus on the potentially transformational value of our durable pipeline, there are a number of interesting pipeline assets that could be launched before the end of next fiscal year, including subflooring, sulfate oral solution, sumatriptan and flutamide.
And our business development team is hard at work to secure more.
We currently have approximately 12 ANDAs pending at the FDA, including partner products, plus three additional products that are approved and pending launch.
We also have more than 20 products in development and expect to add more from both external and internal efforts.
With regard to our large, durable partnered product pipeline, I'll provide an update on two of the 5, starting with our generic ADVAIR DISKUS product.
The FDA provided mid-cycle disciplined review comments on the pending ANDA.
And we are working to address the FDA's helpful comments and intend to respond to as many of the agency's request as possible before the FDA due dates.
We expect to receive additional comments from the FDA on the FDA assigned goal date of January 31, 2022.
As previously disclosed, we expect the product to undergo more than one review cycle.
We believe and we're planning for a launch that is possible next fiscal year.
I'd note the application approval is also contingent on a successful FDA inspection of the overseas facilities involved.
The CRO site that conducted the bioequivalence and clinical studies has already been inspected by the FDA and the observations they shared, we believe are addressable.
Given inspection backlogs due to COVID-19, we appreciate the parent -- priority FDA has assigned to these inspections.
We have formally asked the FDA to schedule an inspection of the manufacturing site and look forward to their visit in the near future.
Regarding our biosimilar insulin glargine product.
We remain on track for submitting the investigational new drug IND application next month and commencing the pivotal trial around March 2022.
While there are always execution risks, we expect to launch this product in fiscal year 2024.
In terms of our expectations for next year's clinical trial, we are not aware of a U.S. trial failure of a well-characterized biosimilar.
And at this point, we believe our product is well characterized and highly similar based on the results of our structural and functional assays.
Those assays have been early reviewed by the FDA.
We are also seeing positive trends in formulary decisions for 2022, demonstrating payers continued effort to pursue affordable insulin.
Express scripts has added Viatris' biosimilar and interchangeable insulin glargine, Semglee as a preferred product for 2022 on one of their formularies.
In addition, Florida, Illinois and Texas have included Walmart's ReliOn insulin as a preferred product on their 2022 state medicaid formularies.
We will continue to monitor how payers adopt biosimilar and interchangeable insulins as we develop our go-to-market plans.
All five of the durable products in our pipeline are differentiated from the average oral generic product that are under the aforementioned industry pressures because of the significant technical expertise required for development and the substantial and largely dedicated plant investments needed to manufacture them.
So for all of these products, we expect only a handful of competitors and thus more durable value.
Also, as noted on the last call, we are evaluating and in negotiations for additional market and product opportunities for insulin and drug device inhalation products.
There continues to be additional multibillion dollar markets to pursue in these areas with both current and future partners.
When combined with our targeted internal development efforts, we believe we have built and continue to expand an exciting pipeline of opportunities.
One brief comment on legal matters.
We have earlier reached a settlement agreement with Genus Lifesciences related to our Numbrino product.
While the terms of the settlement are confidential, the various court challenges levied by Genus related to the product and our right to market it have all been dismissed.
To sum up today's remarks, we have reported better-than-expected top line for the quarter.
We have revised down our fiscal 2022 guidance to reflect the increasingly competitive environment for a base oral generics portfolio.
However, our cash levels remain substantial.
Our core strategies remain in place, and we have begun implementing restructuring plans to become a leaner, more focused organization.
The plan is expected to be completed in approximately 18 months and generate annual cost savings of approximately $20 million.
Our pending generic ADVAIR DISKUS ANDA continues to make its way through the FDA review process.
We expect to submit an IND application for biosimilar insulin glargine next month and commenced the pivotal trial around March of 2022.
We anticipate both these and our other durable assets can contribute significantly to our future sales.
And one final comment.
We appreciate the frustrations our investors may have over the pressures we are now forecasting in our near-term results.
We are keenly aware of our current stock and bond valuations.
However, our optimism on future expectations remains quite high.
Our durable pipeline of exciting opportunities are steadily progressing, and we believe we have the capabilities, discipline and resources to get them to market over the next few years.
With that in mind, our management and our Board will continue to carefully consider various options looking to enhance investor value across the near, immediate and longer term.
I'll begin with our financial results on a non-GAAP adjusted basis.
For the 2022 first quarter, net sales were $101.5 million compared with $126.5 million for the first quarter of last year.
Gross profit was $20.6 million or 20% of net sales compared with $34.4 million or 27% of net sales for the prior year first quarter.
Interest expense increased to $12.8 million from $11.2 million.
Net loss was $10.6 million or $0.27 per share versus net income of $2.2 million or $0.06 per diluted share.
Adjusted EBITDA was $10.0 million.
Turning to our balance sheet.
At September 30, 2021, cash and cash equivalents totaled approximately $105 million, up from $93 million at June 30.
Cash increased during the first quarter due to a few factors: first, as a result of our refinancing earlier this year, we did not have any required debt interest or principal payments in Q1; the second relates to timing of certain inflows and outflows of cash; and the third was the receipt of a prescription drug fee refund.
Looking ahead, we expect to receive additional income tax refunds, continue to benefit from initiatives to improve our working capital, and we have no mandatory principal payments on our debt until maturity.
Accordingly, we expect to maintain a healthy cash position of $80 million plus through the end of fiscal 2022.
As for our liquidity, we also have access to our $45 million credit facility, which to date, we have not drawn upon.
Turning to our revised guidance.
For fiscal 2022, we now expect net sales in the range of $370 million to $400 million, down from $400 million to $440 million.
Adjusted gross margin, as a percentage of net sales, of approximately 19% to 21%, down from approximately 23% to 25%.
Adjusted R&D expense in the range of $25 million to $28 million, down from $26 million to $29 million.
Adjusted SG&A expense ranging from $55 million to $58 million, down from $58 million to $61 million.
Adjusted interest expense of approximately $52 million, unchanged.
The full year adjusted effective tax rate in the range of 22% to 23%, up from 21% to 22%.
Adjusted EBITDA in the range of $22 million to $32 million, down from $40 million to $55 million.
And lastly, capital expenditures to be approximately $10 million to $14 million, down from $12 million to $18 million.
Regarding the phasing of the quarters, we expect net sales and adjusted EBITDA in Q2 to be lower than Q1, ramping up slightly in the second half of fiscal 2022, with Q4 net sales and adjusted EBITDA to approximate Q1.
This reflects the new product launches we've previously discussed combined with the initial benefits from the cost restructuring.
Gross margin to decline slightly in Q2 and Q3 from Q1.
We expect Q4 gross margin to be higher than Q1 as the restructuring plan begins to take effect.
And R&D expected to increase from Q1 and SG&A to decrease from Q1.
With that overview, we would now like to address any questions you may have.

user
lannett revises down full-year guidance.
q1 adjusted loss per share $0.27.
compname announces restructuring plan targeting $20 million in reduced expenses, to consolidate manufacturing operations and restructure research and development function.
sees 2022 net sales $370 million to $400 million.
lannett company - have revised our guidance down to reflect, in part, particularly competitive environment of our current base oral generics portfolio.
also announced a restructuring plan approved by board earlier this week.
restructuring retains core strategies, while further optimizing operations, improving efficiencies and reducing costs.
elements of plan, which is expected to be completed in about 18 months, includes consolidating manufacturing footprint.
plan includes reducing headcount and discontinuing future development programs targeting liquid generic medications.
lannett - current organizational workforce will be reduced by about 11%, and other existing and anticipated future vacancies will not be filled.
plan is expected to result in a leaner, more focused organization and generate cost savings of approximately $20 million, annually.

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