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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 insulin biosimilar initiatives.
A playback will be available for at least three months on Lannett's website.
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'll begin my specific remarks with a brief review of our financial results.
For fiscal 2021 third quarter, we had net sales of $112 million, adjusted gross margin of 27%, adjusted EBITDA of $17 million and adjusted net income of $1 million equal to $0.02 per diluted share.
Gross margin, adjusted EBITDA and adjusted net income were all better than we anticipated.
Moreover, our cash position significantly improved to more than $80 million at the end of Q3 from $34 million at the end of the preceding quarter.
While we are pleased with our overall results, we believe the most important recent news was the April refinancing transaction I earlier mentioned.
We used the proceeds from the refinancing on some cash to retire our outstanding Term B loan balance of approximately $540 million.
The financing was significant for several reasons including, first, we have extended the maturity of our debt to 2026 from 2022 and that maturity is now after several of our larger and more durable pipeline assets are expected to launch and make meaningful contributions to our business.
Second, our free cash flow improved substantially, primarily due to the elimination of mandatory principal payments until maturity.
We estimate that the transaction will add approximately $50 million of free cash flow in the first year alone.
Our plan is to use a portion of the extra cash to invest in additional growth opportunities.
And third, the new debt did not have leverage covenants.
To our view, we believe the successful offering provides investors' validation of our future expected cash flows.
Similarly, I'd like to note that the part of this financing, the second-lien investors received warrants in Lannett, which have historic price of $6.88.
We believe the support of these experienced investors to accept the second-lien position in exchange in part for these warrants further validates our assessment of the future earnings anticipated from our pipeline.
So now let's turn to our pipeline.
Most recently, we launched two products in Q3 including Levorphanol, IR tablets 3 mg a partnered product and Chlorpromazine, an internally developed product.
Thus far in Q4, we launched Venlafaxine ER tablets 75 mg and expect to launch a few more products in the next few months.
In addition, we have more than 18 products in development, another 11 pending with the FDA including partnered products, plus four additional products that are approved and pending launch.
We will now turn to larger more durable opportunities in our near-term pipeline, dealing with products in the respiratory arena.
As we recently announced, we achieved a key milestone with the filing of our generic ADVAIR DISKUS product on April 1.
This asset is a partnered product and of the larger products in our pipeline is currently the closest to expected commercialization.
The investments in technology, dedicated manufacturing infrastructure and development of assets are very significant.
So we are quite pleased to be so far along the development and expect only a handful of competitors.
While we do expect more than one FDA review cycle, and we need FDA feedback to firm up our expectations, we continue to believe an approval and U.S. launch of the product is possible in calendar year 2022 and given our listing in the market, we anticipate the product will generate substantial net sales soon after launch.
Another drug device combination product in our pipeline is generic Flovent DISKUS.
The pivotal clinical trial for this product has been initiated.
So we are tracking to a possible launch in 2023.
As a reminder, we are co-developing this product with the same partner generic ADVAIR DISKUS.
This relationship means that the generic Flovent product leverages the same R&D and manufacturing platforms that support the generic ADVAIR product and will likely follow similar clinical development assets.
For both the generic ADVAIR and Flovent products, we are increasingly confident of our path to launch for three primary reasons.
First, the FDA now has clear guidance for companies developing its complex products and our development programs have been advancing rapidly.
Second, our partners already built R&D and commercial scale manufacturing facilities, both dedicated to inhalation products.
And lastly, our partnered senior management team includes members of GlaxoSmithKline team that was intently involved in developing, filing and manufacturing the ADVAIR into their product.
As we said previously, we are evaluating and in late-stage negotiations for additional product opportunities in the drug device inhalation respiratory space, particularly dry powder inhalers, and Metered Dose inhalers.
These markets are, as we have stated before, generally quite large, growing and durable.
Turning to our biologic insulin products.
The situation is similar to what we noticed for the drug device inhalation opportunities, namely, we are relatively well advanced in the programs and the investments in technology, dedicated manufacturing infrastructure and development are even more significant, it takes multiple hundreds of millions of dollars.
Let me say that again, multiple hundreds of millions of dollars.
Thus we expect only a handful of competitors in what is expected to be a multi-billion dollar market even at competitive biosimilar pricing.
And as we have shared, our partner HEC is shouldering the significant majority of these infrastructure related costs.
With regard to biosimilar insulin glargine, we believe we remain on track to; submit an IND later this calendar year, commence the clinical trial early next calendar year, submit the biologics license application later in calendar year 2022, and launch in 2023, just over two years from now.
You'll recall that representatives from Lannett and HEC's both received guidance from the FDA on the biosimilar insulin glargine clinical advancement program in June of 2020.
The FDA then requested that we submit a protocol and the statistical analysis plan for the pivotal trial for review which we did in November of 2020.
The FDA has since completed its review and provided feedback, which we incorporated into design of the upcoming pivotal trial including the type and sized of the trial, as well as primary and secondary endpoints.
Importantly, the upcoming conforming pivotal human healthy trial plan is similar to our previously completed normal healthy volunteered pilot study.
It's a modestly larger study and will be conducted at the same site as the previous study.
So the FDA's feedback is very encouraging as they reviewed in detail our human pilot study where our insulin glargine met all the primary pharamakinetic and pharmadynamic safety endpoints and the FDA has indicated the same type of study with glargine produced at commercial scale to complete the new facility will be sufficient to file a 351(k) biosimilar application.
Note, we believe we will be the first glargine outpatient to take advantage of new biosimilar insulin rules published in November of 2019, which have helped speed our progression.
In the related positive development, our partner HEC has completed virtually all the required process development scale of work required to producing insulin glargine at commercial scale at the new insulin facility, which is an important next step.
Production of clinical trial materials should occur in the upcoming quarter.
On a further positive related note, in February, we announced we have expanded our agreement with HEC to include the biosimilar insulin aspart, a fast-acting insulin, separate and distinct from longer acting insulin glargine.
Similar to the two asthma product opportunities, the experience, knowledge, dedicated infection infrastructure and investment supporting insulin glargine can be directly leveraged from the development of insulin aspart.
Accordingly, while we still need to get FDA feedback on the development plan, we currently anticipate a potential launch of the aspart product in calendar 2024.
As you can see, and I think our investors understand, we are now advancing for within our overall launch parade, a steady stream of significant new product launches in the not too distant future.
To sum up today's remarks.
We completed our refinancing transaction where we retired our Term Loan B and extended the maturity of our debt beyond the expected launch dates of our larger pipeline assets.
Moreover, the structure of the new debt substantially increased our free cash flow potential around $50 million in the first year alone that will allow us to further invest in growth opportunities.
The ANDA for our generic ADVAIR DISKUS product was submitted on April 1, 2021 and pending FDA feedback, we believe this product is tracking to a launch in calendar year 2022.
The clinical development of our other large opportunity assets including generic flovent and biosimilar insulin glargine continues to advance the launch of insulin glargine possible in 2023.
And in February, we added to our pipeline another large opportunity product biosimilar insulin aspart.
That biosimilar development should track perhaps the year behind insulin glargine and potentially launch in 2024, along with generic flovent, setting up a series of potentially significant product launches in the not too distant future.
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.
Net income was $1.0 million or $0.02 per diluted share, compared with $11.7 million or $0.27 per diluted share.
Adjusted EBITDA was $17.0 million, which was positively impacted by lower R&D expenses in the quarter due to timing.
We expect some of that R&D spend to move to our fourth quarter.
Turning to our balance sheet.
At March 31, 2021, cash and cash equivalents totaled approximately $81 million, up significantly from $34 million at December 31.
The increase was due to the receipt of income tax refunds, as well as benefits derived from initiatives to improve our working capital.
With that, I would like to provide additional details on our recently completed refinancing transaction, which was leverage neutral and as Tim mentioned, extended the maturity of our debt and enhances our cash flow.
For background, in November 2015, we acquired Kremers Urban Pharmaceuticals, primarily using debt to finance the transaction.
For the last six plus years, we have made excellent progress paying down this debt reducing by more than half the original outstanding debt balance of approximately $1.3 billion.
With the Term B loan scheduled to mature in November 2022, we made the strategic decision to refinance our debt.
The refinancing included two new debt instruments, specifically, $350 million of first lien senior secured notes and $190 million of second lien loans, which were used to retire the approximately $540 million outstanding balance of our Term B loan.
As part of the transaction, we also upsized our revolving credit facility to $45 million from $30 million.
The new first lien secured notes will mature in five years that will be secured on a first lien basis by all non-ABL collateral and a second lien basis on ABL collateral.
The second lien facility is junior in priority to the new first lien senior secured notes and included 8.28 million warrants exercisable into the company's common equity at a strike price of $6.88.
The second lien facility also matures in 2026.
The refinancing improved our financial flexibility in a couple of ways.
First, neither of the two new debt instruments include financial maintenance covenants.
And second, with no principal payments due until maturity, it considerably increases our cash flow.
Now, moving to our outlook, we made minor revisions to our guidance for the fiscal 2021 full year which were largely due to the refinancing.
Specifically, changes to our guidance were in the interest expense line and the income tax line.
Otherwise, our adjusted guidance range remains unchanged from the guidance we provided on February 3.
I would note that, given the sales pressure on our Levothyroxine products, combined with an expected delay to our zolmitriptan launch due to an API matter, we would anticipate to be at the lower end of our sales guidance range.
I would also add that an API issue surrounding our thalidomide product has still not yet been resolved.
The launch for the product was most recently expected for late in calendar 2022.
But as of now, we are not estimating a launch timeframe.
With that context, the revised guidance items are as follows: adjusted interest expense of approximately $44 million, up from $41 million to $42 million.
And income tax in the range of $1 million of expense to $1 million of benefit.
Please note we replaced in the income tax line of our adjusted guidance the dollar amount to provide additional clarity.
With that overview, we would now like to address any questions you may have.

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q3 adjusted earnings per share $0.02.
q3 sales $112.4 million versus $144.4 million.

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