LANNETT COMPANY, INC. Cautionary Statement About Forward-Looking Statements
This Report on Form 10-Q and certain information incorporated herein by
reference contains forward-looking statements which are not historical facts
made pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not promises or
guarantees and investors are cautioned that all forward-looking statements
involve risks and uncertainties, including but not limited to the impact of
competitive products and pricing, product demand and market acceptance, new
product development, acquisition-related challenges, the regulatory environment,
interest rate fluctuations, reliance on key strategic alliances, availability of
raw materials, fluctuations in operating results and other risks detailed from
time to time in our filings with the
The following information should be read in conjunction with the consolidated
financial statements and notes in Part I, Item 1 of this Quarterly Report and
with Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the fiscal
year ended
Company Overview
The Company operates pharmaceutical manufacturing plants in
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Impact of COVID-19 Pandemic
In
In mid-March, 2020, the Company instituted a work from home process for all
employees, other than employees in our manufacturing plants, distribution
center, and R&D facilities which support manufacturing. For employees
Currently and as anticipated for the near future, the supply chain supporting the Company's products remains intact, enabling the Company to receive sufficient inventory of the key materials needed across the Company's network. The Company is experiencing some delays and allocations for certain API and other raw materials of higher demand, which, to date, have not had a material impact on its results of operations. However, the Company is regularly communicating with its suppliers, third-party partners, customers, healthcare providers and government officials in order to respond rapidly to any issues as they arise. The longer the current situation continues, it is more likely that the Company may experience some sort of interruption to its supply chain, and such an interruption could materially affect its business, including but not limited to, our ability to timely manufacture and distribute its products as well as unfavorably impact our results of operations. Subsequent to an initial stocking up of supplies at the start of the pandemic, the total volume of drug prescriptions written during the pandemic decreased causing less demand for our products. Specifically, the pandemic has resulted in fewer elective surgeries being performed, causing less demand for our Numbrino cocaine hydrochloride product. Recently, however, prescription volumes have begun to increase back to pre-pandemic levels.
As a result of the pandemic, certain clinical trials which were underway or scheduled to begin were temporarily placed on hold, although all such clinical trials were resumed and have been completed. Such delays impacted the Company's timing for filing applications for product approvals with the FDA as well as related timing of FDA approval of such filings. Additionally, the pandemic has slowed down the Company's efforts to expand its product portfolio through acquisitions and distribution opportunities, impacting the speed with which the Company is able to bring additional products to market. While there have been some efforts by some of our customers to increase their inventory levels for the Company's products in the near term, the Company has not seen significant increases in demand. The Company does not anticipate any significant changes in demand for its products in the future, however, depending on the duration and severity of the outbreak, levels of demand may change.
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In light of the economic impacts of COVID-19, the Company reviewed the assets on
our Consolidated Balance Sheet as of
Based on the foregoing, the Company cannot reasonably predict the ultimate impact of COVID-19 on our future results of operations and cash flows due to the continued uncertainty around the duration and severity of the pandemic.
Climate Change
The Company believes in a more sustainable future with a reduced environmental
footprint, effective use of natural resources and a multi-pronged approach to
reducing our effect on the climate while maintaining our focus on providing
affordable medicines to our customers and ultimately the patients
Results of Operations - Three months ended
Net sales decreased 20% to
(In thousands) September 30, Medical Indication 2021 2020 Analgesic$ 5,314 $ 3,120 Anti-Psychosis 3,715 13,028 Cardiovascular 14,100 19,714 Central Nervous System 22,785 22,525 Endocrinology 7,845 3,233 Gastrointestinal 15,240 17,100 Infectious Disease 12,515 21,932 Migraine 4,685 9,690
Respiratory/Allergy/Cough/Cold 3,114 1,426 Urinary
1,176 1,458
Other 9,176 7,634
Contract manufacturing revenue 1,860 5,619 Total net sales
$ 101,525 $ 126,479
The decrease in net sales was driven by a decrease in the selling price of
products of
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In
The following chart details price and volume changes by medical indication:
Sales volume Sales price
Medical indication change % change %
Analgesic 100 % (30) %
Anti-Psychosis (39) % (32) %
Cardiovascular (18) % (10) %
Central Nervous System 2 % (1) %
Endocrinology 339 % (196) %
Gastrointestinal (2) % (9) %
Infectious Disease - % (43) %
Migraine (36) % (16) %
Respiratory/Allergy/Cough/Cold 134 % (16) %
Urinary (7) % (12) %
The Company sells its products to customers in various distribution channels. The table below presents the Company's net sales to each distribution channel for the three months ended:
(In thousands) September 30, September 30, Customer Distribution Channel 2021 2020 Wholesaler/Distributor $ 84,844$ 100,580 Retail Chain 12,726 17,145 Mail-Order Pharmacy 2,095 3,135 Contract manufacturing revenue 1,860 5,619 Total net sales$ 101,525 $ 126,479
The overall decrease in sales was primarily driven by lower sales of Fluphenazine, Posaconazole and Sumatriptan due to new competitors entering the market partially offset by sales from new product launches. The Company has seen increased competitive market pressure in recent years, which has resulted in overall decrease in sales to the distribution channels above. We have partially offset these competitive pressures with new product launches and will continue to seek opportunities for additional launches.
Cocaine Hydrochloride Solution
In
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The competitor filed a series of Citizen Petitions beginning in 2019, seeking to
block approval of the Company's Section 505(b)(2) NDA for its cocaine
hydrochloride solution product by claiming that the grant of the New Chemical
Entity ("NCE") exclusivity issued to the competitor blocks the approval of the
Company's application for five years. Following the
Separately, on
On
Cost of Sales, including amortization of intangibles. Cost of sales, including
amortization of intangibles, for the first quarter of Fiscal 2022 decreased 16%
to
Gross Profit. Gross profit for the first quarter of Fiscal 2022 decreased 36% to
Research and Development Expenses. Research and development expenses for the
first quarter of Fiscal 2022 decreased 12% to
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 25% to
Other Loss. Interest expense for the three months ended
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Income Tax. The Company recorded an income tax benefit of
Net Loss. For the three months ended
Liquidity and Capital Resources
Cash Flow
The Company has historically financed its operations with cash flow generated
from operations and has
Net cash provided by operating activities of
Significant changes in operating assets and liabilities from
A decrease in accounts receivable of
sales and cash receipts. The Company's days sales outstanding ("DSO") at
?
30, 2021 and gross accounts receivable at
level of DSO at
that DSO will be in the 70 to 85-day range based on customer payment terms.
? An increase in accounts payable of
vendor invoices and payments.
An increase in accrued expenses of
? interest related to the 7.750% Senior Secured Notes, which was paid in October
2021.
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Significant changes in operating assets and liabilities from
An increase in accounts receivable of
sales and cash receipts. The Company's days sales outstanding ("DSO") at
?
30, 2020 and gross accounts receivable at
level of DSO at
that DSO will be in the 70 to 85-day range based on customer payment terms.
? An increase in income taxes receivable totaling
additional estimated tax refunds related to provisions of the CARES Act.
A decrease in accrued payroll and payroll-related costs of
? primarily related to payments made in
incentive-based compensation accrued in Fiscal 2020 as well as the timing of
payroll payments.
? An increase in accounts payable totaling
timing of vendor invoices and payments.
Net cash used in investing activities of
Net cash used in financing activities of
Credit Facility and Other Indebtedness
The Company has previously entered into and may enter future agreements with
various government agencies and financial institutions to provide additional
cash to help finance the Company's acquisitions, various capital investments and
potential strategic opportunities. These borrowing arrangements as of
7.750% Senior Secured Notes due 2026
On
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Second Lien Secured Loan Facility
On
In connection with the Second Lien Facility, the Company is required to maintain
at least
Amended ABL Credit Facility
On
The Amended ABL Credit Agreement provides for a revolving credit facility (the
"Amended ABL Credit Facility") that includes letter of credit and swing line
sub-facilities. Borrowing availability under the Amended ABL Credit Facility is
determined by a monthly borrowing base collateral calculation that is based on
specified percentages of eligible accounts receivable less certain reserves and
subject to certain other adjustments as set forth in the Amended ABL Credit
Agreement. Availability is reduced by issuance of letters of credit as well as
any borrowings. Loans outstanding under the Amended ABL Credit Agreement bear
interest at a floating rate measured by reference to, at the Company's option,
either an adjusted London Inter-Bank Offered Rate ("LIBOR") (subject to a floor
of 0.75%) plus an applicable margin of 2.50% per annum, or an alternate base
rate plus an applicable margin of 1.50% per annum. Unused commitments under the
Amended ABL Credit Facility are subject to a fee of 0.50% per annum, which fee
increases to 0.75% per annum for any quarter during which the Company's average
usage under the Amended ABL Credit Facility is less than
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4.50% Convertible Senior Notes due 2026
On
In connection with the offering of the Convertible Notes, the Company also
entered into privately negotiated "capped call" transactions with several
counterparties. The capped call transaction will initially cover, subject to
customary anti-dilution adjustments, the number of shares of common stock that
initially underlie the Convertible Notes. The capped call transactions are
expected to generally reduce the potential dilutive effect on the Company's
common stock upon any conversion of the Convertible Notes with such reduction
subject to a cap which is initially
Other Liquidity Matters
Refer to the "Impact of COVID-19 Pandemic" section above for the impact on our future liquidity.
Future Acquisitions
We are continuously evaluating the potential for product and company acquisitions as a part of our future growth strategy. In conjunction with a potential acquisition, the Company may utilize current resources or seek additional sources of capital to finance any such acquisition, which could have an impact on future liquidity.
We may also from time to time depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, seek to prepay outstanding debt or repurchase our outstanding debt through open market purchases, privately negotiated purchases, or otherwise. The amounts involved in any such transactions, individually or in the aggregate, may be material and may be funded from available cash or from additional borrowings.
Research and Development Arrangements
In the normal course of business, the Company has entered into certain research and development and other arrangements. As part of these arrangements, the Company has agreed to certain contingent payments, which generally become due and payable only upon the achievement of certain developmental, regulatory, commercial and/or other milestones. In addition, under certain arrangements, we may be required to make royalty payments based on a percentage of future sales, or other metric, for products currently in development in the event that the Company begins to market and sell the product. Due to the inherent uncertainty related to these developmental, regulatory, commercial and/or other milestones, it is unclear if the Company will ever be required to make such payments.
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Critical Accounting Policies
The preparation of our Consolidated Financial Statements in accordance with
accounting principles generally accepted in
Management has identified the following as "Critical Accounting Policies and Estimates": Revenue Recognition, Inventories, Income Taxes, and Valuation of Long-Lived Assets, including Intangible Assets.
Revenue Recognition
The Company complies with Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, which superseded ASC Topic 605, Revenue Recognition. Under ASC 606, the Company recognizes revenue when title and risk of loss of promised goods or services have transferred to the customer at an amount that reflects the consideration the Company is expected to be entitled. Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship product to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied. The new revenue standard also impacts the timing of the Company's revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from "upon shipment or delivery" to "over time." However, the recognition of these arrangements over time does not currently have a material impact on the Company's consolidated results of operations or financial position. The Company adopted ASC 606 using the modified retrospective method.
When revenue is recognized, a simultaneous adjustment to gross sales is made for estimated chargebacks, rebates, returns, promotional adjustments and other potential adjustments. These provisions are primarily estimated based on historical experience, future expectations, contractual arrangements with wholesalers and indirect customers and other factors known to management at the time of accrual. Accruals for provisions are presented in the Consolidated Financial Statements as a reduction to gross sales with the corresponding reserve presented as a reduction of accounts receivable or included as rebates payable, depending on the nature of the reserve.
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Provisions for chargebacks, rebates, returns and other adjustments require varying degrees of subjectivity. While rebates generally are based on contractual terms and require minimal estimation, chargebacks and returns require management to make more subjective assumptions. Each major category is discussed in detail below:
Chargebacks
The provision for chargebacks is the most significant and complex estimate used in the recognition of revenue. The Company sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains and mail-order pharmacies. The Company also sells its products indirectly to independent pharmacies, managed care organizations, hospitals, nursing homes and group purchasing organizations, collectively referred to as "indirect customers." The Company enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers then independently select a wholesaler from which to purchase the products. If the price paid by the indirect customers is lower than the price paid by the wholesaler, the Company will provide a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and the wholesaler purchase price. The provision for chargebacks is based on expected sell-through levels by the Company's wholesale customers to the indirect customers and estimated wholesaler inventory levels. As sales to the large wholesale customers, such as Cardinal Health, AmerisourceBergen and McKesson increase (decrease), the reserve for chargebacks will also generally increase (decrease). However, the size of the increase (decrease) depends on product mix and the amount of sales made to indirect customers with which the Company has specific chargeback agreements. The Company continually monitors the reserve for chargebacks and makes adjustments when management believes that expected chargebacks may differ from the actual chargeback reserve.
Rebates
Rebates are offered to the Company's key chain drug store, distributor and
wholesaler customers to promote customer loyalty and increase product sales.
These rebate programs provide customers with credits upon attainment of
pre-established volumes or attainment of net sales milestones for a specified
period. Other promotional programs are incentive programs offered to the
customers. Additionally, as a result of the Patient Protection and Affordable
Care Act ("PPACA") enacted in the
Returns
Consistent with industry practice, the Company has a product returns policy that allows customers to return product within a specified time period prior to and subsequent to the product's expiration date in exchange for a credit to be applied to future purchases. The Company's policy requires that the customer obtain pre-approval from the Company for any qualifying return. The Company estimates its provision for returns based on historical experience, changes to business practices, credit terms and any extenuating circumstances known to management. While historical experience has allowed for reasonable estimations in the past, future returns may or may not follow historical trends. The Company continually monitors the reserve for returns and makes adjustments when management believes that actual product returns may differ from the established reserve. Generally, the reserve for returns increases as net sales increase.
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Other Adjustments
Other adjustments consist primarily of price adjustments, also known as "shelf-stock adjustments" and "price protections," which are both credits issued to reflect increases or decreases in the invoice or contract prices of the Company's products. In the case of a price decrease, a credit is given for product remaining in customer's inventories at the time of the price reduction. Contractual price protection results in a similar credit when the invoice or contract prices of the Company's products increase, effectively allowing customers to purchase products at previous prices for a specified period of time. Amounts recorded for estimated shelf-stock adjustments and price protections are based upon specified terms with direct customers, estimated changes in market prices and estimates of inventory held by customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available. Other adjustments also include prompt payment discounts and "failure-to-supply" adjustments. If the Company is unable to fulfill certain customer orders, the customer can purchase products from our competitors at their prices and charge the Company for any difference in our contractually agreed upon prices.
Refer to the Company's Form 10-K for the fiscal year ended
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