UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED March 31, 2021
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File No. 001-31298
LANNETT COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
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State of Delaware |
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23-0787699 |
|
(State of Incorporation) |
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(I.R.S. Employer I.D. No.) |
9000 State Road
Philadelphia, PA 19136
(215) 333-9000
(Address of principal executive offices and telephone number)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Common Stock, $0.001 par value |
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LCI |
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New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
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Accelerated filer ☒ |
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|
|
|
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Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
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Emerging growth company ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-12 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each class of the registrant’s common stock, as of the latest practical date.
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|
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Class |
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Outstanding as of April 30, 2021 |
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Common stock, par value $0.001 per share |
|
41,446,013 |
Table of Contents
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Page No. |
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Consolidated Balance Sheets as of March 31, 2021 and June 30, 2020 |
3 |
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Consolidated Statements of Operations for the three and nine months ended March 31, 2021 and 2020 |
4 |
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5 |
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6 |
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Consolidated Statements of Cash Flows for the nine months ended March 31, 2021 and 2020 |
7 |
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8 |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
38 |
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57 |
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57 |
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58 |
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58 |
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59 |
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2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANNETT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share and per share data)
|
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March 31, 2021 |
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June 30, 2020 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
81,290 |
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$ |
144,329 |
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Accounts receivable, net |
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114,691 |
|
|
125,688 |
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Inventories |
|
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113,074 |
|
|
142,867 |
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Income taxes receivable |
|
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40,043 |
|
|
14,419 |
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Assets held for sale |
|
|
2,678 |
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|
2,678 |
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Other current assets |
|
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18,135 |
|
|
13,227 |
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Total current assets |
|
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369,911 |
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|
443,208 |
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Property, plant and equipment, net |
|
|
168,844 |
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|
179,518 |
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Intangible assets, net |
|
|
160,138 |
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|
374,735 |
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Operating lease right-of-use assets |
|
|
10,762 |
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|
9,343 |
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Deferred tax assets |
|
|
138,019 |
|
|
117,890 |
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Other assets |
|
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14,696 |
|
|
11,861 |
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TOTAL ASSETS |
|
$ |
862,370 |
|
$ |
1,136,555 |
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|
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LIABILITIES |
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Current liabilities: |
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Accounts payable |
|
$ |
32,605 |
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$ |
32,535 |
|
Accrued expenses |
|
|
4,025 |
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|
14,962 |
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Accrued payroll and payroll-related expenses |
|
|
9,758 |
|
|
16,304 |
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Rebates payable |
|
|
31,848 |
|
|
38,175 |
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Royalties payable |
|
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14,541 |
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|
20,863 |
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Restructuring liability |
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42 |
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|
27 |
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Current operating lease liabilities |
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2,040 |
|
|
1,097 |
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Short-term borrowings and current portion of long-term debt |
|
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— |
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|
88,189 |
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Other current liabilities |
|
|
2,270 |
|
|
2,713 |
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Total current liabilities |
|
|
97,129 |
|
|
214,865 |
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Long-term debt, net |
|
|
610,698 |
|
|
592,940 |
|
Long-term operating lease liabilities |
|
|
11,306 |
|
|
9,844 |
|
Other liabilities |
|
|
19,187 |
|
|
16,010 |
|
TOTAL LIABILITIES |
|
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738,320 |
|
|
833,659 |
|
Commitments and contingencies (Notes 11 and 12) |
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STOCKHOLDERS’ EQUITY |
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Common stock ($0.001 par value, 100,000,000 shares authorized; 40,872,485 and 39,963,127 shares issued; 39,539,798 and 38,798,787 shares outstanding at March 31, 2021 and June 30, 2020, respectively) |
|
|
41 |
|
|
40 |
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Additional paid-in capital |
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328,911 |
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321,164 |
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Accumulated deficit |
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(186,880) |
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(1,291) |
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Accumulated other comprehensive loss |
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(603) |
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(627) |
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Treasury stock (1,332,687 and 1,164,340 shares at March 31, 2021 and June 30, 2020, respectively) |
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(17,419) |
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(16,390) |
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Total stockholders’ equity |
|
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124,050 |
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|
302,896 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
862,370 |
|
$ |
1,136,555 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
LANNETT COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share data)
|
|
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Three Months Ended |
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Nine Months Ended |
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March 31, |
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March 31, |
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2021 |
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2020 |
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2021 |
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2020 |
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Net sales |
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$ |
112,370 |
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$ |
144,372 |
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$ |
372,769 |
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$ |
407,824 |
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Cost of sales |
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82,063 |
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94,380 |
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298,738 |
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258,699 |
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Amortization of intangibles |
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3,851 |
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8,316 |
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21,097 |
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23,497 |
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Gross profit |
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26,456 |
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41,676 |
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52,934 |
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125,628 |
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Operating expenses: |
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Research and development expenses |
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5,973 |
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7,441 |
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18,156 |
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23,287 |
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Selling, general and administrative expenses |
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17,636 |
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22,147 |
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46,502 |
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60,876 |
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Restructuring expenses |
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— |
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191 |
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4,043 |
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1,771 |
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Asset impairment charges |
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— |
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13,989 |
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198,000 |
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|
15,607 |
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Total operating expenses |
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23,609 |
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43,768 |
|
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266,701 |
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101,541 |
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Operating income (loss) |
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2,847 |
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(2,092) |
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(213,767) |
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24,087 |
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Other income (loss): |
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Loss on extinguishment of debt |
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— |
|
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— |
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— |
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(2,145) |
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Investment income |
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80 |
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393 |
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168 |
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1,552 |
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Interest expense |
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|
(12,631) |
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|
(16,177) |
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|
(40,613) |
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|
(52,163) |
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Other |
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18 |
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(380) |
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23 |
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(181) |
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Total other loss |
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(12,533) |
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(16,164) |
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|
(40,422) |
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(52,937) |
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Loss before income tax |
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(9,686) |
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(18,256) |
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(254,189) |
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|
(28,850) |
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Income tax benefit |
|
|
(2,544) |
|
|
(1,664) |
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|
(68,600) |
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|
(5,185) |
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Net loss |
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$ |
(7,142) |
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$ |
(16,592) |
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$ |
(185,589) |
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$ |
(23,665) |
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Loss per common share: |
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Basic |
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$ |
(0.18) |
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$ |
(0.43) |
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$ |
(4.72) |
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$ |
(0.61) |
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Diluted (1) |
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$ |
(0.18) |
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$ |
(0.43) |
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$ |
(4.72) |
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$ |
(0.61) |
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Weighted average common shares outstanding: |
|
|
|
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|
|
|
|
|
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Basic |
|
|
39,511,296 |
|
|
38,707,049 |
|
|
39,340,670 |
|
|
38,539,850 |
|
|
Diluted (1) |
|
|
39,511,296 |
|
|
38,707,049 |
|
|
39,340,670 |
|
|
38,539,850 |
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| (1) | See Note 14 “Earnings (Loss) Per Common Share” for details on calculation. |
The accompanying notes are an integral part of the Consolidated Financial Statements.
4
LANNETT COMPANY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands)
|
|
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|
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|
|
|
|
|
|
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Three Months Ended |
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Nine Months Ended |
|
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|
|
|
March 31, |
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March 31, |
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||||||||
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|
|
2021 |
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2020 |
|
2021 |
|
2020 |
|
||||
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Net loss |
|
$ |
(7,142) |
|
$ |
(16,592) |
|
$ |
(185,589) |
|
$ |
(23,665) |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Foreign currency translation gain (loss) |
|
|
(8) |
|
|
(63) |
|
|
24 |
|
|
(26) |
|
|
Total other comprehensive income (loss) |
|
|
(8) |
|
|
(63) |
|
|
24 |
|
|
(26) |
|
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Comprehensive loss |
|
$ |
(7,150) |
|
$ |
(16,655) |
|
$ |
(185,565) |
|
$ |
(23,691) |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
5
LANNETT COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Three months ended March 31, 2021 |
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Accumulated |
|
|
|
|
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|
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Common Stock |
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Additional |
|
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Other |
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Total |
||||||
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Shares |
|
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|
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Paid-In |
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Accumulated |
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Comprehensive |
|
Treasury |
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Stockholders’ |
|||||
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|
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Issued |
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Amount |
|
Capital |
|
Deficit |
|
Loss |
|
Stock |
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Equity |
||||||
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Balance, December 31, 2020 |
|
40,832 |
|
$ |
41 |
|
$ |
326,939 |
|
$ |
(179,738) |
|
$ |
(595) |
|
$ |
(17,389) |
|
$ |
129,258 |
|
Shares issued in connection with share-based compensation plans |
|
40 |
|
|
— |
|
|
109 |
|
|
— |
|
|
— |
|
|
— |
|
|
109 |
|
Share-based compensation |
|
— |
|
|
— |
|
|
1,863 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,863 |
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Purchase of treasury stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(30) |
|
|
(30) |
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Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(8) |
|
|
— |
|
|
(8) |
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
(7,142) |
|
|
— |
|
|
— |
|
|
(7,142) |
|
Balance, March 31, 2021 |
|
40,872 |
|
$ |
41 |
|
$ |
328,911 |
|
$ |
(186,880) |
|
$ |
(603) |
|
$ |
(17,419) |
|
$ |
124,050 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
6
LANNETT COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
|
|
|
|
|
|
|
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Nine Months Ended |
||||
|
|
|
March 31, |
||||
|
|
|
2021 |
|
2020 |
||
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OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
Net loss |
|
$ |
(185,589) |
|
$ |
(23,665) |
|
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
38,345 |
|
|
41,386 |
|
Deferred income tax benefit |
|
|
(20,129) |
|
|
(2,488) |
|
Share-based compensation |
|
|
7,196 |
|
|
8,336 |
|
Asset impairment charges |
|
|
198,000 |
|
|
15,607 |
|
Gain on sale/disposal of assets |
|
|
(26) |
|
|
(821) |
|
Loss on extinguishment of debt |
|
|
— |
|
|
2,145 |
|
Amortization of debt discount and other debt issuance costs |
|
|
9,073 |
|
|
11,001 |
|
Provision for inventory write-downs |
|
|
23,613 |
|
|
8,486 |
|
Other noncash expenses |
|
|
853 |
|
|
1,387 |
|
Changes in assets and liabilities which provided (used) cash: |
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
10,997 |
|
|
(15,604) |
|
Inventories |
|
|
6,180 |
|
|
(470) |
|
Income taxes receivable/payable |
|
|
(25,420) |
|
|
(10,472) |
|
Other assets |
|
|
(1,423) |
|
|
3,006 |
|
Rebates payable |
|
|
(6,327) |
|
|
(2,871) |
|
Royalties payable |
|
|
(6,322) |
|
|
5,147 |
|
Restructuring liability |
|
|
15 |
|
|
(2,254) |
|
Operating lease liability |
|
|
52 |
|
|
(1,005) |
|
Accounts payable |
|
|
70 |
|
|
20,341 |
|
Accrued expenses |
|
|
(10,937) |
|
|
1,366 |
|
Accrued payroll and payroll-related expenses |
|
|
(6,546) |
|
|
(6,803) |
|
Other liabilities |
|
|
2,530 |
|
|
(1,374) |
|
Net cash provided by operating activities |
|
|
34,205 |
|
|
50,381 |
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(6,599) |
|
|
(13,105) |
|
Proceeds from sale of property, plant and equipment |
|
|
51 |
|
|
7,332 |
|
Advance to VIE |
|
|
— |
|
|
(250) |
|
Purchases of intangible assets |
|
|
(4,500) |
|
|
(27,750) |
|
Net cash used in investing activities |
|
|
(11,048) |
|
|
(33,773) |
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
— |
|
|
86,250 |
|
Purchase of capped call |
|
|
— |
|
|
(7,072) |
|
Repayments of long-term debt |
|
|
(78,353) |
|
|
(129,989) |
|
Proceeds from issuance of stock |
|
|
552 |
|
|
778 |
|
Payment of debt issuance costs |
|
|
(2,390) |
|
|
(3,489) |
|
Purchase of treasury stock |
|
|
(1,029) |
|
|
(1,854) |
|
Net cash used in financing activities |
|
|
(81,220) |
|
|
(55,376) |
|
Effect on cash and cash equivalents of changes in foreign exchange rates |
|
|
24 |
|
|
(26) |
|
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
|
|
(58,039) |
|
|
(38,794) |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD |
|
|
144,329 |
|
|
140,249 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD |
|
$ |
86,290 |
|
$ |
101,455 |
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
Interest paid |
|
$ |
30,670 |
|
$ |
39,554 |
|
Income taxes paid (refunded) |
|
$ |
(23,052) |
|
$ |
7,775 |
|
Accrued purchases of property, plant and equipment |
|
$ |
803 |
|
$ |
2,023 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
7
LANNETT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Interim Financial Information
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for the presentation of interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited financial statements do not include all the information and footnotes necessary for a comprehensive presentation of the financial position, results of operations and cash flows for the periods presented. In the opinion of management, the unaudited financial statements include all the normal recurring adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Operating results for the three and nine months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2021. These unaudited financial statements should be read in combination with the other Notes in this section; “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Item 2; and the Consolidated Financial Statements, including the Notes to the Consolidated Financial Statements, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. The Consolidated Balance Sheet as of June 30, 2020 was derived from audited financial statements.
Note 2. The Business and Nature of Operations
Lannett Company, Inc. (a Delaware corporation) and its subsidiaries (collectively, the “Company” or “Lannett”) primarily develop, manufacture, package, market and distribute solid oral and extended release (tablets and capsules), topical, nasal and oral solution finished dosage forms of drugs that address a wide range of therapeutic areas. Certain of these products are manufactured by others and distributed by the Company.
The Company operates pharmaceutical manufacturing plants in Carmel, New York and Seymour, Indiana. The Company’s customers include generic pharmaceutical distributors, drug wholesalers, chain drug stores, private label distributors, mail-order pharmacies, other pharmaceutical manufacturers, managed care organizations, hospital buying groups, governmental entities and health maintenance organizations.
COVID-19 Update
In December 2019, the COVID-19 virus emerged in Wuhan, China and spread to other parts of the world. In March 2020, the World Health Organization (“WHO”) designated COVID-19 a global pandemic. Governments on the national, state and local level in the United States, and around the world, implemented lockdown and shelter-in-place orders, requiring many non-essential businesses to shut down operations. The Company’s business, however, is deemed “essential” and it has continued to operate, manufacture, and distribute its medicines to customers.
In light of the economic impacts of COVID-19, the Company reviewed the assets on our Consolidated Balance Sheet as of March 31, 2021, including intangible and other long-lived assets. Based on our review, the Company determined that no impairments or other write-downs specifically related to COVID-19 were necessary during the first nine months of Fiscal Year 2021. Our assessment is based on information currently available and is highly reliant on various assumptions. Changes in market conditions could impact the Company’s future outlook and may lead to impairments in the future.
While COVID-19 has thus far not had a material impact on the Company’s operations, subsequent to an initial stocking up of supplies at the start of the pandemic, the total volume of drug prescriptions being written in the country has decreased causing less demand for our products. We 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.
8
Note 3. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements have been prepared in conformity with U.S. GAAP.
Principles of consolidation
The Consolidated Financial Statements include the accounts of Lannett Company, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year financial statement presentation.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are required in the determination of revenue recognition and sales deductions for estimated chargebacks, rebates, returns and other adjustments including a provision for the Company’s liability under the Medicare Part D program. Additionally, significant estimates and assumptions are required when determining the value of inventories and long-lived assets, including intangible assets, income taxes, contingencies and share-based compensation.
Because of the inherent subjectivity and complexity involved in these estimates and assumptions, actual results could differ from those estimates.
Foreign currency translation
The Consolidated Financial Statements are presented in U.S. dollars, the reporting currency of the Company. The financial statements of the Company’s foreign subsidiary are maintained in local currency and translated into U.S. dollars at the end of each reporting period. Assets and liabilities are translated at period-end exchange rates, while revenues and expenses are translated at average exchange rates during the period. The adjustments resulting from the use of differing exchange rates are recorded as part of stockholders’ equity in accumulated other comprehensive income (loss). Gains and losses resulting from transactions denominated in foreign currencies are recognized in the Consolidated Statements of Operations under other income (loss). Amounts recorded due to foreign currency fluctuations are immaterial to the Consolidated Financial Statements.
Cash, cash equivalents and restricted cash
The Company considers all highly liquid investments with original maturities less than or equal to three months at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value, and consist of bank deposits and money market funds. The Company maintains its cash deposits and cash equivalents at well-known, stable financial institutions. Such amounts frequently exceed insured limits. In connection with the Amendment No. 4 to the Term Loan B Facility, which is discussed in further detail in Note 10 “Long-Term Debt,” the Company is required to maintain at least $5 million in a deposit account at all times, subject to control by the administrative agent. At March 31, 2021, the Company classified this balance as restricted cash, which is included in other assets.
9
Presented in the table below is a reconciliation of the cash, cash equivalents and restricted cash amounts presented on the Consolidated Balance Sheets to the sum of such amounts presented on the Consolidated Statements of Cash Flows for the periods ended March 31, 2021 and 2020.
Allowance for doubtful accounts
On July 1, 2020, the Company adopted guidance issued by the FASB in ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires the Company to recognize an allowance that reflects a current estimate of credit losses expected to be incurred over the life of the financial asset, including trade receivables. The adoption of ASU 2016-13 did not have a material impact on the Company’s Consolidated Financial Statements for the three and nine months ended March 31, 2021. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time balances are past due, the Company’s previous loss history, the customer’s current ability to pay its obligations to the Company and the expected condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they are determined to be uncollectible.
Inventories
Inventories are stated at the lower of cost or net realizable value by the first-in, first-out method. Inventories are regularly reviewed and write-downs for excess and obsolete inventory are recorded based primarily on current inventory levels, expiration date and estimated sales forecasts.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the assets’ estimated useful lives. Repairs and maintenance costs that do not extend the useful life of the asset are expensed as incurred.
Intangible Assets
Definite-lived intangible assets are stated at cost less accumulated amortization. Amortization of definite-lived intangible assets is computed on a straight-line basis over the assets’ estimated useful lives which commences upon shipment of the product, generally for periods ranging from 5 to 15 years. The Company continually evaluates the reasonableness of the useful lives of these assets. Indefinite-lived intangible assets are not amortized, but instead are tested at least annually for impairment. Costs to renew or extend the term of a recognized intangible asset are expensed as incurred.
Valuation of Long-Lived Assets, including Intangible Assets
The Company’s long-lived assets primarily consist of property, plant and equipment and definite and indefinite-lived intangible assets. Property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances (“triggering events”) indicate that the carrying amount of the asset may not be recoverable. If a triggering event is determined to have occurred, the asset’s carrying value is compared to the future undiscounted cash flows expected to be generated by the asset. If the carrying value exceeds the undiscounted cash flows of the asset, then impairment exists. Indefinite-lived intangible assets are tested for impairment at least annually during the fourth quarter of each fiscal year or more frequently if triggering events indicate that the asset might be impaired.
10
An impairment loss is measured as the excess of the asset’s carrying value over its fair value, which in most cases is calculated using a discounted cash flow model. Discounted cash flow models are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows.
In-Process Research and Development
Amounts allocated to in-process research and development in connection with a business combination are recorded at fair value and are considered indefinite-lived intangible assets subject to impairment testing in accordance with the Company’s impairment testing policy for indefinite-lived intangible assets. As products in development are approved for sale, amounts will be allocated to product rights and will be amortized over their estimated useful lives. Definite-lived intangible assets are amortized over the expected lives of the related assets. The judgments made in determining the estimated fair value of in-process research and development, as well as asset lives, can materially impact our results of operations. The Company’s fair value assessments are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows.
Segment Information
The Company operates in one reportable segment, generic pharmaceuticals. As such, the Company aggregates its financial information for all products. The table below identifies the Company’s net sales by medical indication for the three and nine months ended March 31, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
(In thousands) |
|
March 31, |
|
March 31, |
|
||||||||
|
Medical Indication |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
||||
|
Analgesic |
|
$ |
3,836 |
|
$ |
2,811 |
|
$ |
10,528 |
|
$ |
6,806 |
|
|
Anti-Psychosis |
|
|
11,678 |
|
|
27,858 |
|
|
38,023 |
|
|
78,588 |
|
|
Cardiovascular |
|
|
16,573 |
|
|
21,746 |
|
|
52,623 |
|
|
67,325 |
|
|
Central Nervous System |
|
|
24,509 |
|
|
18,566 |
|
|
71,648 |
|
|
57,154 |
|
|
Endocrinology |
|
|
6,822 |
|
|
— |
|
|
19,551 |
|
|
— |
|
|
Gastrointestinal |
|
|
16,817 |
|
|
20,745 |
|
|
52,492 |
|
|
56,020 |
|
|
Infectious Disease |
|
|
10,610 |
|
|
21,749 |
|
|
55,586 |
|
|
51,722 |
|
|
Migraine |
|
|
5,169 |
|
|
12,886 |
|
|
20,942 |
|
|
32,907 |
|
|
Respiratory/Allergy/Cough/Cold |
|
|
2,548 |
|
|
2,966 |
|
|
6,241 |
|
|
8,747 |
|
|
Urinary |
|
|
1,566 |
|
|
1,149 |
|
|
4,385 |
|
|
2,817 |
|
|
Other |
|
|
8,617 |
|
|
8,051 |
|
|
24,661 |
|
|
27,847 |
|
|
Contract manufacturing revenue |
|
|
3,625 |
|
|
5,845 |
|
|
16,089 |
|
|
17,891 |
|
|
Total net sales |
|
$ |
112,370 |
|
$ |
144,372 |
|
$ |
372,769 |
|
$ |
407,824 |
|
Customer, Supplier and Product Concentration
The following table presents the percentage of total net sales, for the three and nine months ended March 31, 2021 and 2020, for certain of the Company’s products, defined as products containing the same active ingredient or combination of ingredients, which accounted for at least 10% of net sales in any of those periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
||||
|
|
|
March 31, |
|
|
March 31, |
|
|
||||
|
|
|
2021 |
|
2020 |
|
|
2021 |
|
2020 |
|
|
|
Product 1 |
|
8 |
% |
11 |
% |
|
13 |
% |
10 |
% |
|
|
Product 2 |
|
8 |
% |
17 |
% |
|
8 |
% |
18 |
% |
|
11
The following table presents the percentage of total net sales, for the three and nine months ended March 31, 2021 and 2020, for certain of the Company’s customers which accounted for at least 10% of net sales in any of those periods:
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 (or as) we satisfy our performance obligations by transferring a promised good or service to a 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 revenue standard 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.
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.
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.
12
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 U.S. in March 2010, the Company participates in a cost-sharing program for certain Medicare Part D beneficiaries designed primarily for the sale of brand drugs and certain generic drugs if their Food and Drug Administration (“FDA”) approval was granted under a New Drug Application (“NDA”) or 505(b) NDA versus an Abbreviated New Drug application ("ANDA’). Drugs purchased within the Medicare Part D coverage gap (commonly referred to as the “donut hole”) result in additional rebates. The Company estimates the reserve for rebates and other promotional credit programs based on the specific terms in each agreement when revenue is recognized. The reserve for rebates increases (decreases) as sales to certain wholesale and retail customers increase (decrease). However, since these rebate programs are not identical for all customers, the size of the reserve will depend on the mix of sales to customers that are eligible to receive rebates.
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.
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.
Leases
On July 1, 2019, the Company adopted ASC Topic 842, Leases, which superseded ASC Topic 840, Leases. Under ASC 842, when the Company enters into a new arrangement, it must determine, at the inception date, whether the arrangement is or contains a lease. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. Once a lease has been identified, the Company must determine the lease term, the present value of lease payments and the classification of the lease as either operating or financing.
13
The lease term is determined to be the non-cancelable period including any lessee renewal options which are considered to be reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The present value of lease payments includes fixed and certain variable payments, less lease incentives, together with amounts probable of being owed by the Company under residual value guarantees and, if reasonably certain of being paid, the cost of certain renewal options and early termination penalties set forth in the lease arrangement. To calculate the present value of lease payments, we use our incremental borrowing rate based on the information available at commencement date, as the rate implicit in the lease is generally not readily available.
In making the determination of whether a lease is an operating lease or a finance lease, the Company considers the lease term in relation to the economic life of the leased asset, the present value of lease payments in relation to the fair value of the leased asset and certain other factors.
Upon the commencement of the lease, the Company will record a lease liability and right-of-use (“ROU”) asset based on the present value of the future minimum lease payments over the lease term at commencement date. The ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred.
For operating leases, a single lease cost is generally recognized in the Consolidated Statements of Operations on a straight-line basis over the lease term unless an impairment has been recorded with respect to a leased asset. For finance leases, amortization expense and interest expense are recognized separately in the Consolidated Statements of Operations, with amortization expense generally recorded on a straight-line basis and interest expense recorded using the effective interest method. Variable lease costs not initially included in the lease liability and ROU asset impairment charges are expensed as incurred.
Cost of Sales, including Amortization of Intangibles
Cost of sales includes all costs related to bringing products to their final selling destination, which includes direct and indirect costs, such as direct material, labor and overhead expenses. Additionally, cost of sales includes product royalties, depreciation, amortization and costs to renew or extend recognized intangible assets, freight charges and other shipping and handling expenses.
Research and Development
Research and development costs are expensed as incurred, including all production costs until a drug candidate is approved by the FDA. Research and development expenses include costs associated with internal projects as well as costs associated with third-party research and development contracts.
Contingencies
Loss contingencies, including litigation-related contingencies, are included in the Consolidated Statements of Operations when the Company concludes that a loss is both probable and reasonably estimable. Legal fees for litigation-related matters are expensed as incurred and included in the Consolidated Statements of Operations under the Selling, general and administrative expenses line item.
Restructuring Costs
The Company records charges associated with approved restructuring plans to remove duplicative headcount and infrastructure associated with business acquisitions or to simplify business processes. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations and contract cancellation costs. The Company records restructuring charges based on estimated employee terminations, site closure and consolidation plans. The Company accrues severance and other employee separation costs under these actions when it is probable that a liability exists and the amount is reasonably estimable.
14
Share-based Compensation
Share-based compensation costs are recognized over the vesting period, using a straight-line method, based on the fair value of the instrument on the date of grant less an estimate for expected forfeitures. The Company uses the Black-Scholes valuation model to determine the fair value of stock options, the stock price on the grant date to value restricted stock and the Monte-Carlo simulation model to determine the fair value of performance-based shares. The Black-Scholes valuation and Monte-Carlo simulation models include various assumptions, including the expected volatility, the expected life of the award, dividend yield and the risk-free interest rate as well as performance assumptions of peer companies. These assumptions involve inherent uncertainties based on market conditions which are generally outside the Company’s control. Changes in these assumptions could have a material impact on share-based compensation costs recognized in the Consolidated Financial Statements.
Self-Insurance
The Company self-insures for certain employee medical and prescription benefits. The Company also maintains stop loss coverage with third party insurers to limit its total liability exposure. The liability for self-insured risks is primarily calculated using independent third-party actuarial valuations which take into account actual claims, claims growth and claims incurred but not yet reported. Actual experience, including claim frequency and severity as well as health-care inflation, could result in different liabilities than the amounts currently recorded. The liability for self-insured risks under this plan was not material to the consolidated financial position of the Company as of March 31, 2021 and June 30, 2020.
Income Taxes
The Company uses the liability method to account for income taxes as prescribed by ASC 740, Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates in the period during which they are signed into law. The Company evaluates the need for a valuation allowance each reporting period weighing all positive and negative evidence. The factors used to assess the likelihood of realization include, but are not limited to, the Company’s forecast of future taxable income, historical results of operations, statutory expirations and available tax planning strategies and actions that could be implemented to realize the net deferred tax assets. Under ASC 740, Income Taxes, a valuation allowance is required when it is more likely than not that all or some portion of the deferred tax assets will not be realized. The Company continues to closely monitor the need for a valuation against its deferred tax assets in light of recent pre-tax losses while also giving consideration to our forecasted taxable income, which is inherently uncertain and subject to change based on market conditions. Further near-term losses along with significant changes to our forecasted income could affect the ultimate realization of our deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.
The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative accounting standards also provide guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
15
On March 27, 2020, in response to COVID-19 and its detrimental impact to the global economy, former President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law, which provides a stimulus to the U.S. economy in the form of various individual and business assistance programs as well as temporary changes to existing tax law. Among the changes to the provision in business tax laws include a five-year net operating loss carryback for the Fiscal 2019 - 2021 tax years, a deferral of the employer’s portion of certain payroll tax, and an increase in the interest expense deductibility limitation for the Fiscal 2020 and 2021 tax years. ASC 740 requires the tax effects of changes in tax laws or rates to be recorded in the period of enactment. As a result of the CARES Act, the Company carried back its Fiscal 2020 taxable loss into the Fiscal 2015 tax year.
Earnings (Loss) Per Common Share
A dual presentation of basic and diluted earnings (loss) per common share is required on the face of the Company's Consolidated Statements of Operations as well as a reconciliation of the computation of basic earnings (loss) per common share to diluted earnings (loss) per common share. Basic earnings (loss) per common share excludes the dilutive impact of potentially dilutive securities and is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Beginning in the first quarter of Fiscal 2020, the Company's diluted earnings (loss) per common share is computed using the "if-converted" method by dividing the adjusted "if-converted" net income by the adjusted weighted average number of shares of common stock outstanding during the period. The adjusted "if-converted" net income is adjusted for interest expense and amortization of debt issuance costs, both net of tax, associated with the Company’s 4.50% Convertible Senior Notes due 2026. The weighted average number of diluted shares is adjusted for the potential dilutive effect of the exercise of stock options, treats unvested restricted stock and performance-based shares as if it were vested, and assumes the conversion of the 4.50% Convertible Senior Notes. Anti-dilutive securities are excluded from the calculation. Dilutive shares are also excluded in the calculation in periods of net loss because the effect of including such securities would be anti-dilutive.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders. Other comprehensive income (loss) refers to gains and losses that are included in comprehensive income (loss), but excluded from income (loss) for all amounts are recorded directly as an adjustment to stockholders’ equity.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which changes the impairment model used to measure credit losses for most financial assets. We are required to recognize an allowance that reflects the Company’s current estimate of credit losses expected to be incurred over the life of the financial asset, including trade receivables. The Company adopted this guidance in the first quarter of Fiscal 2021. The adoption of ASU 2016-13 did not have a material impact on the Company’s Consolidated Financial Statements for the three and nine months ended March 31, 2021.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in Entity’s Own Equity, with changes to modify and simplify the application of U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, with early adoption permitted. The ASU requires adoption using either the retrospective basis or the modified retrospective basis. The Company is currently evaluating the impact of ASU 2020-06 on its Consolidated Financial Statements.
16
Note 4. Restructuring Charges
2020 Restructuring Plan
On July 10, 2020, the Board of Directors authorized a restructuring and cost savings plan (the “2020 Restructuring Plan”) to enhance manufacturing efficiencies, streamline operations and reduce the Company’s cost structure. The 2020 Restructuring Plan was implemented, in part, as a result of previously anticipated near-term competition and pricing pressure with respect to certain key products. The 2020 Restructuring Plan includes lowering operating costs and reducing the workforce by approximately 80 positions. The 2020 Restructuring Plan was initiated on July 13, 2020 and completed as of December 31, 2020.
The Company incurred $4.0 million in severance-related costs in the first nine months of Fiscal 2021 in connection with the 2020 Restructuring Plan. The Company expects the 2020 Restructuring Plan to result in annual cost savings in excess of $15.0 million.
A reconciliation of the changes in restructuring liabilities associated with the 2020 Restructuring Plan from June 30, 2020 through March 31, 2021 is set forth in the following table:
|
|
|
|
|
|
|
|
Employee |
|
|
(In thousands) |
|
Separation Costs |
|
|
Balance at June 30, 2020 |
|
$ |
— |
|
Restructuring charges |
|
|
4,043 |
|
Payments |
|
|
(4,001) |
|
Balance at March 31, 2021 |
|
$ |
42 |
Note 5. Accounts Receivable, net
Accounts receivable, net consisted of the following components at March 31, 2021 and June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
June 30, |
||
|
(In thousands) |
|
2021 |
|
2020 |
||
|
Gross accounts receivable |
|
$ |
258,652 |
|
$ |
271,557 |
|
Less: Chargebacks reserve |
|
|
(74,729) |
|
|
(61,877) |
|
Less: Rebates reserve |
|
|
(16,446) |
|
|
(24,536) |
|
Less: Returns reserve |
|
|
(38,708) |
|
|
(40,796) |
|
Less: Other deductions |
|
|
(13,449) |
|
|
(17,557) |
|
Less: Allowance for doubtful accounts |
|
|
(629) |
|
|
(1,103) |
|
Accounts receivable, net |
|
$ |
114,691 |
|
$ |
125,688 |
For the three months ended March 31, 2021, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $135.4 million, $27.1 million, $3.9 million and $18.6 million, respectively. For the three months ended March 31, 2020, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $201.0 million, $63.8 million, $6.4 million and $35.7 million, respectively.
For the nine months ended March 31, 2021, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $515.2 million, $104.8 million, $14.5 million and $55.2 million, respectively. For the nine months ended March 31, 2020, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $608.6 million, $180.6 million, $16.6 million and $77.2 million, respectively.
17
The following table identifies the activity and ending balances of each major category of revenue-related reserve for the nine months ended March 31, 2021 and 2020:
For the three months ending March 31, 2021 and 2020, as a percentage of gross sales the provision for chargebacks was 46.1% and 45.1%, the provision for rebates was 9.2% and 14.3%, the provision for returns was 1.3% and 1.4% and the provision for other adjustments was 6.3% and 8.0%, respectively.
For the nine months ending March 31, 2021 and 2020, as a percentage of gross sales the provision for chargebacks was 49.2% and 47.8%, the provision for rebates was 10.0% and 14.2%, the provision for returns was 1.4% and 1.3% and the provision for other adjustments was 5.3% and 6.1%, respectively.
The increase in the chargebacks reserve was primarily due to timing of sales and product mix partially offset by lower sales. The rebates reserve decreased primarily due to lower sales of Fluphenazine in Fiscal 2021, which had higher than average government-related rebates. Historically, we have not recorded any material amounts in the current period related to reversals or additions of prior period reserves.
Note 6. Inventories
Inventories at March 31, 2021 and June 30, 2020 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
June 30, |
||
|
(In thousands) |
|
2021 |
|
2020 |
||
|
Raw Materials |
|
$ |
47,307 |
|
$ |
59,703 |
|
Work-in-process |
|
|
16,143 |
|
|
12,235 |
|
Finished Goods |
|
|
49,624 |
|
|
70,929 |
|
Total |
|
$ |
113,074 |
|
$ |
142,867 |
During the three months ended March 31, 2021 and 2020, the Company recorded write-downs to net realizable value for excess and obsolete inventory of $0.4 million and $2.4 million, respectively. During the nine months ended March 31, 2021 and 2020, the Company recorded write-downs to net realizable value for excess and obsolete inventory of $23.6 million and $8.5 million, respectively. The increase in write-downs for excess and obsolete inventory was primarily related to the discontinuation of certain product lines during the second quarter of Fiscal 2021, which is discussed further in Note 9 “Intangible Assets.”
18
Note 7. Property, Plant and Equipment, net
Property, plant and equipment, net at March 31, 2021 and June 30, 2020 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
June 30, |
||
|
(In thousands) |
|
Useful Lives |
|
2021 |
|
2020 |
||
|
Land |
|
— |
|
$ |
1,783 |
|
$ |
1,783 |
|
Building and improvements |
|
10 - 39 years |
|
|
103,361 |
|
|
100,285 |
|
Machinery and equipment |
|
5 - 10 years |
|
|
168,858 |
|
|
164,704 |
|
Furniture and fixtures |
|
5 - 7 years |
|
|
3,402 |
|
|
3,116 |
|
Less accumulated depreciation |
|
|
|
|
(119,953) |
|
|
(102,983) |
|
|
|
|
|
|
157,451 |
|
|
166,905 |
|
Construction in progress |
|
|
|
|
11,393 |
|
|
12,613 |
|
Property, plant and equipment, net |
|
|
|
$ |
168,844 |
|
$ |
179,518 |
Depreciation expense for the three months ended March 31, 2021 and 2020 was $5.8 million and $6.2 million, respectively. Depreciation expense for the nine months ended March 31, 2021 and 2020 was $17.2 million and $17.9 million, respectively.
Property, plant and equipment, net included amounts held in foreign countries in the amount of $0.5 million at March 31, 2021 and June 30, 2020.
Note 8. Fair Value Measurements
The Company’s financial instruments recorded in the Consolidated Balance Sheets include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and debt obligations. The Company’s cash and cash equivalents include bank deposits and money market funds. The carrying value of certain financial instruments, primarily cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate their estimated fair values based upon the short-term nature of their maturity dates.
The Company follows the authoritative guidance of ASC Topic 820 “Fair Value Measurements and Disclosures.” Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company’s financial assets and liabilities measured at fair value are entirely within Level 1 of the hierarchy as defined below:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2 — Directly or indirectly observable inputs, other than quoted prices, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are material to the fair value of the asset or liability. Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation are examples of Level 3 assets and liabilities.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
19
Financial Instruments Disclosed, But Not Reported, at Fair Value
We estimate the fair value of our debt utilizing market quotations for debt that have quoted prices in active markets. Since our debt does not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2). The estimated fair value of our term loan debt was approximately $518 million and $608 million as of March 31, 2021 and June 30, 2020, respectively. The estimated fair value of our 4.50% Convertible Senior Notes was approximately $53 million and $58 million as of March 31, 2021 and June 30, 2020, respectively. The fair value as of March 31, 2021 was lower than the carrying value primarily due to the Company’s stock price at March 31, 2021 as compared to the $15.29 conversion price.
Non-recurring Fair Value Measurements
The Company has certain assets that are measured at fair value on a non-recurring basis and are adjusted to fair value only when the carrying values are greater than the fair values. These assets are subject to fair value adjustments when there is evidence of impairment. The Company’s estimation of the fair value of intangible assets for impairment represents a Level 3 fair value measurement, due to the use of internal and external projections and unobservable measurement inputs. Based on an impairment analysis performed during the second quarter of Fiscal 2021, the Company adjusted the KUPI product rights assets and the KUPI in-process research and development asset to fair value, $84.0 million and $4.0 million respectively, as of December 31, 2020. Refer to Note 9 “Intangible Assets” for further information.
Note 9. Intangible Assets
Intangible assets, net as of March 31, 2021 and June 30, 2020 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
Intangible Assets, Net |
||||||||||||
|
|
|
Avg. Life |
|
March 31, |
|
June 30, |
|
March 31, |
|
June 30, |
|
March 31, |
|
June 30, |
||||||
|
(In thousands) |
|
(Yrs.) |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
||||||
|
Definite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KUPI product rights |
|
15 |
|
|
83,955 |
|
|
416,154 |
|
|
(2,099) |
|
|
(125,327) |
|
|
81,856 |
|
|
290,827 |
|
KUPI trade name |
|
2 |
|
|
2,920 |
|
|
2,920 |
|
|
(2,920) |
|
|
(2,920) |
|
|
— |
|
|
— |
|
KUPI other intangible assets |
|
15 |
|
|
19,000 |
|
|
19,000 |
|
|
(6,778) |
|
|
(5,828) |
|
|
12,222 |
|
|
13,172 |
|
Silarx product rights |
|
15 |
|
|
20,000 |
|
|
20,000 |
|
|
(4,556) |
|
|
(3,556) |
|
|
15,444 |
|
|
16,444 |
|
Other product rights |
|
10 |
|
|
55,218 |
|
|
50,718 |
|
|
(8,602) |
|
|
(5,426) |
|
|
46,616 |
|
|
45,292 |
|
Total definite-lived |
|
|
|
$ |
181,093 |
|
$ |
508,792 |
|
$ |
(24,955) |
|
$ |
(143,057) |
|
$ |
156,138 |
|
$ |
365,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KUPI in-process research and development |
|
— |
|
$ |
4,000 |
|
$ |
9,000 |
|
$ |
— |
|
$ |
— |
|
$ |
4,000 |
|
$ |
9,000 |
|
Total indefinite-lived |
|
|
|
|
4,000 |
|
|
9,000 |
|
|
— |
|
|
— |
|
|
4,000 |
|
|
9,000 |
|
Total intangible assets, net |
|
|
|
$ |
185,093 |
|
$ |
517,792 |
|
$ |
(24,955) |
|
$ |
(143,057) |
|
$ |
160,138 |
|
$ |
374,735 |
For the three months ended March 31, 2021 and 2020, the Company recorded amortization expense of $3.9 million and $8.3 million, respectively. For the nine months ended March 31, 2021 and 2020, the Company recorded amortization expense of $21.1 million and $23.5 million, respectively.
20
In December 2020, the Company reviewed its product portfolio and decided to discontinue 23 lower gross margin product lines, including product lines that were acquired through various past business and product acquisitions. As a result of the discontinuance and the reduction in net sales and gross margin of certain other product lines, the Company determined that such decision represents a “triggering event” and, therefore, commenced an analysis to determine the potential for impairment of certain long-lived assets, primarily its intangible assets. Based on that analysis, the Company recorded an impairment charge of $193.0 million related to the KUPI product rights intangible assets during the second quarter of Fiscal 2021. The impairment charge is primarily a result of the decline in net sales and gross margin of certain product lines acquired in connection with the KUPI acquisition, including those product lines being discontinued.
In the second quarter of Fiscal 2021, the Company also recorded a $5.0 million impairment charge to its KUPI in-process research and development intangible asset due to delays in the expected launch of a product within the portfolio, which resulted in reduced projected cash flows.
In November 2020, the Company entered into Amendment No. 2 to License and Supply Agreement (the “2020 Amendment”) with Recro Gainesville LLC (“Recro”), which amended the Company’s agreement with Recro to exclusively distribute Verelan PM ®, Verelan SR ®, and Verapamil PM. In accordance with the Company’s policy to expense costs to renew or extend the term of a recognized intangible asset as incurred, the Company recorded $5.0 million in consideration to renew the Company’s distribution agreement during the second quarter of Fiscal Year 2021, which is included within cost of sales on the Consolidated Statements of Operations.
Future annual amortization expense consisted of the following as of March 31, 2021:
|
|
|
|
|
|
(In thousands) |
|
Amortization |
|
|
Fiscal Year Ending June 30, |
|
Expense |
|
|
2021 |
|
$ |
3,857 |
|
2022 |
|
|
17,026 |
|
2023 |
|
|
16,726 |
|
2024 |
|
|
16,426 |
|
2025 |
|
|
16,026 |
|
Thereafter |
|
|
86,077 |
|
|
|
$ |
156,138 |
Note 10. Long-Term Debt
Long-term debt, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
June 30, |
||
|
(In thousands) |
|
2021 |
|
2020 |
||
|
Term Loan A |
|
$ |
— |
|
$ |
48,844 |
|
Unamortized discount and other debt issuance costs |
|
|
— |
|
|
(433) |
|
Term Loan A, net |
|
|
— |
|
|
48,411 |
|
Term Loan B due 2022; 6.38% as of March 31, 2021 |
|
|
543,348 |
|
|
572,857 |
|
Unamortized discount and other debt issuance costs |
|
|
(16,162) |
|
|
(23,278) |
|
Term Loan B, net |
|
|
527,186 |
|
|
549,579 |
|
4.50% Convertible Senior Notes due 2026 |
|
|
86,250 |
|
|
86,250 |
|
Unamortized discount and other debt issuance costs |
|
|
(2,738) |
|
|
(3,111) |
|
4.50% Convertible Senior Notes, net |
|
|
83,512 |
|
|
83,139 |
|
$125 million Revolving Credit Facility |
|
|
— |
|
|
— |
|
$30 million ABL Credit Facility |
|
|
— |
|
|
— |
|
Total debt, net |
|
|
610,698 |
|
|
681,129 |
|
Less short-term borrowings and current portion of long-term debt |
|
|
— |
|
|
(88,189) |
|
Total long-term debt, net |
|
$ |
610,698 |
|
$ |
592,940 |
21
The weighted average interest rate for the three months ended March 31, 2021 and 2020 was 7.9% and 8.6%, respectively. The weighted average interest rate for the nine months ended March 31, 2021 and 2020 was 7.9% and 9.0%, respectively. The Company paid off the outstanding balance of the Term Loan A of $42.0 million on November 25, 2020 with cash on hand. The Company’s undrawn $125 million Revolving Credit Facility also expired on November 25, 2020.
Long-term debt amounts due, for the twelve-month periods ending March 31 are as follows:
|
|
|
|
|
|
|
|
Amounts Payable |
|
|
(In thousands) |
|
to Institutions |
|
|
2022 (a) |
|
$ |
39,345 |
|
2023 |
|
|
504,003 |
|
2024 |
|
|
— |
|
2025 |
|
|
— |
|
2026 |
|
|
— |
|
Thereafter |
|
|
86,250 |
|
Total |
|
$ |
629,598 |
| (a) | The Company completed multiple transactions to refinance the existing Term Loan B Facility due 2022 on April 22, 2021. In accordance with ASC 470 Debt, the principal payments due for the twelve-month period ending March 31, 2022 are classified as non-current on the Consolidated Balance Sheet as of March 31, 2021. |
On December 7, 2020, the Company entered into a credit and guaranty agreement, which provides for an asset-based revolving credit facility (the “ABL Credit Facility”) of up to $30 million, subject to borrowing base availability, and includes letter of credit and swing line sub-facilities. Borrowing availability under the 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 ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings. Loans outstanding under the ABL Credit Agreement bear interest at a floating rate measured by reference to an adjusted London Inter-Bank Offered Rate (“LIBOR”), subject to a floor of 0.75%, plus an applicable margin of 2.50% per annum. Unused commitments under the ABL Credit Facility are subject to a per annum fee of 0.50%. The obligations under the ABL Credit Agreement are guaranteed by the Company and all of the Company’s existing and future subsidiaries, subject to certain exceptions (collectively, the “Guarantors”), and such obligations and the obligations of the Guarantors are secured by:
| ● | a perfected security interest in all present and after-acquired accounts receivable, payment intangibles, inventory, deposit accounts, securities accounts, and any cash, cash equivalents or other assets in such accounts and other related assets owned by each Guarantor and the proceeds of the foregoing, except to the extent such proceeds constitute Cash Flow Priority Collateral (as defined below), and subject to certain exceptions (the “ABL Priority Collateral”), which security interest is senior to the security interest in the ABL Priority Collateral securing the Company’s existing Term Loan B Facility; and |
| ● | a perfected security interest in substantially all present and after-acquired tangible and intangible assets of each Guarantor other than the ABL Priority Collateral (the “Cash Flow Priority Collateral”), which security interest is junior to the security interest in the Cash Flow Priority Collateral securing the Term Loan B Facility. |
22
The ABL Credit Agreement contains customary representations and warranties and customary affirmative covenants and negative covenants. The negative covenants include restrictions on, among other things: the incurrence of additional indebtedness; the incurrence of additional liens; dividends or other distributions on equity; the purchase, redemption or retirement of capital stock; the payment or redemption of certain indebtedness; the nature of the business activity of the Company and its subsidiaries; loans, guarantees and other investments; entering into other agreements that create restrictions on the ability to pay dividends or make other distributions on equity or create or incur certain liens; asset sales; consolidations or mergers; amendment of certain material documents; changes in fiscal year; and affiliate transactions. The negative covenants are subject to customary exceptions and also permit dividends and other distributions on equity, consolidations, mergers and asset sales, certain acquisitions and other investments, and payments or redemptions of certain indebtedness, in each case upon satisfaction of the “payment conditions”. The payment conditions are deemed satisfied upon Excess Availability (as defined in the ABL Credit Agreement) on the date of the designated action and Excess Availability for the prior 30-day period exceeding agreed-upon thresholds, the absence of the occurrence and continuance of any event of default and, in certain cases, pro forma compliance with a fixed charge coverage ratio of no less than 1.10 to 1.00.
The ABL Credit Agreement includes a minimum fixed charge coverage ratio of no less than 1.10 to 1.00, which is tested only when Excess Availability is less than 15.0% of the lesser of (A) the borrowing base and (B) the then effective commitments under the ABL Credit Facility for three consecutive business days, and continuing until the first day immediately succeeding the last day of 30 consecutive days on which Excess Availability is in excess of such threshold.
The ABL Credit Agreement provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all of the then outstanding obligations under the ABL Credit Facility to be due and payable immediately and the commitments under the ABL Credit Facility to be terminated.
The Company also entered into Amendment No. 4 to the Credit and Guaranty Agreement, which amends the Term Loan B Facility to permit the incurrence of the ABL Credit Facility and requires the Company to maintain at least $5 million in a deposit account at all times, subject to control by the administrative agent, and a minimum cash balance of $15 million as of the last day of each month. At March 31, 2021, the Company classified the $5 million required deposit account balance as restricted cash, which is included in other assets caption in the Consolidated Balance Sheet. The amendment also replaced Morgan Stanley Senior Funding, Inc. with Alter Domus (US) LLC as administrative agent and collateral agent under the Term Loan B Facility.
The outstanding Term Loan B Facility and ABL Credit Facility amounts above are guaranteed by all of Lannett’s significant wholly-owned domestic subsidiaries and are collateralized by substantially all present and future assets of the Company.
On April 22, 2021, the Company entered into multiple transactions to refinance the existing Term Loan B Facility due 2022. The Company also amended the existing ABL Credit Facility to, among other things, increase the aggregate amount and extend the maturity of the revolving credit. Refer to Note 20 “Subsequent Events” for further discussion of the details of the transactions.
23
Note 11. Legal, Regulatory Matters and Contingencies
State Attorneys General Inquiry into the Generic Pharmaceutical Industry
In July 2014, the Company received interrogatories and a subpoena from the State of Connecticut Office of the Attorney General concerning its investigation into the pricing of digoxin. According to the subpoena, the Connecticut Attorney General is investigating whether anyone engaged in any activities that resulted in (a) fixing, maintaining or controlling prices of digoxin or (b) allocating and dividing customers or territories relating to the sale of digoxin in violation of Connecticut antitrust law. In June 2016, the Connecticut Attorney General issued interrogatories and a subpoena to an employee of the Company in order to gain access to documents and responses previously supplied to the Department of Justice pursuant to the federal investigation described below. Beginning in December 2016, the Connecticut Attorney General and numerous other State Attorneys General have filed civil complaints against the Company and numerous other companies and individuals relating to alleged anti-competitive behavior as more fully described below.
Based on internal investigations performed to date, the Company currently believes that it has acted in compliance with all applicable laws and regulations.
Federal Investigation into the Generic Pharmaceutical Industry
In November and December 2014, the Company and certain affiliated individuals and customers were served with grand jury subpoenas relating to a federal investigation of the generic pharmaceutical industry into possible violations of the Sherman Act. The subpoenas requested corporate documents of the Company relating to corporate, financial and employee information, communications or correspondence with competitors regarding the sale of generic prescription medications and the marketing, sale, or pricing of certain products, generally for the period of 2005 through the dates of the subpoenas.
The Company received a Civil Investigative Demand (“CID”) from the Department of Justice on May 14, 2018. The CID requested information from 2009-present regarding allegations that the generic pharmaceutical industry engaged in market allocation, price fixing, payment of illegal remuneration and submission of false claims. The Company has responded to the CID.
Based on internal investigations performed to date, the Company believes that it has acted in compliance with all applicable laws and regulations.
Government Pricing
During the quarter ended December 31, 2016, the Company completed a contract compliance review, for the period January 1, 2012 through June 30, 2016, for one of KUPI’s government-entity customers. As a result of the review, the Company identified certain commercial customer prices and other terms that were not properly disclosed to the government-entity resulting in potential overcharges. For the period January 1, 2012 through November 24, 2015 (“the pre-acquisition period”), the Company is fully indemnified per the Stock Purchase Agreement.
On May 22, 2019, the Department of Veterans Affairs issued a Contracting Officer’s Final Decision and Demand for Payment, assessing the sum of $9.4 million for overpayments by the Veteran’s Administration for the period of January 1, 2012 through June 30, 2016. In August 2019, the Company remitted payment to the VA and received reimbursement from UCB for the indemnified portion of the payment in the amount of $8.1 million. The VA requested additional information for the period of July 1, 2016 through March 2018. The Company is in the process of responding to the information request.
24
State Attorneys General and Private Plaintiffs Antitrust and Consumer Protection Litigation
In December 2016, the Connecticut Attorney General and various other State Attorneys General filed a civil complaint alleging that six pharmaceutical companies engaged in anti-competitive behavior. The Company was not named in the action and does not compete on the products that formed the basis of the complaint. The complaint was later transferred for pretrial purposes to the United States District Court for the Eastern District of Pennsylvania as part of a multidistrict litigation captioned In re: Generic Pharmaceuticals Pricing Antitrust Litigation (the “MDL”). On October 31, 2017, the State Attorneys General filed a motion for leave to amend their complaint to add numerous additional defendants, including the Company, and claims relating to 13 additional drugs. The District Court granted that motion on June 5, 2018. The State Attorneys General filed their amended complaint on June 18, 2018. The claim relating to Lannett involves alleged price-fixing for one drug, doxycycline monohydrate, but does not involve the pricing for digoxin. The State Attorneys General also allege that all defendants were part of an overarching, industry-wide conspiracy to allocate markets and fix prices generally. On August 15, 2019, the Court denied the defendants' joint motion to dismiss the overarching conspiracy claims, but has yet to decide an individual motion filed by the Company to dismiss the overarching conspiracy claims as to it.
On May 10, 2019, the State Attorneys General filed a new lawsuit naming the Company and one of its employees as defendants, along with 33 other companies and individuals. The complaint again alleges an overarching conspiracy and contains claims for price-fixing and market allocation under the Sherman Act and related state laws. The complaint focuses on the conduct of another generic pharmaceutical company, and the relationships that company had with other generic companies and their employees. The specific allegations in this complaint against Lannett relate to the Company’s sales of baclofen and levothyroxine. The complaint also names another current employee as a defendant, but the allegations pertain to conduct that occurred prior to their employment by Lannett. In June 2020, the State Attorneys General filed a third overarching conspiracy complaint involving scores of different drugs, including alleged price-fixing by the Company for acetazolamide. Both complaints have been added to the MDL.
In 2016 and 2017, the Company and certain competitors were named as defendants in a number of lawsuits alleging that the Company and certain generic pharmaceutical manufacturers have conspired to fix prices of generic digoxin, levothyroxine, ursodiol and baclofen. These cases are part of a larger group of more than 100 lawsuits generally alleging that over 30 generic pharmaceutical manufacturers and distributors conspired to fix prices for multiple different generic drugs in violation of the federal Sherman Act, various state antitrust laws, and various state consumer protection statutes. The United States also has been granted leave to intervene in the cases. On April 6, 2017, these cases were added to the MDL. The various plaintiffs are grouped into three categories - Direct Purchaser Plaintiffs, End Payer Plaintiffs, and Indirect Reseller Purchasers - and filed Consolidated Amended Complaints (“CACs”) against the Company and the other defendants in August 2017.
The CACs naming the Company as a defendant involve generic digoxin, levothyroxine, ursodiol and baclofen. Pursuant to a court-ordered schedule grouping the 18 different drug cases into three separate tranches, the Company and other generic pharmaceutical manufacturer defendants in October 2017 filed joint and individual motions to dismiss the CACs involving the six drugs in the first tranche, including digoxin. In October 2018, the Court (with one exception) denied defendants’ motions to dismiss plaintiffs’ Sherman Act claims with respect to the drugs in the first tranche. In March 2019, the Company and other defendants filed answers to the Sherman Act claims. In addition, in February 2019, the Court dismissed certain of the plaintiffs’ state law claims, but denied the remainder of defendants’ motions to dismiss and set a deadline of April 1, 2019 for certain plaintiffs to amend their existing complaints. Those plaintiffs amended their complaints, but further motions to dismiss the state-law claims remain pending.
Following the lead of the state Attorneys General, the Direct Court Purchaser Plaintiffs, End Payer Plaintiffs and Indirect Reseller Plaintiffs filed their own complaints in June 2018 alleging an overarching conspiracy relating to 14 generic drugs in the End Payer complaint and 15 generic drugs in the Indirect Reseller complaint. Although the complaints allege an overarching conspiracy with respect to all of the drugs identified, the specific allegations related to drugs the Company manufactures involve acetazolamide and doxycycline monohydrate.
25
The Company and the other defendants filed motions to dismiss the overarching conspiracy claims. In August 2019, the Court denied the defendants' joint motion to dismiss the overarching conspiracy claims, but has yet to decide an individual motion filed by the Company to dismiss the overarching conspiracy claims as to it. In addition, between December 2019 and February 2020, the End Payer Plaintiffs, Indirect Reseller Purchasers, and Direct Purchaser Plaintiffs filed separate complaints alleging overarching, industry-wide price-fixing conspiracies modeled on the second one filed by the state Attorneys General. The new complaint involves 135 new drugs in addition to those named in previous complaints. As to the Company, the new drugs involved are pilocarpine HCL, triamterene HCTZ capsules, amantadine HCL, and oxycodone HCL. None of the defendants, including the Company, has responded yet to these new complaints.
Between January 2018 and December 2020, a number of opt-out parties have filed individual complaints or otherwise commenced actions against the Company and dozens of other companies and individuals alleging an overarching conspiracy and individual conspiracies to fix the prices and allocate markets on scores of different drug products, including digoxin, doxycycline, levothyroxine, ursodiol and baclofen. The opt-out parties include various retailers, insurers and county governments, which have filed federal suits in Pennsylvania, New York, California, Minnesota and Texas. All of those complaints have been added to the MDL but none of the defendants, including the Company, has responded to any of the complaints. Other groups of insurers have commenced actions in Pennsylvania state court against the Company and other drug companies by filing writs of summons, which are not complaints but can serve to toll the running of statutes of limitations. Those state-court cases have not been added to the MDL, although the parties have agreed to stay those cases pending further developments in the MDL.
In June 2020, the Company and a number of other generic pharmaceutical manufacturers were named as defendants in a Statement of Claim, along with a number of other generic pharmaceutical manufacturers, in a proposed class proceeding in federal court in Toronto, Ontario, Canada. The case alleges a violation of Canada’s Competition Act. The allegations are similar to those in the MDL alleging an overarching, industry-wide conspiracy to allocate markets and fix the price of generic drugs. That alleged conspiracy reached Canada because these same manufacturers also allegedly sell the majority of generic drugs in Canada. The Statement of Claim alleges that the conspiracy extends to the entire generic pharmaceutical market. The specific drugs identified with respect to the Company are: acetazolamide, baclofen, digoxin, doxycycline monohydrate, levothyroxine, and ursodiol. The Company has not yet responded to the Statement of Claim.
On July 13, 2020, the District Court overseeing the MDL selected as “bellwether” cases the second overarching conspiracy case filed by the state Attorneys General in May 2019 as well as individual-conspiracy cases filed by the Direct Purchaser Plaintiffs, End Payer Plaintiffs, and Indirect Reseller Purchasers involving the drugs clobetasol, clomipramine and pravastatin. The Company is a defendant only in the overarching conspiracy case. On February 9, 2021, the District Court vacated the order selecting the bellwether cases. The District Court has re-designated the clobetasol and clomipramine cases as individual-conspiracy bellwethers, but has not yet designated a new overarching conspiracy bellwether case. To date, none of the bellwether cases have been scheduled for trial.
The Company believes that it acted in compliance with all applicable laws and regulations. Accordingly, the Company disputes the allegations set forth in these class actions and plans to vigorously defend itself against these claims.
26
Shareholder Litigation
In November 2016, a putative class action lawsuit was filed against the Company and two of its former officers in the federal district court for the Eastern District of Pennsylvania, alleging that the Company and two of its former officers damaged the purported class by making false and misleading statements regarding the Company’s drug pricing methodologies and internal controls. In December 2017, counsel for the putative class filed a second amended complaint. The Company filed a motion to dismiss the second amended complaint in February 2018. In July 2018, the court granted the Company’s motion to dismiss the second amended complaint. In September 2018, counsel for the putative class filed a third amended complaint alleging that the Company and two of its former officers made false and misleading statements regarding the impact of competition on prices and sales of certain of the Company’s products and regarding the potential effects on the Company of regulatory investigations and antitrust litigation. The Company filed a motion to dismiss the third amended complaint in November 2018. In May 2019, the court denied the Company’s motion to dismiss the third amended complaint. In July 2019, the Company filed an answer to the third amended complaint. On October 1, 2020, the plaintiff filed a motion for class certification. In March 2021, the Company filed a brief in opposition to the motion to certify the putative class. The Company believes it acted in compliance with all applicable laws and plans to vigorously defend itself from these claims. The Company cannot reasonably predict the outcome of the suit at this time.
In May 2019, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers and certain of the current and former members of the Company’s Board of Directors in the federal court for the District of Delaware. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company, that certain of the defendants caused the Company to issue false and misleading proxy statements in violation of Section 14(a) of the Securities Exchange Act of 1934, that the defendants were unjustly enriched at the expense of the Company, and that the defendants wasted corporate assets belonging to the Company. On December 4, 2019 the Court entered a stipulation consolidating the suit with a separate shareholder derivative suit filed in July 2019, as described below. On December 6, 2019, the Company filed a motion to dismiss the consolidated cases. On January 14, 2020, the parties reached an agreement in principle to resolve the consolidated cases, subject to the execution of a mutually acceptable settlement document and Court approval.
In July 2019, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers and directors in the federal court for the Eastern District of Pennsylvania. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company and that certain of the defendants caused the Company to violate Sections 10(b), 14(a), and 29(b) of the Securities Exchange Act of 1934. In October 2019, this suit was transferred to the federal court for the District of Delaware and was pending before the same judge presiding over the shareholder derivative suit that was filed in May 2019. On December 4, 2019, the Court entered a stipulation consolidating the suit with a separate shareholder derivative suit filed in May 2019, as described above. On December 6, 2019, the Company filed a motion to dismiss the consolidated cases. On January 14, 2020, the parties reached an agreement in principle to resolve the consolidated cases, subject to the execution of a mutually agreeable settlement document and Court approval.
The settlement of the two consolidated cases, which was preliminarily approved by the Court on August 7, 2020, requires the Company to implement certain new corporate policies and pay the plaintiffs’ counsel in the consolidated cases, collectively, the sum of $600,000 in exchange for a release of all liability with respect to both of the consolidated cases. A settlement hearing was held on October 7, 2020. At the settlement hearing, the Magistrate Judge issued an oral Report and Recommendation approving the settlement and denying the objecting parties’ motion to intervene. The time period to object to the Report and Recommendation has expired. On October 22, 2020, the Court adopted the Report and Recommendation, granted the motion for final approval of the settlement, denied the objecting parties’ motion to intervene, and issued a final judgement dismissing the consolidated cases with prejudice. The Company considers these matters closed.
27
In September 2019, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers, directors, and employees in the federal court for the District of Delaware. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company, alleges waste of corporate assets and gross mismanagement, and alleges that certain of the defendants caused the Company to violate Section 14(a) of the Securities and Exchange Act of 1934. On November 22, 2019, the Company filed a motion to dismiss the complaint. On January 16, 2020, the Court entered the parties’ stipulation to stay the case pending the resolution of the defendants’ motion to dismiss the two earlier filed consolidated shareholder derivative cases referenced above. On February 18, 2020, the Court entered the parties’ stipulation to withdraw the Company’s motion to dismiss without prejudice to the Company’s ability to refile a renewed motion to dismiss after the stay is lifted. On March 11, 2020, following notice that Plaintiffs no longer consented to the stay, the Court lifted the stay. On April 6, 2020, certain of the defendants, including the Company, filed a renewed motion to dismiss or, in the alternative, to stay the account. On April 29, 2020, the Court entered the parties’ stipulation to stay the action, pending a decision from the Court regarding the settlement in the consolidated derivative actions discussed above. In light of the Final Order and Judgment entered in the two earlier filed consolidated shareholder derivative cases referenced above, the parties filed a stipulation and proposed order dismissing this action, with prejudice. On October 29, 2020, the District Court Judge entered an Order approving the parties’ Stipulation of Dismissal, with prejudice. The Company considers this matter closed.
In February 2020, a shareholder derivative lawsuit was filed against certain of the Company’s current and former officers, directors, and employees in the Court of Chancery of the State of Delaware. The Company was also named as a nominal defendant in the suit. The suit alleges that the defendants breached their fiduciary duties as directors and/or officers of the Company, and were unjustly enriched. On March 16, 2020, the Company filed a motion to dismiss the complaint, and a motion to stay the proceedings. On March 27, 2020, the Company filed its opening brief in support of its motion to stay the proceedings. On April 6, 2020, the parties entered into a stipulation and proposed order to stay the action. The Court granted the stipulation and proposed order that same day. In light of the Final Order and Judgment entered in the two earlier filed consolidated shareholder derivative cases referenced above, the parties agreed to dismiss this action, with prejudice. The Court granted Stipulation of Dismissal with Prejudice on November 4, 2020. The Company considers this matter closed.
Genus Life Sciences
In December 2018, Genus Lifesciences, Inc. (“Genus”) sued the Company, Cody Labs, and others in California federal court, alleging violations of the Lanham Act, Sherman Act, and California false advertising law. Genus received FDA approval for a cocaine hydrochloride product in December 2018, and its claims are premised in part on allegations that the Company falsely advertises its unapproved cocaine hydrochloride solution product. The Company denies that it is falsely advertising its cocaine hydrochloride solution product and continues to market its unapproved product relying on the Guidance for FDA Staff and Industry, Marketed Unapproved Drugs — Compliance Policy Guide, pending approval of its Section 505(b)(2) application. In January 2019, the Company filed a motion to dismiss the complaint. On May 3, 2019, the Court issued a written decision granting in part and denying in part the motion to dismiss. On June 6, 2019, Genus filed an Amended Complaint. On June 27, 2019, the Company filed a motion to dismiss the amended complaint. By Order dated September 3, 2019, the Court granted in part and denied in part the Company's motion to dismiss. On November 20, 2019, Genus filed a second amended complaint. On December 17, 2019, the Company filed an answer to the second amended complaint. The Company believes it acted in compliance with all applicable laws and regulations and plans to vigorously defend itself from these claims. Discovery is ongoing and the Company cannot reasonably predict the outcome of this suit at this time.
28
Sandoz, Inc.
On July 20, 2020, Sandoz, Inc. (“Sandoz”) filed a complaint in federal court in Philadelphia, alleging claims for tortious interference with contract, unfair competition and conversion of confidential information, arising out of Cediprof, Inc.’s (“Cediprof”) termination of Sandoz’s contract to distribute levothyroxine tablets in the United States and certain territories. Along with the complaint, Sandoz filed a motion for a temporary restraining order and preliminary injunction, seeking to enjoin the Company from commencing the distribution of levothyroxine tablets on August 3, 2020. On the same day, Sandoz filed a separate complaint and application for a temporary restraining order and preliminary injunction against Cediprof in federal court in New York, seeking to prevent Cediprof from selling its levothyroxine tablets in the United States and certain of its territories to anyone other than Sandoz. On July 27, 2020, the New York court held a hearing and denied Sandoz’s application for a temporary restraining order, ruling Sandoz had failed to establish irreparable harm. Sandoz subsequently dismissed the complaint and is proceeding against Cediprof in an Arbitration in New York, where the Company has agreed to indemnify Cediprof. On July 28, 2020, the Philadelphia court held a hearing and denied Sandoz’s application for a temporary restraining order, ruling that Sandoz had failed to establish irreparable harm and failed to establish that it is likely to succeed on the merits of its claim against Lannett. On October 5, 2020, the Company filed a motion to dismiss the complaint. On December 28, 2020, the Court granted in part and denied in part the motion, dismissing certain of the claims. The Company has filed a motion to stay the case pending the Arbitration of the Sandoz/Cediprof dispute. On January 11, 2021, the Company filed an answer and counterclaim to the complaint. The Company denies that it tortiously interfered with Sandoz’s contract or that it converted any of Sandoz’s alleged confidential information. Discovery is ongoing and the Company cannot reasonably predict the outcome of this suit at this time.
Other Litigation Matters
The Company is also subject to various legal proceedings arising out of the normal course of its business including, but not limited to, product liability, intellectual property, patent infringement claims and antitrust matters. It is not possible to predict the outcome of these various proceedings. An adverse determination in any of these proceedings or in any of the proceedings described above in the future could have a significant impact on the financial position, results of operations and cash flows of the Company.
Note 12. Commitments
Leases
At March 31, 2021 and June 30, 2020, the Company had a ROU lease asset of $10.8 million and $9.3 million, respectively, and a ROU liability of $13.3 million and $10.9 million, respectively. The current balance of the ROU liability at March 31, 2021 and June 30, 2020 was $2.0 million and $1.1 million, respectively.
In February 2021, the Company extended our existing lease for the warehouse in Seymour, Indiana. The lease term is now set to expire in March 2031. Accordingly, the Company recorded a ROU lease asset and liability totaling $2.3 million, respectively, in the third quarter of Fiscal 2021.
Components of lease cost are as follows:
| (a) | Not recorded on the Consolidated Balance Sheet. |
29
Supplemental cash flow information and non-cash activity related to our operating leases are as follows:
Weighted-average remaining lease term and discount rate for our operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
||||
|
|
|
March 31, |
||||
|
|
|
2021 |
|
2020 |
||
|
Weighted-average remaining lease term |
|
10 |
years |
|
9 |
years |
|
Weighted-average discount rate |
|
8.5 |
% |
|
7.9 |
% |
Maturities of lease liabilities by fiscal year for our operating leases are as follows:
Other Commitments
During Fiscal 2017, the Company signed an agreement with a company operating in the pharmaceutical business, under which the Company agreed to provide up to $15.0 million in revolving loans, which expires in seven years and bears interest at 2.0%, for the purpose of expansion and other business needs. In Fiscal 2019, the Company sold 50% of the outstanding loan to a third party for $5.6 million, in addition to assigning 50% of all rights, title and interest in the loan and loan documents. As of March 31, 2021, $6.6 million was outstanding under the revolving loan and is included in other assets. Based on the guidance set forth in ASC 810-10 Consolidation, the Company has concluded that it has a variable interest in the entity. However, the Company is not the primary beneficiary to the entity and as such, is not required to consolidate the entity’s results of operations.
In Fiscal 2020, the Company executed a License and Collaboration Agreement with North South Brother Pharmacy Investment Co., Ltd. and HEC Group PTY, Ltd. (collectively, “HEC”) to develop an insulin glargine product that would be biosimilar to Lantus Solostar. Under the terms of the deal, among other things, the Company shall fund up to the initial $32 million of the development costs and split 50/50 any development costs in excess thereof. Lannett shall receive an exclusive license to distribute and market the product in the United States upon FDA approval under the 50/50 profit split for the first ten years following commercialization, followed by a 60/40 split in favor of HEC for the following five years. To date, the COVID-19 pandemic has not had a material impact on the development of the insulin glargine product. The longer that countries around the world remain on lockdown, the more likely it becomes that the timing of the product development and approval will be delayed.
30
On February 8, 2021, the Company executed a License and Collaboration Agreement and a Supply Agreement with Sunshine Lake Pharma Co., Ltd. an HEC Group company (“Sunshine”) with respect to the development of a biosimilar insulin aspart product. Under the terms of the deal, among other things, the Company shall fund up to the initial $32 million of the development costs, provided that if total development and other costs paid by Lannett are less than $32 million then the difference will be paid to Sunshine over the first year of commercialization. The parties shall negotiate the sharing of any development costs in excess of $32 million. Lannett shall receive an exclusive license to distribute and market the product in the United States upon FDA approval under the 50/50 profit split for the first ten years following commercialization, followed by a 60/40 split in favor of Sunshine for the following five years.
Note 13. Accumulated Other Comprehensive Loss
The Company’s Accumulated Other Comprehensive Loss was comprised of the following components as of March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
||||
|
(In thousands) |
|
2021 |
|
2020 |
||
|
Foreign Currency Translation |
|
|
|
|
|
|
|
Beginning Balance, June 30 |
|
$ |
(627) |
|
$ |
(615) |
|
Net income (loss) on foreign currency translation (net of tax of $0 and $0) |
|
|
24 |
|
|
(26) |
|
Other comprehensive income (loss), net of tax |
|
|
24 |
|
|
(26) |
|
Total Accumulated Other Comprehensive Loss |
|
$ |
(603) |
|
$ |
(641) |
31
Note 14. Loss Per Common Share
A reconciliation of the Company’s basic and diluted loss per common share was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
||||
|
|
|
March 31, |
||||
|
(In thousands, except share and per share data) |
|
2021 |
|
2020 |
||
|
Numerator: |
|
|
|
|
|
|
|
Net loss |
|
$ |
(7,142) |
|
$ |
(16,592) |
|
Interest expense applicable to the Convertible Notes, net of tax |
|
|
— |
|
|
— |
|
Amortization of debt issuance costs applicable to the Convertible Notes, net of tax |
|
|
— |
|
|
— |
|
Adjusted “if-converted” net loss |
|
$ |
(7,142) |
|
$ |
(16,592) |
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
39,511,296 |
|
|
38,707,049 |
|
Effect of potentially dilutive options and restricted stock awards |
|
|
— |
|
|
— |
|
Effect of conversion of the Convertible Notes |
|
|
— |
|
|
— |
|
Diluted weighted average common shares outstanding |
|
|
39,511,296 |
|
|
38,707,049 |
|
|
|
|
|
|
|
|
|
Loss per common share: |
|
|
|
|
|
|
|
Basic |
|
$ |
(0.18) |
|
$ |
(0.43) |
|
Diluted |
|
$ |
(0.18) |
|
$ |
(0.43) |
The number of anti-dilutive shares that have been excluded in the computation of diluted loss and earnings per share for the three months ended March 31, 2021 and 2020 were 8.1 million and 7.8 million, respectively. The number of anti-dilutive shares that have been excluded in the computation of diluted loss and earnings per share for the nine months ended March 31, 2021 and 2020 were 8.1 million and 6.0 million, respectively. The effect of potentially dilutive shares was excluded from the calculation of diluted loss per share in the three and nine months ended March 31, 2021 and 2020 because the effect of including such securities would be anti-dilutive.
32
Note 15. Share-based Compensation
At March 31, 2021, the Company had two share-based employee compensation plans (the 2014 Long-Term Incentive Plan “LTIP” and the 2021 “LTIP”). The 2021 LTIP, which authorized 3.0 million new shares of common stock for future issuances, was approved by the stockholders of the Company January 2021. Together these plans authorized an aggregate total of 8.0 million shares to be issued. As of March 31, 2021, the plans have a total of 3.0 million shares available for future issuances. No awards have been granted from the 2021 LTIP as of March 31, 2021.
Historically, the Company has issued share-based compensation awards with a vesting period ranging up to 3 years and a maximum contractual term of 10 years. The Company issues new shares of stock when stock options are exercised. As of March 31, 2021, there was $11.2 million of total unrecognized compensation cost related to non-vested share-based compensation awards. That cost is expected to be recognized over a weighted average period of 2.2 years.
Stock Options
The Company measures share-based compensation cost for options using the Black-Scholes option pricing model. The following table presents the weighted average assumptions used to estimate fair values of the stock options granted, the estimated annual forfeiture rates used to recognize the associated compensation expense and the weighted average fair value of the options granted during the nine months ended March 31, 2021 and 2020:
Expected volatility is based on the historical volatility of the price of our common shares during the historical period equal to the expected term of the option. The Company uses historical information to estimate the expected term, which represents the period of time that options granted are expected to be outstanding. The risk-free rate for the period equal to the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The forfeiture rate assumption is the estimated annual rate at which unvested awards are expected to be forfeited during the vesting period. This assumption is based on our actual forfeiture rate on historical awards. Periodically, management will assess whether it is necessary to adjust the estimated rate to reflect changes in actual forfeitures or changes in expectations. Additionally, the expected dividend yield is equal to zero, as the Company has not historically issued and has no immediate plans to issue a dividend.
A stock option summary as of March 31, 2021 and changes during the nine months then ended, is presented below:
33
Restricted Stock
The Company measures restricted stock compensation costs based on the stock price at the grant date less an estimate for expected forfeitures. The annual forfeiture rate used to calculate compensation expense was 6.5% for the nine months ended March 31, 2021 and 2020.
A summary of restricted stock awards as of March 31, 2021 and changes during the nine months then ended, is presented below:
Performance-Based Shares
In September 2017, the Company began granting performance-based awards to certain key executives. The stock-settled awards will cliff vest based on relative Total Shareholder Return (“TSR”) over a three-year period. The Company measures share-based compensation cost for TSR awards using a Monte-Carlo simulation model.
A summary of performance-based share awards as of March 31, 2021 and changes during the current fiscal year, is presented below:
| (1) | Represents the adjustment based on the performance of the September 2017 awards, which was below the Threshold goal level at the end of the three-year performance period. |
Employee Stock Purchase Plan
In February 2003, the Company’s stockholders approved an Employee Stock Purchase Plan (“ESPP”). Employees eligible to participate in the ESPP may purchase shares of the Company’s stock at 85% of the lower of the fair market value of the common stock on the first day of the calendar quarter, or the last day of the calendar quarter. Under the ESPP, employees can authorize the Company to withhold up to 10% of their compensation during any quarterly offering period, subject to certain limitations. The ESPP was implemented on April 1, 2003 and is qualified under Section 423 of the Internal Revenue Code. The Board of Directors authorized an aggregate total of 1.1 million shares of the Company’s common stock for issuance under the ESPP. During the nine months ended March 31, 2021 and 2020, 81 thousand shares and 83 thousand shares were issued under the ESPP, respectively. As of March 31, 2021, 991 thousand total cumulative shares have been issued under the ESPP.
34
The following table presents the allocation of share-based compensation costs recognized in the Consolidated Statements of Operations by financial statement line item:
Note 16. Employee Benefit Plan
The Company has a 401k defined contribution plan (the “Plan”) covering substantially all employees. Pursuant to the Plan provisions, the Company was required to make matching contributions equal to 50% of each employee’s contribution, not to exceed 4% of the employee’s compensation for the Plan year. Beginning January 1, 2021, the Company reduced the matching contribution to 50% of each employee’s contribution, not to exceed 2% of the employee’s compensation for the Plan year. Contributions to the Plan were $0.3 million and $0.6 million during the three months ended March 31, 2021 and 2020, respectively. Contributions to the Plan were $1.3 million and $1.7 million during the nine months ended March 31, 2021 and 2020, respectively.
In Fiscal 2020, the Company implemented a non-qualified deferred compensation plan for certain senior-level management and executives. The non-qualified deferred compensation plan allows certain eligible employees to defer additional pre-tax earnings for retirement, beyond the IRS limits in place under the Plan. Contributions to the non-qualified deferred compensation plan during the three and nine months ended March 31, 2021 were not material.
Note 17. Income Taxes
The Company uses the liability method to account for income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which are expected to be in effect when these differences reverse. Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.
The federal, state and local income tax benefit for the three months ended March 31, 2021 was $2.5 million compared to $1.7 million for the three months ended March 31, 2020. The effective tax rates for the three months ended March 31, 2021 and 2020 were 26.3% and 9.1%, respectively. The effective tax rate for the three months ended March 31, 2021 was higher compared to the three months ended March 31, 2020 primarily due to the relative impact of excess tax shortfalls related to stock compensation as well as a non-deductible branded prescription drug fee in the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.
The federal, state and local income tax benefit for the nine months ended March 31, 2021 was $68.6 million compared to $5.2 million for the nine months ended March 31, 2020. The effective tax rates for the nine months ended March 31, 2021 and 2020 were 27.0% and 18.0%, respectively. The effective tax rate for the nine months ended March 31, 2021 was higher compared to the nine months ended March 31, 2020 primarily due to the impact of the CARES Act, which increased the interest expense deductibility limitation in the current year and also allowed the Company to carry back its taxable loss into a prior fiscal year, where the statutory tax rate was 35 %. The impact of excess tax shortfalls related to stock compensation as well as a non-deductible branded prescription drug fee in the nine months ended March 31, 2020 relative to expected pre-tax loss also contributed to a lower effective tax rate as compared to the nine months ended March 31, 2021.
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The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
As of March 31, 2021 and June 30, 2020, the Company has total unrecognized tax benefits of $4.6 million and $4.6 million, respectively, of which $4.4 million and $4.5 million would impact the Company’s effective tax rate for each period, if recognized. As a result of the positions taken during the period, the Company has not recorded any material interest and penalties for the period ended March 31, 2021 in the statement of operations and no cumulative interest and penalties have been recorded either in the Company’s statement of financial position as of March 31, 2021 and June 30, 2020. The Company will recognize interest accrued on unrecognized tax benefits in interest expense and any related penalties in operating expenses.
The Company files income tax returns in the United States federal jurisdiction and various states. The Company’s federal tax returns for Fiscal Year 2014 and prior generally are no longer subject to review as such years are closed. The Company’s Fiscal Year 2015 through 2017 federal returns are currently under examination by the Internal Revenue Service (“IRS”). In March 2021, the Company was notified that its Fiscal Year 2020 federal return was also selected for examination. The Company has received preliminary assessments from the IRS, which are not considered material to Company’s Consolidated Statements of Operations; however, we cannot reasonably predict the final outcome of the examinations at this time. In October 2018, the Company was notified that the Commonwealth of Pennsylvania will conduct a routine field audit of the Company’s Fiscal 2016 and Fiscal 2017 corporate tax returns. In March 2021, the Company received a preliminary assessment from the Commonwealth of Pennsylvania, which is not considered material to the Company’s Consolidated Statement of Operations.
Note 18. Related Party Transactions
The Company had sales of $0.6 million and $0.9 million during the three months ended March 31, 2021 and 2020, respectively, to a generic distributor, Auburn Pharmaceutical Company (“Auburn”), which is a member of the Premier Buying Group. Sales to Auburn were $2.1 million for each of the nine months ended March 31, 2021 and 2020. Jeffrey Farber, a current board member, is the owner of Auburn. Accounts receivable includes amounts due from Auburn of $0.4 million and $0.7 million at March 31, 2021 and June 30, 2020, respectively.
Note 19. Assets Held for Sale
In the first quarter of Fiscal 2019, the Company approved a plan to sell the Cody API business, which includes the manufacturing and distribution of active pharmaceutical ingredients for use in finished goods production. The Company was unable to sell the Cody API business as an ongoing operation and sold the equipment utilized by the Cody API business during Fiscal 2020. The Company ceased operations at Cody Labs, leased a portion of the real estate to a third party and intends to sell the remaining real estate. In October 2020, the Company entered into an agreement for the sale of real estate associated with the Cody API business for $3.8 million before fees and selling costs, subject to certain closing conditions. However, prior to closing, the buyer terminated the transaction in December 2020. The Company continues to actively market the real estate. As of March 31, 2021, the remaining real estate associated with the Cody API business, totaling $2.7 million, was recorded in the assets held for sale caption in the Consolidated Balance Sheet.
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The following table summarizes the financial results of the Cody API business for the three and nine months ended March 31, 2021 and 2020:
The pretax loss attributable to the Cody API business during the nine months ended March 31, 2020 includes a full impairment of a $1.2 million ROU lease asset that was recorded upon adoption of ASU No. 2016-02 on July 1, 2019.
Note 20. Subsequent Events
On April 22, 2021, the Company issued $350.0 million aggregate principal amount of 7.750% senior secured notes due 2026 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and outside the United States to persons other than U.S. persons in reliance upon Regulation S under the Securities Act. The Notes will pay interest semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2021, at a rate of 7.750% per annum in cash. The Notes will mature on April 15, 2026, unless earlier redeemed or repurchased in accordance with their terms. The Notes will be secured by first priority liens on substantially all of the assets of the Company and the guarantors, other than working capital assets pledged to secure the Company’s asset-based credit facility, as to which the Notes will be secured on a second lien basis.
On April 5, 2021, the Company entered into an Exchange Agreement with certain Participating Lenders to exchange a portion of their existing Term B Loans for Second Lien Loans pursuant to a new $190.0 million Second Lien Secured Loan Facility (“Second Lien Facility”). On April 22, 2021, in connection with the issuance of the Notes and the entrance into the Amended ABL Facility, which is discussed further below, the exchange between the Company and the Participating Lenders was consummated. From the Closing Date until the 1-year anniversary of the Closing Date, the Second Lien Loans will pay 10% paid-in-kind interest. Thereafter, the Second Lien notes will pay 5% cash interest and 5% paid-in-kind interest until maturity. The Second Lien Loans will mature on July 15, 2026. In connection with the Second Lien Facility, the Company issued to the Participating Lenders warrants to purchase up to 8,280,000 shares of common stock of the Company (the “Warrants”) at an exercise price of $6.88 per share. The Warrants will have a term of 8 years from issuance and the Participating Lenders will receive registration rights with respect to the shares of common stock of the Company to be received upon exercise of the Warrants.
In addition to the Notes Offering and the Second Lien Facility, the Company entered into an amendment (the “Amended ABL Credit Agreement”) to that certain Credit and Guaranty Agreement, dated as of December 7, 2020, among the Company, certain of its wholly-owned domestic subsidiaries party thereto, as borrowers or as guarantors, Wells Fargo Bank, National Association, as administrative agent and as collateral agent and the other lenders party thereto, for the purpose of, among other things, increasing the aggregate amount of the revolving credit facility to $45.0 million and extending the maturity thereof to the fifth anniversary of the closing date of Notes Offering (subject to a springing maturity as set forth therein.
The Company used the net proceeds of the Notes Offering and Second Lien Facility, in addition to cash on hand, to pay off the existing Term Loan B Facility in full and pay certain fees and expenses related to the transactions.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Securities and Exchange Commission (“SEC”). These statements are based on management’s current expectations and are naturally subject to uncertainty and changes in circumstances. We caution you not to place undue reliance upon any such forward-looking statements which speak only as of the date made. Lannett is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events or otherwise and other events or factors, many of which are beyond our control, including those resulting from such events, or the prospect of such events, such as public health issues including health epidemics or pandemics, such as the recent outbreak of the novel coronavirus (“COVID-19”), whether occurring in the United States or elsewhere, which could disrupt our operations, disrupt the operations of our suppliers and business development and other strategic partners, disrupt the global financial markets or result in political or economic instability.
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 June 30, 2020. All references to “Fiscal 2021” or “Fiscal Year 2021” shall mean the fiscal year ending June 30, 2021 and all references to “Fiscal 2020” or “Fiscal Year 2020” shall mean the fiscal year ended June 30, 2020.
Company Overview
Lannett Company, Inc. (a Delaware corporation) and its subsidiaries (collectively, the “Company”, “Lannett”, “we” or “us”) primarily develop, manufacture, package, market and distribute solid oral and extended release (tablets and capsules), topical, liquids, nasal and oral solution finished dosage forms of drugs, generic forms of both small molecule and biologic medications, that address a wide range of therapeutic areas. Certain of these products are manufactured by others and distributed by the Company. Additionally, the Company is pursuing partnerships, research contracts and internal expansion for the development and production of other dosage forms including: ophthalmic, nasal, patch, foam, buccal, sublingual, suspensions, soft gel, injectable and oral dosages.
The Company operates pharmaceutical manufacturing plants in Carmel, New York and Seymour, Indiana. The Company’s customers include generic pharmaceutical distributors, drug wholesalers, chain drug stores, private label distributors, mail-order pharmacies, other pharmaceutical manufacturers, managed care organizations, hospital buying groups, governmental entities and health maintenance organizations.
Impact of COVID-19 Pandemic
In December 2019, the COVID-19 virus emerged in Wuhan, China and spread to other parts of the world. In March 2020, the World Health Organization (“WHO”) designated COVID-19 a global pandemic. Governments on the national, state and local level in the United States, and around the world, have implemented lockdown and shelter-in-place orders, requiring many non-essential businesses to shut down operations for the time being. The Company’s business, however, is deemed “essential” and it has continued to operate, manufacture, and distribute its medicines to customers. The Company has developed a comprehensive plan that enables it to maintain operational continuity with an emphasis on manufacturing, distribution and R&D facilities during this crisis, and to date, has not encountered any significant obstacles implementing its business continuity plans. However, the Company continually assesses COVID-19 related developments and adjusts its risk mitigation planning and business continuity activities as needed.
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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 who cannot perform their job remotely, the Company has implemented enhanced cleaning and sanitizing procedures, weekly fogging and provided additional personal hygiene supplies and personal protective equipment such as rubber gloves, N95 respirators and powered air-purifying respirator that are in line with Centers for Disease Control and Preventions (“CDC”) recommendations. The Company has also implemented thermal screening for all employees and visitors entering its facilities. Employees are required to adhere to the CDC guidelines, social distancing and any employee experiencing any symptoms of COVID-19 is required to stay home and seek medical attention. Any employee who tests positive for COVID-19 is required to quarantine and is not allowed to return to the facilities without a physician’s release or completion of published quarantine periods. The Company has closed its facilities to outside persons that are not critical to continuing our operations. In cases where they are essential, visitors undergo a pre-admittance check to include a thermal screening and risk evaluation. The Company has experienced an increase in absenteeism arising from intermittent spikes in cases across the country, which has caused an increase in overtime and cost to produce the products, but to date the rate of employee absenteeism has not had any material effect on the Company’s business or its ability to manufacture and distribute products and plants continue to operate at normal capacity. As the pandemic continues to linger due to variants or limited vaccine supplies, there is an ongoing risk of employee absenteeism which could materially impact the Company’s operations. To date, the Company’s work from home process has not materially impacted the Company’s financial reporting systems or controls over financial reporting and disclosures nor do we expect that the remote work arrangement will have a material impact in the future.
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. Additionally, subsequent to an initial stocking up of supplies at the start of the pandemic, the total volume of drug prescriptions written during the pandemic has 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.
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.
In light of the economic impacts of COVID-19, the Company reviewed the assets on our Consolidated Balance Sheet as of March 31, 2021, including intangible and other long-lived assets. Based on our review, the Company determined that no impairments or other write-downs specifically related to COVID-19 were necessary during the first nine months of Fiscal Year 2021. Our assessment is based on information currently available and is highly reliant on various assumptions. Changes in market conditions could impact the Company’s future outlook and may lead to impairments in the future.
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.
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2020 Restructuring Plan
On July 10, 2020, the Board of Directors authorized a restructuring and cost savings plan (the “2020 Restructuring Plan”) to enhance manufacturing efficiencies, streamline operations and reduce the Company’s cost structure. The 2020 Restructuring Plan was implemented, in part, as a result of previously anticipated near-term competition and pricing pressure with respect to certain key products. The 2020 Restructuring Plan includes lowering operating costs and reducing the workforce by approximately 80 positions. The 2020 Restructuring Plan was initiated on July 13, 2020 and completed as of December 31, 2020.
The Company incurred approximately $4.0 million in severance-related costs in the first nine months of Fiscal 2021, in connection with the 2020 Restructuring Plan. The Company expects the 2020 Restructuring Plan to result in annual cost savings in excess of $15.0 million.
Financial Summary
For the third quarter of Fiscal Year 2021, net sales decreased to $112.4 million as compared to $144.4 million in the same prior-year period. Gross profit decreased to $26.5 million compared to $41.7 million in the prior-year period and gross profit percentage decreased to 24% compared to 29% in the prior-year period. R&D expenses decreased 20% to $6.0 million compared to $7.4 million in the third quarter of Fiscal Year 2020 while SG&A expenses decreased 20% to $17.6 million from $22.1 million. Operating income for the third quarter of Fiscal Year 2021 was $2.8 million compared to operating loss of $2.1 million in the third quarter of Fiscal Year 2020, which included an asset impairment charge totaling $14.0 million. Net loss for the third quarter of Fiscal Year 2021 was $7.1 million, or $(0.18) per diluted share. Comparatively, net loss in the prior-year period was $16.6 million, or $(0.43) per diluted share.
For the first nine months of Fiscal 2021, net sales decreased to $372.8 million compared to $407.8 million in the same prior-year period. Gross profit decreased to $52.9 million compared to $125.6 million in the prior-year period. Gross profit percentage decreased to 14% compared to 31% in the prior-year period. R&D expenses decreased 22% to $18.2 million compared to $23.3 million in the first nine months of Fiscal 2020 while SG&A expenses decreased 24% to $46.5 million from $60.9 million in the prior-year period. Restructuring expenses increased to $4.0 million from $1.8 million in the prior-year period. Operating loss for the first nine months of Fiscal 2021, which included intangible asset impairment charges totaling $198.0 million, was $213.8 million compared to operating income of $24.1 million in the prior-year period, which included asset impairment charges totaling $15.6 million. Net loss for the first nine months of Fiscal 2021 was $185.6 million, or $(4.72) per diluted share compared to net loss of $23.7 million, or $(0.61) per diluted share in the prior-year period.
A more detailed discussion of the Company’s financial results can be found below.
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Results of Operations - Three months ended March 31, 2021 compared with the three months ended March 31, 2020
Net sales decreased 22% to $112.4 million for the three months ended March 31, 2021. The table below identifies the Company’s net product sales by medical indication for the three months ended March 31, 2021 and 2020.
The decrease in net sales was driven by a decrease in the selling price of products of $18.5 million and a decrease in volumes of $13.5 million. The decrease in the selling price of products was primarily driven by lower sales prices of Fluphenazine, which is included within the Anti-Psychosis medical indication, and Posaconazole, which is included within the Infectious Disease medical indication, due to new competitors entering the market. Overall volumes decreased primarily due to lower volumes of Fluphenazine and Sumatriptan, which is included within the Migraine medical indication, partially offset by the launch of Levothyroxine Tablets and Capsules, which are included within the Endocrinology medical indication.
In January 2017, a provision in the Bipartisan Budget Act of 2015 required drug manufacturers to pay additional rebates to state Medicaid programs if the prices of their generic drugs rise at a rate faster than inflation. The provision negatively impacted the Company’s net sales by $3.7 million and $9.3 million during the three months ended March 31, 2021 and 2020, respectively.
The following chart details price and volume changes by medical indication:
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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:
The overall decrease in sales was primarily driven by lower sales of Fluphenazine and Posaconazole due to new competitors entering the market partially offset by sales from new product launches.
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Cocaine Hydrochloride Solution
In December 2017, a competitor received approval from the FDA to market and sell a Cocaine Hydrochloride topical product. The approval affected the Company’s right to market and sell its unapproved cocaine hydrochloride solution product. According to FDA guidance, the FDA typically allows the marketing of unapproved products for up to one year following the approval of an NDA for the product. Upon the request of the FDA to cease manufacturing and distributing our unapproved cocaine hydrochloride solution product as a result of an approved product on the market, the Company committed to not manufacture or distribute cocaine hydrochloride 10% solution, which was not sold during Fiscal 2019. The Company also ceased manufacturing its unapproved cocaine hydrochloride 4% solution on June 15, 2019 and ceased distributing the product on August 15, 2019.
The competitor filed a Citizen Petition with the FDA in February 2019, claiming that the grant of the New Chemical Entity (“NCE”) exclusivity blocks the approval of the Company’s application for five years and requesting that the FDA refuse to accept any further submissions in furtherance of the Company’s Section 505(b)(2) NDA application, treat as withdrawn any submissions made by the Company after December 2017 and withdraw the Company’s Section 505(b)(2) application. On April 24, 2019, the Company filed an opposition to the Citizen Petition requesting that it be denied. On July 3, 2019, the FDA denied the competitor’s Citizen Petition. Thereafter, the competitor filed a second Citizen Petition claiming that the FDA should rescind the acceptance of the Company’s Section 505(b)(2) application and only permit the Company to re-submit the application as an ANDA after the expiration of the competitor’s five-year exclusivity. The Company filed an opposition to the second Citizen Petition asserting, among other things, that the FDA should summarily deny the second Citizen Petition as an improper attempt to delay competition. On January 10, 2020, the FDA denied the second Citizen Petition and the FDA approved the Company’s Section 505(b)(2) NDA application. On January 27, 2020, the competitor filed a complaint against the FDA seeking an order invalidating the approval of the Company’s 505(b)(2) NDA, claiming the approval violates the competitor’s five-year exclusivity. On February 14, 2020, the Company filed a motion to intervene in the competitor’s lawsuit in order to argue that the request for relief be denied. On April 15, 2020, the competitor filed a motion for summary judgment. The Company and FDA filed responses in opposition and cross motions for summary judgement requesting dismissal of the complaint. The parties submitted further reply briefs and are awaiting a decision by the Court. On September 15, 2020, the Court granted summary judgment in part to the competitor on one of the counts of the complaint. While the Court agreed with the FDA that the competitor’s NCE exclusivity did not block the approval of the Company’s 505(b)(2) application, the Court found that the FDA erred by not requiring the Company to submit a patent certification. The Court requested that the parties file a joint status report indicating the remedy the Court should order to correct the error. The FDA and the Company requested the Court order the case remanded to the FDA without vacating the Company’s 505(b)(2) approval. The competitor requested the Court remand the case to the FDA while also vacating the Company’s 505(b)(2) approval. On October 7, 2020, the Court held a status conference and ordered that the competitor file a motion to vacate on October 16, 2020, and the FDA and the Company to file an opposition and cross motion for reconsideration on October 30, 2020. On October 16, 2020, the competitor filed a motion to vacate the Company’s NDA approval and on October 30, 2020, the Company and FDA filed a response in opposition and a cross motion for reconsideration. On January 11, 2021, the law clerk to the Judge sent an email indicating that Court was inclined to deny the competitor’s motion to vacate, deny the motion for reconsideration and remand the case to the FDA to take appropriate action to cure any procedural defect with the Company’s NDA. On January 21, 2021, the Court held a conference and indicated that it would be issuing an Order remanding the case to FDA for either 45 or 60 days to address the error relating to the missing patent certification in the NDA. By Memorandum and Opinion dated January 27, 2021, the Court denied the FDA and Company’s motion for reconsideration, granted the competitor’s motion to vacate, but stayed the order for 60 days to permit the FDA to take any action necessary to address the Court’s ruling regarding the patent certification in connection with the Company’s 505(b)(2) NDA. On March 18, 2021, the FDA filed a status report with the Court re-affirming the Company’s 505(b)(2) approval and on March 26, 2021 the Court vacated the earlier order that had vacated the Company’s approval. On April 5, 2021, the competitor filed an amended complaint seeking to require the FDA to withdraw the Company’s 505(b)(2) approval and, on April 12, 2021, the competitor filed a motion for summary judgment. The FDA and Company’s opposition and cross motion for summary judgment were filed on April 30, 2021.
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On November 12, 2020, the competitor filed a second lawsuit against the FDA in the United States District Court for the District of Maryland, seeking an order requiring the FDA to initiate proceedings to withdraw the Company’s NDA for alleged false statements in the NDA application. The Company denies that it made any false statements in the NDA application and filed a motion to intervene. Following the Court granting the motion to intervene, on January 15, 2021, both the Company and the FDA filed separate motions to dismiss the second lawsuit.
On June 6, 2020, the competitor filed a patent infringement complaint in the United States District Court for the District of Delaware, asserting that the Company’s approved cocaine hydrochloride product infringes three patents issued to the competitor. On June 19, 2020, the Company filed an answer and counterclaim, alleging that the Company either does not infringe or the three asserted patents are invalid. In addition, the Company sought a declaration that, as to the competitor’s three additional patents not asserted against the Company, they are either not infringed or invalid. The competitor filed a motion to dismiss a portion of the counterclaim and the Company filed a response in opposition to the motion. The competitor subsequently filed an amended complaint asserting additional patents against the Company. The Company is in the process of filing an answer and counterclaim, asserting, among other things, that the patents are invalid. The Company continues to market its approved cocaine hydrochloride product.
Thalomid®
The Company filed with the FDA an ANDA No. 206601, along with a paragraph IV certification, alleging that the fifteen patents associated with the Thalomid drug product are invalid, unenforceable and/or not infringed. On January 30, 2015, Celgene Corporation and Children’s Medical Center Corporation filed a patent infringement lawsuit in the United States District Court for the District of New Jersey, alleging that the Company’s filing of ANDA No. 206601 constitutes an act of patent infringement and seeking a declaration that the patents at issue are valid and infringed. A settlement agreement was reached, and the Court dismissed the lawsuit in October 2017. Pursuant to the settlement agreement, the Company entered into a license agreement that permitted Lannett to manufacture and market in the U.S. its generic thalidomide product as of August 1, 2019 or earlier under certain circumstances. In the second quarter of Fiscal 2019, the Company received a Major Complete Response Letter (“CRL”) related to issues at its API supplier. The Company filed a response to the CRL. The Company received a second Major CRL in the first quarter of Fiscal 2020 related to continued issues at the API supplier, as well as issues with the Risk Evaluation and Mitigation Strategy (“REMS”) program hosted by Celgene. On March 26, 2021, the Company received a third Major CRL from the FDA relating to continuing issues with the API supplier. The Company is working on addressing the FDA comments and cannot reasonably predict timing of the product launch.
Ranitidine Oral Solution, USP
As part of an industry-wide action, the Company issued a voluntary recall on all lots within expiry of Ranitidine Syrup (Ranitidine Oral Solution, USP), 15mg/mL to the consumer level due to levels of N-Nitrosodimethylamine (“NDMA”), a probable human carcinogen, above the levels recently established by the FDA. On September 17, 2019, the FDA notified the Company about the possible presence of NDMA in its Ranitidine Oral Solution product and the Company immediately commenced testing and analysis of the active pharmaceutical ingredient (“API”) and drug product and confirmed the presence of NDMA. The Company’s net sales of Ranitidine Oral Solution in the fourth quarter of fiscal year 2019 totaled $1.9 million. On April 1, 2020, the FDA ordered all Ranitidine products (including the Company’s product) withdrawn from the US market and provided guidance on the requirements for submitting additional information to the FDA in order to re-introduce the product to the market. Since initiating the voluntary recall, the Company has not been marketing its Ranitidine Oral Solution product and has no future plans to attempt to re-introduce the product at this time. The Company does not believe the recall will have a significant impact on our future expected financial position, results of operations and cash flows.
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On June 1, 2020, a class action complaint was served upon the Company and approximately forty-five (45) other companies asserting claims for personal injury arising from the presence of NDMA in Ranitidine products. The complaint is consolidated in a multidistrict litigation (“MDL”) pending in the United States District Court for the Southern District of Florida. Similar complaints were filed in state court in New Mexico and state court in Maryland and served upon the Company. Subsequently, a number of similar complaints were served on the Company. The Company has filed a motion to dismiss the complaint filed in the MDL and has filed a motion to transfer the complaint filed in the New Mexico state court to the MDL. On December 31, 2020, the Court granted the Company’s motion to dismiss Master Personal Injury Complaint, Consolidated Consumer Class Action Complaint and Consolidated third Party Payor Class Complaint, all based on federal preemption. The Court dismissed some of the claims with prejudice and others with leave to amend. The plaintiffs filed an amended complaint on February 9, 2021, and the Company along with the other generic defendants recently filed a joint motion to dismiss these claims. Separately, the New Mexico case was conditionally transferred to the MDL and the plaintiff filed a motion to vacate the conditional transfer, which the Company has opposed. These motions were recently granted and the case has been transferred back to state court in New Mexico. The plaintiffs filed their First Amended Complaint on April 16, 2021 and defendants will have 30 days thereafter to file substantive and jurisdictional motions to dismiss. Since the Company was not licensed to do business in New Mexico and, based upon the information received to date, did not sell Ranitidine in New Mexico, we plan to join both arguments. The Company filed a notice to remove and transfer the Maryland case to the MDL which the plaintiff has opposed. The Company has placed its insurance carrier on notice of the claim and the carrier has appointed counsel to defend the Company.
Cost of Sales, including amortization of intangibles. Cost of sales, including amortization of intangibles, for the third quarter of Fiscal Year 2021 decreased 16% to $85.9 million from $102.7 million in the same prior-year period. The decrease was primarily attributable to lower volumes due to the Company’s decision to discontinue lower margin products in the second quarter of Fiscal Year 2021, partially offset by additional volumes from new product launches. Product royalties expense included in cost of sales totaled $12.6 million for the third quarter of Fiscal Year 2021 and $21.4 million for the third quarter of Fiscal Year 2020 primarily attributable to lower sales of Posaconazole. Amortization expense included in cost of sales totaled $3.9 million for the third quarter of Fiscal 2021 and $8.3 million for the third quarter of Fiscal 2020.
Gross Profit. Gross profit for the third quarter of Fiscal 2021 decreased 37% to $26.5 million or 24% of net sales. In comparison, gross profit for the third quarter of Fiscal 2020 was $41.7 million or 29% of net sales. The decrease in gross profit percentage was primarily attributable to lower volumes of Fluphenazine, which had higher than average gross profit margins, as well as overall lower average selling prices of our products.
Research and Development Expenses. Research and development expenses for the third quarter of Fiscal 2021 decreased 20% to $6.0 million from $7.4 million in Fiscal Year 2020. The decrease was primarily due to lower R&D expenses as a result of timing of certain milestones related to product development projects.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 20% to $17.6 million in the third quarter of Fiscal Year 2021 compared with $22.1 million in Fiscal Year 2020. The decrease was primarily driven by a lower branded prescription drug fee, lower incentive-based compensation and other cost reduction initiatives, partially offset by higher legal expenses.
Asset impairment charges. In the third quarter of Fiscal 2020, the Company performed an impairment analysis of its AB-rated Methylphenidate Hydrochloride product, which is distributed under a license agreement with Andor Pharmaceuticals, LLC (“Andor”), due to significant declines in the projected profitability of the distribution arrangement. As a result of the analysis, the Company recorded a $14.0 million impairment charge.
Other Loss. Interest expense for the three months ended March 31, 2021 totaled $12.6 million compared to $16.2 million for the three months ended March 31, 2020. The decrease was due to a lower average debt balance in the third quarter of Fiscal 2021 as compared to the prior-year period as well as a lower weighted-average interest rate due to the full repayment of the outstanding Term Loan A balance. The weighted average interest rate for the third quarter of Fiscal 2021 and 2020 was 7.9% and 8.6%, respectively.
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Income Tax. The Company recorded an income tax benefit of $2.5 million in the third quarter of Fiscal Year 2021 as compared to an income tax benefit of $1.7 million in the third quarter of Fiscal Year 2020. The effective tax rate for the three months ended March 31, 2021 was 26.3%, compared to 9.1% for the three months ended March 31, 2020. The effective tax rate for the three months ended March 31, 2021 was higher compared to the three months ended March 31, 2020 primarily due to the relative impact of excess tax shortfalls related to stock compensation as well as a non-deductible branded prescription drug fee in the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.
Net Loss. For the three months ended March 31, 2021, the Company reported net loss of $7.1 million, or $(0.18) per diluted share. Comparatively, net loss in the corresponding prior-year period was $16.6 million, or $(0.43) per diluted share.
Results of Operations - Nine months ended March 31, 2021 compared with the nine months ended March 31, 2020
Net sales decreased to $372.8 million for the nine months ended March 31, 2021. The table below identifies the Company's net product sales by medical indication for the nine months ended March 31, 2021 and 2020.
The decrease in net sales was driven by a decrease in the selling price of products of $64.8 million partially offset by increased volumes of $29.7 million. The decrease in the selling price of products was primarily driven by lower sales prices of Fluphenazine, which is included within the Anti-Psychosis medical indication, and Posaconazole, which is included in Infectious Disease medical indication, due to new competitors entering the market, as well as lower average selling price across the remaining medical indications. Overall volumes increased primarily due to increased volumes of Posaconazole and from new product launches, including Levothyroxine Tablets and Capsules, partially offset by lower volumes of Fluphenazine.
In January 2017, a provision in the Bipartisan Budget Act of 2015 required drug manufacturers to pay additional rebates to state Medicaid programs if the prices of their generic drugs rise at a rate faster than inflation. The provision negatively impacted the Company’s net sales by $12.6 million and $31.9 million during the nine months ended March 31, 2021 and 2020, respectively.
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The following chart details price and volume changes by medical indication:
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 nine months ended:
The overall decrease in sales was primarily driven by lower sales of Fluphenazine and Posaconazole due to new competitors entering the market partially offset by sales from new product launches.
Cost of Sales, including amortization of intangibles. Cost of sales, including amortization of intangibles, for the first nine months of Fiscal Year 2021 increased 13% to $319.8 million from $282.2 million in the same prior-year period. The increase was primarily attributable to additional volumes from new product launches as well as an increase of $15.1 million in write-downs for excess and obsolete inventory, which primarily relates to the Company’s decision to discontinue 23 lower margin product lines. The Company also recorded $5.0 million in consideration to renew the Company’s distribution agreement with Recro Gainesville, LLC (“Recro”) during the second quarter of Fiscal Year 2021. Product royalties expense included in cost of sales totaled $49.6 million for the first nine months of Fiscal Year 2021 and $57.7 million for the first nine months of Fiscal Year 2020. Amortization expense included in cost of sales totaled $21.1 million for the first nine months of Fiscal 2021 and $23.5 million for the first nine months of Fiscal 2020.
Gross Profit. Gross profit for the first nine months of Fiscal 2021 decreased 58% to $52.9 million or 14% of net sales. In comparison, gross profit for the first nine months of Fiscal 2020 was $125.6 million or 31% of net sales. The decrease in gross profit percentage was primarily attributable to lower volumes of Fluphenazine, which had higher than average gross profit margins, as well as overall lower average selling prices of our products. The Company also recorded an increase in the write-downs for excess and obsolete inventory as well as consideration to renew the distribution agreement with Recro in the second quarter of Fiscal 2021.
Research and Development Expenses. Research and development expenses for the first nine months of Fiscal 2021 decreased 22% to $18.2 million from $23.3 million in Fiscal Year 2020. The decrease was primarily due to lower R&D expenses as a result of timing of certain milestones related to product development projects as well as employee headcount reductions related to the 2020 Restructuring Plan.
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Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 24% to $46.5 million in the first nine months of Fiscal Year 2021 compared with $60.9 million in Fiscal Year 2020. The decrease was primarily driven by a lower branded prescription drug fee, lower incentive-based compensation, lower expenses at the Company’s Cody Labs subsidiary and other cost reduction initiatives.
Asset impairment charges. In December 2020, the Company reviewed its product portfolio and decided to discontinue 23 lower gross margin product lines, including product lines that were acquired through various past business and product acquisitions. As a result of the discontinuance and the reduction in net sales and gross margin of certain other product lines, the Company recorded an impairment charge of $193.0 million related to the KUPI product rights intangible assets during the second quarter of Fiscal 2021. The impairment charge is primarily a result of the decline in net sales and gross margin of certain product lines acquired in connection with the KUPI acquisition, including those product lines being discontinued.
In the second quarter of Fiscal 2021, the Company also recorded a $5.0 million impairment charge to its KUPI in-process research and development intangible asset due to delays in the expected launch of a product within the portfolio, which results in reduced projected cash flows.
In the first nine months of Fiscal 2020, the Company recorded a ROU lease asset totaling $1.2 million related to an existing lease at Cody Labs upon adoption of ASU No. 2016-02. The Company subsequently recorded a full impairment of the asset as a result of the decision to cease operations at Cody Labs.
In the third quarter of Fiscal 2020, the Company performed an impairment analysis of its AB-rated Methylphenidate Hydrochloride product, which is distributed under a license agreement with Andor, due to significant declines in the projected profitability of the distribution arrangement. As a result of the analysis, the Company recorded a $14.0 million impairment charge.
Other Loss. Interest expense for the nine months ended March 31, 2021 totaled $40.6 million compared to $52.2 million for the nine months ended March 31, 2020. The decrease was due to a lower average debt balance in the first nine months of Fiscal 2021 as compared to the prior-year period as well as a lower weighted-average interest rate due to the full repayment of the outstanding Term Loan A. The weighted average interest rate for the first nine months of Fiscal 2021 and 2020 was 7.9% and 9.0%, respectively.
Income Tax. The Company recorded an income tax benefit of $68.6 million in the first nine months of Fiscal Year 2021 as compared to an income tax benefit of $5.2 million in the first nine months of Fiscal Year 2020. The effective tax rate for the nine months ended March 31, 2021 was 27.0%, compared to 18.0% for the nine months ended March 31, 2020. The effective tax rate for the nine months ended March 31, 2021 was higher compared to the nine months ended March 31, 2020 primarily due to the impact of the CARES Act, which increased the interest expense deductibility limitation in the current year and also allowed the Company to carry back its taxable loss into a prior fiscal year, where the statutory tax rate was 35 %. The impact of excess tax shortfalls related to stock compensation as well as a non-deductible branded prescription drug fee in the nine months ended March 31, 2020 relative to expected pre-tax loss also contributed to a lower effective tax rate as compared to the nine months ended March 31, 2021.
Net Loss. For the nine months ended March 31, 2021, the Company reported net loss of $185.6 million, or $(4.72) per diluted share. Comparatively, net loss in the corresponding prior-year period was $23.7 million, or $(0.61) per diluted share.
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Liquidity and Capital Resources
Cash Flow
The Company has historically financed its operations with cash flow generated from operations supplemented with borrowings from various government agencies and financial institutions. At March 31, 2021, working capital was $272.8 million as compared to $228.3 million at June 30, 2020, an increase of $44.5 million. Current product portfolio sales as well as sales related to future product approvals are anticipated to generate positive cash flow from operations.
Net cash provided by operating activities of $34.2 million for the nine months ended March 31, 2021 reflected net loss of $185.6 million, adjustments for non-cash items of $256.9 million, as well as cash used through changes in operating assets and liabilities of $37.1 million. In comparison, net cash provided by operating activities of $50.4 million for the nine months ended March 31, 2020 reflected net loss of $23.7 million, adjustments for non-cash items of $76.6 million, as well as cash used through changes in operating assets and liabilities of $2.5 million.
Significant changes in operating assets and liabilities from June 30, 2020 to March 31, 2021 were comprised of:
| ● | A decrease in accounts receivable of $11.0 million mainly due to the timing of sales and cash receipts. The Company’s days sales outstanding (“DSO”) at March 31, 2021, based on gross sales for the nine months ended March 31, 2021 and gross accounts receivable at March 31, 2021, was 67 days. The level of DSO at March 31, 2021 was lower than the Company’s expectation that DSO will be in the 70 to 85-day range based on customer payment terms, primarily due to higher gross sales in the three months ended December 31, 2020 compared to the three months ended March 31, 2021. |
| ● | An increase in income taxes receivable totaling $25.4 million primarily due to additional estimated tax refunds related to provisions of the CARES Act and an anticipated Fiscal 2021 taxable loss, partially offset by income tax receipts of $23.1 million. |
| ● | A decrease in accrued expenses totaling $10.9 million primarily due to the payment of the branded prescription drug fee in October 2020. |
| ● | A decrease in accrued payroll and payroll-related costs of $6.5 million primarily related to payments made in August 2020 in connection with incentive-based compensation accrued in Fiscal Year 2020 as well as the timing of payroll payments. |
Significant changes in operating assets and liabilities from June 30, 2019 to March 31, 2020 were comprised of:
| ● | An increase in accounts receivable of $15.6 million mainly due to the timing of receipts. The Company’s DSO at March 31, 2020, based on gross sales for the nine months ended March 31, 2020 and gross accounts receivable at March 31, 2020, was 78 days. The level of DSO at March 31, 2020 was comparable to the Company’s expectation that DSO will be in the 70 to 85-day range based on customer payment terms. |
| ● | An increase in prepaid income taxes totaling $10.5 million primarily due to estimated tax payments made in the first nine months of Fiscal 2020. |
| ● | A decrease in accrued payroll and payroll-related costs of $6.8 million primarily related to payments made in August 2019 in connection with incentive compensation accrued in Fiscal Year 2019, partially offset by the timing of payroll payments. |
| ● | An increase in accounts payable totaling $20.3 million primarily due to the timing of vendor invoices and payments. |
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Net cash used in investing activities of $11.0 million for the nine months ended March 31, 2021 was mainly the result of purchases of property, plant and equipment of $6.6 million and purchases of intangible assets of $4.5 million. Net cash used in investing activities of $33.8 million for the nine months ended March 31, 2020 was mainly the result of purchases of intangible assets of $27.8 million and purchases of property, plant and equipment of $13.1 million, partially offset by proceeds from the sale of property, plant and equipment of $7.3 million.
Net cash used in financing activities of $81.2 million for the nine months ended March 31, 2021 was due to debt repayments of $78.4 million, payment of debt issuance costs of $2.4 million, and purchases of treasury stock totaling $1.0 million, partially offset by proceeds from issuance of stock pursuant to stock compensation plans of $0.6 million. Net cash used in financing activities of $55.4 million for the nine months ended March 31, 2020 was due to debt repayments of $130.0 million, purchase of a capped call in connection with the 4.50% Convertible Senior Notes offering totaling $7.1 million, payments of debt issuance costs totaling $3.5 million, and purchases of treasury stock totaling $1.9 million, partially offset by proceeds from the issuance of 4.50% Convertible Senior Notes of $86.3 million and proceeds from issuance of stock pursuant to stock compensation plans of $0.8 million.
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 March 31, 2021 are as follows:
Amended Senior Secured Credit Facility
On November 25, 2015, in connection with its acquisition of KUPI, Lannett entered into a credit and guaranty agreement (the “Credit and Guaranty Agreement”) among certain of its wholly-owned domestic subsidiaries, as guarantors, Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent and other lenders providing for a senior secured credit facility (the “Senior Secured Credit Facility”). The Senior Secured Credit Facility consisted of Term Loan A in an aggregate principal amount of $275.0 million, Term Loan B in an aggregate principal amount of $635.0 million and a revolving credit facility providing for revolving loans in an aggregate principal amount of up to $125.0 million.
On June 17, 2016, Lannett amended the Senior Secured Credit Facility and the Credit and Guaranty Agreement to raise an incremental term loan in the principal amount of $150.0 million (the “Incremental Term Loan”) and amended certain sections of the agreement (the “Amended Senior Secured Credit Facility”). The terms of this Incremental Term Loan are substantially the same as those applicable to the Term Loan B. The Company used the proceeds of the Incremental Term Loan and cash on hand to repurchase the outstanding $250.0 million aggregate principal amount of Lannett’s 12.0% Senior Notes due 2023 (the “Senior Notes”) issued in connection with the KUPI acquisition.
On December 10, 2018, the Company entered into a third amendment to the Senior Secured Credit Facility and the Credit and Guaranty Agreement. Pursuant to the amendment, the Secured Net Leverage Ratio applicable to the financial leverage ratio covenant was increased from 3.25:1.00 to 4.25:1.00 as of December 31, 2019 and prior to September 30, 2020, and then to 4.00:1.00 as of September 30, 2020. The Amended Senior Secured Credit Facility is also subject to a minimum liquidity covenant, which provides that the Company shall not permit its liquidity as of the last day of any fiscal quarter to be less than $75.0 million. On November 25, 2020, the Company repaid the remaining $42 million outstanding balance of its Term A Loans with cash on hand and, upon repayment, the Company is no longer obligated to comply with the financial leverage ratio and minimum liquidity covenants described above.
On December 7, 2020, the Company entered into Amendment No. 4 to the Credit and Guaranty Agreement, which amends the Term Loan B Facility to permit the incurrence of the ABL Credit Facility, which is discussed further below, and requires the Company to maintain at least $5 million in a deposit account at all times, subject to control by the administrative agent, and a minimum cash balance of $15 million as of the last day of each month. At March 31, 2021, the Company classified the $5 million required deposit account balance as restricted cash, which is included in other assets. The amendment also replaced Morgan Stanley Senior Funding, Inc. with Alter Domus (US) LLC as administrative agent and collateral agent under the Term Loan B Facility.
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On April 22, 2021, the Company used the net proceeds of the 7.750% Senior Secured Notes offering and Second Lien Secured Loan Facility, in addition to cash on hand, to pay off the existing Term Loan B Facility in full.
Refer to the Company’s Form 10-K for the fiscal year ended June 30, 2020 for further details on the Amended Senior Secured Credit Facility.
ABL Credit Facility
On December 7, 2020, the Company entered into a credit and guaranty agreement, which provides for an asset-based revolving credit facility (the “ABL Credit Facility”) of up to $30 million, subject to borrowing base availability, and includes letter of credit and swing line sub-facilities. Borrowing availability under the 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 ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings.
Loans outstanding under the ABL Credit Agreement bear interest at a floating rate measured by reference to an adjusted London Inter-Bank Offered Rate (“LIBOR”), subject to a floor of 0.75%, plus an applicable margin of 2.50% per annum. Unused commitments under the ABL Credit Facility are subject to a per annum fee of 0.50%. The obligations under the ABL Credit Agreement are guaranteed by the Company and all of the Company’s existing and future subsidiaries, subject to certain exceptions (collectively, the “Guarantors”), and such obligations and the obligations of the Guarantors are secured by:
| ● | a perfected security interest in all present and after-acquired accounts receivable, payment intangibles, inventory, deposit accounts, securities accounts, and any cash, cash equivalents or other assets in such accounts and other related assets owned by each Guarantor and the proceeds of the foregoing, except to the extent such proceeds constitute Cash Flow Priority Collateral (as defined below), and subject to certain exceptions (the “ABL Priority Collateral”), which security interest is senior to the security interest in the ABL Priority Collateral securing the Company’s existing Term Loan B Facility; and |
| ● | a perfected security interest in substantially all present and after-acquired tangible and intangible assets of each Guarantor other than the ABL Priority Collateral (the “Cash Flow Priority Collateral”), which security interest is junior to the security interest in the Cash Flow Priority Collateral securing the Term Loan B Facility. |
The ABL Credit Agreement contains customary representations and warranties and customary affirmative covenants and negative covenants. The negative covenants include restrictions on, among other things: the incurrence of additional indebtedness; the incurrence of additional liens; dividends or other distributions on equity; the purchase, redemption or retirement of capital stock; the payment or redemption of certain indebtedness; the nature of the business activity of the Company and its subsidiaries; loans, guarantees and other investments; entering into other agreements that create restrictions on the ability to pay dividends or make other distributions on equity or create or incur certain liens; asset sales; consolidations or mergers; amendment of certain material documents; changes in fiscal year; and affiliate transactions. The negative covenants are subject to customary exceptions and also permit dividends and other distributions on equity, consolidations, mergers and asset sales, certain acquisitions and other investments, and payments or redemptions of certain indebtedness, in each case upon satisfaction of the “payment conditions”. The payment conditions are deemed satisfied upon Excess Availability (as defined in the ABL Credit Agreement) on the date of the designated action and Excess Availability for the prior 30-day period exceeding agreed-upon thresholds, the absence of the occurrence and continuance of any event of default and, in certain cases, pro forma compliance with a fixed charge coverage ratio of no less than 1.10 to 1.00.
The ABL Credit Agreement includes a minimum fixed charge coverage ratio of no less than 1.10 to 1.00, which is tested only when Excess Availability is less than 15.0% of the lesser of (A) the borrowing base and (B) the then effective commitments under the ABL Credit Facility for three consecutive business days, and continuing until the first day immediately succeeding the last day of 30 consecutive days on which Excess Availability is in excess of such threshold.
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The ABL Credit Agreement provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, and interest on all of the then outstanding obligations under the ABL Credit Facility to be due and payable immediately and the commitments under the ABL Credit Facility to be terminated.
On April 22, 2021, the Company entered into an amendment (the “Amended ABL Credit Agreement”) to that certain Credit and Guaranty Agreement, dated as of December 7, 2020, among the Company, certain of its wholly-owned domestic subsidiaries party thereto, as borrowers or as guarantors, Wells Fargo Bank, National Association, as administrative agent and as collateral agent and the other lenders party thereto, for the purpose of, among other things, increasing the aggregate amount of the revolving credit facility to $45.0 million and extending the maturity thereof to the fifth anniversary of the closing date of the offering of the Notes (subject to a springing maturity as set forth therein). The ABL Credit Facility was undrawn as of March 31, 2021.
7.750% Senior Secured Notes due 2026
On April 22, 2021, the Company issued $350.0 million aggregate principal amount of 7.750% senior secured notes due 2026 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and outside the United States to persons other than U.S. persons in reliance upon Regulation S under the Securities Act. The Notes will pay interest semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2021, at a rate of 7.750% per annum in cash. The Notes will mature on April 15, 2026, unless earlier redeemed or repurchased in accordance with their terms. The Notes will be secured by first priority liens on substantially all of the assets of the Company and the guarantors, other than working capital assets pledged to secure the Company’s asset-based credit facility, as to which the Notes will be secured on a second lien basis.
Second Lien Secured Loan Facility
On April 5, 2021, the Company entered into an Exchange Agreement with certain Participating Lenders to exchange a portion of their existing Term B Loans for Second Lien Loans pursuant to a new $190.0 million Second Lien Secured Loan Facility (“Second Lien Facility”). On April 22, 2021, in connection with the issuance of the Notes and the entrance into the Amended ABL Facility, the exchange between the Company and the Participating Lenders was consummated. From the Closing Date until the 1-year anniversary of the Closing Date, the Second Lien Facility will pay 10% paid-in-kind interest. Thereafter, the Second Lien notes will pay 5% cash interest and 5% paid-in-kind interest until maturity. The Second Lien Loans will mature on July 15, 2026. In connection with the Second Lien Facility, the Company issued to the Participating Lenders warrants to purchase up to 8,280,000 shares of common stock of the Company (the “Warrants”) at an exercise price of $6.88 per share. The Warrants will have a term of 8 years from issuance and the Participating Lenders will receive registration rights with respect to the shares of common stock of the Company to be received upon exercise of the Warrants.
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4.50% Convertible Senior Notes due 2026
On September 27, 2019, the Company issued $86.3 million aggregate principal amount of the 4.50% Convertible Senior Notes (“the Convertible Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and used the net proceeds to repay a portion of the outstanding Term Loan A balance. The Convertible Notes bear interest at an annual rate of 4.50% payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2020. The Convertible Notes will mature on October 1, 2026, unless earlier repurchased, redeemed or converted in accordance with their terms. The Convertible Notes are convertible into shares of the Company’s common stock at an initial conversion rate of 65.4022 shares per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $15.29 per share), subject to adjustments upon the occurrence of certain events (but will not be adjusted for any accrued and unpaid interest). The Company may redeem all or a part of the Convertible Notes on or after October 6, 2023 at a redemption price equal to 100% of the principal amount of the Convertible Notes redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the redemption date, subject to certain conditions relating to the Company’s stock price having been met. Following certain corporate events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event or notice of redemption. The indenture covering the Convertible Notes contains certain other customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee or holders of at least 25% in principal amount of the outstanding Notes may declare 100% of the principal of, and accrued and unpaid interest on, all the Convertible Notes to be due and payable.
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 $19.46 per share.
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.
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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.
Critical Accounting Policies
The preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States and the rules and regulations of the U.S. Securities & Exchange Commission requires the use of estimates and assumptions. A listing of the Company’s significant accounting policies is detailed in Note 3 “Summary of Significant Accounting Policies.” A subsection of these accounting policies has been identified by management as “Critical Accounting Policies.” Critical accounting policies are those which require management to make estimates using assumptions that were uncertain at the time the estimates were made and for which the use of different assumptions, which reasonably could have been used, could have a material impact on the financial condition or results of operations.
Management has identified the following as “Critical Accounting Policies”: Revenue Recognition, Inventories, Income Taxes, Valuation of Long-Lived Assets, including Intangible Assets, In-Process Research and Development and Share-based Compensation.
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 (or as) we satisfy our performance obligations by transferring a promised good or service to a 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.
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:
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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 U.S. in March 2010, the Company participates in a new cost-sharing program for certain Medicare Part D beneficiaries designed primarily for the sale of brand drugs and certain generic drugs if their FDA approval was granted under a NDA or 505(b) NDA versus an ANDA. Drugs purchased within the Medicare Part D coverage gap (commonly referred to as the “donut hole”) result in additional rebates. The Company estimates the reserve for rebates and other promotional credit programs based on the specific terms in each agreement when revenue is recognized. The reserve for rebates increases (decreases) as sales to certain wholesale and retail customers increase (decrease). However, since these rebate programs are not identical for all customers, the size of the reserve will depend on the mix of sales to customers that are eligible to receive rebates.
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 June 30, 2020 for a description of our remaining Critical Accounting Policies.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On November 25, 2015, in connection with the acquisition of KUPI, the Company entered into a Senior Secured Credit Facility, which was subsequently amended in June 2016. Based on the variable-rate debt outstanding at March 31, 2021, each 1/8% increase in interest rates would yield $0.7 million of incremental annual interest expense. The Company’s variable-rate debt is subject to a 1.0% London Inter-bank Offered Rate (“LIBOR”) floor. On April 22, 2021, the Company paid off our existing Term Loan B Facility with the proceeds from new fixed-rate debt.
The Company has historically invested in equity securities, U.S. government agency securities and corporate bonds, which are exposed to market and interest rate fluctuations. The market value, interest and dividends earned on these investments may vary based on fluctuations in interest rate and market conditions.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-Q, management performed, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Lannett’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Change in Internal Control Over Financial Reporting
There has been no change in Lannett’s internal control over financial reporting during the nine months ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information pertaining to legal proceedings can be found in Note 11 “Legal, Regulatory Matters and Contingencies” of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and is incorporated by reference herein.
ITEM 1A. RISK FACTORS
Lannett Company, Inc’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 includes a detailed description of its risk factors. Refer to the Form 10-Q for the quarterly period ended September 30, 2020 for a detailed description of an additional risk factor identified by the Company since filing of the Form 10-K.
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ITEM 6. EXHIBITS
| (a) | A list of the exhibits required by Item 601 of Regulation S-K to be filed as a part of this Form 10-Q is shown on the Exhibit Index filed herewith. |
Exhibit Index
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31.1 |
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Filed Herewith |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Filed Herewith |
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32** |
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Filed Herewith |
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10.88+* |
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Filed Herewith |
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10.89+* |
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Supply Agreement by and among Lannett Company, Inc. and Sunshine Lake Pharma Co., Ltd. |
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Filed Herewith |
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101.INS |
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XBRL Instance Document – the instance document does not appear within the Interactive Data File because its XRBL tags are embedded within the Inline XRBL Document |
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Filed Herewith |
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101.SCH |
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XBRL Taxonomy Extension Schema Document |
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Filed Herewith |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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Filed Herewith |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
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Filed Herewith |
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101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document |
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Filed Herewith |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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Filed Herewith |
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104 |
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Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XRBL tags are embedded within the Inline XRBL document |
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Filed Herewith |
* Certain portions of this Exhibit have been redacted to preserve confidentiality. The registrant hereby undertakes to provide further information regarding such redacted information to the Commission upon request.
+ Certain portions of this Exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant undertakes to provide further information regarding such omitted materials to the Commission upon request.
** Furnished Herewith
59
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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LANNETT COMPANY, INC. |
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Dated: May 6, 2021 |
By: |
/s/ Timothy Crew |
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Timothy Crew |
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Chief Executive Officer |
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Dated: May 6, 2021 |
By: |
/s/ John Kozlowski |
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John Kozlowski |
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Vice President of Finance, Chief Financial Officer and Principal Accounting Officer |
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60
EXECUTION VERSION
CERTAIN INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE REGISTRANT IF PUBLICLY DISCLOSED.
[***] INDICATES THAT INFORMATION HAS BEEN REDACTED.
Exhibit 10.88
COLLABORATION AND LICENSE AGREEMENT
by and among
LANNETT COMPANY, INC.
and
SUNSHINE LAKE PHARMA CO., LTD.
Dated as of February 5, 2021
TABLE OF CONTENTS
Page
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Exhibits |
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Exhibit A+ Exhibit AA+ Exhibit B+ |
Insulin Aspart Insulin Glargine Lannett Patents, HEC Patents and HEC Collaboration Patents (as of the Effective Date) |
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Exhibit C+ |
Third Party Agreements |
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Exhibit D+ |
Profit & Loss Share |
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Exhibit E+ |
Partnership Tax Matters |
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Exhibit F* |
Pen Development Plan |
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Exhibit G** |
Form of Supply Agreement |
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Exhibit H* |
New Facility No. 1 Timeline |
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Exhibit I* |
New Facility No. 2 Timeline |
Schedules
Schedule 3.2(a)*Development Plan
Schedule 3.5+Record Maintenance Timelines
Schedule 12.2(i)+Patents (HEC)
Schedule 12.2(j)+ Third Party Agreements (HEC)
Schedule 12.3(h)+ Patents (Lannett)
Schedule 12.3(i)+ Third Party Agreements (Lannett)
*This Exhibit or Schedule has been redacted to preserve confidentiality. The registrant hereby undertakes to provide further information regarding such redacted information to the Commission upon request.
**Filed as Exhibit 10.89 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2021.
+ This Exhibit or Schedule has been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant undertakes to provide further information regarding such omitted materials to the Commission upon request.
COLLABORATION AND LICENSE AGREEMENT
This Collaboration and License Agreement (this “Agreement”) is entered into as of February 5, 2021 (the “Effective Date”), by and among Lannett Company, Inc., a Delaware corporation (“Lannett”), Sunshine Lake Pharma Co., Ltd., a corporation organized and existing under the laws of the People’s Republic of China, ( “HEC”). Lannett and HEC are each referred to herein by name or as a “Party”, or, collectively, as the “Parties”.
WHEREAS, HEC and Lannett entered into a Collaboration and License Agreement for Insulin Glargine dated November 21, 2019; and
WHEREAS, HEC has been Developing Insulin Aspart for the Product (as defined below); and
WHEREAS, pursuant to this Agreement, HEC hereby grants to Lannett co-exclusive rights for the US with respect to Development of the Product and exclusive rights for the US regarding Commercialization of the Product, on the terms and subject to the conditions set forth herein, and HEC retains Development and Commercialization rights to the Product in the ROW.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements set forth below, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
“Accounting Standards” means (a) GAAP (United States Generally Accepted Accounting Principles); or (b) IFRS (International Financial Reporting Standards); and (c) CAS (Chinese Accounting Standards), in either case, consistently applied.
“Affiliate” means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person, as the case may be, for so long as such control exists. As used in this definition, “control” means: (a) to possess, directly or indirectly, the power to direct the management and policies of a Person, whether through ownership of voting securities or by contract relating to voting rights or corporate governance; or (b) direct or indirect beneficial ownership of at least fifty percent (50%) (or such lesser percentage that is the maximum allowed to be owned by a foreign Person in a particular jurisdiction and is sufficient to grant the holder of such voting stock or interest the power to direct the management and policies of such entity) of the voting share capital in a Person. For purposes of this Agreement, neither HEC nor Lannett shall be deemed an Affiliate of the other Party.
“Annual Net Sales” means total Net Sales by Lannett, its Affiliates or Licensee Partners of Products in a particular Calendar Year in the US.
“Antitrust Law” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules and regulations promulgated thereunder (the “HSR Act”), the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade Commission Act, as amended, and any other Laws of the United States, a state or territory thereof, or any foreign government that are designed to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade.
“Biologics License Application” or “BLA” means a Biologics License Application (as more fully described in U.S. 21 C.F.R. Part 601.20 or, as of March 23, 2020, Section 351(k) of the Public Health Service Act, or any other successor regulation) and all amendments and supplements thereto submitted to the FDA, or any equivalent filing in a country or regulatory jurisdiction other than the U.S. with the applicable Regulatory Authority, or any similar application or submission for Regulatory Approval filed with a Regulatory Authority to obtain marketing approval for a biologic product in a country or in a group of countries.
“Biosimilar Product” means a biological product pursuant to the Biologics Price Competition and Innovation Act (BPCI Act) of 2009 that (a) is highly similar to and has no clinically meaningful differences to NovoLog® FlexPen®, including the active ingredient and drug product, (b) for which Regulatory Approval is obtained by referencing NovoLog® FlexPen®, and (c) is approved for use in the US pursuant to a Regulatory Approval process governing approval of interchangeable or biosimilar biologics as described in 42 U.S.C. §§ 262, or any other similar provision that comes into force, or is the subject of a notice with respect to NovoLog® FlexPen® under 42 U.S.C. § 262(l)(2).
“Biosimilar User Fee” means the fees for developing and maintaining a Biosimilar Product owed with respect to the Product pursuant to FDA’s Biosimilars User Fee Program (BsUFA) pursuant to the Federal Food, Drug, and Cosmetic Act, as amended by the Biosimilar User Fee Act, which authorizes FDA to assess and collect fees for biosimilar biological products to expedite the review process for these products.
“BLA Filing” means the filing of a BLA for the Product in the US.
“Business Day” means a day other than a Saturday or Sunday or any other day on which commercial banks in Philadelphia, Pennsylvania, or China are authorized or required by applicable Law to close.
“Calendar Quarter” means a calendar quarter ending on the last day of March, June, September or December; provided, however, that the first Calendar Quarter shall begin on the Effective Date and end on the last day of the calendar quarter during which the Effective Date occurs.
“Calendar Year” means a period of time commencing on January 1 and ending on the following December 31; provided, however, that the first Calendar Year shall begin on the Effective Date and end on December 31 of the calendar year during which the Effective Date occurs.
“Change of Control” of a Party means any of the following, in a single transaction or a series of related transactions: (a) the sale or disposition of all or substantially all of the assets of such Party to a Third Party, (b) the direct or indirect acquisition by a Third Party (other than an employee benefit plan (or related trust) sponsored or maintained by such Party or any of its Affiliates) of beneficial ownership of more than fifty percent (50%) of the then-outstanding common shares or voting power of such Party or any direct or indirect entity which holds, directly or indirectly, beneficial ownership of more than fifty percent (50%) of the then-outstanding common shares or voting power of such Party (a “Parent Entity”), or (c) the merger or consolidation of such Party or any Parent Entity with or into a Third Party, unless, following such merger or consolidation, the stockholders of such Party or Parent Entity immediately prior to such merger or consolidation beneficially own directly or indirectly more than fifty percent (50%) of the then-outstanding common shares or voting power of the entity resulting from such merger or consolidation.
“Chemistry, Manufacturing and Controls” or “CMC” means the part of pharmaceutical development that is directed to the Development and Manufacture of products, the specifications therefor, and other parameters which indicate that the finished drug or biologic product and the manufacturing process are consistent and controlled, in each case, as specified by the FDA or other applicable Regulatory Authorities in the chemistry, manufacturing and controls section of a BLA or other regulatory filing in the United States, or the equivalent section of regulatory filings made outside of the United States.
“Clinical Trial” means a Phase I Study, a Phase II Study, a Phase III Study, a Pivotal Clinical Trial, a Phase IV Study or a combination of any of the foregoing studies.
“Code” means the United States Internal Revenue Code of 1986, as amended.
“Collaboration” means the activities performed or to be performed by a Party or Parties, as the case may be, relating to the Development, Manufacture or Commercialization of the Products under this Agreement, including in the exercise of any license granted under this Agreement relating to the Products.
“Collaboration Intellectual Property” means Collaboration Know-How and Collaboration Patents, collectively.
“Collaboration Know-How” means any Know-How or interest therein that is discovered, developed, generated or invented on or after the Effective Date, either (a) solely by or on behalf of HEC or its Affiliates, (b) solely by or on behalf of Lannett or its Affiliates or (c) jointly by or on behalf of Persons described in the foregoing clauses (a) and (b), in the conduct of the Collaboration activities pursuant to this Agreement, including Joint Know-How and Joint Inventions, but excluding, in all cases, Pen Know-How.
“Collaboration Patents” means any Patents or interest therein that: (a) result from the conduct of the Collaboration activities pursuant to this Agreement, (b) are filed on or after the Effective Date, (c) are Controlled solely by HEC or Lannett or Controlled jointly by any of such Persons and (d) Cover Collaboration Know-How, including Joint Patents, but excluding, in all cases, Pen Patents.
“Commercialization” or “Commercialize” means any activities directed to using, marketing, promoting, advertising, distributing, importing, exporting, offering to sell or selling a product, after
or in expectation of receipt of Regulatory Approval in the applicable country for such product (but excluding Development).
“Commercially Reasonable Efforts” means, with respect to the performing Party under this Agreement, the carrying out of obligations of such Party in a diligent, expeditious and sustained manner with efforts that are consistent with the efforts used by a biopharmaceutical company of similar size and market capitalization as such Party in the exercise of its commercially reasonable business practices relating to an exercise of a right or performance of an obligation under this Agreement, including the Development, Manufacture and Commercialization of a pharmaceutical or biologic compound or product, as applicable, at a similar stage in its research, development or commercial life as the relevant Program Compound(s) or Program Product(s), and that has commercial and market potential similar to the relevant Program Compound(s) or Program Product(s), taking into account issues of intellectual property coverage, safety and efficacy, stage of development, product profile, competitiveness of the marketplace, proprietary position, regulatory exclusivity, anticipated or approved labeling, present and future market and commercial potential, the likelihood of receipt of Regulatory Approval and other regulatory requirements, profitability (including pricing and reimbursement status achieved or likely to be achieved), amounts payable to licensors of patent or other intellectual property rights, legal issues, Manufacturing, difficulty in Manufacturing the Program Compound(s) or Program Product(s) and alternative Third Party products in the marketplace of the Program Compound(s) or Program Product(s) to be marketed.
“Confidential Information” means, subject to Sections 11.1(a), 11.1(b), 11.1(c) and 11.1(d), (a) all confidential or proprietary information relating to the Collaboration, and (b) all other confidential or proprietary documents, technology, Know-How or other information (whether or not patentable) actually disclosed by one Party or any of its Affiliates to the other Party or any of its Affiliates pursuant to this Agreement relating to the Products and all proprietary biological materials of a Party.
“Control” or “Controlled” means, with respect to any intellectual property, Patents, Know-How, inventions, Data or Confidential Information, the possession (whether by license (other than a license granted under this Agreement) or ownership) by a Party of the ability to grant to the other Party access or a license, as provided herein, without violating the terms of any agreement with any Third Party existing as of the Effective Date or thereafter during the Term. Notwithstanding the foregoing, for the purpose of defining whether intellectual property, Patents, Know-How, inventions, Data or Confidential Information is Controlled by a Party, if such intellectual property, Patents, Know-How, inventions, Data or Confidential Information is first acquired, licensed or otherwise made available to such Party after the Effective Date and if the use, practice or exploitation thereof by or on behalf of the other Party, its Affiliates or sublicensees would require the first Party to pay any amounts to the Third Party from which the first Party acquired, licensed or otherwise obtained such intellectual property, Patents, Know-How, inventions, Data or Confidential Information (“Additional Amounts”), such intellectual property, Patents, Know-How, inventions, Data or Confidential Information shall be deemed to be Controlled by the first Party only if such Additional Amounts are reflected in the Profit & Loss Share with respect to the Parties’ use of or license to such intellectual property, Patents, Know-How, inventions, Data or Confidential Information to the extent specified in this Agreement.
“Cover,” “Covering” or “Covered” means that, with respect to a product or technology and a Patent, but for ownership of or a license under such Patent, the Development, Manufacture, Commercialization or other use of such product or practice of such technology by a Person would infringe a claim of such Patent or, with respect to a claim included in any patent application, would infringe such claim if such patent application were to issue as a patent.
“Damages” means all claims, threatened claims, damages, losses, suits, proceedings, liabilities, costs (including reasonable legal expenses, costs of litigation and reasonable attorney’s fees), or judgments, whether for money or equitable relief, of any kind and is not limited to matters asserted by Third Parties against a Party, but includes claims, threatened claims, damages, losses, suits, proceedings, liabilities, costs (including reasonable legal expenses, costs of litigation and reasonable attorney’s fees) or judgments incurred or sustained by a Party in the absence of Third Party claims; provided that no Party shall be liable to hold harmless or indemnify the HEC Indemnified Parties or Lannett Indemnified Parties, as applicable, for any claims, threatened claims, damages, losses, suits, proceedings, liabilities, costs or judgments for punitive or exemplary damages, except to the extent the Party seeking indemnification is actually liable to a Third Party for such punitive or exemplary damages in connection with a Claim by such Third Party.
“Data” means any and all research data, results, pharmacology data, medicinal chemistry data, preclinical data, market research, clinical data (including investigator reports (both preliminary and final), statistical analysis, expert opinions and reports, safety and other electronic databases), pharmacovigilance data generated in the Territory, and the Sales data in the US, in any and all forms, including files, reports, raw data, source data (including patient medical records and original patient report forms, but excluding patient-specific data to the extent required by applicable Laws) and the like, in each case directed to, or used in, the Development or Commercialization of the Products for US or the Manufacture of the Pen for the US.
“Develop” or “Development” means discovery, research, preclinical, non-clinical and clinical development activities, including activities relating to screening, assays, test method development and stability testing, toxicology, pharmacology, formulation, quality assurance/quality control development, clinical trials (including Phase IV Studies), technology transfer, statistical analysis, process development and scale-up, pharmacokinetic studies, data collection and management, report writing and other pre-Regulatory Approval activities.
“Development Costs” means the costs actually incurred by the Parties or their Affiliates including any Manufacturing Costs associated with the clinical supply of Product for Clinical Trials, in accordance with the Development Budget with respect to those Development activities performed pursuant to the Development Plan, the results of which will include all the activities associated with Commercialization of the Product in the US, including but not limited to the development regulatory filing and manufacture, after the Effective Date. It being understood that “Development Costs” in no event shall include any costs actually incurred by HEC or its Affiliates solely for Clinical Trials designed to support Regulatory Approval in the ROW (even, for the avoidance of doubt, in the case where the safety data for such Clinical Trials designed to support Regulatory Approvals in the ROW are included in Regulatory Documentation to support Regulatory Approval in the US). The “Development Cost” shall exclude any costs of the employment of the outside
representative in the Insulin Aspart Manufacturing Site and the consultant(s) for the management of the Development from Lannett.
“Direct Cost” means, with respect to certain activities hereunder, direct expenses paid or payable by either Party or its Affiliates to Third Parties that are specifically identifiable and incurred to conduct such activities for the Collaboration hereunder and have been recorded in accordance with the Accounting Standards.
“Executive Officers” means HEC’s President of HEC Pharm USA (or the officer or employee of HEC then serving in a substantially equivalent capacity) or his designee and Lannett’s Vice President of Business Development (or the officer or employee of Lannett then serving in a substantially equivalent capacity) or his designee; provided that any such designee must have decision-making authority on behalf of the applicable Party.
“Failure to Ensure Minimum Supply” means HEC’s failure to achieve the Minimum Supply.
“FDA” means the United States Food and Drug Administration, or any successor agency thereof.
“Field” means the diagnosis, prevention, palliation or treatment of diseases in humans or animals.
“First Commercial Sale” means the first commercial sale of a Product by Lannett, its Affiliates or Licensee Partners in the US in an arms’ length transaction to a Third Party following receipt of applicable Regulatory Approval of such Product in the US. Sales for test marketing or Clinical Trial purposes shall not constitute a First Commercial Sale.
“Good Manufacturing Practices” or “GMP” means all applicable standards relating to manufacturing practices for fine chemicals, intermediates, bulk products and/or finished pharmaceutical products, including (a) all applicable requirements set forth in the quality systems regulations for drugs and biological products contained in 21 C.F.R. Parts 210 and 211 and 600 and 610 as well as the FDA’s current Good Manufacturing Practices regulations, U.S. 21 C.F.R. Parts 210 and 211 as each may be amended from time to time, and (b) all applicable Laws promulgated by any governmental authority having jurisdiction over the manufacture of Insulin Aspart.
“HEC Collaboration Intellectual Property” means HEC Collaboration Know-How and HEC Collaboration Patents, collectively.
“HEC Collaboration Know-How” means, Collaboration Know-How Controlled by HEC (including HEC’s interest in the Joint Know-How and Joint Inventions).
“HEC Collaboration Patents” means Collaboration Patents Controlled by HEC (including HEC’s interest in the Joint Patents).
“HEC Intellectual Property” means HEC Know-How and HEC Patents, collectively.
“HEC Know-How” means any Know-How that is (a) related to the Development or Manufacture of the Products Controlled by HEC as of the Effective Date or during the Term; and (b) necessary
or useful for the Development or Commercialization of the Products, but excluding HEC Collaboration Know-How.
“HEC Patents” means any Patents that (a) are in relation to the Development or Manufacture of the Products Controlled by HEC provided by HEC to Lannett in the due diligence or as of the Effective Date or during the Term; and (b) Cover HEC Know-How or the Products, but excluding HEC Collaboration Patents. HEC Patents as of the Effective Date are as set forth on Exhibit B to this Agreement.
“IND” means any Investigational New Drug application, filed with the FDA pursuant to Part 312 of Title 21 of the U.S. Code of Federal Regulations, including any supplements or amendments thereto and any foreign equivalents thereof.
“Insulin Aspart” means the recombinant insulin aspart having a molecular formula and sequence as set forth on Exhibit A.
“Insulin Aspart Manufacturing Site” means the New Facility No. 1 and New Facility No. 2 (if applicable).
“Insulin Glargine” means the recombinant insulin glargine having a molecular formula and sequence as set forth on Exhibit AA and subject to the Collaboration and License Agreement and Supply Agreement dated between HEC and Lannett on November 19, 2019.
“Insulin Glargine Manufacturing Site” means the New Facility No. 1 and New Facility No. 2 (if applicable).
“Joint IP” means, collectively:
“Joint Know-How” which means all Know-How, including physical embodiments of Product(s), that is discovered, developed, generated or invented by or on behalf of both Parties or their respective Affiliates, whether solely or jointly with any Third Party, pursuant to the conduct of activities under the Collaboration at any time during the Term, including Joint Inventions; and
“Joint Patents” which means Patents that: (a) result from the conduct of the Collaboration activities pursuant to this Agreement, (b) are filed on or after the Effective Date, and (c) Cover any Joint Know-How or Joint Patents or the Product.
“Know-How” means any tangible or intangible trade secrets, know-how, expertise, discoveries, inventions, information, Data or materials, including ideas, concepts, formulas, methods, procedures, designs, technologies, compositions, plans, applications, technical data, assays, manufacturing information or data, samples, chemical and biological materials and all derivatives, modifications and improvements thereof.
“Lannett Collaboration Intellectual Property” means Lannett Collaboration Know-How and Lannett Collaboration Patents, collectively.
“Lannett Collaboration Know-How” means the Collaboration Know-How Controlled by Lannett (including Lannett’s interest in the Joint Know-How and Joint Inventions).
“Lannett Collaboration Patents” means the Collaboration Patents Controlled by Lannett (including Lannett’s interest in the Joint Patents).
“Lannett Intellectual Property” means Lannett Know-How and Lannett Patents, collectively.
“Lannett Know-How” means any Know-How that is (a) related to the Development or Manufacture of the Products Controlled by Lannett as of the Effective Date or during the Term, and (b) necessary or useful for the Development or Commercialization of the Products, but excluding Collaboration Know-How.
“Lannett Patents” means any Patents that (a) are related to the Development or Manufacture of the Products Controlled by Lannett as of the Effective Date or during the Term, and (b) Cover Lannett Know-How or the Products, but excluding Lannett Collaboration Patents. Lannett Patents as of the Effective Date are as set forth on Exhibit B to this Agreement.
“Law” means any law, statute, rule, regulation, ordinance or other pronouncement having the effect of law, of any federal, national, multinational, state, provincial, county, city or other political subdivision, as from time to time enacted, repealed or amended, including Good Clinical Practices and adverse event reporting requirements, guidance from the International Conference on Harmonization or other generally accepted conventions, the United States Federal Food, Drug, and Cosmetic Act and similar laws and regulations in countries outside the United States, and all other rules, regulations and requirements of the FDA and other applicable Regulatory Authorities.
“Licensee Partner” means any Third Party to whom a Party or any of its Affiliates or any other Licensee Partner grants a sublicense or license with respect to the Development or Commercialization of Products in the Field under rights to Lannett Intellectual Property, HEC Intellectual Property, HEC Collaboration Intellectual Property, Lannett Collaboration Intellectual Property or Joint IP, as the case may be, granted to such Party or Affiliate hereunder, in each case excluding (a) Third Party Contractors and (b) wholesale distributors or any other Third Party that purchases any Product in an arm’s-length transaction, where such Third Party does not have a sublicense to Develop, Manufacture or Commercialize any Product except for a limited sublicense to the extent required to enable such Third Party to perform final packaging for such Product for local distribution.
“Manufacture” or “Manufacturing” means, as applicable, all activities associated with the production, manufacture, processing, filling, packaging, labeling, shipping and storage of a drug substance or drug product, or any components thereof, including process and formulation development, process validation, stability testing, manufacturing scale-up, preclinical, clinical and commercial manufacture and analytical methods development and validation, product characterization, quality assurance and quality control development, testing and release in the Territory.
“Minimum Supply” means, by [***] January 1, 2024 and at any time thereafter during the Term, HEC’s ability to manufacture, or capability reserved to manufacture the Insulin Aspart for the production of the Products supplying to Lannett for the US market each Calendar Year the greater of (a) [***] or (b) [***].
“Net Sales” means, with respect to the Product, the gross amounts invoiced by Lannett, its Affiliates and Licensee Partners (each, a “Selling Party”) to Third Parties (that are not Licensee Partners) for sales or other commercial dispositions of such Product in the US, less the following deductions actually incurred, allowed, paid, accrued or specifically allocated in its financial statements and calculated in accordance with the Accounting Standards as consistently applied, for:
There should be no double counting in determining the foregoing deductions from gross amounts invoiced to calculate “Net Sales” hereunder. The calculations set forth in this definition shall be determined in accordance with Accounting Standards consistently applied.
If non-monetary consideration is received by a Selling Party for any Product in the relevant country, Net Sales will be calculated based on the average price charged for such Product during the preceding royalty period, or in the absence of such sales, the fair market value of the Product as
determined by the Parties in good faith. Notwithstanding the foregoing, Net Sales shall not be imputed to transfers of Products for use in Clinical Trials, non-clinical development activities or other development activities with respect to Products by or on behalf of the Parties, for bona fide charitable purposes or for compassionate use or for Product samples, if no monetary consideration is received for such transfers.
Net Sales shall be determined on, and only on, the first sale by a Selling Party or any of its Affiliates or (sub)licensees to a non-(sub)licensee Third Party.
“New Facility No.1” means [***].
“New Facility No. 2” means [***].
“NMPA” means the National Medical Products Administration of China, or any successor agency thereof.
“Operational Qualification” means the demonstration of whether a facility, process equipment and sub-systems are capable of consistently operating within established limits and tolerances by testing (at upper and lower operating limits) compliance with the requirements identified in the corresponding design specifications for such facility, individual equipment, or sub-system and confirming whether any newly acquired equipment (or facilities, services or systems) functions as expected, that all parts and components operate correctly, that all controls perform the intended function and that all gauges and indicators are calibrated and display the correct value. Operational Qualification should follow on from the installation of the equipment and sub-systems and should include tests that have been developed based on detailed knowledge of equipment, systems or processes.
“Out-of-Pocket Costs” means, with respect to certain activities hereunder, direct expenses paid or payable by either Party or its Affiliates to Third Parties (other than employees of such Party or its Affiliates) that are specifically identifiable and incurred to Develop the Product hereunder and have been recorded in accordance with the Accounting Standards.
“Patent” means any (a) patent or patent application anywhere in the world, (b) divisional, continuation, continuation in-part thereof or any other patent application claiming priority, or entitled to claim priority, directly or indirectly to (i) any such patent or patent application or (ii) any patent or patent application from which such patent or patent application claims, or is entitled to claim, direct or indirect priority, and (c) patent issuing on any of the foregoing anywhere in the world, together with any registration, reissue, re-examination, patent of addition, renewal, patent term extension, supplemental protection certificate, or extension of any of the foregoing anywhere in the world.
“Pen” means the variable dose, multi-dose disposal injection drug delivery device(s) (including autoinjectors and other needle-based and needle-free devices) customized by a Third Party and assembled by HEC that are used in the US during the Term to deliver formulated Insulin Aspart in the Product intradermally, transdermally, subcutaneously or intramuscularly, but excluding transdermal patch technology.
“Pen Know-How” means any Know-How that is (a) Controlled by Lannett and/or HEC as of the Effective Date or during the Term; and (b) necessary or useful for the Development, Manufacture or Commercialization of the Pen.
“Pen Patents” means any Patents that (a) are Controlled by Lannett and/or HEC as of the Effective Date or during the Term; and (b) Cover the Pen.
“Person” means any corporation, limited or general partnership, limited liability company, joint venture, trust, unincorporated association, governmental body, authority, bureau or agency, any other entity or body, or an individual.
“Phase I Study” means a human clinical trial of a Product, the principal purpose of which is a preliminary determination of safety, tolerability, pharmacokinetics and pharmacodynamics in study subjects where potential pharmacological activity may be determined or a similar clinical study prescribed by any applicable Regulatory Authority, from time to time, pursuant to applicable Law or otherwise, including for example the trials referred to in 21 C.F.R. §312.21(a), as amended (or the non-United States equivalent thereof).
“Phase II Study” means a human clinical trial of a Product intended to explore a variety of doses, dose response, and duration of effect, and to generate evidence of clinical safety and effectiveness for a particular indication or indications in a target patient population, or a similar clinical study prescribed by any applicable Regulatory Authority, from time to time, pursuant to applicable Law or otherwise, including for example the trials referred to in 21 C.F.R. §312.21(b), as amended (or the non-United States equivalent thereof).
“Phase III Study” means a human clinical trial of a Product in any country that would satisfy the requirements of 21 C.F.R. §312.21(c), as amended (or the non-United States equivalent thereof) and is intended to (a) establish that the product is safe and efficacious for its intended use, (b) define contraindications, warnings, precautions and adverse reactions that are associated with the product in the dosage range to be prescribed, and (c) support Regulatory Approval for such product.
“Phase IV Study” means a human clinical trial of a product which is (a) conducted to satisfy a requirement of a Regulatory Authority in order to maintain a Regulatory Approval or (b) conducted voluntarily after Regulatory Approval of the product has been obtained from an appropriate Regulatory Authority for enhancing marketing or scientific knowledge of an approved indication.
“Pivotal Clinical Trial” means a human clinical trial of a Product on a sufficient number of subjects that satisfies both of the following ((a) and (b)):
| (a) | such trial is designed to establish (with one or more other Pivotal Clinical Trials, if applicable) that such product has an acceptable safety and efficacy profile for its intended use, and to determine warnings, precautions, and adverse reactions that are associated with such product in the dosage range to be prescribed, which trial is intended to support Regulatory Approval of such product, or a similar clinical study prescribed by the FDA; and |
| (b) | such trial is a registration trial designed to be sufficient (with one or more other Pivotal Clinical Trials, if applicable) to support the filing of an application for a Regulatory Approval for such product in the U.S., as evidenced by (i) an agreement with or statement from the FDA on a Special Protocol Assessment or equivalent, or (ii) other guidance or minutes issued by the FDA, for such registration trial. |
“Product” means the Insulin Aspart as the sole active ingredient and in all forms, presentations, and formulations (including manner of delivery and dosage), which is co-Developed by HEC and Lannett for US market, manufactured by HEC in the Territory and Commercialized by Lannett or any of its Affiliates or Licensee Partners in the US pursuant to this Agreement, as sold in combination with the Pen (whether or not co-packaged).
“Product Data” means all relevant Data included in the Know-How Controlled by either Party in relation to Products for use in the Field either: (a) as of the Effective Date or during the Term; or (b) generated from activities conducted by or on behalf of a Party under the Development Plan; (c) that otherwise specifically relates to Products and is necessary or useful for applications for Regulatory Approval, or Regulatory Approvals; or (d) are recorded during the Commercialization activities for Products in the Field and in the US.
“Product Liabilities” means all losses, damages, fees, costs (including medical monitoring) and other liabilities incurred by a Party, its Affiliate(s) or its Licensee Partner(s) and resulting from or relating to the use of a Product in a human (including clinical trials or Commercialization) in the Territory incurred after the Effective Date. For the avoidance of doubt, Product Liabilities include reasonable attorneys’ and experts’ fees and costs relating to any claim or potential claim against a Party, its Affiliate(s), or its Licensee Partner(s) and all losses, damages, fees and costs associated therewith. Product Liabilities shall include liabilities associated with recalls or the voluntary or involuntary withdrawal of any Product.
“Prosecution” or “Prosecute” means the filing, preparation, prosecution and maintenance of Patents, including any and all pre-grant proceedings before any patent authority, such as interferences.
“Publication” means any publication in a scientific journal, any scientific abstract to be presented to any audience, any presentation at any scientific conference, including slides and texts of oral or other public presentations, any other scientific presentation and any other oral, written or electronic scientific disclosure directed to any audience that pertains to any Product, or the use of any of the foregoing, or the data or results from any work under the Collaboration.
“Regulatory Approval” means all approvals of each applicable Regulatory Authority necessary for the commercial marketing and sale of a product for a particular indication in a country (including separate Regulatory Authority pricing or reimbursement approvals whether or not legally required in order to sell the product in such country).
“Regulatory Authority” means a federal, national, multinational, state, provincial or local regulatory agency, department, bureau or other governmental entity with authority over the testing,
manufacture, use, storage, import, promotion, marketing or sale (including pricing and reimbursement approval) of a product in a country or territory.
“Regulatory Documentation” means, with respect to the Collaboration, all INDs, BLAs and other regulatory applications submitted to any Regulatory Authority, Regulatory Approvals, pre-clinical and clinical data and information, regulatory materials, drug dossiers, master files (including Drug Master Files, as defined in 21 C.F.R. 314.420 and any non-United States equivalents), and any other data, reports, records, regulatory correspondence and other materials relating to Development or Regulatory Approval of the Products, or required to Manufacture, distribute or sell the Products, including any information that relates to pharmacology, toxicology, chemistry, Manufacturing and controls data, batch records, safety and efficacy, and any safety database.
“Right of Reference or Use” means a “Right of Reference or Use” as that term is defined in 21 C.F.R. §314.3(b), and any non-United States equivalents.
“ROW” means all countries in the world other than the US.
[***]
“Territory” means the US and the ROW, collectively.
“Third Party” means any Person other than HEC or Lannett that is not an Affiliate of HEC or Lannett.
“Third Party Agreement” means any agreement listed on Exhibit C, Schedule 12.2 (j) and Schedule 12.3 (i) to this Agreement.
“Third Party Rights” means, with respect to a Party, any rights of, and any limitations, restrictions or obligations imposed by, Third Parties pursuant to any Third Party Agreements.
“US” means the United States of America, including its territories, possessions and Puerto Rico.
“Validation Batch” means a batch or lot produced from a validation run. Each Validation Batch is intended to produce Product that is or is expected to be (following Regulatory Approval) commercially saleable.
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DEFINITION |
SECTION |
|---|---|
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35 U.S.C. § 102(c) Patent |
Section 10.7 |
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Acquirer Program |
Section 8.6(b)(iii)(B) |
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Agreement |
Preamble |
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Allocable Overhead |
Exhibit D |
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Allowable Expenses |
Exhibit D |
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Audit Rights Holder |
Section 9.4(e) |
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DEFINITION |
SECTION |
|---|---|
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Audit Team |
Section 9.4(a) |
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Auditee |
Section 9.4(e) |
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Bankruptcy Code |
Section 8.8 |
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China |
Section 3.1(b) |
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Claim |
Section 13.1 |
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Competitive Infringement |
Section 10.3(b) |
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Competitive Program |
Section 8.6(b)(ii) |
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Competitive Program Party |
Section 8.6(b)(ii) |
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Cooperating Party |
Section 11.3(b)(iii) |
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Costs of Goods Sold or COGs |
Exhibit D |
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Cure Period |
Section 14.2(a)(i) |
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Development Budget |
Section 3.2(b) |
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Development Cost Share |
Section 9.1(a) |
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Section 3.2(a) |
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Disclosing Party |
Section 11.1 |
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Dispute |
Section 15.1 |
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Distribution Costs |
Exhibit D |
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DOJ |
Section 11.7(b) |
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Earlier Patent |
Section 10.7 |
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Effective Date |
Preamble |
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Electronic Delivery |
Section 15.16 |
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Finance Working Group |
Exhibit D |
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force majeure event |
Section 15.7 |
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FTC |
Section 11.7(b) |
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Global Safety Database |
Section 5.3 |
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Gross Profit |
Exhibit D |
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HEC |
Preamble |
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HEC Indemnified Parties |
Section 13.2 |
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HEC’s Financial Responsibility |
Section 3.2(b) |
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Definition of Antitrust Law |
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HSR Clearance Date |
Section 11.7(b) |
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HSR Filing |
Section 11.7(b) |
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Implementation Date |
Section 11.7(b) |
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Indemnified Party |
Section 13.3 |
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Indemnitor |
Section 13.3 |
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Indirect Taxes |
Section 9.5(b)(iii) |
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[***] |
[***] |
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Joint Inventions |
Section 10.1(c) |
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Joint Patents |
Section 10.1(c) |
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Lannett |
Preamble |
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Lannett Indemnified Parties |
Section 13.1 |
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Lannett’s Financial Responsibility |
Section 3.2(b) |
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Licensed Branding |
Section 6.4(c) |
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Licensed Party |
Section 10.2(e) |
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Manufacturing Costs |
Exhibit D |
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DEFINITION |
SECTION |
|---|---|
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Marketing Costs |
Exhibit D |
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Material Breach |
Section 14.2(a)(i) |
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Operating Profits or Losses |
Exhibit D |
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Exhibit D |
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Party or Parties |
Preamble |
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Patent Prosecution Expenses |
Section 10.2(c) |
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Payee Party |
Section 9.5(b)(i) |
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Paying Party |
Section 9.5(b)(i) |
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Pen Development Plan |
Section 3.6(b) |
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[***] |
[***] |
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Pen Presentation |
Section 3.6(a) |
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Pharmacovigilance Expenses |
Exhibit D |
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Product Assets |
Section 12.5(a) |
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Product Recall Expenses |
Exhibit D |
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Production Commitment |
Section 4.3 |
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Profit & Loss Share |
Section 9.2(a) |
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Prosecuting Party |
Section 10.2(d)(ii) |
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Receiving Party |
Section 11.1 |
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Redacted Version |
Section 11.3(b)(i) |
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Regulatory Expenses |
Exhibit D |
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Regulatory Interactions |
Section 5.1(b) |
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Report |
Exhibit D |
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Requesting Party |
Section 11.3(b)(iii) |
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Sales Costs |
Exhibit D |
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SEC |
Section 11.3(b)(i) |
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Selling Party |
Definition of Net Sales |
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Sublicense Revenues |
Exhibit D |
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Supply Agreement |
Section 4.1 |
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Term |
Section 14.1(a) |
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Third Party Contractors |
Section 8.2(a)(ii) |
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Third Party Infringement |
Section 10.3(a) |
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Third Party Infringement Action |
Section 10.4 |
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Third Party Products Liability Action |
Section 13.5(a) |
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US Product Trademarks |
Section 6.4(a) |
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to the extent reasonably required (1) to exercise the rights and licenses of the Receiving Party expressly surviving expiration or termination of this Agreement; or (2) to perform the obligations of the Receiving Party expressly surviving expiration or termination of this Agreement.
Notwithstanding the return or destruction of the Disclosing Party’s (and its Affiliates’) Confidential Information, the Receiving Party shall continue to be bound by its obligations of confidentiality and other obligations under this Article XI.
Agreement, or (ii) at the election of either Party, immediately upon notice to the other Party, in the event that the HSR Clearance Date shall not have occurred on or prior to two hundred seventy (270) days after the effective date of the HSR Filing. Notwithstanding anything to the contrary contained herein, except for the terms and conditions of this Section 11.7(b), none of the terms and conditions contained in this Agreement shall be effective until the “Implementation Date,” which is agreed and understood to mean the later of (A) the Effective Date, (B) if a determination is made pursuant to this Section 11.7(b) that a notification of this Agreement is not required to be made under the HSR Act, the date of such determination, or (C) if notification of this Agreement is required to be made under the HSR Act, the HSR Clearance Date. As used herein: (x) “HSR Clearance Date” means the earliest date on which the Parties have actual knowledge that all applicable waiting periods under the HSR Act with respect to the transactions contemplated by this Agreement have expired or have been terminated; and (y) “HSR Filing” means a filing by HEC and Lannett with the FTC and the DOJ of a Notification and Report Form for Certain Mergers and Acquisitions (as that term is defined in the HSR Act) with respect to the matters set forth in this Agreement, together with all required documentary attachments thereto.
in each case, provided, however, that, such indemnity shall not apply to the extent (i) Lannett has an indemnification obligation pursuant to Section 13.2(a) or 13.2(b) for such Damages or (ii) such Damages are reflected in any applicable Operating Profits or Losses calculation.
in each case, provided, however, that such indemnity shall not apply to the extent (i) HEC has an indemnification obligation pursuant to Section 13.1(a) or 13.1(b) for such Damages or (ii) such Damages are reflected in any applicable Operating Profits or Losses calculation.
written consent, assign this Agreement and its rights and obligations hereunder in whole or in part to an Affiliate of such Party. In the event Lannett intends to assign this Agreement in whole or in part to a Third Party, HEC shall have the right of first refusal to exclusively negotiate with Lannett for a period of sixty (60) days for repurchasing the rights, interests and obligations under this Agreement at a price agreed to by both Parties (the “Right of First Refusal of HEC”); provided that, if the Parties cannot reach an agreement within such sixty (60) day period, then Lannett shall be entitled to assign this Agreement in whole or part to a Third Party in its sole discretion without restriction. In the event HEC does not exercise the Right of First Refusal or HEC exercises the Right of First Refusal but the Parties cannot reach a repurchasing intention within the aforementioned sixty (60) day period, Lannett shall keep HEC informed of the final result of the negotiation between Lannett and the Third Party to the extent of the details of the terms and provisions that will impair the license rights, benefits and interests of HEC to the Product in the U.S.
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To Lannett
Lannett Company, Inc.
Philadelphia, PA 19136
Facsimile: (215) 464-1861 |
To HEC HEC Pharm US Inc.
2 Enfield Circle, West Windsor , NJ, 08550Telephone: 408-580-6016
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With a copy to: Hill Wallack LLP 21 Roszel Rd, Princeton, NJ 08540
Attention: Quinn Zhao
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Any such notices shall be effective upon receipt by the Party to whom it is addressed. Any notice given in connection with this Agreement shall be in English. Unless otherwise agreed upon by all of the Parties, any other document provided pursuant to this Agreement shall be: (i) in English; or (ii) translated in to English and accompanied by a certified English translation at HEC’s sole cost, in which case the English translation prevails unless the document is a statutory or other official document.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, the Parties have executed this Collaboration and License Agreement as of the Effective Date.
LANNETT COMPANY, INC.
By: /s/ Tim Crew
Name: Tim Crew
Title: CEO
SUNSHINE LAKE PHARMA CO., LTD
By: /s/ Wenjia Li
Name: Wenjia Li
Title: Vice President
EXECUTION VERSION
CERTAIN INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT BECAUSE IT IS NOT MATERIAL AND WOULD LIKELY CAUSE COMPETITIVE HARM TO THE REGISTRANT IF PUBLICLY DISCLOSED.
[***] INDICATES THAT INFORMATION HAS BEEN REDACTED.
Exhibit 10.89
SUPPLY AGREEMENT
THIS SUPPLY AGREEMENT (this “Agreement”) is made this 5th day of February 2021 (the “Effective Date”), by and among Sunshine Lake Pharma Co., Ltd., a corporation organized and existing under the laws of the People’s Republic of China, (“Seller”), and Lannett Company, Inc., a Delaware corporation (“Lannett”).
WHEREAS, Lannett and Seller have entered into that certain Collaboration and License Agreement, dated as of the Effective Date (the “Collaboration Agreement”), for Lannett to develop and commercialize Product in the US;
WHEREAS, Seller has developed and manufactured the insulin aspart identified on Exhibit A hereto (the “Drug Substance”) and shall manufacture the finished product containing the Drug Substance assembled with an injection drug delivery device identified on Exhibit A hereto (such finished product, the “Product”) at Seller’s new manufacturing facility to be constructed in Yidu, China in accordance with the terms of the Collaboration Agreement (the “New Facility”); and
WHEREAS, Lannett desires to purchase Product from Seller; and
WHEREAS, Seller is willing to supply such Product for Lannett’s use, distribution and sale in the U.S. on the terms and conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the promises and the mutual covenants set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree and covenant as follows:
2.1Pricing. Subject to Section 2.9, the pricing for the Product shall be as set forth on Exhibit C hereto, as may be amended from time to time by mutual agreement of the parties in writing (the “Price”). Price is determined by Seller’s Costs of Goods Sold.
Any increase to the Price during any calendar year cannot be greater than the percentage increase in the Chinese equivalent of the Consumer Price Index for all Urban Consumers for Medical Care Commodities for the twelve (12) month period ending three (3) months prior to the commencement of such calendar year, unless the Seller can provide relevant documentation or evidences to justify an increase greater than the percentage increase in the Chinese equivalent of the Consumer Price Index for all Urban Consumers for Medical Care Commodities thirty (30) days prior to such increase of the Price. A reasonable quantity of the Product shall be made available to Lannett for marketing samples for the Product and shall be deductible by Lannett, with advance notice to Seller, from any amounts due to Seller under future Purchase Orders. All sums shall be expressed in and payable in U.S. Dollars.
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If to Seller, then to: |
HEC Pharm US Inc. 2 Enfield Circle, West Windsor, NJ, 08550 Attn: Kevin Kong Email: kongweiheng@yahoo.com__ |
IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.
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SELLER: SUNSHINE LAKE PHARMA CO., LTD By: /s/ Wejia Li Name: Wenjia Li Its: Vice President Date: February 06, 2021 |
LANNETT: LANNETT COMPANY, INC. By: /s/ Tim Crew Name: Tim Crew Its: CEO Date: February 08, 2021 |
LIST OF EXHIBITS
Exhibit A+Product
Exhibit B+Product Specifications
Exhibit C*Pricing
Exhibit D+Shipping Instructions
Exhibit E+Quality Agreement
_________________________________________
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* |
This Exhibit have been redacted to preserve confidentiality. The registrant hereby undertakes to provide further information regarding such redacted information to the Commission upon request. |
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+ |
This Exhibit has been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant undertakes to provide further information regarding such omitted materials to the Commission upon request. |
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Timothy Crew, certify that:
1. I have reviewed this report on Form 10-Q of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in shareholders’ equity and cash flows of the Company as of and for the periods presented in this report;
4. The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting;
5. The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
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Date: May 6, 2021 |
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/s/ Timothy Crew |
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Chief Executive Officer |
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Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John Kozlowski, certify that:
1. I have reviewed this report on Form 10-Q of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in shareholders’ equity and cash flows of the Company as of and for the periods presented in this report;
4. The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting;
5. The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
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Date: May 6, 2021 |
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/s/ John Kozlowski |
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Vice President of Finance, Chief Financial Officer and Principal Accounting Officer |
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Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Lannett Company, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy Crew, the Chief Executive Officer of the Company, and I, John Kozlowski, the Vice President of Finance, Chief Financial Officer and Principal Accounting Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report complies with the requirements of Section13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Dated: May 6, 2021 |
/s/ Timothy Crew |
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Timothy Crew, |
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Chief Executive Officer |
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Dated: May 6, 2021 |
/s/ John Kozlowski |
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John Kozlowski, |
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Vice President of Finance, Chief Financial Officer and Principal Accounting Officer |