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Hi-Tech Pharmacal Co., Inc. (HITK)

F1Q2013 Earnings Conference Call

Sep 5, 2012 10:00 AM ET

Executives

David Seltzer - President and Chief Executive Officer

William Peters - Chief Financial Officer and Vice President of Finance

Analysts

Randall Stanicky - Canaccord Genuity

Timothy Chiang - CRT Capital Group

Sumant Kulkarni - Bank of America Merrill Lynch

Scott Eisler - Moors & Cabot

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Quarter One and 2013 Hi-Tech Pharmacal Earnings Conference Call. My name is Lisa, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

Before we begin the company has asked me to read the following statement. Forward-looking statements, statements which are not historical facts in this conference call, are made pursuant to the Safe Harbor provision 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 will involve risks and uncertainties including, but not limited to, the impact of competitive products and pricing; product demand and market acceptance; new product development; the regulatory environment, including, without limitation, reliance on key strategic alliances, availability of raw materials, fluctuations in operating results and other results; and other risks detailed from time to time in the company's filings with the Securities and Exchange Commission. 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. Hi-Tech 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.

I would now like to turn the call over to Mr. David Seltzer, President and CEO. Please proceed, sir.

David Seltzer

Thank you. Good morning, everyone. I'm David Seltzer, and I would like to welcome all of our listeners to our conference call this morning. The purpose of today's call is to discuss this morning's earnings release for the first quarter ended July 31, 2012. Joining me on the call this morning is our Chief Financial Officer, Bill Peters. In a moment, I will turn the call over to Bill who will review the financial results for the quarter and then I will make some comments on the quarter and give an update on some more current events. Bill?

William Peters

Thank you, David. Sales for the quarter declined 7%, to $52 million from $56.2 million the previous year. Sales of generic products were up 6%, to $45.9 million. Strong unit sales of Fluticasone Propionate nasal spray offset lower – were offset by lower average prices that resulted in sales of $22 million in the quarter down from $26.2 million in the previous year. Pricing and units declined and Dorzolamide ophthalmic products also contributed to lower sales. Recently launched products including Lidocaine sterile jelly and Lidocaine 5% partially offset these declines.

We had particularly strong sales in the months of May and June, but July was fairly weak as we had a strong start and fast end to the allergy season. Additionally, after the quarter was over we learned that the inventory levels of Fluticasone at wholesalers had declined materially. This led to higher levels of accounts receivable reserves and lower sales at the beginning of August. In June, we also had higher than typical purchases by a large customer on an incentive rebate plan which led to a higher rebate level than previously anticipated. This rebate went back to sales dollar one for the previous 12 months. Post period of shelf stock adjusted pricing adjustment primarily for Fluticasone also impacted the quarter. Sales for our healthcare products division were down to $3 million for the quarter and $3.5 million in the previous year.

In-store pricing promotions such as free after register rebates and heavy coupon use which were part of our campaign to re-launch Nasal Ease led to this decline.

Hi-Tech's ECR Pharmaceuticals subsidiary declined to $3.1 million in sales from $3.7 million in the prior year. Sales of Lodrane prescription strength, the subsidiary's top product line, dropped to 0 from $2.4 million after the company discontinued the product at the end of August, 2011. Partially offsetting the loss of Lodrane were sales from newly acquired TussiCaps and strong sales of Dexpak and Bupap.

Cost of sales increased to $26.7 million from $23 million, an increase as a percentage of sales to 51% from 41%. Pricing on our Fluticasone and Dorzolamide products, were the primary reason for this change. Rebate and couponing at the healthcare products division also negatively impacted the margins this quarter.

Sales, general and administrative spending increased to $10.6 million from $8.8 million, which excludes amortization expense which we now break out on a separate line. The increase was due to higher advertising expenses supporting our re-launch of Nasal Ease and our newly acquired Sinus Buster products. Additionally, we had increased spending in our ECR subsidiary as a result of the 30 contract sales representatives we added in October 2011. The company stopped using these reps at the end of July.

We now breakout amortization on a separate line item, because it has become a significant portion of our expenses after several acquisitions over the past year. Amortization increased to $1.8 million from $800,000 in the previous year. This increase was primarily due to the TussiCaps and Sinus Buster acquisitions. Research and development expenditures increased to $4.5 million from $3.4 million as the company increased headcount and external development projects.

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