ACET - NASDAQ

Jody Burfening - Investor Relations, LHA Sal Guccione - President and Chief Executive Officer Doug Roth - Chief Financial Officer Walter Kaczmarek - Chief Operating Officer

Matt Hewitt - Craig Hallum Capital Group Steve Schwartz - First Analysis Dewey Steadman - Canaccord Adam Peck - Riverwater Partners Greg Eisen - Singular Research Daren Heitman - Azarias

Good day. And welcome to the Aceto Fourth Quarter Fiscal 2017 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jody Burfening of LHA. Please go ahead.

Thank you, Brandon. Good morning, everyone, and welcome to Aceto Corporation's fourth quarter fiscal 2017 earnings conference call. On today's call are Sal Guccione, President and CEO; Doug Roth, Chief Financial Officer, they will lead the discussion about the quarterly financial results and business performance. Walter Kaczmarek, Aceto's Chief Operating Officer is also with us today to participate in the Q&A session. The company issued its fourth quarter earnings press release yesterday after the market closed. For those of you who have not yet seen the release, a copy is available in the Investor Relations section of the company's website at www.aceto.com. Before starting the call, I'd like to remind you that today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 that can be identified by words such as believe, expect, anticipate, plans, projects, seeks and similar expressions that involve numerous risks and uncertainties. The company's actual results could differ materially from those anticipated or implied by these forward-looking statements as a result of certain factors that are set forth in the company's filings with the Securities and Exchange Commission. Also on today’s call, management will be referring to certain non-GAAP financial measures. These measures Aceto's adjusted net income and Aceto's adjusted earnings per share are defined as net income, excluding amortization of intangibles, debt extinguishment and amortization of debt discounts and debt issuance cost and cost related to acquisitions. These non-GAAP measures allow investors to compare results of operations in the current period to prior period results based on the company's fundamental performance and analyze operating trends of the business. With those housekeeping items out of the way, I would now like to turn the call over to Sal. Good morning, Sal.

Good morning, Jody. Thank you. Good morning, everyone. Thank you for joining us on Aceto's fourth quarter and full year fiscal 2017 earnings conference call. The fourth quarter brought to close a year, which we definitely advanced our strategic transition towards Human Health, but also brought to close a year challenges in our generics business. Despite the increase in sales brought about, primarily by the acquisition of products from Lucid and Citron, our financial profit results are clearly disappointing. Net sales in our fourth quarter were $196 million, which is an increase of about 43.5% from the $135 million in last year’s quarter. Net income was $2 million or $0.06 a share, compared to net income of $6.8 million and $0.23 a share for the comparable quarter of fiscal 2016. On a non-GAAP basis, adjusted net income was $9.6 million or $0.27 a share in the quarter and that compares to $10.3 million or $0.35 a share in the prior year period. Increased competition and customer consolidation in the generic pharmaceutical industry continues to create headwinds for us in the quarter, which we partially offset through the launch of nine new generic products. One of the launches, a product called Atomoxetine, which is an AB rated generic version of Eli Lilly's Strattera. For us it was a sizeable P4 launch, which originated from the Citron transaction. Strattera was about $1 billion drug before the launch. The overall impact of that launch was favorable for us, but was at the lower end of a range of expectations. In terms of our ongoing transition towards Human Health, our Human Health plus pharma ingredients business segments in the quarter accounted for about 77% of our total sales. Regarding our pharma ingredients and performance chemicals business segments, both of these segments continued at stable cash generating businesses during the quarter. Looking at the full-year numbers after achieving six consecutive years of increases in sales, gross profits, reported GAAP EPS, and non-GAAP adjusted earnings per share, fiscal 2017 unfortunately saw a break in that trend, in particular in terms of profitability. Net sales for fiscal 2017 were $638 million, which is an increase of 14% over fiscal 2016 and that was fueled by the acquisition of the Citron and Lucid products. Gross profit was just under $141 million, which is down 1.4% versus last year and GAAP net income was $11.4 million, which is a decline of 67% versus last year. GAAP EPS was $0.35 a share that compares to $1.18 in fiscal 2016, while non-GAAP adjusted EPS decreased by around 20% from $1.50 last year to $1.19 this year. On fiscal 2017, our Rising business faced increased competitive pressure stemming from customer consolidations, as well as new competitive product launches. Rising also experienced supply chain challenges, mostly early in the year that affected several new product launches, as well as commercial product supplied. At the same time, we did move the ball forward strategically with the mid-year acquisition. The acquisition combined two complementary business lines with similar asset-like business models and partnership based product development strategies. The transaction substantially enhanced our scale in the generic space and broadened our growth opportunities. We’ve consolidated the commercial and pipeline products into Rising and we’re making progress on a new warehouse that will house combined product lines. We’re also making progress towards implementing the new ERP system through which we will manage the business. Both these projects are expected to be completed around the end of this calendar year. The cost synergies from these projects together with headcount savings from the transaction continue to be estimated about $4 million on an annualized basis. We remain encouraged by how the transaction has expanded and diversified our product portfolio and strength our position in the generic marketplace making Aceto definitely a more logical supplier to the industry. From an operating perspective, we successfully resolved the API supply issues that had impacted two of our Rising products during the year. We also made good progress in minimizing approval to launch time gaps for new product launches. And in terms of the FDA’s utilization labeling protocol, we continue to work with our partners to be ready for the November 2017 date. Regarding business development, during fiscal 2017 we continued to invest in our new product pipeline both to M&A, as well as through R&D. Our R&D spending for 2017 was even with that of fiscal 2016, which was $7.9 million. We expect to increase R&D spend in fiscal 2018 between to between $10 million and $13 million. For the year, we launched a total of 20 new finished dose generic products, which is just slightly short of the range of 21 to 24 we have previously indicated, and of those 20 product launches 13 were legacy Rising products and 7 were among the products we had acquired from Citron. We currently have 133 projects in our pipeline, which compares to 154 projects we reported on our third quarter call. The difference is a combination of two things. It is a combination of the launch of nine products that we did, as well as a net reduction of 12 products that is related to pipeline pruning. Due to adverse market conditions on some of the products, we made a commercial decision to prune about 10 that we had previously slated for launch. Should market conditions become more favorable in the future, we certainly have the option of bringing those products back into the launch queue. During the quarter, we also filed new, four new additional ANDAs bringing the total number of ANDAs on file with the FDA to 39. In terms of current pipeline, we’re planning to launch between 15 and 20 generic products during fiscal 2018. Just a quick word on our balance sheet, with respect to our debt, we generated roughly $45 million of cash from operations during the year, which allows to begin the process of reducing debt post-acquisition. Total long-term debt was reduced by about $33 million during the third and fourth quarters of fiscal 2017, so since the acquisition, and that brings our total long-term debt figure down to $339 million from the $368 million that was at the end of December of 2016. As we move through fiscal 2018, we will continue to assess our new product development pipeline and our existing portfolio in order to maximize value and identify opportunities to secure future growth. As we continue to scale our business, we’re going to strategically look at becoming involved in larger more complex projects and diversifying our product development projects to have not only the typical Rising singles and doubles, but also product candidates with larger potential returns. We also intend to increase our leverage in our global API footprint in order to identify unique situations in the API market upon which we could capitalize. Additionally, a significant portion of our portfolio is now vertically integrated, which enhances our ability to compete on a cost basis. We know we have our work cut out for us in fiscal 2018, but we do expect it will be a year of growth both top line and bottom line for us. We recently added significant senior talent at the Rising business and key functional areas. We will have a full-year contribution of the former Citron and Lucid products. We have synergies to realize from that acquisition yet. We have the aforementioned 15 to 20 product launches planned at Rising, as well as we expect to see continued solid cash flow to be generated from our performance chemicals and foreign ingredients businesses. So all told, we expect a challenging 2018 ahead, but we expect the year of growth to come. So with that, I’ll turn the call over to Doug and then open up to questions.

Thank you, Sal and good morning everyone. Now I will walk you through our financial results for the fourth quarter and fiscal year and then provide you with our fiscal year 2018 guidance. Net sales for the fourth quarter were $195 million, an increase of approximately 44% from the $135 million reported in the fourth quarter of 2016, reflecting a large part to contribution from Citron and Lucid products. Gross profit was $36.8 million, an increase of $8.2 million, compared to $34 million in the fourth quarter of fiscal 2016. Our gross margin in the fourth quarter was just under 19%, compared to 25% in the prior year period. Our gross margin drop of 620 basis points versus the prior year level was primarily due to intensified pricing competition on our generic business, lower gross profit from acquired Citron and Lucid products, combined with a few charges in the generic business that I will cover shortly. On a reporting segment basis, Human Health segment sales were $113.7 million, an increase of over 115% from the fourth quarter of fiscal 2016. The revenue gain was due to the addition of Citron and Lucid products we acquired in December, offset by increased competition and pricing pressure on more mature Rising products. On the nutritional side, our sales were down modestly versus the prior year fourth quarter. The Human Health gross margin was 19%, compared to 31.7% last year. The decline in gross margin was primarily due to the lower gross profit ability of the Citron and Lucid products and lower gross profitability on legacy products, reflecting an unfavorable product mix and price erosion on certain products. We also recorded charges totaling $4.7 million in the quarter, including an impact from the Medicaid inflation-adjusted rebate program, short dated inventory, and amortization of the inventory step-up related to the Citron product acquisition. Gross profit on the other hand increased almost 30% to $21.7 million, reflecting once again the addition of the Citron and Lucid sales. Pharmaceutical ingredient segment sales were $36.2 million a decrease of approximately 15% versus the fourth quarter of 2016. Gross profit in the fourth quarter decreased 28.9% to $5.6 million from $7.9 million in the fourth quarter of 2016, primarily due to lower sales of a high margin API. Our performance chemical segment sales increased $11.3 million to just under $45 million from $40 million in the fourth quarter of 2016, largely due to higher sales of specialty chemical products including pigments, coating and die intermediates. Our gross profit was flat at $9.5 million, reflecting a less favorable agricultural protection product mix. Our SG&A expense for the fourth quarter of 2017 increased from $20.4 million to $26.7 million or 13.7% of sales, which was approximately 140 basis points lower than the fourth quarter of fiscal 2016. The absolute SG&A increase in the quarter was primarily attributable to the amortization of intangible assets and transition and administrative services costs associated with the Citron and Lucid product acquisition. Our investment in research and development in the fourth quarter totaled $2.9 million, compared to $1.7 million in the comparable period last year. As milestone achievements and project initiations remained lumpy on a quarter-to-quarter basis. With our SG&A and R&D growth outpacing our gross profit growth, operating income dropped $7.2 million versus $11.9 million last year and our net income was $2 million or $0.06 per share on a GAAP basis, compared with net income of $6.8 million or $0.23 for the fourth quarter of last year. Our non-GAAP income was $9.6 million or $0.27 per share for the fourth quarter, compared to $10.3 million or $0.35 last year. Our adjusted EBITDA for the fourth quarter was $19.3 million, an increase of $2.3 million or 13% over the same quarter last year. Now looking at the full-year results, the 12-month ended June 2017, our net sales were $638 million, a 14% increase from the $558 million of fiscal 2016. For the full-year, segment sales in Human Health were $315 million, an increase of 38% over last year. Our pharmaceutical ingredients segment sales were $157 million, a decrease of approximately 2.2%; and our performance chemical sales were $165.5 million, a decrease of 2.4%. Gross profit was $140.8 million, a decrease of 1.4%, compared to the gross profit of $142.8 million in the prior year. Our full-year gross margin contracted to 22.1%, a decrease of 350 basis points. Gross profit from Human Health was $78.1 million, an increase of less than 1%. Our pharmaceutical ingredient gross profit decreased 11.4% to $25.5 million, while our performance chemical gross profit increased 2.9% to $37 million. Our SG&A expenses were $102 million or 33% increase in fiscal 2017. Included in the fiscal 2017 SG&A were $8.8 million of transaction cost, $11.5 million of amortization cost, and $2 million of consultant services provided by former Citron and Lucid employees, all in connection with the Citron and Lucid product purchase agreement. Research and development expenses totaled $7.9 million, unchanged versus last year. Operating income was $30.6 million, compared to $58 million, a 43% decrease. For the full-year, reported net income was $11.4 million or $0.35 per diluted share, compared to $34.8 million last year or $1.18 per diluted share for 2016, decreases of 67% and 70% respectively. Non-GAAP net income was $38.7 million, compared to $44 million last year, a 12.9% decrease and non-GAAP earnings per share of $1.19, compared to $1. 05 last year, a 20.7% decrease. Our adjusted EBITDA for the full year was just under $72 million, a decrease of $2 million from fiscal 2016. Turning to the balance sheet as of June 30, 2017, our cash and cash equivalents and short-term investments totaled $57.7 million. Our working capital was $251 million, and shareholder equity was $408 million or $13.55 a share. Our total bank debt and convertible debt was $353.7 [ph] million, including $232 million under our senior credit facility. Our total net leverage ratio was 3.69%. Our trade receivables increased by $97.3 million from the year ended June 30, 2016, reflecting the addition of the Citron and Lucid product purchase acquisition. Our DSOs increased from 83 days from June 30, 2016 to 99 days for the fourth quarter of fiscal 2017. Although we did bring the DSO numbers down by 5 days for the fourth quarter 2017 versus our fiscal third quarter of 2017, the year-over-year increase in DSO was expected and primarily reflects the inclusion of the purchase Citron and Lucid products, which have the longer payment terms than our performance chemicals and pharmaceutical ingredients segment, as well as we had an uptick in our legacy Rising DSOs. Financially, Aceto remains strong with ample capital resources to support our future growth plans and meet our financial obligations. Now turning to our guidance for fiscal 2018, we expect sales and net income growth for the year based on our product launch schedule and the contributions from recently launched products both of which we expect will sufficiently offset the generic industry headwinds. We are currently projecting sales growth of 20% to 25%, reported diluted GAAP earnings per share to be in the range of $0.55 to $0.70, and diluted non-GAAP earnings per share to be between $1.25 and $1.40. This guidance assumes in part that we will launch between 15 to 20 generic products. We see generic product price erosion continuing in the upper single digits and we have exchanged reason in-line with our fiscal fourth quarter 2017 averages. Regarding our R&D spend, we anticipate spending between $10 million and $13 million in fiscal 2018 for our finished dosage form generic pipeline versus our R&D spend of just under $8 million for fiscal 2017. Again as a reminder, our R&D expenditures are milestone based. Now, I’d like to turn over to the operator for questions.

Thank you. [Operator Instructions] Our first question comes from Matt Hewitt with Craig Hallum Capital Group. Please go ahead.

Good morning gentlemen and thank you for taking our questions.

Good morning, Matt.

First of all, looking at the pipeline you’ve got so what is it 39 ANDAs that are currently awaiting FDA approval, a large portion of the total addressable market there is ungenericized markets. I think, in your slide presentation you got 9.6 billion. How many of those are you first to file, and maybe a little bit of color on those opportunities as I see that having the best opportunity from a margin perspective to maybe right size that segment.

So we're here, Doug is here, Walt is here and I am Matt. I will take a quick shot and then I will turn over to Walt. I don't know that we know [indiscernible] [00:25:11] we do know the way we lay this out as, again because we don't know what the competition is working on. So we know that at this moment there is no generics available on blue, which is on our chart. So there is a significant piece and those aren’t a handful of products adding up to about $9 billion or $10 billion worth where there are currently no generics on the marketplace.

Yes. To add to that Matt this is Walt. So, we do have a handful of P4, but I will refer back to the recently launched Atomoxetine, which was also a P4 launch that had four competitors including Rising coming into itself, you know in essence that P4 doesn’t necessarily guarantee that you’re not going to have competition. So, we will look forward to a robust pipeline, but that’s really what it’s looking like for now.

Okay and then I guess moving to the next segment, in the API, that came up a little bit light of our expectations. There have been disruptions with GDUFA, the FDA has gone out hired more inspectors, there’s been disruptions internationally. We have seen other companies speak to this on their last conference call, I would expect that’s creating opportunities for you, is there a lag or is there something else going on that’s maybe or not you haven’t yet capitalized on some of those opportunities?

I think, again our API business as a mix it is a little bit different than some of the other companies that you might follow in that. For the most part, our API business is made up for a lot of let’s say second source opportunity. So, we do have a number and we’ve had in the past a number of first source opportunity than API’s, and that’s where you will see the large ups and downs so to speak. Okay, largely a business could come in, in one short. We don't have too much of that. Our stance will be a little bit more steady. So, I think in our case Matt, we saw nice growth in the API business in 2016, I'm talking about full year now, 2016 over 2015, I think sales and profits were up about 8% each, sales and gross profit. This year, we took a little bit step backward. So, that business for us is more or less consistent, little bit up little bit down and it is not affected by some of the aspects that you have mentioned.

Okay. And then maybe one for Doug and I’ll hop back in the queue. Doug last quarter DSO's and you just spent a little bit of time in your prepared remarks talking about this, DSOs increased, obviously there’s some impact from Citron and Lucid, but one of the things you discussed last quarter was potentially lowering WAC prices, which would obviously have a positive impact on DSO, it doesn't appear that happened in your Q4, is that still something that you’re looking at or have market dynamics changed where it doesn't make sense to mess with WAC pricing? Thank you.

Okay Matt, that’s a great question. I’m glad you asked it. As you mentioned, during my commentary that we actually did realize a five-day decrease in our DSOs from the March quarter. We have affirmatively reduced a few products, the WAC prices and as I mentioned last time when you reduce the WAC prices it causes what is known as a shelve stock, which will slow down your payments, but then once you get through that it should have a favorable increase moving forward. So, we selectively have identified molecules that we took the WAC decrease and there is more to come. We realized a five-day decrease in DSOs this quarter and we expect that trend to continue in the current quarter, because we are having some good collection months or weeks so far in this quarter. So that’s an ongoing process and we still expect to see results from that.

Great. Thank you very much for those details.

You're welcome.

Thank you.

Our next question comes from Steve Schwartz from First Analysis. Please go ahead.

Hi, good morning everyone.

Good morning.

I guess, the first question is just about the pipeline. So if I understand Slide 11 in your current deck, you've got 62 ANDAs that are filed and/or pending approved, launch. And you're calling up 39 ANDAs. So, to me, I read that as there are 23 products that have been approved and are awaiting launch, am I reading those numbers correctly?

That’s correct.

Okay. And then of the 23, you expect to launch 15 to 20 in this fiscal year?

Correct.

Okay. And then so, Sal, if I could ask, let's assume you do 20. You've burned through, right, a good portion of what's in the backlog, so to speak. Looking out a year from now, how do you expect to go into 2019? Do you think your current pipeline will continue to feed through so that we have a similar number of opportunities going into next year? Do you think you'll need to continue to acquire products like you did with Citron?

We think as we go out into fiscal 2019, again so if there is 20 some or 22 that are approved already that means there is another 39 with the FDA waiting for a decision. So, we think those should work their way through the system. We’ve got another 71 that are under development that will continue to get filed and then as we know that we're up in our R&D spend this year versus last and so to keep that funnel full. So, we think basically as we look out over 2018 and 2019 the sheer investment and moment of the products through our funnel should allow us to continue to launching fair number of products.

Okay. And Sal, in your prepared remarks, you talked about pruning the pipeline. And you mentioned 12 products were pruned. Those are essentially ANDAs that had been filed, if I understand correctly?

Hi Steve this is Walter. I will take that one. So those products were actually approved and 10 of the products as Sal mentioned in his earlier comments were what we’re terming as park. So the current market dynamics are very unfavorable to launch. So 10 of the products we are parking if the market dynamics changed and it becomes a more profitable scenario we will certainly launch those at that particular time. Two other products had very, very difficult technical challenges to bring them to market and we just cancelled those.

So what we see from time to time and again more so now as things have changed a little bit in the industry is, you have something in development it works its way all the way through, it gets through the FDA. So if you have done all that right and then you look up and three other people did that right also, and they beat you to the market and that is one of the dynamics in our industry as we just don't know what the other guys are working on. So you make assumptions based off of history and some of them just turn out to be not right timing by the time you are getting ready to launch.

Okay. I pulled up a presentation from June of 2016, so roughly a year ago. And at that time you were showing 49 ANDAs. So did the differential intend where we stand today did those get approved, did you decide to pull those, what’s happened with the classification there?

I am not sure we had said 49 ANDAs, what [indiscernible]?

It had been filed. This was a June 8 presentation for a conference and I think you had shown 49 ANDAs filed with the FDA.

Steve these particular 10 that we are referring to are 10 that came to us through the acquisition of Citron products so those are the 10 we are referring to.

And I understand and thank you for the qualification on those, but…

Steve, I will have to go back and check, I imagine they were approximately launched over the course of the past, you said it was June of 2016 right, so…

Right, right.

[Indiscernible] [00:34:34] we may have cancelled a couple or two, I just have to go back and check.

Okay, okay. And so there's been news that the FDA issued draft guidelines for serialization, and there was a one-year extension. It sounds like from the prepared remarks that you guys are not particularly benefiting from that extension, or am I missing that?

Hi Steve, this is Walt. I will tackle this one first and if Sal wants to add-on he certainly can. So there really wasn’t an extension of the law, it was more of a ruling that suggested that there was not going to be any enforcement if you were not there. So, we are continuing to move forward with our partners to be ready for the serialization, which is if I have my date correct, November 27 of this year. So, we want to be ready for it and if there is a great period of 12-months and that’s what it’s being referred to as a grace period, so be it, but we really do want to be ready for that event on the 27 of November.

That's exactly it.

Okay, I get you on that. And then lastly, if I could ask, with respect to the timing of earnings through the year and how your product launches will go, do you think of - it's a progressive ramp from first quarter through fourth? Or do you think it see-saws? Or can you offer some perspective?

Yes, it’s hard to be precise on this, but I think we are seeing at this point that most of those are [indiscernible] [00:36:14] I think it is Q2 and Q3, again it could be slippage, which happens sometimes, but I think for the most parts it would be Q2 and Q3.

Okay that sounds. Thank you gentlemen for all the color. Appreciate it.

Sure, thank you.

Our next question comes from Dewey Steadman with Canaccord. Please go ahead.

Good morning guys and thanks for taking my questions. I guess on the overall corporate gross margins, I know you guys don't give guidance on gross margins, but with the step down from 3Q to 4Q, should we look at that as the new bees going forward, the sort of the adjusted gross margin around 24% or is it something where we could see normalization as the portfolio sort of stabilizes?

Yes. I think that’s a fair way to look at it. I think we’re going to be - you're going to see going forward somewhat consistent with or in the range of what we’re showing for the full year. There is 22 and you just mentioned 24, so I think we’re in the low 20 region on a consolidated basis.

Consolidated adjusted basis?

Adjusted. I’m not aware of any adjustments within gross margin next year.

Okay. I mean normally on a quarterly basis you take out amortization and then there is one other item that you pick up there.

That’s below that line.

Okay.

We don't include our amortization and depreciation in gross profit, it’s below the line.

Okay. And then I guess on the performance chemicals business or on the chemicals segment, with the looming breakup of Platform and I know your business is a little bit different than Platform, but the breakup of Platform into an ag company and then a performance chem. Company, does that trade any opportunities for you or does it change the dynamics of your operating environment in the wake of that?

To be honest Dewey I am not sure. I know Platform specialties, but I don't know how that might or might not affect us. I imagined it wouldn't have really any effect on the way we operate the business or the business at all. But the question is getting at something different that I'm not understanding.

No, no, it’s just thinking about how that business would react to the new competitor in that market essentially and operating independently.

It’s got, a we are distribution for the most part in that business; and b, we have plenty of competitors to begin with. So, I don't see a change in much at all.

Okay. And then in this consolidated environment of payers with 100 and some odd labelers [ph] out there in the US market and with three or four major buyers, do you see continued opportunities to consolidate and obviously you’ve made some acquisitions recently, are there other opportunities that you see out there that could bulk up the business or change the dynamics of your business on the Human Health side?

So there are other opportunities out there both in terms of companies and product lines. I think for us right now, we’re going to continue to focus on getting the Citron and Lucid, the former Citron and Lucid products totally integrated. The systems are up and running, the warehouse and all the things we kind of talked about, up and going to pay down some debt and then we will come out and look for the next company acquisition. It would be in my thought there. Maybe there is a product line or two that we pick up over time, but in the near-term, near-term in my mind say the next 6 to 12 months, I would expect us to be quite on the company acquisition front.

Okay. And how should we look at as SG&A expense moving forward? I mean you guys don't give guidance obviously, but there has been a steady step up obviously because of the Citron and Lucid acquisitions, but it continued to rise from 3Q to 4Q, do you see this leveling off as we head into 2018 or are there additional increases that we should see sequentially?

I think as our SG&A as a percentage of sales should not increase going forward. We need to as Sal and Walt spoke about before, we see some cost synergies once we fully integrate the Citron or rising products in the form of headcount and warehouse savings. So, I think what you'll see is an improvement there as a percentage of sales.

All right great. Thanks guys for taking the question.

Thank you.

Thank you.

Our next question comes from Adam Peck with Riverwater Partners. Please go ahead.

Good morning guys. Thanks for taking the questions.

Good morning.

Sal you referenced, you look at larger more diverse products with larger potential returns, so are there any of those in the pipeline now?

Yes they are definitely are. In fact some of the - if you go back a quarter or two and compare the pipeline then to the pipeline now, some of the changes that you see in there include some products that are more complicated and larger. I believe that [indiscernible].

Sal you are absolutely right and we’re continually going to be looking for strategic differentiators in the pipeline products. I can't remember who it was, either Steve or Matt already asked the question relative to the API situation and the FDA being more stringent in there in their reviews of the particular plant and does that create any opportunities and we do think that does from a strategic perspective not only for our API business, but also as we leverage our API footprint globally, which we’ve discuss - strategically doing and in turn using that for our finished goods portfolio as well. So, we think there is some good opportunities out there.

Okay. Thanks Walt. And Walt on the 71 on file, does that number to include multiple dosage forms of the same drug anywhere?

No.

And then Doug, what was CapEx this past year?

Once we release the K, which should be later today it was just short of $2 million.

2 million. Okay. And then Doug my last question is, I am looking at the reconciliation table and there was roughly $27 million difference last year between GAAP and non-GAAP, I know that included like 8 million of transaction cost and then a step-up in inventory was about 4.5. So, I would expect the delta between GAAP and non-GAAP to be lower than what your guidance is giving, can you give any color on what the one-time cost differences would be in 2018 between GAAP and non-GAAP?

I think you will see a full year of amortization of Citron and Lucid, right. So right now in our six months, pardon me in our 2017 numbers you only have six months, you won't have transaction cost next year and you won't have inventory step up next year.

Got it. So the amortization will overtake - will come in and then the transaction and the step-up will be gone and then that would result in roughly, I think it’s about $2.5 million drop between the difference between the two?

Okay. I think Jody defines what our non-GAAP.

I think I am clear. Great. Thank you guys appreciate it.

Sure, thank you.

Our next question comes from Greg Eisen with Singular Research. Please go ahead.

Thank you. Good morning gentlemen.

Good morning Greg.

You mentioned for this quarter gross margin in Human Health was affected by price erosion, and you’ve had it all, obviously every quarter this year, can you tell us what percentage price erosion you experienced this quarter and my follow-up surrounds next year's price erosion.

Yes Greg, this is Walt. I’ll take that. We tracked price erosion not only obviously for our own portfolio, but the market overall and what we’ve seen sequentially from first fiscal quarter to current fiscal quarter, not only for the market, but for our portfolio is a little bit of a mitigating price deflation factor, so it is mitigating as the quarters on throughout the year, but one thing I want to make sure that it’s clear that we’re certainly not calling a bottom to the price inflation. There still are some events that are occurring out in the marketplace with the customer consolidation that have yet to be fully vetted. So, it is - once again it’s mitigating, but it’s not over yet.

Understood. And my follow-up to that is, you referenced high single-digit price erosion in expectations for fiscal 2018 and this year you’ve called out there is some specific products that had unique circumstances that caused them to have price erosion and they were highly profitable, previously, so their margin contribution was severely cut, and that was the one factor that you described as hurting you the most earlier this year. As you look at next year, is the price erosion centered around any particular product, or is it really at an across the board environmental backdrop to your business?

Right, at this point it is going to be more of an environmental backdrop because our portfolio as it exists now is very diverse and very broad. We do not have one single product that accounts for greater than 10% of net sales or 10% gross profit of the entire book. So, it’s well diversified. So, we're not going to be subject to the big hits that have occurred in the past.

Understood. And that’s helpful, but that also describes industry environment where there is price pressure really for your competitors also, as well as you kind of across the industry environment, is - how long do you see this lasting, is this really just a fiscal 2018 event or should we expect, I guess I was expecting ongoing lower end to the single-digit range price erosion, not high single-digit ongoing, is this range of the high single-digit something we should expect kind of add infinite item until further notice in the industry?

We hope not. I would say that typically we used to see, you know before kind of this intensified competition and price erosion we would see on the existing product line somewhere 3%, 4%, 5% per year price erosion and that was kind of normal. So part of our industry is price erosion, you launch a product, your grabs here depending if you are first or the fifth, it will determine a, the price; and b, the share, but then it’s just an industry where there is generally erosion. So that I’d say we should expect that’s part of the business model. The elevated levels [indiscernible] high single digits, hard to tell exactly about as Walt said, we think it’s beginning to mitigate. We know we can’t pinpoint exactly where the bottom is, we were talking about this, it is almost like a recession you know it. When you look back you know where the bottom was, but we do think it’s beginning to mitigate. I can’t tell you if we are at the bottom, but it feels like it’s going to get a little bit better.

Yes Greg and just to add a little bit more to that. We do feel like this business is cyclical and if you look back at our industry, if you look back 10 years there is a lot of correlations between what happened in the injectable market 10 years ago and what’s going on now. So when you look at those parallels in the historic events that have occurred, you can’t see that it potentially is going to mitigate out, which we’re seeing some signs of that, but once again as I alluded to there is a couple of events, predominantly the [indiscernible] and the of further clarification of the ClarusONE situation that needs to flush out of the system and once those are done then I think we are in a better position to really start mitigating some of these price declines.

Understood. And if I could just ask one quick question about the pipeline, 15 drugs to 20 new drugs is your goal to launch new genetics this fiscal year, maybe I didn't/wasn't hearing correctly, so please tell me if I misread it, where these all coming from the acquired Citron product line or how much of those might be from the legacy rising R&D pipeline, I wasn't sure if that was pointed out?

No, we didn’t point that out. So, it comes from both. I think it is roughly 50-50. Again depending on exactly whether it is 15 or 20, but roughly we are expecting 50-50.

Good. Okay. And now of course you just called it Rising, and at some point everything will just be referred to as Rising once you fully integrate it, I realize that, but…

Internally we have heard everything is Rising now, but just because the acquisition is still only six months or eight months old, we are providing a separation right now.

Good. Appreciate that. I will let someone else go. Thank you.

Thank you.

[Operator Instructions] Our next question is from Daren Heitman with Azarias. Please go ahead.

Good morning. I wanted to follow-up on the longer term outlook from margins, do you think that there is eventually some recovery in your gross margins on a corporate basis or beyond fiscal 2018, and what would drive that?

So I think there is and I think there is few things. One, starting with maybe the performance chemicals and Pharma ingredients businesses, you know those we've in particular the performance chemicals we’ve optimized over the last number of years and there may be a little bit of - maybe a little bit of room to move those up over time, but not much, but I think on the generics space businesses do go through kind of cyclical situations. This one, I’d say is a combination of some structural changes, meaning the consolidation that we saw amongst the customers at wholesales et cetera that’s changed and I think there’s just a structural change that we’re going to have to live with going forward, but then there’s also just part of this cyclical nature of businesses, and I think what happens over time is some weaker players flush out. As I mentioned, I think we’ve become a more logical supplier to the industry with the expanded commercial and pipeline portfolio now. And the stronger ones, you carry on. So, I think as we get through this kind of downturn that we’ve - we as an industry have been monitored in, I do think through new product development, as well as taking advantage of opportunities as they arise we can begin to raise the margins and not to mention, I think we’re pretty much fully staffed and as we grow we can leverage some of the SG&A to. So, I think there are opportunities, but it’s going to take a little bit of time at least through fiscal 2018 to flush through that.

Okay. Thank you.

This concludes our question and answer…

Okay. Thank you so much. I really appreciate the time, the attention, and the questions. Appreciate all the support and we look forward to speaking with everyone again in November, after the end of the first quarter. So thank you so much.