Hi-Tech Pharmacal Reports Q4 Sales of $58.5M vs. $66.3M Est., Adjusted EPS of $0.50 vs. $0.63 Est.

Hi-Tech Pharmacal Co., Inc.

today reported results for the fourth quarter and year ended April 30, 2013. Net sales of $58.5 million for the fourth quarter compared to $61.3 million for the same prior year period GAAP loss of $4.6 million or $0.34 per diluted share for the fourth quarter Adjusted non-GAAP net income of $6.9 million or $0.50 per diluted share for the fourth quarter Net sales of $232.4 million for the fiscal year compared to $230.0 million for the same prior year period GAAP income of $16.3 million or $1.19 per diluted share for the fiscal year Adjusted non-GAAP net income of $31.0 million or $2.28 per diluted share for the fiscal year Fourth Quarter Fiscal Year 2013 2012 2013 2012 Net sales $ 58,473,000 $ 61,292,000 $ 232,384,000 $ 230,003,000 GAAP net income $ (4,617,000 ) $ 9,989,000 $ 16,251,000 $ 48,351,000 Adjusted non-GAAP net income $ 6,868,000 $ 11,033,000 $ 31,049,000 $ 51,796,000 GAAP Diluted EPS $ (0.34 ) $ 0.73 $ 1.19 $ 3.59 Adjusted non-GAAP Diluted EPS $ 0.50 $ 0.81 $ 2.28 $ 3.85 (see Table I for reconciliation to GAAP numbers) Fourth Quarter Results For the three months ended April 30, 2013, the Company reported net sales of $58,473,000, a decrease of 5% from $61,292,000 for the same period last year. During the quarter ended April 30, 2013, net sales of generic pharmaceutical products were $48,906,000, a decrease of 7% compared to $52,699,000 for the same fiscal 2012 period. The primary reason for the change was a decrease in sales of Fluticasone Propionate nasal spray. Sales of Fluticasone Propionate nasal spray totaled $19,600,000, down from $28,400,000 in the same fiscal 2012 period due to lower average prices. New product launches such as Nystatin oral suspension, Lidocaine 5% ointment, Levetiracetam oral solution, and Paregoric partially offset this decline in sales. Sales for the Health Care Products division (“HCP”), which markets the Company's branded OTC products, decreased 7% to $4,912,000 for the three months ended April 30, 2013 compared to $5,265,000 for the same fiscal period in the prior year. The decrease was primarily due to lower sales of Diabetic Tussin® which was partially offset by an increase in sales of MagOx®. Sales for ECR Pharmaceuticals (“ECR”), which markets the Company's branded prescription products, were $4,655,000 for the three months ended April 30, 2013, up 40% from $3,328,000 for the same period in the prior year. The increase was due to increased sales of TussiCaps®, which was acquired in fiscal 2012. Higher sales of Bupap® also contributed to this increase in ECR sales for the quarter. Cost of goods sold increased to $31,182,000 for the three months ended April 30, 2013 from $29,461,000, and increased as a percentage of sales to 53% from 48% of sales. The increase in cost of goods sold as a percentage of net sales is primarily due to pricing declines for Fluticasone Propionate nasal spray. This trend was partially offset by launches of new generic products with above average margins and increased sales of higher margin products in the ECR subsidiary. Selling, general and administrative expenses increased to $14,700,000 from $13,731,000, a 7% increase compared to the same fiscal 2012 period. The increase was primarily due to additional selling and marketing expenses in the ECR subsidiary. As a percentage of sales, SG&A increased to 25% from 23% for the three months ended April 30, 2013. Amortization expense for the quarter ended April 30, 2013 was $1,606,000, a slight decrease from $1,618,000 for the comparable fiscal 2012 period. For the three months ended April 30, 2013, Research and Development costs increased by 5% to $3,552,000 from $3,372,000 for the comparable fiscal 2012 period as a result of increased spending on internal projects for the generic division, which include five projects that require clinical trials. Clinical trials for two of these projects were ongoing during the quarter. In the fourth quarter of 2013, the Company established a $15,500,000 settlement and loss contingency accrual to cover potential settlement or other outcomes in connection with the investigation by the Texas Health and Human Services Commission relating to the submission of price information. Additionally, the Company established a $700,000 accrual for the settlement of a class action lawsuit relating to the advertising of Nasal Ease®. The Company reported adjusted non-GAAP quarterly net income of $6,868,000 or $0.50 per fully diluted share for the three months ended April 30, 2013, compared to adjusted non-GAAP net income of $11,033,000 or $0.81 per fully diluted share for the same period in the prior year. Full Year Results For the fiscal year ended April 30, 2013, the Company reported net sales of $232,384,000, an increase of 1% from $230,003,000 for the same period last year. Sales of generic pharmaceutical products were $196,262,000, a decrease of 1% compared to $197,877,000 for the prior year. The decrease was primarily due to pricing declines of Fluticasone Propionate nasal spray. Sales of Fluticasone Propionate nasal spray decreased to $86,100,000 for the current fiscal year versus $99,400,000 in the previous fiscal year as the Company sold more units at a lower average price. The Company benefited from recent product launches such as Nystatin oral suspension, Lidocaine 5% ointment, Levetiracetam oral solution, and Paregoric which helped offset lower sales of Fluticasone. Sales for the HCP division, which markets the Company's branded OTC products, increased 3% to $17,700,000 for the fiscal year ended April 30, 2013 compared to $17,234,000 for the prior year. Stronger sales of Mag-Ox® led the increase in addition to sales of Sinus Buster®, which was acquired in the prior year. ECR, which markets the Company's branded prescription products, contributed $18,422,000 in sales for the full fiscal year, up 24% from $14,892,000 for the fiscal year ended April 30, 2012. The increase was due to higher sales of TussiCaps®, which was acquired in fiscal 2012. Increased sales of Bupap® and DexPak® also contributed to this increase in ECR sales for the fiscal year. Cost of goods sold as a percentage of sales was 50% for the year ended April 30, 2013 compared to 44% for the year ended April 30, 2012. Pricing declines for Fluticasone Propionate nasal spray were partially offset by launches of new generic products with above average margins as well as increased sales in the higher margin ECR subsidiary. Selling, general and administrative expenses increased to $53,575,000 from $44,698,000 primarily due to an increase of $4,428,000 in selling, marketing and severance costs at the ECR subsidiary as the Company restructured its sales organization. Additionally, advertising expense increased to $10,603,000 in fiscal 2013 from $8,864,000 in fiscal 2012 primarily to support the re-launch of Nasal Ease® and the newly acquired Sinus Buster® brand in the HCP division. Amortization expense increased to $6,742,000 from $5,341,000, a 26% increase compared to the same fiscal 2012 period. The increase was due to intangible asset purchases over the last fiscal year which includes TussiCaps® and Sinus Buster®. Research and Development costs increased by 41% to $17,331,000 from $12,256,000 as the Company increased spending on internal projects for the generic division. Additionally, the Company increased expenditures on five projects requiring clinical trials, four of which it has undertaken with partners. Clinical trials for three of these projects were ongoing during the year. Royalty income decreased to $1,789,000 from $3,000,000 primarily because royalties on sales of certain divested products came to an end in June 2012. In the fourth quarter of 2013, the Company established a $15,500,000 settlement and loss contingency accrual to cover potential settlement or other outcomes in connection with the investigation by the Texas Health and Human Services Commission relating to the submission of price information. Additionally, the Company established a $700,000 accrual for the settlement of a class action lawsuit relating to the advertising of Nasal Ease®. Adjusted non-GAAP net income decreased to $31,049,000 or $2.28 per fully diluted share in fiscal 2013 compared to adjusted non-GAAP net income of $51,796,000 or $3.85 per fully diluted share for the prior year. David Seltzer, President and CEO, commented: “The Company showed growth while facing several challenges along the way. Pricing of Fluticasone Nasal Spray, our best selling product saw steeper price declines than we expected throughout the fiscal year. However we continue to reduce our costs to partially offset this pricing decline. In addition, we had some one-time expenses associated with restructuring the ECR sales force under new leadership of Dr. Cameron Durrant. In our Health Care Products division, we spent more heavily on advertising to promote consumer products Nasal Ease® and Sinus Buster®, which we acquired last year. We believe that the investment we made in each of our branded divisions will enable them to grow and become more profitable. The increase in research and development spending in our generic division enabled us to build a pipeline of products developed in house and some recently licensed products which will drive our future growth.”