Yahoo Finance Akorn (AKRX) Q2 2019 Earnings Call Transcript
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Akorn (NASDAQ: AKRX)
Q2 2019 Earnings Call
Aug 01, 2019, 9:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to Akorn second-quarter 2019 financial results call. [Operator instructions] As a reminder, today's conference is being recorded. I would like to turn the conference over to Jennifer Bowles, Akorn's senior vice president of strategy and investor relations. Please go ahead.
Jennifer Bowles -- Senior Vice President of Strategy and Investor Relations
Thank you. Good morning, and welcome to Akorn's second-quarter 2019 earnings conference call. I'm joined today by Douglas Boothe, Akorn's president and chief executive officer; and Duane Portwood, Akorn's chief financial officer. The second-quarter press release is available on the Investor Relations portion of Akorn's website.
On today's call, Doug will first provide a business update and then Duane will review the company's second-quarter 2019 financial results. We will then open the call to your questions. As a reminder, the conference call and webcast are being recorded and will be available on Akorn's Investor Relations website shortly following the conclusion of today's call. Before we begin, I would like to remind everyone that any statements made on this call that express the belief, expectation, anticipation or intent as well as those that are not historical fact are considered forward-looking statements and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.
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A description of these risks can be found in the Risk Factors section of Akorn's most recent annual report on Form 10-K as updated by Akorn's subsequent filings with the SEC. The forward-looking statements on this call speak only as of today's date and Akorn assumes no obligation to update forward-looking statements as a result of new information or further developments. With that, I'd like to turn the call over to Doug.
Douglas Boothe -- President and Chief Executive Officer
Thank you, Jennifer, and good morning, everyone. I'm happy to share with you an update on our business and review the progress we've made during second quarter. As outlined in the press release issued earlier this morning, our second-quarter revenues and adjusted EBITDA both showed improvement over the first quarter of 2019. Improved product availability, particularly from our Somerset site, contribute to the sequential improvement.
Companywide focus on sales planning, operations and quality metrics across all sites drove our back orders as of the end of the quarter to multiyear lows. While we continue to have room to improve, I'm very proud of what the team has accomplished so far this year. I like to highlight two recent product launches, Loteprednol Etabonate Ophthalmic Suspension, 0.5% and Dicyclomine Hydrochloride Injection. Both of these products were launched right at the end of the second quarter.
As discussed previously, Loteprednol is the first to market generic and highlights our ability to execute on development and manufacturing of complex ophthalmic suspensions. While our available inventory has been limited, we are pleased to provide patients with an FDA-approved alternative to the branded drug. Dicyclomine injection is a new Akorn generic launched out of our Decatur facility. The approval for Dicyclomine was received last May before we received the Form 483 related to inspection that was ongoing at that time.
While the timing of these launches was such that the contribution in the quarter was small, the launches themselves are important accomplishments that highlight our ability to bring differentiated new products to market. The full-year contribution from these new products has already been factored into our guidance. I would now like to address the Somerset warning letter that we received in June. This warning letter was related to an inspection at our Somerset, New Jersey, manufacturing facility that took place in July and August of 2018.
Following that inspection, the FDA issued a Form 483 with observations related to items, such as quality systems, laboratory controls and production processes. Akorn responded to the FDA in September of 2018 outlining the actions that will be taken to address the agency's observations. The warning letter indicates that the FDA was not satisfied with our initial response and request a number of additional actions, such as comprehensive independent assessments of several aspects of our processes and systems, risk assessments and retrospective reviews of historical activities as well as updates on specific investigations and other items. While we are disappointed to receive this warning letter, we had planned and had already initiated some of the activities requested as part of our global compliance initiatives.
And in July, we submitted our formal warning letter response to the FDA, committing to complete the majority of the activities requested in early 2020. Activities related to the Decatur 483 and warning letter received earlier this year are on track to reach essentially full completion by the end of this year. While we still have work to do to complete all the FDA compliance-related improvement activities, with the QSCAP in place and a companywide support, we now have a strong governance model and the right team to ensure sustainable compliance and harmonization of best practices across our global network. As I've said before, we understand there is much work left to do as we continue to rebuild trust and credibility with all of our stakeholders.
However, we are pleased with our progress to date and are confident in the fundamentals of the business and as such, we are affirming our revenue and adjusted EBITDA guidance for the full fiscal-year 2019. We believe that we are on the right track to get back to running our company with the freedom to operate and a focus on creating value for all of our shareholders. I will now hand the call over to Duane for a review of our financial results, the refinancing activities and the recent agreements in principle to settle the shareholder class actions. Duane?
Duane Portwood -- Chief Financial Officer
Thank you, Doug, and good morning, everyone. I trust you had a chance to read the press release we issued earlier this morning outlining Akorn's second quarter and first-half 2019 unaudited financial results. Please note that we intend to file our second-quarter 2019 Form 10-Q by the end of this week. When discussing our financial results this morning, I will be referring to a number of non-GAAP figures.
Please refer to today's press release for our GAAP to non-GAAP reconciliations and a listing of items included in our adjustments. Starting with our second-quarter results, our financial results and year-over-year comparisons continue to be impacted by a combination of factors, including industry headwinds, in particular, increased competition for key drugs as well as the more unique impact of the cost of CGMP enhancements and legal and advisory fees. However, as Doug noted, we are pleased with the sequential improvements we have seen in the second quarter, which we believe reflect continued progress and traction we are seeing across some of our operational enhancement initiatives, in particular, better product availability. With that, net revenue for the quarter ended June 30, 2019, was $178 million, a decrease of 6.7% from the prior-year quarter.
The $13 million decrease was driven by two main factors. First, revenue was negatively impacted by lower volume due to continued competitive pressures on a number of products, such as fluticasone, Methylene Blue and Clobetasol Cream. In addition, volume was hampered by supply shortfalls due to our continued production ramp up at our Somerset manufacturing facility. Favorable price somewhat offset these volume declines.
Sequentially, net revenues increased by $12 million or 7.3% from the first quarter, primarily due to a combination of improved product availability and pricing on selected products. Gross margin for the second quarter was 38.2%, compared to 42.6% for the prior-year quarter. This decrease in gross margin was primarily driven by the cost of FDA compliance-related activities, which was $12 million in the quarter compared to a negligible amount of cost in the prior year. Please note that, while these costs are included in our adjusted EBITDA results, we do call them out separately as we consider the amount of effort currently under way to be unusually high as we address the Decatur and Somerset warning letters and other CGMP enhancement opportunities.
Increased inventory write-offs also had a negative impact on margin rate and these pressures were somewhat offset by favorable price versus the prior year. On a sequential basis, gross margin improved to 38.2% in the current quarter from 32.6% in the first quarter, mainly due to favorable price and product mix, along with increased manufacturing outputs, supported by the Somerset ramp up relative to the first quarter. SG&A expense was $61 million for the first quarter of 2019, compared to $84 million for the prior-year quarter. The $23 million decrease was driven by lower legal expenses associated with the Delaware action and lower expenses related to our data integrity assessment effort relative to prior year.
These increases were somewhat offset by increased expenses for refinancing advisory fees. Please note that these aforementioned expenses are excluded from our adjusted EBITDA. R&D expense for the second quarter of 2019 was $9.5 million, compared to $11.4 million in the second quarter of 2018, reflecting lower spend on labor and projects. GAAP net loss for the second-quarter 2019 was $112 million or $0.89 per diluted share, compared to GAAP net loss of $88 million or $0.70 per diluted share for the same quarter of 2018.
After a net adjustment of $109 million to net loss for non-GAAP items, adjusted diluted earnings per share for the second-quarter 2019 was a $0.02 loss, compared to $0.10 income in the same quarter of 2018 after net adjustment of $101 million to net income for non-GAAP items. Included in the $109 million net adjustment for the second quarter of 2019 is a $74 million charge related to the agreement in principle to settle the shareholder litigation. Further, included in the $101 million net adjustment for the second quarter of 2019 was a $65 million impairment charge. Our adjusted EBITDA for the second quarter of 2019 was $22 million, compared to $35 million in the prior-year quarter.
The decrease in adjusted EBITDA from the prior-year quarter is primarily the result of higher FDA compliance-related activities as previously discussed. These costs are not adjusted out in our calculation of adjusted EBITDA. Sequentially, adjusted EBITDA improved to $22 million from $10 million for the first quarter as a result of higher net revenue and increased manufacturing output. Please refer to the reconciliation tables in the press release for the non-GAAP measures.
Turning to the balance sheet, our cash balance at June 30, 2019, was $178 million, down approximately $6 million from March 31, driven by $7 million spend on capital expenditures. For the second quarter, we generated positive operating cash flow even with approximately $19 million expended on FDA compliance, data integrity and refinancing activities. Year to date, we have used $29 million of cash from operations, driven by approximately $41 million expended on FDA compliance, data integrity and refinancing activities. With a debt balance of $844 million on a trailing 12-month basis, our net debt-to-adjusted-EBITDA ratio was approximately 30.9 at June 30, 2019.
Now I'd like to provide an update on our refinancing efforts. As discussed previously, the standstill agreement we entered into during the second quarter with our lenders requires us to refinance or enter into a comprehensive amendment by mid-December. Additionally, the standstill agreement had a number of impacts on our current financial statements and results. First, the term loan, which is, due in April 2021, is now reflected as a current liability given the need to amend or refinance by mid-December of this year.
Additionally, the standstill agreement increased our interest rate 150 basis points. And lastly, given the mid-December refinance date, we have accelerated the amortization of the deferred financing fees from the term loan as well as the standstill agreement fees in order to fully amortize those amounts by December 2019. With the second quarter now behind us, we will begin discussions and information sharing with parties interested in providing capital as part of the term loan refinancing. There has been a significant amount of inbound interest, and we will evaluate, along with PJT Partners and other advisors, a number of capital structure options over the next few months.
Finally, you may have noticed that our asset-backed line of credit or ABL expired on July 16. Given our healthy cash balance and expected operating results, we believe that we have sufficient liquidity at this time and chose not to replace the ABL. We will consider new ABL within the context of the overall refinancing that we expect to complete before the end of the year. As described earlier this week in an 8-K and in our press release this morning, we have reached an agreement in principle to settle the securities class action litigation.
While there are a number of steps before this can become finalized, this was a critical step toward resolving this uncertainty and doing so in a way that is cash neutral to the company in the near term. As disclosed in the 8-K, the agreement has three main components: First, we had insurance policies in place, which could provide up to $30 million to the plaintiffs; second, we will issue our remaining authorized but currently unissued shares or about 6.5 million shares to the plaintiffs; and finally, we would issue a contingent value right or CVR that would entitle the plaintiffs to receive future cash payments if our profitability or EBITDA exceeds certain thresholds. These future cash payments would not exceed $12 million in any annual period and won't exceed $60 million in total over the term of the CVR, which could be up to seven years. As a result of this agreement in principle, we recorded a charge of $74 million in the second quarter.
Turning to our outlook for the full year, we are pleased with our recent progress and remain confident in the fundamentals of the business. As a result, we are affirming our revenue and adjusted EBITDA guidance for the full-year 2019. Please refer to the reconciliation tables in the press release for non-GAAP measures. As you may recall, net revenue for the year is expected to be in the range of $690 million to $710 million and adjusted EBITDA is expected to be in the range of $71 million to $86 million.
There are a few moving parts on some of the other guidance amounts. Net loss is now expected to be in the range of $273 million to $258 million. The increased loss from our initial guidance is primarily driven by the charge related to the securities class action litigation nonbinding agreement in principle. As a result of the Somerset warning letter, we now expect approximately $50 million for FDA compliance-related and data integrity assessment expenditures, an increase of $10 million from our initial guidance.
Finally, we continue to expect approximately $40 million in capital expenditures for the year. Our full-year outlook -- I'm sorry, our full-year 2019 outlook anticipates building on the momentum generated in the first half with our strongest adjusted EBITDA contribution expected in the fourth quarter. Thank you, and with that, I'll turn the call back over to Doug.
Douglas Boothe -- President and Chief Executive Officer
Thanks, Duane. Our improved financial results demonstrate continued progress and more importantly, reinforce that we are reestablishing the organizational capabilities and the confidence needed to achieve our long-term objectives. This organizational momentum, which originates from improved operational and quality metrics should ultimately provide the financial flexibility to expand investment in our people, facilities, internal pipeline and business development opportunities in support of long-term growth. As I said before, 2019 is the year that we get back to operating our company in the best interest of Akorn and all of our stakeholders.
Importantly, we are taking steps to restore our freedom to operate by addressing our capital structure and resolving litigation overhangs. Since joining Akorn in January, I repeatedly emphasized to our associates the importance of leading, managing and owning the operational quality and compliance activities necessary to improve our standing with customers and external stakeholders. I'm excited about the opportunities that lie ahead for Akorn. I would now like to open the call for questions.
Questions & Answers:
Operator
[Operator instructions] Our first question comes from the line of Gregg Gilbert with SunTrust.
Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst
I have a few. I want to start, Duane, with a couple of simple model questions. First, on failure to supply, what was the effect of that on revenue in the first quarter -- in the second quarter, I'm sorry?
Duane Portwood -- Chief Financial Officer
It was about a little less than $5 million, Gregg. It's included in the tables that we include in the press release, but it was about $4.7 million for the quarter.
Douglas Boothe -- President and Chief Executive Officer
About a $1 million improvement from prior quarter.
Duane Portwood -- Chief Financial Officer
Yes, down about $1 million from Q1.
Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst
Nice improvement on gross margin from 2Q to -- from 1Q to 2Q. Are you still expecting that to improve sequentially over the remainder of the year? Did you get more of the improvement more quickly than you thought on gross margin?
Duane Portwood -- Chief Financial Officer
Yes, we are pleased with the gross margin change from the first quarter. You're not going to see that kind of step change going into the back half of the year. We do have -- I know it's a little bit confusing for everybody, but we do have remediation cost in there. A lot of that is out of the way but there's still some more spend to go.
To the extent that margin improves, it will probably more directly be a result of those remediation costs coming down.
Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst
OK. Great. Just a couple more and I'll get back in line. The favorable price comments you made guys are intriguing in light of an industry that's talking about the opposite.
Can you talk about the year-over-year favorable price and whether that was driven by just a few products or is it more broad-based and basically speak to the sustainability of that theme given that it's counter to what most people think about right now?
Duane Portwood -- Chief Financial Officer
Yes. It's not broad-based as I mentioned before, and we do have volume pressures as it relates to competition. And in this space, volume and price can come -- can become somewhat interchangeable. You have to lower price to keep volume or if you don't want to lower price, you lose the volume.
So those pressures remain as it relates to the price favorability, that's related to some pricing actions we took on a small number of products.
Douglas Boothe -- President and Chief Executive Officer
I think also just mix as product availability of some of the products in Somerset and Decatur come back online. They bring with them also good pricing.
Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst
Great. And Doug, maybe I could get you to comment on a couple of new products that could be launched in generic Restasis and generic Durezol. Anything you could comment on those would be helpful.
Douglas Boothe -- President and Chief Executive Officer
Sure. Again, these are the products -- are in our guidance for 2019. We are responding to deficiency we received on Durezol and then on Restasis, we're still working on the activities, so those are more 2020 activity.
Operator
And our next question comes from the line of Elliot Wilbur with Raymond James.
Elliot Wilbur -- Raymond James -- Analyst
Just a couple of financial questions up front for Duane, specifically with respect to operating cash flow positive in the quarter, given the expected sequential positive movement in adjusted EBITDA over the balance of the year, would it be reasonable to assume that the company would generate positive operating cash flow in the second half? And then just real quickly, on the securities class action settlement, a component of that is sort of tied to share -- option-related share issuance based on share -- options that may expire. I'm just trying to figure out sort of what the cap could be in terms of the maximum number of shares that would be issued pursuant to that provision of the settlement.
Duane Portwood -- Chief Financial Officer
Yes. So on your first question, we're pretty darn pleased with the cash performance in the second quarter. I would expect that trend to continue. Obviously, we have some vague reasons how net working capital may change.
Net working capital is kind of a neutral impact in the second quarter not held, not much of a hurt. So as long as that continues, which we'll make every effort to make that happen and I would expect continued better cash performance as the year progresses. As it relates to the component of the agreement in principle that calls for expiring options to go to the plaintiffs, that would add another, I think, roughly 3 million shares to the -- about 2.5 million to 3 million shares to what they would get. And that's over about a five-year period.
Elliot Wilbur -- Raymond James -- Analyst
OK. That's helpful. A couple of questions for Doug as well. I guess with respect to the warning letter on Somerset and particularly some of the request from the FDA around what looks like on paper to be fairly extensive, historical data integrity investigations, how much of that is actually new or incremental with respect to what FDA is looking for versus what you already had in place or what the company has been working on for the past several years?
Douglas Boothe -- President and Chief Executive Officer
Working on the data integrity portion, we're pretty much at the end of line on that. We've been through that and through a independent third party who's been supporting us. They definitely asked for some retrospective work just to maintain justification for products on the market, which are investigations such we've been following. So that work is again, why also we believe the time frame to complete the warning letter items is a shorter time frame than in the past.
Elliot Wilbur -- Raymond James -- Analyst
OK. And given the existing constitution of the ANDA pipeline, I think there's something like 13 or 14 ophthalmic filings pending. How much or how many of those are in fact coming from the Somerset facility?
Douglas Boothe -- President and Chief Executive Officer
We don't do it specific by site, but it's not a significant driver. We have both our Amityville facility, our Hettlingen facility as well as contracted third parties to do the majority of our pipeline items.
Elliot Wilbur -- Raymond James -- Analyst
OK. And then just one final product-specific question. One of your key base products, isotretinoin, there's a little bit more competition in the market lately. I think Reddy's has relaunched in early June.
Looks like Mylan's picked up a little bit share there. Just talk -- I know that's been a big win for you guys in the last couple of years. Just what's happened in the marketplace given some of this recent competitive movement, your ability to hold share, defend price?
Douglas Boothe -- President and Chief Executive Officer
Well, again, I mean, it's definitely a more competitive market. It's always been a competitive market. It's certainly a high net sales driver item for us, but from a margin perspective, it's not as large of a contributor overall. We have been rebalancing our mix with customers in light of both the competition and a later quite frankly improve our yield.
So we continue to move along with that product. And I guess we're below 10% as we were in the first quarter on this item as a contribution.
Duane Portwood -- Chief Financial Officer
Yes. No product in the second quarter or the first half was over 10% of our total sales.
Operator
And our next question comes from the line of David Amsellem with Piper Jaffray.
David Amsellem -- Piper Jaffray -- Analyst
Just a few. So first, you mentioned inventory on Lotemax. Just wanted to get some color on the build-out of inventory for the product and how much of that portion of the market you think you would be able to supply as the year progresses? That's number one. Number two, and I apologize if I missed any color on this.
On Voltaren, any thoughts on your launch and then -- but more than that, given all the competition, I mean is it fair to say that that's just not going to be a meaningful product?
Douglas Boothe -- President and Chief Executive Officer
On Voltaren, I mean, we are in our launch prep activities, we actually got -- already have some offers out there. It is actually component in our guidance for the second half of the year. So we do expect contribution. Meaningful is relevant to the size of our company compared to competition, so it's an important product for us.
On the Loteprednol, we're just balancing opportunities with our existing base business as well as expanding our batch size in our products. So we expect more opportunity for products in the second half of the year.
David Amsellem -- Piper Jaffray -- Analyst
OK. That's helpful. Then on Decatur, you mentioned that you're on track to reach full completion by year-end. So I guess, my question here is, what are your thoughts on when the FDA will be back in there sort of an early next year event or first half of next year, just help us understand timing as we get to the close out of this letter?
Douglas Boothe -- President and Chief Executive Officer
Sure. Well, again, I mean, agency can come in today or tomorrow, always the right. We are in the midst of actually our plant facility shut down with many of the enhancements that are required to complete the responses to some of the outstanding warning letter items. So with that also then our regulatory submissions either CBE-type of activities or annual reportable.
Those may trigger the agency to come back in. Also as part of our warning letter response to Somerset, we did request another meeting with the agency and usually the meeting and/or site inspection sometimes come hand in hand. So we're anticipating and preparing for the agency to come in later this year, but we don't control their schedule.
David Amsellem -- Piper Jaffray -- Analyst
OK, that's helpful. And then lastly, in terms of the mix of filings, can you just remind us what portion of your pipeline, at least products pending at the FDA are coming out of Amityville or third parties versus Decatur and Somerset?
Douglas Boothe -- President and Chief Executive Officer
It's about 50-50. I'll just -- again, on that is -- the majority of the high-value ones are not coming from -- even though the numbers are mixed, the benefit and the contribution is more slanted toward our Amityville, our contract manufacturers and our Hettlingen facility.
Operator
And our next question comes from the line of Randall Stanicky with RBC Capital Markets.
Randall Stanicky -- RBC Capital Markets -- Analyst
Doug, last quarter, you talked about the EBITDA for the year being weighted toward the fourth quarter, 50% in Q4. How are you thinking about the trajectory of the guidance range for this year, currently?
Duane Portwood -- Chief Financial Officer
I'll take it. Randall, this is Duane. So as I --
Douglas Boothe -- President and Chief Executive Officer
Heavy math for me. I'll give to Duane.
Duane Portwood -- Chief Financial Officer
As I mentioned, I guess, a couple of things to think about. We do expect the largest EBITDA, adjusted EBITDA contributor to come from the fourth quarter relative to all the quarters in the year. In the first quarter, we said about half, I didn't quite say that this time. Most of that is due to -- our second-quarter results exceeded our expectations.
It was a stronger quarter than we had anticipated in our original guidance. And so that along with the fact that, as we mentioned, we actually have increased our FDA-related compliance estimate from $40 million to $50 million. So that's $10 million up from our initial guidance. And even with that, we're still able to maintain our -- and affirm our overall EBITDA guidance and so that's what's kind of muting my comments just a little bit from the first quarter, is that additional expense.
Randall Stanicky -- RBC Capital Markets -- Analyst
OK. So still expecting 4Q to be bigger, but still see the same range for the full year. As we think about next year, again, you said at least doubling of that EBITDA outlook previously. Is that still the view?
Douglas Boothe -- President and Chief Executive Officer
That's still the view.
Duane Portwood -- Chief Financial Officer
That is still the view. Yes.
Randall Stanicky -- RBC Capital Markets -- Analyst
OK. And then my final question is, as you think, about the $50 million to $75 million in cost savings that you guys have called out, how much of that has been realized and how much of that you expect to see in 2020 and 2021? Just trying to get a sense of the time lines you capture that savings.
Duane Portwood -- Chief Financial Officer
Yes. I think at this time, it's probably a little early to talk about 2020 and 2021. We do believe it will take around four to five years to get that $50 million to $75 million. As it relates to this year, probably about a third of it or so, most of that coming from discretionary marketing expenditures relating to TheraTears that we're not doing this year.
So somewhat low-hanging fruit admittedly.
Douglas Boothe -- President and Chief Executive Officer
Yes. We also put the emphasis on some of the longer-lead items like from a procurement standpoint in alternative sourcing, we've got projects already under way to have alternatives to some of our current suppliers so we can drive down that which, of course, will improve the margin. And also with the work we're doing on compliance remediation and IT systems improvements, we will get productivity at our facilities in the outer quarters and years.
Randall Stanicky -- RBC Capital Markets -- Analyst
Doug, one more question for you on Durezol. Have you -- I'm sorry if I missed it. Did you respond to the deficiencies and are you expecting a six-month turnaround? I know you said 2020 at this point, but how -- where is that in the process?
Douglas Boothe -- President and Chief Executive Officer
We just recently received our complete response letter. So the team is in the process of reviewing and putting in a time line for response. So again, when we described our guidance for 2019, we did not include it. We took activities to prepare for a day one approval in anticipation and maybe in hope and our desire to be ready to go-to-market has not played out that way, but certainly we've got a lot of activity both ourselves and with our contract partner to respond to the FDA questions in a timely and efficient manner and complete now.
Duane Portwood -- Chief Financial Officer
And then Randall, as part of kind of getting ready for a day one launch, we did manufacture some inventory at risk and then, with the -- not getting the approval that inventory needed to be reserved for written off if you will and so that was the biggest piece behind my comment about higher inventory loss in the second quarter.
Operator
[Operator instructions] Our next question comes from the line of Matt Hewitt with Craig-Hallum Capital.
Matt Hewitt -- Craig-Hallum Capital Group LP -- Analyst
Maybe a couple. First, for Duane. Given some of the remediation efforts and the cost related to that. You got the strong performance in gross margin here in Q2, how should we be thinking about gross margin on a normalized basis? I can't imagine that it gets back to the 60% we saw a couple of years ago, but where should that number kind of shakeout ex the cost that you're having to approve for the remediation?
Duane Portwood -- Chief Financial Officer
Yes. So I mean -- so this -- for the second quarter, if we were to back out those kind of unusually high remediation costs, we would be in the 44% range. So I'll put that out there and then, come with a net comment that is kind of over the relevant horizon here, the near term, we do think that that's sustainable and can be improved upon. So right now, I probably call it in the mid- to high 40s at this stage.
Certainly, we'll strive to get more, but until we get all the kind of remediation activities out of the way and the facility is stable from a headcount perspective, once we're not just so focused on that. I'm a little bit hesitant to call anything higher than kind of high 40s at this stage with our current product portfolio.
Douglas Boothe -- President and Chief Executive Officer
Yes, Matt, another thing that will contribute that over time is the emphasis on product availability and service levels, should see a reduction in our failure to supply. We made modest improvements, but certainly, we've also greatly increased our product availability. So that's a lagging factor and that also -- will contribute also to positive margin increase.
Matt Hewitt -- Craig-Hallum Capital Group LP -- Analyst
Understood. And I guess, along those lines of the roughly $4.7 million in failure to supply penalties in Q2, is it your hope or expectation that that's minimal by the time we exit the year? Or is a lot of that inching on the progress that you're going to make from a remediation standpoint and maybe it's half of that exiting, just trying to gauge where that shakes out, come 12/31?
Douglas Boothe -- President and Chief Executive Officer
I'm sure if you asked any employee of Akorn, they understand exactly what the expectation is.
Duane Portwood -- Chief Financial Officer
Matt, it's a hard number to predict. And you can be perfect on 99% of your portfolio and one goes away and you got a little bit of a hit. So it is dependent on stable product availability, stable operations in the facilities, whether or not that's with heavy remediation efforts under way or just normal efforts under way. So it's something that we strive for every day.
We do expect improvement there, whether it's going to be zero or not, I can't speak to that. We'll try hard, but not ---
Douglas Boothe -- President and Chief Executive Officer
It will never be zero.
Duane Portwood -- Chief Financial Officer
And we don't -- in the guidance that we've given for 2019, we don't expect it to be zero by the end of the year.
Matt Hewitt -- Craig-Hallum Capital Group LP -- Analyst
OK. Fair enough. And then maybe one more higher-level question for you, Doug. You launched another TheraTears product here in the second quarter.
As you look at the OTC market, given some of the strong brand like TheraTears that you have, is that an area that you expect or want to move into to a greater extent going forward? And is it about expanding the TheraTears brand into some new areas? Or what other opportunities are you looking at?
Douglas Boothe -- President and Chief Executive Officer
It's a great question. And absolutely, I'm a believer, the company is a believer in our OTC franchise, specifically around TheraTears. We did the sterile antimicrobial product, which we launched. If you would walk into a CVS or Walgreens and a Rite Aid in, look right at the center isle of the products, we're right there in the middle.
So we are well placed. The team has done a great job in expanding our placement and our product line there. So we do see that as a franchise we can build upon. And certainly, as we work through our financial restructuring and such, that should free up capacity capability to look at more opportunities in that space and expanded promotion.
Operator
And our next question comes from the line of David Steinberg with Jefferies.
David Steinberg -- Jefferies -- Analyst
I want to get a sense of what you're doing toward restocking your pipeline. Over the years, Akorn filed lots of ANDAs. I know last year, it came down to a trickle. And I know you're focusing on quality not quantity and more complex products, but can you give us any guidelines in terms of perhaps how many ANDAs you may think about filing this year, next year and what particular areas of focus?
Douglas Boothe -- President and Chief Executive Officer
Well, we don't specifically say how many filings we intend to file. We have multiple projects under way. Areas of focus, as we've been very clear on is complex, ophthalmic suspensions and products as well as specialty injectables, both from our internal development activity as well as with partners, also again we have a active animal health portfolio and some targeted OTC line extension products and such. So that's been the focus.
Our R&D organization, both internally with partners is being recharged. We definitely have built some momentum there. We -- honestly, I've been personally very much involved in the portfolio work, and we'll continue to do so. We need the capability, of course, to expand our investments, which is part of the activities we're doing from a restructuring right now.
David Steinberg -- Jefferies -- Analyst
Right. And then just related to that, obviously, the company also grew a lot through acquisitions and obviously, you're doing a lot of remediation and trying to get your leverage ratio down. But to what extent do you actively engaged in BD activities? Should we expect anything this year? And if you are, what are you seeing in terms of valuations of -- in terms of both companies and products, both on the generic side and OTC?
Douglas Boothe -- President and Chief Executive Officer
Well, again, I mean, I'd say we're always involved in discussions around BD regarding it's more transformative. I think our -- the thing right in front of us is to address our capital structure first and foremost.
Operator
And our next question is a follow-up question from the line of Gregg Gilbert with SunTrust.
Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst
Doug, I think you just answered this, but as you consider those options to restructure, are you considering combinations with other companies in sort of a healing transaction sort of way or should we think about this as getting your own house in order and you really can't contemplate such a thing until you sort of fix your capital structure. That's follow-up number one.
Duane Portwood -- Chief Financial Officer
Gregg, this is Duane. I think just as it relates to the term loan, we're looking at -- we'll look at a number of alternatives as it relates to kind of the stand-alone leverage profile and capital structure of this company. So nothing necessarily of the table, and we'll explore options that make sense. As it relates to combining with another company, if that opportunity makes sense, then we'd certainly explore that as well, but right now, we're trying to really look at this.
As Doug says, the freedom to operate, and we need to get the right capital structure in place so we can do that, whether it's investing in our facilities or investing in other companies or the like. So that's the priority. If something else comes up that is appealing, then we'll certainly take a look.
Douglas Boothe -- President and Chief Executive Officer
I mean, certainly, one thing since I've joined here and of course, part of the work we did that we've discussed previously with our long-term plan is we have a very robust portfolio of products. We've got significant investments into our facilities. So we have a road map that supports our financial projections on a stand-alone basis. Doesn't mean we're not looking for opportunities, but certainly right now, our work is right in front of us that the team is very much focused on and our associates are committed toward supporting the expansion of Akorn as we are currently constituted.
Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst
Great. And then my other follow-up, Doug, is perhaps more of an industry question but curious on your observations about the Civica Rx agreement with Hikma, as it applies either to your company or the industry more broadly, kind of an interesting development there are they GPO or not?
Douglas Boothe -- President and Chief Executive Officer
Right. Yes, I review that. I mean, the 14 items are pretty readily available commoditized generics, so seems more of a GPO play.
Operator
Thank you. And that does conclude today's Q&A session. And I would like to turn the conference back over to Ms. Jennifer Bowles for any further remarks.
Jennifer Bowles -- Senior Vice President of Strategy and Investor Relations
Thank you all for joining the call today, and we look forward to speaking with you again next quarter.
Operator
[Operator signoff]
Duration: 44 minutes
Call participants:
Jennifer Bowles -- Senior Vice President of Strategy and Investor Relations
Douglas Boothe -- President and Chief Executive Officer
Duane Portwood -- Chief Financial Officer
Gregg Gilbert -- SunTrust Robinson Humphrey -- Analyst
Elliot Wilbur -- Raymond James -- Analyst
David Amsellem -- Piper Jaffray -- Analyst
Randall Stanicky -- RBC Capital Markets -- Analyst
Matt Hewitt -- Craig-Hallum Capital Group LP -- Analyst
David Steinberg -- Jefferies -- Analyst
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