DEF 14A 1 tmb-20210127xdef14a.htm DEF 14A

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LANNETT COMPANY, INC.

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Proxy Statement

2021 Annual Meeting of

Stockholders


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Lannett Company, Inc.

1150 Northbrook Drive, Suite 155

Trevose, Pennsylvania 19053

215-333-9000

www.Lannett.com

December 7, 2020

Dear Lannett Company, Inc. Stockholders:

It is my pleasure to invite you to the 2021 Annual Meeting of Stockholders of Lannett Company, Inc. which will be held on January 27, 2021 at 9:00 a.m. Eastern Time.

In light of the coronavirus outbreak (“COVID-19”) and to protect the health and safety of Lannett Company, Inc.’s stockholders, Board of Directors and employees, this year’s Annual Meeting will be our first time hosting a completely virtual meeting of stockholders, which will be conducted online via live webcast. You will be able to attend and participate in the Annual Meeting online, vote your shares electronically and submit your questions prior to and during the meeting by visiting: www.meetingcenter.io/251487326 at the meeting date and time described in the accompanying proxy statement. The password for the meeting is LCI2021. There is no physical location for the Annual Meeting. To participate in the Annual Meeting, you will need to review the information included on your proxy card.

The purpose of the meeting is to (i) elect seven members of our Board of Directors, (ii) vote to ratify the selection of Grant Thornton, LLP as our independent auditors, (iii) obtain an advisory vote on the compensation of the Company’s executive officers, (iv) approve the Lannett Company, Inc. 2021 Long-Term Incentive Plan, and (v) transact such other business as may properly come before the Annual Meeting.

Your vote is important. Whether you plan to attend the meeting via remote communication or not, we encourage you to read this Proxy Statement, in its entirety, and vote your shares. Please sign, date and return the enclosed proxy card as soon as possible in the postage-paid envelope provided.

We look forward to your participation should you be able to join our virtual meeting of stockholders.

Thank you.

/s/ Patrick G. LePore

December 7, 2020

Patrick G. LePore

Trevose, Pennsylvania

Chairman of the Board


LANNETT COMPANY, INC.

1150 Northbrook Drive, Suite 155

Trevose, Pennsylvania 19053

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD JANUARY 27, 2021

TO THE STOCKHOLDERS OF LANNETT COMPANY, INC.

The 2021 Annual Meeting (the “Annual Meeting”) of the Stockholders of Lannett Company, Inc., a Delaware Corporation (the “Company” or “Lannett”), will be held on January 27, 2021 at 9:00 a.m. Eastern Time, online by remote communication for the following purposes:

1.To elect seven (7) members of the Board of Directors (the “Board”) to serve until the next Annual Meeting of Stockholders;

2.To ratify the selection of Grant Thornton, LLP as independent auditors for the fiscal year ending June 30, 2021;

3.To obtain a non-binding advisory vote on the compensation of the Company’s executive officers;

4.To approve the Lannett Company, Inc. 2021 Long-Term Incentive Plan; and

5.To transact such other business as may properly come before the Annual Meeting or any adjournment thereof.

THESE MATTERS ARE MORE FULLY DESCRIBED IN THE PROXY STATEMENT ACCOMPANYING THIS NOTICE.

Only stockholders of record at the close of business on December 3, 2020 are entitled to notice and to vote at the 2021 Annual Meeting.

It is important that your shares be represented and voted at the Annual Meeting. Please vote by following the instructions on the enclosed proxy card as promptly as possible so that, whether you intend to be present at the Annual Meeting via remote communication or not, your shares can be voted.

By Order of the Board of Directors

/s/ Patrick G. LePore

December 7, 2020

Patrick G. LePore

Trevose, Pennsylvania

Chairman of the Board


LANNETT COMPANY, INC.

PROXY STATEMENT FOR

ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON JANUARY 27, 2021

TABLE OF CONTENTS

ATTENDANCE AND VOTING MATTERS

2

2

2

2

2

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

3

BOARD OF DIRECTORS

4

4

5

5

6

7

REPORT OF THE AUDIT COMMITTEE

8

PRINCIPAL STOCKHOLDERS

9

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

12

DIRECTORS AND OFFICERS

12

EXECUTIVE COMPENSATION

14

14

15

21

25

31

32

33

40

41

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

43

43

PROPOSAL NO. 1 — ELECTION OF DIRECTORS

44

PROPOSAL NO. 2 — RATIFICATION OF GRANT THORNTON, LLP AS INDEPENDENT AUDITORS

46

PROPOSAL NO. 3 — NON-BINDING ADVISORY VOTE ON EXECUTIVE COMPENSATION

47

PROPOSAL NO. 4 — APPROVAL OF THE LANNETT COMPANY, INC 2021 LONG-TERM INCENTIVE PLAN

48

OTHER

57

57

57

57


ATTENDANCE AND VOTING MATTERS

DATE, TIME, AND PLACE OF MEETING

This Proxy Statement is provided to you by the Board of Directors (the “Board”) of Lannett Company, Inc. (“Lannett” or the “Company”) in connection with the 2021 Annual Meeting of Stockholders (the “Annual Meeting”). The Annual Meeting will be held on January 27, 2021 at 9:00 a.m. Eastern Time, online by remote communication or at any adjournments or postponements of the Annual Meeting for the purposes set forth in the accompanying Notice of Annual Meeting. We intend to mail this Proxy Statement and the accompanying Notice of Annual Meeting of Stockholders on or about December 18, 2020 to all stockholders of the Company entitled to vote at the Annual Meeting.

VOTING METHODS

You may vote on matters to come before the Annual Meeting in three ways:

You may attend the Annual Meeting and cast your vote online by remote communication; or

You may vote by internet or by phone by following the instructions set forth on the proxy card; or

You may vote by signing and returning the enclosed proxy card by mail. If you do so, the individual named on the card will vote your shares in the manner you indicate. You may revoke your proxy at any time prior to the Annual Meeting by sending written notice to the Secretary of the Company at 1150 Northbrook Drive, Suite 155, Trevose, Pennsylvania 19053, or by attending the virtual meeting.

If you attend the virtual Annual Meeting to cast your vote and you are holding your stock in a brokerage account (“street name”), you will need to provide a legal proxy obtained from your broker by following the instructions on the enclosed proxy card.

You are entitled to cast one vote for each share of Lannett common stock owned on the record date, December 3, 2020. As of the record date, there were 41,700,297 shares of Lannett common stock outstanding. Stockholders are not entitled to cumulative voting in the election of directors.

QUORUM

A quorum of stockholders is necessary to hold a valid meeting for the transaction of business. If the holders of a majority of Lannett common stock are present at the meeting, online by remote communication or by proxy, a quorum will exist. Abstentions and “broker non-votes” are counted as present for purposes of establishing a quorum.

VOTE NECESSARY FOR ACTION

Directors are elected by a plurality vote of shares present by remote communication or by proxy at the Annual Meeting. Each other action to be considered by the stockholders will be approved by the affirmative vote of at least a majority of the shares present by remote communication or by proxy at the meeting and entitled to vote on the matter. For any proposal, an abstention will have the same effect as a vote against the proposal. Broker non-votes will not be voted for or against any of these proposals and will have no effect on any of these proposals.

2


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Proxy Statement contains forward-looking statements. Any statements made in this Proxy Statement that are not statements of historical fact or that refer to estimated or anticipated future events are forward-looking statements. We have based our forward-looking statements on management’s beliefs and assumptions based on information available to them at this time. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue,” or “pursue,” or the negative other variations thereof or comparable terminology, are intended to identify forward-looking statements. Such forward-looking statements reflect our current perspective of our business, future performance, existing trends and information as of the date of this filing. These include, but are not limited to our beliefs about future revenue and expense levels, growth rates, prospects related to our strategic initiatives and business strategies, express or implied assumptions about government regulatory action or inaction, anticipated product approvals and launches, business initiatives and product development activities, assessments related to clinical trial results, product performance and competitive environment, and anticipated financial performance. The statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. We caution the reader that certain important factors may affect our actual operating results and could cause such results to differ materially from those expressed or implied by forward-looking statements. Lannett is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events or otherwise and other events or factors, many of which are beyond our control, including those resulting from events, or the prospect of such events, such as public health issues including health epidemics or pandemics, such as the recent outbreak of the novel coronavirus (“COVID-19”), whether occurring in the United States or elsewhere, which could disrupt our operations, disrupt the operations of our suppliers and business development or other strategic partners, disrupt the global financial markets or result in political or economic instability. We believe the risks and uncertainties discussed under “Item 1A - Risk Factors” contained in the Company’s Annual Report on Form 10-K and from time to time in our SEC filings may affect our actual results.

We disclaim any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. We also may make additional disclosures in our Form 10-K, Form 10-Q, Current Reports on Form 8-K and in other filings that we may make from time to time with the SEC. Other factors besides those listed here could also adversely affect us.

3


BOARD OF DIRECTORS

The Role of the Board and Risk Oversight

The Board is responsible for overall corporate governance as well as for management and the strategic direction of the Company as a whole. The corporate governance guidelines are available at www.lannett.com. The Board and various committees of the Board meet regularly to discuss operating and financial reports presented by the Company, including but not limited to the Chief Executive Officer, Chief Financial Officer, and other members of management.

Assessing and managing risk is the responsibility of management; however, the Board, through the Audit Committee, provides oversight and reviews various details regarding the Company’s risk mitigation efforts. The Board is engaged in the Company’s strategic planning efforts, which include evaluating the objectives and risks associated with these initiatives.

Through the Board’s committees, the Board maintains broad oversight over various functions within the Company. The Audit Committee, under its charter, reviews and discusses risk exposures and the steps management has taken to monitor and mitigate each risk. The Compensation Committee and the Governance and Nominating Committee monitor risks associated with succession planning and the attraction and retention of talent, as well as risks related to the design of compensation programs within the Company.

The Board has adopted a Code of Business Conduct and Ethics (the “code of ethics”). The code of ethics applies to all employees including the Company’s Chief Executive Officer, Chief Financial Officer, Corporate Controller, and other finance employees. The code of ethics is publicly available on our website at www.lannett.com. If the Company makes any substantive amendments to the code of ethics or grants any waiver, including any implicit waiver, from a provision of the code of ethics to our Chief Executive Officer, Chief Financial Officer, or Corporate Controller, we will disclose the nature of such amendment or waiver on our website or in a Current Report on Form 8-K.

The Board has established effective anti-hedging and anti-pledging policies. We have an insider trading policy which among other restrictions prohibits employees, officers and Directors, including Named Executive Officers (“NEOs”), from entering into short sales, calls or any other hedging transaction involving Lannett securities. In addition, the Board has a policy that prohibits Directors and NEOs from pledging Lannett stock. None of our Directors or NEOs have pledged Lannett stock as collateral for personal loans or other obligations.

The members of the Board are expected to attend all Board meetings whether in person or via teleconference. Additionally, members of the Board are expected to attend the Annual Meeting.

The Board met six times during the fiscal year ended June 30, 2020 (“Fiscal 2020”). In addition to meetings of the Board, Directors attended meetings of individual Board committees. Each of the Directors attended 100% of the Board meetings and meetings of Board committees of which they were a member during Fiscal 2020. All Directors were present at the 2020 Annual Meeting.

During the past year, the Board has prioritized providing meaningful oversight and guidance to management during the COVID-19 global pandemic. In mid-March 2020, preceded by earlier calls with management, the Board held a special Board meeting, in which management presented: 1) a business continuity plan as it related to the COVID-19 virus, which included – but was not limited to – control and decision charts that addressed corporate-wide actions to be taken at different levels of the spread and severity of the virus; 2) internal and external communication actions, which included – but was not limited to – providing Center for Disease Control (“CDC”) guidelines to employees and beginning remote work procedures; 3) the status of the Company’s supply chain, which included – but was not limited to – business partners, API and excipient suppliers, and transportation and shipment providers; and 4) an analysis of our customers’ situations and any changes in demand for product. Since the beginning of the pandemic, the Board and management have worked closely together to monitor the crisis and ascertain the Company’s success.

4


As the Board and management have been busy navigating this crisis, we have been striving to better communicate our policies and goals regarding corporate stewardship and environmental, society, and corporate governance (“ESG”). The Board and the Company are – and have been - committed to a sustainable future, one that is centered on a reduced environmental footprint, effective use of natural resources and a comprehensive approach to managing carbon intensity that strengthens our quality-oriented focus of providing affordable pharmaceuticals to patients who depend on them. As part of this effort to best communicate our stewardship performance with our shareholders and stakeholders, we are annually and quarterly posting to our website (www.lannett.com/approach/sustainability/) important environmental monitoring metrics and levels such as corporate freshwater intensity, corporate energy usage, corporate climate impact, and corporate waste management. With best practices for corporate stewardship and ESG policies in mind, in this coming year we intend to communicate to our shareholders pertinent information regarding certain programs, plans and initiatives dealing with corporate risk assessment and mitigation, governance programs, long-term strategy, R&D ethics, business ethics, health and safety, government lobbying, supplier ethics, and other stakeholder and societal issues.

Along with increasing our corporate stewardship and ESG disclosure levels, the Board has been actively improving and tightening other governance affairs. This year the Board has put in place an expanded compensation recovery or “clawback” provision for all executive officers. Under the new “clawback” provision, if the Company is required to issue a material financial restatement as a result of fraud or other misconduct, the Board may, in its discretion, seek to recoup any excess performance-based short-term or long-term incentive compensation awarded during the three-year period following the originally filed financial statement(s) from any executive officer who knew about or should have known of the fraud or misconduct and took no action to prevent it. More information on this new provision can be found in the “Compensation Discussion and Analysis” on page 14 of this proxy. Moreover, as it relates to improving corporate governance, we have fortified our Audit Committee by adding Board member, Dr. Melissa Rewolinski, to its ranks, which will broaden the Committee’s skill set. With the Committee’s deepened experience and knowledge base, it has added to its duties and responsibilities oversight for the Company’s Enterprise Risk Management (“ERM”), including enterprise risk assessments, analysis and mitigation efforts. And lastly, to further encourage alignment with shareholder interest, the Board has established stock ownership and retention requirements for executive officers; that is, within five years of first being subject to the guidelines, our CEO and other executive officers are required to achieve and maintain ownership levels based on a 3.0x and 1.5x multiple of base salary, respectively. More information on these guidelines can be found in the “Compensation Discussion and Analysis” on page 14 of this proxy.

Board Leadership Structure

The Company’s Corporate Governance Guidelines provide that a majority of our Directors should meet New York Stock Exchange (“NYSE”) independence requirements. A director will not be considered independent unless the Board determines that the director meets the NYSE independence requirements and has no relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director.

Our Board leadership structure is one under which Patrick G. LePore serves as the non-executive, independent Chairman of the Board. We currently have six other Directors, including Timothy C. Crew, Chief Executive Officer. Five of the seven Directors currently serving on the Board of Directors are “independent” as defined by the NYSE. During Fiscal 2020, the board had four permanent committees: the Audit Committee, Compensation Committee, Governance and Nominating Committee, and Strategic Planning Committee. In October 2020, the Board assumed the responsibilities of the Strategic Planning Committee, including overseeing the Company’s medium and long-term business strategies, and subsequently dissolved the committee of the Board. In addition, the non-management members of the Board of Directors meet regularly without management directors or management personnel present.

The Board believes that the role of Chairman of the Board and Chief Executive Officer should be separate, and that the Chairman should not be an employee of the Company. The Board believes that this separation benefits the stockholders in the form of increased oversight. As further oversight, the independent Board members also meet throughout the year in executive sessions where neither management personnel nor other non-independent directors are present. In the Company’s case, this excluded Jeffrey Farber and Timothy C. Crew, Chief Executive Officer.

Overall, we believe that the separation of the Chairmanship and Chief Executive Officer positions, our strong committee system, and regular non-management director and independent director meetings allow for effective Board oversight of management.

Communicating with the Board of Directors

Interested persons may contact the non-management directors by sending written comments to 1150 Northbrook Drive, Suite 155, Trevose, Pennsylvania 19053 Attn: Board of Directors. The original communication as addressed, or a summary of the submissions will be forwarded to the directors for discussion in the next directors meeting. If a summary of the communication is provided, the original communication will be maintained on file and available for the directors’ review upon request.

5


Board Committees

In Fiscal 2020, the Board had four permanent committees - Audit Committee, Compensation Committee, Governance and Nominating Committee and Strategic Planning Committee. There were nine (9) Audit Committee meetings, four (4) Compensation Committee meetings, and four (4) Governance and Nominating Committee meetings held during Fiscal 2020. In October 2020, the Board dissolved the Strategic Planning Committee, which held no meetings during Fiscal 2020. In August 2018, the Board formed a Special Committee to provide oversight and strategic advice following JSP’s decision not to renew the JSP contract, as well as to provide assistance in evaluating potential capital restructuring and cost reduction efforts. The Special Committee met four (4) times during Fiscal 2020. In February 2019, the Board also formed a Special Stockholder Demand Committee for the purpose of investigating and responding to various stockholder demands against the Company; the Special Stockholder Demand Committee met five (5) times in Fiscal 2020. In October 2020, the Board dissolved the Special Stockholder Demand Committee following the resolution of shareholder derivative lawsuits. The following table shows the directors who are currently members of each permanent Board Committee:

Compensation

Governance and

Name

Audit Committee

Committee

Nominating Committee

John C. Chapman

Chairman

Member

Timothy C. Crew

David Drabik

Member

Member

Chairman

Jeffrey Farber

Patrick G. LePore, Chairman of the Board

Member

Melissa Rewolinski

Member*

Paul Taveira

Member

Chairman

Member


*Dr. Rewolinski joined the Board in July 2019 and was appointed a member of the Audit Committee effective July 1, 2020.

The Audit Committee has responsibility for overseeing the Company’s financial reporting process on behalf of the Board. In addition, Audit Committee responsibilities include selection of the Company’s independent auditors, conferring with the independent auditors regarding their audit of the Company’s Consolidated Financial Statements, pre-approving and reviewing the independent auditors’ fees and considering whether non-audit services are compatible with maintaining their independence, and considering the adequacy of internal financial controls. The Audit Committee operates pursuant to a written charter adopted by the Board, which is available on the Company’s website at www.lannett.com. The charter describes the nature and scope of the Audit Committee’s responsibilities. All members of the Audit Committee are independent directors as defined by the rules of the NYSE. See “Report of the Audit Committee.”

Financial expert on Audit Committee: The Board has determined that John C. Chapman, current director and chairman of the Audit Committee, is the Audit Committee financial expert as defined in section 3(a)(58) of the Exchange Act and the related rules of the Commission.

The Compensation Committee establishes and regularly reviews the Company’s compensation philosophy, strategy, objectives and ethics and determines the compensation of the executive officers of the Company. For a discussion on the Compensation Committee’s process and factors used in determining executive compensation refer to “Compensation Discussion and Analysis” starting on page 14. The Compensation Committee also administers the Company’s equity compensation plans. The Compensation Committee operates pursuant to a written charter adopted by the Board, which is available on the Company’s website at www.lannett.com. All members of the Compensation Committee are independent directors as defined by the rules of the NYSE.

Compensation Committee Interlocks and Insider Participation

No member of the Compensation Committee during Fiscal 2020 or as of the date of this Proxy Statement is or has been an officer or employee of the Company and no executive officer of the Company served on the compensation committee or board of any company that employed any member of the Company’s Compensation Committee or Board.

The Governance and Nominating Committee is responsible for identifying and evaluating individuals qualified to become Board members and for recommending such individuals for nomination. All candidates must possess an unquestionable commitment to high ethical standards and have a demonstrated reputation for integrity. Other factors considered in identifying and evaluating candidates include an individual’s business experience, education, civic and community activities, knowledge and experience with respect to the issues impacting the pharmaceutical industry and public companies, as well as the ability of the individual to devote the necessary time to service as a director.

6


Once a person has been identified by the Governance and Nominating Committee as a potential candidate, the Governance and Nominating Committee performs a robust review, which includes collection of outside information, to include publicly available information and all other relevant information available to determine if the person should be considered further. Once this determination has been made the person is contacted. If the person expresses a willingness and interest to be considered to serve on the Board, the Governance and Nominating Committee will request further information from the candidate including resumes, references and other relevant information. A formal interview process is then held. The Governance and Nominating Committee will then consider all information, qualifications, and accomplishments, including comparisons to other potential candidates before making its final decision.

The Governance and Nominating Committee will also consider candidates recommended by stockholders. All nominees will be evaluated in the same manner, regardless of whether they were recommended by the Governance and Nominating Committee or recommended by a stockholder. To have a candidate considered by the Governance and Nominating Committee, a stockholder must submit the recommendation in writing and must include the following information:

The name of the stockholder and evidence of the person’s ownership of Company stock, including the number of shares owned and the length of ownership; and

The name of the candidate, the candidate’s resume or a listing of his or her qualifications to be a director of the Company and the person’s consent to be considered as a director nominee if recommended by the Governance and Nominating Committee to the Board and nominated by the Board to be included in the Proxy Statement for election at the Annual Meeting.

The stockholder recommendation and information described above must be sent to the Company at 1150 Northbrook Drive, Suite 155, Trevose, Pennsylvania 19053, and must be received not less than 90 days prior to the anniversary date of the Company’s most recent Annual Meeting.

The Governance and Nominating Committee operates pursuant to a written charter adopted by the Board, which is available on the Company’s website at www.lannett.com. All members of the Governance and Nominating Committee are independent directors as defined by the rules of the NYSE.

Executive Sessions of Independent Directors

In accordance with the rules and regulations of the NYSE, non-management independent directors meet at regularly scheduled executive sessions without management participation. At least once a year, an executive session is held with only independent Directors. Executive sessions are chaired by the non-executive, independent, Chairman of the Board.

7


REPORT OF THE AUDIT COMMITTEE

The Audit Committee is comprised of four independent directors (as defined in section 303(A) of the NYSE listing company manual) and maintains a written charter in accordance with rules of the NYSE.

Management is primarily responsible for the Company’s financial statements and related internal controls over financial reporting. The independent registered public accounting firm is responsible for performing an audit of the Company’s Consolidated Financial Statements and related internal controls over financial reporting. The Audit Committee’s responsibility is to monitor the Company’s financial reporting and internal control processes and to review the performance and independence of the Company’s independent registered public accounting firm.

Management has represented to the Audit Committee that the Company’s Consolidated Financial Statements were prepared, in all material respects, in accordance with accounting principles generally accepted in the United States, and the Audit Committee has reviewed and discussed the Consolidated Financial Statements with management and the independent registered public accounting firm.

The Audit Committee has received from its independent registered public accounting firm written communications regarding the matters required to be discussed with the Audit Committee. These matters included information regarding the scope and results of their audit of the Company’s financial statements, including with respect to (i) their responsibilities under generally accepted auditing standards, (ii) significant accounting policies, (iii) management judgments and estimates, (iv) any significant accounting adjustments, (v) any disagreements with management and (vi) any difficulties encountered in performing the audit. The Committee discussed these matters with the Company’s independent registered public accounting firm, with and without management present.

The Company’s independent registered public accounting firm also provided to the Audit Committee the written disclosures required by the Public Company Accounting Oversight Board, and the Audit Committee discussed the firm’s independence with the independent registered public accounting firm. The Audit Committee also pre-approved all Fiscal 2020 audit and non-audit services and fees and concluded that the non-audit services performed, and related fees did not impair the independence of the independent registered public accounting firm.

Based upon the Audit Committee’s discussions and reviews referred to above, the Audit Committee recommended that the audited Consolidated Financial Statements be included in Lannett’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 as filed with the Securities and Exchange Commission.

Audit Committee:

John C. Chapman (Chairman)

David Drabik

Paul Taveira

Melissa Rewolinski

8


PRINCIPAL STOCKHOLDERS

The following table sets forth, as of October 31, 2020, information regarding the security ownership of the directors and certain executive officers of the Company and persons known to the Company to be beneficial owners of more than five (5%) percent of the Company’s common stock. Although some grants of restricted stock under the Company’s 2011 and 2014 Long Term Incentive Plans (“LTIPs”) vest equally over time from the grant date, the restricted shares are included below because the voting rights with respect to such restricted stock are acquired immediately upon grant.

Name and Address of

  

  

 

Beneficial Owner /

  

Excluding Options (*)

Including Options (**)

 

Director / Executive

    

  

    

Shares Held

    

Shares Held

    

Total

    

Percent of

    

Number of

    

Percent of

 

Officer

Office

Directly

Indirectly

Shares

Class

Shares

Class

 

 

John M. Abt

1150 Northbrook Drive, Suite 155

VP and Chief Quality

Trevose, Pennsylvania 19053

and Operations Officer

96,800

96,800

(1)

0.23

%

115,113

(1), (2)

0.28

%

Maureen Cavanaugh

 

Senior VP & Chief

 

1150 Northbrook Drive, Suite 155

Commercial Operations

Trevose, Pennsylvania 19053

Officer

118,120

118,120

(3)

0.28

%

135,270

(3), (4)

0.32

%

John Chapman

 

1150 Northbrook Drive, Suite 155

Trevose, Pennsylvania 19053

Director

 

85,005

85,005

0.20

%

85,005

0.20

%

Timothy Crew

 

1150 Northbrook Drive, Suite 155

Trevose, Pennsylvania 19053

Chief Executive Officer

 

399,963

399,963

(5)

0.96

%

487,799

(5), (6)

1.17

%

David Drabik

 

1150 Northbrook Drive, Suite 155

Trevose, Pennsylvania 19053

Director

 

84,958

84,958

0.20

%

84,958

0.20

%

Robert Ehlinger

 

 

1150 Northbrook Drive, Suite 155

VP and Chief

Trevose, Pennsylvania 19053

Information Officer

70,911

70,911

(7)

0.17

%

112,774

(7), (8)

0.27

%

Jeffrey Farber

 

1150 Northbrook Drive, Suite 155

Trevose, Pennsylvania 19053

Director

 

1,668,510

2,552,140

4,220,650

(9)

10.14

%

4,220,650

(9)

10.08

%

David Farber

 

  

 

1150 Northbrook Drive, Suite 155

Trevose, Pennsylvania 19053

1,885,870

1,766,149

3,652,019

(10)

8.77

%

3,652,019

(10)

8.73

%

Samuel H. Israel

 

1150 Northbrook Drive, Suite 155

Trevose, Pennsylvania 19053

Chief Legal Officer and General Counsel

 

121,620

121,620

(11)

0.29

%

149,631

(11), (12)

0.36

%

John Kozlowski

 

VP of Finance,

1150 Northbrook Drive, Suite 155

Chief Financial Officer and

Trevose, Pennsylvania 19053

Principal Accounting Officer

 

104,280

104,280

(13)

0.25

%

139,949

(13), (14)

0.33

%

Patrick G. Lepore

 

1150 Northbrook Drive, Suite 155

Trevose, Pennsylvania 19053

Chairman of the Board, Director

 

240,326

240,326

0.58

%

240,326

0.57

%

Melissa Rewolinski

 

1150 Northbrook Drive, Suite 155

Trevose, Pennsylvania 19053

Director

 

44,771

44,771

0.11

%

44,771

0.11

%

Paul Taveira

 

1150 Northbrook Drive, Suite 155

Trevose, Pennsylvania 19053

Director

 

90,401

90,401

0.22

%

90,401

0.22

%

All directors and executive officers as a group 

 

  

 

(12 persons)

3,125,665

2,552,140

5,677,805

13.63

%

5,906,647

14.11

%


(1)

Includes 73,722 unvested shares received pursuant to restricted stock awards granted in April 2018, July 2018, July 2019, July 2020, and September 2020.

(2)

Includes 1,970 vested options to purchase common stock at an exercise price of $59.20 per share, 1,155 vested options to purchase common stock at an exercise price of $31.30 per share, 2,759 vested options to purchase common stock at an exercise price of $17.40 per share, 4,302 vested options to purchase common stock at an exercise price of $12.20 per share, and 8,127 vested options to purchase common stock at an exercise price of $6.57 per share.

(3)Includes 99,493 unvested shares received pursuant to restricted stock awards granted in May 2018, July 2019, and July 2020.

(4)Includes 17,150 vested options to purchase common stock at an exercise price of $6.57 per share.

9


(5)

Includes 312,626 unvested shares received pursuant to restricted stock awards granted in January 2018, July 2018, July 2019, and July 2020.

(6)

Includes 21,402 vested options to purchase common stock at an exercise price of $23.65 per share, 14,417 vested options to purchase common stock at an exercise price of $12.20 per share, and 52,017 vested options to purchase common stock at an exercise price of $6.57 per share.

(7)

Includes 36,010 unvested shares received pursuant to restricted stock awards granted in July 2018, July 2019, and July 2020.

(8)

Includes 11,667 vested options to purchase common stock at an exercise price of $13.86 per share, 10,000 vested options to purchase common stock at an exercise price of $34.77 per share, 6,300 vested options to purchase common stock at an exercise price of $59.20 per share, 968 vested options to purchase common stock at an exercise price of $31.30 per share, 2,759 vested options to purchase common stock at an exercise price of $17.40 per share, 3,712 vested options to purchase common stock at an exercise price of $12.20 per share, and 6,457 vested options to purchase common stock at an exercise price of $6.57 per share.

(9)

Includes 994,412 shares held by the Jeffrey Farber Family Foundation which is managed by Jeffrey Farber. Jeffrey Farber disclaims beneficial ownership of these shares. Includes 30,000 shares held by the Jeffrey and Jennifer Farber Family Foundation which is managed by Jeffrey Farber. Jeffrey Farber disclaims beneficial ownership of these shares. Includes 528,122 shares held by Farber Family LLC (“FFLLC”) which is managed by Jeffrey and David Farber. David Farber and Jeffrey Farber each disclaim beneficial ownership of these shares. Includes 73,408 shares held by Jeffrey Farber as custodian for his children, 17,279 shares held as joint custodian with David Farber for a relative, and also includes 38,000 shares held by Farber Investment Company (“FIC”). Jeffrey Farber and David Farber each beneficially own 25% of FIC and each disclaim beneficial ownership of all but 9,500 shares held by FIC. Includes 870,919 shares held by a Grantor Retained Annuity Trust, in which Jeffrey Farber is the trustee.

(10)

Includes 854,443 shares held by the David and Nancy Family Foundation. David Farber disclaims beneficial ownership of these shares. Includes 528,122 shares held by FFLLC which is managed by Jeffrey and David Farber. David Farber and Jeffrey Farber each disclaim beneficial ownership of these shares. Includes 180,145 shares held by David Farber as joint custodian with his children, 148,160 shares held as trustee for his children and 17,279 shares held as joint custodian with Jeffrey Farber for a relative. David Farber disclaims beneficial ownership of these shares. Also includes 38,000 shares held by FIC. Jeffrey Farber and David Farber each beneficially own 25% of FIC and each disclaim beneficial ownership of all but 9,500 shares held by FIC.

(11)

Includes 89,846 unvested shares received pursuant to restricted stock awards granted in July 2018, July 2019, and July 2020.

(12)

Includes 2,759 vested options to purchase common stock at an exercise price of $17.40 per share, 9,110 vested options to purchase common stock at an exercise price of $12.20 per share, and 16,142 vested options to purchase common stock at an exercise price of $6.57 per share.

(13)

Includes 81,512 unvested shares received pursuant to restricted stock awards granted in July 2018, July 2019, July 2020, and September 2020.

(14)

Includes 4,000 vested options to purchase common stock at an exercise price of $4.16 per share, 9,334 vested options to purchase common stock at an exercise price of $13.86 per share, 4,200 vested options to purchase common stock at an exercise price of $34.77 per share, 6,635 vested options to purchase common stock at an exercise price of $12.20 per share, and 11,500 vested options to purchase common stock at an exercise price of $6.57 per share.

* Percent of class calculation is based on 41,625,636 outstanding shares of common stock at October 31, 2020.

** Assumes that all options exercisable within sixty days of October 31, 2020 have been exercised.

10


The following table sets forth, as of October 31, 2020, information regarding the names and addresses of the stockholders known to the Company to be beneficial owners of more than five (5%) percent of the Company’s common stock.

    

Number of

    

Percent of

 

Name and Address of Beneficial Owner

Shares

Class

 

BlackRock, Inc.

 

55 East 52nd Street

New York, NY 10055

5,227,912

(1)  

13.0

%

D.E. Shaw & Co., L.P.

1166 Avenue of the Americas, 9th Floor, 6th Ave

New York, NY 10036

3,412,246

(2)  

8.50

%

JP Morgan Chase & Co.

 

383 Madison Avenue

New York, NY 10179

2,765,513

(3)  

6.80

%

The Vanguard Group

 

100 Vanguard Blvd.

Malvern, PA 19355

2,360,972

(4)

5.85

%

LSV Asset Management

 

155 N Wacker Dr, Suite 4600

Chicago, IL 60606

2,099,152

(5)  

5.21

%

Highbridge Capital Management, LLC

 

277 Park Avenue, 23rd Floor

New York, New York 10172

2,128,841

(6)

5.01

%


(1)

Based on Schedule 13G/A filed by Blackrock, Inc. with the SEC on February 4, 2020, Blackrock, Inc. has sole voting power over 5,172,055 shares, shared voting power over 0 shares, sole dispositive power over 5,227,912 shares and shared dispositive power over 0 shares.

(2)

Based on Schedule 13G/A filed by D.E. Shaw & Co., L.P. with the SEC on February 14, 2020, D.E. Shaw & Co., L.P. has sole voting power over 0 shares, shared voting power over 3,320,872 shares, sole dispositive power over 0 shares and shared dispositive power over 3,412,246 shares.

(3)

Based on a Schedule 13G filed by JP Morgan Chase & Co. with the SEC on January 24, 2020, JP Morgan Chase & Co. has sole voting power over 2,492,538 shares, shared voting power over 0 shares, sole dispositive power over 2,735,913 shares and shared dispositive power over 0 shares.

(4)

Based on a Schedule 13G filed by The Vanguard Group with the SEC on February 11, 2020, The Vanguard Group has sole voting power over 34,000 shares, shared voting power over 3,946 shares, sole dispositive power over 2,330,532 shares and shared dispositive power over 30,440 shares.

(5)

Based on Schedule 13G filed by LSV Asset Management with the SEC on February 11, 2020, LSV Asset Management has sole voting power over 1,309,713 shares, shared voting power over 0 shares, sole dispositive power over 2,099,152 shares and shared dispositive power over 0 shares.

(6) Based on Schedule 13G filed by Highbridge Capital Management, LLC with the SEC on July 20, 2020, Highbridge Capital Management, LLC has sole voting power over 0 shares, shared voting power over 2,128,841 shares, sole dispositive power over 0 shares and shared dispositive power over 2,128,841 shares.

11


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors, officers and persons who own more than 10% of a registered class of the Company’s equity securities to file with the SEC reports of ownership and changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater-than-10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

Based solely on review of the copies of such reports furnished to the Company or written representations that no other reports were required, the Company believes that, during Fiscal 2020, all filing requirements applicable to its officers, directors and greater-than-10% beneficial owners under Section 16(a) of the Exchange Act were complied with in a timely manner, except for one Form 4 for Jeffrey Farber reporting a single sale of 142 shares. The transaction was subsequently reported on a Form 5 and Jeffrey Farber disclaims beneficial ownership of these shares.

DIRECTORS AND OFFICERS

The directors and executive officers of the Company are set forth below:

Age

Position

Directors:

 

 

Patrick G. LePore

 

65

 

Chairman of the Board

John C. Chapman

 

66

 

Director

Timothy C. Crew

 

59

 

Director

David Drabik

 

52

 

Director

Jeffrey Farber

 

60

 

Director

Melissa Rewolinski

 

51

 

Director

Paul Taveira

 

61

 

Director

Officers:

 

Timothy C. Crew

 

59

 

Chief Executive Officer

John Kozlowski

 

48

 

Vice President of Finance, Chief Financial Officer
and Principal Accounting Officer

John M. Abt

 

55

 

Vice President and Chief Quality and Operations Officer

Maureen M. Cavanaugh

 

61

 

Senior Vice President and Chief Commercial Operations Officer

Robert Ehlinger

 

63

 

Vice President and Chief Information Officer

Samuel H. Israel

 

59

 

General Counsel and Chief Legal Officer

Patrick G. LePore — See “Proposal No. 1 - Election of Directors” for information pertaining to Mr. LePore.

John C. Chapman — See “Proposal No. 1 - Election of Directors” for information pertaining to Mr. Chapman.

Timothy C. Crew — See “Proposal No. 1 - Election of Directors” for information pertaining to Mr. Crew.

David Drabik — See “Proposal No. 1 - Election of Directors” for information pertaining to Mr. Drabik.

Jeffrey Farber — See “Proposal No. 1 - Election of Directors” for information pertaining to Mr. Farber.

12


Melissa Rewolinski — See “Proposal No. 1 - Election of Directors” for information pertaining to Dr. Rewolinski.

Paul Taveira — See “Proposal No. 1 - Election of Directors” for information pertaining to Mr. Taveira.

Timothy C. Crew was appointed as the Company’s Chief Executive Officer and a Director of the Company in January 2018. Mr. Crew has more than 30 years of experience in the generic and branded pharmaceutical industries. Previously, he served as Chief Executive Officer of Cipla North America, a global pharmaceutical company based in Mumbai, India. Before Cipla, he worked for eight years at Teva Pharmaceuticals Industries Ltd. (“Teva”), where he ultimately served as Senior Vice President and Commercial Operating Officer of the North American Generics division, the world’s largest generic operation with multibillion dollars of annual sales. Before that, he was Teva’s Vice President, Alliances and Business Development. Mr. Crew was also an Executive Vice President, North America, for Dr. Reddy’s Laboratories Ltd. Mr. Crew began his pharmaceutical career at Bristol-Myers Squibb, where he held a number of senior management positions in global marketing, managed healthcare, marketing, business development and strategic planning. Prior to his pharmaceutical roles, Mr. Crew served in the United States Army, where he rose to the rank of Captain. Mr. Crew earned a Bachelor of Arts degree in economics from Pomona College and a Masters of Business Administration degree from Columbia Business School.

John Kozlowski joined the Company in 2009 and was promoted in 2010 to Corporate Controller. In 2016, Mr. Kozlowski was promoted to Vice President Financial Operations & Corporate Controller. In October 2017, Mr. Kozlowski was promoted to Chief Operating Officer. In April 2018, Mr. Kozlowski was promoted to Chief of Staff and Strategy Officer. In August 2019, Mr. Kozlowski succeeded Martin Galvan as the Vice President of Finance and Chief Financial Officer. In July 2020, Mr. Kozlowski was also appointed the Principal Accounting Officer. Prior to joining the Company, Mr. Kozlowski served in senior finance and accounting roles for Optium Corporation and Finisar Australia. He earned a Bachelor of Arts degree in finance from James Madison University and a Masters of Business Administration degree from Rider University.

John M. Abt joined the Company in March 2015 as Vice President of Quality and was promoted to Vice President and Chief Quality and Operations Officer in April 2018. Prior to joining the Company, Mr. Abt held senior level positions in both quality and operations and has extensive knowledge in pharmaceutical manufacturing, quality, strategy, business improvement and site transformation. Prior to joining the Company, he most recently served as Teva Pharmaceuticals’ Vice President Global Quality Strategy, overseeing the development and implementation of strategy and associated initiatives for the global quality organization. Before that, he held a number of leadership positions of increasing responsibility in operations, continuous improvement, quality systems and compliance. He earned his Doctorate in Business Administration from Temple University, Masters of Administrative Science in Business Management from Johns Hopkins University and a Bachelor of Science in Biochemistry from Niagara University.

Maureen M. Cavanaugh joined the Company in May 2018 as Senior Vice President and Chief Commercial Operations Officer. Prior to joining the Company, Ms. Cavanaugh spent the past 11 years at Teva, most recently as Senior Vice President, Chief Commercial Officer, North American Generics. Earlier at Teva, Ms. Cavanaugh served as Senior Vice President and General Manager, US Generics and before that held a variety of positions in sales, marketing and customer operations. Ms. Cavanaugh also previously served as Senior Director of Marketing at PAR Pharmaceuticals, as Director, Product Management and Marketing Research at Sandoz Inc., and held a number of finance, sales and marketing operations positions at Bristol Myers-Squibb. Ms. Cavanaugh earned a Bachelor of Science in Business Administration degree from LaSalle University and a Masters of Business Administration degree from Rider University.

Robert Ehlinger joined the Company in July 2006 as Chief Information Officer. In June 2011, Mr. Ehlinger was promoted to Vice President of Logistics and Chief Information Officer. Prior to joining Lannett, Mr. Ehlinger was the Vice President of Information Technology at MedQuist, Inc., a healthcare services provider, where his career spanned 10 years in progressive operational and technology roles. Prior to MedQuist, Mr. Ehlinger was with Kennedy Health Systems as their Corporate Director of Information Technology supporting acute care and ambulatory care health information systems and biomedical support services. Earlier on, Mr. Ehlinger was with Dowty Communications where he held various technical and operational support roles prior to assuming the role of International Distribution Sales Executive managing the Latin America sales distribution channels. Mr. Ehlinger received a Bachelor’s of Arts degree in Physics from Gettysburg College in Gettysburg, PA.

Samuel H. Israel joined the Company in July 2017 as General Counsel and Chief Legal Officer. Prior to joining Lannett, Mr. Israel was a partner with Fox Rothschild LLP, a national, full-service law firm, with 26 offices that provide services in more than 60 practice areas, since 1998. He served as chair of the firm’s Pharmaceutical and Biotechnology Practice and handled a variety of commercial litigation matters. Mr. Israel earned a Bachelor of Science degree in Chemical Engineering from the University of Pennsylvania and a Juris Doctor degree with honors from Rutgers University School of Law.

To the best of the Company’s knowledge, there have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions that are material to the evaluation of the ability or integrity of any director, executive officer, or significant employee during the past ten years.

13


EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This Compensation Discussion and Analysis (“CD&A”) describes our Fiscal 2020 Executive Compensation Program. It provides an overview of the compensation program for the following Named Executive Officers (“NEOs”) and how the Compensation Committee of the Board of Directors (“the Committee”) made its decisions for our 2020 Fiscal Year.

NEO

Title/Role

Timothy C. Crew

Chief Executive Officer (“CEO”)

John Kozlowski

Vice President of Finance, Chief Financial Officer and Principal Accounting Officer*

Maureen Cavanaugh

Senior Vice President and Chief Commercial Operations Officer

Samuel H. Israel

Chief Legal Officer and General Counsel

John Abt

Vice President and Chief Quality and Operations Officer

Martin P. Galvan

Former Vice President of Finance and Chief Financial Officer*


*

Mr. Galvan retired from the Company effective August 30, 2019 and Mr. Kozlowski assumed the role of Vice President, Finance and Chief Financial Officer effective August 31, 2019 and also assumed the Principal Accounting Officer role effective July 13, 2020.

Say on Pay Results in 2020

At our annual stockholders meeting in January 2020, our stockholders approved the “say-on-pay” proposal, with approximately 95% of votes cast in support of our executive compensation program.

Although this vote is non-binding, its outcome, along with stockholder feedback and the competitive business environment, plays an important role in how the Committee makes decisions about the program’s structure. To this end, the Committee periodically conducts reviews of the Executive Compensation Program, monitors industry practices and seeks feedback from some of our largest investors. Based in part on this feedback, the Committee introduced performance shares tied to the Company’s three-year total stockholder returns relative to companies in the S&P Pharmaceuticals Select Industry Index as part of the long-term incentive program for NEOs in Fiscal 2018 and increased its weighting from 25% to 33.3% of the target award opportunity in Fiscal 2019 and 2020. Our executive compensation program for NEOs continues to place a significant emphasis on performance-based variable pay tied to key strategic objectives. We also maintain stock ownership requirements for executive officers and non-employee directors, and our Board of Directors recently approved an expanded compensation recovery or “clawback” provision amending all executive officer employment contracts in the event of the need for a restatement of financial statement arising from fraud or misconduct. We believe these actions demonstrate our responsiveness to stockholder feedback and our ongoing commitment to aligning executive pay with performance and long-term value creation.

The following pages of this CD&A highlight performance results since Fiscal 2017 that have had a direct impact on the compensation paid to our NEOs over the same period of time. It looks specifically at the performance measures used in the short- and long-term incentive awards under the Executive Compensation Program that the Committee believes drive stockholder value. It also describes recently approved changes for Fiscal 2021 to further align our Executive Compensation Program with our objectives and best competitive practice.

COVID-19 Impact and Response

The COVID-19 pandemic poses serious health risks for all companies and the general public as well as financial challenges for many organizations. As a generic pharmaceutical company, we are considered to be an essential business and have maintained continuous operations throughout the pandemic. Over the past several years, we took a variety of actions to refocus our business on core generics, streamline our operations, strengthen our financial position and supply chain, and prioritize new product development to further diversify our portfolio and customer base. These initiatives, along with the hard work and dedication of our employees, has allowed us to successfully navigate through these challenging times. In March 2020, we implemented a variety of procedures and safeguards to help ensure the safety of employees at our manufacturing plants, distribution center, and research and development facilities, while enabling other staff to work remotely. As a result, we have continued to operate profitably (excluding impairment charges and certain non-cash and non-recurring expenses), minimize supply chain disruptions, and produce and distribute more than 100 high quality pharmaceutical products that address a wide variety of therapeutic needs. Demand for many of our products remains strong, although our profitability and sales for certain products have been adversely impacted by the pandemic.

14


Due to the continued uncertainty within the current environment, the Committee decided to defer the timing of base salary merit increases, excluding certain promotional adjustments, from the first quarter to the third quarter of Fiscal 2021. Additionally, the Committee slightly increased the emphasis on restricted stock for Fiscal 2021 equity grants to NEOs and other executives to further enhance retention. Equity grants and total compensation opportunities for NEOs will continue to emphasize at-risk, variable pay. The Committee will continue to carefully monitor COVID-19’s impact on our business and may consider additional actions or modifications to our executive compensation program as needed to help ensure it continues to reinforce strategic priorities and incentivize and retain our NEOs, while also being mindful of the pandemic’s impact on all company stakeholders.

A Word About Risk

The Committee believes that incentive plans, along with the other elements of the Executive Compensation Program, provide appropriate rewards to our NEOs to keep them focused on our goals. The Committee also believes that the program’s structure, along with its oversight, continues to provide a setting that does not encourage the NEOs to take excessive risks in their business decisions.

Executive Summary

Business Highlights

Fiscal 2020 included various challenges relating to the COVID-19 pandemic, as noted above, as well as many achievements. Most importantly, the Company was able to maintain operations, produce and distribute critical medications to patients and customers while providing a safe working environment for our employees during an unprecedented public health pandemic and broad economic shutdown. We continued to successfully execute on our strategy of growing our core business, launching new products, building our R&D pipeline, expanding strategic alliances, and reducing costs. We launched a total of 18 new products during Fiscal 2020, most of which have limited or moderate competitors, matching the record number of launches in Fiscal 2019. During a very challenging environment, we achieved our budgeted revenue goal, with nearly 23% of sales derived from new products launched in Fiscal 2019 and 2020. We also continued to operate profitably, based on adjusted metrics for Operating Income and EPS which exclude impairments, amortization, restructuring and non-cash interest expenses, and certain other non-recurring items. During Fiscal 2020, we completed certain refinancing transactions to lower interest expense and reduced our total debt by approximately $60 million. We also continued to execute on our cost savings program, which generated net annualized cost savings of approximately $33.0 million at the end of Fiscal 2020 when compared to the Fiscal 2018 expenses. During the first quarter of Fiscal 2021, we fully implemented a new restructuring and cost savings plan with expected annual savings of more than $15 million to help address ongoing competitive pricing pressure within the generic pharmaceuticals sector. We added a new non-employee director in July 2019 and continue to execute on a number of key strategic initiatives as discussed below. We believe these actions will better position the Company for long-term profitable growth and stockholder value creation.

In addition, we continued to make important advances in product development and mix, market share, and in our regulatory approval process, allowing us to efficiently and safely place our products that span a variety of categories on the market. As noted above, we have launched a total of 18 new products over each of the past two fiscal years, with additional launches planned in Fiscal 2021 and beyond. As of June 30, 2020, we had over 100 products available to the market. We also continue to capitalize on our strategic partnerships, both domestically and internationally. Since January 2018, we acquired or in-licensed approximately 60 ANDA products and entered into several new strategic alliance agreements which diversified and enhanced our revenue streams. In Fiscal 2020, we entered into commercialization agreements with several leading pharmaceutical companies that have the potential to significantly increase our future annual revenues. Included among these is a revised and expanded agreement with our strategic alliance partner, HEC Group, for an insulin-based product with significant market potential to treat type 1 and type 2 diabetes, which impacts 34 million Americans. We also entered into agreements with Respirant for inhalation products. We continue to make progress advancing these and other product candidates towards commercial launches over the next several years.

15


Our financial performance in Fiscal 2020 was adversely impacted by the COVID-19 pandemic and ongoing competitive pressures within the generic pharmaceutical industry. Despite these challenges, our executive leadership and other employees made significant progress in executing our strategic plan and positioning the Company for future growth. Excluding Fiscal 2019 sales associated with a former distribution agreement with Jerome Stevens Pharmaceuticals, which expired in March 2019, our annual revenues grew by approximately 19% in Fiscal 2020. Our Fiscal 2020 sales mix shifted towards lower margin products due to the pandemic, adversely impacting our profitability. Our financial results for Fiscal 2020 slightly exceeded the target performance goal for net sales and were over 90% of target levels for the profitability metrics under the Annual Bonus Plan. We achieved target results for refinancing goals under the strategic objectives component. Calculated award funding levels associated with the aforementioned targets as well as individual objectives under our Annual Bonus Plan were equal to approximately 83% of target funding for most NEOs. In July 2020, our NEOs received target equity grants based on a target value mix of 45% for restricted stock, 20% for stock options, and 35% for performance shares tied to our relative TSR vs. companies in the S&P Pharmaceuticals Select Index for the three-year performance cycle running from July 1, 2020 through June 30, 2023. Many outstanding stock options held by our NEOs are currently “underwater” and the value of many other outstanding equity awards are below grant date target values. Based on our interim relative TSR results through June 30, 2020, performance shares granted in Fiscal 2018 are tracking below threshold levels which, if sustained over the applicable three-year performance periods, would result in no awards being earned by NEOs, while Fiscal 2019 grants are tracking slightly above threshold levels (and below-target) and those granted in Fiscal 2020 are currently tracking at above-target levels.

Key financial performance highlights, as reported in accordance with GAAP requirements, are shown below. GAAP-based results for Fiscal 2020 reflect asset impairments and certain other non-cash and/or non-recurring expenses that are excluded from adjusted profitability metrics. Year over year declines vs. Fiscal 2019 results reflect continued challenging market conditions within the generic pharmaceuticals industry as well as the non-renewal of the former distribution agreement with Jerome Stevens Pharmaceuticals (JSP), which expired in March 2019 and had significantly contributed to our prior net sales and profitability. See the section of our Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional details and discussion of Company performance.

Graphic


†Peer Group average pertains to the Fiscal 2020 peer group.

16


Comparison of Target Versus Actual CEO Pay (In Year Earned)

The following chart compares actual versus target CEO pay for Mr. Crew for the past three fiscal years. To more accurately demonstrate the impact of Company performance on executive pay, comparisons include annual equity grants in the year earned, as opposed to the year granted. Fiscal 2018 values for Mr. Crew include annualized base salary and short-term incentives (STI) and new hire equity grants. Actual pay for each of Fiscal 2019 and 2020 include the applicable pro-rata portions of a one-time retention incentive earned by Mr. Crew during the period of 12/1/18 - 12/1/19. As shown below, actual pay levels earned for Fiscal 2018 were well below target opportunities, even when new hire equity grants are included. Including the value of the one-time retention incentive, Mr. Crew’s actual pay was well above target for Fiscal 2019 and slightly above target for Fiscal 2020. Excluding the retention incentive award, actual pay was slightly above target for Fiscal 2019 and below target for Fiscal 2020. Equity-based long-term incentives reflect grant-date award values, with current actual or realizable values for Fiscal 2018 awards considerably lower based on our closing stock price as of June 30, 2020.

Graphic

17


Comparison of Disclosed Versus Realizable CEO Pay for Mr. Crew (Based on Summary Compensation Table)

Compared with values reported in the Summary Compensation Table for Mr. Crew, current realizable values are 20% lower for Fiscal 2019 and 12% lower for Fiscal 2020. Mr. Crew’s reported compensation for Fiscal 2019 reflects actual base salary plus bonus (STI) earned plus equity awards granted in Fiscal 2019 (with stock options and restricted stock based on Fiscal 2018 performance). Fiscal 2020 reported compensation includes actual base salary plus STI earned plus the full value of a retention incentive earned in December 2019 plus equity awards granted in Fiscal 2020 (with stock options and restricted stock based on Fiscal 2019 performance). Realizable pay reflects current intrinsic values for equity grants based on our stock price as of June 30, 2020, with assumed performance share award funding at 63% of target for the Fiscal 2019 grant and at 158% of target for the Fiscal 2020 grant based on interim relative TSR results from date of grant through June 30, 2020.

Graphic

18


Fiscal 2020 Executive Compensation Program Changes

As our Company grows, the Committee is committed to the evolution and improvement of our Executive Compensation Program to ensure alignment with our business strategy and stockholder interests, as well as best competitive practices. The Committee made the following adjustments to the program’s core compensation elements for 2020:

What’s Changed

How It’s Changed

Explanation

Short-Term Incentives (“Annual Bonus”)

Changed performance mix to increase the emphasis on the strategic objectives component with a corresponding decrease in the emphasis on Adjusted Operating Income, in each case by 10% of the total target award opportunity.

No changes were made to performance metrics or award opportunities. Half of total award opportunities are tied to corporate profitability. Increased emphasis on strategic objectives allows for a more holistic assessment of performance, with Fiscal 2020 component tied to refinancing goals to strengthen our financial position.

Long-Term Incentives

Increased target award opportunities for Messrs. Crew (from 300% to 350% of salary), Kozlowski (from 150% to 175% of salary) and Abt (from 100% to 150% of salary).

Eliminated former performance “look back” feature that impacted stock option and restricted stock grant levels. Fiscal 2020 target value mix was equally weighted between stock options, restricted stock, and performance shares tied to our 3-year relative total stockholder return (TSR) vs. industry comparators.

Increased full vesting period to four years for all award vehicles.

Mr. Crew received a market adjustment to align his target total compensation more closely with 50th percentile market values. Mr. Kozlowski received a promotional adjustment and Mr. Abt’s increase recognizes the assumption of additional responsibilities. The performance lookback elimination allows for more consistency in terms of annual equity grant levels, to further enhance retention and align more closely with market practice. The time frame for full vesting for all awards was increased from three years to four years to further enhance retention.

19


To address retention concerns and encourage NEOs to focus on achieving strategic objectives following the announced non-renewal of the JSP contract, the Committee adopted a retention bonus program in December 2018. NEOs were eligible to receive cash payments equal to 100% of their Fiscal 2019 base salary if they remained employed and performed duties and responsibilities in a satisfactory manner through December 1, 2019, or if they are terminated other than for Cause (as defined in employment agreements) during the one-year retention period. Our current NEOs earned retention incentives in December 2019 upon completing the service requirements and Mr. Galvan, our former Vice President Finance & CFO, received a pro-rated portion of his incentive following his termination without Cause on August 30, 2019 per his Separation Agreement. Retention incentive awards are reported in the “Bonus” column of the Summary Compensation Table for Fiscal 2020.

Our Commitment to Sound Corporate Governance

In order to align our executive compensation program with long-term stockholder interests, we have adopted a variety of sound corporate governance practices, as illustrated in the following table:

What We Do

What We Don’t Do

Emphasize variable incentives to align pay with performance

Provide multi-year pay guarantees within employment agreements

Tie incentive compensation to multiple performance metrics that reinforce key business objectives

Allow stock option repricing without stockholder approval

Place primary emphasis on equity compensation to align executive and stockholder interests

Permit stock hedging or pledging activities

Use stock ownership guidelines for executive officers and non-employee directors

Provide uncapped incentive awards

Maintain a clawback policy allowing for the recoupment of excess compensation in the event of a material financial restatement and fraud or misconduct

Pay tax gross-ups on any awards

Engage an independent compensation consultant to advise the Compensation Committee

Provide excessive executive perquisites

Executive Officer Stock Ownership Guidelines

To further encourage alignment with stockholder interests, the Board has established stock ownership and retention requirements for executive officers. Within five years of first being subject to guidelines in their current role, each executive officer is required to achieve and maintain ownership levels, based on a multiple of base salary, as noted in the following table.

Position

Base Salary Multiple Ownership Requirement

CEO

3.0X (300%) annual base salary

All Other Executive Officers

1.5X (150%) annual base salary

Until guidelines are met, executive officers must retain 50% of net after-tax shares received from equity grants, including net after-tax shares received from stock option exercise or vesting of restricted stock and performance shares, until they are in compliance. If guidelines are not met within the five-year compliance period, the holding requirement increases to 100% of net after-tax shares from equity grants until achieved. Shares owned outright by executive officers or their spouse, as well as shares held in retirement plans and unvested time-based restricted stock count towards ownership requirements. Unearned performance shares and outstanding stock options do not count towards ownership. Non-employee directors are also subject to stock ownership and holding requirements, as described in the “Compensation of Directors” section of this proxy.

20


Overview of the Executive Compensation Program

Our Philosophy

A fundamental objective of our Executive Compensation Program is to focus our executives on creating long-term stockholder value — all aspects of our program are rooted in this goal and designed around the following guiding principles:

Pay for performance: A significant portion of compensation should be variable and directly linked to corporate and individual performance goals and results.

Competitiveness: Compensation should be sufficiently competitive to attract, motivate and retain an executive team fully capable of driving exceptional performance.

Alignment: The interests of executives should be aligned with those of our stockholders through equity-based compensation and performance measures that help to drive stockholder value over the long term.

To support these guiding principles, our program includes the following compensation elements:

Pay Element

Form

Purpose

Base Salary

Cash (Fixed)

Provides a competitive level of compensation that reflects position responsibilities, strategic importance of the position and individual experience.

Short-Term Incentives (Annual Bonus)

Cash (Variable)

Provides a cash-based award that recognizes the achievement of corporate goals in support of the annual business plan, as well as specific, qualitative and quantitative individual goals for the most recently completed fiscal year.

Long-Term Incentives

Equity (Variable)

Provides incentives for management to execute on financial and strategic goals that drive long-term stockholder value creation and support the Company’s retention strategy.

21


Target Compensation Mix

The charts below show that most of our NEO’s target compensation for Fiscal 2020 is variable (82% for our CEO and an average of 69% for our other current NEOs). Variable pay includes the target value of short-term cash incentives (“STI”), performance shares, stock options, and restricted stock.

Graphic

Based upon Fiscal 2020 compensation as reported in the Summary Compensation Table on page 33 of this proxy, variable pay represents approximately 67% of total pay for our CEO and 52% of average total pay for our other current NEOs. This mix reflects below target annual incentives earned in Fiscal 2020 under the Annual Bonus Plan (shown as STI), the full value of one-time retention incentives earned in December 2019, target performance share grants in Fiscal 2020, and slightly above-target stock option and restricted stock grants in Fiscal 2020 based on Fiscal 2019 Company performance. Excluding one-time cash retention incentives, the weighting on variable pay increases to 80% for the CEO and averages 68% for other current NEOs.

Graphic

22


How Compensation Decisions Are Made

The Role of the Compensation Committee. The Committee, composed entirely of independent directors, is responsible for making executive compensation decisions for the NEOs. The Committee works closely with its independent compensation consultant, Pearl Meyer & Partners (“Pearl Meyer”), and management to examine pay and performance matters throughout the year. The Committee’s charter, which sets out its objectives and responsibilities, can be found at our website at www.lannett.com under the “Investors” section.

The Committee has authority and responsibility to establish and periodically review our Executive Compensation Program and compensation philosophy. Importantly, the Committee also has the sole responsibility for approving the corporate performance goals upon which compensation for the CEO is based, evaluating the CEO’s performance and determining and approving the CEO’s compensation, including equity-based compensation, based on the achievement of his goals. The Committee also reviews and approves compensation levels for other NEOs, taking into consideration recommendations from the CEO.

In making its determinations, the Committee considers market data and advice from Pearl Meyer, as well as budgets, reports, performance assessments and other information provided by management. It also considers other factors, such as the experience, skill sets, and contributions of each NEO towards our overall success. However, the Committee is ultimately responsible for all compensation-related decisions for the NEOs and may exercise its own business judgment when evaluating performance results and making compensation decisions.

Timing of Committee Meetings and Grants; Option and Share Pricing

The Committee meets as necessary to fulfill its responsibilities, and the timing of these meetings is established during the year. The Committee holds special meetings from time to time as its workload requires. Annual equity grants occur after finalizing fiscal year end performance results, typically within the July/August time frame. Individual grants (for example, associated with the timing of a new NEO or promotion to an NEO position) and special recognition awards may occur at any time of year. The exercise price of each stock option and fair value of restricted stock awarded to our NEOs is the closing price of our common stock on the date of grant.

The Role of the CEO. The CEO does not play any role in the Committee’s determination of his own compensation. However, he presents the Committee with recommendations for each element of compensation including base salaries and short- and long-term incentive awards for the other NEOs, as well as non-executive employees who are eligible for equity grants. The CEO bases these recommendations upon his assessment of each individual’s performance, as well as market practice. The Committee has full discretion to modify the recommendations of the CEO in the course of its approvals.

The Role of the Independent Consultant. The Committee consults, as needed, with an outside compensation consulting firm. As it makes decisions about executive compensation, the Committee reviews data and advice from its consultant about current compensation practices and trends among publicly traded companies in general and comparable generic pharmaceutical companies in particular. The Committee also periodically reviews recommendations from its outside consultant and makes recommendations to the Board about the compensation for non-employee directors.

In Fiscal 2019, Pearl Meyer was retained by the Committee, as its independent consultant, to review the competitiveness of the Executive Compensation Program. Pearl Meyer provided the Committee with compensation data with respect to similarly sized biopharmaceutical and life sciences companies and consulted with the Committee about a variety of issues related to competitive compensation practices and incentive plan designs. Pearl Meyer was also retained by the Committee in Fiscal 2020 to review the competitiveness of the Executive Compensation Program and to provide ongoing advice relating to the Executive Compensation Program. The Committee assessed the independence of Pearl Meyer pursuant to the SEC rules and concluded that no conflict of interest exists that would prevent Pearl Meyer from independently advising the Committee.

23


Peer Group & Benchmarking

The Committee evaluates industry-specific and general market compensation practices and trends to ensure the Executive Compensation Program is appropriately competitive. When making decisions about the program for Fiscal 2020, the Committee considered publicly available data, as well as a market study conducted by Pearl Meyer in April 2019. The Pearl Meyer study developed market values using a blend of peer group proxy pay data for the companies shown below as well as published survey data for the broader life sciences industry. Using this information, the Committee compared our program to the compensation practices of other companies which the Committee believes are comparable to the Company in terms of size, scope and business complexity (the “peer group”). As shown below, the Company ranked in the upper half of the peer group in terms of employee headcount, operating income and net sales and between the 25th and 50th percentiles for enterprise value.

Enterprise

Fiscal Year

Fiscal

 

Fiscal Year

Value

End Operating

Year End

Cumulative

Cumulative

Cumulative

 

End # of

6/30/2020

Income

Sales

1 YR TSR

3 YR TSR

5 YR TSR

 

Company Name

Employees

($mm)

($mm)

($mm)

6/30/2020

6/30/2020

6/30/2020

 

Acorda Therapeutics, Inc.

 

334

$

203

$

(117)

$

192

 

(90.4)

%

(96.3)

%

(97.8)

%

Akorn, Inc.

 

2,227

$

843

$

(61)

$

682

 

(94.6)

%

(99.2)

%

(99.4)

%

Amneal Pharmaceuticals, Inc.

 

5,500

$

3,719

$

19

$

1,626

 

(33.6)

%

%

%

Amphastar Pharmaceuticals, Inc.

 

2,027

$

1,083

$

$

322

 

6.4

%

25.8

%

27.8

%

ANI Pharmaceuticals, Inc.

338

$

592

$

16

$

207

 

(60.7)

%

(30.9)

%

(47.9)

%

Assertio Therapeutics, Inc.

 

125

$

24

$

(4)

$

230

 

(75.2)

%

(92.0)

%

(96.0)

%

Cambrex Corporation

 

1,732

$

$

11

$

531

 

%

%

%

Catalent, Inc.

12,300

$

15,216

$

314

$

2,518

 

35.2

%

108.8

%

149.9

%

Momenta Pharmaceuticals, Inc.

 

118

$

3,408

$

(312)

$

24

 

167.2

%

96.9

%

45.9

%

Prestige Consumer Healthcare Inc.

 

520

$

3,564

$

300

$

963

 

18.6

%

(28.9)

%

(18.8)

%

Supernus Pharmaceuticals, Inc.

 

464

$

1,230

$

149

$

393

 

(28.2)

%

(44.9)

%

39.9

%

United Therapeutics Corporation

 

920

$

4,581

$

(178)

$

1,449

 

55.0

%

(6.7)

%

(30.4)

%

Lannett Company, Inc.

 

954

$

889

$

20

$

546

 

19.8

%

(64.4)

%

(87.8)

%

Percentile Rank

 

58

%

 

36

%

 

67

%

 

58

%

73

%

30

%

30

%

Subsequent to the 2019 study, Akorn, Inc. filed for bankruptcy and Cambrex Corporation was acquired. For purposes of a subsequent market pay analysis conducted by Pearl Meyer in May 2020, the Committee approved a revised peer group excluding Akorn, Inc. and Cambrex Corporation and including the 10 remaining companies from the 2019 peer group as shown above. The revised peer group aligns with us in terms of company size and industry focus.

The Committee uses external market data as a reference point to ensure the Company’s executive compensation program is sufficiently competitive to attract, retain, and motivate highly experienced and talented NEOs. The Committee generally seeks to position target total direct compensation for NEOs at or near 50th percentile market values for comparable positions but does not utilize a purely formulaic benchmarking approach. Based on the April 2019 Pearl Meyer study, target total direct compensation, including the sum of base salary plus target short-term and long-term incentives, was within the competitive range (defined as +/- 15%) of 50th percentile market values for all then-current NEOs other than Mr. Kozlowski, who was above the range based on market values for his then-current role (and below the range vs. his now-current CFO role), and equal to 102% of the 50th percentile in the aggregate. Actual total direct compensation was well-below 50th percentile market values for all then-current executive officers participating in the Fiscal 2019 short-term and long-term incentive programs and equal to 61% of the 50th percentile in the aggregate, reflecting below-target incentive awards based on actual vs. planned performance. As previously noted, when evaluating our executive compensation program, the Committee considers a variety of other factors in addition to external market data, such as Company and individual performance, and each NEO’s qualifications, skill sets, and past and expected future contributions towards our success.

24


2020 Executive Compensation Program Decisions

Base Salary

We attribute much of our success to our highly experienced executive management team, and the strength of their leadership has been clearly demonstrated by our exceptional long-term performance results and growth. In order to remain competitive among our industry peers, the Committee believes it should set compensation at market-competitive levels that reflect the executive’s experience, role and responsibilities. Based on Pearl Meyer’s 2019 study, current salaries were below 50th percentile market values for 3 of our 5 current NEOs and within a competitive range (+/- 10%) of the 50th percentile for all incumbents. The Committee approved merit increases equal to 2% of base salary for Mr. Crew and 3% base salary for all of our other current NEOs for Fiscal 2020, plus an additional 15% market adjustment effective August 5, 2019 for Mr. Kozlowski upon his promotion of the VP, Finance and Chief Financial Officer role. The following table summarizes annualized salaries for Fiscal 2019 and 2020 for our NEOs. Annualized salaries differ from actual values received as reported in the Summary Compensation Table for certain incumbents with less than a full year of service or promotions.

NEO

    

2019 Base Salary

    

2020 Base Salary

% Change

Timothy C. Crew

$

735,000

$

750,000

2

%

John Kozlowski

$

325,000

$

385,000

18

%

Maureen Cavanaugh

$

425,000

$

438,000

3

%

Samuel H. Israel

$

400,000

$

412,000

3

%

John Abt

$

344,500

$

354,500

3

%

Short-Term Incentives (Annual Bonus)

The Company’s NEOs participate in an annual bonus program, which is designed to reinforce the annual business plan and budgeted goals and to recognize yearly performance achievements focused primarily on financial and operating results. Actual payouts can range from 0% (below threshold) to 200% (superior performance) of target awards and are paid in cash. The Committee sets each NEO’s threshold, target and superior bonus opportunity as a percentage of base salary, as follows:

Annual Bonus Opportunity As a % of Salary

 

Threshold

Target

Superior

 

NEO

(25% of Target)

(100% of Target)

(200% of Target)

 

Timothy C. Crew

 

25

%

100

%

200

%

All Other NEOs

 

15

%

60

%

120

%

Expressed as percentages of salary, Fiscal 2020 award opportunities were the same as those established in Fiscal 2019 for all NEOs who were employed during both years.

The overall annual bonus plan for Fiscal 2020 was comprised of two components:

Corporate Financial & Operational Goals: 70% of the total target award opportunity is tied to operating results versus targets established by the Committee to promote a focus on Company-wide profitable growth and collaboration:

Performance Metric

Weighting (out of 100%)

Adjusted Operating Income

30

%

Adjusted Earnings Per Share (“EPS”)

20

%

Net Sales

20

%

Strategic Objectives

20

%

Individual Objectives

10

%

Fiscal 2020 performance metrics and weightings were similar to those established in Fiscal 2019, except that weightings were decreased for the Adjusted Operating Income component (from 40% to 30% of the total target mix) and increased for the strategic objectives component (from 10% to 20% of the total target mix). These changes were made to allow for a more holistic assessment of performance and increased emphasis on key strategic objectives.

25


Adjusted Operating Income and Adjusted EPS are defined as GAAP Operating Income and diluted EPS, respectively, excluding bonus and stock-based compensation expense, as further adjusted for certain non-recurring items.

Strategic / Individual Objectives: 30% of the total target award opportunity is based on the achievement of pre-established quantitative and qualitative strategic and individual goals, to reinforce key strategic objectives and to promote individual accountability and “line of sight.” For Fiscal 2020, the strategic objectives component for all NEOs was tied to various refinancing objectives. The individual objectives component for each NEO is tied to various other strategic, financial and operational objectives, taking into consideration each NEO’s job function and responsibilities. For competitive harm reasons, the Company does not disclose specific details on individual goals and other strategic objectives.

2020 Short-Term Incentives (Annual Bonus): Results and Payouts

Corporate Financial & Operational Results (Collectively Weighted 70% of Total Target Award) Fiscal 2020 Target goals for Adjusted Operating Income, Adjusted EPS, and Net Sales were set below Fiscal 2019 actual levels based on our 2020 internal budgets which accounted for the non-renewal of the former JSP agreement and anticipated continued challenging market conditions within the generic pharmaceuticals sector. The Committee viewed the Fiscal 2020 performance hurdles as very challenging in light of then-current internal forecasts and industry and economic conditions. The Committee established Threshold performance hurdles at 85% of Target goals and Superior hurdles at 120% of Target to account for stretch goals, challenging market conditions, and to align more closely with our historical performance range spreads. Fiscal 2020 financial performance goals and actual results are shown in the following table:

Weighting

Performance Goals

Performance Metric

(Out of 70%)

Threshold

Target

Superior

Actual

Adjusted Operating Income ($ millions)

 

30

%

$

117.2

$

137.9

$

165.4

$

125.5

Adjusted EPS

 

20

%

$

1.26

$

1.49

$

1.78

$

1.41

Net Sales ($ millions)

 

20

%

$

457.4

$

538.1

$

645.7

$

545.7

Actual Fiscal 2020 performance results were slightly above the Target goal level for Net Sales and between Threshold and Target levels for both profitability metrics. Actual Adjusted Operating Income for Fiscal 2020 excluded pre-tax items totaling approximately $105.9 million, including restructuring expenses, impairments, and other non-recurring items. Actual Adjusted EPS excluded the same $105.9 million in pre-tax items plus $16.5 million primarily related to non-cash interest expense and a loss on extinguishment of debt as well as the related tax effects for all of these items. For Fiscal 2020, the Net Sales result was the same as the GAAP-reported value, with no adjustments applied.

Strategic and Individual Performance Results (Collectively Weighted 30% of Total Target Award) For Fiscal 2020, the strategic objectives component was primarily tied to various refinancing goals, which were met at the Target level. The Committee also considered each NEO’s contributions towards a variety of other company-wide strategic and function-specific objectives, including 18 new product launches, matching the prior year’s record setting level. While no specific weightings were assigned to these other objectives, the Committee considered each NEO’s contributions towards the Company’s response to the COVID-19 pandemic, ongoing success with restructuring activities, the continued strengthening of our balance sheet, maintaining operational discipline within a challenging market environment, and achievement of various other strategic growth milestones. Based on the Committee’s overall assessment, each NEO met or exceeded all goals for the strategic objectives and individual performance components.

Total Annual Bonus

Based on our Fiscal 2020 performance results, calculated award funding levels were equal to approximately 83% of target levels for each NEO other than Mr. Israel, who earned a maximum payout for his individual performance component and whose actual total award was equal to 93% of target. In evaluating these results, the Committee chose to not apply any discretion to calculated performance outcomes and award funding levels. Total Fiscal 2020 payouts for current NEOs are summarized in the following table:

Corporate Financial /

Strategic / Individual

Total Actual Bonus for

Current NEO

Operational Component

Objectives Component

Fiscal 2020

Timothy C. Crew

$

394,390

$

225,000

$

619,390

John Kozlowski

$

119,768

$

68,328

$

188,096

Maureen Cavanaugh

$

138,194

$

78,840

$

217,034

Samuel H. Israel

$

129,991

$

98,880

$

228,871

John Abt

$

111,849

$

63,810

$

175,659

26


Long-Term Incentives

NEOs participate in a performance-based long-term incentive program. Target award opportunities, expressed as percentages of base salary, for Fiscal 2020 are summarized in the following table:

NEO

Target Award as % of Base Salary

 

Timothy C. Crew

 

350

%

John Kozlowski

 

175

%

Maureen Cavanaugh

 

175

%

Samuel H. Israel

 

175

%

John Abt

 

150

%

The target value mix for our NEOs in Fiscal 2020 is summarized below:

Graphic

All equity grants made in Fiscal 2020 were tied to performance. For the stock option and restricted stock components, grant levels were tied to Company and individual performance, using the same metrics and weightings as under the Annual Bonus Plan. Actual grants could range from 0% (for below Threshold results) to 150% (for Superior performance) of target award levels, as shown in the following table:

Percentage of Target Equity Grants Earned

Performance Result

(as % of Target Grant)

Below Threshold

 

0% (subject to Committee discretion)

Threshold

 

50%

Target

 

100%

Superior

 

150%

For equity grants in Fiscal 2020 or prior years, any earned stock option and restricted stock grants were made following the end of the Fiscal Year in which performance was measured. These grants typically occurred in the first quarter of the next Fiscal Year.

27


For the performance share component, award opportunities can range from 0% to 200% of target levels, based on our three-year TSR relative to companies in the S&P Pharmaceuticals Select Industry Index, as follows:

Lannett Three-Year Relative TSR vs. S&P
Pharmaceuticals Select Index

Percentage of Target Grant
Earned

Below 40th Percentile

40th Percentile

50

%

50th Percentile

100

%

80th Percentile or Higher

200

%

Beginning in Fiscal 2021, all equity grants will be made at target levels, to align more closely with market practice, provide for more consistent and predictable awards, and further enhance retention. Grants will continue to occur during the first quarter of each Fiscal Year, with stock options and restricted stock tied to continued service over the applicable vesting period and performance shares tied to 3-year relative TSR vs. comparator companies.

Grants Made in Fiscal 2020 (Based on Fiscal 2019 Performance)

In Fiscal 2019, the Company achieved financial performance results between Target and Superior levels for Net Sales, Adjusted Operating Income, and Adjusted EPS. Based on Company financial and strategic / individual objective performance results, the Committee approved the following stock option and restricted stock grants, effective as of July 29, 2019:

Equity Grants Earned Based on Fiscal 2019 Performance

NEO

# of Stock Options

# of Restricted Shares

Timothy C. Crew

 

208,070

 

129,590

John Kozlowski

 

46,000

 

28,650

Maureen Cavanaugh

 

68,600

 

42,720

Samuel H. Israel

 

64,570

 

40,210

John Abt

 

32,510

 

25,250

These stock options vest in four equal annual increments, beginning on the first anniversary of the grant date and expire on the tenth anniversary from the date of grant. Each stock option has an exercise price of $6.57, equal to our closing stock price on the date of grant. Restricted stock granted in Fiscal 2020 also vests in four equal annual increments, beginning on the first anniversary of grant.

Our NEOs also received the following TSR performance share grants:

NEO

Target Number of Performance Shares Granted

Timothy C. Crew

 

70,390

John Kozlowski

 

15,560

Maureen Cavanaugh

 

23,740

Samuel H. Israel

 

22,350

John Abt

 

11,000

Grants were made on July 29, 2019 and were determined by dividing target award values by the grant date fair value of $10.71 per share, based on a Monte-Carlo binomial modeling valuation tool, as discussed in Note 14 “Share-based Compensation” of our Consolidated Financial Statements. Award vesting will be based on the Company’s TSR relative to companies in the S&P Pharmaceuticals Index for the three-year period ending July 29, 2022, with no awards earned for below-Threshold results and maximum awards of up to 200% of target grants for Superior performance. For this grant, any earned performance shares are payable after one additional year of continued service beyond the end of the three-year performance cycle.

28


Target Equity Grants Made in Fiscal 2021

Beginning in Fiscal 2021, all equity grants are made at target award levels. For Fiscal 2021 grants, the Committee approved a target value mix equal to 35% for performance shares, 20% for stock options, and 45% for service-based restricted shares. The Committee approved the following performance share, stock option and restricted stock target grants, effective as of July 31, 2020:

Target Equity Grants

NEO

# of Performance Shares

# of Stock Options

# of Restricted Shares

Timothy C. Crew

 

158,679

 

144,628

204,016

John Kozlowski

 

40,728

 

37,121

52,364

Maureen Cavanaugh

 

46,334

 

42,231

59,573

Samuel H. Israel

 

43,584

 

39,725

56,036

John Abt

 

32,144

 

29,298

41,328

The Committee also approved additional restricted stock grants of 5,000 shares to Mr. Kozlowski and 10,000 shares of Mr. Abt, effective September 7, 2020, to further recognize their contributions in Fiscal 2020 and assumption of additional responsibilities. These grants vest in three equal annual increments, beginning on the first anniversary of the grant date.

Retention Bonus Program

To address retention concerns and to further encourage NEOs to focus on achieving strategic objectives following the announced non-renewal of the JSP contract, the Committee adopted a retention bonus program in December 2018. NEOs were eligible to receive cash payments equal to 100% of their Fiscal 2019 base salary if they remained employed and performed duties and responsibilities in a satisfactory manner through December 1, 2019, or if they were terminated other than for Cause (as defined in employment agreements) during the one-year retention period. All current NEOs earned cash retention incentives in December 2019. Mr. Galvan, our former Vice President, Finance and Chief Financial Officer who retired from the Company on August 30, 2019, received a pro-rata payout of $311,250 per the terms of his Separation Agreement. Retention incentives are reported in the “Bonus” column of the Summary Compensation Table for Fiscal 2020 in this proxy.

Compensation Recoupment (Clawback) Policy for Executive Officers

In early Fiscal 2021, our Board of Directors approved an expanded compensation recovery or “clawback” provision that will be incorporated into all executive officer employment contracts. Under the revised contracts, if the Company is required to issue a material financial restatement as a result of fraud or other misconduct, the Board may, in its discretion, seek to recoup any excess performance-based short-term or long-term incentive compensation awarded during the three-year period following the originally filed financial statement(s). The recoupment provision applies to any executive officer who is found to have participated in or knew or should have known about such fraud or misconduct and took no action to prevent it. In determining the amount of any excess performance-based incentives, the Board will compare the award received based on the original financial statement(s) against the amount that would have been earned based on the restated financial results. Prior to this new policy, the Company maintained a clawback policy under the Sarbanes-Oxley Act, with incentive awards for the CEO and CFO subject to recoupment in the event of a material financial restatement triggered by fraud or misconduct. Additionally, any employee who violates the provisions of the Company’s Code of Business Conduct and Ethics is subject to disciplinary penalties that may include termination of employment. The Committee intends to comply with any regulatory requirements pertaining to clawback provisions under the Dodd-Frank Act once rules are finalized by the SEC and New York Stock Exchange.

Other Policies, Programs and Guidelines

NEOs, like all other employees, have retirement programs and other benefits as part of their overall compensation package. The Committee believes that these programs and benefits support our compensation philosophy, part of which is to provide compensation that is sufficiently competitive to attract, motivate and retain an executive team fully capable of driving exceptional performance. The Committee periodically reviews these programs to validate that they are reasonable and consistent with market practice. Attributed costs of the personal benefits available to the NEOs are included in column (h) of the Summary Compensation Table on page 33.

Retirement Benefits. Each of our NEOs is eligible to participate in a 401(k) plan that is available to all employees. The Company provides matching contributions on a $0.50 basis up to 8% of the contributing employee’s base salary, subject to limitations of the 401(k) plan and applicable law.

29


Other Benefits. Our NEOs are eligible to participate in the same health benefits available to all other employees. They also participate in a wellness program which provides a comprehensive annual physical examination and up to $1,000 in optional preventive health screening benefits. Lannett provides life insurance for NEOs which would, in the event of death, pay up to $250,000 to designated beneficiaries. Premiums paid for coverage above $50,000 are treated as imputed income. Lannett also provides short- and long-term disability insurance which would, in the event of disability, pay the NEO 100% of his base salary up to the plan limits of $10,000 per week for short-term disability and $15,000 per month for long-term disability. The NEOs are also provided with car allowances.

Post-Termination Pay. The Committee believes that reasonable severance and change-in-control benefits are necessary in order to recruit and retain qualified senior executives and are generally required by the competitive recruiting environment within our industry and the marketplace in general. These severance benefits reflect the fact that it may be difficult for our NEOs to find comparable employment within a short period of time and are designed to alleviate concerns about the loss of his or her position without cause. The Committee also believes that a change-in-control arrangement will provide security that will likely reduce the reluctance of an NEO to pursue a change in control transaction that could be in the best interest of our stockholders. Lannett’s severance plan is designed to pay severance benefits to a NEO for a qualifying separation. For the CEO, the severance plan provides for payment of three times base salary, plus a pro-rated annual cash bonus for the current year calculated as if all targets and goals are achieved. For the other NEOs, the severance plan provides for a payment of 18-months of base salary, plus a pro-rated annual cash bonus for the current year calculated as if all targets and goals are achieved. Employment agreements with NEOs do not have any tax gross-up provisions, and include non-compete, non-solicitation, and other restrictive covenants for designated time frames. As previously noted, Mr. Crew’s employment agreement was amended during Fiscal 2018 to eliminate a “walk away” provision that would have entitled him to severance benefits upon a voluntary resignation within thirty days of a Change in Control of the Company. This change was made based on the 2018 say on pay vote and concerns raised by stockholders advisory groups and further demonstrates our commitment to sound corporate governance practices. None of the agreements with our other NEOs contain any type of “walk away” provision, with severance benefits only payable upon a qualifying termination of employment by the Company without “Cause” (as defined in the agreements) or a voluntary resignation for “Good Reason” (as defined in the agreements).

Tax and Accounting Implications. Section 162(m) of the Internal Revenue Code of 1986, as amended, precludes the deductibility of an NEO’s compensation that exceeds $1,000,000 per year. The Tax Cuts and Jobs Act, which became effective as of January 1, 2018, modified Section 162(m) provisions, including the elimination of the “performance-based exception” that previously allowed certain performance-based compensation meeting specific requirements to qualify for full tax deductibility by the Company. The changes to Section 162(m) do not apply to certain compensation paid pursuant to a binding written contract that was in effect as of November 2, 2017. As a result of the tax law changes, compensation paid to designated “covered executives”, including current and former NEOs, in excess of $1,000,000 per individual will generally not be deductible, whether or not it is performance-based. Although the Committee has historically attempted to structure executive compensation to preserve deductibility, it also reserves the right to provide compensation that may not be fully deductible, in order to maintain flexibility in compensating NEOs in a manner consistent with our compensation philosophy, as deemed appropriate. The Committee believes that stockholder interests are best served by not restricting the Committee’s discretion in this regard, even though such compensation may result in non-deductible compensation expenses to the Company.

Non-Qualified Deferred Compensation Plan. Effective July 1, 2019, the Company established a non-qualified deferred compensation plan that allows NEOs and a select group of other senior management and highly compensated employees to elect to defer up to 50% of base salary and up to 100% of annual bonuses. Deferral elections must be made prior to the start of each calendar plan year, with participants selecting among a variety of investment alternatives. The Committee has the discretion to periodically authorize company contributions but is under no obligation to do so, and any such company contributions may be subject to vesting requirements. Participant compensation deferrals are immediately vested and will be credited to individual participant accounts, along with any company contributions (if applicable) and any investment returns. Distribution of the participant’s accounts is triggered by the occurrence of the applicable event (i.e., separation from service, retirement, death, disability, a Change in Control, or pre-determined in-service distributions that are no earlier than three years after the year in which deferrals were made) under the terms of the plan, but the date on which payment is actually processed will be subject to timing requirements associated with Section 409A of the Internal Revenue Code (“409A”). The plan is unfunded and payouts will generally be made in one cash lump sum; however, subject to the 409A restrictions on initial and subsequent form of payment elections, participants will also be eligible to elect to receive payments in annual installments of up to five years for in-service distributions and up to ten years following retirement.

30


Looking Ahead: Executive Compensation Program Changes for Fiscal 2021

For Fiscal 2021, the Committee decided to increase base salaries for all NEOs, modify the short-term incentive (Annual Bonus) design, and to modify the long-term incentive plan design, as shown below.

Base Salaries. For Fiscal 2021, the Committee approved the following market adjustments to position NEO salaries at or near 50th percentile market values. Due to the COVID-19 pandemic, the effective date for all salary increases, other than a market adjustment for Mr. Kozlowski, whose salary remains below 50th percentile market values for the CFO position, was delayed from the first quarter to the third quarter of Fiscal 2021.

NEO

2020 Base Salary

2021 Base Salary*

% Change

 

Timothy C. Crew

$

750,000

$

772,500

3.0

%

John Kozlowski

$

385,000

$

410,000

6.5

%

Maureen Cavanaugh

$

438,000

$

451,000

 

3.0

%

Samuel H. Israel

$

412,000

$

424,400

3.0

%

John Abt

$

354,500

$

365,000

 

3.0

%


* Reflects full-year annualized salaries; as noted above, all increases are effective as of January 1, 2021 except for Mr. Kozlowski, whose increase became effective July 1, 2020

Short-Term Incentives (Annual Bonus). For Fiscal 2021, target award opportunities, expressed as percentages of base salary, are the same as in Fiscal 2020. Performance metrics and mix will be similar to Fiscal 2020. Award funding for Threshold performance will increase from 25% of Target to 50% of Target for all metrics other than Net Sales (which will remain at 25% of Target) to align more closely with market practice and account for the use of challenging performance hurdles.

Weighting (out of

 

Performance Metric

100%)

 

Adjusted Operating Income

 

30

%

Adjusted Earnings Per Share (“EPS”)

 

20

%

Net Sales

 

20

%

Strategic Objectives

 

20

%

Individual Objectives

 

10

%

Long-Term Incentives. Expressed as percentages of base salary, target long-term incentive award opportunities are the same as in Fiscal 2020 for all NEOs. To further enhance retention during an uncertain environment and help manage equity plan share reserves, the target value mix changed slightly from the prior year, with assigned weightings of 45% restricted stock, 35% for performance shares, and 20% for stock options. All equity grants will continue to be made at target award levels, with the majority of award opportunities “at risk”. Vesting periods for all equity grants in Fiscal 2021 were set at three years, consistent with vesting periods for grants prior to Fiscal 2020, and to align more closely with market practice.

Stock option and restricted stock grants were made at target award levels in July 2020, vesting in three equal annual increments based on continued service.

For the performance share component, award opportunities can range from 0% to 200% of target levels, based on our three-year TSR relative to companies in the S&P Pharmaceuticals Select Industry Index, as follows:

Lannett Three-Year Relative TSR vs. S&P

Percentage of Target Award Opportunity

 

Pharmaceuticals Select Index

Earned

Below 40th Percentile

40th Percentile

50

%

50th Percentile

100

%

80th Percentile or Higher

200

%

Target performance shares were granted in July 2020. Any earned shares will vest following the end of the three-year performance period.

31


REPORT OF THE COMPENSATION COMMITTEE

The Compensation Committee has reviewed, discussed and approved the CD&A as set forth above with management. Taking this review and discussion into account, the undersigned Committee members recommend to the Board of Directors that the CD&A be included in the annual report on Form 10-K and in this Proxy Statement.

Paul Taveira, Chairman
John C. Chapman

David Drabik

32


COMPENSATION OF EXECUTIVE OFFICERS

Overview

The tables and narratives set forth below provide specified information concerning the compensation of our Named Executive Officers (NEOs) for the fiscal year ended June 30, 2020.

Summary Compensation Table

This table summarizes all compensation paid to or earned by our Fiscal 2020 NEOs for the years indicated to the extent they were serving as NEOs.

   

   

   

   

   

   

Non-equity

   

   

Restricted

incentive plan

All Other

Name and Principal Position

Fiscal Year

Salary

Bonus

Stock Awards

Options Awards