ANI Pharmaceuticals, Inc. (ANIP) Q3 2014 Earnings Report, Transcript and Summary

Good morning. My name is Estalani, and I will be your conference operator today. At this time, I would like to welcome everyone to the ANI Q3 2014 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Arthur Przybyl, you may begin your conference.

Thank you. Good morning, everybody, and welcome to ANI's Earnings Conference Call for the Third Quarter of 2014. My name is Art Przybyl, I am the President and CEO; and with me today is Charlotte Arnold, our Chief Financial Officer. Before we begin, I would like to refer everyone to the forward-looking statements language in this morning's press release, and ask each of you to review it carefully as important context for this conference call. Discussions will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles. reconciliations of those non-GAAP financial measures to the most directly comparable financial measures can be found in our earnings release dated today. By all metrics, ANI had a record third quarter. Third quarter revenues were $17.4 million, an increase of 122% over the prior year period. As compared to the midpoint of our revenue guidance of $14.5 million, we exceeded guidance by 20%. The increase in revenues was fueled by organic growth across all of our RX products, as well as our newly acquired products, Lithobid and Vancocin. Due to when we acquired Vancocin, the third quarter only had 2 months of Vancocin revenues. EEMT revenues were on plan as forecasted. Our current customer base represents predictable unit sales, as we anticipated. Third quarter adjusted non-GAAP EBITDA was $10.1 million, an increase of 494% over the prior year period. As compared to the midpoint of our non-GAAP EBITDA guidance of $7.25 million, we exceeded guidance by 39%. Operating income was $8.2 million, an increase of 912% as compared to $800,000 in the same period in 2013. Third quarter adjusted non-GAAP earnings per share was $0.66. As compared to the midpoint of our non-GAAP adjusted earnings per share guidance of $0.475, we exceeded guidance by 39%. Third quarter diluted earnings per share was $0.59, an increase of 354% as compared to $0.13 in the same period in 2013. Based on our third quarter results, we are increasing our guidance for the fourth quarter. We now expect net revenues of $17 million to $18 million, adjusted non-GAAP EBITDA of $9.75 million to $10.25 million and adjusted non-GAAP earnings per share of $0.60 to $0.65 based on 11.3 million shares outstanding. Any additional new product launches during the fourth quarter would be incremental to our guidance. Our initial 2015 guidance will be provided in conjunction with the announcement of our fourth quarter and year-end results. Since we became a public company, approximately 15 months ago, we have increased our annualized non-GAAP EBITDA by 1,000%, from $4 million to $40 million. That said, from my perspective, ANI's third quarter results represent only the first steps in unlocking the earnings potential of this company. Throughout 2014, we have focused on building a strong foundation for future revenue and earnings growth. Some of the potential future events that we look forward to include: The opportunity to increase our market share and unit sales for EEMT in the second half of 2015; the launch of the first product acquired from Teva in the fourth quarter of 2014, a transaction that expanded our development pipeline by 31 products, which today represents a total combined market value of $860 million, as reported per IMS Health; the launch of our own labeled Vancocin capsules this December; the launch of our first products with our finished-dosage form partners, Dexcel and Sofgen, in 2015; the FDA approval of our first generic anticancer product which was granted an expedited review; the continued pursuit of our dual strategies, expanding our generic product lines and acquisitions that target mature brands that provide high-margin cash flow and diversification of our revenues and earnings. To that end, as you know, we acquired Lithobid and Vancocin for a total consideration of $23 million earlier this year. In our last earnings conference call, we've guided that these 2 products combined were expected to generate $9.4 million in annual revenues and $8 million in annual non-GAAP EBITDA. I am pleased to report that we now expect these 2 products to generate approximately $22 million in annual revenues and $20 million in annual non-GAAP EBITDA combined. We intend to continually selectively pursue transactions that we feel grow value in our strategic fit for the company. I will turn the conference call over to our Chief Financial Officer, Charlotte Arnold, who will discuss our financial results.

Thank you, Art, and good morning, again, everyone, and thank you for joining our conference call to discuss ANI's third quarter financial results for 2014. We are very pleased with our financial performance during the third quarter of 2014. We reported record net revenues and record diluted earnings per share and exceeded, on a pro rata basis, the net revenue, adjusted non-GAAP EBITDA and adjusted non-GAAP diluted earnings per share guidance we provided in our last earnings call. This achievement is a direct result of our efforts to grow and diversify our revenue base through the acquisition of mature brands and organic growth across our existing product line. In our press release earlier this morning, we also increased our guidance for the fourth quarter of 2014, reflecting the ongoing impact of those efforts. Turning now to our financial performance for the third quarter of 2014. We reported net revenues of $17.4 million, an increase of 122% from $7.8 million in the prior year period. The increase in revenues was due to a 135% increase in pharmaceutical product sales from $6.4 million to $15 million. Our generic product sales of $10.2 million were 81% higher than the prior-year period, with each of our generic products generating higher revenues than forecast. Our brand product sales of $4.8 million were 545% higher than the same period in 2013, primarily due to our newly acquired products, Lithobid and Vancocin, each of which also generated higher-than-expected sales. Contract sales, development services and royalty revenues increased from $1.5 million to $2.4 million versus the prior year period, primarily due to royalties received on sales of the authorized generic of Vancocin. These royalties also exceeded our expectations. In total, net revenues for the third quarter were $2.9 million higher than the midpoint of our guidance. Cost of sales decreased as a percentage of net revenues to 18% from 35% in the prior-year period, primarily due to higher margin sales of the newly acquired Lithobid and Vancocin branded products, as well as price increases taken earlier this year for the company's existing products. Research and development costs were $0.9 million, and selling, general, and administrative expenses were $4.1 million for the 3 months ended September 30, 2014. In total, these operating expenses were consistent with our forecast. Adjusted non-GAAP EBITDA was $10.1 million for the 3 months ended September 30, 2014, compared to $1.7 million in the prior-year period, an increase of 494%. Adjusted non-GAAP EBITDA was $2.8 million higher than the midpoint of our guidance due to the impact of higher-than-expected sales, particularly of higher-margin products. Operating income was $8.2 million for the 3 months ended September 30, 2014, as compared to $0.8 million in the prior year period. Third quarter 2013 operating income included $0.5 million of merger-related expenses. Net income was $6.7 million for the 3 months ended September 30, 2014 as compared to $1.2 million in the prior year period. Diluted earnings per share for the 3 months ended September 30, 2014 was $0.59 based on 11.3 million diluted shares outstanding as compared with earnings per share of $0.13 in the prior year period. Adjusted non-GAAP diluted earnings per share of $0.66, $0.18 higher than the midpoint of our guidance. Higher sales, particularly of higher-margin products, increased our pretax earnings and our effective estimated effective tax rate to 17%, 2 percentage points higher than we had forecasted in our guidance. Our higher effective tax rate partially offset the positive impact of higher sales on our adjusted non-GAAP diluted earnings per share. In our earnings release this morning, we provided financial guidance for the fourth quarter of 2014 based on our current estimates of market shares and pricing for each of our products, our cost of sales and our operating costs. We estimate net revenues of $17 million to $18 million. We anticipate adjusted non-GAAP earnings, excluding noncash stock compensation expense of $0.60 to $0.65 per share, assuming 11.3 million shares outstanding. We expect adjusted non-GAAP EBITDA, excluding noncash stock compensation expense, of $9.75 million to $10.25 million. Finally, we are projecting that our effective tax rate will be 18%, which includes the positive impact of utilizing a portion of our remaining NOL carryforwards. Notably, the guidance does not take into account additional product launches during the fourth quarter of 2014. We will provide initial 2015 guidance when we announce our fourth quarter and year-end financial results in February 2015. In conclusion, we are very pleased with our financial performance during the third quarter of 2014 and look forward to continuing to execute on our business strategy. At this point, I will turn the call back over to our President and CEO, Art Przybyl.

Thank you, Charlotte. Moderator, we will now open the conference call to any questions.

[Operator Instructions] And your first question comes from the line of Scott Henry.

I'm just trying to get a little extra visibility on the levers that are moving the numbers. It sounds like all the upside is coming from Lithobid and Vancocin. So the question is -- when we think about $22 million in revenues, I would imagine that would be split relatively even but the majority to Vanco. Is that a fair assessment?

I wouldn't say that the revenues are split evenly. I think that the majority of the revenues are being driven by Vancocin.

Okay. And are we thinking like a 60-40 split or perhaps even higher than that?

You're thinking more along the lines of about a 70-30 split.

Okay. And then I know you're not giving 2015 guidance, but when we think about -- you've got a couple of quarters in a row where you're starting to see adjusted earnings in the $0.60 to $0.65 range. Should we think about these quarters, early fourth quarter, as being somewhat reflective of how the business is going?

Yes, we certainly feel that the third quarter represents what should be viewed as consistent results on a go-forward basis, without some of those opportunities that I mentioned in my narrative. And so taking those opportunities and layering them with a quantified EBITDA amount on top of where we are already, $10 million in EBITDA per quarter, is what I imagine the company to do on a go-forward basis.

Okay. And then, I guess Charlotte, the tax rate 18%, 19% in second half of 2014. Should we assume, as you become more profitable, we'll see that kind of take a step up in 2015?

That's correct, Scott. Because our ability to use our NOLs is capped at a $6 amount on an annual basis. And so while our marginal tax rate on the first sort of $12 million of earnings is much lower. For every dollar beyond that, it's taxed at the full 35% rate. So as the dollars beyond the $12 million increase in magnitude then that drives up the effective tax rate.

Okay. And then just a couple of pipeline questions, very quick one. The Teva products, I think I had in my notes, 2 launches in fourth quarter '14, 1 in '15, is that still accurate or I thought I might have heard 1 in Q4 '14?

That's still an accurate statement. Our first one is a CBE-30 that has been granted by the agency. We have not yet submitted our other 2 under the CBE-30 approach. But as of this moment in time, that's an accurate statement, 2 launches in 2014 and 1 in early 2015.

Okay. And then the anticancer drug that you filed with the FDA, is that one of your 5 proprietary ANDAs or how should I think about that?

That's a product that is partnered with a formulation house and so there is a shared approach to that product in terms of investing against the ANDA expenses and the earn-out of the product once launched. And that's the approach that you should take in eventually modeling that product as we get closer to FDA approval.

Okay. And just the final question. Art, EEMT obviously, a very important franchise. Anything new on the competitive front? Any reason to think there may be new competition or any changes to expectations for supply running out for the competitor? Just a general question if there's anything new on that front.

Sure. So, not from our perspective. I think that we are still seeing our way through to increasing our share and revenues in the second half of the year. We still anticipate that, that residual material that's being sold in the marketplace today will run out. We were off in our market share calculations as to what our share would be for the product. We're currently running at let's say about 40% share, per the Wolters Kluwer prescription data. But again, the important thing for us is that the market share was carved up several months ago. The prescription data is a lagging indicator and so we have a forecast for that product that provides for x amount of units to be sold every quarter. And that is very stable with the customers that we currently have buying the product from us. So we really, from our perspective, have nothing but upside to that product in the second half of next year, and obviously that could be a substantially large number in regards to EBITDA.

And your next question comes from the line of Rohit Vanjani. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: I just want to confirm. So there were no onetime events in the quarter right? Big wholesaler sales or anything like that?

Nothing.

That's a correct statement, yes.

It's just business as usual. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: Okay. And then last quarter you provided the EEMT annualized revenue guidance of 30 to 35, so around $7.5 million or $8.75 million per quarter? Did the 3Q fall within that range? And is that still good guidance?

That still is good guidance and the third quarter fell within that range. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: Okay. And then the strength in Lithobid and Vancocin from the original guidance. Is that a unit story or is that you're realizing more of the price increase? Or what's going on there that's kind of making you jump from $10-or-so million to $20 million?

So, a number of items actually. In regards to the Lithobid product, we launched our own label product. And when we launched our own label product on a mature brand, it sort of gives the company an opportunity to reset pricing. In regards to Vancocin, which we have not yet launched our own label product on, but we see that certainly as a future upside to the product beginning in December, there are a number of items that allow us to increase our guidance substantially for that product. First and foremost, unit sales, both associated with the brand and with the authorized generic, are higher than we anticipated. So it leads to higher revenues and higher royalties than perhaps what our initial due diligence thought we had us at. Secondly, there are some royalties that drop off beginning January, for the product that are currently being paid. As I mentioned, there's the opportunity to launch our own label. We've also negotiated a lower raw material cost for the product. And so a combination of all those factors, obviously, has allowed us to increase our guidance and is a welcome surprise from where we thought we were when we initially acquired the product. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: Okay, great. And then the Teva product, I mean it doesn't look like they've launched yet. Is it imminent or is it more end of the quarter that we're going to see those 2 products?

So the very first product, I think I just want to leave our guidance as in the fourth quarter. Because we are going through a CBE-30 process with the agency and we feel that, that is going to allow us to launch in short order. And I would continue guidance, again, to the fourth quarter for the second product as well. And the reason for that, Rohit, is simple. I have found over the years that attempting to predict agency actions associated with approvals, CBE-30s, prior approval supplements, and nailing it down to a finite timeline is very difficult. So I'm very comfortable with the statements that we're making today in regards to those products, but I certainly don't want to be sort of tunnel-visioned into an imminent versus in-the-quarter type of approach. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: Okay. So I mean, out of those 3 products, the 2 in 4Q '14 and 1 in 1Q '15. I think you said you have guidance on 1 that won the CB-30, but how do you gain confidence that the other 2, or even the future Teva products, will be CBE-30s as well?

I don't until I submit the CBE-30s for those products. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: Okay. And then the royalties received on the authorized generic of Vancocin. This is just a modeling question, a housekeeping question. That will always be in contract services or you said that's going to fall off in January?

No that will always be-- go ahead, Charlotte.

Yes. So there are 2 different things, Rohit. There's a royalty due on net sales of Vancocin that terminates at the end of this calendar year. And then royalties on the authorized generic sales will be reported consistently with the way that it was reported in the third quarter as contract services, development services and other income. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: Okay. And then one last question for me on the pipeline. I think you listed 9 products at the FDA, 1 is the anticancer expedited review product that was filed in 2Q. But other than that, the 8 other products, what is the average kind of length of stay at the FDA for those other 8 products?

We believe that approval times have moved from 36 months to 42 months. Rohit Vanjani - Oppenheimer & Co. Inc., Research Division: No, I meant how long have those products, on average, the 8 other products, been sitting at the FDA?

That's a good question. I'd have to get you that information.

[Operator Instructions] And your next question comes from the line of Robert Brown [ph].

Art and Charlotte, this is Bob [ph]. Listen, I just wanted to say -- I know I speak for the entire board when I say congratulations on a really great quarter, job well done. That's all I had to say.

Thank you, Bob.

Thank you. Thank you very much.

And there are no further questions.

And I'd just like to conclude and thank everybody for attending our conference call today. ANI has a significant amount of cash flowing earnings power as we exist today and we look forward to unlocking even more as we move forward into 2015 and look forward to providing 2015's annual guidance with our next earnings conference call. Thank you very much. Have a good day. Bye-bye.

Bye-bye.

Thank you. And this does conclude today's call. You may now disconnect.