ANI Pharmaceuticals, Inc. (ANIP) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Lynn and I will be your conference operator today. At this time, I would like to welcome everyone to the ANI Q1 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Arthur Przybyl, you may begin your conference.

Thank you. Good morning, everyone and welcome to ANI’s earnings conference call for the first quarter 2015. My name is Art Przybyl, I am the CEO. And with me today is Charlotte Arnold, our Chief Financial Officer. Before we begin, I want 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. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in our earnings release dated today. Before we discuss the quarter, I want to let all of you know that one of our directors, Ross Mangano recently passed away. Ross was a dear friend, strategic contributor and an avid supporter of the company. He will be dearly missed by all of us. ANI’s first quarter revenues of $18.8 million and adjusted non-GAAP EBITDA of $11.5 million represent increases of 72% and 170% respectively over the first quarter 2014. We continue to maintain our ratio of better than 60% of our revenues contributing to our adjusted EBITDA. Operating income of $9.6 million increased by 174% as compared to the first quarter 2014. We are reaffirming our revenue, non-GAAP EBITDA and non-GAAP earnings per share guidance for 2015. Currently, we have a business that over the last two quarters averages approximately $80 million in annual revenues and $49 million in annual EBITDA. Revenues from sales of generic pharmaceuticals were $12.3 million, an increase of 52% over the prior year period. The increase was primarily due to increased EEMT sales, as well as the launch of two new products, Methazolamide and Etodolac. On the last day of the quarter, we also launched the new generic product, Propafenone. With this latest launch, we now have eight total generic products that comprise 15 SKUs. Over the past month, we were awarded two new contracts for EEMT that are effective in the second and third quarters. The first contract is for volume previously supplied by one of our EEMT competitors, Amneal, who we believe has now exited the EEMT market. As further evidence to that fact, we received direct stocking orders under this new contract for EEMT in April. The second contract will be effective July 1. Currently, this customer is buying EEMT from Seton, but as we have guided to before, we believe Seton, another EEMT competitor, will exhaust their inventories by late summer as evidenced by this customer awarding ANI this contract for EEMT. At the current time, Seton continues to sell EEMT to both Walgreens and AmerisourceBergen. And when their inventories are exhausted, those customers represent potential additional market share gains for ANI. The FDA expedited review for our generic anticancer product filed last August continues to progress through pre-approval inspection activities. And we have received our first set of ANDA deficiencies from the agency. Although we cannot predict an approval date, we are encouraged from the activities that the expedited review process continues to advance itself on a fast-track timeline and that we can address the initial FDA comments in a timely manner. In the first quarter, we acquired an FDA approved generic product, Flecainide, for $4.5 million. We anticipate launching this product in early 2016 after the manufacturing site transfer and the regulatory CBE-30 document is completed. This recent acquisition brings our generic pipeline to 46 products that represent a total annual market size of approximately $3 billion based on data from IMS Health. Combined revenues from sales of our branded pharmaceuticals and contract services and royalties were $5.4 million, an increase of 241% as compared to the prior year period. The increase in revenues was primarily the result of sales of Lithobid and Vancocin, products we acquired in the third quarter of 2014. We currently market four branded products that represent seven SKUs and in the fourth quarter of 2015 we will begin to market generic Vancocin as one of our ANI-labeled generic products. In the fourth quarter 2014, we launched our branded Vancocin project in the ANI label. As such, we received wholesaler stocking orders that were in line with historical monthly unit sales. However, in the first quarter, we did not experience unit sales that were representative of historical run rates for the product. At the same time, the customer mix for the products shifted from historical norms. We do not know yet due to a lack of historical data for our label product whether or not the first quarter unit sales and customer mix are the new run rates for this product. However, to be both prudent and conservative, we have reduced our revenue expectations for Vancocin based on our first quarter experience for the product. Our other three branded products Lithobid, Reglan and Cortenema continued to perform in line with our expectations. Based on our internal reforecast, which looks at the business in total, we reaffirm our prior 2015 guidance for revenue, non-GAAP EBITDA and non-GAAP earnings per share. As of today, May 5, we have approximately $169 million in cash and remain actively involved in acquiring accretive assets with those moneys. At any point in time, we typically have several non-binding letters of intent outstanding in our attempt to drive shareholder value by acquiring additional revenues and EBITDA. I will now turn the conference call over to our Chief Financial Officer, Charlotte Arnold.

Good morning everyone and thank you, Art. Thank you for joining our conference call to discuss ANI’s first quarter financial results for 2015. ANI began 2015 with a strong start. Our revenues during the quarter grew by 72% over the prior year period, while our cost of sales decreased as a percentage of net sales from 24% to 15%, a decrease of nine percentage points. These results are directly attributable to the organic growth in our generic product sales, as well as sales from our mature brand products Lithobid and Vancocin, both of which we acquired in the third quarter of 2014. Also, our adjusted non-GAAP EBITDA for the three months ended March 31, 2015 increased by 170% over the prior year period from $4.2 million to $11.5 million and we generated adjusted non-GAAP earnings per share for the quarter of $0.57. Turning now to some of the details of our financial performance, net revenues in the first quarter for our generic products were $12.3 million and $4.3 million for our mature brands, increases of 52% and 452% respectively. The primary reason for the generic sales increase was increased sales for EEMT as well as sales from our Methazolamide and Etodolac products, which we launched in the fourth quarter of 2014 and the first quarter of 2015, respectively. The increase in our mature brand sales resulted primarily from our Lithobid and Vancocin products, both of which we acquired during the third quarter of 2014. Our contract sales development services and royalty revenues increased slightly from $2.1 million in the prior year period to $2.3 million in the first quarter of 2015 due primarily to royalties received on sales of the authorized generic of Vancocin partially offset by a decline in contract manufacturing orders. In our press release earlier this morning, we reaffirmed our financial guidance for 2015 of between $80 million and $88 million in revenues, adjusted non-GAAP EBITDA of between $48.8 million and $53.1 million and adjusted non-GAAP earnings per share of between $2.44 and $2.67. Our adjusted non-GAAP EPS guidance when compared with the 2015 guidance provided earlier this year reflects the combined impact of a slightly higher effective tax rate from 36% to 36.8% and slightly higher weighted average shares outstanding from 11,476,000 shares to 11,562,000 shares. While we are encouraged by our recent success in securing additional sales contracts for our EEMT products, which we expect will go into effect in the second and third quarters of 2015, we experienced a decline in both our unit sales and average selling price of our Vancocin product. Our royalties on sales of the authorized generic to Vancocin also declined during the quarter. As a result, in our reaffirmed 2015 guidance, we have reduced our revenue and royalty expectations for Vancocin, which reduction is offset by our increased revenue expectations for EEMT and our recently launched Methazolamide, Etodolac and Propafenone products. Turning now to the balance sheet, we ended the quarter with $165.6 million in unrestricted cash and cash equivalents. During the three months ended March 31, 2015, we generated $1.1 million in positive cash flow from operations, which was net of a $3.2 million increase in our inventories. In addition, we acquired an additional ANDA, Flecainide from Teva for $4.5 million, which we expect to launch in early 2016. In conclusion, we are very pleased with our results for the first quarter of 2015. And 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 questions.

[Operator Instructions] Your first question comes from the line of Louise Chen.

Hi, thanks for taking my questions. So, I had a few. First one, with respect to EEMT, just curious, how we should think about sales in the quarter, I think last quarter was about $7.9 million so wondering if it was better than this and how much so? Second question I had was on your anti-cancer product, I know you have a potential approval coming up in ‘15 and this could be a meaningful product for you. So, curious if we should think about in order of magnitude wise, is it tens of millions of dollars of upside to your guidance or is it in the $100 million range? And then lastly, just to clarify question on the reaffirmation of the ‘15 guidance, I think before I had down your EPS of $2.48 to $2.72, but maybe I included other things in there, so just curious how we should think about that versus your $2.44 to $2.67? Thanks.

Louise, let’s take your last question first, okay, the reaffirmation of our guidance. So, as Charlotte mentioned in her narrative, our guidance changed in terms of EPS as a direct result of our tax rate moving from 36% to 36.8% and it also moved as a direct result of the number of underlying shares outstanding that affect the calculation of that earnings per share, so from approximately 11.4 million to 11.5 million shares outstanding. Those two changes are the reasons for the guidance change in regards to earnings per share. Your second question regarding the anti-cancer product, the reason why we mentioned it in our press release isn’t sort of track it without giving any type of guidance associated within an approval date, which we cannot do is because we believe that the product represents material upside to both our revenues and especially our EBITDA the type of margins that this product would throw off if we are fortunate enough to be the only generic product alongside the brand when it’s launched. Because of our exclusive raw material contract for this product, our current guidance is that we will be the only generic alongside the brand. That’s not to preclude fact that the brand might potentially launch an authorized generic, nevertheless even if that occurs, we feel this is a material upside to, again both our revenue and especially our EBITDA line. It is not in the order of hundreds of millions of dollars, however. But nevertheless, it is a material percentage upside to our current base business and run rate of approximately $80 million in revenues and $49 million in annual EBITDA run rates. In regards to EEMT, I don’t believe that we broke out the quarterly sales results, but EEMT performed according to plan, according to our expectations and our forecasted revenue numbers in the first quarter for the product. We typically have guided to in the past, for the sake of argument about $7.5 million in a run rate for EEMT. That is representative of numbers that we say are about 30,000 units at $250. And so that’s our guidance, and yes it did occur – it did perform according to that level of expectation in the first quarter.

Okay, thank you.

You’re welcome.

Your next question comes from the line of Rohit Vanjani.

Hi Art and Charlotte. Thanks for taking the questions and good morning.

Good morning Rohit.

Hi, Rohit.

Just want to make sure that, I mean you kind of alluded to it, but the commentary on the EEMT everything is still as you have been planning in terms of the second half of 2015 that you expect all of those competitors to fall out of the market and you to garner a larger share of that market beginning second half of ‘15?

Yes, that is a correct statement. We, again, you heard me say in the narrative that it’s our belief and strong belief that Amneal is now out of the market and that first contracts that we picked up, who was being supplied by Amneal is now being supplied by ANI from the initial direct stocking orders that we received in the first quarter. And the second contract that will take effect July 1 is today being supplied by Seton. But obviously, after communications, we suspect with Seton, it is one of the reasons why that contract was awarded to us. And so, our sources tell us, again that the last remaining inventory of Seton product will exhaust itself in late summer. This will also open up what we hope is an opportunity with AmerisourceBergen and Walgreens for – we will say approximately September 1 timeframe.

Okay. And then did you know about the – in your 4Q when you originally gave that guidance about these customers may be coming your way, because I mean you indicated that your guidance stay the same, but you potentially have these incremental EEMT revenues within the second and third quarters that you didn’t maybe think you had it first half when you gave the guidance or is there something else offsetting that?

Well, the offsets, we are going to take a wait and see approach to our Vancocin-branded product. So we will update our guidance every quarter. After this quarter’s results, it allows us to reaffirm our guidance for the year. And certainly, there is a potential for a step approach associated with some of these EEMT contracts kicking in. But I want to make sure that folks understand that from what we saw in terms of our Vancocin unit sales, which did not match the historical levels that we have seen heretofore for the product. That’s an offset. Like any business, we have some puts and takes. And so we feel, we tend to be conservative in our approach to our numbers and we think that again the prudent thing for us to do was to do that internal reforecast make sure that we could indeed reaffirm our guidance from what we have seen and take a wait-and-see approach on that product. As you know, we do not have a direct detailed sales force. We buy these mature brands. We, to a certain extent, enjoy the cash flow associated with them, but we are not in control of the ordering patterns of these mature brands. This is market shares that are typically representative of less than 2% for these particular types of products. And so, again, they are nice cash flows, nice margins, but we are not always in control. We are certainly not in control of the ordering patterns of the products, because we do not detail physicians. So, from our perspective, being able to reaffirm our guidance, the fact that we have some of these EEMT contracts, one that’s now kicked in, the second that will kick in, in the third quarter, I think that the business is in very good shape, stable at this particular point in time and we look forward to our continued results in the latter part of the year.

Okay. And I think originally when you announced the Lithobid and Vancocin acquisitions you gave that 2015 guidance that include the royalties of $22 million, can you talk about a magnitude change with your updated Vancocin guidance?

No, we have not, but it’s not royalties of $22 million. We gave revenue guidance of $22 million from those mature brands that included the sales of the authorized generic of Vancocin as well as royalties received from that. So, you could see that in the first quarter when I gave my number of $5.3 million for both mature brands and royalties that was very close to our guidance, okay, but again, we have seen the product mix change and some unit sales decline. So, we are not yet sure of the magnitude of that expectation, let’s say sales or revenue decline versus the guidance that we gave last quarter. So, that’s why we will reserve our comments to later quarters once we have a more historical perspective associated with the unit sales of Vancocin.

Okay. And then you mentioned the expedited review cancer product, but can you speak to kind of when can you expect some of the other products, the Sofgen and Dexcel partnerships, the narcotic products, that cancer review product as you said? Are you still anticipating all of those?

Yes, so the reason, Rohit, we don’t speak to Sofgen and Dexcel and some of the other products is because – so our expectation is to launch those products in 2015, but those products are dependent upon as formal new FDA approvals. And we absolutely cannot predict FDA approvals at this point in time for any product.

Same with the narcotic products?

Same with the narcotic product, that’s correct.

Okay. So – and when do you think – so you won’t be able in a position to talk about those opportunities until you feel like you have the approval?

Until we launch the – until we have the approval, right. When we have the approval, we would actually release a press release announcing that. We wouldn’t launch probably for another sake of argument 90 days from the date of approval, because it takes some time for us to do the process validation work associated with the product. But at that particular point in time, we could talk about the current IMS Healthcare market size for the product and at least begin to discuss the potential for revenue and EBITDA gains for ANI once we launch the product.

Okay. And then the last one for me is I may have gotten this wrong with Flecainide, it sounds like you issued a CBE-30 for it and when do you expect to launch for that in 2015?

So, we have not issued a CBE-30.

Right.

We have to go through the tech transfer process like we have for – the point I am trying to make is that this product is a candidate for a changes being affected or CBE-30 in 30 days and we expect to launch the product in the first quarter of next year.

Okay, great. Thanks so much for taking my questions.

You’re welcome Rohit.

Your next question comes from the line of Scott Henry.

Thank you and good morning. I guess I will start with EEMT, just trying to get my arms around some of these new contracts. Can you talk about – how is pricing in the EEMT category as you are getting these new contracts, I would think it will be pretty strong since alternatives are not out there, but curious if you could talk about that and just for the category of EEMT in general pricing?

Yes. We have to be a little careful about speaking in specifics, because we are bound by – and one of the reasons why we didn’t name these contracts is because we are actually bound by pretty specific confidentiality with these customers. I can tell you that the pricing for the first contract is a little bit less than what our normal average price for EEMT is. And that’s because this was tied into a contract for many of our products that is representative of substantial market shares. And so we took a longer term approach associated with that agreement. The second contract though is right along the historical norms of what I always guide the street to about $250 a unit for the product.

Okay, thank you. That’s helpful. And then when I think about ANI share of the EEMT category, I generally think of it around 50% market share, I mean depending how you look at the data you may come out with a different number, but when you add in these contracts, it would seem like ANI would be moving towards 80%-85% share of this market by the end of the year, if in fact Seton and Amneal are out of the market, is that the reasonable assumption…?

That is a reasonable assumption.

Okay. And then is – I mean, does your guidance fully reflect that or perhaps part of that just in a conservative effort?

I would say that some of that is built in.

Okay, fair enough. Shifting gears, I was wondering if you could provide any color on the revenue potential of the two new products Propafenone and Flecainide?

Propafenone is a smaller product for us. And I think if you recall, as we began to launch the products from manufacturing site transfers associated with the acquisition of some of those ANDAs in 2014, we took the highest – we prioritized them based on the – let’s say, highest revenues or more importantly highest EBITDA contribution. And so we went from Methazolamide to Etodolac recently to Propafenone. So Propafenone is a smaller market. It is not – it’s nice to have out there. There are some intermittent back orders that are occurring on the products, which allows us to get a little bit higher price, but it’s a smaller opportunity for us. Flecainide is a little bit different, I recall Flecainide, Scott today – and forgive me if I am a little bit off it’s about a $40 million market. And there are two competitors. There is – I know Roxane is one, I believe Amneal is the second. And recently, Amneal put forth a price increase for the product that we thought could potentially double the market size. But our market intelligence told us that Roxane did not follow through. Roxane has a tendency not to raise price. And so, I will just say that it’s a $40 million market opportunity for us at this moment in time and hopefully that’s where it is when we launch the product in the guidance that we are providing in the first quarter of next year.

Okay, thank you. That’s helpful. And then I guess, just final question, anything new on Opium Tincture, I mean it’s still material product, just curious how that market is looking?

That has not changed, that’s meeting our expectations for – certainly for revenues and EBITDA, margins are great and it’s a product that really has not changed over time.

Okay, great. Thank you for taking the questions.

Thanks, Scott.

[Operator Instructions] Your next question comes from the line of Fred Gram [ph].

Yes, hi guys. I guess I am going to be a little bit repetitive here, because I am going to focus on the same thing that everyone else in the Q&A is focused on, but I try to say in a different way. So, if you think of EEMT and we think – I think the previous question was what percentage of revenues is EEMT relative to your guidance and I think the correct answer is somewhere between 45% and 50% accurate?

Correct.

So, then if you think about your guidance for Lithobid and Vancocin, you said $22 million, so that’s roughly 25% of your revenues or at least your revenues in terms of guidance. And you cited the weakness in Vancocin, but I think Vancocin and Lithobid – I think Vancocin is probably is at about 60% to 65% of that $22 million. Is that correct?

I don’t think we have provided that number. And I don’t have that. Frankly, I don’t have that in front of me.

I think you did say it was a larger percentage of that $22 million, it wasn’t I guess 50-50 split. So, it was – I am kind of making an assumption that it was somewhere in the neighborhood of $12 million of the $22 million? And so, you have – I am just kind of running through the numbers if you have kind of price erosion there and you take that down by whatever it is, I know you didn’t give guidance. If you take that down by 10% or 15%, it would seem to be marginal compared to the market shares gain you are going to get in EEMT in addition to the launches of Etodolac and Propafenone. And I just – I guess I am trying to say it feels like your guidance is very conservative kind of relative if you parse out the numbers.

Well, our guidance is what we feel comfortable with providing our investors, our shareholders and The Street at the end of the first quarter. And so we as a company like to hit our numbers. And so again, we are comfortable with reaffirming the guidance for the year. That doesn’t mean that as the year progresses that our run-rates from an annual perspective might increase, but the fact of the matter is that we are right now speaking to our annual guidance and not guidance on a sort of quarterly go-forward basis.

Right, right, understood. Yes, I mean, I guess it’s always better to set the bar low, expectations low and then outperform, I think that’s probably a good approach. And then, so we should expect for this year, for 2015 two more launches and then Flecainide in 2016 around – was that the….

So, we certainly can guide you to the launch of Flecainide in the first quarter of 2016, because we are in control of that launch. We cannot guide you to the launches associated with the Dexcel and the Sofgen product, except to say we expect that or anticipate that to happen this year. But again, those products launches are determined by formal FDA approval processes and we just cannot estimate when those approvals might happen partly because we are not in control of those products. They are partnered with the companies that are going to be manufacturing those products for us. They are in control of the FDA approval process to a certain degree, control meaning their response to comprehensive reviews, any deficiencies, etcetera, but it is – no company is able to predict FDA approvals at this particular point in time.

Right. Now, finally, I will get back in the queue after this, but can you provide us an update on lansoprazole recent mix?

So, our expectations for the product that we have always guided everyone to, is to submit the formal prior approval supplement for the product prior to the end of this year.

And what about from a competitive standpoint?

From a competitive standpoint, the only product that’s out there is Takeda’s Prevacid ODT is the brand. And we are aware of another company, Sun Pharma that has filed a 30-months stay on the product.

Okay, that’s helpful. Thank you, guys.

You’re welcome.

And sir, there are no further questions at this time.

Then let me thank everybody for joining our earnings conference call. Have a nice day. Thank you. Bye-bye.

This concludes today’s conference. You may now disconnect.