ANI Pharmaceuticals, Inc. (ANIP) Q3 2016 Earnings Report, Transcript and Summary

Good morning everyone. And welcome to the ANI Third Quarter 2016 Earnings Call. At this time, all participants are in a listen only model. Later you will have the opportunity to ask questions during the question-and-answer session [Operator Instructions]. Please note, this call maybe recorded. It is now my pleasure to turn today’s program over to Mr. Arthur Przybyl. Please go ahead.

Good morning, everyone. And welcome to ANI's earnings conference call for the third quarter 2016. My name is Art Przybyl, I am the CEO. And with me today is Stephen Carey, 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 can be found in our earnings release dated today. Today, we reported record third quarter results, as evidenced by net revenues of $38.5 million, and adjusted non-GAAP EBITDA of $16.4 million, increases of 93%, and 41% respectively as compared to the prior year period. Adjusted non-GAAP net income per share increased by 36% to $1.09. These increases are the direct result of our nine product launches during the first three quarters of 2016 and continue to represent ANI’s foundation for growth, through our deployment of capital, accretive transactions for mature brands products, acquisitions of approved but discontinued and sNDAs, internal product development, strategic marketing partnerships, and the marketing of several authorized generic products. Included in this diverse approached is Corticotropin, and approved NDA that when we commercialize will compete in a $1.25 billion market that is currently a monopoly. Our two significant business platforms, generic pharmaceutical and branded pharmaceutical products generated $30.2 million and $6.8 million in second quarter net revenue, increases of 100% and 203% respectively as compared to the prior year period. These increases were due to several new product launches that occurred over the previous 12 months. As previously discussed, our expectation is that revenues and EBITDA will continue to grow sequentially through the end of the year. ANI will provide guidance for 2017 when the Company announces its fourth quarter 2016 results. Today, in our earnings press release, we provide a brief but important update on our Corticotropin re-commercialization effort. The key message in this update is that ANI has established a strong foundation to re-commercialize Corticotropin. Work has been done in earnest to modernize the NDA to today’s analytical standards, and manufacturing efforts have begun. More than ever, this project is real. We look forward to advancing Corticotropin towards a supplemental NDA filing. As discussed previously, we will continue to blind certain aspects of the project, namely identification of specific analytical methods, supplier relationships, regulatory strategies, and our internal re-commercialization timelines for this important project. The market for our main business platform, generic drugs, is becoming more comparative. I believe ANI is well positioned for this headwind. Our growing commercial portfolio of niche limited competition generics and mature brand provides us product breath and relevance that is critical in light of ongoing customers consolidation. And our ANDA pipeline affords us the opportunity to maintain a strong launch cadence of new generics in 2017 and beyond. We continue to look to grow our business through future acquisitions and partnerships. To that end, we maintain a strong balance sheet with healthy positive cash flow, and access to capital. Finally we are uniquely positioned with the transformational product opportunity in Corticotropin that we are actively investing in. We’ve successfully implemented a business model that does not rely on price increases for growth and future success. And as always, we will continue to remain focused on revenue and EBITDA as key metrics to measure the success of our business. I will now turn the conference call over to our Chief Financial Officer, Stephen Carey, who’ll provide you with more details on our financial results.

Thank you, Art. Good morning to everyone on the line, and thank you for joining the call to discuss ANI’s third quarter 2016 financial results. During my remarks this morning, I will refer to certain non-GAAP measures. It is important to note that we believe that these non-GAAP measures will aid the investor community and analyst community by providing further insights into our results. These measures should be considered in addition to, and not in lieu of, GAAP EPS and other key measures reported under GAAP. Please refer to the financial exhibit supplied with our press release this morning for a detailed reconciliation between our key GAAP and non-GAAP measures. As Art indicated, ANI has posted record quarterly net revenues and adjusted non-GAAP EBITDA, building momentum from the previous records posted in the second quarter of this year. Net revenues for the quarter ended September 30, 2016 reached $38.5 million, representing a 93% increase over prior year and a 23% increase over the second quarter of 2016. Adjusted non-GAAP EBITDA, which is a key metric utilized by management in evaluating operational performance, increased $4.7 million or 41% from the year ago period to $16.4 million. In addition, this represents a 6% increase from the $15.4 million posted in the second quarter of 2016. GAAP EPS declined from $0.39 per diluted share in the third quarter of 2015 to $0.22 per diluted share in the current period. GAAP EPS includes the impact of depreciation and amortization, which increased $3.9 million from $2 million in the prior year to nearly $6 million in the current year, driven by amortization of a significantly higher intangible asset base. In addition, GAAP EPS includes $1.1 million of incremental cost to sales related to the inventory step-up recognized in the asset purchase accounting for Inderal LA and Propranolol ER. Our adjusted non-GAAP net income per diluted share metric which excludes these impacts, increased $0.29, or 36%, from the prior year, to $1.09 per diluted share. With this third quarter earnings release, the Company is reporting a modest adjustment to the calculation of its non-GAAP tax measure, which is a component of non-GAAP net income per diluted share. Please refer to table three of the earnings release for more detail. We will now turn to our third quarter sales performance. Net revenues of our generic products doubled from the third quarter of 2015 to $30.2 million driven by 10 product introductions released over the past 12 months. During the same time frame, net revenues of our branded pharmaceutical products tripled, reaching $6.8 million in the quarter, driven by the April 2016 launch of Inderal LA. Revenues from contract manufacturing services were up 12%, while contract services and other income declined $1.3 million, primarily due to the fourth quarter 2015 discontinuation of royalties received on sales of the authorized generic of Vancomycin, which is now sold directly by ANI and reflected in generic sales performance. Cost of sales as a percentage of net revenue increased from 16% in the prior year to 43% in the current year, partially driven by the aforementioned $1.1 million of cost of goods sold reported in the current year period due to the Inderal LA and Propranolol ER inventory step-up. Excluding this amount, cost of goods sold represents 40% of our third quarter net revenues, in line with our expectations due to the increase in sales of products with profit sharing arrangements. Selling, general and administrative expenses of $6.9 million increased $1.5 million over the prior year, primarily due to employment related costs as we have selectively added personnel to support the growth of the business and our key development projects, including the Corticotropin re-commercialization team. Research and development costs increased 28% compared to prior year to $1 million as we work to commercialize pipeline products. As it relates to forward-looking information, this morning we are narrowing our full-year guidance for net revenues, GAAP EPS and adjusted non-GAAP EBITDA. We currently project full-year net revenues of between $128 million and $134 million as compared to the previously disclosed range of $119 million to $134 million. Correspondingly, we have narrowed GAAP EPS guidance to be between $0.60 and $0.75 per diluted share, and adjusted non-GAAP EBITDA of between $59 million and $63 million. Our guidance for adjusted non-GAAP net income per diluted shares stands at $4 to $4.25 per diluted share. It is worth noting that with these revisions, we have begun to build-in Corticotropin R&D project expenses in conjunction with the recent operational progress that Art discussed earlier on the call. Finally, as it relates to our balance sheet, as of September 30, 2016, we had cash and cash equivalents of $16 million on-hand. This balance is reflective of year-to-date cash flow from operations of $15.4 million and over $144 million of cash deployed to acquire products and product distribution rights during the year. Cash flow from operations reflects pull- through on the significantly higher sales base, tempered by the corresponding increase in working capital, principally accounts receivable and inventory. Our $30 million credit line was undrawn as of the balance sheet, and remains undrawn as of today. In summary, our third quarter 2016 financial results continue to build upon the ongoing broadening of our product portfolio with multiple revenue and profit drivers. We believe that we are well positioned to capitalize on the strength of our 2016 launches as we close out the year and look forward to 2017. With this, I will turn the call back to our President and CEO, Art Przybyl.

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

[Operator Instructions] Your first question comes from the line of Scott Henry of ROTH Capital.

Looking through the numbers, the generic formal products looked a bit stronger than expected. And given the uptick in the COGS rate that would indicate that perhaps some of the lower margin partner products performed very well. Could you give me any color on Fenofibrate in the quarter and perhaps HPC or Hydroxyprogesterone?

Let me take the later part of the question first. HPC will give update on at the end of the -- when we announce our fourth quarter results. And again, we get a better feel for the run-rate of that product. But HPC was a de minimis amount associated with the results, the revenue results that we announced today. And regarding some of the product level or revenue drivers, let me turn that question over to Steve. Steve would you be kind enough answer that please.

Clearly, as we see the full effect of the second quarter launches in the third quarter, and as I stated in the prepared comments, the gross margin rates are in line with our forecast in our guidance. So, we do have a full quarter worth of Fenofibrate and that product was a driver for the quarter. But that is linked it with multiple drivers at various different individual gross margin rates.

And any commentary on how EEMT in the quarter?

Yes, we can give you some exact numbers since we always do on the product. We did $7.4 million of net revenues for EEMT in the quarter. This brings us to a year to date number of $22.9 million in revenues for the first three quarter of the year that is down $6.9 million from the prior year. And we do have a full-year estimate of $30.3 million for EEMT in 2016, which would be representative of down about $8.6 million or 22% as compared to the prior year. This is obviously due primarily to declining scripts and where our market share has shaken out remains constant at about 50%.

And then just a final question and I’ll get back into the queue. On Corticotropin you’ve given us a lot more information, and I appreciate that. Without asking for any timelines or there specifics, can you tell me about what would be the next data point that we would expect you to comment on? At some point it will be the filing of the supplemental NDA. Are there any data points we should look for before that where we might get commentary?

Yes there is. When we announced our fourth quarter results, we intend to provide you with the amount of investment from both personnel contracting for manufacturing, as well as the development work, analytic work, that's required in terms of investment dollars in R&D and SG&A for next year. And so you should look forward to receiving that information again when we announce our fourth quarter results.

Your next question comes from the line of Elliot Wilbur of Raymond James.

Art we once again find ourselves in an environment where market seem to, want to focus on every scary little noise in the dark. And maybe I could just get you to address kind of seems if we would put principal issue this morning with respect to EBITDA guidance for the year. Obviously, numbers have continued to come in strong. But at least optically you trim the top-end of the range versus what you had expected last quarter. Maybe you could just talk a little bit about some of the issues that might have drove that, whether it’d be base product performance or launch uptake, a couple of newly introduced products. But maybe just some of the pushes and/or I guess it’s more of the pulls there?

Well, our generic business has takeaways, and certainly has additions to it from time to time. So we -- because of our knowledge of where the business is over the course of the year, we essentially pegged our EBITDA for the end of the year at quite frankly the midpoint of where we expect it to come in at. And needless to say, our EBITDA generation has gained momentum over the course of, let's say, sequentially over the course of each quarter that we've announced this year. So, we continue to see EBITDA growth, obviously, heading into the fourth quarter of next year from the third quarter. And we've always pointed to that level of EBITDA as being a reasonable number for the base business as we move into 2017. And so, again, I would always continue to point to what that number will be in taking that at a pro-forma basis on an annualized approach going forward.

And appreciate your comments with respect to timing of 2017 guidance, we expect next quarter. But just, conceptually, I guess, at this point, given the momentum from new product launches, relative performance of the base and then you guys have been a little bit quiet in terms of the cadence of new approvals for next year. But I guess given lot of questions as to whether or not you think that you can still grow the business from annualized third quarter levels, going forward, without potential capital deployment or more inorganic growth.

We certainly think we can. Remember that couple of products the anti-cancer Nilutamide the anti-invective EES, were just launched in the third and the fourth quarter, essentially, respectively. So you're looking at annualized numbers associated with a couple of products that remain and are strong contributors to our EBITDA line. I could -- we know the number of products that we potentially could launch between now and the end of next year. We'll give new product introductions and we will certainly provide an understanding of the number in that basket that we feel comfortable projecting between now and next year. I could tell you it’s double-digits, again. And we'll give you certainly, when we announce fourth quarter, what that IMS revenue umbrella is for those product launches that we feel comfortable disclosing. And so yes, we certainly feel very good about our business prospects for growth heading into 2017. And so, we think we're, again, as I stated in my commentary, we think that we're well positioned for continuous growth for the Company. So, I hope that answers your question. But we're pretty optimistic about our opportunities moving forward.

That’s good color commentary appreciated, may be just one last question for Steve or yourself. Just with respect to gross margin performance in the quarter. Obviously, the numbers continue to move down based upon product mix. But still seems like some of these partner products gain more share relatively and then obviously HPC uptake. That number probably will still continue to trend down from third quarter levels, may be just comment on that observation?

Sure. Just a reminder, the HCP is not in any of our forward-looking guidance. And so, excluding HPC, Elliot, I would tell you that I would expect the fourth quarter gross margins to be very similar to the third quarter actual that we just posted today, so, right around that 60%, excluding any amortization of the inventory step-up.

Your next question comes from the line of Louise Chen of Guggenheim Securities.

This is Donna on for Louise, congrats on the quarter. We had a couple of question on Corticotropin if you can answer then. This first, have you meet with the FDA recently? And if not, when do you plan to meeting with them? And the secondly, what regulatory hurdles would you have to meet from this point going forward? I think your sNDA approved. And then I have a couple of question on the rest of the business as well afterwards.

I can answer the first two pretty quickly by saying we have not publically disclosed answer to either of those questions at this point in time. And maybe we can take any additional questions you might have Donna.

Can you give us some color on the uptake you’re seeing with some other products you’ve just launched, particularly the anti-infective and anti-cancer drugs. And then how should we think about your tax rate going forward. Is the 17% that we saw this quarter, the effective non-GAAP tax rate, is that something that is at a level we could expect going forward? Or should we expect it to come up a little bit?

I’m going to let Steve answer that. I wish we were paying a 17% effective tax rate, unfortunately we’re not. But let me answer the first part of your question first. We’ve had very solid launches in regards to Nilutamide and Erythromycin Ethylsuccinate, I would approximate our market shares at somewhere between 85% to 90% on Nilutamide and 70% on the EES product. And Steve I’ll let you take our tax rate now, and if you want to comment on it going forward, please do so.

So you should expect for the fourth quarter and the full-year of 2016 for the total Company effective tax rate to be right around 51% and the current tax rate, which we use in that non-GAAP measure, to be right around 59% to 60%.

Your next question comes from the line of Gregg Gilbert of Deutsche Bank.

Hi good morning this is Pravesh on Gregg Gilbert. I have just two, first one, can you comment on how you’re positioning HPC, and whether you’re seeing, or expect to see, usage in the pre-term broad market? And the second one on Corticotropin, can you give us a sense for what type of updates you plan to provide as you progress in your re-commercialization efforts? Thank you.

Thanks for the questions. So in regards to HPC, as I mentioned earlier in the call, we will give a much higher level understanding of our expectation for that products. In terms of unit sales, moving in, when we announced our fourth quarter results, we want to see if we can get an understanding as to what our mature run rate will be. And I have no comment. Our product is not indicated for a pre-term labor, so it’s difficult for me to comment on whether it’s used for that indication or not. In regards to Corticotropin, I’ll refer back to Scott Henry’s earlier question. I think the next update that you can expect to receive regarding Corticotropin will be in -- again, when we announce our fourth quarter results and we provide 2017 guidance. So people can have an understanding as to what our level of, we'll call it R&D expense or SG&A expense associated with the project, will be for 2017.

Your next question comes from the line of Patrick Trichio of Wells Fargo.

My questions are regarding Corticotropin re-commercialization. First, can you tell us who is leading the re-commercialization team, or who the key members of the team are? And secondly, is there a particular year in which you expect to file by?

Thanks for the questions. The later question we have not publicly disclosed, our time lines for the project. The leader of the project team is a gentleman that we hired earlier this year, as we call him the Vice President of Corticotropin and his name is Mark Kinsky.

[Operator Instructions] At this time, there are no further questions. Are there any closing remarks?

Yes, I just would again like to thank everybody for joining ANI's earnings conference call today. And wish you all nice afternoon. Thank you very much. Bye-bye.

Thank you. This concludes ANI's third quarter 2016 earnings conference call. You may now disconnect your lines, and have a wonderful day.