ANI Pharmaceuticals, Inc. (ANIP) Q4 2016 Earnings Report, Transcript and Summary

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

Good morning everyone. Welcome to ANI's earnings conference call for the fourth quarter and year-end 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 year-end results for ANI. Record results were achieved in revenues, adjusted non-GAAP EBITDA and operating cash flows for 2016. Before we present the factors responsible for year-over-year growth and describe the quantitative metrics of our results, I want to personally thank and congratulate our entire employee base for all their hard work and effort this past year. We have but never accomplish what we achieve this past year without each and every one of you. The contributions are recognized and greatly appreciated. In our press release today, we reported annual revenues of $128.6 million and EBITDA of $61.1 million, increases of 69% and 41% respectively as compared to the prior year. In the fourth quarter, revenues increased 112% to $38.2 million and EBITDA increased 88% to $17.9 million. We continue to focus on revenue and EBITDA growth and regard both as important valuation metrics for ANI. In 2016, ANI generated $27.5 million in operating cash flows and we invested $4.6 million in capital expenditures. Our revenues are primarily generated through two business platforms, generic drug sales and branded drug sales. Annual 2016 generic drug revenues was $95.2 million, an increase of 73% as compared to the prior year. For the fourth quarter 2016, generic drug revenue was $29.3 million, an increase of 109% as compared to the prior year period. These increases were the direct result of several important product launches throughout the year. These launches, annualized for 2017, will help to contribute to continued generic revenue growth. To support this growth and our future growth plans, we hired 45 full time employees in 2016, increasing our overall headcount by 32% primarily to support our manufacturing facilities in Minnesota. All but one of our finished dosage form products are manufactured in the United States. Annual 2016 brand drug revenue was $26.4 million, an increase of 140% as compared to the prior year period. For the fourth quarter 2016, brand drug revenue was $6.5 million, an increase of 179% as compared to the prior year period. These increases were primarily generated from our acquisition of Inderal LA. Recently, we acquired and launched Inderal XL and InnoPran XL, two products that will help brand drug revenue continue to grow in 2017. We remain strategically committed to advancing our overall revenue and EBITDA growth through selective acquisitions in both our generic and brand drug business platforms, when appropriate to do some. During the fourth quarter, we terminated our distribution agreement for Hydroxyprogesterone Caproate or HPC. You may recall that this agreement was consignment based for ANI. In exchange for terminating the agreement, we received cash and an undisclosed NDA. We hope to launch the NDA as an authorized generic in the near future. For the quarter, we recorded a non-cash impairment expense of $6.7 million for testosterone gel, a non-core asset. Our Corticotropin project continues to advance on all fronts manufacturing, analytics and team resources. We have begun work on manufacturing raw material batches, analytical method development and have recently hired Karen Quinn to lead our regulatory filing strategy. Please reference our Corticotropin recommercialization update in today's press release. As before, we are not publicly disclosing internal timelines for the project. Looking forward, today we have provided guidance for 2017. Our revenue and EBITDA even got guidance range midpoints assumes revenue growth of 44% to $185.5 million and EBITDA growth of 23% to $75.1 million for 2017. We have a robust pipeline of product opportunities and anticipate launching several new products in 2017. Our investment in R&D is increasing primarily due to Corticotropin project activities. The balance sheet remains strong. We are levered approximately two times and have access to additional liquidity for potential future transactions. I will now turn the conference call over to Steve Carey, our CFO. Steve?

Thank you Art. Good morning to everyone on the line and thank you for joining the call to discuss ANI's full year and fourth quarter 2016 financial results. ANI posted a strong fourth quarter to close out a record year in 2016. Net revenues for the quarter ended December 31, 2016 was $38.2 million and more than doubled from prior year. Reported net revenues were essentially in line with record third quarter 2016 actual and exceeded the low end of our guidance range despite including the negative impact of accounting for the on plan termination of HPC distribution agreement. Excluding this impact, ANI would have posted its fourth consecutive sequential revenue gain. This fourth quarter performance places our full year net revenues at $128.6 million, representing a significant 69% increase over 2015 revenues of $76.3 million. Fourth quarter adjusted non-GAAP EBITDA reached a quarterly record of $17.9 million, representing an $8.4 million or 88% increase from the year ago period and a 10% increase from the $16.4 million posted in the third quarter of 2016. At $61.1 million, full year adjusted non-GAAP EBITDA grew 41% over prior year. During the fourth quarter, we recognized $6.7 million non-cash impairment of a finite lived non-core intangible asset. This intangible related to our NDA for testosterone gel, an asset that was acquired and accounted for in our 2013 merger with BioSante. This impairment drove our GAAP net loss of $0.09 per diluted share as compared to a GAAP earnings per share of $0.25 in the fourth quarter of 2015. GAAP EPS also includes the impact of significantly higher year-over-year depreciation and amortization, which increased $3.7 million from $2.1 million in the prior year to $5.8 million in the current year driven by amortization of a significantly higher intangible asset base. In addition, GAAP PS includes $2.8 million of incremental cost of sales related to the inventory step up recognized in the asset purchase accounting for Inderal LA and Propranolol ER inventory. Our adjusted GAAP net income per diluted share metric, which excludes these impacts, increased $0.32 or 62% from prior year to $0.84 per diluted share. This metric fell short of our previous guidance entirely driven by unfavorable timing items in our current tax provision as calculated under the company's previous methodology for this metric. Excluding these tax timing impacts, fourth quarter non-GAAP net income per diluted share would have been at the high end of our guidance range commensurate with our EBITDA performance. I will further discuss this metric in context of our 2017 guidance in a moment. Now sending to the details of our fourth quarter sales performance. Net revenues of our generic products more than doubled from the fourth quarter of 2015 to $29.3 million driven by 10 product introductions during the near. Key contributors included Fenofibrate, Propranolol ER, EES, Mesalamine and Nilutamide. Net revenues of our branded pharmaceutical products grew 179% year-over-year to reach $6.5 million in the quarter, driven by the April 2016 launch of Inderal LA. In addition, revenues from contract manufacturing services were up 19%, while contract services and other income increased nearly $500,000. Cost of sales, as a percentage of net revenues, increased from 20% in the prior year to 44% in the current year, partially driven by the aforementioned $2.8 million of cost of goods sold recorded in the current year period due to the Inderal LA and Propranolol ER inventory step up. Excluding this amount, cost of goods sold represents 37% of net revenues for the fourth quarter of 2016 reflective of the increase in sales of products with profit-sharing arrangements. Selling, general and administrative expenses were $7.4 million as compared to $5.5 million in the prior year, primarily due to employment related costs as we have added personnel to support the growth of our business. Our headcount growth has been concentrated in manufacturing and manufacturing related support as well as in staffing our Corticotropin recommercialization team. Research and development costs were lower in the fourth quarter as higher Corticotropin related spend was tempered by favorable timing in our generic development programs. Our overall effective tax rate for 2016 ended at 55% of pretax income, slightly higher than previous projections. This rate is higher than our statutory rate of 37% due to the negative impact of the Dutch subsidiary that was put in place in conjunction with our first quarter 2016 purchase of the Corticotropin assets from Merck. Under this structure, we were unable to deduct current amortization of the intellectual property acquired in the deal. We have reevaluated the structure and determined that it no longer fit our near term financial and long-term operating goals and took the appropriate steps to dismantle the structure in the fourth quarter. As such, we began to recognize immediate benefit of this action in the final month of the year and currently project an effective tax rate of approximately 37% in 2017. From a balance sheet perspective, we had unrestricted cash and cash equivalents of $27.4 million as of December 31, 2016. This balance is reflective of year-to-date cash flow from operations of $27.5 million, $12.1 million of which was delivered in the fourth quarter as increases in working capital from our string of second and third quarter product launches began to temper and convert to cash. As announced and disclosed last week, we utilized cash on hand along with $30 million of borrowings from our credit agreement with Citizens Bank to fund the purchase of two brand products, InnoPran XL and Inderal XL for total consideration of approximately $51 million. After this transaction, we have net debt of approximately $162 million, representing approximately 2.1 times net leverage utilizing forward-looking 2017 adjusted EBITDA. Turning our attention to 2017 guidance. We currently anticipate strong growth in our key financial metrics driven by the annualization and continued operational focus on maximizing 2016 launches, expansion of our brand revenues with the addition of InnoPran XL and Inderal XL and execution of our 2017 generic product launches while increasing the investment behind our Corticotropin recommercialization project, our employee base and our manufacturing and distribution capabilities. We project net revenues to reach between $181 million and $190 million, representing a robust 41% to 48% increase over 2016. Gross margin is projected to be between 56% to 58% of net revenues and we expect to more than double our investment in R&D, projecting 2017 spend of upwards of $6.8 million as compared to $2.1 million during 2016. Adjusted non-GAAP EBITDA is projected to be between $73.1 million and $77.2 million, reflecting 20% to 26% growth over our record 2016 year. In addition to adding guidance on our SG&A and R&D spend, beginning in 2017 we are changing the method under which we calculate the tax impact in our non-GAAP net income per diluted share measure. Our new methodology will reflect the estimated tax impact of adjustments utilizing an estimated federal and state statutory rate of 37% and is intended to greatly simplify the calculation, enhance our investors understanding of the calculation and more closely align our measure with companies in our peer group. In addition, we will refer to this measure as non-GAAP diluted earnings per share on a go forward basis. For ease of comparison as we move forward in 2017, we have provided each of the four quarters of 2016 calculated under the new methodology in table three of our press release this morning. All other aspects of the calculation other than tax remain the same. Annual free cash flow in 2017 is expected to be in the range of $29 million to $34 million reflecting the projected cash flow from operations of $40 million to $45 million and capital expense requirements of nearly $11 million as we continue to invest in our capabilities. Given our rapidly expanding business, anticipated cash flow and relatively low leverage, we believe that we have access to additional sources of liquidity to fund potential future transactions and enhance the growth of our business. In summary, we look forward to continuing to advance ANI in 2017 on the strength of the steps taken this year to execute on our plan to diversify and broaden the product portfolio and to deliver on our commitment to key stakeholders. With this, I turn the call back to our President and CEO, Art Przybyl.

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

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

Hi. Thanks for taking my questions. I had a few here. I wanted to start off with a more broad question. Just curious, now that you have changed the company quite a bit and moved away from EEMT, what is your strategic vision for ANI? And what do you want to do to get there? And how long will it take you?

Hi Louise. Thank you. So our strategic vision in the short-term remains the same as it has been over the past several quarters. We went public in June 2013 with a zero EBITDA base and $60 million valuation. And I would say that our short term vision for EBITDA is still $100 million. And we are working hard to achieve that objective in that goal. But realistically, our objective for the company in moving towards that goal is to continue to advance the company through internal product development, product launches, partnered product development and certainly a finite transactions or acquisitions for assets that we feel provide good value at the multiples we buy them at and certainly a value add when we add them to our portfolio and eventually launch the products. So we have that continued focus on revenues and EBITDA as drivers for a lot of the work that we put forth as a company. Secondly, I think you know that we have a potentially significant transformational asset in corticotrophin, an asset that potentially could drive anywhere from upwards of $200 million of annualized free cash flow for the company. We continue to develop a significant amount of resources and attention directed at recommercializing that asset. And the folks that are working on the management, the analytics, the manufacturing, the steps necessary to recommercialize that asset are 100% dedicated to that effort. They do not participate actually in the generic or the brand business platforms of the company. And that's our preference to have those folks remain 100% dedicated to the recommercialization of corticotrophin.

Okay. And then, just I guess as you talked about corticotrophin, on the questions that we get a lot is whether or not you have met with the FDA? And if not, do you think you need to before the NDA can be revised?

So we have not met with the FDA. As you have seen we have recently hired Dr. Karen Quinn to lead the regulatory strategy and meetings with FDA and eventual filings of an sNDA for us. And we absolutely will need to meet with the FDA before we file the sNDA, so they understand our approach, what they will be receiving in the sNDA filing. And we have an opportunity to discuss that with the.

Okay. And the last question here is just on M&A. I know that you said that you have sources to additional capital. But just curious, what areas interest you the most? And could you give any color on the size of the details that you would like to do here?

I would prefer not to give color on size of any deals. I think you have seen us do deals that are immediately accretive. You have seen us basket deals for ANDAs that require some time for us to get our return on investment because it takes some time to launch, recommercialize some of those products and then you seen us obviously spend, in the past, $75 million for the Corticotropin asset. We are always interested, Louise, in expanding our product line offerings for the marketplace. I think that's synonymous with scale. We think that because of the concentration of our customer base that scale is important. The fact that we have established long-term contractual relationships with the four folks or entities that comprise better than 95% percent of all of the scripts in the country for our type of products that we market. The more products we can add to those agreements, again represents our ability to scale up those agreements. So I would say that as long as we feel that we have the financial resources for any type of transaction and we feel that the transaction obviously merits a solid return for us, good value, we would be interested in that. And so I wouldn't tunnel vision us into whether we are going to do a larger or a small transaction. I think we have always had a financial discipline associated with the assets that we have acquired. And so for us, it's both. It's looking at value in the transaction from a multiple standpoint and our ability to extract value from the asset that we buy after we acquire it. And I think we are dedicated to remaining steadfast to that financial discipline. One of the advantages that we have in today's generic business environment is that we have never really been reliant upon, for instance, price increases to grow value in our business. And as you see, many business models have to roll back on some of the pricing. We have not been affected negatively due to that impact for some other business models. At the same time, we have been very careful in how we have leveraged our balance sheet in order to grow the company. We like our position of two times leverage. We feel, as Steve mentioned, that gives us a significant amount of firepower to continue to look for accretive transactions that might be coming to the market in the near term. And it's our belief that more assets will be coming available in the marketplace in the near term.

Okay. Thank you.

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

Thanks. Good morning. First question is for Steve. You had mentioned an item that had negatively impacted revenue in the fourth quarter in terms of hurting the sequential comp. And I apologize, I didn't catch exactly what that was. And just if you wouldn't mind repeating that?

Sure, Elliot and good morning. Yes, as Art had mentioned, in the fourth quarter, we terminated our distribution agreement with Aspen for the HPC product. And so there was associated accounting that went along with that termination of the agreement. And so that forced some negative adjustments in the fourth quarter revenue line.

Could you disclose what that amount was?

It was approximately $800,000 negative to the net revenue line.

Okay. And then, again Steve, so looking at the 2017 guidance with respect to SG&A and R&D, could we get a sense from you of how much of the expected year-over-year increase is tied specifically to Corticotropin related initiatives?

We are not going to define it in terms of dollars. But I would tell you that directionally a significant portion of the increase that you see in the R&D line is driven by that Corticotropin program.

Okay. And then for Art, with respect to the new product launch expectations in 2017, anything you want to say about the cadence to that? Whether it's first half or second half loaded? And then not, specifically, what the mix of products might be? Like, how many of these already are products that you could get to market through CBE-30's or prior approval supplements versus having to go to through a full ANDA process?

Okay. Hi Elliot. Thanks for the question. We still expect to launch approximately double digits in terms of product launches this year. Most of the products are certainly in the second, third and fourth quarter. I would say more the back half of the year. Obviously, we just launched the two products that we acquired on the next day after we acquired the products. Inderal XL and InnoPran XL. But with the exception of those two brands, most of the products are still a CBE-30 driven. And there is also within that mix some products that we hope to launch from our partner IDT out of Australia. And their products are also, I believe, primarily CBE-30 driven as well.

Okay. And then just one last question with respect to gross margin gains in 2017, at least versus the rate that was generated in the fourth quarter. Obviously, I would assume that mix is a large part of that. But maybe you could talk about some of the other dynamics that may be impacting the sequential trend there?

Sure. I am going to handle the first and then I am going to just pass that over to you, Steve. On a macro basis, we have always said that our gross margin percentage would obviously over time be coming down, be more reflective of the business not being so top-heavy concentrated to, for instance, an EEMT product. And it's a nice balance between, obviously branded products carry higher-margins than generics. But I would again continue to refer you to the fact that we now market several authorized generics. And selling products like Mesalamine and Fenofibrate, we generate a significant revenue line, but certainly a smaller percentage of those revenues as the representative of those authorized generics in the marketplace. And I would say that it's primarily, the marketing of our authorized generics that drives our overall gross margin percentage down. On the other hand, I think the company is looking at generating in the triple digits in terms of gross profit dollars in 2017. And we obviously focus more on the aggregate dollars than we do on the margin percentage. Steve, do you want to add something please?

No. Arthur, I think that is it in a nutshell. And Elliot, it's really just a matter of that mix between the products without royalties and those that are with. And as Art pointed out, the products that are AGs tend to carry a higher royalty rate. So it quite simply is just a mix dynamic that you are seeing. So that's really the story there. Moderator, are they other questions?

Yes, sir. You do have a question from the line of Scott Henry with ROTH Capital.

Thank you and good morning. A couple of question. First, when I look at 2017, you have done a great job of diversifying into what it looks like the big five products, maybe call it the big four, if I pull Fenofibrate out because it's lower margin. So the big four would be Erythromycin, Propranolol, perhaps Inderal, now that that's franchised and EEMT. It looks like all of those could be tracking towards around $20 million in 2017. My question is, any comments on those four products? Does that seem to be reasonable? Or any changes in the marketplace that we should think and we should factor in particularly with regards to erythromycin?

Right. Certainly you are going to see, we had one product that maybe you left off your list, Scott and that's Nilutamide which is also a very important EBITDA contributor for us to that mix. And I think it's important to note that we are actually growing our brand business substantially as well as the generic platform. So brands are now in overall aggregate base sales revenue and margin base to our business, they are significant. And with the addition of InnoPran and Inderal, that business has now grown to a point where it's representative of a fairly large revenue percentage of the company's overall revenues. We like that mix. So certainly you are going to see increases in Nilutamide and EES and Propranolol and obviously the Inderal products and even see them increase not just because may be market share gains, but also because of just a natural factor of the fact that these are going to be annualized numbers since these products were launched at different intervals throughout last year's calendar year. In regards to EEMT, we have our natural headwind of 15% loss in scripts year-over-year. So that product will continue to trend down in terms of overall contribution. But EEMT, we have recognized that over time, we strategically planned for it and just to give you an idea, EEMT was down in terms of overall profit, gross profit and revenues of approximately $9.5 million dollars year-over-year, 2015 versus 2016. We don't expect nor do we forecast that level of decline for the product this year either. But I think the point I want to make is the company grew obviously from $44 million to approximately $61 million in EBITDA even in the face of that decline. So that has always been anticipated over time and we planed for it, needless to say. And that planning continues as the company goes forward. And so it's why we obviously are still able to produce and guide towards higher revenue EBITDA numbers 2016 into 2017.

Okay. Great. Thank you for that color. And if you pull out all the big products, if we look at you know the smaller products, which individually don't make a huge difference. I mean they are nice to have and throw off cash. The question is, the smaller products, what's kind of the trend there? I mean, are you seeing price offsetting volume? Or is it a slow, historic generic decline? Just trying to get an idea how to model the smaller products.

It's a good question. We would typically just put in a decline of 5% year-over-year, but in many cases they are flat and sometimes we pick up market share so our gross profit dollars actually increase on some of those products. But we get asked the question a lot about pricing headwinds in the generic industry. And I see a lot of statements out there that say, oh, it's down 20%, down 15%, down 8%, whatever the numbers might be. We don't look at it quite that way. We are still small enough where we look at pricing, whether it's headwinds or increases on a singular basis. We have gone from 16 to 25 products over the course of one year's time. And so some products can really be hit hard, others can't be. Our product line, really, has not been impacted dramatically by pricing headwinds. We certainly have had one product that we have experienced that on. But as an overall general approach to, again the products that we market, we have not seen significant pricing headwinds. Our interpretation of some of these pricing headwinds are again related to products that maybe have had some very, very significant price increases over the past several years from, sake of argument, $10 to $200 and all of a sudden, they are rolling back to more historical pricing levels. Those are tough pricing headwinds to overcome. And we have seen a lot of announcements in regards to other companies' generic business models that they are affected by that. We just don't have really that type of impactful scenarios here because we really haven't seen and I can't pick out a specific product where we have seen that kind of upside to pricing and then eventual downside to pricing.

Okay. Great. Thank you for the color. And if I could, one question on Corticotropin. And I am not sure how much you want to disclose on it at this point, so I respect that. The question is, at some point you are going to have products that you are going to have to generate stability data on. How long would you expect to have stability data? And the question that rolls into that as well is, will you have to do that on the finished dosage product form?

We absolutely will have to do it on the finished dosage product form. Typically, for an injectable, you run 90-day accelerated. Then there might be some question, it's 180-day accelerated, but to answer your question, prior to any sNDA filing, we will have to have, certainly lot to lot, we will have to validate three lots of finished dosage form injectable product and have run accelerated stability on those lots.

Okay. Great. Thank you for the color. Absolute final question. With regards to the guidance, should we assume any acquisitions would be upside to that guidance? Or do you factor any of that into it?

No. So any acquisitions are upside to that guidance. Because obviously, they haven't been announced and it would be very speculative of us to hope that another transaction might take place. So yes, the transactions are upside to our guidance for 2017.

Great. Thank you for taking the questions.

We have reached --

If I may just, I want to thank everybody for attending our earnings conference call today. I want to let all of our stakeholders know that management's 2017 commitment remains the same as 2016. To continue to grow revenues and EBITDA and to advance Corticotropin to an eventual sNDA filing. Thank you very much for attending our call today. Bye, bye.

Thank you. This concludes the ANI fourth quarter 2016 earnings conference call. You may now disconnect your lines at this time and have a wonderful day.