ANI Pharmaceuticals, Inc. (ANIP) Q1 2017 Earnings Report, Transcript and Summary

Good morning everyone. And welcome to the ANI's First Quarter 2017 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 this call may be recorded. It is now my pleasure to turn today's program over to Mr. Arthur Przybyl. Please go ahead.

Good morning everyone. Welcome to ANI's earnings conference call for the first quarter 2017. 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, its 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 strong first quarter results. Net revenues of $36.6 million, adjusted non-GAAP EBITDA of $14.7 million and adjusted non-GAAP net income per diluted share of $0.74; increases of 78%, 29% and 40% respectively as compared to the prior year. As result of these reported financial matrix, we reaffirming our annual guidance, annual revenues of $181 million to $190 million, adjusted non-GAAP EBITDA of $73.1 million to $77.2 million and adjusted non-GAAP income per diluted share of $3.58 to $3.94. Our two significant business platforms generic pharmaceutical and branded pharmaceutical products. They're already $26.6 million and $8 million in first quarter net revenues; increases of a 101% and 44% respectively as compared to the prior year. Non-GAAP gross profit was $21.8 million or 59% of net sales as compared to $17.1 million or 83% of net sales in the prior period. In the first quarter, we generated $6.5 million in positive cash flows from operations. Looking forward to the remainder of 2017, we continue to broaden our generic and brand product lines and anticipate positive effects on our revenues in non-GAAP EBITDA from the launch of three brand products, InnoPran XL, Inderal XL and Inderal LA and it was launched ANI label. In addition, we anticipate several new generic product launches, recently we announced the launch of Indapamide tablets. Last week, our partner IDT Australia announced that received FDA clearance for Pindolol tablets which will allow us to launch the product in the coming weeks. Finally, our EEMT market share has increased to approximately 65%. Due to a contract win and in fact one of our EEMT competitors has dropped out of the market, full effect of which will begin in the second quarter. In the first quarter, EEMT revenues were $5.1 million. Corticotropin gel and it's free commercialization effort continues to progress. Recently, we successfully manufactured development a lot of Corticotropin active pharmaceutical ingredient that replicated the yield and manufacturing process from when the API was last manufactured. Because of the success, we have begun process characterization and scale of efforts of three batches of API, which is the next step prior to commercial API manufacturing. We will soon select to finish those that we are manufacturer and attempt to initiate administers which who are manufacturing the Corticotropin gel in the second half of this year. We continue to advance the development analytical methods in order to modernize the NDA. We made progress in developing analytical methods to analyze the components of the purified Corticotropin API powder. These analytical methods are being used to generate results that are in turn compared to results from historical batches of API. In addition to our manufacturing and analytical method work, we have to develop a comprehensive regulatory filing for Corticotropin gel and intent to meet with the FDA to present the plan in the second half of this year. I will now turn the conference call over to our Chief Financial Officer, Stephen Carey who will provide you with more details on our financial results.

Thank you, Arthur. Good morning to everyone online and thank you for joining the call to discuss ANI's first quarter 2017 financial results. ANI began 2017 by posting a strong quarter that was in line with our internal expectation as one sets the tone for achievement of our full-year goals and objectives. Net revenues for the quarter ended March 31st, 2017, with $36.6 million representing a 78% increase from prior year as the company continues to execute on key 2016 product launches and integrates InnoPran XL and Inderal XL into our brand portfolio. Sequentially, we reported that revenues were down a modest 4% or $1.6 million from fourth quarter 2016 driven by the contraction of the market size of EEMT, which negatively impacted sequential for us comparisons by $1.3 million. This contraction as well as the recent EEMT contracts and sided buyer was fully flat in our internal quarterly plan and external annual guidance as the resume presents it. We mechanized the analyst community did not quite reflect the extent of this quarterly phasing in the consents of figures, however this should not be tracked from our published results today. First quarter adjusted non-GAAP EBITDA was $14.7 million representing a $3.3 million or 29% increase from the year-ago period. This result was achieved while in choosing our estimate in R&D by over 600,000 driven by our Corticotropin recommercialization project. Our adjusted non-GAAP deluded earnings per share metric increased $0.21 or 40% from prior year to $0.74 per deluded share. As previously reported in our year-end 2016 earnings call, in February, we utilized Mesalamine along with $30 million of borrowings from our credit agreement with Citizens Bank to fund the purchase of two brands products. InnoPran XL and Inderal XL for total consideration of approximately $51 million. These transactions has begun it for asset acquisitions or U.S. GAAP purchase accounting drills and that resulted in approximately $34 million of product level intangible assets and nearly $17 million of purchased finished goods inventory stated at fair value on our balance sheet. The intangible assets will be amortized, they were 10-year estimated use for life, with the majority of the amortization to be taking during the period of patent protection for the assets. The inventory step-up will be amortized as the inventory is sold through. For the close of the transaction in February, through March 31st of this year, we recognized approximately $1.5 million of incremental cost of goods sold for sales of these products related to the inventory step up. Further details of the accounting for these transactions can be found in our first quarter 10-Q which will be filed with the SEC after the bell this afternoon. Turning to the details of our first quarter sales performance. Net revenues of our generic products doubled from the first quarter of 2016 to $26.6 million driven by the continued execution of our 2016 product launches. Key contributors included Fenofibrate, Propranolol ER, EES, Nilutamide and Mesalamine. Net revenues for our brand in pharmaceutical products grew 44% year-over-year to reach $8 million in the quarter. Driven by the April 2016 launch of Inderal LA and the introduction of InnoPran XL and Inderal XL into our product line up in the second half of February 2017. In addition, revenues from contract manufacturing services were up $409,000 or 30%. Cost of sales as the percentage of net revenues increased from 17% in the prior year to 45% in the current year, partially driven by the aforementioned $1.5 million of cost of goods sold reported in the coming quarter due to the Inderal XL and InnoPran XL inventory step-up. Excluding it now, cost of goods sold represents 41% of net revenues for the first quarter of 2017, in line with the expectations and reflective of the increase in sales of products with profit sharing arrangements. Selling, general and administrative expenses were $7.3 million as compared to $5.9 million in the prior year, primarily due to employment related cost as we have added personnel to support the growth of our business. From addition during the quarter, we incurred nearly $500,000 of transaction expenditures including legal and due diligent support related to a transaction that we ultimately decided not to pursue. This amount has been added back for purpose of our non-GAAP measures. Research and development cost were as forecasted higher in the first quarter driven by the momentum in our Corticotropin recommercialization program. Notably, our overall effective tax rate for the quarter was 31% of quarterly pretax income, reflected of the previously discussed with quarter dissolution of the foreign subsidiary that was put in place in conjunction with our first quarter 2016 purchase of the Corticotropin assets from Merck. From a balance sheet perspective, we had unrestricted cash and cash equivalents of $10.8 million as of March 31st 2017. This balance is reflective of first quarter cash flow from operations of $6.5 million and the utilization of approximately $21 million of cash on hand to fund the Inderal XL and InnoPran XL transactions. We will also do down $30 million from our credit agreement with Citizens Bank from these purchases. As of the March 31st balance sheet day, we had net debt of approximately $163 million representing approximately 2.2 times net leverage utilizing forward-looking 2017 adjusted EBITDA. As stated in our press release this morning, we are reaffirming our annual guidance has further published and discussed in detail on our fourth quarter 2016 earnings call and associated press release. In summary, we project full-year net revenues to reach between a $181 million and a $190 million representing a robust 41% to 48% increase over 2016 and a corresponding 20% to 26% growth in our adjusted non-GAAP EBITDA to be between $73.1 million and $77.2 million. This guidance continues to include anticipated increasing quarterly revenues from EEMT driven by recent contract wins, the annualization and continued operational focus on maximizing 2016 launches. Expansion of our main revenues with the addition of the Inderal XL and InnoPran XL and execution of 2017 generic product launches. While continuing to increase the investment and moment behind our Corticotropin recommercialization project, our employee base and our manufacturing and distribution capabilities. With this, I will turn the call back to our President and CEO, Arthur Przybyl.

Thank you, Steve. And moderator, we will no open the conference call to any questions.

[Operator Instructions] Your first question comes from the line of Elliot Wilbur of Raymond James.

Thanks, good morning. First question for yourself, Art, regarding your commentary around the EEMT market and trends there. I guess, given your assumption now or that with the contract when you moved around 65% of the market, it looks like the beginning of the year in our markets still long has been in decline for kind of a long period time in terms of prescription volume. But it kind of looks like the beginning of the year, there was a more pronounced sort of step down in volume trend that I don’t know if there's something happening there in terms of product availability or whatever that may have sort of depressed volume levels. But is you're thinking at this point that you're going to have 65% share of market that's slightly under 10,000 scripts. So, we continues to tick lower or do you think there was something be unusual or kind of impacted overall volume trends for that category since beginning of the year?

Hi, Elliot. Thanks for the question. So, we experience in the EEMT market as we see a script declines of in the name of a 15% to a 20%. And that expectations always built into our forward-looking sales estimates for the products. So, to give you an example, year-over-year first quarter of '16 versus first quarter of this year, our unit sales were down by approximately 15,000 units or total of 2.75 in net sales. Now, that was driven by certainly script declines year-over-year but also by the fact that our market share was in at 45% to 50% range as compared to where it was in the quarter 2016. So, we see, we're always going to experience script declines in that product, it's just a function of a generic product that's not being obviously not, has no detail left with behind it. But at the same time we now have three of the four large script groups buying group consortiums under contract. And so, that allows us to you will see an increase in our overall unit sales from our representative market share today to climb to what's representative of 65% of the existing market as it stands today. So, we expect to see revenue increases over the course of the rest of the year on EEMT.

Okay, thanks for that color. And then I guess with respect to the performance to the generic base of a last couple of quarter obviously sequentially it's been down two straight quarters and EEMT of course kind of it, some of that in the first quarter. But it looks like all the key base products have actually performed pretty well. So, I guess some of the questions or queries we have this morning are just some investor questions about sort of some of the smaller products in the generic base and ultimately whether you're seeing maybe stepped up price erosion on some of your smaller assets similar to what some other companies in the space have commented on the last couple of days and weeks?

Well, we have approximately 20 generic products, 21 if included Indapamide. And we're fortunate that we have about seven of those products that have essentially one or two competitors or no competitors. And so, in the generic space. And so, that to some respect insulates us from price erosion that's certainly occurring into market place today. And many of those products that I mentioned also have exclusive raw material relationships associated with them. So, that's helpful to us. That sort of puts us in a bit of unique position now. That's tempered by the fact that and clearly there's a new buying consortium. I think we all know that our Claris one is sent out request for proposals and eventually will make awards. So, that provides certainly for more competitive platform across the board for generic products. But in our business that continues to grow in the generic space, even with the headwind that we'd experienced, Elliot, year-over-year in regards to EEMT, our business in generic products is up a 100%. And so, we see our business as continuing to be a growth end with product that would want to launch in our generic platform. And so, that's helpful. I mean, we are not a company yet that has what I would call scale. 20 products in the generic market place does not represent scale, we're just unfortunate to choose ones that have a lesser competitive environment, a lot of companies seek those out. But our objectives continue to launch product, program and use in the generic space and continue to advance our broaden our product line offerings.

Okay, thanks. And there is one last question around some of the addition of corticotrophin. It was in the press release today, indicate that you intent to meet, sent the plan to the FDA in the second half. Have you already requested the meeting at this point?

We have not. We'll request the type C meeting at the appropriate time to obviously adapt to the timeframe that I mentioned, second half of the year. We have strategic planning's that should be scheduled later on this month with our corticotrophin development team. We have the putting the stake in the ground as we advance towards an sNDA filing and part of that will be when we request the meeting, the type C meeting with FDA. Typically FDA will grant those meetings with us today lead time sake of argument. So, we have not yet approached FDA and asked for a meeting, but is our plan to do so and obviously meet with them second half of '17.

Okay, understood. And then, there is a last question and then would be, what would be the sort of the next key disclosure that we might get with respect to that program, and you're going to tell us when you have the meeting schedule or if that is after the meeting or?

I think, certainly it's very important. No, what's very important now we're trying to take a step approach in terms of disclosure, not get ahead of our sales. The disclosure that we've advanced our sales now mitigate process characterization on the manufacturing of three lots of purified Corticotropin powder, that's important. Because that represents lot-to-lot consistency in terms of yield potency etcetera. And I think that that is a key milestone for from our perspective, if we can accomplish that, successfully accomplish that, we got runway to an sNDA filing. And so, that is something that I would think would be from my perspective is the next significant milestone associated with the project.

Alright, thank you.

You're welcome, Elliot.

Your next question comes from Scott Henry of ROTH Capital.

Thank you, and good morning.

Good morning, Scott.

Just a few questions. On EEMT, we've already starting to see the market share maintenance scripts. Question is how is the pricing environment, it sounds like it could be stable given that a competitor has left the field, but just trying to get a sense if do you have to trade price for volume or was this simply none to play out there?

So, it's relatively stable, the pricing environment. Again, there is only one other competitor today, Scott, that's Creekwood. And as I mentioned, they have one of the four big line consortium awards, primary awards. So, for right now it's relatively stable pricing. Remember that our product has always been priced higher than Creekwood's price.

Okay, great. Thank you for that color. And then, when I look at the product mix, I'm just wondering if there's a couple kind of bigger or anchor products and I'm wondering if you could give me a sense of how revenues were for those because they're kind of significant drivers. I guess the Fenofibrate and Propranolol ER and then maybe the Inderal line. Any sense of how those three, I mean, those look like to be three of the bigger ones you gave us EEMT. Any sense to how they do?

We typically, outside of EEMT because we had currently on as a public company, such a large concentration in revenues and obviously gross profit associated with the product. We've always talked about the revenue base for that product. We don’t disclose our revenues for other individual products. I can tell you though that since we acquired Propranolol ER last year, where generic revenues to the product are certainly up over that period of time, I think we acquired a profit that 8% market share level and our market share has certainly increased from that point. In regards to Fenofibrate. Fenofibrate, I remind you is a product that we still a strong amount of the sales revenues, because we are marketing this product under our license as an authorized generic. And revenues there have been fairly stable, since we acquired the license to market this product. But we've seen our market shares on our key products, majority of them increase over time. And that's obviously contributed to the doubling of our generic revenues from the prior year period.

Okay, great. Thanks for that color. And then, on the Corticotrophin program, I mean, wasn’t that long ago that you reported full-year '16 results, but certainly to me it looks like there is a lot more granularity, a lot more disclosure and it appears like you have set a progress there. Was there anything specific that happened between the last reporting in this one or are you just given us greater color because it does giving the --.

I think we're, we've always been careful not to head ourselves on the project. I think we're just providing more color on milestones that have been achieved us developing, successfully manufacturing the first development lot of purified Corticotrophin powder is an important milestone. Because being able to replicate the yield that we anticipate that from let's say a historical manufacturing, but was very important in profit. And if you think that where we have come, we started in let's say January of last year when we acquired massively the sum of the team, we have put together what we feel are the necessary analytical methods to modernize the NDA. We have started contract manufacturing or manufacturing those purified Corticotrophin raw material. We source obviously the natural substance foreseeing the territories, and now we have a fields are fairly comprehensive regulatory filing strategy. And so, we're getting to the point, now we're as I always say, there's going to be meat on the bone data points to allow us to sit down with FDA and discuss our intent to submit a supplemental NDA filing in or not too distant future. So, this has just been natural course of events from my perspective Scott, as to how we've rolled out this recommercialization program. And I think you should expect these updates to be not to articulate they were at in the project and if that means that it provides more color to the project and then so be it. But I think it's just important that we report on what we consider to be a significant milestones to the project as we move forward.

Okay, great. Final question, just regarding the expenses related to a transaction not consummated that $477,000. Could you give any I mean is that a situation where the cost was higher than typical and that's why you called it out or were you very close to doing it and then pulled back to. Since you have pulled it out, I thought I'd ask you about it.

Let me give you some color on the transaction. We continually look to advanced mensuration of our business model. We were looking at quite frankly and it's without obviously naming any names, we were looking at vertically integrating into raw material manufacturing. We were looking at potential for conditional simulation capabilities and at the same time we were looking at acquiring a pipeline of filed ANDAs and ANI ANDAs about to be filed. And so, we always have viewed that step as important progress for as a company. And it was unfortunate that we were not able to consummate the transaction, we just felt that in the due diligence process that value was not something that we were or the price was not something that we're willing to pay. And so we decided to cease exploring the opportunity and obviously walk away. And so, but that at least gives you a feel for the part of the company's internal strategic thinking as how we'd like to advance the company on a go forward basis.

Okay, great. Thank you for that color. And thank you for taking the questions.

You're welcome, Scott.

Thank you. I'll now return the call to Arthur Przybyl for any additional or closing remarks.

I would just like to thank everybody for attending our earnings conference call today. And we look forward to our next quarter and getting to get to you once again. Thank you, very much. Bye-bye.

Thank you. This concludes ANI's first quarter 2017 earnings call. You may now disconnect your lines at this time. Have a wonderful day.