ANI Pharmaceuticals, Inc. (ANIP) Q1 2018 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to ANI's First Quarter 2018 Earnings 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, and welcome to ANI's earnings conference call for the first quarter of 2018. My name is Art Przybyl. I am the CEO. And joining 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 strong first quarter results, net revenues of $46.5 million, record adjusted non-GAAP EBITDA of $21.8 million and record adjusted non-GAAP diluted earnings per share of $1.32, increases of 27%, 48% and 78%, respectively, as compared to the prior year quarter. First quarter results include the impact of royalties from four branded products acquired at the end of 2017, and the positive effects from recent tax reform. Steve will provide you with our financial highlights during this presentation. Strategically we’ve strengthened our two primary business platforms, generic and branded pharmaceutical products, through a series of transactions since last December. These transactions are designed to increase platform revenues and profits both in short and long term based on the timing of relative product launches. Specifically, with the close of yesterday’s announced transaction we’ve launched three new generic products comprising 12 SKUs, that will provide us immediate revenue and profit contribution. These launches increased our commercialized generic product portfolio to a total of 27 products. Since the beginning of the year, we've been receiving royalties on four branded products that we acquired in December of last year. For the first quarter the royalty revenue totaled approximately $5.4 million. We expect to launch these four products in the ANI label in 2018 and that will serve to increase our commercialized brand portfolio to a total of 11 products. Our pipeline now includes 76 products addressing the total annual market size of 4.7 billion based on data from IMS Health. Of these 76 products 71 were acquired and we believe an environment continues to exist today for future pipeline growth opportunities through continued acquisitions. We see compelling opportunities in our existing pipeline for two generic products, methylphenidate extended release tablets and aspirin/dipyridamole extended-release capsules, large market products with limited competition. Both products are approved, require validation efforts, prior to launch. We are very excited about our options for the Aspirin/Dipyridamole product which provides us with a date certain launch date of October 1, 2019 regardless of our own validation effort. Currently, the product has only one generic competitor and generates annual revenues of approximately $120 million. Our pipeline also has two compelling branded product opportunities Vancocin oral solution and of course Cortrophin Gel. Vancocin oral solution remains on target for us to file a prior approval supplement with the FDA in the second half of this year. Cortrophin Gel and its re-commercialization effort continues to progress in cadence with our internal timeline. In the first quarter of 2018, we have continued to advance the manufacture of Corticotropin active pharmaceutical ingredient or API. We ordered and are in the process of installing qualifying the capital equipment necessary for commercial scale API manufacturing. We plan to initiate commercial scale API manufacturing in the second quarter of 2018 and are still on track to initiate API process validation and registration batch manufacturing by the end of 2018. We’ve continued to manufacture batches of Cortrophin Gel drug product and are still on track to manufacture commercial scale drug product batches before the end of 2018. We requested a Type C meeting with the FDA in the fourth quarter of 2017 to provide the regulatory plan for re-commercialization of Cortrophin Gel. The FDA granted the meeting and provided initial response in March 2018. With further communications expected during the second quarter of 2018. In our press release today, we’ve included Table 5 Cortrophin Gel re-commercialization milestone update that is intended to provide relevant information and forecasted timing of certain events as we advance to our supplemental NDA regulatory filing. 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, Art. Good morning to everyone on the line and thank you for joining the call to discuss ANI's first quarter 2018 financial results. ANI started 2018 on the strong note, posting record non-GAAP adjusted EBITDA of $21.8 million on $46.5 million of revenue representing a nearly 47% non-GAAP EBITDA margin. At 21.8 million adjusted non-GAAP EBITDA is up 7 million or 48%, as compared to the prior year. GAAP EPS increased $0.09 to $0.19 per diluted share and adjusted non-GAAP diluted earnings-per-share increased $0.58 or 78% to reach a new company record of $1.32 per diluted share. Net revenue for the three months ended March 31, 2018 was $46.5 million, up 9.9 million, or 27% versus prior year, driven by strong growth in our brands. Revenues of our branded pharmaceutical products more than doubled to reach 16.6 million representing a new record for the portfolio. This performance was driven by the February 2018 relaunch of InnoPran XL and Inderal XL in the ANI label and continued strength in our Inderal LA franchise. In addition, we recognized $5.4 million of royalty income in the initial quarter of revenues related to our December 2017 purchase of four brand products, Arimidex, Atacand, Atacand HCT and Casodex from AstraZeneca. These revenues will be recorded as royalty income during the initial phase of the transition of the products from AstraZeneca to ANI. Revenues of our Generic pharmaceutical products declined 13% from prior year, to $23.2 million, driven by decline in lower margin product, such as Fenofibrate and Propranolol ER. In addition, revenues from our contract manufacturing services were down 848,000 principally due to the timing of the fulfillment of customer orders. Cost to sale as recorded on a GAAP basis, includes $5.6 million of cost recorded due to the step up of basis for finished goods inventory purchased in conjunction with the Inderal XL and InnoPran XL product acquisitions. Comparatively, the first quarter of 2017 included $1.5 million of such costs. Excluding these amounts, cost of goods sold represented 32% of net revenues for the first quarter of 2018, as compared to 41% for the prior year period. This improvement is directly attributable to favorable mix toward brand sales at the impact of royalty income which has no corresponding cost of sale. Selling, general and administrative expenses were $9 million as compared to $7.3 million in the prior year, driven by employment and related costs to support the growth of our business, as well as increased legal expenses. SG&A as a percentage of revenues decreased from 19.9% in prior year to 19.3% in the first quarter of 2018. Research and development costs totaled $2.1 million in the quarter an increase of 30% over prior year, driven by continued investment and momentum behind our Cortrophin and Re-commercialization program. Our effective tax rate for the quarter was 20.8% as compared to 31.2% in the prior year period as it is the first period that we are reporting under the new Federal statutory income tax rate of 21% as established in the Tax Cuts and Jobs Act of 2017. This new rate benefited both our GAAP and adjusted non-GAAP diluted earnings per share metrics in the quarter. The favorable impact on cash flow will initially be realized in the second quarter in conjunction with the first of our 2018 estimated tax payments. From a balance sheet perspective, we had unrestricted cash and cash equivalents of nearly $52 million as of March 31, 2018, representing an increase of $20.8 million or 67% from the December 31, balance sheet. Driven by $22.9 million of cash flow from operations during the quarter. We generated free cash flow of $20.6 million reflective of cash flow from operations, net of $2.3 million of capital expenditures. This compares favorably to the 4.4 million of free cash flow generated in the first quarter of 2017 and the 12.4 million generated in the fourth quarter of 2017. During the quarter we also paid 938,000 in scheduled principal payments against our term loan, leaving remaining balance of 74.1 million. Total net debt as of the balance sheet date approximated a 166 million representing two times net leverage on the trailing 12-month basis and 1.75 times utilizing the midpoint of forward looking 2018 guidance. The $50 million revolver portion of our senior secured credit facility remains undrawn and continues to provide us with flexibility in pursuing further business development transactions. In addition, in the beginning of April we initiated an interest rate swap for the total amount due for the remaining tenure of our term loan. This instrument synthetically fixes the interest rate we pay on this portion of our debt structure to approximately 4.1% at our current leverage ratios. Finally, we are reiterating our annual guidance this morning and continue to project net revenues to reach between 212 million and 228 million, representing a 20% to 29% increase over 2017. We anticipate that these figures will be driven by the ongoing expansion of our brand revenue base, continued execution in maximizing the potential of our currently commercialized generic product portfolio and successful execution of 2018 generic product launches and transition of the recently announced purchase of three currently commercialized products from impacts which will have a greater impact to result in the second half of the year. In addition, we continue to expect adjusted non-GAAP EBITDA to be between 90 million and 100 million reflecting 21% to 35% growth over 2017 and adjusted non-GAAP diluted earnings-per-share to reach between $5.43 and $6.08 per diluted share. In summary we are pleased with the start of 2018 and look forward to executing upon our recent business development transactions while we continue to invest in Cortrophin and deliver against our 2018 goals. We will continue to judiciously utilize our balance sheet to support ongoing business development opportunities in order to further build out our capabilities and drive long-term value to our shareholders and stakeholders. With this I will turn the call back to our President and CEO, Art Przybyl.

Thank you, Steve. Nicole, we’ll now open the conference call to questions.

Certainly. [Operator Instructions]. Your first question comes from the line of Dewey Steadman with Canaccord.

Hi, good morning. Can you guys opine just a bit on the contents and results of the FDA meeting. What's left there to discuss and since the table in the press release still indicates that you are expecting the PAS with a four-month review. Should we assume that there are no clinical trials required at this point for Cortrophin? Thanks.

So, Dewey the later part of your question. The four months' timetable we put for a PAS review is based on a current legislation, current PDUFA legislation. So that’s a placeholder, it's no different than saying that a generic drug will be approved to 12 months under PDUFA legislation. So that remains to be determined. In terms of what the FDA initially opined on, they opined on our some of chemistry questions that we had associated with the modernization of the Cortrophin gel drug product and there are still discussions ongoing in regards to the bridge, necessary to bridge an older product to let's say to today’s standards and so we are awaiting, what I would best view or term as an advice letter from the agency regarding that.

Okay, and so that bridge, would that be a clinical bridge, or does the CMV...

I think that it's too early to answer that question. So unfortunately, you have to wait till perhaps the next earnings call, to get a more insight, as we are as well. Okay, there have been additional ongoing discussions with the agency, telephonically as well as -- and then we expect additional return communication. So, it's just too early to answer your question.

Okay and then one more on Cortrophin. The commercial batches that you are expecting to produce at the end of the year, can those be used for stability studies that are required by the FDA?

That is correct. That’s a registration batch that we are intending. That’s correct.

Okay, great. And my final question just on impacts, those products acquired recently, are those now baked into your full year guidance that we just received?

They really are not. From the standpoint that we typically as a company, we don’t change our guidance right after that. We wait and see, we try to understand market conditions for our entire product portfolio and so we feel very comfortable with the guidance that we reaffirmed today obviously. But we typically just on jump the gun and increase or decrease guidance after one quarter unless there are some market dynamics that would compel us to do that. So, we’re going to take a looksie and we’ll adjust our guidance appropriately as the year progresses. But, I think the one thing we want to avoid is adjusting guidance up or down, we have seen other pharma companies do it only to get whipsawed in the following quarter because of dynamic market conditions. So, we tend to try to take really as you know a reasonably conservative approach to our numbers.

Great, thanks.

You welcome.

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

Thanks, good morning. Just a quick question initially on sequential trends in the generics business, I suppose looking at from the third party data sources would've suggested the number would have been roughly similar to that in 4Q, so I'm not sure if it's just a function of buying patterns or seasonality or maybe some top line adjustments that you just didn't really call out specifically but maybe just give a little bit of color in terms of sort of trends in the last couple of quarters in the generic segment specifically?

Specifically, there are two products, so you’re looking at a let’s call it year-over-year decline of 13%, Steve's called out, there were really two products, they’re lower margin items for us. So, it's why our margins improved associated with brand sales, generating kind of increases that they did, but two products in particular Fenofibrate. Fenofibrate is a distribution agreement for us. We make approximately a little bit north of 7% to distribute the product. There is no generic for that particular SKU, and one of the consortium stopped buying it. And so that affects our revenues, but really doesn't affect our margin in a material way. And the other product is a product that’s just seen price decreases over time and that is the generic of our Inderal product called propranolol extended release, and so again the margins associated with that product do not tend to affect the overall margins of the business, but certainly would affect the revenues generated by the business.

And then second follow-up question just on the recent transaction announcement. I guess speaking with some folks in industry, including some who were looking at or interested in that package of assets that you acquired through FTC divesture process, a lot of deal envy out there, I guess for lack of better term, so maybe or you could just talk a little bit or maybe give us a little bit of color in terms of how ultimately you think that what was probably a package of interest a lot of folks ended up in your hand some of the unique capabilities of ANI, and then specifically on Concerta, seems like of course a product with potentially significant upside for a company of a ANI size and maybe you could just give us a little bit more flavor in terms of the gating factors are requirements in terms of getting that product back on the market?

So why did Amneal/Impax choose ANI as the company to take forward, and this is not your past three to five years process and gating a company through the Federal Trade Commission through the FTC, it is very-very different, the FTC is primarily interested in these overlap type opportunities and making sure that there is not a competitive imbalance. And so, the FTC is very interested in understanding the company's capabilities to successfully transfer a product and of course capture relative market share. And I think that after the discussions obviously, with Amneal/Impax, discussions with the FTC in some of the presentations that we made, they came to understand that that's the nature of our business. We’ve been doing it for several years and I believe they felt extremely comfortable with us, in terms of being able to accomplish and establish the competitive balance on some of these products that the FTC is looking for. In regards to Amneal/Impax and choosing us as the vendor to go forward with FTC, I think they saw much of the same things, they saw potential sense of urgency to get it done and bear in mind they have to choose somebody to take to finish line or they can't get their merger done the business combination done. So, all of those factors led to what we see as a really -- this is a really great deal for ANI. I mean I took the deal maybe too many people sounds too good to be true, we got equipment, we got consulting, we got technical resources, we got three products for launch right away, and we’ve got several products that represent significant opportunities. And so maybe it does sound too good to be true but it was a deal that was born out of our capabilities to get it done, okay. And certainly, it’s a tremendous deal for ANI, I can’t understate that. The opportunity here, the return on this just from the three generic products that are launched, certainly completely overshadows the monies paid and on top of that you have these additional opportunities. So, we are very excited about this deal and I think if you can’t understate the fact that regardless of the two big products that require validation efforts aspirin/dipyridamole and methylphenidate ER, you can’t understate the fact that we are launching aspirin/dipyridamole October 1 of 2019 into a one player market that is generating realistically net sales not IMS health, but net sales of a $120 million. That’s not the sale that people might not launch before us, but it is to say that that’s going to be a high margin less competitive market when we launch that product on October 1. Now first and foremost that is probably the midterm opportunity that should not be overlook. Now the second part of your question Elliot, is associated with methylphenidate ER and we have a fair amount of resources available to us to get that product validated and on the market. And I don’t want to go into that much detail just yet, but as that unfolds, you can rest assure that we’ll be talking about that opportunity over time. Nicole, are there any other questions?

We are showing there are no further audio questions at this time. If you wanted to proceed with closing remarks.

I just want to thank everybody for again joining and listening to ANIs first quarter 2018 earnings conference call. Wish you all a good day. Thank you very much, bye bye.

Thank you.

Thank you. This concludes ANIs first quarter 2018 earnings call. You may now disconnect your lines at this time and have a wonderful day.