ANI Pharmaceuticals, Inc. (ANIP) Q4 2018 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to ANI's Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we 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 full-year and fourth quarter 2018. Joining me today is Steve 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 to 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 our full-year and fourth quarter results. For the fourth quarter ANI reported record net revenues $57.1 million and record adjusted non-GAAP EBITDA of $22.2 million. These numbers represent increases of 21% and 13% respectively over the prior year period. Fourth quarter generic product revenues increased by 13% and our branded product revenues increased by 21% over the prior year period. These increases were the direct results of new product launches to help drive our robust quarterly results. Full-year 2018 results generated records net revenues of $201.6 million and record adjusted non-GAAP EBITDA $84.4 million increases of 14%, as compared to 2017. For the year, adjusted non-GAAP EBITDA was 42% of net revenue. We generated $67.1 million of cash from operations. In 2018, research and development expenses increased by $6.3 million and increase of 70% primarily attributed to our Cortrophin re-commercialization efforts. During the year, we launched a total of 11 drug products, seven generic and four branded products, increasing our commercial drug portfolio to 42 products and increase of 35%. Annualizing revenues from our 2018 product launches combined with anticipated 2019 new product launches and 2019 forecasted contract manufacturing revenues. We have estimated 2019 revenues in the range of $231 million to $245 million. Estimated revenue increases of 15% to 22%. As a result, we estimated 2019 adjusted non-GAAP EBITDA in the range of $95 million to $105 million estimated EBITDA increases of 13% to 24%. Our 2019 financial guidance does not include any additional asset acquisitions and their net effect to our business model and guidance. In 2018, we acquired several generic products from our first FTC divestiture process. In the fourth quarter, we realize the full revenue effect from acquiring launching four branded products in the ANI label, acquired and began integration of our new manufacturing facility in Canada that is intended to grow our contract manufacturing business and provide additional capacity for own ANI label products. Since 2013, we have closed 26 total transactions for approximately $378 million and continue to seek additional opportunities to augment the growth of our business model through acquisitions. We intend to use our cash on hand and available credit lines of fund these anticipated future transactions. We also refinanced our debt providing us with a credit line of $75 million for future acquisitions and allowing us to retire the current convertible debt without any additional dilution to our existing shareholder base in front of our anticipated Cortrophin supplemental NDA filing. We remain on-track to final our Cortrophin supplemental NDA by the first quarter of 2020. In conclusion, our 2019 results and 2020 guidance continue exemplify a growing business model that generates increasing cash flow from its operations, in an admittedly tough but improving business environment for our industry. Regardless of the macro business climate, we continue to see opportunities that arise from time-to-time and that our cash flow allows us to pursue, in order to strengthen and grow our business. And finally we had compelling transformational product in Cortrophin, and we are advancing it ever closer to realizing its commercial potential. I will now turn the conference call over to our CFO, 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 fourth quarter and full-year 2018 financial results. We are pleased to report this morning that ANI reported a strong fourth quarter to close out 2018 and by extension posted our fifth consecutive year of records net revenue, adjusted non-GAAP EBITDA and adjusted non-GAAP diluted earnings per share. Full-year net revenue reached $201.6 million representing a 14% increase versus 2017, from gross profit pull through on these sales gains drove full-year adjusted non-GAAP EBITDA to $84.4 million and adjusted non-GAAP diluted earnings per share to $5.07, representing an increase of 14% and 30% as compared to 2017, respectively. Turning our attention to the highlights of the fourth quarter. For the three months ended December 31, 2018 ANI posted net revenues of $57.1 million and adjusted non-GAAP EBITDA of $22.2 million representing new quarterly records for the Company. Corresponding adjusted non-GAAP EPS was $1.32 per diluted share. At $57.1 million net revenue for the three months ended December 31, 2018 was up $9.8 million or 21% versus prior year on gains in all four of our product categories. Revenues of our generic pharmaceutical products increased 13% from prior year to $33.7 million driven by Ezetimibe-Simvastatin, Diphenoxylate Atropine and other products launched in 2018 tempered by declines in lower margin products, such as Fenofibrate and lower sales of Nilutamide. Branded pharmaceutical revenues were $18.8 million in the quarter and increase of 21%, primarily due to sales of Atacand and Atacand HCT which were launched in the ANI label in October of 2018. And sales of Casodex and Arimidex which were launched in the ANI label in July of 2018. Gains in these products were tempered by lower sales of Inderal LA and Vancocin. Revenues for our contract manufacturing services were $3.7 million, up $1.8 million or 94% principally due to a full quarters worth of revenues for ANI Canada. Royalty and other income was 878,000 for the quarter, driven by royalty income related to sales of Gilead's Yescarta, as well as the impact of a full quarters worth of products and laboratory development services revenue for ANI Canada. Cost of sales in the current period was $28.1 million or 35% of net revenues. Prior year cost of sales included $2.9 million of costs recorded due to the step-up of basis for finished goods inventory purchased in conjunction with certain acquisitions. Excluding this amount, prior year cost of sales and $17.5 million or 37% of net revenues. The proximate two points year-over-year improvement in margin is due to favorable product mix, driven by decreased sales of products subject to profit sharing arrangements. Selling, general and administrative expenses were $13.4 million, as compared to $8.9 million in the prior year, driven by approximately $2 million of ANI Canada costs, incremental costs to support the growth of our U.S. business and certain transaction related expenses incurred in the quarter. Research and development costs totaled $3.8 million in the quarter, up 931,000 or 31% from prior year. This increase was driven by investment behind our Cortrophin re-commercialization program, and work related to our underlying generic pipeline, including new products and projects acquired in our second quarter 2018 asset purchase from Amneal. Turning our attention to the debt portion of our capital structure. We had a very active quarter. The continued strength of our business, consistency of our results and the health of our cash flow allowed management to proactively address various components of its debt structure. As previously announced on December 7th, we utilized cash from our balance sheet to repurchase in privately negotiated transactions, 25 million of our outstanding 3% convertible senior notes, which are deemed December of this year. And correspondingly unwound a portion of certain hedge transaction related to the notes. The net impact of these transactions was to reduce the face value of the remaining convertible notes outstanding to 118,750,000 and to remove a portion of the equity dilution risk for our shareholders. In addition, as we have previously announced on December 27th, we entered an amended and restated five years senior secured credit facility for up to $265.2 million of financing with our existing syndicate of bank lenders, which is led by Citizens Bank with strong support from Huntington, MUFG, Regions, U.S. Bank and JP Morgan. This transaction amended our previous $125 million facility and was specifically structured to address the December 2019 maturity of the remaining balance of the convertible senior notes. This is achieved through a new $118 million delayed draw term loan that is fully committed by the bank group and can be accessed by ANI at any time and in multiple tranches through December 1, 2019. In addition, the facility includes the extension of our pre-existing $72 million Term Loan A and increases our pre-existing $50 million revolving credit facility to $75 million. Interest on the facility as LIBOR base with a traditional leverage based pricing grid that flexes between 1.5% and 2.75% above LIBOR. Further, in the February of 2019, we entered an interest rate swap with a forward start date to manage our exposure to LIBOR related to the anticipated draw down of the $118 million delayed draw term loan and fixed the LIBOR component of our rate at 2.47%. We had previously hedged the $72 million term loan at a rate of 2.6%. The culmination of these transactions provides ANI with fully committed financing to address the upcoming December 2019 maturity of our convertible debt with banks debt that will insulate our shareholders from future potential equity dilution. As we look forward to the next five years and anticipate continued growth for the Company. Further, the interest rate swap transactions provide certitude of the LIBOR portion of rate at approximately 2.5% in December of 2023. From a balance sheet perspective, we had unrestricted cash and cash equivalents of $43 million as of December 31, 2018. This balance is reflective of $27.2 million of cash flow from operations during the quarter and is net of the $25 million of cash utilized to repurchase convertible notes during the quarter. On a full-year basis, we have generated $67.1 million of cash flow from operations while investing $27.4 million back into the business through our acquisition of WellSpring Pharma Services; purchase of generic, commercial and pipeline opportunities and capital expenditures to enhance the capabilities of our manufacturing facilities. Total net debt as of the balance sheet date approximated $148 million, representing just 1.75 times net leverage on a trailing 12-month basis and less than 1.5 terms when utilizing the midpoint of our full-year 2019 guidance. The newly upsized $75 million revolver portion of our seniors secured credit facility remains undrawn and coupled with our cash flow from operations continues to provide us with flexibility in pursuing further business development transactions. Looking forward to 2019, we currently project net revenues to reach between $231 million and $245 million representing a 15% to 20% increase over 2018 driven by the returns to full-year growth of our generic product portfolio on continued execution in maximizing the potential of our currently commercialized product and the strength of our planned 2019 product launches. Ongoing expansion of our brand revenue base with the full-year impact of marketing of Arimidex, Casodex, Atacand and Atacand HCT in the ANI label and successful integration of ANI Pharmaceuticals Canada. Adjusted non-GAAP EBITDA is projected to be between $95 million and $105 million reflecting 13% to 24% growth over our records 2018 year. Inherent in this guidance is continued investment in research and development spending, driven by increased activity in our Cortrophin Gel re-commercialization program. Our guidance ranges include approximately $14.5 million to $16.5 million of total ANI R&D expense as compared to $15.4 million incurred in 2018. In addition, we assume investment in SG&A expense to support the continued growth of our business and brands. Adjusted non-GAAP diluted earnings per share is projected to reach between $5.57 and $6.21 per diluted share and reflects an anticipated income tax rate of 24% and approximately 11.9 million shares outstanding. In summary, we exit 2018 in a very strong position to continue the growth trajectory of the Company. We have exciting pipeline opportunities to add to our increasingly diverse product base, the ability to leverage new capabilities at ANI Pharmaceuticals Canada. A transformation of development asset in Cortrophin and a healthy balance sheet, strong cash flow and access to fully committed capital. As always, we look forward to continuing to build out our capabilities and drive long-term value to our stakeholders. With this, I will 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] Our first question comes from the line of Elliot Wilbur with Raymond James.

Thanks. Good morning. I'm not allowed to say congratulations on a good quarter during conference call. So I will just say that it's very encouraging to see the Company continue to book record results in what has been a very challenging macro environment. So based on that comment, if I were to simply look at your second half 2018 top-line results and analyze those, I would come up with a number that is about $250 million given what is expected to be a record year in terms of new launches in 2019 combined with base portfolio trend that seem to be pretty stable from what we can tell, seems like there is quite a bit of conservatism embedded in the forecast. So maybe I'm missing something in terms of some of expected product movements in 2019 versus 2018 and some of the base products that we just haven't picked up yet, but just sort of want to kind of bounce that idea off you in terms of thinking about the robustness of the potential new product story in 2019?

Great. Good morning Elliot, it's a very good point. I think from our perspective, I think you know us to be an aggressive management team, but at the same time it conservative one when it comes to things like balance sheet leverage, debt and building a Company on what we internally describe as a wall of worry associated with the environment that we are in. Unfortunately, when we start out looking at the next year's guidance, we always start out with a negative, which is we anticipate competition on exiting generic products, potential new competition coming to market, potential erosion in some of our branded sales. So we start out from a glory outlook of all the negatives. And then we add positives to it, which are the new product launches. We have stated some of them in the press release, some we haven’t, we do not count obviously on things we don't have such as putting some of our dollars or cash flow back to work in terms of asset acquisitions, that we have described here and we come out with a number. And, we have admittedly in the past missed guidance either because of being too aggressive or not anticipating something that we didn't forecast. And so we think this number is a good number, if you take our fourth quarter results and you annualize them, you get a good feel for maybe where the guidance came from, where the year will turn out for us. But again, we feel comfortable with this and these numbers represent from us continued robust growth even greater than what we saw 2018 verses 2017 which was 14% on the revenue and adjusted EBITDA line. This year we are guiding to 19% increases on the revenue and adjusted EBITDA line from what is admittedly the law of larger numbers. And so, we are obviously comfortable in these numbers out as being representative of our business model for 2019. And so I hope that answers your comments.

Good color, I appreciate it. And if I could just ask the second question here, much of the growth and of course, sort of the focus and attention in the story in the past couple years has been on incremental ads via transactions and some of the diversification into the branded side. But you still have this large portfolio of ANDAs, I think it's something north of 70, most of them already approved. And there hasn't been a lot of movement, there hasn't been a lot of talk about it. But if I look at some of these assets, and kind of what has happened in the U.S. generic space with Mylan really pulling back from solid oral dose markets to the other players. I mean just seems like you are starting to see some of those products move in terms of price. And obviously, I'm suggesting it's getting more favorable. So I'm just kind of wondering how you may be thinking about potentially monetizing those assets in the next 12 to 18 months versus maybe what you thought about over the past 12 to 18 months.

Well we view that was - we view or and the pipeline that can be re-commercialized through CBE-30s or PASs as a library for us. And those product launches sometimes fluctuate based on opportunities that arise in the marketplace from exactly what you described as other companies potentially discontinuing products. And supply disruptions in our marketplace play a large part today. We have excellent service levels, you know we carry $40 million worth of inventory on the books, for $20 million revenue based business. In order to avoid those failure to supply penalties, which potentially can drive you into bankruptcy, as you have seen from recent filings that have occurred. And so I think you are going to see - remember that we first also attacked from that portfolio that we acquired. The faster route and obviously the larger opportunities, but many of those entail products that did not require a change in raw material supplier. And so they could be launched as changes being effective in 30-day type products. So many of the products now our prior approval supplements and some obviously are filed. You will certainly see a significant a product launch in the second quarter that comes out of that library of ANDAs. And we continue to evaluate those products based on market conditions and obviously time it takes to bring those products to market.

Okay. great. Those are my two questions. Thank you.

Alright. Thank you Elliot.

Our next question comes from the line of Dewey Steadman with Canaccord.

Hi guys, thanks for taking my question. I guess to build on the prior question. How should we think about phasing for revenue in 2018. Obviously, Concerta and Aggrenox are coming. You mentioned a library product and then there is also the unknown, undisclosed, I guess rare generic that is coming as well. So how should we think about how rather new progresses throughout the year?

Yes. I think you see a climb throughout the year really from the second quarter going forward. I know you will have a your separate call with Steve to discuss the cadence later on that you can - hopefully will help guide you a little bit more in terms of research reports that you write in regards to that revenue cadence. And that is because, methylphenidate is a - two of the SKUs are launching in late March. Two additional SKUs are anticipate to launch in this quarter. And then aspirin/dipyridamole is a October 1st date certain. I just mentioned to you that one of those products that we thought is important it's coming out of call it library is ANDAs will launch in the second quarter. And, we are forecasting for and anticipating the launch of Vancomycin oral solution in the fourth quarter. And so I hope that gives you some feel for you know how we see this new cadence of revenues going forward throughout the year.

Excellent. And then to build on Vanco oral solution, how do you plan to approach the marketing for that product? Obviously, this is a new dosage form and how do you get the word out that an oral solution is available?

We will probably utilize many of the same tools that we use for some of our, we will call it off patent brands today, which is a virtual marketing program. I don't think folks realize that we invest in the neighborhood of $2 million to $3 million on virtual marketing programs to those brands. And so we see that potentially as playing well into our launching Vanco oral solution. There is another also Vanco oral solution on the market today, and will certainly be playing of off the success of that product. But, I think primarily the strategy will be to launch it as a generic and to make sure that we get the word out that this product is available to obviously, the consortiums, the hospital GPOs, your typical traditional channels that we use a product like this. We have seen admittedly some of our Vancomycin oral or capsule sales increase in light of the fact that we have seen compounders continually buying more product, more Vancomycin product to what we believe that to put that product into an oral solution. So part of our challenge and launching a FDA approved Vancomycin oral solution will be also to make an attempt to remove those compounders from the marketplace as well, which will only increase our overall market. But we feel that this is a dosage form that has some pent up demand associated with it and obviously we have the gold standard if you will the brand as well as the generic and so we feel pretty good about the prospects for that product once we launch it.

Thanks and then just on business development with, in Rob's world, is there an increase or decrease in potential opportunities out there. I know that you were able to capitalize on some mergers within the group, but are there still portfolios out there of interesting products that can be acquired either on the generics even on the branded side.

So that is a three word answer, target-rich environment. I can't actually quite remember as much upheaval going on the generic marketplace as it is today. And from that upheaval for a company like us that is not over levered and debt is a four letter word to a generic business when you come right down to it, you just can't be levered up in our business. And so you know from all of that cash flow as we described, et cetera, we think there are compelling opportunities for us to continue that transaction train that we started really when we went public. It's not to put pressure on Rob. He does a tremendous job of finding us some of our deals. I really believe the street quite frankly completely in this the FTC divestiture process and the amount we pay for those assets and the contribution to our business model in 2018 and 2019 and maybe even beyond that. So, those are the type of compelling opportunities that we look for, those are hard to come by. But at the same time, there are more and more assets for sale in the marketplace today. And so, as long as we have the cash flow, and we keep our watchful eye on our leverage. I think we have continued compelling opportunities for us in terms of transactions in the marketplace.

Excellent. Thanks for the color.

Thank you Dewey.

And our final question comes from the line of Brandon Folkes with Cantor Fitzgerald.

Hi, thanks for taking my questions and congratulations on the quarter. Firstly, can you talk about the competitive dynamics you are seeing from your side in the methylphenidate ER market given that you are all going to launch into that market this year and that is a meaningful product for you and how much of that product may be just - just quantitatively how you thought about including the product in guidance on what's in there? And then secondly, maybe just a bigger picture question. I think the value drivers within your business model are very clear and I think the guidance related onto 2019 will be another good year and we have got Cortrophin coming in 2020 as well. But as we think your base business in 2020 and beyond, can you help us just think of some of the value drivers that we may see there? Thank you.

Alright. Well you know back in several years ago, when oral solid generics. Really came under tremendous competitive pressure for two reasons, it was the formation of three consortiums and the price reductions associated with the competing for their market share in business. And then there was the fact that OGD, or the industry in Infinite Wisdom decided to pay OGD money to approve products on a faster basis and remove the backlog. That also led to significantly increased competition. Now, if you remember, I don't know if you were covering us back then, but we have always looked at - at one time, I think we were - one product was driving a significant amount of our EBITDA run rate and we always have plan to diversify ourselves away from the concentration of risk associated with being a one or two product type EBITDA driven Company. And certainly away from the competitive pressures of consortiums in oral solid generics and obviously the additional faster approvals, we will say from OGD from Office of Generic Drugs. And we did so saw by, as you know initially started out by pivoting to brands a little bit. Now if you take a look at our fourth quarter numbers for brands versus our generic business. Our brands are now greater than 50% of our overall generic revenues, at very nice margins. So we have sake of argument found a way to insulate ourselves from some of the goings on in terms of the destruction of pricing or price erosion associated with some of those oral solid generic business. Okay. We certainly have in mind the continued object to continue to de-concentrate risk associated with any one specific business platform. So you seen as pivot to - you know I will buy - we are starting, so sake of argument, from ground up, but associated with contract manufacture. And you have seen some contract manufacture businesses recently sell for multiples that resemble multiples back in 2016 for generic companies. So we like that pivot plus it provides additional capacity for us all the reasons we talked about. You potentially could see us pivot to additional business platforms. Our largest opportunity, Brandon is an injectable product. And my background is primarily in injectables, and so it's something that interests us, okay. So making I'm making an advertisement right now that we would potentially like to move into an injectable business platform, but these are some of the opportunities that we continually think about don't necessarily always come out publicly and talk about in terms of looking at ourselves strategically in our business model going past 2020. Okay. We are without a doubt a transaction based Company. And cash flow and EBITDA have been the most compelling objective and drivers for our business model year in and year out. And so we continually have this scenario putting money to work, okay. We don't buy back our stock, it's not what we do, we don't pay dividends, it's not the type of Company we are. We want to put our money to work for our shareholders. And so that, I don't see that changing over time and we are not going to go into a specific as to where our strategies are going past 2020 on this call certainly, but we do discuss them amongst our senior management group without question. And you asked a little about Methylphenidate ER we see approximately seven or eight competitors in that market, we still see it as a compelling market opportunity to us, it certainly is factored into our guidance. But, based on a number of competitors, we are conservative in that approach. And we have nowhere to go but up. And again, that was part of a $2.3 million asset purchase. If we had launched into the marketplace and been a specific number, we would have had to make a milestone payment to Teva associated with that. That will not be the case. So we have nowhere to go about up on a product and we think we still have a good opportunity for revenue and margin generation when we launched our own version into the marketplace. I hope that answers your question, Brandon.

Thanks guys and thank you very much and congratulations again.

Thank you Brandon.

And if there is no further questions. I would just like to thank everybody for attending our conference call today and look forward presenting to all of you our business in the future as well. Thank you very much. Bye-bye.

Thank you. This concludes ANI's fourth quarter 2018 earnings call. You may now disconnect your lines at this time and have a wonderful day.