ANI Pharmaceuticals, Inc. (ANIP) Q1 2019 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to ANI's First Quarter 2019 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. Welcome to ANI's earnings conference call for the first quarter 2019. My name is Art Przybyl, I'm the President and 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 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 first quarter 2019 results. For the first quarter ANI reported record net revenues $52.9 million, an increase of 14% and record adjusted non-GAAP EBITDA of $22.3 million, an increase of 3% over the prior year period. Adjusted non-GAAP EBITDA was 42% of net revenues. First quarter generic product revenues increased by 36% to $31.6 million as compared to the prior year period a direct result for several generic product launches over the last several months. In the first quarter, research and development expenses increased by $2.3 million, an increase of 180% over the prior year period primarily attributed to our Cortrophin gel re-commercialization effort, which remains on track for our targeted first quarter 2020 FDA filing. We’ve assembled a library of ANDAs that can be re-commercialized through tech transfer for efforts and we anticipate several new product launches throughout the remainder of the year .And as such today, we reaffirm our 2019 financial guidance. We have substantial firepower to pursue strategic opportunities and we intend to continue to use our cash and cash availability to partner and require assets that represent future and immediate revenue and cash flow opportunities for ANI. From our perspective, they're continued to exist a target rich environment for these types of opportunities. 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 2019 financial results. We are pleased to report this morning that ANI started 2019 off on a strong note, posting 14% year-over-year net revenue growth and record quarterly adjusted non-GAAP EBITDA of $22.3 million while significantly increasing our research and development spend. Corresponding adjusted non-GAAP EPS was $1.30 per diluted share. At $52.9 million, net revenue for the three months ended March 31, 2019 was up $6.4 million or 14% versus prior year driven by gains in our generic pharmaceutical products and contract manufacturing categories. Revenues of our generic pharmaceutical products increased 36% from prior year to $31.6 million driven by Ezetimibe-Simvastatin, Candesartan and other 2018 launch products as well as the incremental sales of Vancomycin. These gains were tempered by lower Sanofi sales which has a third-party authorized generic is relatively low margin product for us. Branded pharmaceutical revenues were $17.5 million in the quarter, an increase of 6%, 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 unit sales of Inderal LA and InnoPran XL. Revenues for our contract manufacturing services more than doubled to $2.4 million principally due to the impact of the ANI Pharmaceuticals Canada, which was acquired in August 2018. Royalty and other income was $1.3 million for the quarter reflective of product and laboratory development services revenue from ANI Canada. Royalty income related to sales of the Gilead's Yescarta as well as royalties related to a true up from our former marketing partner on the authorized generic version Vancocin. Cost of sales in the current period was $14.7 million or 28% of net revenues. Prior year cost of sales included $5.6 million of cost recorded due to the step-up of basis for finish goods inventory, purchased in conjunction with certain acquisitions. Excluding this amount, prior year cost of sales was $15 million or 32% of net revenues. The approximate four point year-over-year improvement in margin is principally due to lower royalty expense resulting from our royalty buyout completed in the quarter. Selling, general and administrative expenses were $13.3 million, as compared to $9 million in the prior year, driven by cost related to our new ANI Canada subsidiary, increased U.S.- based headcount and pharmacovigilance cost in continued support of the expansion of our commercial portfolio, higher GDUFA and PDUFA user fees paid to the U.S. FDA, higher legal cost and increase sales and marketing related cost. Research and development cost totaled $4.4 million in the quarter, up $2.3 million or more than double prior year levels. This increase was driven by investment behind our Cortrophin re-commercialization program and work related to our underlying generic pipeline including projects acquired in our second quarter 2018 asset purchase from Amneal. Our GAAP consolidated effective tax rate for the quarter was 51% of pre-tax income as compared to 21% in the prior year period. [D2] valuation allowance recognized against the tax benefit generated by our Canadian subsidiaries, pre-tax net loss. Our U.S. statutory rate continues to approximate 22% and we anticipate that our GAAP effective tax rate will moderate significantly as the year progresses. On the GAAP basis, fully diluted earnings per share were $0.04 per share as compared to $0.19 per share in the year ago period. The year-over-year decrease was largely driven by incremental amortization on business development activity notably a one-off charge of $6.8 million of amortization related to the aforementioned royalty buyouts. Our adjusted non-GAAP diluted earnings per share was $1.30 per share, down slightly from $1.32 per share in the year ago period driven by the higher effective income tax rate in the current year period. From a balance sheet perspective, we had unrestricted cash and cash equivalents of $38.2 million as of March 31, 2019. This balance is reflected of $14.3 million of cash flow from operations and is net of $18.5 million of cash utilized to acquire ANDA-related intangible assets during the quarter. Total net debt as of the balance sheet date approximated a $152 million representing just under 1.8 times net leverage on the trailing 12 months basis and approximately 1.5 turns when utilizing the midpoint of our full year 2019 guidance. Please recall that as previously announced and discussed, in December of 2018, we entered into an amended and restated five-year senior secured credit facilities for $265 million of financing with our existing syndicate of bank lenders. This transaction amended our previous $125 million facility and was specifically structured to address the December 2019 maturity of the remaining balance of 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 anytime through December 1, 2019. In addition, the facility includes the extension of our pre-existing Term Loan A and a $75 million revolving credit facility. This revolver portion of our facility remains undrawn and coupled with our existing cash and cash flow from operations, continues to provide us with flexibility in pursuing further business development transactions. This morning, we also reiterate our full year 2019 guidance. While first quarter results were ahead of our internal expectations, our current view of full year projections remained unchanged that net revenues of $231 million and $245 million representing a 15% to 22% increase over 2018. Adjusted non-GAAP EBITDA between $95 million and a $105 million reflecting a 13% to 24% growth, and adjusted non-GAAP diluted earnings per share of $5.57 and $6.21 per diluted share. This guidance continues to reflect an anticipated full year income tax rate of 24% and approximately 11.9 million share outstanding. In summary, the first quarter of 2019 provides ANI a very solid base on which we plan to continue to build upon. We have exciting pipeline opportunities to add to our increasingly diverse product base and we are working diligently to work new capabilities at ANI Pharmaceuticals Canada. We continue to advance Cortrophin, our transformational development asset, and importantly, we have a healthy balance sheet, strong cash flow and access to fully committed capital which allows us flexibility as we continue to grow out the Company. As always, we look forward to continuing to drive long-term value for 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 the questions.

Thank you. [Operator Instructions] And your first question is from Elliot Wilbur of Raymond James.

This is Lucas Lee on for Elliot. Congrats on the quarter and I have a couple of questions. So given recent competitive entries in both the, generic Concerta and Aggrenox market. What is your level of confidence in winning? Would you consider to your fair share of the market?

We’ve launched the methylphenidate products, the lower strengths, and we anticipate launching the two higher strengths SKUs at the end of the second quarter, [indiscernible] beginning of the third quarter. We have the ability to capture even on the two lower strengths. A targeted market share for us that we think will drive the gross profit dollars for those strengths that we anticipated. Admittedly, with the additional competitors Alvogen, Lenus going to enter the market, I think there is going to be approximately eight competitors in methylphenidate. It’s going to be a far more competitive market. Keeping that in mind and that’s same for us aspirin-dipyridamole. There’ll be more competitors by the time we launch, but keeping that in mind, we forecasted for additional competition in those products as we entered those markets. And the important thing to bear in mind is that, for those two products as well as the Ezetimibe-Simvastatin and two others, we paid $2.3 million. And so, for we look at this as a substantial -- continue substantial gross profit dollar opportunity out buy lower gross profit percentage markets.

Thank you. Our next question is from Dewey Steadman of Canaccord.

I guess on the gross margin, obviously, the essential step up I think it was driven by royalty buyback. Can you give us a little bit more detail on that royalty buyback whether it was brand or generic product? And maybe even details on the product itself? And then, how should we look at gross margin throughout the year? Obviously, we've got the step-up but then we’d expect gross margins maybe to come in a bit because of the generic launch was expected in the second half, or yes, second half of the year, but just more color there would be appreciated?

Sure. I’ll take the first part of that question and then I’ll let Steve answer the latter part. So, if you recall, Dewey, the royalty buyout that we accomplished in the fourth quarter was for the Teva products that we acquired over several tranches, over the last several years. So, that royal -- that margin step up is primarily related to those generic products that we have launched from those Teva baskets. And, Steve, I’ll let you address the margins going forward part of Dewey's question.

Sure, thing, and good morning, Dewey. Yes, so first question margins were particularly strong at essentially 72%. I would expect that to moderate slightly as the year goes on, but certainly be in say the 65 to upper 60 percentile. But I do expect it to moderate just a slight bit as the year progresses. And to your point as generic launches come in and always predicated on a mix between brand and generic sales in any given quarter as well.

And then, there is two product-related questions on the undisclosed priority review generic product. Is that a one player market that you’re launching into? And then, do you have any updates on timing or anything on Vanco OS? Thank you.

So, I will get back to you on the number of players regarding that undisclosed products. We have not really spoken publicly about that. In regards to the Vanco OS product, we are anticipating a launch in the first quarter of this year for that product. And it is possible that, that launch can occur before that. But that launch is predicated on a FDA approval, and so currently, we have a July date associated with the FDA on that submission. And so, we are obviously hopeful that will occur, nevertheless, we’re forecasting for fourth quarter launch.

Thank you. Our next question is from Brandon Folkes with Cantor Fitzgerald.

Hi, thanks for taking my question. Congratulations on the quarter. On pipeline, I see this quarter you've disclosed that you have 103 products in your pipeline versus 75 that you've disclosed last quarter. Could you provide some color on the 28 additional products required? Thank you.

We bought I think 28 additional products in a basket and like any basket of ANDA's, the time of purchase from our perspective, a three of them had a significant commercial opportunities attached to them. Now, we monitor our ANDA basket of products on a consistent basis because commercial opportunities can sometimes all of our sudden we're up, and it’s a product that maybe we'll find its way to higher priority in terms of tech transfer and eventual launch of the product. Our PD team is leading right now. We have approximately 20 slots for some of those products, and so, we try to slot those products in associated with CBE-30 activities or supplemental ANDA filings prior approval supplements. And then, obviously, ranks them based on commercial opportunities associated with gross profit dollars. The important thing there is that, the reason we have 20 slots open to us now for these tech transfer opportunities from this ANDA pipeline is because we purchased Canada. And so, Canada now provides us with greater opportunities to launch products out of our baskets faster. And we expect to see that ramp up over in next 24 months.

And then, maybe just -- could you give us some color how you’re prioritizing investment in commercializing those products over continued business development and growing the pipeline?

Brandon, to take your question in this manner, we don’t at -- the Company at the current time have what I would call a center for excellence. We are not a company that has invested as of the moment in, in the filing our own -- developing and filings for own ANDAs. As you know, we have gone out and purchased and acquired a lot of our generic product opportunities as we sum these ANDA baskets et cetera. It's tough to say, as we grow as a company that we're not interested in either acquiring or putting together and putting in place our own center for excellence, we just don’t have that at the moment today. We have concentrated our, I’ll call it, our development effort on one product that has certainly -- it’s been Skunkworks for us. All the people that are engaged in that development project, worked solely and exclusively on that project and as the Cortrophin gel re-commercialization project. And as you can see, next somewhere in the neighborhood of a 4 or 5 year project, very complex in order to bring it to FDA filing and eventual re-commercialization. And so, that’s where we stand right now. So, we continue to take our cash flow and our available dollars and invest it in strategic opportunities that we think will augment our product pipelines, our sales and our gross profit dollars. And so, I would expect us to continue to give that for the foreseeable near future, as compared to the investment in a much higher dollar amount associated with more traditional product development.

Thank you. We have no further questions at this time. I will return the call to management for any additional or closing remarks.

Thank you, moderator. I would just like to thank everybody for attending ANI's conference call today. We’re off to a solid start for 2019 and look forward to build on the first quarter momentum. Thank you very much. Bye, bye.

Thank you.

Thank you. This concludes the ANI's first quarter 2019 earnings call. You may now disconnect your lines at this time and have a wonderful day.