Lantheus Holdings, Inc. (LNTH) Q1 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Lantheus Holdings First Quarter 2020 Earnings Conference Call. This is your operator for today's conference call. [Operator Instructions] This call is being recorded for replay purposes. A replay of the audio webcast will be available in the Investors section of the company's website approximately 2 hours after the completion of the call and will be archived for 30 days. I will now turn the call over to your host for today, Mark Kinarney, Director of Investor Relations. Mark?

Thank you, and good morning. Welcome to Lantheus Holdings First Quarter 2020 Earnings Conference Call. Joining me today is our President and CEO, Mary Anne Heino; and our CFO, Bob Marshall. This morning, we issued a press release, which was furnished to the Securities and Exchange Commission under Form 8-K, reporting our first quarter 2020 results. You can find the release in the Investors section of our website at lantheus.com. Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties. In particular, there is significant uncertainty about the duration and contemplated impact of the COVID-19 pandemic. This means that results could change at any time, and the contemplated impact of COVID-19 on the company's business results and outlook is the best estimate based on the information available as of today's date. Please note that we assume no obligation to update these forward-looking statements, except as required by applicable law, even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties. Also, discussions during this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is also included in the Investors section of our website. With that, I'll turn over the call to Mary Anne. Mary Anne?

Thank you, Mark, and good morning, everyone. First and foremost, Lantheus is proud to serve the life sciences sector, and we want to thank health care workers everywhere for their extraordinary commitment in these unprecedented times. I hope to find each of you and your families safe and well as you listen to this call. Lantheus' products have been included in the list of products deemed essential. And we continue to manufacture and ship products from our campus daily, although on a reduced basis, as Bob and I will discuss during the call. The safety of our employees is a priority, as is that of the patients who receive our products, and we have adopted heightened measures to ensure the ongoing production of our microbubble and nuclear medicine products. I am proud of the dedication and support of the entire Lantheus team, whether they are working at home or in our manufacturing facilities during these very challenging times. On April 9, we announced that while business results through the first 2 months of the first quarter were ahead of company expectations, as COVID-19 reached global pandemic levels in mid-March, procedural volumes for our products declined. We also noted that we anticipated the second quarter impact of the COVID-19 pandemic on our business would be more significant than that seen in the first quarter. Accordingly, we had already taken steps at that time to reduce ongoing cost until demand levels for our products impacted by the reduction of elective procedures within health care systems recover. In addition to significant reduction of discretionary spending, we have implemented a higher increase through the balance of 2020. Further, effective April 13, 2020, and for the balance of the second quarter, we reduced our work week from 5 days to 4 days in order to better align manufacturing, supply, distribution and other activities with reduced product demand. We also reduced pay for our personnel, including a 75% reduction for myself, a 35% reduction for members of our executive team, a 25% reduction for our Vice President and across the Board reduction of 20% of salaries for our other salaried employees and 20% of hours for our hourly employees for that same period. In addition, our Board of Directors has also reduced director and committee member compensation by 35% for the second half of the year and has elected to receive all remaining compensation payable in 2020 in the form of time-based restricted stock units that will vest on the first anniversary of the granting rather than in cash. We are confident that despite these measures, we are poised to meet our customers' needs as elective procedures start to return across the country. The company also strategically implemented other precautionary measures in an effort to ensure business continuity capabilities in our management, supply chain and manufacturing facilities. Our manufacturing employees have always been protected with appropriate Personal Protective Equipment, or PPE, as we are a manufacturer of nuclear and sterile products. We have adopted additional measures to ensure appropriate social distancing and increased safety measures in our manufacturing suites. At the business level, our product portfolios were demonstrating healthy trends in 2020 prior to the impact of the pandemic. I'll begin with DEFINITY. DEFINITY delivered another strong start to the year for our microbubble franchise, and we continue to bolster our patent portfolio. Earlier this month, three of our recently issued method-of-use patents covering DEFINITY were listed in the Orange Book. One of these patents expires at the end of 2035, and 2 of them expire in 2037. Our DEFINITY patent portfolio now includes 4 Orange Book patent - listed patents in total. Also, as we have disclosed previously, we hold the composition of matter patent that expires at the end of 2035 for our second-generation modified formulation of DEFINITY, which we call DEFINITY RT. Once that product is approved by the FDA, that composition of matter patent would also be eligible for listing in the Orange Book. We continue to prosecute patents relating to DEFINITY and DEFINITY RT worldwide, and we are prepared to vigorously defend our patent portfolio against potential infringers. Regarding the status of a potential generic filer, to date, we have not received notice of an ANDA application. We remain confident in our plan to send our DEFINITY intellectual property and growth prospects for the future. Another important development relating to DEFINITY in the quarter was with our Chinese development partner, Double-Crane pharmaceutical company. On March 19, we filed an import drug license application with the NMPA, or National Medical Product Administration, for the use of DEFINITY for the echocardiography indication. This is an important milestone in our efforts to commercialize DEFINITY in China. Double-Crane is also in the process of analyzing the clinical results relating to the liver and kidney indications and will also work with us to prepare an import drug license application those indications. In February, we announced the results of BENEFIT 1, the first of our 2 Phase III open-label multi-center studies to evaluate left ventricular ejection fraction, or LVEF, measurement accuracy and reproducibility of DEFINITY contrast-enhanced and unenhanced echocardiography where noncontrast cardiac magnetic resonance imaging, or CMRI, was used as a truth standard. After reviewing the Benefit 1 study results, we concluded there were no statistically significant improvement in the accuracy of LVEF values for contrast-enhanced echocardiography versus unenhanced echocardiography as compared to CMRI. In addition, analyses of the secondary endpoints revealed no improvement in inter-reader variability between the contrast-enhanced and unenhanced echocardiograms for LVEF assessments. We have now had the opportunity to review the study results of Benefit 2, our second Phase III study, and those results are similar to the previously reported Benefit 1 results. Namely that the Benefit 2 study also did not meet its primary endpoint. Among the secondary endpoints of Benefit 2, inter-reader variability for left ventricular volume measurements improved when using DEFINITY versus unenhanced ultrasound. While there was no improvement in the LVEF inter-reader variability. In both studies, a post-hoc analysis did show statistically significant improvements in left ventricular diastolic and systolic volume measurements with contrast-enhanced versus unenhanced echocardiography when compared to CMRI. Although we very much see the continued value of the use of contrast in suboptimal echocardiograms to opacify the left ventricular chamber and improve the delineation of the left ventricular endocardial border. At this point, we do not foresee spending additional time or effort pursuing an LVEF indication for DEFINITY. Now we'd like to provide an update on our moly supply for the first quarter and what we expect for the balance of 2020. If you recall, ANSTO has been approved to produce at levels to satisfy their domestic demand since late 2019. In late March of this year, ANSTO announced that it received regulatory approval from ARPANSA, the Australian Radiation Protection and Nuclear Safety Agency, to utilize its additional capacity. With this approval, ANSTO can resume supply to international customers. And as a priority customer, Lantheus will be the first to receive that supply. As the COVID-19 pandemic has evolved, the availability of international transportation logistics for inbound supply has been a dynamic situation. While we have been able to secure flights, we have experienced challenges, uncertainties being able to meet demand for our nuclear products in the U.S. and other markets we serve. Turning now to our pending Progenics acquisition. As you know, in February, we announced with Progenics Board that we had entered into an amended and restated merger agreement. More recently, we jointly announced that we rescheduled our respective special meetings from April 28, 2020, to June 16, 2020, given the high level of volatility in the capital markets caused by the COVID-19 pandemic. In addition, on April 14, together with Progenics, we announced that Lantheus has entered into a support agreement with Velan Capital and certain of the affiliates to which they agreed to vote in favor of approving the proposed merger between Lantheus and Progenics, and to be bound by certain standstill obligations through our 2021 Annual Meeting as set forth in that agreement. Since first announcing the merger in October, the compelling strategic rationale of combining our companies has not changed. I remain convinced about the value that could be unlocked by combining our two business, and I'm very encouraged by the progress of our integration planning efforts. I am proud to share that as a life science company manufacturing sterile products, we were able to donate 10,000 pieces of PPE, including masks, gowns and gloves. These PPE collected by the National Guard went to first responders in our home state of Massachusetts. We are so grateful for the brave service of first responders everywhere, and we're privileged to be able to make such a contribution. With that, I'll turn the call over to Bob. Bob?

Thank you, Mary Anne, and good morning, everyone. I will provide highlights of the first quarter financials, focusing on adjusted results, unless otherwise noted. Revenue for the first quarter was $90.7 million, an increase of 4.8% over the prior year quarter. While revenue came in at the top end of guidance for the full quarter, we saw a meaningful drop off beginning - during the last 2 weeks March. Sales of DEFINITY in the first quarter were $56.8 million or 11.1% higher as compared to the prior year quarter. TechneLite revenue was $23.1 million, down 4.3% from the prior year quarter. Other nuclear increased 2.5% to $15.5 million due to the timing of certain Neurolite sales, offset in part by Xenon volume. Rebates and allowances totaled $4.7 million. Gross profit margin for the first quarter was 51.1%, a decrease of 85 basis points from the first quarter 2019 on a similar basis. The decrease is due mainly to planned under-absorbed overhead cost associated with our new on-campus manufacturing facility as was noted earlier this year. Operating expenses were 221 basis points favorable to the prior year at 27.4% of net revenue, driven primarily by lower relative expenditures in each spending category. Favorability was driven by both the phasing of certain planned expenses as well as conscious decisions to slow discretionary spend during the latter half of the quarter as the COVID-19 pandemic began to take shape. Operating profit for the quarter was $21.6 million or an increase of 11.2% over the same period prior year. Total adjustments in the quarter totaled $14.5 million before taxes. Of this amount, $3.1 million is associated with noncash stock and incentive plans. Also in the quarter, we recorded $7.3 million of expense relating to an asset impairment charge associated with certain of our other nuclear legacy manufacturing assets. Additionally, we recorded $3.8 million of expense related to our acquisitions and pre-integration efforts with Progenics. The balance sheet - excuse me, balance relates to acquired intangible amortization. Our effective tax rate was 28.5% in the quarter. The resulting reported net income for the first quarter of $3.3 million and $14.3 million on an adjusted basis, an increase of 27.1%. GAAP fully diluted earnings per share were $0.08 and $0.36 on an adjusted basis, an increase over the prior year of 26.1%. Now turning to cash flow. First quarter operating cash flow totaled $9.4 million as compared to $10.5 million in Q1 2019. Capital expenditures totaled $2.7 million, down from the prior year quarter, both as a function of the work taking place in the prior year quarter on our new on-campus manufacturing capabilities as well as a slowing of capital investment spend during the quarter. Free cash flow, which we define as operating cash flow less capital expenditures, was $6.7 million, an increase of $6.8 million over the prior year period. This cash flow performance has brought our cash and cash equivalent balance to $95.7 million, adding to the strength of our balance sheet heading into the pandemic. Also, just following the quarter, and as a precaution, the company drew $100 million on our revolver, representing half of the availability. And as a note, we intend to repay this draw ahead of closing the Progenics transaction to better manage our covenant requirements as a combined company. The net leverage ratio, as we exited the first quarter and not including the subsequent facility draw, stood at 1.4x. As you know, we redrew our revenue and adjusted earnings per share full year guidance for 2020 in an April 9 press release. This action was precipitated by the meaningful decrease in revenue due directly to patient and hospital actions associated with stay-at-home orders and advisories throughout the United States. During the second half of March and throughout April, we have seen our total sales decrease by as much as 50% to 60% from recent quarterly revenue run rates and notably, have maintained these levels over the last 3 weeks. We are monitoring customer orders and order trends closely, looking to both regional and national data points to inform our forward-looking sensitivity analyses. For modeling purposes, we would expect gross margin to be lower in Q2 than what we experienced in Q1 due to a lower overall absorption trend and lower relative contribution from DEFINITY. As we assess revenue for the balance of 2020, we have attempted to model various sensitivity assumptions for a recovery of elective procedures and a return of patients to hospitals and related points of care where our products are most often utilized. However, due to the uncertainties of recoveries within each geographic segment of the country, the uncertainties of each state Governor's decisions to reopen parts of their respective economies, the uncertainty surrounding any potential reemergence of COVID-19 severity later in 2020 and many other COVID-19-related issues, we are unable to provide investor guidance at this time. We continue to assess the impact of COVID-19 on our business and remain vigilant to day-to-day indications that could challenge the validity of our assumptions and allow ourselves the opportunity to make cost-savings and capital-spending decision adjustments as business conditions warrant to protect the long-term prospects of our business. With that, let me turn the call back over to Mary Anne.

Thank you, Bob. In closing, I'd like to give a special thank you to Lantheus employees. Both those essential workers coming to our Billerica headquarters daily to manufacture our products as well as those diligently working from home as we do our part to serve patients and fight this virus. You continue to embody the very best of our company's values, and I thank you for your commitment. Before I open the call to questions, I'd again like to express my sincere thanks to first responders and those on the front lines everywhere and wishes for the safekeeping of everyone until our next call. With that, Bob and I are now ready to take your questions. Operator, please go ahead.

[Operator Instructions] And our first question comes from the line of Larry Solow with CJS Securities. Please go ahead.

Just obviously, unprecedented times. But just on DEFINITY, a lot of this stuff is sort of not really elective, I guess, but some - I guess in the short run, inability to get to hospitals and closures and whatnot, and people are just probably afraid to go to the hospital unless they absolutely have to. How do you view - do you view this as somewhat of it is just going to be lost revenue. I guess you can't make up all the stuff, but inevitably, hopefully, we get some break and slowdown in this stuff, especially in some of the major cities. And people have to come for these procedures, right? So how do you sort of balance that? And any thoughts on that?

So Larry, it really is a popery here because the range of use of echocardiography really spans so many uses. You have inpatients where echocardiography is used as part of the kind of the routine evaluation of patients who are already being - it's part of their inpatient care. You have echocardiography as part of the prescreening of patients who are being admitted into hospitals for elective procedures. You have echocardiography as part of ongoing cardiac screening of patients who are being monitored for their cardiac status. And you're right, for some of the latter uses that I just mentioned there, right now, those uses are suspended. Because patients aren't being screened - they're not having the pre-hospital screening done for elective procedures because those elective procedures have been postponed. Patients aren't going to their physicians' offices for kind of normal ongoing health assessments on a yearly basis. And so those echocardiography studies aren't being ordered. To the question of whether they are lost revenue, the only echocardiograms that we see as lost revenue right now are what we call serial echocardiograms. And those are patients who for what could be a variety of reasons also are currently scheduled to, per se, have an echo done every 3 months. So they might be post-AAA repair or post some other kind of cardiac repair, where they were on a standing schedule of having an echo done every three months. And because of the timing of this pandemic, it's very likely that, that patient will not have one of those echos done. That they'll just, by the time they move on to what would be the next echo. I can't tell you across the full universe of use of echocardiography, what percent those patients represent. That is just not a level of detail of data we have. You heard Bob speak to what we are seeing as the level of reduction in our revenue. It's a really fluid assessment that we're making. It's very different geographically as is the pandemic across the nation. You have - and we're seeing that especially now as we see different parts of the country reopened at different rates. We're going to continue to see that. So we are monitoring this in real-time, we are with our customers in real time, we will continue to kind of follow it. But I think we're all suffering in some ways from a lack of intricate detail, and I know it's tough because it's a very financial business that we run, but I think we're all doing our best to try to understand what's happening in real time.

Understood, understood. How about just on - qualitatively, maybe on the R&D side, obviously, with your programs and then a couple - I don't know how much you could speak to Progenics yet, but obviously, with their - the pending, hopeful filing for the PSMA antigen in the back half of this year and just R&D trials and work, does some of that, I assume, get delayed or pushed out, just because of logistics and inability to get patients in the prudent of the trials? And how do you view that stuff?

So I think there's two different questions into 1 there, because you referenced filings versus trials. There's no need to stop forward progress with the preparation of filings, and that's certainly - Progenics saved very important work going on for the preparation of the PyL filing. That is filing in progress because those trials are closed. All the patients have been enrolled that's about data preparation and file preparation. No need - there's no lack of forward progress in files like that. From clinical trial enrollment, and I'm speaking generally for the larger fields here, I'd say it's very fair to say there has been a general stop to clinical trial enrollment for very valid reasons. Depending on what you're studying, these are patients who are usually at risk for one reason or another, and these are not the patients. And unless they are so at risk that they - truly, the risk outweighs - the benefit of the trial drug outweighs the risk of bringing them to a clinical site to administer in a COVID environment. That's a decision that's being made on a trial-by-trial basis. But for oral trials where the benefit of the trial does not outweigh the risk of bringing the patient to a site where there is risk of exposure to COVID, it's fair to say that enrollment has been paused.

[Operator Instructions] All right. We show no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.