Lantheus Holdings, Inc. (LNTH) Q2 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Lantheus Second Quarter 2022 Conference Call. This is your operator for today's call. [Operator Instructions] I'll now turn the call over to your host for today, Mark Kinarney, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. Welcome to Lantheus' Second Quarter 2022 Conference Call. With me on today's call are Mary Anne Heino, our President and CEO; Bob Marshall, our Chief Financial Officer; and Paul Blanchfield, our Chief Operating Officer. Mary Anne will begin the call with introductory remarks and then turn the call over to Paul to provide an operational update. Bob will cover our financial results and updated guidance. Mary Anne will provide closing remarks, and then we will open the call for Q&A. This morning, we issued a press release, which was furnished to the Securities and Exchange Commission under Form 8-K, reporting our second quarter 2022 results. You can find the release in the Investors section of our website at lantheus.com. For those of you not on the webcast, you can find the slide presentation in the Investors section of our website under the Presentations tab. Before I get started, I would 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. 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 the call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is also included on the Investors section of our website. With that, it's my pleasure to now turn the call over to Mary Anne.

Thank you, Mark, and good morning to everyone joining us. We had another outstanding quarter as we continue to execute on our strategy to accelerate growth, diversify our portfolio and position Lantheus as a category leader in the markets in which we compete. I'm particularly pleased to share that, for the second quarter in a row, we reported record revenue, up 121% year-over-year, led by PYLARIFY growth in our radiopharmaceutical oncology category. Having launched PYLARIFY just over 1 year ago, we are delighted with the impact PSMA-targeted PET imaging is making on the U.S. prostate cancer community. In fact, at our inaugural Investor Day in May, Dr. E. David Crawford, an internationally renowned urologist at the University of California San Diego, highlighted that he believes PET PSMA imaging is one of the most important steps forward he has seen in prostate cancer in the last few decades. We believe that endorsements from experts in the field such as Dr. Crawford's, along with inclusion in the guidelines for both the National Comprehensive Cancer Network, or NCCN, and the Society of Nuclear Medicine and Medical Imaging or SNMMI, speak to the importance of PSMA-targeted PET imaging for the U.S. prostate cancer community. In the EU, we are pleased to note that Curium completed its Phase III PYTHON clinical trial for piflufolastat F-18 in May and submitted its marketing authorization application to the European Medicines Agency, or EMA, on June 27. We also worked with Curium to add PYLARIFY to its U.S. ECLIPSE trial, a multicenter open-label randomized Phase III trial comparing the safety and efficacy of Curium's PSMA-targeted therapeutic versus hormone therapy in patients with metastatic castration-resistant prostate cancer. PYLARIFY will be used to determine PSMA avidity as part of patient selection. PYLARIFY will now be included in the vast majority of late-stage U.S. trials for the study of PSMA-targeted therapies. We also noted progress with our AI offering, having received an additional FDA clearance for PYLARIFY AI during the second quarter. The updated deep learning algorithm of PYLARIFY-AI has been trained and validated on one of the largest and rapidly growing databases of contextualized PYLARIFY PSMA PET/CT images in the world. The enhanced performance of PYLARIFY AI was presented by Dr. Jeremie Calais at the SNMMI annual meeting, along with the results from our prospectively planned and independently validated study of PYLARIFY AI in our Phase III CONDOR study. These results independently validated and confirmed the efficiency, consistency and diagnostic accuracy of AI-assisted image interpretation in detecting and quantifying disease in patients with prostate cancer. PYLARIFY AI provides a standardized approach to identifying and quantifying prostate cancer and further enhances the clinical utility of PYLARIFY as an imaging agent. Earlier this year, in the American Urological Association's annual meeting, Dr. Nicholas Nickols presented data on the AI-enabled quantification of disease by PSMA PET and how PYLARIFY AI could serve as an imaging biomarker to predict response to androgen deprivation therapy. PYLARIFY AI continues to add real-world evidence and enhance the utility of PYLARIFY in the effective care and management of prostate cancer patients. We are pleased to continue to support the U.S. prostate cancer community with PYLARIFY and PYLARIFY AI to find and follow disease. Our market-leading ultrasound-enhancing agent, DEFINITY, grew despite headwinds associated with a decrease in referring physician visits and staffing-related challenges consistent with the trends noted by other companies in the healthcare sector. While in-person U.S. cardiology visits were down during the quarter year-over-year and reported staffing challenges for nurses persisted at U.S. healthcare institutions, DEFINITY grew quarter sales year-over-year. While DEFINITY growth during the second quarter was lower than expected, we believe that contrast-enhanced echocardiography continues to play an important role in cardiac imaging, and we are confident growth levels will normalize as these challenges abate. Moving now to our clinical development programs. We have recently progressed 2 of our pipeline products: 1095, our PSMA-targeted I-131 prostate cancer therapeutic; and NM-01, our novel imaging agent currently under development for the assessment of PD-L1 expression in non-small cell lung cancer. For 1095, I'm pleased to announce that we have enrolled the last patient in our ARROW trial. In total, 120 patients have been randomized, 80 in the 1095 plus enzalutamide combination group and 40 in the enzalutamide group alone. As a reminder, the primary endpoint in ARROW is prostate-specific antigen or PSA response rate. Key secondary endpoints include time to radiographic-free progression, progression-free survival and overall survival. Patients in the ARROW trial will be followed for 1 year after their first treatment for all efficacy endpoints. Survival and safety data will be collected for an additional year. That is an important milestone, and I look forward to sharing more information in the future. Moving to NM-01, the preliminary study results of the Phase I PECan study evaluating PD-L1 express in cancer were presented at SNMMI. These results indicate that NM-01 has the potential to identify non-small cell lung cancer patients who will respond to checkpoint inhibitor therapies and monitor the early response of these patients to these therapies, pending further an ongoing investigation. In addition to the Phase I PECan study being run by King's College, we continue to progress this asset with the initiation of a single-arm Phase IIa PELICAN trial and enrolled the first patients in May. The primary endpoint of the PELICAN study is the measurement of PD-L1 expression in non-small cell lung cancer, both primary tumor and metastatic lesions, as assessed using NM-01 compared to immunohistochemistry PD-L1 expression results. We continue to seek ways to further expand our portfolio, evaluating several opportunities to collaborate, and in-license or acquire additional assets which match our strategic priorities. We are particularly pleased and focused on late-stage diagnostic and therapeutic product opportunities in oncology that complement our existing portfolio. In addition, certain early-stage opportunities also align with the strategy that drives our pharma services business. For example, we recently entered into a collaboration agreement with Radiopharm Theranostics. Radiopharm is an Australian-based developer of platforms of radiopharmaceutical products for both diagnostic and therapeutic uses. Radiopharm plans to initiate a Phase I therapeutic trial for patients with PD-L1 positive non-small cell lung cancer in Australia. Lantheus will supply our diagnostic product candidate, NM-01, to Radiopharm for their clinical trials, to be used as a clinical research tool to assess PD-L1 expression in patient selection. We have also retained the option to expand our partnership to additional assets in Radiopharm's pipeline. Finally, I would like to share an important change I recently made in the executive team. In June, I promoted Paul Blanchfield to the role of Chief Operating Officer. I've had the pleasure of working with Paul since he joined Lantheus in January 2020 as Chief Commercial Officer. Paul has been an exemplary leader throughout his tenure and combines a strong command of the data that drives the business with attention to longer-term strategy. In his new role, Paul has taken responsibility for commercial, manufacturing and technical operations, quality and corporate communications. Now let me turn the call over to Paul for an operational update on our business.

Good morning, everyone. As Mary Anne noted, we continued to execute on our strategy during the quarter, including for PYLARIFY and DEFINITY. Beginning with PYLARIFY, the market leader in PSMA-targeted PET imaging, I am pleased to announce PYLARIFY net sales for $130.2 million compared to $92.8 million in the first quarter. We continued to make progress during the quarter in our geographic footprint, including capacity and redundancy, new customers, market access and our PYLARIFY AI software, while monitoring medical practice and guidelines as it relates to our total addressable market, or TAM. We expanded our U.S. geographic footprint with the activation of 4 additional PET manufacturing facilities, or PMFs, since our last quarterly earnings call. These new PMFs are located in New York and West Virginia, which add redundancy and enhanced capacity, and in Colorado and Florida, which are new geographies where we had previously been flying doses. I am also pleased to announce that we have reached an agreement with one of our key PMF partners to nearly double the number of their PMFs that are manufacturing PYLARIFY and extend our partnership through 2027. This agreement will expand our geographic footprint and provide redundancy and enhance capacity in existing geographies to ensure we can continue to meet the needs of the U.S. prostate cancer community for many years to come. We also continue to focus on adding new customers, whether they be hospitals, freestanding imaging centers or government facilities. We now have almost 900 customers across 45 states and the District of Columbia actively ordering PYLARIFY. This is up from the approximately 700 customers at the end of the first quarter, even with the availability of competing PSMA PET imaging agents. With respect to market access, both NCCN and SNMMI updated their guidelines earlier this year to endorse all PSMA PET imaging agents, including PYLARIFY, for the use of patient selection for PSMA-targeted radioligand therapy, including Pluvicto. We are pleased to note that several commercial payers, including Humana, Aetna and Anthem BCBS, or Blue Cross Blue Shield, have updated their policies to reflect an agnostic approach to the choice of imaging agent used to identify patients with PSMA avid lesions who may be eligible for radioligand therapy. Humana's policy in particular highlights piflufolastat F-18 by name as an alternative to other tracers. We believe these advancements, combined with more than $130 million in sales for this quarter, speak to the clinical benefits of PYLARIFY, its scalable manufacturing network and our operational capabilities. I also want to note the progress we have made with PYLARIFY AI. As Mary Anne mentioned, the FDA cleared an updated version of PYLARIFY AI. In addition, we continue to install PYLARIFY AI at leading institutions and incorporate it into PSMA-targeted therapeutic trials. We believe this continued progress will have a positive impact on patient care and help sustain PYLARIFY's market leadership going forward. During Investor Day in May, I told you there were 3 key takeaways for PYLARIFY. First, PSMA PET imaging has significant opportunity, with a total addressable market of approximately $1.1 billion that continues to grow. Second, we have a significant first mover advantage that has translated into what we believe is sustainable market leadership. And third, there's significant long-term potential, with the likelihood of labels and guidelines expanding in the future. On the TAM specifically, I would note that we continue to see guidelines and medical practice evolve, as it frequently does in oncology, based on real-world experience. And we expect the same for PSMA PET more broadly and PYLARIFY specifically. We believe the TAM could increase by an additional 100,000 scans from its existing 250,000 scans that we highlighted in April, from 2 primary areas. First, we believe there could be additional PSMA PET scans for patient selection for metastatic castrate-resistant prostate cancer in the first and second line, in which PSMA-targeted therapeutics are currently being studied. Second, we believe that medical usage of PSMA PET imaging may expand over time to additional patient populations, including but not limited to the intermediate favorable patient population. These additional 100,000 scans would increase the TAM to approximately $1.5 billion, up from $1.1 billion. We will continue to monitor guidelines for both PSMA PET and radio therapeutics, as well as medical practice, and continue to update the total addressable market as it evolves. I am thrilled with our results for the first half of 2022, as well as the opportunity to continue to expand the market, and believe our continued efforts to solidify PYLARIFY as the PSMA PET imaging agent of choice will continue to positively impact the prostate cancer community for the foreseeable future. Turning now to DEFINITY, the market-leading ultrasound enhancing agent, sales for the second quarter were $62.3 million compared to $59.8 million in the prior year quarter. While we saw increasing momentum in DEFINITY during the first quarter as COVID-19 levels receded, staffing and customer capacity-related challenges impacted growth in the second quarter, particularly at our largest customers. We note a year-over-year decrease in in-person cardiology visits, and many customers noted a backlog of patients needing an echo ultrasound. We continue to have over 80% share of the U.S. ultrasound enhancing agent market, but believe near-term growth will remain constrained until hospitals have adequate staff to support the current demand for echocardiography and ultrasound enhancing agents. Bob will show more about our 2022 expectations when he reviews guidance as part of his financial update. Bob?

Thank you, Paul, and good morning, everyone. I will provide highlights of the second quarter financials, focusing on adjusted results unless otherwise noted. Turning to the results. Revenue for the second quarter was $223.7 million, an increase of $122.7 million or 121.4% over the prior year period. Earnings per share for the second quarter were $0.89, an increase of approximately $0.78 over the prior year quarter. Now I'll turn to the details, beginning with Precision Diagnostics. Revenue of $87.1 million was down 3.6% from the prior year quarter. Sales of DEFINITY net of rebates and allowances were $62.3 million, 4.1% higher as compared to the prior year quarter and slightly lower than our expectations for the reasons just explained by Paul. TechneLite net revenue was $19.4 million, down 18.2% from the prior year quarter, due primarily to a contract we exited mid last year with an impact of approximately $2.5 million per quarter as well as a prior year comparable that included opportunistic sales which did not repeat this year in the quarter. Radiopharmaceutical Oncology contributed $131.2 million of sales, up significantly due to the continued rapid ramp in sales of PYLARIFY. This result also includes a sequentially lower contribution from AZEDRA with continued COVID-related constraints. Commercial efforts remain focused on bringing leading sites of care online, increasing share of voice and driving our referral campaign. Lastly, strategic partnerships and other revenue was $5.5 million, driven primarily by the RELISTOR royalty stream. Unfavorability for the category is due to a prior year comparison includes the sale of cREPO digital solution to Fuji, not repeated in the current year. Gross profit margin for the first quarter was 66.0%, an increase of 13.35% over the second quarter 2021 result at 52.6%. As has been the case in recent quarters, the increase is due mainly to favorable product mix, led by PYLARIFY and DEFINITY, offset in part by increased supply chain and logistics costs. Operating expenses were 15.97% favorable from 42.4% in the prior year to 26.4% of net revenue in the current quarter, highlighting operating leverage while investing for sustainable growth in both sales and marketing and R&D in support of our commercialized and pipeline portfolios. G&A as a percent of net revenue improved by approximately 550 basis points, even amidst higher travel expenditure, rebranding, business development efforts as well as ERP discovery work to drive workflow efficiencies as we grow. Operating profit for the quarter was $88.6 million or an increase of $78.2 million or 752.5% over the same period prior year. Total adjustments in the quarter were $25.4 million before taxes. Of this amount, $7.4 million and $8.3 million of expense is associated with non-cash stock incentive plans and acquired intangible amortization respectively. Also in the quarter, we expensed $8.5 million of net contingent liabilities, of which $8 million is related to the PYLARIFY CVRs or contingent value rights. The liability, now at $99.7 million, is fully accrued up to the maximum amount that may be paid to the CVR holders under the merger agreement dated February 20, 2020, and has been recorded within short-term liabilities on our balance sheet in its entirety. As such, we would expect to pay this amount in the first half of 2023, with no further liability beyond this amount or date. The remainder is related to acquisition, integration and other non-recurring expenses. Our effective tax rate was 28.1% in the quarter. Our effective tax rate is slightly higher than recent run rates with unfavorable mix of PYLARIFY sales and higher state tax jurisdictions. The resulting reported net income for the second quarter was $43.1 million and $62.9 million on an adjusted basis, an increase of $69.7 million and $55.1 million respectively. GAAP fully diluted earnings per share were $0.61 and $0.89 on an adjusted basis, an increase from the prior year of $1 and approximately $0.78 respectively. Now turning to cash flow. Second quarter operating cash flow totaled $72.6 million as compared to $25.9 million in Q2 of 2021. Capital expenditures totaled $4.3 million, up slightly from the prior year quarter. Free cash flow, which we define as operating cash flow less capital expenditures, was $68.3 million, an increase of $45 million over the prior year period. We are beginning to see the impact from ramping PYLARIFY revenue as it converts to cash through the working capital cycle. Cash and cash equivalents net of restricted cash now stand at $171.4 million. We continue to have access to our $200 million undrawn bank revolver and are very comfortable with our strong liquidity position. Turning now to our guidance for Q3 and updated guidance for the full year. We forecast revenue to be in the range of $220 million to $230 million for the third quarter of 2022, an increase of approximately 116% and 125% over the third quarter of 2021. As noted, we are updating our full year view to take into consideration actual first half performance. While DEFINITY has continued to post record dollar level results this year, lower-than-expected cardiology visits coupled with ongoing staffing issues at hospitals have us forecasting DEFINITY in the second half of the year in the mid-single- to high-single-digit range. Our surveys do not indicate any loss of share, and we believe that these trends are transitory. And as I have mentioned, and importantly, DEFINITY continues to grow amidst this backdrop. With regard to PYLARIFY, we now model at $480 million to $500 million with expanding PMF coverage and user uptake. Therefore, we now forecast full year revenue to be in the range of $885 million to $905 million from the prior range of $800 million to $835 million. This updated range includes the recognized revenue from Novartis at $24 million, which was recorded in the first quarter. Turning now to earnings. Adjusted EPS should be in the range of $0.80 to $0.85 for the third quarter. We are raising our full year adjusted EPS to account for relative first half outperformance as well as the incremental contribution from higher PYLARIFY revenue expectations and inclusive of the aforementioned adjusted EPS had an impact of the Novartis agreement of approximately $0.25. We now expect adjusted EPS to be in the range of $3.50 to $3.60 per share versus the prior range of $2.90 to $3.15. With that, let me now turn the call back over to Mary Anne.

Thank you, Bob. In closing, I'd like to leave you with a few key takeaways. Our mission to find, fight and follow disease to deliver better patient outcomes remains our guiding force. We continue to execute our strategy to accelerate growth, diversify our portfolio and position Lantheus as a category leader in the markets in which we compete. Our record revenue and outstanding financial results for the first half of 2022 reflects the strong execution of our strategy and our ability to deliver on our goal to drive long-term growth and shareholder value. The key drivers of our growth continue to be our category-leading products. For PYLARIFY, our market-defining product, we continue to grow the market and have now solidified it as the PSMA PET imaging agent of choice for the U.S. prostate cancer community. Our market-leading ultrasound enhancement agent, DEFINITY, grew despite headwinds associated with a decrease in referring physician visits and staffing-related challenges. We expect our growth for the second half of the year will continue and will be driven by our passion to find, fight and follow disease to deliver better patient outcomes. With that, Bob, Paul and I are now ready to take your questions.

[Operator Instructions] Your first question comes from the line of Richard Newitter from Truist Company.

Hi. Thanks for taking the question and congrats on another excellent performance in the quarter. So a couple of questions for me. I wanted to just start off with the TAM. Paul, thank you for the comments there on the TAM. I think you guys are talking to about a $1.5 billion size right now. I guess I'm trying to figure out if that's the right actual size. Just given the PYLARIFY performance and the trajectory that you're on, it would seem to me to suggest that you guys are either close to penetrating, or much closer than we would have thought to penetrating, that diagnostic component -- not the therapeutic piece, but the diagnostic component of the TAM, potentially in the next few quarters or within the next year here. So is it that, or is it just that maybe that diagnostic TAM is bigger when you exclude the therapeutics piece, even beyond the intermediate unfavorable portion that you added to it? And then, on the therapeutic piece, what's the assumption that you're using to get to, call it, that $400 million to $500 million TAM expansion? By my math, it would suggest you're only assuming, like, 1.5 scans per patient, but if it was anything closer to 2, to 3, to 4, which is kind of what physicians say they would do when accounting for follow-up scans, it would seem that that would probably be close to double. So I was just wondering if you could talk about that -- those TAM considerations. Are we -- am I thinking about that correctly?

So Rich, first of all, thank you for the question and obviously the diligent preparation and research that you and your team continue to do. I don't think you're thinking about this incorrectly. We've raised the total addressable market for PSMA PET imaging 3 times over the last 15 months or so. And the determination of a total addressable market is really a triangulation between our indications, leading institutional guidelines like NCCN and SNMMI, as well as medical practice. We are very pleased with our penetration in both of our indications for the risk of metastases, as well as the recurrent population, and we continue to assess what that total addressable market is, recognizing that we are in oncology and so that does add some nuances as medical practice evolves. We've highlighted that it's currently based on approved guidelines for radioligand therapies at $1.1 billion. But as you know, there are clear opportunities as radioligand therapy is used earlier line and physicians use PSMA PET imaging, and PYLARIFY in particular, earlier in the risk of metastases indication. And so we've highlighted it's grown 3 times recently. We see future growth. And as you correctly know, this is very sensitive to the assumptions that you make on per patient per scan basis, meaning the number of scans per patient. You're correct to say that we have heard physicians using this, as you know, an increasing number of times, particularly in the therapeutic space, but I think I'd also remind you that Pluvicto in particular has only been approved for a few months, and so medical practice is still very much evolving. I think we're pleased with our penetration and believe that, as we work and PolariPy and PSMA PET imaging continues to penetrate the market, that physicians and guidelines will continue to catch up and this will be a growing market for many years to come.

That's very helpful context, thank you. Just with respect to the guide, I guess $480 million to $500 million for PYLARIFY is implied there. That implies that your 2Q performance more or less gets run rated for the rest of the year. I know that's more or less consistent with how you've been guiding to PYLARIFY in the past few quarters, but I'm just curious. Is there -- given that you have so much capacity coming online -- you mentioned all these PMF approvals. Florida and New York are now online in a more significant way. Is there any reason why that wouldn't continue to step up sequentially?

I'll take that, and Paul can fill in maybe the qualitative aspects of it. But the math does demonstrate that it should be sequentially improved as you go through the back half of the year. If I look at the first half versus total second half, I showed that our second half performance relative to the first half performance is probably between, call it, 15% and 20% greater in total -- in terms of total POLARIFY volumes? There's still competition that is just sort of entering the marketplace at this juncture, albeit small, but still competition that is there, and we will continue to make sure that we watch the marketplace and make updates as appropriate. But right now, we're staring at what is a significant growth from what had been last year, I think, $42 million or so to what is now -- or I sort of bracketed a nearly $500 million contribution to our revenues. So again, I don't think that there's a reason for us to need to get out over our skis. There's still a lot of runway in the year, and we're very pleased with where we're going.

But I think you said it in the intro to your question: this is consistent with the way that we have guided in recent quarters to PYLARIFY.

That's helpful. On competition, you mentioned you have another competitor that's a little bit more aggressive in the marketplace now going forward with the gallium radioisotope. I guess, what's contemplated in your guidance -- your updated guidance for competition? What are you seeing in the marketplace right now, now that they're out there and they have some reimbursement tailwinds at their back?

I think what we see in the market and what we want to continue to see is adoption of PSMA-based PET imaging. That is the wonderful innovation that has been brought to the prostate cancer community and where our focus has remained. I guess anyone who knows me knows that my typical kind of approach has always been I talk about Lantheus, I talk about our product and how we're doing. But I am going to step aside for a moment here and talk about competition, because I think it's important. I think that it's important that accurate information be offered out to the -- not only the analyst community, but also to shareholders who are making decisions. And so I'm going to correct what I think is some fairly inaccurate information that's been fed into the market about one of the recent commercial entrants of the 2 PSMA-11 agents. So kind of just -- as we all know, there's now 4 PSMA-11 agents in the market. 2 of them are the academics. They were approved late 2020, or they were approved kind of early -- by 2020, and they're kind of geographically restricted in how they're used. More recently, we have the 2 approved PSMA-11 agents, and it's one of these 2 public companies that's fairly kind of vocal and public in claiming that they've had a more successful launch execution than PYLARIFY, so I'm just going to take a look at that. This is a company for whom the product missed its original PDUFA date by 3 months. And then if you then look at what happened post approval -- what was finally the delayed approval -- and you look at revenue posted, generated no revenue in its first full quarter on the market. And this would be compared to then PYLARIFY's first full quarter on the market, in which we generated and reported $7.4 million in revenue. In the second full quarter for both products in the market, PYLARIFY -- Lantheus -- reported $35.4 million. This other product, even though it was, I'll say, riding the wave of the momentum that had been built by us with the PSMA market, has come in and reported $13 million. So I'm going to stand firm on what represents a successful launch and take that victory and take that claim for Lantheus. The sales numbers and everything else that we've done in the market as far as building our capacity, building market access for this product and building awareness, I'm going to say we feel terrific about, and for what we've done for patients and physicians in making this product available. This is, again, a kind of a one-time [indiscernible] that I feel is important. We are going to stay, as a company, focused on our commitment to the prostate cancer community, the patients we serve there as well as, of course, the shareholders we serve, and continue to work to make sure that patients and physicians have access to what we truly believe are innovation breakthroughs in PSMA-based PET imaging. So I'm not sure if that answers your question there.

Your next question comes from the line of Zach Weiner from Jefferies.

Hey, everyone, thanks for taking the question. And congrats on another great quarter. I just wanted to continue, Mary, if I could, on competition. Can you talk about some of the benefits of F-18 versus gallium in terms of the manufacturing side? I know you've talked about in the past the half-life comparisons, but just curious on the manufacturing side and if you could provide any color there.

Essentially, Paul is going to add in here because he's closer to it on some aspects than I am, but there's really -- there's 2 major differences here that lend themselves into advantages. One is the half-life of F-18 versus gallium. It's essentially double, and when you -- if everyone remembers kind of fourth grade chemistry, half-life is the amount of time it takes for the amount of isotopes to half itself as far as what's available. So when you have twice the time, you can -- essentially, you have twice the logistical availability to deliver the product. So that's one key advantage. The second is in manufacturing scale. When you're using F-18, you're using a cyclotron, and so you're producing in batches. And what that means, and what we've already seen, is that you can produce upwards of 40 patient doses per batch, and you can run more than 1 batch a day. So this is truly a manufacturing approach that matches a large-scale patient population, and unfortunately, prostate cancer is a large-scale patient population. So the approach of manufacturing matches the patient community that you're serving, and that's what -- why we feel F-18 and why -- from a description, F-18 is a better match. Now, gallium is a fine isotope as well. It's got about a 68-minute half-life. Its manufacturing process is through a generator. What that means, though, is it is limited as to the number of doses that can be produced at any given time, and that, just from a total -- from a scale perspective, is limiting. The more important thing here is do we have enough capacity to serve the U.S. prostate cancer market. That is what's most important. And I'm pleased to say that we have now built capacity on our own, just through our own network -- we have built capacity that can serve the United States prostate cancer community. Now, I -- and Paul will fill in here -- there are certain geographic areas where, as we all know, population density wise is -- where that has been challenging just because of the -- kind of those population centers. But even there, we continue to open new sources of availability to ensure that we can meet the demands of the U.S. prostate cancer community. Paul, do you want to add?

Yes. Maybe just a few points, Mary Anne. I think it's important to remember that the most prevalent PET image agent out there is FDG, with over 2 million doses done on an annual basis. That is an F-18-based product that is levering this same scalable PMF network across the country. And so the health care community is very accustomed to working with F-18, to ordering from these same PMFs, because this is embedded in their practices for decades. And so we're really levering an existing PMF network across the country that provides the #1 PET agent in FDG. We are naturally adding additional PMFs to be able to manufacture PYLARIFY, as Mary Anne notes, and are acutely focused on ensuring we have capacity and redundancy to ensure that we can provide backups. And as I've mentioned, we're able to provide doses to repeat customers on a weekly basis in 45 states plus the District of Columbia. There are naturally going to be regions, as Mary Anne has mentioned, and so Wyoming, Idaho and Montana, Alaska and Hawaii are not markets that we can currently fly doses into or travel, nor are there PMFs that are easily accessible in those markets. But in the key geographies, when we look at major metropolitan areas of New York, of Chicago, of Los Angeles, of Dallas and Houston -- when we think of the new market that we just opened up with PYLARIFY in Florida -- those are key markets where we believe we can continue to have market-leading share, as we've demonstrated on our comparable share in the second quarter, of roughly 90%-plus relative to our competition, and we believe F-18 will continue to provide those sustainable advantages.

Thanks. I just had one on DEFINITY and the shift in manufacturing to in-house. Can you provide just a time line as to when you think you'll sell through all of the historical inventory and we should start to see the margin benefit from DEFINITY being produced in-house? Thanks.

Zach, we will continue to sort of co-blend, if you will, and co-source, both from external partners that we've had for any number of years, together with batches that are being produced in-house. Now, that mix will shift over time, over the next years, and we'll -- that incremental benefit -- if I talk about gross margin and its ability to continue to expand, driven by volume of PYLARIFY as well as DEFINITY, so any time those products are growing, margin expansion will happen naturally. The incremental benefit from in-house manufacturing of our own is just that: it's incremental. So I would expect to see it continue to contribute -- probably the first bps' worth of contribution are probably sometime late this year into next year because of just the time frame of working through existing inventory and batch production, which we do expect to increase batch production here in the second half of the year. But from that perspective and those inventories -- of course, that benefit doesn't show up until you actually sell that particular product in that period. So again, I think it starts into next year and the next, and because -- keeping in mind that DEFINITY has a 24-month shelf life so, as we work through inventory levels, that's the sort of the time horizon that you would start to see that benefit.

Your next question is from the line of Roanna Ruiz from SVB Securities.

Hi, good morning and also my congrats on the progress. So two quick ones from me on PYLARIFY. First, now I noticed you mentioned 900 customers have ordered the product, and how do you expect this number to grow into the second half of the year? And if you can't speak to exact numbers, maybe it would help to just elaborate on the push and pulls that could influence this customer metric. And I have a follow-up.

So, as we mentioned, we have approximately 900 customers. And by customers, just to be clear, we define those as PET imaging facilities, whether they be freestanding imaging centers, government facilities like the VA or hospitals. And that's up from approximately 700 at the end of the first quarter, and so we would expect that number to grow, but we wouldn't expect it to continue to accelerate, because there's only so many PET imaging centers across the country. Where we do see continued growth is the amount of referrals and prescriptions flowing into those imaging centers from the referring community. And by referring community, I mean urologists, I mean medical oncologists and urological oncologists who are managing men with prostate cancer. And when they determine a scan is needed, they would send a prescription to one of our current 900 customers to then run the scan. And so, when we see growth, we will naturally see an increase, I should say, of treating sites -- the hospitals, the government facilities and the imaging centers -- but that number will slow over time because we already have significant penetration of that marketplace. Our commercial efforts are increasingly focused, now that we have 900 customers with almost 100% of them repeat ordering and ordering on a regular basis, to continue to drive demand and awareness in the referring community, because many of those can continue to drive additional demand. And so we're really in the demand generation phase within the referring physician community, and that's where we see the bulk of the growth coming going forward.

And I also wanted to ask, I noticed that you mentioned PYLARIFY is now included in a majority of the late-stage U.S. trials for PSMA-targeted therapeutics. And I'm curious, what kind of optionality does that give PYLARIFY in terms of possible indication expansion or therapeutic use in the next couple of years, and what do you think we should keep an eye on in terms of future updates?

So, to be clear, it's being included in the trial as a biomarker to reflect PSMA avidity for patient selection and/or for response to therapy once the therapy is initiated. I think, from an optionality perspective, it again speaks to the value and the growing utility that is being appreciated for PSMA-based imaging agents, and I think we could anticipate at a point in the future that the labels for therapeutic products will broadly reflect the use of PSMA-based imaging agents as a criteria for selection and then response to therapy of patients. Not saying that they will name by brand -- that's an FDA choice as to how they reflect that in their labels -- but I think we would absolutely expect that at some point those therapeutic labels will reflect the utility of using PSMA-based agents either for patients, including for patient selection, and then for response to therapy. And perhaps broader throughout the prostate cancer therapeutic options you may see -- and that was something I mentioned in my comments -- the use of PYLARIFY a trial that is currently underway where it's looking at response to androgen deprivation therapy. These are also patients that are PSMA avid in their disease, but their current therapeutic intervention at that point in their disease state is androgen deprivation, and you can there still use a PSMA-based imaging agent to monitor that patient's response to that therapy, and that is the trial that I referenced in my comments earlier.

I think this goes really to the increasing potential total addressable market as PSMA PET imaging is being used in these new patient populations, as Mary Anne notes, whether it's patient selection or treatment response or patient following. And so, as PYLARIFY is being used in more and more trials, not only just for radioligand therapy, as she notes, but alternative therapies, this has the opportunity, as these studies progress, to not only benefit the U.S. prostate cancer community, most importantly, but also increase the potential usage and the awareness and comfort of PYLARIFY usage, particularly going forward.

Your next question is from the line of Larry Solow from CJS Securities.

Great, thanks. Good morning, everybody. Mary Anne, thanks for the clarification, too, on the competitor and pounding their chest in the last few weeks. 100% agree with you on that one. Could you just talk about -- on the competition front, maybe a little bit more on mid to long term, again, on PYL, just in terms of potential F-18-based agent coming out? Clearly, you guys will have significant first mover advantage and whatnot, but when might we see F-18-based? I believe sometime maybe even within 12 months, is that possible?

Please let's call it PYLARIFY, not PYL, thank you, now that we're [indiscernible].

My mistake. Absolutely.

You're forgiven. So, to the other agents under development, as you know, the one that we're aware of that we referenced is under development by Bracco/Blue Earth, and that is a private company, so we do not have access to those data as to whether that product has been filed with the FDA yet. Again, I'm going to come back and say that I think this is a very large market and the market will support many products. Now, at Lantheus, we intend to be first and best wherever we go, as I -- and my comments are clear on that throughout this discussion this morning as well. But I think this is a market that, as we noted earlier in our discussions with Rich, continues to grow, and it continues to evolve in what the full utility will be. So we're confident that, regardless how many agents enter the market, we will retain our leadership position, and that will come with both share and with revenue -- continued revenue increase.

Can you speak to pricing at all? I mean, it seems like -- I think you guys are -- seem like you're getting what you thought you were, somewhere in that $4,000 rate, but can you maybe talk about that a little bit? And I've heard some noise that reimbursement -- potentially there could be some kind of a cliff would be coming down in a couple of years, especially on the Medicare side. Is there anything you can add to that? Any color to that?

I'm going to start, and then I'm going to turn over to Paul, but your comments on our pricing -- we don't speak specifically to pricing points for any of our products, but I will say that you did not hear Bob say that our revenue was impacted by loss of prices. Sometimes you'll hear us when we do speak to DEFINITY, we'll talk about price versus volume a little bit. So there's that about it to say. I would say then that, yes, price is where we expected it to be for PYLARIFY. By benefit design in the PET imaging class -- agent imaging class, there is a CMS distinction around reimbursement approach that is referred to as pass-through period, and I'm going to let Paul describe that and what impact that might have within the PSMA imaging agent class.

As Mary Anne mentioned, overall price, we've been pleased. We've been very much in line with our expectations and able to garner that, we believe, going forward. What Mary Anne refers to is the CMS distinction is known as a pass-through. Pass-through is a 3-year program that provides separate payment for use of PET imaging -- in this case, PYLARIFY -- in the hospital outpatient setting for traditional Medicare. And so that is currently a 3-year program which provides that differential payment for, as I mentioned, traditional Medicare, so not Medicare Advantage, and it's only in the hospital outpatient setting. We expect that to be -- that portion of the population is roughly 1/3 to 30% of the overall population, as Medicare Advantage has become increasingly popular. And then we've also seen significant adoption within government facilities as well as freestanding imaging centers, both of which are not subject to pass-through. And so that clearly affects a minority of the overall business. We believe we have a number of opportunities and means to sustain payment and reimbursement even after that date. We've spoken extensively on the FIND Act, which is currently being discussed on both the floors of the House and the Senate, which would alter the pass-through payment and effectively provide permanent reimbursement. The second piece is we naturally have stickiness. Prostate cancer is a disease of prevalence and so, as patients get scanned repeatedly, we believe there are benefits to continue with the same agent to be able to track progress. And then we also think about other options to continue to work with our customers. We've talked about the benefits of PYLARIFY AI that is increasingly rolling out to institutions, which also provides some of those stickiness. And so we've been very pleased with our coverage coding and payment. We're very pleased with the updated views that payers have taken regarding radioligand patient selection. And we are monitoring and continue to influence the payment related to pass-through in this minority of the patient population going forward.

If I may, just one more question for Bob, if I could just slip in, just on the margins. Obviously, PYLARIFY driving higher, better improved mix, so that's clearly benefiting gross margin. The 66% this quarter -- how do you view that going forward, at least in the next couple of quarters? And as you mentioned also, you are certainly increasing operating expenses, but you're still getting leverage, so how should we kind of decipher those -- the gross margin line and operating line over the next couple of quarters?

The 66% is obviously a number that we had thought about in terms of kind of giving guidance being north of 65%, so I do believe that it can be sustainable in the sort of mid-60s kind of range. Specifically to 66%, so I'm not going to go there. I do think that, obviously, one of the things that we have all seen and witnessed is that our supply chain logistics is increasingly unpredictable, so I would build in certainty of uncertainty as we look forward. But certainly the key drivers, as you point out, very specifically with PYLARIFY volume and DEFINITY volume -- growing both those growth engines -- both of those things are going to continue to help drive gross margin benefit as we look forward. So yes, I do think that gross margins of sort of that mid-60s range is sustainable. As far as OpEx goes, you're correct, we are maintaining it sort of in that 25% range. And I think that that's -- again, we're also able to gain leverage while making investment, and there are a number of sort of singular investments that are embedded within the financials as they exist in what we're reporting that won't necessarily repeat over the longer term. So, as I even look at adjusted EBITDA margins, which we had also talked about, I know those are in that 42-ish range at the moment, which is really where we're going to drive further leverage from gross margin expansion down through leveraging our OpEx base as we go forward, without sacrificing the opportunity to invest.

And your next question is from [indiscernible] from B. Riley.

Hi, good morning. Thank you for taking our question and congratulation on impressive quarter. So maybe two questions from us. First, maybe can you clarify a bit of the milestone payments related to your Curium collaboration in Europe? Will there be a milestone payment after the EMA approval, and do you think the royalty from that part could be a significant driver for your 2023 or beyond revenue?

So our relationship with Curium for the EU market for what is called PYLARIFY in the U.S. market is a royalty-only-based agreement.

[Indiscernible] to the concept of -- with their approval and their ability to sort of launch into that market. Those numbers I don't believe have been sort of contemplated in Street estimates as we look forward, nor have we provided any kind of guidance to how we think about that addition to our income stream, as you will, if you look into 2023 and 2024. And we'll give that update as we get more clarity into timing and so forth and how it relates to future financials.

And then one more from us. Maybe, Mary Anne, can you comment on your thoughts to expand beyond oncology indications? So far, a lot of your indications is oncology, and I just want to hear if you guys have thought about expanding to [indiscernible] neuroscience such as Parkinson's and Alzheimer's.

That is a terrific question, and certainly within our pharma services business, which is somewhat the lead in the insight that we get into what the kind of emerging trends are for use of biomarkers which become imaging agents, there is already good investigation and advanced investigation outside of oncology. I do think, though, that when we're talking about therapeutics and we're talking about companion diagnostics in the therapeutics area, I think we're going to continue to see that lead in oncology and also in kind of late line use in oncology. And that is just very much typically the way that oncology, especially complex oncology agents, enter. They enter usually as either whatever the line might be -- we'll call it third line here, assuming that there's 3 lines of treatment available for a patient -- and then, with good data and with good experience, they tend to then move up in the line of usage that they have within those patient populations. But I do see, for what we are seeing as somewhat a renaissance of use of radioligands, both therapeutically and diagnostically, I think in the short term we'll continue to see that within the oncology arena -- outside of prostate cancer, which will be very exciting, but within the oncology arena.

And your next question is from Anthony Petrone from Mizuho Securities.

Thanks. And congratulation on fantastic launch of PYLARIFY and all success here and obviously it’s reflected in valuation as well as it should be so congratulation to you and the team. I have two on PYLARIFY and then a couple of quick follow-ups. Just to start on PYLARIFY, one would be to just walk through the diversion of ordering patterns across the 900 active accounts. So what would you consider a high-volume account when you consider, for instance, monthly orders, and then what is the average across the 900? So that would be the first question. And then, at the analyst day, we heard of previously untreatable patients moving to curative therapies with PYLARIFY, right? And so they've actively diagnosed prostate cancer or a recurrence, so they move to a treatable therapy. Are those patients in particular being rescanned with PYLARIFY? And I'll have a couple of follow-ups.

So I'm going to answer your second question and then call Paul in for your first. I think, to the concept of what -- of patients, I don't know that I would designate that there was untreatable patients. There have always been lines of therapy available for prostate cancer patients. I think what the true innovation has been, has been the role of PSMA imaging in really helping physicians, and then in discussion with their patients, have a much clearer view to staging of that patient an early on -- be it early on or be it late stage, and now, as we've seen also with the advance of therapeutics, the response of patients. And that is an incredible insight that was not available previously and to the extent that it was not PSMA-based. And so I think that has been kind of the revelation and the innovation in the prostate cancer community. But I would not want to characterize that, from a treatment perspective, these were untreatable patients prior to that. I do think, though -- and to the point of your question, Anthony -- that these are all patient areas where PSMA imaging, we're already anecdotally hearing, is being embraced. It comes back to what Paul was explaining before. Our estimates are what they are for what we assume currently will be the number of scans used per patient, but it's the physician community who will ultimately decide how often there is good utility in imaging a patient so that they can make the most informed decision at that moment as to how to treat a patient, whether to begin the treatment, to switch a treatment or stop a treatment. And that's what I think PSMA imaging also brings as a kind of a gift of science to the prostate cancer community.

100% agree, Mary Anne. I think on that, right, the medical practice continues to evolve. We are prudent in ensuring that we can substantiate any total addressable market that we put out there. And while we continue to do surveys and understand that, we will update that as due course allows to be able to substantiate what that evolution is in terms of a scans per patient. If I go back to your first question, Anthony, I'm not going to break down specifically each of the key customers. What I would say is there's natural variability around those approximately 900 customers, with some very large institutions doing a significant number of scans. I think the key piece of the data that I would be willing to share is it's about 97%, 98% of customers are repeat orders, meaning they're ordering PYLARIFY on a repeat basis. When we think of large accounts, it's approximately 40% of our accounts -- of those 900 -- that make up about 80% of our volume. And so, if you do the math there, you can see that the normal 80:20 rule, it's a little bit more dispersed, but 40% of those accounts roughly make up 80% of the volume. And then roughly 40% have ordered more than 50 doses year-to-date through the second quarter. And so you can do the math there and see there are some very large accounts in the names that you would expect -- large academic and institutional organizations -- and then there are smaller freestanding imaging centers across the country. But that number continues to grow, and our job and the commercial team's role is to continue to educate and drive more demand to -- from those referring physicians to those institutions. And we believe there's still ample capacity not just in our ability to supply, but in terms of space on the PET/CT machines, to be able to do more PYLARIFY scans going forward.

And then a quick follow-up here. The first one is on ARROW 2 1095, the last patient in the quarter. You have a 1-year follow-up. So maybe just thoughts on timing for next year on the Phase II readout, just considering that it was staggered in terms of enrollment -- we just had last man in -- and then maybe what the Phase III protocol may or may not look like. And then the last one, for Mary Anne or Bob. So cash flow profile is dramatically improved, the CVR liability is all but satisfied here and the debt ratio is at favorable levels, and so maybe just the updated thoughts on being more aggressive here on follow-on M&A.

So, to your first question around ARROW, so it's ARROW, not ARROW 2. And yes, you're right, the patient enrollment was staggered, and when you're following for a year, that means that the information coming in -- the data for [indiscernible] patients will stagger in. So I don't have a date that I'm offering right now as to when we'll offer publicly a readout on the trial, and my answer then goes to somewhat of the same about what the Phase III protocol would be. And I think that response there is even more appropriate given what we're seeing in the market -- and this is, again, great news for all of us in the radiopharmaceutical space, but the market's evolving so rapidly around us with advent of radiopharmaceuticals and appreciation of them, I think we'd like to leave our options open as to what that means about how we'd like to structure our Phase III trial, potentially, for that asset to most uniquely and best meet the needs of the market as it's evolving. So I think you'll -- we'll wait to offer commentary there. I'm not sure -- your other question, I think you kept answering it as you were offering it. So thanks for all of the great insight into our business, and you're right, it does set us up. We -- once again, we are set, thanks to Bob and all his great work. We are set very well from a capitalization structure to pursue whatever M&A meets our strategic priorities and also meets the -- what we see as the -- kind of the tenets of our strategic plan as we go forward.

The only thing I would tack on to that is, as you point out, I mean, our liquidity position just continues to improve, and I would expect it to continue to improve from even where we are today, ending the year with significant cash balances as well as a leverage ratio that is, I think, under half a turn at this point on a net basis. And obviously we're at net cash as a company, which just provides us the flexibility to do what we need to do yet still remain conservative when it comes to overall capital structure and not having to overextend ourselves to find assets that we believe can drive future long-term growth. So I think it's -- you're spot on, and the company is going to continue to be very disciplined in its deployment of capital.

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, and have a wonderful day.