ANIP
#Good morning, everyone, and welcome to ANI's Earnings Conference Call for the Third Quarter 2017.
My name is Art <UNK>.
I am the CEO, and with me today is <UNK> <UNK>, our Chief Financial Officer.
Before we begin, I want to refer everyone to the forward-looking statements language in this morning's press release and ask each of you to review it carefully as important context for this conference call.
Discussions will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles.
Reconciliation of those non-GAAP financial measures can be found in our earnings release dated today.
Today, we reported our third quarter results: record net revenues of $48.2 million, record adjusted non-GAAP EBITDA of $20.7 million and record adjusted non-GAAP net income per diluted share of $1.11, increases of 25%, 26% and 44%, respectively, as compared to the prior year.
These results are the direct result of our brand product launches of InnoPran and Inderal XL and the continued impact of generic products launched in 2016 and 2017.
Year-to-date results include net revenues of $129.6 million, adjusted non-GAAP EBITDA of $54.5 million and adjusted non-GAAP diluted earnings per share of $2.83, increases of 43%, 26% and 38%, respectively, as compared to the prior year.
As a result of these reported financial metrics, we are narrowing our annual guidance to annual net revenues of $181 million to $183 million, adjusted non-GAAP EBITDA of $74 million to $76.3 million and adjusted non-GAAP diluted earnings per share of $3.83 to $4.
The changes to guidance reflect better than previously forecast product mix and gross profit pull-through on net revenues.
Our 2 primary business platforms, generic pharmaceutical and branded pharmaceutical products, generated $30.5 million and $15.7 million in the third quarter net revenues, increases of 1% and 130%, respectively, as compared to the prior year quarter.
On an annualized basis and calculated from third quarter revenues, our generic net revenues are at an annualized run rate of $122 million and our brand net revenues are at an annualized run rate of $62.8 million.
As a result of our increased brand product net revenues as compared to generic products, cost of sales was 38% of net sales, excluding inventory step-up costs.
This is indicative of a 62% non-GAAP gross margin for the third quarter, an increase of 2 percentage points as compared to the second quarter of 2017.
In the third quarter, we launched 2 additional generic products Indapamide tablets and oxycodone hydrochloride oral solution.
These product launches increased our generic product line to 23 total products, representing 47 SKUs.
Combined with our 7 brand products, ANI now has as a total of 30 drug products in our portfolio.
For perspective, at the end of 2015, ANI had 16 drug products in our portfolio.
We continue to pursue transactions in both generics and brands to add value and scale to our existing product portfolio.
We have sufficient available capital for these opportunities.
Cortrophin gel and its recommercialization effort continues to progress.
In the third quarter, we executed a long-term commercial supply agreement with a fill/finish contract manufacturer specializing in aseptic parenteral manufacturing using mobile isolator technology.
Combined with our current relationships for raw material procurement of porcine pituitary glands and active pharmaceutical ingredient of purified corticotropin powder, we have finalized our Cortrophin gel supply chain.
We continue to advance process characterization by manufacturing intermediate scale batches used to determine ---+ used to demonstrate lot-to-lot consistency in both yield and potency.
Analytically, we continue to modernize the corticotropin characterization package by developing and implementing new and current analytical technologies that were not part of the original Cortrophin gel NDA.
These methods are being utilized throughout the API manufacturing process as a means of establishing lot-to-lot consistency and process control and demonstrating comparability to historically manufactured commercial lots of API.
Our plan is to initiate commercial scale manufacturing in early 2018.
In this press release, we have included Table 5 that is intended to provide Cortrophin recommercialization milestone updates as we advance to our supplemental NDA regulatory filing.
We are also advancing commercialization for another branded product, Vancocin oral solution.
We intend to file a prior approval supplement in the second half of 2018.
We believe the launch of this product will fulfill a currently unmet need for an FDA-approved oral dosage form of the vancomycin molecule and will compete in the market that currently exceeds $450 million annually.
I will now turn the conference call over to our CFO, <UNK> <UNK>, 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 Third Quarter 2017 Financial Results.
For the these 3 months ended September 30, 2017, ANI posted net revenues of $48.2 million, non-GAAP adjusted EBITDA of $20.7 million and non-GAAP EPS of $1.11 per diluted share.
All 3 of these metrics represent new quarterly records for the company coming off the previous records posted in the second quarter of this year.
These results continue to reflect ANI executing its strategy to broaden its portfolio in order to achieve strong contribution across multiple product lines.
Consistent with the second quarter of this year, the number of product families in our commercial portfolio that posted quarterly net revenues in excess of $1 million nearly doubled from 8 in the third quarter of 2016 to 15 in the third quarter of 2017.
Net revenues for the third quarter reached $48.2 million, representing a 25% increase from prior year and were driven by the continued execution of key 2016 and 2017 product launches and accelerating growth in our branded product portfolio.
On a sequential basis, reported net revenues increased $3.4 million or 8% from our previous quarterly record posted in the second quarter of 2017, driven by gains in our branded product portfolio.
Third quarter adjusted non-GAAP EBITDA was $20.7 million, representing a $4.3 million or 26% increase from the year ago period and representing the first time that we have posted greater than $20 million of EBITDA in a given quarter.
This result was achieved while increasing our year-over-year investment in research and development by $1.6 million as we continue to advance our Cortrophin recommercialization program and invest behind our Vancocin oral solution pipeline opportunity.
On the sequential basis, adjusted EBITDA of $20.7 million grew 8% from the second quarter of 2017.
GAAP earnings per share increased from $0.22 per diluted share in the third quarter of 2016 to $0.40 per diluted share in the current period while our adjusted non-GAAP diluted earnings per share metric increased $0.34 or 44% from prior year to $1.11 per diluted share.
Turning to the highlights of our third quarter sales performance.
Net revenues of our branded products more than doubled, increasing from $6.8 million in the third quarter of 2016 to $15.7 million in the current year period, driven by gains in our Inderal LA franchise and the addition of InnoPran XL and Inderal XL, which were introduced into our product portfolio in February of this year.
Net revenues of our generic products increased to modest $355,000 or 1% as gains from 2017 launches and certain key products were tempered by the nonrecurrence of higher launch quarter revenues of certain products that were launched in the third quarter of 2016.
Revenues from our EEMT franchise posted a second consecutive sequential quarter sales gain with revenues of $7 million, up 21% from the second quarter ---+ I'm sorry.
Yes, up 21% from the second quarter of 2017, driven by increased volume.
In addition, revenues from contract manufacturing services were up $402,000 or 28%.
Cost of sales as recorded on a GAAP basis includes $2.8 million of cost recorded due to the step-up of phases for finished goods inventory purchased in conjunction with the Inderal XL and InnoPran XL product acquisitions.
Comparatively, the third quarter of 2016 included $1.1 million of such costs associated with the inventory step-up of previous acquisitions.
Excluding these amounts, cost of goods sold represented 38% of net revenues for the third quarter of 2017 versus 40% in the year ago period.
The 2-point improvement in this metric is driven by a significant change in product mix towards sales of branded products, which generally carry higher aggregate margins as compared to our generic product lines.
Selling, general and administrative expenses were $8 million as compared to $6.9 million in the prior year, driven by employment and related costs to support the growth of our business.
SG&A as a percentage of revenues decreased approximately 1.3 points from 18% in the prior year to 16.7% in the current year, reflecting greater leverage of our employee base and business platform.
Research and development costs totaled $2.6 million in the current quarter, approaching 6% of net revenues, driven by continued momentum in our Cortrophin recommercialization program and costs incurred in conjunction with our Vancocin oral solution development program.
Our overall effective tax rate for the quarter was 26% of pretax income and included discrete benefits that were recognized in the quarter.
Excluding these amounts, our effective tax rate would've been approximately 31% for the quarter and relatively in line with the first half of 2017.
On a year-to-date basis, we have posted nearly $130 million of net revenues and $54.5 million of adjusted non-GAAP EBITDA, representing year-over-year gains of 43% and 26%, respectively.
These gains were fueled by 34% growth in generic product revenues and 78% growth in revenues of our portfolio of brands.
From the balance sheet perspective, we had unrestricted cash and cash equivalents of $18 million as of September 30, 2017, representing an increase of $9.7 million from the June 30th balance sheet.
This balance is reflective of year-to-date cash flow from operations of $23.6 million, of which approximately $17.1 million was generated in the third quarter.
Of this amount, we utilized $5 million to pay down against the $30 million of principal that we drew against our revolving credit facility to fund the Inderal XL and InnoPran XL transactions in the first quarter and an additional $2.6 million on capital expenditures.
As of the September 30th balance sheet date, we had net debt of approximately $151 million, representing just 2x net leverage utilizing estimated forward-looking full year 2017 adjusted EBITDA.
We continue to anticipate strong cash generation in the fourth quarter and are confident in our ability to fund business development activities by leveraging off the strength of our balance sheet and future earnings potential.
To reiterate Art's comments on forward-looking guidance, as we stated in our press release this morning, we are updating our full year 2017 guidance range to narrow our previously published guidance for net revenues and adjusted non-GAAP EBITDA.
We currently project full year net revenues of between $181 million and $183 million, representing a robust 41% to 42% increase over 2016 and a corresponding 21% to 25% growth in our adjusted non-GAAP EBITDA to reach between $74 million and $76.3 million.
In conjunction with this change, we are making a modest upward revision of our projected full year non-GAAP diluted earnings per share to be between $3.83 and $4 per diluted share and a favorable revision in non-GAAP cost of sales as a percentage of revenues to be between 39% and 41% of net revenues.
As Art stated, this morning's revisions to guidance reflects better than previously forecast product mix and corresponding product pull-through on net revenues.
In summary, with 9 months of 2017 behind us, we remain pleased with the results achieved to date and remain focused on continued execution of our business plan and daily operations as we look to the fourth quarter.
We are focused on continuing to deliver near-term results while investing behind our 2 exciting brand pipeline opportunities Cortrophin and Vancocin oral solution.
In addition, we remain diligent in pursuing business development opportunities in order to continue to expand our product portfolio and drive long-term value to our stakeholders.
With this, I will turn the call back to our President and CEO, Art <UNK>.
Thank you, Steve.
Nicole, we will now open the conference call to questions.
Yes.
<UNK>, thank you.
So for us specifically, pricing is product-dependent.
It is specific based on the product, the number of competitors and, obviously, our forecasted or anticipated market share.
If you ---+ if we launch a product, I think you know that we have to reduce the price in order to ---+ from its existing levels in order to capture market share.
And generics to me remain consistent with the number of competitors for that particular product.
The more competitors, the greater the price reduction.
The advent of a brand-new consortium in terms of ClarusONE, typically, you have your initial shock to the system.
They tend to do a cash grab and take money right out of your revenue base.
And what we have seen associated with that is the larger generic companies not utilizing their scale to offset that.
We view us as somewhat independent from that, in that the products that we attempt to choose and introduce, we take great pains to identify products potentially, again, that have perhaps more opportunity for gross margin.
So our gross margin on our generics remains, I think, fairly high, and we obviously try to stay away from some of those more commoditized products.
I think in terms of price stability in the marketplace, it is all dependent upon company-by-company and product-by-product specific basis.
You put out a very good report from time-to-time, <UNK>, that talks more to the macro environment.
But the macro environment for generics is always downward and is always dependent upon future growth for a company based on new product ---+ new generic product introductions, because we model in year-to-year, just as a placeholder, a 5% reduction year-over-year for our existing products just based on the nature of the competitive business that generic pharmaceuticals represent.
We have tried also, as you can tell, to mitigate or offset some of the volatility associated with generics by moving the company into brands, and you now see that our branded franchise is representative of, obviously, higher-margin products, substantial cash flow and continues to grow.
We've built that branded franchise through acquisition, and we intend to continue to do so.
But we also have in our pipeline 2 very, very important products, 2 branded products in Cortrophin and Vancocin that potentially represent significant growth to the company in the near term.
And so that's essentially how we view the landscape at this moment in time associated with generic pricing and how it has affected ANI and how we have also focused much of our efforts towards branded portfolio products as well.
All right.
I see.
Thanks for the question, <UNK>.
It's a good one.
And before I answer it, let me give a shout out to our VP of Business Development, and his name is Rob Schrepfer.
And he has found many of these assets for us in unsolicited transaction, and they have led to a significant amount of growth above and beyond what we might have anticipated initially in modeling out some of these assets that we acquired.
He continues to look for us, for strategic opportunities in both generics and brand.
We see a blended sort of hybrid model here, where we're not just primarily a generic pharmaceutical company anymore.
But we obviously are morphing into more of a hybrid model between those 2 segments.
So I can tell you that he's active in both spaces.
And for smaller companies like us, as larger companies rationalize out small gross profit contributors, lot of work to maintain the supply chain, products eat up manufacturing capacity for them, as they make way for newer, maybe more lucrative product introductions, those smaller products represent opportunities to us, especially if the competitive environment for those smaller products shrinks.
Generic pharmaceuticals is a function of supply and demand.
The more competitors, the less the margin.
The less competitors, the higher the margin.
It's frankly that simple.
It's just capitalism at its finest in terms of the dynamics associated with the competitive landscape for each product.
So I can tell you that if we see generics that are coming to market that make opportunistic sense for our company at good multiples, I would say that we'll be front and center for those opportunities.
And the same is true of some of these branded products that we obviously look for from time to time.
So to answer your question, we see rationalization of generics out of larger generic pharmaceutical companies' product lines as a potential opportunity for a company like ANI.
So that is not ---+ the $450 million market opportunity is not specific to Vancocin oral solution, again, a product that we feel meets an unmet patient need.
That is for the entire vancomycin molecule.
That includes injections, oral capsules.
There is a compounded market for this Vancocin oral solution, and we are the RLD for this product.
Again, that's why we can file a prior approval supplement.
We acquired this dosage form from Shire in ---+ I don't want to misquote myself, but I believe it was 2014.
And so we've essentially modernized the formulation, and we feel we can bring it to market.
We believe that the product can reach peak sales for us of about $50 million on an annualized basis.
So we think it's an excellent opportunity for us.
And ---+ but that $450 million number relates to the ---+ what we feel is the entire today's market ---+ annualized market size for the vancomycin molecule.
There's ---+ <UNK>, that's ---+ there's an easy answer to that.
We are the RLD.
There is no RLD on the market.
From a GDUFA perspective, I believe the ---+ I believe it's a 6-month time line.
Yes.
So we will talk about that.
We still intend to request a meeting in the fourth quarter.
So we're in the fourth quarter now.
And that is really to present our regulatory filing plan and ---+ which encompasses process characterization, modernization of the analytics, of the NDA chemistry section.
And it's a very comprehensive document that's being compiled now by our VP of Cortrophin regulatory affairs.
So what we will do is when we have a firm date to meet with the agency ---+ I don't want to commit to this, but chances are we'll update our milestone table and announce it, okay, and go from there.
And that's how the public will get communicated to on what the date actually is.
Yes.
We tend to give our Cortrophin gel updates during earnings conference calls.
So you should expect that continuity associated with progress on that product.
I don't care.
The answer is no in terms of surprising developments, and I won't comment on any agency communication.
That's excellent question, and we are not ready to opine on 2018 at this moment, <UNK>, sorry.
It is our sort of standard operating procedure to provide next year's guidance when we announce our fourth quarter 2017 results in ---+ I believe it's April.
So it would be our next earnings conference call.
Sorry.
Go ahead, Steve.
Yes.
So we ---+ you should look for that, <UNK>, sometime in late February when we announce year-end earnings and file the 10-K.
So yes, we would expect that meeting to occur in the first quarter of 2018, okay.
We will request a meeting shortly in 2017.
But I say it would be best for us to say that meeting will occur in first quarter of 2018.
We have effectively captured share in that product.
It's growing very nicely for us since launch.
We have been helped by the fact that one of the competitors has had some supply disruptions.
And so that has allowed us to maybe step into those contracts, and it allowed us to gain some traction in terms of market share a bit quicker.
But again, it's been ---+ it was always a nice opportunity, and I think it exceeded ---+ safe to say, it's exceeded our expectations since launch.
It's a good question.
No, it's not a lot of noise.
We have been ---+ we are marketing the product.
We have had a inspection associated with that product and been granted an Establishment Inspection Report.
So they are well aware.
We've had no findings.
But they have asked us to also do a small clinical study, which we're doing and submitting to them, we believe, in February of 2018, a fasting study.
I believe it's continuing.
I think that our branded step-up of 130% increase in branded revenues is something that will continue, not at that level, but at the ---+ at least at, certainly, the annualized run rate of brands that I mentioned in my narrative.
And I'd like to thank everybody for joining and participating in ANI's Third Quarter 2017 Earnings Conference Call today.
I wish you all a good day and a nice afternoon.
Bye-bye.
Thanks, everyone.
