LNTH
#Thank you, <UNK>, and welcome to everyone joining us today on our conference call.
Performance for the quarter was once again strong with third quarter 2017 revenue and adjusted EBITDA results, both exceeding the high end of our guidance for the quarter.
Total worldwide revenues for the quarter grew approximately 9% compared to the same period 1 year ago.
Revenue for our flagship imaging agent, DEFINITY, grew approximately 16% compared to the third quarter of 2016, as a result of higher unit volumes.
Revenue growth in our TechneLite product was approximately 7% on a year-over-year basis, while Xenon revenues for the quarter were up approximately 16% compared to the third quarter of 2016, both primarily attributable to higher volumes.
These strong revenue results during the quarter yielded over a 100% improvement in our net income and an increase of approximately 21% in our adjusted EBITDA when compared to the third quarter of 2016.
Combined with the strength of our balance sheet, these results will enable us to make additional investments in strategic initiatives in the future, while continuing to drive positive bottom line results.
I now invite Jack to provide a more detailed review of our third quarter results as well as our updated guidance for the year.
After which, I will provide an update on some recent events of note and closing comments.
Jack.
Thanks, <UNK> <UNK>, and good afternoon, everyone.
As a reminder, the tables included in today's press release include a reconciliation of our GAAP results to the as-adjusted non-GAAP performance I'll be covering with you today.
I'll begin my comments by focusing on our third quarter results as compared to the third quarter of 2016, followed by our revised full year guidance.
In the third quarter, Lantheus delivered $79.9 million in worldwide revenue, an increase of 9.4% as compared to the third quarter of 2016.
DEFINITY continued its strong performance with worldwide revenues totaling $37.7 million for the quarter, an increase of 15.7% over last year.
TechneLite revenue in the third quarter was $26.4 million, an increase of 7.4% over the prior year, while Xenon revenue for the third quarter was $7.7 million, an improvement of 15.7%.
Finally, revenue from our other product category was $8.1 million for the third quarter, down from $9.2 million 1 year ago.
Excluding the 2016 impact from our Australian radiopharmacy business, which we divested in August of 2016, as well as the impact of Hurricane Maria on our Puerto Rico operations, revenue from our other product category remained relatively flat.
Moving below the revenue line, our third quarter 2017 gross profit margin, excluding technology transfer activities, which we referred to in our reconciliations as new manufacturing costs, totaled approximately 50.2%, an increase of 300 basis points over the prior year.
This improvement was once again attributable to the increased contribution of our higher-margin products, including the impact of Xenon cost savings generated by the addition of processing and finishing capabilities at our Billerica facility late last year.
Operating expenses were $25.7 million in the third quarter of 2017, an increase of $4.1 million compared to last year.
This was largely attributable to $1.9 million in higher employee-related expenses and campus consolidation costs, as well as $1.4 million in increased sales and marketing expenses, related to the continued investment in our echo business as well as our nuclear product lines.
Operating income for the third quarter of 2017 was $12.8 million compared to $12.6 million 1 year ago.
Excluding the impact of accelerated depreciation and operating costs, adjusted operating income in the third quarter of 2017 was $13.7 million, an improvement of 13.8% compared to the prior year.
Moving below operating income, third quarter interest expense totaled $4.4 million, a 34.6% improvement over the same period a year ago, as a result of over $31 million in debt principal reduction as well as the lower interest rate of our debt as a result of our refinancing activities completed earlier this year.
Net income for the third quarter of 2017 was $8.5 million or $0.22 per diluted share compared to $4.2 million or $0.13 per diluted share for the third quarter of 2016.
Excluding accelerated depreciation and operating costs, adjusted net income for the third quarter totaled $9.4 million, an 85.1% improvement over the prior year.
Moving on to our quarter-end balance sheet, cash flow and liquidity.
As of September 30, 2017, we had cash and cash equivalents totaling $68.1 million.
Borrowing capacity under our revolving credit facility was $75 million, making our total liquidity, including cash on hand, $143.1 million, providing substantial support for our operating needs and representing a 69% improvement over last year.
Third quarter 2017 operating cash flow totaled $15.6 million compared to $15.4 million last year.
In the third quarter of 2016, operating cash flow was positively impacted by approximately $3 million due to the timing of accrued expenses incurred during the third quarter of 2016, but paid in the fourth quarter of 2016.
Capital expenditure during the third quarter of 2017 were $3.3 million compared to $2.6 million in the third quarter of 2016.
Turning to our guidance for the remainder of 2017.
Excluding the impact of the $5 million payment from GE, we are increasing our full year total revenue guidance to a range of $323 million to $325 million and our full year adjusted EBITDA guidance to a range of $86 million to $88 million.
Including the GE payment, full year revenue and adjusted EBITDA guidance ranges are $328 million to $330 million and $91 million to $93 million, respectively.
In closing, we entered the final quarter of 2017 with significant momentum as a result of our performance over the first 3 quarters of the year and look forward to a strong finish to the year.
With that, I will now turn the call back over to <UNK> <UNK>.
Thank you, Jack.
I would now like to spend a few minutes discussing some key developments that have occurred since our last earnings call.
In early July, the Centers for Medicare and Medicaid Services, or CMS, released their proposed 2018 Medicare payment rules for Hospital Outpatient Prospective Payment System, or HOPPS.
The 2018 proposed rules include significant changes to reimbursement rates for a number of procedures, including contrast-enhanced echo.
As in previous years, during the open comment period immediately following the release of the proposed rules, the medical community together with industry leaders, including Lantheus, worked to inform CMS of any unintended consequences inherent in their proposal.
The final CMS HOPPS 2018 rules were published yesterday.
On an absolute basis, CMS slightly raised reimbursement levels for both contract-enhanced echos and noncontrast-enhanced echos.
On a relative basis, these rates are consistent with 2017 rates.
Lantheus remains committed to strong advocacy for appropriate reimbursement of contrast-enhanced echo procedures as well as for the cost effectiveness of the use of imaging agents such as DEFINITY.
While on the subject of DEFINITY, during our last call last quarter, I spoke of our multifaceted next generation programs.
We are pleased to report that in October, we received approval for a new method of use patent for DEFINITY, which was listed in the Orange Book.
This patent will expire in 2037.
For competitive reasons, I will not offer any additional details at this time about our program.
I can say, however, that we continue to make good overall progress on our next generation programs, and we'll report more on that progress in early 2018.
From a worldwide perspective, our DEFINITY China program continues to advance with first patients now enrolled in both the cardiac and liver studies.
We expect enrollment in the kidney study before year-end.
Also, on our last earnings call, I shared our expectation to launch DEFINITY in Taiwan, and I am pleased to announce that we have recently filled our first customer order sale.
We continue to evaluate additional growth opportunities for DEFINITY outside of the U.S. Turning to our nuclear medicine business, we are pleased to announce the extension of our supply agreement with Cardinal Health through 2018.
We now have contracts that extend from 2018 through 2020 with 3 of our 4 major radiopharmacy customers and continue to have an active dialogue with the fourth, Triad Isotopes, for the extension of their supply contract, currently scheduled to expire at the end of 2017.
Finally, over the last few months, a number of significant weather events have impacted Florida, Puerto Rico and Texas.
We operate a radiopharmacy in San Juan, Puerto Rico, which we proactively closed for a period of time during and immediately following Hurricanes Irma and Maria.
Our primary concern was for the safety of our employees, and we are pleased to report that all of our employees are indeed safe.
Fortunately, our facility sustained only minimal external damage, and we were able to reopen not long after each of the storms.
As the region continues to recover, we believe that the number of diagnostic procedures performed in Puerto Rico will slowly return to prior levels.
Lantheus' greatest asset has always been its people.
And I would like to extend my deepest gratitude to our employees in the affected areas who demonstrated incredible leadership and resourcefulness, working tirelessly in support of our operations, customers and, ultimately, patients.
As 2017 draws to a close, we are pleased with the progress we've made to date, and I believe we are only scratching the surface of our full potential, as we seek to continue providing value to our shareholders, while advancing our strategic initiatives.
With that, I hope that everyone has a happy and healthy holiday season, and I look forward to providing our next update in early 2018.
I'll now open the call for questions.
Operator.
<UNK>, it's <UNK> <UNK>, and thank you for joining the call.
And I'll answer your question, which, again, is an opinion that I'll offer.
I would not say that there was widespread awareness at a hospital level about these rules, and I'll explain why.
These rules are included, the proposed rates, in a document that is well over 800 pages and covers every procedure that is performed in the outpatient setting.
And so if you think about a hospital and all of the other activities they undergo, I don't think there is line item detail awareness.
Having said that, there are a group of industry participants, Lantheus included, who paid very careful attention to that.
And we were very quick and active and cohesive in our communications to CMS about what we felt was appropriate reimbursement for procedures that offer valuable insight and information in the diagnostic procedures that are involved, and I think that may have been contributable to CMS' final decision.
I would say also, just for clarity, this is a process that happens every year.
So the same process that we saw this year where there is an initial announcement on proposed rates for the upcoming year, followed by a common period before the publication of final reimbursement rates, replicates on an annual basis, and we are very involved in it and very attentive to it every year.
So <UNK>, I will answer an affirmative strong yes to your question about whether we intend to continue our efforts to protect the intellectual property of DEFINITY and of the other assets that are in our next generation programs.
I think one of the demonstrations of that is this recently awarded Orange Book patent, which is a method of use patent, which dates out now to 2037, that is added to the armamentarium of patents and intellectual property that we protect for our products, and we will continue those efforts very strongly.
If you would like to ask your question more specifically about nuclear contracting, I did announce on the call that we now have an extended contract with Cardinal Health through 2018.
The fourth radiopharmacy chain customer that we historically had a relationship with, which is Triad Isotopes, their contract ---+ our current contract with them expires at the end of December.
We remain in active dialogue with them to agree to what our relationship will be in 2018.
Larry, thank you for joining.
As Jack mentioned, the impact of sales or sales loss in those areas was such that it didn't change our performance for the quarter.
And those sales ---+ those particular sales were included in our other category.
The other item that was impacting that category was the year-over-year difference that was drawn by the sale of our radiopharmacy in Australia.
As we look forward, we're certainly aware that the pace and number ---+ absolute number of medical procedures being conducted in Puerto Rico has not yet returned to pre-storms levels, but we're confident over time it will.
And as you can see with our guidance, we actually took our guidance up for the year.
So certainly, we did not see enough of an impact to have pause or cause to take our guidance down.
Are you talking about working business days.
The number of shipping business days Q4 is equal to that of Q3.
And for the business year 2017, that equals 49 for each quarter.
So Larry, there is a slight difference.
As compared year-over-year 2017 Q3 versus 2016 Q3, 2017 has 1 less shipping day.
For the same period in Q4 year-over-year, it's an equal number of shipping days, 49 in each quarter.
That's 2 different questions, Larry.
And I'll speak to them ---+ I'll make a statement that applies to both, and then I'll speak to them separately.
The statement that applies to both is that our contracting strategy and our sale strategy for our nuclear medicine products is one that's very driven ---+ very much driven on a volume margin basis.
And so we look continually at what's the best volume of those products is to flow through our campus, of course, backed by market demands, to optimize our operating costs and, therefore, the margin for those products.
I think you see some of those results through 2017 already.
And in fact 2017 volumes for both of those products are higher than the corresponding periods in 2016.
As we look out to 2018, it's not something that you'll hear me speaking to specifically other than to say our continued attention will be to margins.
Margin at above the nuclear medicine kind of products business level as well as to the company level, and our contracting efforts will reflect that.
Larry, it's Jack.
I'll take that.
And ---+ no, I mean, we'll give the guidance at our next call when we provide the full year '18 guidance.
And, obviously, the puts and takes, some of the things that have impacted our adjusted EBITDA margin is, obviously, the product mix, our continued work to get more efficiencies on our campus and then sometimes the timing of projects has led to some of that fluctuation in those quarter-over-quarter.
So we'll give more guidance on that when we address the '18 guidance.
There were changes in the terms, but it's a multiproduct contract.
So I'm not going to be specific to changes at an individual product level.
We're really pleased with the contracts.
The F18, you're right, Larry.
The F18 trial ---+ the second F18 trial is in GE Healthcare's hands, very capable hands.
And we've been very pleased with the relationship there and with the orderly, kind of, progress of not only transition of information to them, but their ability to kind of incorporate that information and move forward.
I think it's fair to say we expect to see that trial begin in Q1 of '18.
But we'll have more ---+ we'll share more information as we have it and as we gain approval from GE to share it with you because, again, that trial is in their hands.
China is something I can speak to directly because they are ---+ our trial is being conducted there.
As I mentioned, we have seen patient starts in both the cardiac and the liver studies.
And as a reminder, there are ---+ essentially there's 4 small confirmatory studies that will take place in China as part of the approval process.
And they're small, and they're confirmatory.
The 4 different studies are cardiac, and then liver and kidney because there, they split apart the, kind of, the definition of abdominal into those 2 organs.
And the fourth one is a PK study, which is also required by the ---+ one of the regulatory offices in China for what would be considered an imported drug.
Those trials are all well-defined.
We expect to see the start of the first patient in for the kidney trial as well by the end of this year.
Once they start, unlike Phase III trials in the U.S. regulatory process, these are small and confirmatory studies, so it's fair to say that they would be completed within 6 months with data fully available from them.
Yes, <UNK>.
Thanks for joining the call.
And I think your questions are really good one.
I'm really pleased to answer it.
I think we should as participants in health care delivery as well as being patients in the same health care delivery system in the United States, we should all be constantly aware that there is pressure for more efficient use of health care dollars and for demands for proof of value for the health care dollars that are spent.
And we're happy to take that challenge with our products and with the diagnostic exams that our products service.
And I think the work we did over the summer with our peers, and when I say peers here, I mean, not only the companies who are competitive in our space, but I mean, physicians from medical societies and from other parts of health care ---+ the health care delivery chain, and our collective efforts to CMS to demonstrate the value offered by the use of contract agents where needed in these medical procedures, was well heard.
And therefore, the value was held when the final rates were stated.
I would expect us to be given that challenge every year, and I see those ---+ our obligation to continually prove that the use of our products and those services deliver the value above and beyond whatever cost there is to administer it.
<UNK>, it's Jack.
I'll take that.
So as we've talked about, one of the places we've been and worked very hard to get to is a really strong liquidity position.
We do continue to have a good amount of cash in the balance sheet and the $75 million revolver gives us flexibility.
We do think the improved stock price gives us additional dry powder, if you will.
And what I can say is the business development activities are ongoing at a very good and measured pace, and we do pay attention to it.
We're not locking ourselves in any particular strategy, but we are open and focused on a number of different fronts.
I think also it's fair to say you're going to hear more about that in early '18, <UNK>.
Yes, I would say we don't really necessarily have a definitive sweet spot.
I mean, we want to be opportunistic.
I mean, I know you've heard this before so don't chuckle, but we worked very hard to get into the place we are at, and so we want to be very careful and purposeful in the deployment of that capital.
So as part of that strategy, we are evaluating a number of options, and we're not really locking ourselves into ---+ <UNK> <UNK> has talked in the past about small tuck-in acquisitions or more significant acquisitions or other partnerships.
I mean, we're really evaluating a number of things across a wide range of size, if you will.
I would also share that we have active conversations out in the marketplace ---+ out in different marketplaces, in fact, to ensure that we're thinking about all the different possibilities of what constitutes a good deal, it's not only by size, but by fit for us.
