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Edited Transcript of ANIP earnings conference call or presentation 7-Aug-19 2:30pm GMT

Q2 2019 ANI Pharmaceuticals Inc Earnings Call

LINCOLNSHIRE Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of ANI Pharmaceuticals Inc earnings conference call or presentation Wednesday, August 7, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arthur S. Przybyl

ANI Pharmaceuticals, Inc. - President, CEO & Director

* Stephen P. Carey

ANI Pharmaceuticals, Inc. - CFO & VP of Finance

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Conference Call Participants

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* Brandon Richard Folkes

Cantor Fitzgerald & Co., Research Division - Analyst

* Elliot Henry Wilbur

Raymond James & Associates, Inc., Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to ANI's Second Quarter 2019 Earnings Call. (Operator Instructions)

Please note, this call may be recorded. It is now my pleasure to turn today's program over to Mr. Arthur Przybyl. Please go ahead.

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Arthur S. Przybyl, ANI Pharmaceuticals, Inc. - President, CEO & Director [2]

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Good morning, everyone. Welcome to ANI's earnings conference call for the second quarter 2019. My name is Art Przybyl, I'm the CEO. And joining me today is Stephen Carey, our Chief Financial Officer.

Before we begin, I want to refer everyone to the forward-looking statements language in this morning's press release and ask each of you to review it carefully as important context for this conference call. Discussions will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of both non-GAAP financial measures can be found in our earnings release dated today.

Today, ANI reported second quarter 2019 results. For the second quarter, we reported net revenues of $54.4 million, an increase of 15%; and record adjusted non-GAAP EBITDA of $23.7 million, an increase of 24% over the prior year period. Adjusted non-GAAP EBITDA was 44% of net revenues. First quarter generic product revenues increased by 20% to $36.3 million as compared to the prior year period, a direct result of several generic product launches over the last several months.

During the second quarter, we received FDA approval for our Vancomycin oral solution product, and we anticipate a September launch. This product will enter the Vancomycin market that we believe exceeds $450 million in the United States, not including a substantial market for compounded product. Our excitement for the launch is based on the strength of our uniquely convenient single-bottle presentation available in 3 sizes. Our belief that this dosage form can take substantial share of a molecule that is chronically on the drug shortage list and an ongoing industry-wide shift from the use of compounded product when an Rx alternative is available. Finally, we will leverage our existing virtual marketing infrastructure to drive product awareness at launch.

Throughout the quarter, we continued our process validation effort for Cortrophin Gel. As described in the press release today, we intend to complete both raw material and finished good product process validation by the end of August. After the required 180 days stability time line is complete for all 3 batches of raw material and drug product, we intend to file the supplemental NDA for Cortrophin Gel in March 2020. After the filing, we expect to be assigned a 4-month PDUFA date as per PDUFA guidelines for supplemental new drug applications.

In today's press release, we updated our 2019 revenue guidance to be in the range of $220 million to $226 million, which represents 9% to 12% growth over 2018. We reduced our revenue guidance due to the competitive landscape for methylphenidate extended-release tablets. We reaffirmed our guidance for adjusted non-GAAP EBITDA and diluted earnings per share due to continued favorable product mix and gross profit trends. We currently have over $100 million available to continue to acquire assets that represent both immediate and future revenue and cash flow opportunities for ANI.

During the second quarter, we signed 1 new distribution agreement and acquired 7 development-stage generic products that expanded our pipeline of injectable drugs to 6. Expanding our injectable drug pipeline is an important objective for us, and we intend to continue to invest in that business platform.

ANI has grown its revenue and non-GAAP EBITDA annually since becoming a public company in 2013. We expect that trend to continue in 2019. In an increasingly competitive generic industry, we remain well positioned for future growth. Our balance sheet is not overly burdened by debt, we are levered less than 2x and our cash flow from operations remains robust. We are not partied to the 2 macro issues that plague the generic industry: the Department of Justice price collusion lawsuit and any of the opioid lawsuits and their potential for adverse-related cash settlements.

We have a near-term opportunity for a transformational blockbuster drug, Cortrophin Gel, that upon FDA approval and launch can significantly benefit ANI shareholders. ANI's launch of Cortrophin Gel will break a long-standing monopoly since we believe the drug cannot be genericized. Upon launch, our anticipated market price for Cortrophin Gel is intended to save patients, providers and the United States health care system hundreds of millions of dollars. We remain committed to that effort.

I'll now turn the conference call over to our CFO, Steve Carey, who will provide you with more details on our financial results.

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Stephen P. Carey, ANI Pharmaceuticals, Inc. - CFO & VP of Finance [3]

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Thank you, Art. Good morning to everyone on the line, and thank you for joining the call to discuss ANI's second quarter 2019 financial results. ANI continued to post strong results in the second quarter of 2019, posting 15% year-over-year net revenue growth and record quarterly adjusted net GAAP EBITDA of $23.7 million. Corresponding adjusted non-GAAP EPS was a record $1.44 per diluted share. At $54.4 million, net revenue for the 3 months ended June 30, 2019, was up $7.1 million or 15% versus prior year driven by gains in our generic pharmaceutical products and contract manufacturing categories. Revenues of our generic pharmaceutical products improved 20% from prior year to $36.3 million driven by Ezetimibe-Simvastatin, EES, Candesartan and other recently launched products as well as the incremental unit sales of Vancomycin. These gains were tempered by lower sales of EEMT, diphenoxylate atropine and Nilutamide.

Branded pharmaceutical revenues were $14 million in the quarter, an increase of 33% primarily due to sales of Arimidex and Casodex, which were launched in the ANI label in July of 2018; and Atacand and Atacand HCT, which were launched in the ANI label in October of 2018. In addition, we achieved sales gains in Inderal L.A. Gains in these products were tempered by lower unit sales of Vancocin and InnoPran XL.

Revenues for our contract manufacturing services more than doubled to $3.7 million, principally due to the impact of ANI Pharmaceuticals Canada, which was acquired in August of 2018. Royalty and other of $419,000 in the quarter declined $4.4 million driven by the aforementioned launch of Atacand, Atacand HCT, Arimidex and Casodex in the ANI label in the second half of 2018. Revenue from these products was initially recorded as royalty income, however, is now included in the net sales of branded pharmaceuticals products line. This decline was somewhat tempered by product development and laboratory services revenue from ANI Canada.

Cost of sales in the current period was $15.6 million or 29% of net revenues as compared to $16.6 million or 35% of net revenues in the prior year period. The approximate 6 point year-over-year improvement in gross margin is principally due to lower royalty expense resulting from a royalty buyout concluded in the first quarter of 2019 as well as favorable mix. Selling, general and administrative expenses were $14.2 million as compared to $10 million in the prior year driven by costs related to our new ANI Canada subsidiary, increased U.S.-based headcount and pharmacovigilance costs, higher GDUFA and PDUFA user fees paid to the U.S. FDA, higher legal fees and increased sales and marketing-related costs. Research and development costs totaled $5.8 million in the quarter and included $2.3 million in process R&D charge recorded in conjunction with our previously announced acquisition of 7 development-stage generic products from Coeptis Pharmaceuticals. This charge was added back for purpose of our non-GAAP EBITDA and EPS calculation. Organic R&D spend continues to be driven by investment behind our Cortrophin recommercialization program and work related to our underlying generic pipeline.

As it relates to taxes, during the quarter, we recognized a net $653,000 tax benefit driven by the recognition of tax assets that were previously reserved for purpose of GAAP accounting upon implementation of our ANI Canada transfer pricing agreement. This onetime benefit was excluded for the purpose of calculating adjusted non-GAAP diluted earnings per share for the quarter. Our consolidated effective tax rate, exclusive of discrete items, approximates 21% to 22%. On a GAAP basis, fully diluted earnings per share more than doubled to $0.53 per share as compared to $0.23 per share in the year ago period. This is the first quarterly period in which the calculation of our GAAP EPS includes the dilutive effect of our convertible debt. Most importantly, from an economic perspective, our shareholders are protected from equity dilution up to a share price of $96.21 due to the hedging program that the company put in place in 2014. GAAP accounting, however, requires that our diluted weighted average shares outstanding include the theoretical dilution that would occur at share prices above the $69.48 conversion price on the face of our convertible debt. The inclusion of these theoretical shares negatively impacted GAAP EPS by $0.01 in the quarter. Our adjusted non-GAAP diluted earnings per share excludes these impacts and was $1.44 per diluted share, up $0.31 or 27% from prior year.

On a year-to-date basis, we have generated $107.2 million of net revenues, $46 million of adjusted non-GAAP EBITDA and $2.75 of adjusted non-GAAP diluted earnings per share, representing year-over-year gains of 14%, 13% and 12%, respectively.

From a balance sheet perspective, we had unrestricted cash and cash equivalents of $40.6 million as of June 30, 2019. This balance is reflective of $19 million of year-to-date cash flow from operations and is net of $20.8 million of cash utilized for business development activities during the first half of the year. Total net debt as of the balance sheet date approximated $149 million, representing under 1.7x net leverage on a trailing 12-month basis and approximately 1.5 turns when utilizing the midpoint of our full year 2019 guidance. Please recall that as previously announced and discussed, we have fully committed financing in place to refinance the upcoming December 1 maturity of our $118,750,000 of convertible debt in the form of our $265 million senior secured credit facility. In addition, the $75 million revolver portion of this facility remains undrawn and coupled with our existing cash and cash flow from operations continues to provide us with flexibility in pursuing further business development transactions.

In summary, we are pleased with our second quarter and first half results, which reflect continued execution by the ANI team of our business plan for 2019. In the second half of the year, we look forward to a successful Vancomycin oral solution launch and continued success in meeting stated goals and milestones for our Cortrophin recommercialization program. We have a healthy balance sheet, strong cash flow, access to fully committed capital, which allows us flexibility as we continue to search for business development opportunities. As always, we look forward to continuing to drive long-term value for our stakeholders.

With this, I will turn the call back to our President and CEO, Art Przybyl.

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Arthur S. Przybyl, ANI Pharmaceuticals, Inc. - President, CEO & Director [4]

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Thank you, Steve. Moderator, we will now open the conference call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Elliot Wilbur with Raymond James.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [2]

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First question for yourself, Art, and Steve as well, which hit the subject of guidance. Obviously, methylphenidate market -- I remember a time when generics took 10 years to get to market. Now it seems like even I could get approval in that product. So not surprising, I guess, that it's not going to meet your revenue expectations. But the fact that took top line guidance down a little bit and have reiterated bottom line adjusted EBITDA guidance suggests there's overperformance on the rest of the portfolio. So maybe you could just talk about some of the key items that are driving that relative overperformance.

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Arthur S. Przybyl, ANI Pharmaceuticals, Inc. - President, CEO & Director [3]

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Yes. Yes, we can. First of all, we admittedly forecasted poorly for revenue guidance associated with that product, and that was just on the basis of the fact that there are far more competitors, 8 or 9 competitors in that market today, than what we anticipated at this particular point in time.

Our mix is far better. I can tell you that our profit margins on some of our generics with -- on certain products and inside of one consortium, in particular, is far greater than we anticipated. And so even though we had to guide down on our revenue numbers for methylphenidate and the related gross profit, we obviously are overachieving even with the lower revenue base in the first half of the year on our EBITDA number or gross profit number. And so our mix is much better, and we've been able to absorb the loss of revenues -- anticipated revenues, forecasted revenues for methylphenidate because of that better mix. And so that's worked out very well for us.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [4]

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Okay. And then a follow-up question for you, Art, as well. You are a master of the injectable world based on your past experience and endeavors, and obviously, you've communicated the intent to move more aggressively into that market and, of course, just recently bought in a bunch of assets. But can you talk to us a little bit about that strategy and sort of what you think near term kind of presents the best opportunities for you, whether it be pipeline ANDAs, approved products? There's capacity out there with companies that maybe don't have the ability to optimize it that might be dilutive but could be relatively inexpensive. And then couple those thoughts on the generics side with the thoughts of potentially utilizing the injectable effort and incorporating more of a 505(b)2 quasi-branded strategy.

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Arthur S. Przybyl, ANI Pharmaceuticals, Inc. - President, CEO & Director [5]

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Right. Okay. So why a pivot to -- or not a pivot, but why the expansion of our business platforms into injectables? A long time ago, when I was young, I carried a bag and I sold many injectables in the range of $5 to $10. And many of those same products today are selling in the range of $50 to $100. This was in large part due to the compliancy courage of many manufacturing facilities, I think, when Elizabeth Homburg (sic) [Margaret Hamburg] was FDA Commissioner and sort of set that market on its head. So there's certainly margin opportunities in injectables, I think, that are far greater than in, sake of argument, oral solids. So that becomes an attractive space for us.

Obviously, our first injectable product is -- will probably be our largest, and that's Cortrophin Gel. And we feel that, that's on -- we think that's getting closer, without a doubt. And so it's a natural pivot for us to potentially invest in injectable pipeline products, and that's what we're doing now. We have the experience in that marketplace, and that marketplace also is, from a contracting perspective, certainly competitive but doesn't, in my opinion, have the same level of competitiveness that has happened in oral solids due to far greater generic approvals, increased competition and the fact that there's, in essence, a 3-consortium cartel, if you want to call it that, associated with the contracting for oral solid and liquid products.

And so the hospital market is still maybe not as finite in terms of the way they contract for their business than the current oral solid market. So that is a second reason as to why this is obviously attractive.

Now your third point is well put, and that is, ultimately, we like to own brick and mortars. Steve didn't mention, we never really talk about the difference in our margins between products that we manufacture ourselves and products that we have manufactured for us. But that difference in gross profit dollars is almost representative of 100% in some cases. We get twice as much gross profit dollars for every product we manufacture ourselves than have somebody else do it for us.

So that led us to the fact that with the money we have available to us as we move into the injectable platform, we will be looking for opportunities potentially to buy brick and mortars or buy an injectable facility. We think it's important to be integrated at least into manufacturing associated with the supply chain in that business platform and in all our business platforms, which is why you saw us also go out and buy Canada for our existing generic products. And we're transferring many of our products that are manufactured in Baudette into Canada to free up capacity. So for those of you that don't know, we're now recruiting for our third shift in our Baudette, Minnesota facilities because of our increased unit volumes.

And so I hope that answers your questions as to why we like injectables. We see it as a potential for obviously expanding gross profit dollars for us in our business model. We think we can be successful, and we think there are substantial opportunities still available to companies like ourselves in the space. And obviously, it's an intended byproduct of the first injectable product we think we'll launch, which will be Cortrophin Gel.

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Elliot Henry Wilbur, Raymond James & Associates, Inc., Research Division - Senior Research Analyst [6]

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Good color. Then one final question. Actually, I want to throw you a bit of a curveball here on Cortrophin, but I know you'd be able to give a terrific response. So some recent developments in the market itself for the branded product, Acthar. Owner of that product is about to lose what looks like $125 million, $150 million book of business because they effectively have to sell in the Medicaid program at a loss. You're not encumbered by some of the structural issues that are resulting in that outcome for them. Seems like it could be a really easy win for you guys kind of out of the gate. Have you sort of thought about a strategy to kind of really go after that piece of business or sort of accelerate entry into or just pick up that Medicaid business right out of the gate?

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Arthur S. Przybyl, ANI Pharmaceuticals, Inc. - President, CEO & Director [7]

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Well, we'll think about that -- we think about our launch for Cortrophin all the time. We feel very good about the science and analytics, and finally it's about to occur in March of next year. So we definitely think about the launch. It harkens back to the comments I made that we're committed to saving the U.S. health care industry hundreds of millions of dollars on an annualized basis. It's interesting, the competitor obviously that markets Acthar, I think I read recently where they're guiding to less than $1 billion now in revenues for that product.

Our price point -- the question always is with our price point that we think will enter the market with, will that drive increased usage because it will certainly be lower than the price point for the product today. And so that will be an interesting dynamic in how that plays well with payers and obviously the Medicare system. And that remains to be seen.

For us, it is a -- we call it a blockbuster drug for us, a transformational drug for a number of reasons. We think the drug -- we still stand by the fact we think the drug could potentially drive $200 million in free cash flow for us per year. You can take a smaller number, it still is a tremendous blockbuster for us at even reduced levels from that, if one wanted to forecast something less.

We also have a slightly different investment in the product as compared to our potential competitor. They bought it for -- with a B at the end of it, billions at the end of it. And our investment in the drug is going to total our acquisition price of $75 million, sake of argument, $100 million all in to get it to filing.

So we're a very different position, and we're much a smaller company and cash flows like that are incredibly meaningful to a company like us and certainly open up additional opportunities to continue to grow through heightened transactions, and you know we've done a lot over the years. And so we like our position. And we believe that economics will continue to rule the day once we enter the marketplace for that drug. And we certainly think that it will not go unnoticed when we file our supplemental NDA with the FDA with some of the folks within that agency. And so we're very transparent in regards to our game plan.

Will it benefit ANI shareholders and investors? Absolutely, it will. But will it also benefit the United States health care system and serve to lower the health care cost and break that monopoly? It definitely will. And so we like where we're at. We're on the 5-yard line, we're going in and this has been the end of many quarters and certainly several years of development activities associated with this drug. And our excitement level couldn't be higher at this point in time.

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Operator [8]

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Your next question comes from the line of Brandon Folkes with Cantor Fitzgerald.

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Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [9]

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Firstly, I know you talked about positive margin due to mix. But one of the other generics players earlier in the week actually called out pricing pressure again in the quarter. So I was just wondering, in terms of your guidance, how do you think about pricing for the rest of the year?

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Arthur S. Przybyl, ANI Pharmaceuticals, Inc. - President, CEO & Director [10]

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Well, we factor in what we think is adequate price erosion, and we do that really at the beginning of the year. Steve does that in his model when he forecasts where we think we'll end up in the guidance that we want to set up, and that's a combination of puts and takes. And so typically, we like to think we get that right. Admittedly, with a product like methylphenidate, we did not. There are more competitors in the market than we anticipated.

Going forward, the rest of the year, we think we're in good shape. Otherwise -- we do an analysis of where we are at the end of every quarter, and that is why either to affirm, update or whatever we do with our guidance numbers, it's based on that analysis. So we see pricing for our generic products for the rest of the year to be accommodative of the fact that we can hit the guidance that we just put out in today's press release for the back half of the year.

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Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [11]

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Okay. And maybe just one follow-up on guidance. You called out methylphenidate opportunity. But when you first gave guidance for 2019, I think the generic Aggrenox opportunity was around $178 million market -- as a target market. Now I see it come down to just over $100 million. Have you made any changes around your assumptions for that product this year?

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Arthur S. Przybyl, ANI Pharmaceuticals, Inc. - President, CEO & Director [12]

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Steve, do you want to address that? Although I think we -- the revenue guidance -- I'll just say, Brandon, the revenue guidance we took down today is directly reflective of the change in the assumptions we made.

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Stephen P. Carey, ANI Pharmaceuticals, Inc. - CFO & VP of Finance [13]

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Right. So Art just spoke of the fact that we do a very detailed, essentially a bottoms-up process certainly for our revenues and gross margins on a quarterly basis, looking out for the remainder of the year. And so our guidance reflects our updated expectations across the entire portfolio. And so obviously, there's puts and takes across various products, but it's reflective of our expectations on a product-by-product basis. And obviously, we don't speak to particular sales and margin expectations at that level. But you can be assured that it reflects an updated expectation for all products.

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Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [14]

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Okay. That's very helpful. And then lastly, just on Cortrophin Gel. Art, I know you talked about economics winning at the end of the day. Just how should we think about new launch in terms of the investments needed behind it? Obviously, there is a lot of commercial infrastructure behind Acthar. So how do you think about that? Is it just a pricing play? Or would you put an element of commercial investment behind it? And then any color in terms of how you're viewing the launch in terms of should we think about it in terms of a generic launch, biosimilar or alternative brand?

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Arthur S. Przybyl, ANI Pharmaceuticals, Inc. - President, CEO & Director [15]

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Well, the second part of your question is it's an alternative brand, not a generic, plain and simple. There's a natural substance, pig pituitary drug, as I mentioned, that we feel cannot be genericized and certainly has not been to date. It's very difficult to match. It would be very difficult to get a rating on the -- generic rating on the product, an extract -- chromatograph with a natural substance pig pituitary product like this one is.

We will definitely make an investment behind the marketing effort. And so just from a macro answer today, we will have boots on the ground, we'll have a sale -- a specialized sales team, et cetera. And that's a good question for me when we file the product. And at that point in time, we'll be more prepared to talk specifically about some of our thoughts and plans associated with the overall marketing program for the drug.

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Operator [16]

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I would now like to turn the call over -- back over to Arthur Przybyl for any closing remarks.

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Arthur S. Przybyl, ANI Pharmaceuticals, Inc. - President, CEO & Director [17]

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I'd like to thank everybody for attending our earnings conference call today. Wish you all a good day. We'll speak to you next quarter. Bye-bye.

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Operator [18]

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Thank you. This concludes ANI's Second Quarter 2019 Earnings Call. You may now disconnect your lines at this time, and have a wonderful day.