ANI Pharmaceuticals (NASDAQ:ANIP) Q1 2019 Earnings Call

0:00 Good morning, everyone, and welcome to ANI's first quarter 2019 earnings call. At this time, all participants are in listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at that time by pressing star and the number one on your touch-tone phone. If you would like to withdraw your question, press the pound key. Please note, this call may be recorded. It is now my pleasure to turn today's program over to Mr. Arthur Priswell. Please go ahead, sir.

0:30 Good morning, everyone. Welcome to ANI's earnings conference call for the first quarter of 2019. My name is Art Prisbell. I'm the president and 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 those non-GAAP financial measures can be found in our earnings release data today. Today we reported our first quarter 2019 results.

1:17 For the first quarter, ANI reported net revenues of $52.9 million, an increase of 14%, and record adjusted non-GAAP EBITDA, of $22.3 million, an increase of 3% over the prior year period. Adjusted non-GAAP EBITDA was 42% of net revenues. First quarter generic product revenues increased by 36% to $31.6 million as compared to the prior year period, a direct result of several generic product launches over the last several months. In the first quarter, research and development expenses increased by $2.3 million, an increase of 180% over the prior year period, primarily attributed to our quatropan gel re-commercialization effort, which remains on track for our targeted first quarter 2020 FDA filing.

2:14 We've assembled a library of ANDAs that can be re-commercialized through tech transfer efforts. and we anticipate several new product launches throughout the remainder of the year. And as such, today we reaffirmed our 2019 financial guidance. We have substantial firepower to pursue strategic opportunities and we intend to continue to use our cash and cash availability to partner and to acquire assets that represent future and immediate revenue and cash flow opportunities for ANI. From our perspective, there continues to exist a target-rich environment for these types of opportunities. I will now turn the conference call over to our Chief Financial Officer, Stephen Carey, who will provide you with more details on our financial results.

3:07 Thank you, Art. Good morning to everyone on the line, and thank you for joining the call to discuss ANI's first quarter 2019 financial results. We are pleased to report this morning that ANI started 2019 off on a strong note, posting 14% year-over-year net revenue growth and record quarterly adjusted non-GAAP EBITDA of $22.3 million, while significantly increasing our research and development spend. Corresponding adjusted non-GAAP EPS was $1.30 per diluted share. At $52.9 million, net revenue for the three months ended March 31, 2019 was up $6.4 million, or 14% versus prior year, driven by gains in our generic pharmaceutical products and contract manufacturing categories.

4:08 Revenues of our generic pharmaceutical products increased 36% from prior year to $31.6 million, Driven by ezetimibe simvastatin, Candisartan, and other 2018 launch products, as well as incremental sales of vancomycin. These gains were tempered by lower phenylfibrate sales, which as a third-party authorized generic is a relatively low-margin product for us. Branded pharmaceutical revenues were $17.5 million in the quarter, an increase of 6%. primarily due to sales of Atacand and Atacand HCT, which were launched in the A&I label in October of 2018, and sales of Casodex and Arimidex, which were launched in the A&I label in July of 2018.

5:05 Gains in these products were tempered by lower unit sales of Inderol LA and Inopran XL. Revenues for our contract manufacturing services more than doubled to $2.4 million, principally due to the impact of ANI Pharmaceuticals Canada, which was acquired in August of 2018. Royalty and other income was $1.3 million for the quarter, reflective of product and laboratory development services revenue from ANI Canada, Royalty income related to sales of Gilead's Yaskarta, as well as royalties related to a true-out from our former marketing partner on the authorized generic version of Bankiston.

5:55 Cost of sales in the current period was $14.7 million, or 28% of net revenues. Prior year cost of sales included $5.6 million of costs recorded due to the step-up of basis for finished goods inventory purchased in conjunction with certain acquisitions. Excluding this amount, prior year cost of sales was $15 million or 32% of net revenues. The approximate four-point year-over-year improvement in margin is principally due to lower royalty expense resulting from a royalty buyout completed in the quarter. Selling, general, and administrative expenses were $13.3 million as compared to $9 million in the prior year.

6:45 Driven by costs related to our new ANI Canada subsidiary, increased U.S.-based headcount and pharmacovigilance costs in continued support of the expansion of our commercial portfolio, higher GDUFA and PDUFA user fees paid to the U.S. FDA, higher legal costs, and increased sales and marketing-related costs. Research and development costs totaled $4.4 million in the quarter, up $2.3 million or more than double prior year levels. This increase was driven by investment behind our Cortrophin Recommercialization Program and work related to our underlying generic pipeline.

7:31 including projects acquired in our second quarter 2018 asset purchase from Amniel. Our GAAP consolidated effective tax rate for the quarter was 51% of pre-tax income as compared to 21% in the prior year period due to a valuation allowance recognized against the tax benefit generated by our Canadian subsidiary's pre-tax net loss. Our US statutory rate continues to approximate 22% and we anticipate that our GAAP effective tax rate will moderate significantly as the year progresses. On a GAAP basis, fully diluted earnings per share was $0.04 per share as compared to $0.19 per share in the year-ago period.

8:23 The year-over-year decrease was largely driven by incremental amortization on business development activity, notably a one-off charge of $6.8 million of amortization related to the aforementioned royalty buyout. Our adjusted non-GAAP diluted earnings per share was $1.30 per share, down slightly from $1.32 per share in the year-ago period, driven by the higher effective income tax rate in the current year period. From a balance sheet perspective, we had unrestricted cash and cash equivalents of $38.2 million as of March 31, 2019. This balance is reflective of $14.3 million of cash flow from operations and is net of $18.5 million of cash utilized and the related intangible assets during the quarter.

9:24 Total net debt as of the balance sheet date approximated $152 million, representing just under 1.8 times 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, in December of 2018, we entered into an amended and restated five-year senior secured credit facility for $265 million of financing with our existing syndicate of bank lenders. This transaction amended our previous $125 million facility and was specifically structured to address the December 2019 Thank you for joining us today.

10:45 This revolver portion of our 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. This morning, we also reiterate our full year 2019 guidance. While first quarter results were ahead of our internal expectations, Our current view of full-year projections remains unchanged at net revenues of $231 and $245 million, representing a 15% to 22% increase over 2018. Adjusted non-GAAP EBITDA between $95 and $105 million, reflecting a 13% to 24% growth, and adjusted non-GAAP diluted earnings per share of $5.57 and $6.21 per diluted share.

11:49 This guidance continues to reflect an anticipated full-year income tax rate of 24% and approximately 11.9 million shares outstanding. In summary, The first quarter of 2019 provides A&I a very solid base on which we plan to continue to build upon. We have exciting pipeline opportunities to add to our increasingly diverse product base, and we are working diligently to leverage new capabilities at A&I Pharmaceuticals Canada. We continue to advance Cortrophin, our transformational development asset, and importantly, we have a healthy balance sheet, strong cash flow and access to fully committed capital, which allows us flexibility as we continue to grow out the company.

12:43 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 Priswell.

12:56 Thank you, Steve. Moderator, we will now open the conference call to any questions. Thank you. At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. And your first question is from Elliot Wilber of Raymond James.

13:13 Good morning. This is Lucas Leon for Elliot. Congrats on the quarter, and I have a couple questions. So given recent competitive entries in both the What is your level of confidence in winning what you consider to be your fair share of the market?

13:35 We've launched the methylphenidate product, the two lower strengths, and we anticipate launching the two higher strength SKUs at the end of the second quarter, sake of argument, beginning of the third quarter. We've had the ability to capture, even on the two lower strengths, a targeted market share for us that we think will drive the gross profit dollars for those strengths that we anticipated. Admittedly, with additional competitors, Alvagen, Lynette's going to enter the market, I think there's going to be approximately eight competitors in methylphenidate. It's going to be a far more competitive market.

14:22 Keeping that in mind, and that's the same for aspirin dipyridamol. There'll be more competitors by the time we launch. But keeping that in mind, we forecasted for additional competition in those products as we entered those markets. And the important thing to bear in mind is that for those two products, as well as acinamide, simvastatin, and two others, we paid 2.3 million dollars. and so forth. We look at this as a substantial, a continued substantial gross profit dollar opportunity albeit at lower gross profit percentage margins. Thank you. Your next question is from Dewey Steadman of Canaccord.

15:15 Hi, guys. Thanks for taking the question. I got some gross margin questions. Obviously, it was a substantial step up. I think it was driven by a royalty buyback. Can you give us a little bit more detail on that royalty buyback, whether it was a brand or generic product, and maybe even details on the product itself? And then how should we look at gross margins throughout the year? Obviously, we've got the step up, but then we'd expect gross margins maybe to come in a bit because of the generic launches expected in the second half of the year. But just some more color there would be appreciated. Thanks.

15:47 Thank you for your question. Those generic products that we have launched from those Teva baskets. And Steve, I'll let you address the margins going forward, part of Dewey's question.

16:30 Sure thing, and good morning, Dewey. Yeah, so first quarter margins were particularly strong at essentially 72%. I would expect that to moderate slightly as the year goes on. but certainly be in say the 65 to upper 60 percentile. But I do expect it to moderate just a slight bit as the year progresses. And to your point, as generic launches come in and always predicated on a mix between brand and generic sales in any given quarter as well.

17:16 Thanks. And then there's two product related questions on the undisclosed priority review generic product. Is that a one player market that you're launching into? And then do you have any updates on timing or anything on Banco OS? Thank you.

17:33 So I will get back to you on the number of players regarding that undisclosed product. We have not really spoken publicly about that. In regards to the Vanco OS product, we are anticipating a launch in the fourth quarter of this year for that product. And it is possible that that launch can occur before that, but that launch is predicated on a FDA approval. And so currently we have a A July date associated with the FDA on that submission.

18:23 And so we are obviously hopeful that that will occur. Nevertheless, we're forecasting for a fourth quarter launch.

18:33 Great. Thank you so much.

18:35 You're welcome. Thank you. Your next question is from Brandon Foulkes of Cantor Fitzgerald.

18:41 Hi. Thanks for taking my question.

18:44 Congratulations on the quarter. On pipeline, I see this quarter you disclosed that you have 103 products in your pipeline versus 75 that you disclosed last quarter. Could you provide some color on the 28 additional products acquired? Thank you.

19:03 We bought, I think, 28 additional products in a basket. Like any basket of andas, at the time of purchase, from our perspective, three of them had significant commercial opportunities attached to them. We monitor our andabasket of products on a consistent basis because commercial opportunities can sometimes all of a sudden rear up and it's a product that maybe will find its way to a higher priority in terms of tech transfer and eventual launch of the product.

19:53 Our PD team is meeting right now. We have approximately 20 slots for some of those products and so we try to slot those products in associated with CB30 activities or supplemental ANDA filings, prior approval supplements, and then obviously rank them based on commercial opportunities associated with gross profit dollars. The important thing there is that the reason we have 20 slots open to us now for these tech transfer opportunities from this ANDA pipeline is because we purchased Canada. And so Canada now provides us with greater opportunities to launch products out of our baskets faster.

20:47 And we expect to see that ramp up over the next 24 months.

20:55 Okay, great. And then maybe just could you give us some color how you prioritize investment in commercializing those products over continued business development and growing the pipeline?

21:10 Brandon, to take your question in this manner, we don't at the company at the current time have what I would call a center for excellence. We are not a company that has invested as of the moment in developing and filing for our own andes. As you know, we have gone out and purchased and acquired a lot of our generic product opportunities through some of these and the baskets, etc. That's not to say as we grow as a company that we're not interested in either acquiring or putting together and putting in place our own center for excellence. We just don't have that at the moment today.

21:56 We have concentrated our, I'll call it our development effort on one product that has certainly been skunk works for us. All the people that are engaged in that development project, worked solely and exclusively on that project, and that's the Cortropin gel re-commercialization project. And as you can see, that's somewhere in the neighborhood of a four- to five-year project, very complex, in order to bring it to FDA filing and eventual re-commercialization. And so that's where we stand right now. So we continue to take our cash flow and our available dollars and invest it in strategic opportunities that we think will augment our product pipelines, our sales and our gross profit dollars. And so I would expect us to continue to do that for the foreseeable near future. As compared to the investment in a much higher dollar amount, associated with more traditional product development.

23:14 Okay, great. Thanks very much. You're welcome. Thank you. We have no further questions at this time. I will return the call to management for any additional or closing remarks.

23:26 Thank you, moderator. I would just like to thank everybody for attending ANI's conference call today. We're off to a solid start for 2019 and look forward to build on the first quarter momentum Thank you. This concludes ANI's first quarter 2019 earnings call. You may now disconnect your lines at this time and have a wonderful day.