ANI Pharmaceuticals, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. ANI develops, manufactures, and markets branded and generic specialty pharmaceuticals, with a focus on complex, niche products and contract manufacturing.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net revenue | $201.6 million | $176.8 million |
| Operating income / margin | $35.4 million / 17.6% | $28.3 million / 16.0% |
| Net income (loss) | $15.5 million | ($1.1) million |
| Diluted earnings (loss) per share | $1.30 | ($0.09) |
| Operating cash flow | $67.1 million | $39.4 million |
| Cash and cash equivalents at year-end | $43.0 million | $31.1 million |
- Revenue increased 14.0%. Branded product revenue rose 18.9% to $60.6 million, contract manufacturing rose 29.4% to $9.1 million, and generic product revenue declined 0.8% to $117.5 million. Royalty and other income was $14.5 million, primarily reflecting transition royalties on acquired products and $1.8 million of Yescarta-related royalties.
- Cost of sales excluding depreciation and amortization was 36.2% of revenue, versus 44.7% in 2017. The company attributed the improvement largely to higher royalty income, product mix, lower sales of profit-sharing products, and the absence of certain 2017 acquired-inventory costs. Research and development expense increased 69.7% to $15.4 million; SG&A increased 39.5% to $44.1 million.
- Interest expense, net, increased to $14.8 million from $12.0 million. FY 2018 included a $0.5 million loss on repurchasing convertible notes. The effective tax rate was 22.7%; FY 2017’s tax expense included a $13.4 million deferred-tax remeasurement related to the U.S. tax-rate reduction.
- Current assets were $152.9 million and current liabilities were $165.5 million; the reported working-capital ratio was 0.9. The current liabilities include $112.5 million of convertible notes, classified as current following the refinancing. Cash flow statements report $48.0 million of cash, cash equivalents, and restricted cash, including $5.0 million of restricted cash.
- Operating cash flow was $67.1 million; investing cash outflow was $27.4 million, mainly for WellSpring, product-rights acquisitions, and capital expenditures; financing cash outflow was $27.8 million, principally from the $26.1 million cash repurchase of notes.
Fourth-quarter results
Q4 2018 revenue was $57.1 million, operating income was $11.4 million, and net income was $5.4 million, compared with Q4 2017 revenue of $47.3 million, operating income of $7.4 million, and a net loss of $9.6 million. Q4 2017 net loss included the tax impact of the Tax Cuts and Jobs Act.
Material changes and financing
- ANI acquired WellSpring in August 2018 for $16.7 million after customary adjustments, paid from cash. The acquisition added a Canadian manufacturing facility, contract manufacturing business, laboratory, and workforce; WellSpring contributed $4.7 million of revenue and a $1.1 million net loss from acquisition through year-end.
- ANI launched 11 products in 2018 and reported a portfolio of 42 marketed products at year-end. Other 2018 asset purchases included generic-product ANDAs from Amneal and IDT.
- In December, ANI refinanced its credit facility. The amended facility provides for a $72.2 million secured term loan maturing in December 2023, a $75.0 million revolver, and a $118.0 million delayed-draw term loan restricted to refinancing the remaining convertible notes. Neither the revolver nor delayed-draw loan was drawn at year-end.
- ANI repurchased $25.0 million principal amount of its 3.0% convertible notes for $26.1 million including accrued interest. Remaining note principal was $118.75 million, due December 2019. The delayed-draw refinancing is subject to conditions, including restrictions tied to material adverse events. The secured facility includes financial covenants and liens on substantially all relevant domestic assets.
Outlook, risks, contingencies, and unusual items
- Management anticipated 2019 revenue increases in generic products from expected launches, branded products from a full year of 2018 launches, and contract manufacturing from a full year of ANI Canada activity. It expected royalty and other income to decline as acquired products transitioned to sales under ANI labels. Management also expected higher R&D, SG&A, and depreciation and amortization expenses. These are qualitative expectations; the filing does not provide specific 2019 revenue or earnings guidance.
- Cortrophin re-commercialization remains a significant development program. ANI completed a first commercial-scale corticotropin API batch in Q4 2018; it planned API process validation and registration-batch manufacturing in Q1 2019 and commercial-scale Cortrophin Gel validation and registration batches in Q2 2019. FDA approval of a supplemental application remains necessary before commercialization.
- EEMT and Opium Tincture are marketed without FDA-approved NDAs or ANDAs and generated combined revenue of $24.9 million in 2018, approximately 12% of total revenue. ANI cautions that FDA action or interruption of imported EEMT API supply could require approval, suspension, or withdrawal of these products.
- Three wholesalers represented approximately 81% of revenue and 81% of net accounts receivable. ANI also depends on suppliers, often a single qualified API source per product, and on annual DEA quotas for controlled-substance ingredients. DEA quota reductions in 2018 moderately reduced quotas for certain products.
- Legal matters include a Louisiana Medicaid lawsuit seeking unspecified damages and penalties, a Lanham Act false-advertising action in discovery, remaining metoclopramide cases whose outcome ANI says it cannot assess, and a federal generic-pharmaceutical-industry investigation for which ANI was cooperating. The company also described potential contingent milestone payments on certain acquired products; it had not accrued some because management considered them not both estimable and probable.
- In January 2019, ANI agreed to pay Teva $16.0 million to terminate future royalties on products associated with ten ANDAs. It also reported entering a swap for the potential delayed-draw loan in February 2019. ANI stated that cash and anticipated operating cash flows should cover needs for at least 12 months, while noting financing needs could arise if assumptions or cash requirements change.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective. The assessment excluded ANI Canada, which was being integrated after the WellSpring acquisition.
Most important facts for investors to verify
- Progress, regulatory readiness, costs, and launch timing for Cortrophin and other planned products.
- Ability to refinance or repay the $118.75 million notes due December 2019, and compliance with delayed-draw conditions and credit-facility covenants.
- Revenue exposure to unapproved products, wholesaler concentration, DEA quotas, and imported API supply.
- Whether 2019 launches and WellSpring integration deliver anticipated growth, and how rising operating expenses affect margins and cash generation.
- Developments in the disclosed lawsuits and federal investigation, plus potential acquired-product milestones and the $16.0 million Teva payment’s cash impact.