ANI Pharmaceuticals, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated financial statements; amounts below are in millions of dollars unless noted.
Business context
ANI develops, manufactures, and markets branded and generic specialty pharmaceuticals, focusing on niche and higher-barrier products. Its two manufacturing facilities are in Baudette, Minnesota. The company filed the report on August 7, 2018.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $47.3 | $44.8 | $93.8 | $81.4 |
| Operating income | $7.3 | $7.0 | $13.8 | $11.6 |
| Net income | $2.8 | $2.7 | $5.0 | $3.8 |
| Diluted EPS | $0.23 | $0.23 | $0.42 | $0.33 |
| Operating margin | 15.3% | 15.6% | 14.7% | 14.3% |
Q2 revenue increased 5.6%; six-month revenue rose 15.2%. Growth in six-month branded sales and royalties more than offset lower generic revenue. Q2 generic and branded revenue declined 4.1% and 9.8%, respectively, while royalty and other income rose to $4.9 million, primarily from products acquired from AstraZeneca. Six-month royalty and other income was $10.6 million.
Cost of sales, excluding depreciation and amortization, was 35.1% of revenue in Q2 versus 47.2% a year earlier, and 39.8% for the six months versus 46.1%. Management attributed the six-month improvement mainly to product mix and lower sales of profit-sharing products; the comparison also included a $5.6 million cost impact from acquired Inderal XL and InnoPran XL inventory sold or written off. R&D and SG&A increased materially, and depreciation and amortization rose with acquired product rights. Interest expense increased to $3.7 million in Q2 and $7.4 million for the six months.
Operating cash flow was $31.5 million for the six months, compared with $6.5 million in 2017; management attributed the improvement principally to working-capital changes and increased sales and gross profit dollars. Investing cash outflow was $8.5 million, including $5.2 million for asset acquisitions and $3.4 million in capital expenditures. Financing cash flow was $0.9 million.
Liquidity and debt
At June 30, cash and cash equivalents were $55.0 million, up from $31.1 million at year-end; current assets were $152.4 million and current liabilities $39.7 million. The company reported $60.0 million of cash, cash equivalents, and restricted cash combined.
Debt included $143.75 million principal of 3.0% convertible notes due December 1, 2019, and a term loan with a $74.1 million balance. The notes’ net carrying value was $132.1 million; their disclosed fair value was $161.0 million. The $50 million revolving facility was undrawn. The term loan and revolver may become due by August 30, 2019 if specified conditions concerning repayment or refinancing of the notes are not met; the credit agreement’s final maturity is no later than December 2022. An April interest-rate swap hedges the term loan and provides a weighted-average fixed rate of 2.60% on the hedged borrowings. Management said available working capital, expected operating revenue, and the revolver should cover requirements for at least 12 months.
Changes, outlook, risks, and notable items
- ANI launched Cholestyramine for Oral Suspension in June and received FDA approval in April for Morphine Sulfate Oral Solution strengths of 10, 20, and 100 mg/5 mL.
- It acquired product rights and related assets from IDT Australia and Impax/Amneal for cash payments totaling $5.0 million. The Impax/Amneal purchase included $1.3 million of acquired in-process R&D, expensed during the period. Potential milestone payments include up to $10 million to Amneal and up to $40 million to Teva, subject to specified launch and competition conditions; none was recorded as a liability because the Teva milestones were not considered both estimable and probable.
- Management expected 2018 R&D, SG&A, and depreciation and amortization expenses to exceed 2017 levels. It expected to file a supplemental NDA for Cortrophin Gel by Q1 2020; commercial-scale drug-product manufacturing was intended to begin in 2018, with API validation and registration batches targeted for Q1 2019. A prior approval supplement for Vancocin oral solution was planned for September 2018. These are forward-looking plans, not guaranteed outcomes.
- In August 2018, after quarter-end, ANI acquired Canadian contract development and manufacturing company WellSpring for $18.0 million, subject to customary adjustments, using cash on hand.
- Material risks include marketing EEMT and Opium Tincture without approved NDAs, FDA review of Erythromycin Ethylsuccinate (EES), and a federal investigation of the generic pharmaceutical industry. ANI received a second Major Complete Response Letter for EES on May 25, 2018 and was preparing a response. The company is also defending a Louisiana Medicaid lawsuit and an Arbor Pharmaceuticals false-advertising action; outcomes could not be predicted.
- Three customers represented 76% of Q2 revenue, and receivables from those customers were 75% of net accounts receivable. ANI also depends on single-source-qualified APIs for many products and noted import, supplier, FDA, and DEA quota risks. The filing reported no material change to the risk factors in its 2017 Form 10-K.
Important facts for investors to verify
- Progress toward refinancing or repaying the convertible notes before the credit-agreement conditions could accelerate repayment of the term loan and revolver.
- FDA developments for EES, unapproved products, and the planned Cortrophin Gel and Vancocin filings and commercialization timelines.
- Whether royalty growth and acquired-product sales can offset declining generic and certain branded sales, and how customer concentration and variable revenue allowances evolve.
- Cash generation, use of the undrawn revolver, debt-service costs, and the cash impact of the WellSpring acquisition and any contingent acquisition milestones.