ANI Pharmaceuticals, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited results; amounts below are in millions of dollars except per-share data.
Business context and financial performance
ANI develops, manufactures, and markets branded and generic prescription pharmaceuticals, with two manufacturing facilities in Minnesota. The company’s strategy includes growing its product portfolio through development, partnerships, and acquisitions.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net revenue | $31.3 | $19.5 | $51.9 | $38.3 |
| Operating income | $5.2 | $8.4 | $10.9 | $18.0 |
| Net income | $1.1 | $3.6 | $2.5 | $7.9 |
| Diluted EPS | $0.10 | $0.31 | $0.21 | $0.68 |
| Operating margin | 16.5% | 43.1% | 20.9% | 46.9% |
| Net margin | 3.6% | 18.3% | 4.8% | 20.7% |
Revenue rose 60.6% in Q2 and 35.4% in the first half. Growth reflected higher generic sales, including Propranolol ER and Vancomycin, and branded sales following the Inderal LA launch and increased Vancocin unit sales. Lower contract services and other income—principally because royalties on the former authorized generic of Vancocin ceased—partly offset growth.
Profitability fell despite higher revenue. Cost of sales increased to 37.7% of Q2 revenue from 16.1% (29.3% versus 15.4% for the first half), reflecting product profit-sharing arrangements and $2.1 million of acquired-inventory fair-value step-up expense related to Inderal LA and Propranolol ER. Depreciation and amortization also increased substantially following acquisitions. Management said the inventory step-up will continue until the acquired Inderal LA inventory is consumed, and expects 2016 R&D, SG&A, and depreciation and amortization to exceed 2015 levels.
Cash flow, liquidity, and debt
- First-half operating cash flow was $14.3 million, compared with $2.3 million in 2015. The filing attributes the improvement principally to higher sales volume and gross profit dollars.
- Investing cash outflow was $151.6 million, primarily for the Corticotropin/Corticotropin-Zinc rights, Inderal LA, and H2-Pharma product rights, plus $5.0 million placed in restricted escrow and $2.1 million of capital expenditures. Financing cash outflow was $2.4 million, including a $2.5 million share repurchase.
- At June 30, cash and cash equivalents were $15.0 million, down from $154.7 million at year-end; restricted cash was $5.0 million. Current assets were $79.8 million and current liabilities $24.7 million.
- Convertible notes had $143.75 million principal and a $117.0 million net carrying value; their disclosed fair value was $155.4 million. The notes carry a 3.0% coupon, mature December 2019, and had a 7.8% annualized effective interest rate. First-half net interest expense was $5.6 million.
- A new $30 million asset-based revolving facility, maturing in May 2019, had no borrowings at quarter-end and $30 million of available borrowing base. It is secured by substantially all assets of the borrower and includes covenants and a conditional fixed-charge-coverage test.
Management stated that working capital, anticipated operating revenue, and the revolving facility should be sufficient for requirements for at least the next 12 months. The company may use additional equity or debt to fund future acquisitions.
Material changes, outlook, and risks
- Acquisitions drove a major expansion in intangible assets, from $66.4 million at year-end to $194.7 million at June 30. 2016 purchases included Corticotropin and Corticotropin-Zinc rights for $75 million, Inderal LA for $60 million upfront plus milestones, and H2-Pharma distribution rights for $10 million total consideration.
- Three customers accounted for 28%, 21%, and 18% of Q2 revenue; those customers collectively represented 74% of net accounts receivable at June 30. Supplier concentration and reliance on single qualified API sources create supply risks; imported API supply has previously been disrupted by FDA inspections.
- Esterified Estrogen with Methyltestosterone and Opium Tincture, which lack FDA-approved NDAs or ANDAs, generated $9.0 million of Q2 revenue and $18.0 million in the first half. The filing cautions that FDA enforcement could require approval efforts or withdrawal, with potentially material revenue effects. Certain contract-manufactured products and royalty-generating products are also marketed without approved NDAs.
- ANI disclosed a Louisiana Medicaid lawsuit concerning products sold by its former operation; damages, fines, and penalties are unspecified, and the company cannot predict the outcome. It is also involved in metoclopramide product-liability litigation in several states; the insurer has assumed the defense, but the outcome remains uncertain.
- The former CFO resigned effective May 6. Q2 included $0.9 million of stock-based compensation and $0.4 million of other transition expense under the separation agreement; management reported $1.3 million of total CFO transition-related expense in SG&A.
- The estimated annual effective tax rate was 52.8% for the first half, versus 36.9% for the first half of 2015, contributing to lower after-tax earnings. No formal revenue or earnings guidance was provided.
- Management reported disclosure controls and procedures were effective as of June 30, 2016, with no material changes to internal control over financial reporting during the quarter. It reported no material changes to the risk factors in the 2015 Form 10-K.
Important facts for investors to verify
- Whether revenue growth from recently launched and acquired products can offset elevated cost of sales, profit-sharing, amortization, and acquired-inventory charges.
- The timing and financial impact of consuming the Inderal LA acquired inventory, and the assumptions behind acquisition valuations and future milestone or royalty obligations.
- The continuing regulatory status and revenue exposure of unapproved products, including possible FDA action and any effects on contract customers.
- Customer and API supplier concentration, availability of DEA quotas for controlled-substance products, and potential supply interruptions.
- Liquidity following the acquisitions, the borrowing-base availability and covenant conditions of the revolver, and the company’s ability to meet note obligations and fund further acquisitions.
- Developments in the Louisiana Medicaid and metoclopramide litigation, as well as the effects of the elevated estimated tax rate and high customer receivable concentration.