ANI Pharmaceuticals, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Comparisons are with the three months ended March 31, 2014, unless otherwise stated. Financial amounts are in U.S. dollars; figures below are in millions except per-share data.
Business context
ANI develops, manufactures and markets branded and generic prescription pharmaceuticals. It operates two manufacturing facilities in Baudette, Minnesota, and targets specialty products including narcotics, oncolytics, hormones and steroids, and complex formulations. Its strategy includes developing products and acquiring product rights.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net revenue | $18.8 | $10.9 |
| Operating income | $9.6 | $3.5 |
| Operating margin | 50.9% | 32.1% |
| Interest expense, net | $2.7 | — |
| Income before taxes | $6.9 | $3.5 |
| Income tax provision | $2.5 | $0.2 |
| Net income | $4.4 | $3.4 |
| Net margin | 23.2% | 30.8% |
| Basic and diluted EPS | $0.38 | $0.33 |
| Cash from operations | $1.1 | $5.2 |
Revenue rose 72.5%. Generic product revenue increased 52.2% to $12.3 million; branded product revenue increased 451.9% to $4.3 million; contract services and other income rose 135.8% to $1.1 million; contract manufacturing fell 25.6% to $1.2 million. Cost of sales was 14.6% of revenue versus 24.1%, reflecting EEMT price increases and a favorable mix that included Lithobid and Vancocin. SG&A increased 28.3% to $4.8 million, and depreciation and amortization increased 88.8% to $1.3 million, principally with amortization of acquired product rights. The effective tax rate was 36.8%, compared with 4.6% in the prior-year quarter; the filing cites state taxes, permanent differences and prior use of net operating loss carryforwards.
Operating cash flow was $1.1 million, down from $5.2 million. Working-capital changes used $7.1 million, including a $3.8 million reduction in income taxes payable and a $3.2 million inventory increase. Investing activities used $4.6 million, primarily for a $4.5 million product-rights acquisition; financing activities provided $18,000. Cash and cash equivalents were $165.6 million at March 31, 2015, down from $169.0 million at year-end. Current assets were $203.0 million and current liabilities $9.1 million.
Total liabilities were $121.2 million, including convertible notes with a $112.2 million net carrying value and $143.8 million principal. The notes bear a 3.0% coupon, mature December 1, 2019, and had a 7.7% annualized effective interest rate. The filing reports their March 31 fair value at $165.9 million. Management stated that available working capital and anticipated operating revenue should fund requirements for at least the next 12 months. No quantified earnings or revenue guidance is provided.
Material changes and management commentary
- Growth reflected higher EEMT revenue, sales of products launched in late 2014 and early 2015, and revenue from Lithobid and Vancocin rights acquired in 2014.
- ANI acquired the Flecainide Acetate tablet ANDA from Teva in March for $4.5 million plus a percentage of future gross profits; the asset is amortized over 10 years.
- The December 2014 convertible-note offering explains new interest expense in Q1 2015. The note hedge is intended to reduce potential dilution, but warrants issued with it may dilute shares if the stock price exceeds $96.21; the conversion price is initially $69.48.
- Cash from operations declined despite higher net income, primarily because of working-capital movements. The 2014 comparison also included $46.7 million of net proceeds from an equity offering, while Q1 2015 had no comparable equity proceeds.
Risks, contingencies and unusual items
- Unapproved products: EEMT and Opium Tincture are marketed without FDA-approved NDAs or ANDAs and generated $10.3 million of Q1 2015 revenue, versus $6.7 million a year earlier. The company says FDA enforcement could require approval or withdrawal, potentially materially reducing revenue or increasing costs. Certain contract-manufactured and royalty-generating products also lack FDA approval.
- Customer concentration: Three customers generated 28%, 24% and 19% of Q1 revenue; net receivables from them totaled $14.2 million.
- Supply concentration: Four suppliers accounted for approximately 62% of inventory purchases in the quarter. The company generally relies on a single qualified API source per product and cites potential import disruptions and FDA inspection delays. Opium Tincture production also depends on annual DEA API quotas.
- Legal matters: ANI is defending a Louisiana Medicaid lawsuit concerning products from a former operation; potential damages, penalties and fines could be material, and the outcome is uncertain. It also faces metoclopramide/Reglan product-liability litigation; its insurance policy excludes related claims.
- Other uncertainty: Results depend on regulatory approvals, product development, competition, pricing and execution of acquisitions. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Exposure to potential FDA action on unapproved products and the share of revenue dependent on them.
- Sustainability of revenue growth and margins, including product-level contributions and customer concentration.
- Cash conversion and working-capital needs, especially inventory growth and tax payments.
- Convertible-note terms, fair value, cash-settlement exposure, and potential dilution from conversion and warrants.
- Developments in the Louisiana Medicaid and metoclopramide litigation, and continued API supply and DEA quota access.