ANI Pharmaceuticals, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; filed May 12, 2014. Unless otherwise noted, financial figures below are in U.S. dollars. The filing presents unaudited consolidated results. Following the June 2013 reverse acquisition, ANI’s historical results are the accounting predecessor’s results; 2013 per-share results are not calculable on a comparable basis.
Business context and financial performance
ANI develops, manufactures and markets branded and generic prescription pharmaceuticals, with two manufacturing facilities in Minnesota. Its strategy emphasizes niche generics and products requiring specialized manufacturing capabilities.
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net revenue | $10.9 million | $5.6 million; up 96% |
| Operating income / margin | $3.5 million / 32.1% | $0.4 million / 7.3% |
| Net income / margin | $3.4 million / 30.8% | $0.3 million / 4.7% |
| Basic and diluted EPS | $0.33 | Not calculable, due to the merger accounting |
| Cash from operations | $5.2 million provided | $0.2 million used |
| Cash from investing | $12.6 million used | $0.1 million used |
| Cash from financing | $47.7 million provided | $0.4 million provided |
Cost of sales excluding depreciation and amortization was $2.6 million, or 24.1% of revenue, versus $2.4 million, or 43.3%, a year earlier. Revenue less this cost was $8.3 million, a 75.9% margin, compared with 56.7% in Q1 2013. Selling, general and administrative expense rose 60% to $3.7 million; depreciation and amortization increased to $0.7 million from $0.1 million, largely reflecting acquired product rights. Research and development expense was $0.4 million.
Liquidity, assets and capital
Cash and cash equivalents were $51.4 million at March 31, 2014, up from $11.1 million at December 31, 2013. Current assets were $67.9 million and current liabilities $4.6 million. Total assets were $96.7 million; stockholders’ equity was $92.1 million. The balance sheet lists no debt; the company said its revolving line of credit had been repaid in 2013.
Financing cash flow primarily reflects $46.7 million in net proceeds from a March follow-on offering of 1.6 million shares. Investing cash flow includes $12.5 million paid to acquire ANDAs for 31 products from Teva. The company said available working capital and anticipated operating revenue should fund requirements for at least the next 12 months.
Material changes and management commentary
- Generic pharmaceutical revenue increased to $8.1 million from $2.7 million. Management attributed the increase mainly to higher EEMT market share and pricing after a significant competitor stopped producing the product in Q3 2013, plus gains in Opium Tincture, Metoclopramide and Fluvoxamine Maleate. Management cautioned that the reduced competition may not continue.
- Branded revenue fell 10% to $0.8 million, mainly on lower Cortenema and Reglan tablet sales. Contract manufacturing revenue declined 7% to $1.6 million, while contract services and other income rose 54% to $0.5 million, primarily from customer project milestones.
- Management cited favorable product mix, higher EEMT prices and lower Opium Tincture raw-material costs as drivers of improved cost-of-sales margin. SG&A growth reflected added personnel and costs associated with operating as a public company.
- The Teva ANDA purchase added $12.5 million of intangible assets; the company expects to amortize acquired ANDAs over useful lives averaging 10 years.
Outlook, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management’s stated liquidity outlook is that resources should be sufficient for at least 12 months. Forward-looking statements are subject to risks including competition and price erosion, product development and regulatory approvals, access to financing, supply disruptions and customer or licensee performance.
- Unapproved products: EEMT and Opium Tincture are marketed without FDA-approved NDAs or ANDAs. Combined revenue from these products was $6.7 million in Q1 2014, versus $1.5 million a year earlier. The FDA could require approval or withdrawal; ANI requested a pre-IND meeting concerning an Opium Tincture NDA. ANI reported that the FDA closed its inspection concerning Opium Tincture on April 2, 2014.
- Other unapproved products: Contract manufacturing revenue from a customer’s unapproved products was $0.4 million; related royalties were $0.1 million. Regulatory action could affect these revenues.
- Supply and customer concentration: Two suppliers accounted for 49% of inventory purchases. Three customers represented 56% of Q1 revenue, and receivables from those customers totaled $8.0 million. ANI also depends on single-source qualified APIs for many products and on DEA approval of annual Opium Tincture quotas.
- Legal matters: A BioSante-related state derivative lawsuit remained on appeal; the company said it could not estimate a possible loss and had accrued nothing. ANI also disclosed Louisiana Medicaid litigation and product-liability litigation involving Reglan/metoclopramide; outcomes and potential losses were uncertain.
- Tax attributes: The company reported a 4.6% effective tax rate for the quarter, primarily reflecting NOL use. Section 382 ownership-change limitations may restrict use of tax attributes and increase future taxes.
- Subsequent event: In April 2014, ANI agreed with Sofgen Pharmaceuticals to collaborate on development of an oral soft-gel prescription product, with milestone payments and future profit sharing; the product would require an ANDA filing.
Management reported effective disclosure controls as of March 31, 2014 and no material quarter-on-quarter change in internal control over financial reporting.
Investor verification priorities
- Determine how much Q1 revenue and profit depended on EEMT pricing and the competitor’s exit, and whether that market position persisted.
- Review FDA status and potential approval or withdrawal exposure for EEMT, Opium Tincture and customers’ unapproved products.
- Assess launch timing, development costs, competition and expected returns for the 31 Teva ANDAs.
- Monitor customer and API-supplier concentration, supply continuity and DEA quota approvals.
- Track the remaining litigation, possible losses, and the impact of Section 382 limits on NOL and tax-credit utilization.