Lantheus Holdings, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The company develops, manufactures and commercializes diagnostic medical imaging products, including DEFINITY, TechneLite and Xenon. This unaudited report covers the quarter and six months ended June 30, 2018; financial figures below are in millions of dollars unless otherwise indicated.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $85.6 | $88.8 | $168.2 | $170.2 |
| Gross profit | $43.8 | $45.9 | $86.2 | $85.7 |
| Operating income | $15.9 | $17.9 | $31.1 | $29.8 |
| Net income | $9.7 | $13.6 | $18.0 | $17.7 |
| Diluted EPS | $0.25 | $0.35 | $0.45 | $0.46 |
| Operating cash flow | Not separately stated for quarter | $19.6 | $26.1 |
- Q2 gross margin was approximately 51.2% versus 51.7%; operating margin was 18.6% versus 20.1%; net margin was 11.4% versus 15.3%. For the six months, gross margin was 51.2% versus 50.4%, operating margin 18.5% versus 17.5%, and net margin 10.7% versus 10.4%.
- Q2 revenue fell 3.7% year over year, while six-month revenue fell 1.2%. Q2 net income declined 28.3%; six-month net income increased 1.3%.
- Six-month operating cash flow decreased to $19.6 million from $26.1 million. Capital expenditures were $7.8 million; investing cash outflow was $6.8 million and financing cash outflow was $2.5 million. Cash rose by $10.2 million to $86.5 million.
- At June 30, cash was $86.5 million and total liabilities were $357.3 million. Term-loan principal was $271.6 million; its carrying value, including current and long-term portions net of discount and issuance costs, was $267.3 million. The $75 million revolving facility had no borrowings outstanding.
- The term loan bore 5.8% interest at period-end and matures June 30, 2022; only 1% annual amortization is required, with $261.9 million of principal scheduled for 2022. The facility includes leverage covenants and customary restrictions.
Material changes and management commentary
- DEFINITY revenue increased 14.9% to $46.1 million in Q2 and 16.6% to $90.8 million for the first half, supported by higher unit volumes. Management described DEFINITY as its fastest-growing and highest-margin commercial product.
- TechneLite revenue declined 12.1% to $23.5 million in Q2 and 16.2% to $44.9 million for the first half. Management attributed the decline mainly to reduced supply during an NTP processing-facility outage and changes in contracted customer volumes.
- Other revenue declined, in part because the prior-year period included approximately $5.0 million from GE Healthcare related to flurpiridaz F 18 development and commercialization rights. Xenon revenue also faces renewed competition: Curium resumed U.S. sales in May 2018.
- Six-month operating income improved despite lower revenue, helped by lower research and development expense and the absence of the prior-year $2.2 million debt-extinguishment loss and $1.7 million of refinancing costs. Interest expense fell $1.4 million for the first half after refinancing. Higher 2018 tax expense partly offset these improvements; the six-month effective tax rate was 25.1%, compared with 7.1%.
- Management said existing cash, operating results and revolving-credit availability should fund liquidity needs for the foreseeable future. No specific revenue, earnings or cash-flow guidance was provided.
Risks, contingencies and unusual items
- Moly supply remains fragile. NTP’s facility was offline from late November 2017 to mid-February 2018 and again from early June 2018 through the filing; the company could not meet all TechneLite demand on certain manufacturing days and could not predict when NTP would resume operations.
- JHS is the sole-source manufacturer of DEFINITY, Neurolite, Cardiolite and TechneLite evacuation vials. The company is pursuing alternative supply and manufacturing capabilities, but timing and success are uncertain.
- Other disclosed risks include DEFINITY competition and potential generic competition as exclusivities expire, Xenon competition, dependence on key customers and suppliers, clinical and regulatory development risks, reimbursement uncertainty, and substantial debt and covenant constraints.
- The company is pursuing monetary damages in arbitration against Pharmalucence regarding an unsuccessful DEFINITY manufacturing and supply arrangement; outcome and recovery are uncertain. It reported no other material ongoing litigation or regulatory proceedings.
- A $28.2 million surety bond provides required decommissioning financial assurance for the North Billerica facility. The recorded asset-retirement-obligation liability was $11.0 million; management said it does not intend to close the facility.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method and had no material financial-statement impact. The company was assessing the effect of the new lease standard, effective for it January 1, 2019.
Important facts for investors to verify
- Whether and when NTP resumes Moly processing, and whether supply constraints continue to limit TechneLite volumes.
- Whether DEFINITY growth can offset TechneLite weakness and any renewed Xenon competition or changes in customer contracts.
- Progress, cost and timing of alternative manufacturing and supply arrangements, including JHS approvals, SBL technology transfer and the North Billerica project.
- Debt repayment capacity, covenant headroom and the large term-loan maturity scheduled for 2022.
- Future tax rates and the realization of deferred tax assets, along with the outcome of the Pharmalucence arbitration.