Lantheus Holdings, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Lantheus develops, manufactures and commercializes diagnostic imaging agents and products, reporting U.S. and International segments.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $331.4 million | $301.9 million |
| Gross profit / margin | $162.1 million / 48.9% | $137.8 million / 45.6% |
| Operating income / margin | $51.9 million / 15.6% | $56.6 million / 18.8% |
| Net income | $123.4 million | $26.8 million |
| Operating cash flow | $54.8 million | $49.6 million |
| Capital expenditures | $17.5 million | $7.4 million |
| Cash and cash equivalents at year-end | $76.3 million | $51.2 million |
| Long-term debt, net of discounts and costs | $265.4 million | $274.5 million |
- Revenue increased 9.8%. DEFINITY revenue rose 19.5% to $157.3 million and TechneLite rose 5.5% to $104.6 million; together they represented about 79% of revenue. Xenon increased to $31.4 million from $29.1 million, while Other revenue declined to $38.1 million from $41.9 million.
- U.S. revenue grew 12.7% to $290.0 million; International revenue declined 6.9% to $41.4 million, mainly reflecting the 2016 sale of the Australian radiopharmacy business. U.S. gross profit increased, while International gross profit fell 20.8%.
- Gross margin improved by about 3.3 percentage points. Operating income fell 8.4% as operating expenses grew 25.9%, including higher sales and marketing, R&D and G&A costs. Interest expense decreased $8.2 million following refinancing and debt repayment.
- Adjusted EBITDA, a non-GAAP measure, was $94.1 million versus $78.3 million. Management cautions that it is not a substitute for GAAP results or operating cash flow.
- Year-end current assets were $147.9 million and current liabilities $46.8 million, a current ratio of approximately 3.2. The $75 million revolving facility was undrawn. Principal debt was $272.9 million, or approximately $196.6 million net of cash; the term loan matures June 2022 and bears variable interest (5.3% at year-end).
Material changes and unusual items
- Net income includes a large, non-cash income tax benefit: the company released $141.1 million of its U.S. deferred-tax valuation allowance after concluding the assets were more likely than not realizable. This was partly offset by $45.1 million of tax expense from remeasuring deferred tax assets after the federal corporate tax rate reduction. The fourth-quarter net income of $97.1 million was substantially driven by these tax items; it is not representative of recurring operating performance.
- Operating income also reflects $5.0 million of upfront license revenue from GE Healthcare for flurpiridaz F 18. The agreement provides eligibility for up to $60 million in regulatory and sales milestones and royalties, none of which had been recognized at year-end.
- In March 2017, the company refinanced its term loan and revolving facility and repriced the facilities in November. Refinancing and related debt-extinguishment costs included $2.6 million of G&A expense and a $2.4 million debt-extinguishment loss.
- Fourth-quarter 2017 revenue was $81.2 million, compared with $74.4 million in fourth-quarter 2016; gross profit was $37.9 million versus $34.6 million.
Outlook, commentary and principal risks
- Management expects existing cash, operating results and revolver availability to fund requirements for the foreseeable future, but the filing provides no numerical revenue or earnings guidance.
- Management identified DEFINITY growth as a key opportunity. It planned two clinical trials in the second half of 2018 to pursue an additional ejection-fraction indication. The trials and any approval or commercial benefit are uncertain.
- GE Healthcare is responsible for continuing Phase 3 development and seeking approval of flurpiridaz F 18; recruitment for the next Phase 3 trial was expected to begin in the first half of 2018. Lantheus anticipated initiating a Phase 3 trial for LMI 1195 by year-end 2018.
- Supply concentration is a material operating risk: JHS is the sole-source manufacturer of DEFINITY, Cardiolite and Neurolite, while Moly supply depends on a limited number of processors. NTP was offline from late November 2017 to mid-February 2018; Lantheus reported it could not meet all TechneLite demand on certain manufacturing days, reducing revenue and cash flow. The planned additional ANSTO processing capacity was expected in the second half of 2018; SHINE supply was estimated for 2020.
- Other key risks include DEFINITY competition and potential generic entry as earlier patents expire, Xenon competition and price pressure, dependence on major radiopharmacy customers, reimbursement and regulatory changes, product safety and quality, and variable-rate debt. A 100-basis-point rate increase was estimated to add about $2.8 million to annual term-loan interest expense.
- The company reported arbitration against Pharmalucence over a DEFINITY manufacturing agreement that was never successfully implemented; the outcome and any recovery were uncertain. It reported no other material ongoing litigation or regulatory proceedings at year-end.
Important facts for investors to verify
- How much of reported earnings growth is attributable to the one-time valuation-allowance release, and what normalized tax expense may look like.
- Whether DEFINITY growth continues amid competition and the 2019 composition-of-matter patent expiration, and whether the planned clinical trials advance as expected.
- Whether Moly supply disruptions have ended, ANSTO capacity comes online as planned, and TechneLite demand can be consistently fulfilled.
- Renewal and pricing terms for major customer and supplier contracts, including Cardinal’s contract expiring in 2018 and IRE’s Moly agreement expiring in 2018.
- Debt covenant headroom, refinancing and interest-rate exposure, and the cash requirements for planned capital investment; 2017 capital expenditures more than doubled year over year.