Lantheus Holdings, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The company develops, manufactures and sells diagnostic medical imaging products, including DEFINITY, TechneLite and Xenon. Dollar amounts below are in U.S. millions unless noted.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $73.1 | $74.1 | $227.5 | $222.3 |
| Gross profit | $33.7 | $33.7 | $103.1 | $102.1 |
| Operating income | $12.6 | $13.4 | $44.4 | $30.1 |
| Net income (loss) | $4.2 | $5.4 | $21.9 | $(18.7) |
| Diluted EPS | $0.13 | $0.18 | $0.71 | $(0.83) |
- Gross margin was approximately 46.1% in Q3 (45.5% prior year) and 45.3% for nine months (45.9% prior year). Q3 operating income declined despite nearly flat gross profit; nine-month operating income benefited from $6.5 million in asset-sale gains and lower operating expenses.
- For the nine months, operating cash flow was $36.9 million, versus $9.1 million. Investing provided $5.6 million, including asset-sale proceeds, versus $8.4 million used in the prior year. Financing used $18.0 million. Cash increased $24.6 million to $53.2 million.
- At September 30, cash was $53.2 million and current assets were $110.5 million against current liabilities of $39.1 million. Term debt principal was $305.4 million ($298.2 million net carrying amount including current portion); the term-loan rate was 7.0%. Stockholders’ deficit was $121.2 million.
Changes and notable items
- Q3 revenue fell 1.4%; nine-month revenue rose 2.4%. U.S. nine-month revenue increased 8.1%, while international revenue declined 20.9%, primarily following the Canadian and Australian radiopharmacy dispositions and unfavorable currency effects.
- Q3 DEFINITY revenue increased 13.0% and TechneLite 43.6%; Xenon revenue fell 47.5%. Management attributed DEFINITY growth to higher volumes and continued market penetration, TechneLite growth mainly to customer contracts, and Xenon weakness chiefly to lower contract pricing and competition.
- The company sold its Canadian radiopharmacy-related assets for $9.0 million plus a working-capital adjustment, recording a $5.9 million gain. It sold its Australian radiopharmacy servicing subsidiary for approximately $3.0 million total proceeds and recorded a $0.6 million gain. Both sales included ongoing supply arrangements with the buyers.
- In September, the company raised $39.9 million net in a follow-on stock offering and used those proceeds plus $15.1 million of cash to prepay $55.0 million of term debt. It recorded $1.4 million in debt-retirement costs and expects the prepayment to reduce annual interest expense by approximately $3.9 million.
Outlook, risks and contingencies
- Management said existing cash, operating results and revolving-facility availability should fund liquidity needs for at least 12 months. The $50 million revolver had approximately $31.5 million of net borrowing-base availability after the letter of credit and accrued interest; borrowing capacity may be constrained by debt covenants.
- Key risks include reliance on JHS as sole-source manufacturer for several products, delayed DEFINITY technology transfer at Pharmalucence, and potential Xenon supply and demand pressures. The NRU reactor was scheduled to transition from routine isotope supply beginning November 1, 2016; the company cited alternative Moly suppliers and IRE as its Xenon source after that transition.
- Competition is increasing: Mallinckrodt had resumed U.S. Xenon sales, and Bracco’s Lumason competes with DEFINITY. Customer and group-purchasing-organization concentration, reimbursement, regulatory, product-liability, development and foreign-exchange risks also remain.
- The term facility imposes a total-net-leverage covenant, tightening from 6.0:1 through Q4 2016 to 5.5:1 in Q1–Q2 2017 and 5.0:1 thereafter. The company disclosed no material ongoing litigation or material control changes; management assessed disclosure controls as effective.
- No quantified earnings or revenue guidance was provided. The filing states that the company is seeking strategic partners for development programs, including flurpiridaz F 18.
Investor verification priorities
- Verify whether DEFINITY and TechneLite volume growth can offset Xenon’s price and competitive pressures.
- Track supply continuity at JHS, progress and timing of Pharmalucence qualification, and isotope sourcing after the NRU transition.
- Assess covenant headroom, revolver availability and cash generation relative to the substantial variable-rate debt.
- Separate recurring operating performance from the $6.5 million asset-sale gains and compare reported results with the effects of international business disposals.
- Monitor whether strategic partners advance development candidates and whether the company updates its 12-month liquidity assessment.