ANI Pharmaceuticals, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; financial statements are unaudited. ANI develops, manufactures, and markets branded and generic specialty pharmaceuticals, with three manufacturing facilities in the U.S. and Canada.
Key financial results
Amounts in millions of dollars, except per-share data. Comparisons are with the corresponding 2018 period.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $51.3 | $50.7 | $158.6 | $144.5 |
| Operating income | $7.3 | $10.1 | $21.0 | $23.9 |
| Net income | $3.9 | $5.0 | $10.9 | $10.1 |
| Diluted EPS | $0.32 | $0.42 | $0.89 | $0.85 |
| Operating margin | 14.2% | 19.9% | 13.3% | 16.6% |
| Net margin | 7.6% | 9.9% | 6.9% | 7.0% |
- Revenue mix: Q3 generic sales rose 4.8% and branded sales rose 13.8%, while contract manufacturing fell 15.9% and royalty and other revenue declined 79.9%. For the nine months, generic sales increased 18.8%, branded sales 15.8%, and contract manufacturing 55.9%; royalty and other fell 82.8%. The royalty decline primarily reflects products transitioned to ANI’s own labels.
- Costs and earnings: Q3 cost of sales, excluding depreciation and amortization, declined 3.9% to $15.0 million; it was 29.2% of revenue versus 30.8%. For nine months, it declined 14.2% to $45.4 million and was 28.6% of revenue versus 36.6%. The 2018 comparison included $5.6 million of acquired-inventory costs that did not recur. Higher R&D, SG&A, and depreciation and amortization more than offset revenue growth, lowering operating income in both comparison periods.
- Cash flow: Nine-month operating cash flow was $40.8 million, versus $39.8 million. Investing used $26.2 million, including product-rights purchases and $4.9 million of capital expenditures; financing provided $2.0 million. Cash and cash equivalents were $59.7 million at September 30, 2019, up from $43.0 million at year-end 2018; restricted cash was an additional $5.0 million.
- Liquidity and debt: Current assets were $182.4 million and current liabilities $170.7 million. The term loan balance was $70.4 million; convertible notes had $118.75 million principal and $117.6 million net carrying value. The 3% notes matured December 1, 2019. The company had not drawn on its $118 million delayed-draw term loan, intended to repay the notes, or its $75 million revolver. Management said cash, expected operating revenue, and available credit would be sufficient for working capital and debt obligations for at least 12 months.
Material changes and notable items
- Nine-month revenue growth reflected launches and sales of generic products, branded products including Arimidex, Casodex, Atacand and Atacand HCT, and WellSpring contract manufacturing. Q3 generic growth was partly offset by weaker EEMT, diphenoxylate/atropine, and fenofibrate sales.
- In January 2019, ANI paid Teva $16.0 million to end future royalties on products associated with ten ANDAs. The transaction increased intangible assets and resulted in $6.8 million of cumulative amortization expense.
- ANI acquired 35 previously marketed generic-product ANDAs from Teva for $2.5 million and paid $2.3 million for seven development-stage products from Coeptis, recording the latter amount as R&D expense. Up to $12.0 million in Coeptis development and commercial milestone payments may be due if specified conditions are met.
- ANI launched Vancomycin Hydrochloride for Oral Solution in September and reported launching Aspirin and Extended Release Dipyridamole in October 2019.
- Interest-rate swap fair-value changes contributed to a $5.7 million nine-month other comprehensive loss, net of tax; this was not an operating expense in net income.
- The nine-month tax benefit included release of a $1.9 million valuation allowance related to ANI Canada following adoption of a transfer-pricing policy.
Outlook, risks, and contingencies
- Cortrophin: Management reported progress on commercial-scale API and gel batches, viral-clearance studies, and favorable cortisol-response study results in 20 healthy volunteers, with no adverse safety events reported. ANI remained on track to file a supplemental NDA in March 2020. The company expected R&D, SG&A, and depreciation and amortization to remain higher in 2019 than in 2018; Cortrophin pre-launch material costs were $0.2 million in Q3 and may increase.
- Ranitidine: Following the FDA’s September 2019 notice concerning NDMA impurity in some ranitidine medicines, ANI voluntarily suspended sales of its product. It had not been specifically recalled, but the company was evaluating possible impairment of the related intangible asset.
- Regulatory and supply risks: EEMT and Opium Tincture are marketed without FDA-approved applications and generated $15.5 million of nine-month revenue. ANI relies on qualified API suppliers, sometimes single-source and international, and requires DEA quotas for certain controlled-substance products. FDA action, supply interruptions, competition, or approval delays could affect sales and operations.
- Customer concentration: Three customers represented 80% of Q3 revenue, and 84% of accounts receivable at quarter-end was due from those customers.
- Legal matters: Disclosed contingencies include Louisiana Medicaid litigation, an Arbor Pharmaceuticals lawsuit, a newly served California metoclopramide-related claim, and a federal generic-drug-industry investigation with which ANI said it was cooperating. Outcomes and potential financial effects were not clearly quantifiable in the filing.
- The credit facility contains leverage and fixed-charge coverage covenants and restrictions. Its delayed-draw facility includes a subjective acceleration clause; the notes were classified as current. ANI disclosed no material changes to its previously reported risk factors.
Most important facts for investors to verify
- How ANI repaid or refinanced the $118.75 million principal of notes due December 1, 2019, and whether the delayed-draw facility’s conditions were satisfied.
- Subsequent Cortrophin regulatory progress, approval timing, commercialization costs, and potential launch economics.
- Ranitidine sales suspension, FDA findings, and any resulting impairment or other financial impact.
- Whether revenue growth and margins can be sustained as product mix changes and operating expenses rise.
- Exposure to concentrated customers, sole-source API supply, unapproved products, and the disclosed legal and regulatory matters.