ANI Pharmaceuticals, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Comparisons are with the corresponding 2016 periods. Amounts are in U.S. dollars.
Business context
ANI develops, manufactures, and markets branded and generic specialty pharmaceuticals, focusing on niche and higher-barrier products. In February 2017, it acquired rights and inventory for Inderal XL for $20.2 million and InnoPran XL for $30.6 million.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $44.8 million | $31.3 million | $81.4 million | $51.9 million |
| Operating income | $7.0 million | $5.2 million | $11.6 million | $10.9 million |
| Net income | $2.7 million | $1.1 million | $3.8 million | $2.5 million |
| Diluted EPS | $0.23 | $0.10 | $0.33 | $0.21 |
| Operating margin | 15.6% | 16.5% | 14.3% | 20.9% |
Q2 revenue increased 42.8%; six-month revenue increased 56.8%. Revenue growth reflected new and recently launched generic products, including Nilutamide and Erythromycin Ethylsuccinate, and branded Inderal XL and InnoPran XL. Q2 operating income rose 34.6%, but operating margin declined. Net margin was 6.0% in Q2 versus 3.6%; for the six-month periods it was 4.8% in both years.
Cost of sales, excluding depreciation and amortization, was 47.2% of Q2 revenue versus 37.7%, and 46.1% for the first half versus 29.3%. Management attributed the increase to product mix and acquired-inventory fair-value step-up costs ($3.2 million in Q2; $4.7 million for the first half), as well as higher volumes. These costs are expected to continue until the acquired inventory is consumed.
Cash flow, liquidity, and debt
- For the first half, operating cash flow was $6.5 million, down from $14.3 million; investing cash flow was negative $55.4 million, mainly for the two product acquisitions and $4.4 million of capital expenditures; financing cash flow was positive $29.9 million, principally from the revolver draw.
- Cash and cash equivalents were $8.4 million at June 30, down from $27.4 million at year-end. Restricted cash was an additional $5.0 million. Working capital was approximately $84.6 million; current assets were $112.9 million and current liabilities $28.3 million.
- Debt included $30.0 million drawn on the $40.0 million asset-based revolving facility, with $10.0 million of borrowing-base availability, and convertible notes with $143.75 million principal and $124.4 million net carrying value. Notes mature December 1, 2019 and carry a 3.0% coupon; reported effective interest rate was 7.9%. The revolver matures May 2019.
- Management said working capital, anticipated operating revenue, and the revolving facility should be sufficient for at least the next 12 months. The company may use additional debt or equity to fund future acquisitions.
Changes, outlook, and notable items
- Generic revenue grew 40.2% in Q2 and 62.6% in the first half; branded revenue grew 55.9% and 50.6%, respectively. Growth was partly offset by lower EEMT sales and lower Lithobid and Vancocin unit sales. Prior-year Vancocin revenue included $2.4 million of clinical-trial-related orders that did not recur in 2017.
- R&D increased to $2.2 million in Q2 and $3.8 million for the first half, primarily due to timing of development work, including Corticotropin re-commercialization. Management expected 2017 R&D and SG&A spending to exceed 2016 levels; depreciation and amortization was also expected to be higher following acquisitions. No numerical earnings or revenue guidance was provided.
- Two products, EEMT and Opium Tincture, are marketed without FDA-approved NDAs. They generated $6.7 million of Q2 revenue and $12.9 million for the first half, versus $9.0 million and $18.0 million, respectively, in 2016. FDA enforcement could require approval or withdrawal and materially affect revenue.
- ANI continued marketing Erythromycin Ethylsuccinate after a dispute over whether a prior-approval supplement was required. The FDA’s inspection of the Baudette facility in May 2017 resulted in no objectionable conditions or FDA-483 observations; the filing says the supplement’s action date was revised to October 2017.
- Three customers represented 79% of Q2 revenue, and those customers accounted for 82% of net accounts receivable at quarter-end. ANI also noted dependence on qualified API suppliers, including single-source suppliers for some products, and on DEA quotas for certain controlled-substance ingredients.
- Contingencies include a Louisiana Medicaid lawsuit seeking unspecified damages and penalties and remaining metoclopramide litigation in other states. The company could not assess the likely outcome of the remaining cases. ANI reported no material change to previously disclosed risk factors and said disclosure controls were effective.
Investor verification points
- Assess whether revenue growth from recent launches can offset falling EEMT sales and variable Vancocin orders, and whether the unusually high customer concentration persists.
- Track product margins as acquired inventory step-up costs run off and profit-sharing product mix changes.
- Verify revolver availability, cash conversion, and working-capital needs alongside the $143.75 million notes due in 2019 and planned acquisition spending.
- Monitor FDA decisions affecting unapproved products and the Erythromycin Ethylsuccinate supplement, as well as API sourcing and DEA quota risks.
- Follow the outcomes and potential financial exposure of the Louisiana Medicaid and remaining product-liability matters; the filing does not provide a clear quantified estimate for these exposures.