ANI Pharmaceuticals, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited consolidated results; financial statement amounts below are in millions of dollars unless stated otherwise. ANI develops, manufactures, and markets branded and generic specialty pharmaceuticals.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net revenue | $20.0 | $17.4 | $58.3 | $34.9 |
| Operating income | $8.5 | $8.2 | $26.4 | $9.2 |
| Net income | $4.6 | $6.7 | $12.5 | $7.7 |
| Diluted EPS | $0.39 | $0.59 | $1.07 | $0.70 |
| Operating margin | 42.3% | 47.2% | 45.4% | 26.5% |
- Revenue rose 14.9% in Q3 and 66.9% year to date. Generic product sales were $15.1 million in Q3, up 48.2%, and $41.1 million year to date, up 78.2%. Growth reflected EEMT sales, launches and price increases, as well as acquired products.
- Branded revenue fell 53.1% in Q3 to $2.3 million, mainly from lower Reglan sales and lower Lithobid and Vancocin volumes, alongside increased Medicaid utilization and rebates. Year-to-date branded revenue increased 40.9% to $8.7 million, primarily reflecting acquired Lithobid and Vancocin rights.
- Q3 net income declined despite higher revenue and operating income, principally as interest expense on convertible notes rose to $2.8 million from near zero. Year-to-date interest expense was $8.2 million. The effective tax rate was 19.4% for Q3 and 31.4% year to date, versus 18.6% and 16.9% in the comparable 2014 periods.
- Cost of sales excluding depreciation and amortization was 16.3% of revenue in Q3 and 15.7% year to date, versus 17.6% and 22.3%. Management attributed the improvement mainly to product mix and EEMT pricing. Amortization and SG&A increased, reflecting acquisitions, business development, stock compensation and personnel costs.
- Operating cash flow was $12.6 million for the first nine months, versus $11.3 million. Investing activities used $31.6 million, primarily for acquired product rights and $1.1 million of capital expenditures. Financing activities provided $0.9 million; the 2014 period included $46.7 million of public-offering proceeds.
Financial position and debt
- At September 30, cash and equivalents were $150.9 million, down from $169.0 million at December 31, 2014. Current assets were $197.5 million and current liabilities $12.2 million. Accounts receivable was $21.6 million and inventory $13.7 million, up from $17.3 million and $7.5 million, respectively, at year-end.
- Convertible notes had $143.8 million principal and a $115.2 million net carrying value. The notes bear a 3.0% coupon, mature December 2019, and have a 7.7% effective interest rate. Their disclosed fair value was $131.4 million. Bond hedge and warrant transactions were intended to reduce conversion dilution; the warrants have a $96.21 exercise price.
- Total assets were $283.3 million and stockholders’ equity $155.9 million. The company reported no off-balance-sheet arrangements.
Material developments, outlook and risks
- ANI acquired a Flecainide ANDA for $4.5 million in March and 22 generic-product ANDAs for $25.0 million in July, plus paid $1.0 million for marketing and distribution rights in August. The acquired ANDAs are amortized over ten years.
- In September, ANI agreed to acquire specified Merck NDAs, product rights and manufacturing licenses for $75.0 million cash plus a percentage of future net sales, subject to closing conditions including regulatory approvals. Closing was expected in January 2016; management anticipated using cash on hand.
- In October, the board authorized repurchases of up to $25.0 million of common stock through December 31, 2016. This is a subsequent event, not a Q3-period transaction.
- Management said available resources and anticipated operating revenue should meet working-capital needs for at least 12 months. The filing provides no quantified revenue or earnings guidance. Management expected lower Lithobid and Vancocin sales trends and Medicaid pressures to continue. ANI launched its own-label authorized generic Vancocin in November 2015.
- Regulatory exposure is material: EEMT and Opium Tincture were marketed without approved NDAs and generated $12.5 million of Q3 revenue and $33.8 million year to date. The FDA could require approval or withdrawal; the filing notes no assurance that its enforcement policy will remain unchanged. Some contract-manufactured products and royalty-generating products are also marketed without approved NDAs.
- Other risks include reliance on single-source qualified APIs, imported-material disruptions and annual DEA quota approval for Opium Tincture. Four customers accounted for 72% of Q3 revenue; receivables from those customers totaled $16.9 million.
- Contingencies include a Louisiana Medicaid lawsuit seeking unspecified damages, fines and costs, and metoclopramide/Reglan product-liability litigation. ANI said it could not predict the Louisiana case outcome or assess the likely outcome of remaining product cases.
Investor verification priorities
- Confirm the Merck transaction’s closing, approvals, funding and expected royalty economics; assess the cash impact alongside the repurchase authorization.
- Track sales, pricing, customer contracts and regulatory status of EEMT and Opium Tincture, and quantify the potential impact of any FDA action.
- Assess sustainability of generic-product growth and monitor branded-product declines, Medicaid rebates, customer concentration and chargeback/rebate accruals.
- Review cash conversion and working-capital needs, especially the increases in inventory and receivables, and the convertible notes’ cash interest, maturity and potential dilution.
- Monitor API supplier continuity, DEA quotas and the status and potential exposure of disclosed litigation.