ANI Pharmaceuticals, Inc. — 2014 Form 10-K
Business context and reporting period. This filing reports the fiscal year ended December 31, 2014, not a standalone fourth quarter. ANI develops, manufactures and markets branded and generic prescription drugs, with two manufacturing facilities in Baudette, Minnesota. The 2013 comparison is affected by the June 2013 merger, while 2014 includes product acquisitions and a full year of the combined company’s operations.
Financial results and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net revenue | $56.0 million | $30.1 million |
| Operating income | $20.0 million | $0.9 million |
| Net income | $28.7 million | $0.3 million |
| Diluted EPS | $2.59 | $(0.92) |
| Cash from operating activities | $22.0 million | $(5.5) million |
- Revenue increased 86.1%. Generic product revenue was $35.9 million, branded product revenue $11.0 million, contract manufacturing $5.9 million, and contract services and other income $3.2 million.
- Cost of sales, excluding depreciation and amortization, was 20.5% of revenue versus 33.2% in 2013, implying a 79.5% gross margin on that basis. Operating margin was 35.7% versus 3.0%.
- Net income included a $9.4 million income tax benefit, primarily reflecting a $16.7 million reversal of valuation allowance on deferred tax assets. The reported 51.4% net margin therefore includes a material, non-cash tax benefit.
- Cash and cash equivalents were $169.0 million at year-end, compared with $11.1 million. Current assets were $203.5 million and current liabilities $13.2 million; working capital was approximately $190.2 million.
- Net cash used in investing activities was $35.8 million, principally for acquisitions; financing activities provided $171.7 million, primarily from equity and convertible note offerings.
- ANI issued $143.8 million of 3.0% convertible senior notes due 2019; year-end carrying value, net of discount, was $110.7 million. The notes have an initial conversion price of $69.48 per share; related hedge and warrant transactions raise the effective dilution threshold to $96.21. ANI reported no off-balance-sheet arrangements.
Material changes versus 2013
- Revenue growth was driven substantially by EEMT, whose 2014 revenue share rose to 42% from 33%. A competitor’s return to the market in 2014 reduced EEMT unit sales from the second quarter; ANI said the effect could continue in 2015. EEMT revenue also included $3.9 million of price-protection charges.
- Branded revenue increased with the acquisitions of Lithobid and Vancocin in the third quarter; these contributed $3.3 million and $4.4 million, respectively, during 2014. The company also acquired 31 Teva generic ANDAs for $12.5 million and launched Methazolamide.
- Cost of sales rose 15.0%, less than revenue growth, reflecting product mix and EEMT price increases. Depreciation and amortization increased to $3.9 million from $1.1 million, mainly due to acquired product rights and ANDAs.
- R&D expense increased 56.4% to $2.7 million. SG&A rose 9.4% to $17.9 million, including higher public-company, personnel and stock-compensation costs, partly offset by the absence of prior-year merger expenses.
Outlook, risks and unusual items
- Management stated that cash, working capital and expected operating revenue should fund requirements for at least the next 12 months. It anticipated higher R&D and SG&A to support growth and higher 2015 amortization as acquired product rights contribute a full year of expense.
- Two products marketed without approved NDAs or ANDAs—EEMT and Opium Tincture—accounted for 53% of 2014 revenue. ANI said FDA enforcement or required approval or withdrawal could materially affect results. EEMT depends entirely on imported API; Opium Tincture depends on annual DEA quota approval.
- Revenue and receivables are concentrated: three wholesalers generated 65% of 2014 revenue, and accounted for approximately 73% of net receivables at year-end. Two suppliers provided 42% of inventory purchases.
- Other significant risks include generic competition and price erosion; regulatory and manufacturing compliance; product-supply interruptions; Medicaid rebates and revenue-estimate sensitivity; and potential impairment of product rights. Lithobid and Vancocin face prescription erosion, and the Teva-licensed testosterone gel’s $9.4 million intangible asset could be impaired if it is not successfully marketed.
- ANI disclosed metoclopramide/Reglan product-liability litigation, with New Jersey cases dismissed but remaining cases unresolved and excluded from product-liability insurance coverage. A Louisiana Medicaid lawsuit relating to products from a former operation seeks unspecified damages, fines and penalties; ANI intends to defend it.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether EEMT’s competitive position, pricing and imported API supply remain sustainable, and how much revenue depends on products without FDA-approved applications.
- Whether the acquired Lithobid, Vancocin and Teva ANDA rights deliver expected sales and cash flows, including the competitive and impairment outlook.
- The assumptions behind the $16.7 million valuation-allowance reversal, deferred tax asset realization and Section 382 limits on NOL use.
- The terms, cash-service burden and potential dilution of the convertible notes, including conversion, hedge and warrant mechanics.
- The status and potential financial exposure of the Louisiana Medicaid lawsuit and remaining metoclopramide litigation.
- The sensitivity of reported net revenue to chargebacks, rebates, returns and other estimates; ANI disclosed that a 10% change in these adjustments could affect 2014 revenue and pretax income by $4.7 million.