ANI Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018. Unaudited results are compared with the corresponding 2017 periods. ANI develops, manufactures, and markets branded and generic specialty pharmaceuticals; it reported one operating segment.
Financial performance
Amounts below are in USD millions, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $50.7 | $48.2 | $144.5 | $129.6 |
| Operating income | $10.1 | $9.3 | $23.9 | $21.0 |
| Net income | $5.0 | $4.7 | $10.1 | $8.6 |
| Diluted EPS | $0.42 | $0.40 | $0.85 | $0.73 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $39.8 | $23.6 |
- Revenue increased 5.3% in Q3 and 11.5% year to date. Q3 growth reflected a sharp increase in royalty and other income and contract manufacturing, partly offset by lower branded and generic product sales. Nine-month growth was primarily driven by royalties on Atacand, Atacand HCT, Arimidex, and Casodex.
- Q3 operating margin was 19.9% versus 19.3%; net margin was 9.9% versus 9.8%. For the nine months, operating margin was 16.6% versus 16.2%; net margin was 7.0% versus 6.5%. Cost of sales excluding depreciation and amortization was 30.8% of revenue in Q3 and 36.6% year to date, compared with 43.8% and 45.2% in 2017, respectively.
- Operating income and net income rose despite increased R&D, SG&A, depreciation and amortization, and interest expense. Q3 pretax income was nearly unchanged at $6.4 million. Nine-month interest expense increased to $11.1 million from $9.0 million.
- Nine-month cash from investing activities was $27.0 million used, mainly for the WellSpring acquisition, product-asset purchases, and capital expenditures. Financing activities provided $0.1 million, including option-exercise proceeds offset by term-loan payments and other items.
Balance sheet, debt, and liquidity
- At September 30, 2018, cash and cash equivalents were $44.1 million, up from $31.1 million at December 31, 2017; restricted cash was an additional $5.0 million. Current assets were $156.8 million and current liabilities $46.9 million, implying working capital of approximately $109.9 million.
- Total assets were $439.4 million and total liabilities $247.0 million. Balance-sheet equity was $192.5 million.
- Debt carrying value was approximately $205.8 million: $134.1 million for convertible notes and $71.6 million for the term loan, including its current portion. The notes have $143.8 million principal and mature December 1, 2019. The term loan had a $73.1 million balance; the $50 million revolving facility was undrawn.
- The credit agreement may require repayment of borrowings by August 30, 2019 if specified conditions regarding repayment or refinancing of the convertible notes are not met; final maturity is no later than December 29, 2022. A swap hedges the term loan’s variable-rate exposure; management said it minimizes interest-rate volatility.
- Management said working capital, expected operating revenue, and the revolving facility should provide sufficient resources for at least the next 12 months. No off-balance-sheet arrangements were reported.
Material changes, outlook, and risks
- WellSpring acquisition: ANI acquired the Canadian contract development and manufacturing business on August 6 for estimated consideration of $17.3 million, paid from cash. It added a facility, laboratory, commercial business, and workforce. From acquisition through September 30, WellSpring generated $1.7 million revenue and a $0.2 million net loss. Purchase accounting remained preliminary; ANI cited integration and realization-of-benefits risks.
- Product and pipeline developments: ANI reported October launches of authorized generics of Atacand HCT and Brethine. Cortrophin Gel work continued; ANI said it was on track for API validation and registration-batch activity in 2019, with drug-product validation and registration batches targeted for Q2 2019. It filed a prior approval supplement for Vancocin oral solution in September 2018.
- Management expected R&D, SG&A, and depreciation and amortization to remain higher in 2018 than in 2017, reflecting pipeline work, growth support, WellSpring, and amortization of acquired product rights. It anticipated lower 2018 cash tax payments following the U.S. corporate tax-rate reduction. No numerical full-year revenue or earnings guidance was provided.
- Regulatory exposure: EEMT and Opium Tincture were marketed without FDA-approved applications and generated $6.2 million revenue in Q3 and $18.3 million in the first nine months. ANI warned that FDA action could require approval or withdrawal, materially reducing revenue or increasing costs. ANI also manufactures certain products for a customer without an approved application.
- Legal and other contingencies: Disclosed matters include a Louisiana Medicaid lawsuit, an Arbor Pharmaceuticals false-advertising and unfair-competition action, and a federal investigation of the generic drug industry for which ANI said it was cooperating. Outcomes and potential effects were uncertain. ANI stated that the FDA approved its EES prior approval supplement on November 2, 2018, after quarter-end.
- Concentration and supply risks: Three customers accounted for 35%, 23%, and 20% of Q3 revenue; together they represented 80% of accounts receivable. ANI also disclosed reliance on qualified single-source APIs for many products and that one supplier accounted for 36% of inventory purchases in Q3, excluding WellSpring inventory.
Most important facts for investors to verify
- Whether ANI can refinance or repay the convertible notes due December 2019 and satisfy the credit agreement’s repayment conditions.
- Whether WellSpring integration delivers expected manufacturing, contract-revenue, and pipeline benefits without significant additional costs.
- Progress, validation, regulatory approvals, timing, and commercial prospects for Cortrophin Gel, Vancocin oral solution, and acquired ANDAs.
- Exposure from unapproved products, the federal investigation, and pending litigation, including any subsequent developments.
- Customer and supplier concentration, receivables collection, and the adequacy of chargeback, rebate, and returns reserves.