ANI PHARMACEUTICALS INC quarterly report, Q1 FY2018

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ANI Pharmaceuticals, Inc. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018; unaudited. ANI develops, manufactures, and markets branded and generic specialty pharmaceuticals, with manufacturing facilities in Baudette, Minnesota. Comparisons are with Q1 2017 unless stated otherwise. Amounts below are in U.S. dollars.

Financial performance and liquidity

  • Revenue: $46.5 million, up 26.9% from $36.6 million. Branded product revenue rose 106.4% to $16.6 million and royalty and other income increased to $5.7 million, primarily from acquired AstraZeneca product rights. Generic revenue declined 12.6% to $23.2 million; contract manufacturing revenue fell 47.3% to $0.9 million.
  • Profitability: Operating income was $6.5 million versus $4.6 million; operating margin improved to 14.1% from 12.7%. Net income was $2.3 million versus $1.2 million; diluted EPS was $0.19 versus $0.10. Net margin increased to 4.8% from 3.2%.
  • Costs and interest: Cost of sales was $20.7 million, or 44.5% of revenue, compared with 44.7%. Operating expenses totaled $39.9 million, including $8.2 million of depreciation and amortization. Net interest expense rose 23.9% to $3.6 million.
  • Cash flow: Operating cash flow was $22.9 million versus $6.5 million. Investing cash outflow was $2.3 million, mainly capital expenditures; financing provided $0.2 million. Capital expenditures were $2.3 million. Cash and cash equivalents increased to $52.0 million from $31.1 million; restricted cash was an additional $5.0 million.
  • Balance sheet and debt: Current assets were $143.4 million and current liabilities $39.7 million. The company reported $74.1 million outstanding on its term loan and $143.8 million principal on 3.0% convertible notes due December 2019; their net carrying value was $130.2 million. The $50 million revolving facility was undrawn. Total liabilities were $238.4 million and stockholders’ equity was $179.6 million.

Changes versus prior-year quarter

  • Revenue growth reflected the relaunch under ANI labels of Inderal XL and InnoPran XL, increased Inderal LA sales, and royalties from acquired Atacand, Atacand HCT, Arimidex, and Casodex rights. Generic sales declined, notably due to lower Fenofibrate volume and Propranolol ER pricing.
  • Cost of sales included a $5.6 million charge related to the excess of fair value over cost for acquired Inderal XL and InnoPran XL inventory sold or written off during the relaunch. Despite this item, reported cost of sales as a percentage of revenue was slightly lower year over year.
  • R&D increased 29.9% to $2.1 million, principally reflecting development work including Cortrophin gel. SG&A rose 22.8% to $9.0 million, primarily from personnel costs; depreciation and amortization increased 22.2%, partly due to acquired product rights.
  • Operating cash flow improved substantially, principally from working-capital changes and increased sales and gross profit. Q1 2017 investing outflow had included $50.8 million of product-rights acquisitions.

Outlook, risks, and notable items

  • Management said financial resources, anticipated operating revenue, and the revolving facility should cover working-capital needs for at least the next 12 months. No full-year revenue or earnings guidance was provided. ANI anticipated higher 2018 R&D, SG&A, and amortization expense than in 2017.
  • ANI was advancing Cortrophin gel redevelopment: commercial-scale API manufacturing was planned to begin in Q2 2018, with validation and registration batches targeted by year-end; commercial-scale drug-product batches were also targeted before year-end. Further FDA communications were expected in Q2. For Vancocin oral solution, ANI intended to file a prior approval supplement in the second half of 2018.
  • Subsequent to quarter-end, ANI reported FDA approval of Morphine Sulfate Oral Solution in April; acquired 23 generic-product ANDAs for $2.7 million plus a single-digit royalty; and completed an Impax product-rights transaction in May for $2.3 million upfront. The related Amneal supply arrangement could require a milestone payment of up to $10 million, subject to launch conditions. ANI also entered an interest-rate swap in April to fix the rate on its term loan.
  • Key risks include FDA/DEA regulation and approvals, competition and price erosion, reliance on single-source API suppliers and imported materials, and customer concentration: three customers accounted for 79% of Q1 revenue, and together represented 79% of receivables at quarter-end.
  • Two products marketed without FDA-approved applications, EEMT and Opium Tincture, generated $5.6 million of Q1 revenue. ANI said adverse FDA action could require approval or withdrawal and could materially reduce revenue. Certain contract-manufactured products also lack an approved application.
  • Contingencies include a Louisiana Medicaid lawsuit seeking unspecified damages and penalties; an Arbor Pharmaceuticals false-advertising and unfair-competition action; remaining metoclopramide litigation; and a federal investigation of the generic pharmaceutical industry for which the company said it was cooperating. ANI could not predict the outcome of these matters. The FDA issued a Major Complete Response Letter concerning the EES supplement; ANI submitted a response in February 2018 and received priority-review status in March.
  • ANI reported no material changes to the risk factors in its 2017 Form 10-K. It adopted the new revenue standard in January 2018 with no material financial-statement impact. Management concluded disclosure controls were effective as of March 31, 2018.

Important facts for investors to verify

  • Whether branded growth and acquired-product royalties can offset continuing generic-product pressure, and how revenue evolves after the acquired inventory write-off.
  • Cash generation quality: operating cash flow benefited from working-capital movements; assess whether it is repeatable alongside ongoing capital spending.
  • Debt refinancing or repayment plans for the $143.8 million convertible notes due December 2019, term-loan covenants and maturities, and the effect of the April interest-rate swap.
  • FDA status and timing for EES, Cortrophin gel, Vancocin oral solution, and products marketed without approved applications; assess possible revenue or cost impacts.
  • Progress and economics of the post-quarter acquisitions and product launches, including the conditional Amneal milestone, as well as outcomes of disclosed litigation and the federal investigation.