ANI Pharmaceuticals, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results compared with the corresponding 2016 periods. Amounts are in millions of dollars except per-share data.
Business context
ANI develops, manufactures, and markets branded and generic specialty pharmaceuticals, with a focus on niche and complex products. Its two manufacturing facilities are in Baudette, Minnesota. Growth strategy includes product development and acquisitions.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $48.2 | $38.5 | $129.6 | $90.4 |
| Operating income | $9.3 | $7.9 | $21.0 | $18.8 |
| Operating margin | 19.3% | 20.6% | 16.2% | 20.8% |
| Net income | $4.7 | $2.5 | $8.6 | $5.0 |
| Diluted EPS | $0.40 | $0.22 | $0.73 | $0.43 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $23.6 | $15.4 |
Revenue growth in Q3 was 25.0%; year-to-date growth was 43.3%. Branded pharmaceutical revenue increased 129.6% in Q3 and 77.7% year to date, led by the 2017 launches of Inderal XL and InnoPran XL. Generic revenue grew 1.2% in Q3 and 34.4% year to date. Q3 net income benefited in part from a lower effective tax rate: 25.9%, versus 49.6% in Q3 2016; year-to-date rates were 28.7% and 51.2%.
Cost of sales, excluding depreciation and amortization, was 43.8% of revenue in Q3, versus 43.2% a year earlier; year-to-date it was 45.2%, versus 35.2%. Management attributed the year-to-date increase largely to product profit-sharing and the excess of acquired inventory fair value over cost as acquired products were sold. That inventory accounting impact was $7.5 million year to date and is expected to persist until the acquired inventory is consumed. Operating margin consequently declined year to date despite higher revenue and operating income.
Cash, liquidity, and debt
At September 30, 2017, cash and cash equivalents were $18.0 million, compared with $27.4 million at year-end 2016; restricted cash was $5.0 million. Current assets were $125.6 million and current liabilities $36.4 million. Net accounts receivable was $62.2 million and inventory $38.5 million.
For the first nine months, operating activities provided $23.6 million; investing activities used $57.9 million, principally for the Inderal XL and InnoPran XL acquisitions and $6.9 million of capital spending; financing activities provided $24.9 million, principally from net line-of-credit borrowings. Cash, cash equivalents, and restricted cash decreased by $9.3 million.
Debt included $25.0 million outstanding on a revolving credit facility and $143.8 million principal on 3.0% convertible notes due December 2019. The notes’ net carrying value was $126.3 million; their disclosed fair value was $155.3 million. The credit facility was increased to $40.0 million in February 2017; $15.0 million of borrowing-base availability remained at quarter-end. Management said current working capital, expected operating revenue, and the facility should fund requirements for at least 12 months.
Material changes and management outlook
- February acquisitions of Inderal XL for $20.2 million and InnoPran XL for $30.6 million added branded products; InnoPran XL was partly financed with the credit facility.
- Research and development expense rose 153.0% in Q3 and 131.6% year to date, primarily due to Cortrophin gel re-commercialization work. Management expected R&D, SG&A, and depreciation and amortization to be higher in 2017 than in 2016.
- Management planned Cortrophin gel development batches in Q4 2017, further intermediate-scale API batches by year-end, commercial-scale API manufacturing in early 2018, and an FDA meeting on its regulatory filing plan in Q4 2017. These are plans, not assurances of approval or launch.
- For Vancocin oral solution, ANI intended to file a prior approval supplement in the second half of 2018 following formulation and manufacturing optimization.
- No specific full-year revenue or earnings guidance was provided in the supplied filing text.
Risks, contingencies, and unusual items
- On September 20, 2017, the company and certain employees were served search warrants and/or grand jury subpoenas in a federal investigation of the generic pharmaceutical industry. ANI said it was cooperating; timing and outcome were uncertain.
- ANI markets EEMT and Opium Tincture without FDA-approved applications. Together they generated $7.9 million of Q3 revenue and $20.9 million year to date. An FDA enforcement action could require approval applications or withdrawal from the market.
- ANI received a September 21, 2017 Major Complete Response Letter for its Erythromycin Ethylsuccinate supplement and was preparing a response. The product had been launched under a CBE-30 submission; the company stated it reserved its legal options.
- Other contingencies include a Louisiana Medicaid lawsuit seeking unspecified damages, fines, penalties, fees, and costs, and product-liability litigation concerning metoclopramide. Outcomes could not be predicted.
- Customer concentration is substantial: three customers represented 79% of Q3 revenue and 81% of net receivables at quarter-end. ANI also depends on suppliers, sometimes a single qualified source for an active ingredient; two suppliers represented about 40% of Q3 inventory purchases.
- On November 2, 2017, after quarter-end, ANI entered into change-in-control severance agreements with named executive officers. Qualifying terminations may trigger salary and bonus continuation, accelerated equity vesting, and other benefits.
Most important facts for investors to verify
- Whether the acquired branded products sustain revenue growth and whether margins improve as acquired inventory fair-value step-ups are worked through.
- Progress, manufacturing consistency, regulatory requirements, and timing for Cortrophin gel and Vancocin oral solution.
- FDA developments concerning EES and the company’s unapproved products, and any developments in the federal investigation or litigation.
- Receivables collection and customer concentration, supplier continuity, and the availability and cost of borrowing under the asset-based facility.
- Cash generation and debt repayment capacity ahead of the convertible notes’ December 2019 maturity.