ANI Pharmaceuticals, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited consolidated results, compared with Q1 2016 unless otherwise noted. ANI develops, manufactures and markets branded and generic specialty pharmaceuticals, with a focus on niche and complex products.
Financial performance
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net revenue | $36.6 million | $20.6 million; up 78.2% |
| Operating income | $4.6 million | $5.7 million |
| Operating margin | 12.7% | 27.6% |
| Net income | $1.2 million | $1.3 million |
| Diluted EPS | $0.10 | $0.12 |
| Operating cash flow | $6.5 million | $11.0 million |
| Investing cash flow | $(53.1) million | $(85.6) million |
| Financing cash flow | $30.0 million | $(2.4) million |
Generic product revenue rose 100.5% to $26.6 million, primarily from products launched in 2016, including Propranolol ER, Nilutamide and Erythromycin Ethylsuccinate. Branded product revenue increased 43.7% to $8.0 million, reflecting Inderal LA and Q1 launches Inderal XL and InnoPran XL. Contract manufacturing revenue grew 29.6% to $1.8 million; contract services and other income declined 30.7% to $0.2 million.
Cost of sales was $16.4 million, or 44.7% of revenue, versus $3.4 million, or 16.6%. On this basis, gross margin was approximately 55.3%, down from 83.4%. The filing attributes higher cost of sales to greater sales of profit-sharing products and a $1.5 million inventory fair-value step-up expense on acquired products sold. Higher amortization also contributed to operating income falling despite revenue growth. SG&A was $7.3 million; R&D was $1.6 million; depreciation and amortization was $6.7 million. Interest expense, net, was $2.9 million.
Liquidity, debt and material changes
At March 31, 2017, cash and cash equivalents were $10.8 million, down from $27.4 million at year-end; restricted cash was a further $5.0 million. Current assets were $107.0 million and current liabilities $32.4 million. Inventory increased to $45.9 million from $26.2 million, including finished goods acquired in product-rights transactions. Total assets were $357.1 million; total liabilities were $184.9 million.
ANI drew $30.0 million on its asset-based revolving credit facility in February, increasing its commitment to $40.0 million; $30.0 million was outstanding and the reported available borrowing base was $10.0 million. Convertible notes due December 2019 had $143.75 million principal and a $122.5 million net carrying value. The notes carry a 3.0% coupon; reported annualized effective interest rate was 7.9%. Their March 31 fair value was $151.3 million.
Investing outflow chiefly reflected February cash acquisitions of Inderal XL rights and inventory for $20.2 million and InnoPran XL rights and inventory for $30.6 million, plus $2.1 million of capital expenditures. Management said operating cash flow declined year over year primarily because of increased spending to support business growth. The company stated that working capital, expected operating revenue and the revolving facility should be sufficient for at least the next 12 months.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance was provided. Management expected 2017 R&D, SG&A and depreciation and amortization expenses to exceed 2016 levels, citing product development, growth support and the recent acquisitions. It expects continued higher cost of sales associated with profit-sharing products and the acquired inventory step-up until that inventory is consumed.
- Two products, EEMT and Opium Tincture, are marketed without FDA-approved NDAs or ANDAs; their combined Q1 net revenue was $6.2 million, versus $9.0 million a year earlier. FDA enforcement or withdrawal could materially affect revenue. Certain contract-manufactured products are also unapproved; related Q1 manufacturing revenue was $0.6 million.
- ANI continued marketing Erythromycin Ethylsuccinate after the FDA, nearly four months after its CBE-30 filing, notified the company that a prior approval supplement was required. ANI disputes the notice’s timing and says its PAS had an FDA action date of June 2017.
- Risks include dependence on limited or single-source API suppliers, occasional imported-ingredient supply disruptions and DEA quotas for controlled-substance ingredients. Three customers represented 31%, 25% and 20% of Q1 revenue and 79% of net receivables at quarter-end.
- Contingencies include a Louisiana Medicaid lawsuit seeking unspecified damages, fines and costs, with potential material exposure; remaining metoclopramide litigation; and regulatory risk involving unapproved products. The filing says ANI cannot predict the outcome of the Louisiana matter or remaining cases.
- Other unusual items included $0.5 million of expenses for a proposed transaction ANI chose not to pursue, and an approximately $1.5 million acquired-inventory fair-value step-up cost. The company reported effective disclosure controls and no material change in internal control during the quarter.
Key facts for investors to verify
- Whether revenue growth from newly launched and acquired products translates into sustainable operating and net-income growth as margins normalize.
- Sales, margins and remaining inventory-related step-up costs for Inderal XL, InnoPran XL and Inderal LA, as well as performance of products subject to profit sharing.
- Liquidity and borrowing-base availability after the $30.0 million revolver draw, and the company’s capacity to service debt and fund further acquisitions.
- Regulatory developments affecting EEMT, Opium Tincture and EES, including any FDA action or PAS decision.
- Customer and API-supplier concentration, and developments in the Louisiana Medicaid litigation and remaining product-liability cases.