Lantheus Holdings, Inc. — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; quarterly figures below identify the fourth quarter. Lantheus develops, manufactures and sells diagnostic imaging products, including DEFINITY ultrasound contrast and radiopharmaceutical products TechneLite and Xenon. It reports U.S. and International segments. In 2016, it sold its Canadian radiopharmacy and Gludef business and its Australian radiopharmacy servicing subsidiary.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $301.9 million | $293.5 million |
| Gross profit / margin | $137.8 million / 45.7% | $135.5 million / 46.2% |
| Operating income / margin | $56.6 million / 18.7% | $42.5 million / 14.5% |
| Net income (loss) | $26.8 million | $(14.7) million |
| Operating cash flow | $49.6 million | $21.8 million |
| Capital expenditures | $7.4 million | $13.2 million |
| Cash and cash equivalents, year-end | $51.2 million | $28.6 million |
| Long-term debt, net, year-end | $274.5 million | $349.9 million |
- Revenue increased 2.9%. DEFINITY revenue rose to $131.6 million (up 17.6%) and TechneLite to $99.2 million (up 36.7%); Xenon fell to $29.1 million (down 40.5%). DEFINITY and TechneLite comprised 43.6% and 32.9% of revenue, respectively.
- U.S. revenue increased 9.2% to $257.4 million, while International revenue declined 22.9% to $44.4 million, primarily reflecting the business sales and unfavorable currency effects.
- Operating income included a $6.4 million gain on asset sales. Net income also benefited from lower interest expense following the 2015 refinancing and 2016 debt prepayments. The company reported $1.9 million of debt retirement costs in 2016.
- Fourth-quarter 2016 revenue was $74.4 million, gross profit $34.6 million and net income $4.9 million, versus $71.2 million, $33.4 million and $3.9 million, respectively, in fourth-quarter 2015. Diluted fourth-quarter EPS was $0.13 versus $0.13.
- Year-end principal under the term loan was $284.5 million, bearing a 7.00% variable rate. Revolving-facility availability was approximately $35.7 million after reserves and the standby letter of credit. Stockholders’ deficit was $106.5 million.
Material changes, outlook and risks
- Management attributed DEFINITY growth to increased penetration and sustained supply. TechneLite growth reflected customer contracts and higher volumes, including opportunistic sales when other suppliers could not meet demand; management cautioned these sales may not recur.
- Xenon revenue and margins were pressured by lower contracted pricing and renewed U.S. competition from IBAM. Lantheus also relies on IRE as its sole source of bulk unprocessed Xenon.
- In 2016, the company made $75 million of voluntary term-loan principal prepayments, funded with follow-on equity offerings and cash. Management expected these prepayments to reduce 2017 annual interest expense by approximately $5.3 million versus 2016.
- Management stated that cash, expected operating cash flows and revolving availability should fund liquidity needs for the foreseeable future. It did not provide a specific revenue or earnings forecast. Debt covenants, variable-rate exposure and the ability to sustain profitability remain relevant constraints.
- Supply concentration is a central risk: JHS is the sole-source manufacturer for DEFINITY and certain other products. The DEFINITY transfer to Pharmalucence was delayed and an exit was being negotiated; next-generation DEFINITY transfer to Samsung BioLogics remained in progress. Moly supply agreements with NTP, ANSTO and IRE ran through 2017, while routine supply from Canada’s NRU reactor ended in November 2016.
- On February 21, 2017, Lantheus announced a GE Healthcare term sheet for flurpiridaz F 18 development and commercialization, including a proposed $5 million upfront payment and up to $60 million in milestones plus royalties. A definitive agreement was not assured. The prior Phase 3 trial missed its specificity co-primary endpoint; further development and approval remain uncertain.
- Other material risks include DEFINITY competition and safety labeling, customer concentration, reimbursement and regulatory changes, dependence on third-party distributors, and product liability. The filing reports no material ongoing litigation as of December 31, 2016. A $9.4 million asset-retirement liability was recorded; estimated decommissioning cost was approximately $26.9 million.
- The company retained a valuation allowance against substantially all deferred tax assets, citing uncertain sustainability of profitability and business risks. A 2016 ownership change triggered Section 382 limits; $7.1 million of research and foreign tax credits were removed from deferred tax assets.
Investor verification points
- Assess the durability and margins of DEFINITY and TechneLite growth, and whether 2016 TechneLite demand included nonrecurring supply disruptions elsewhere.
- Check Xenon volumes, realized pricing and competitive impact from IBAM, alongside progress toward a qualified alternate Xenon source.
- Verify continuity and quality of JHS supply, progress on alternative manufacturing transfers, and renewal of key supplier and customer contracts.
- Review Moly availability, supplier capacity and contract renewals beyond 2017, including the timing and execution of planned ANSTO and IRE capacity expansions.
- Confirm the status and final economics of the proposed GE Healthcare transaction and flurpiridaz’s next clinical trial plan.
- Monitor operating cash generation, debt covenant headroom, variable-rate interest exposure and the availability of the revolving facility.
- Reconcile reported earnings with the asset-sale gain and other nonrecurring items; review tax attributes, Section 382 limitations and the valuation allowance.