ANI Pharmaceuticals, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited. ANI develops, manufactures, and markets branded and generic prescription pharmaceuticals.
Financial results and liquidity
Amounts below are in millions, except per-share data. Year-over-year comparisons are with the comparable 2015 period.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $38.5 | $20.0 | $90.4 | $58.3 |
| Operating income | $7.9 | $8.5 | $18.8 | $26.4 |
| Net income | $2.5 | $4.6 | $5.0 | $12.5 |
| Diluted EPS | $0.22 | $0.39 | $0.43 | $1.07 |
| Operating margin | 20.6% | 42.3% | 20.8% | 45.4% |
| Cost of sales as % of revenue, excluding D&A | 43.2% | 16.3% | 35.2% | 15.7% |
- Revenue mix and drivers: Q3 generic product revenue rose 99.9% to $30.2 million and branded product revenue rose 203.3% to $6.8 million. Growth reflected new and acquired products, including Propranolol ER, Nilutamide, Erythromycin Ethylsuccinate, Vancomycin, and Inderal LA. Nine-month revenue increased 55.1%; contract services and other income fell 87.5%, mainly because royalties from the prior Vancocin authorized generic declined.
- Profitability: Revenue growth did not translate into higher earnings. Management attributed increased cost of sales in part to profit-sharing products and acquired inventory sold above its carrying cost; Q3 and nine-month cost of sales included $1.1 million and $3.2 million, respectively, from this acquired-inventory step-up. Higher amortization from acquisitions also weighed on operating income. Nine-month tax expense was $5.3 million and the estimated annual effective tax rate was 51.2%, versus a 31.4% effective rate for the comparable 2015 period.
- Cash flow: Nine-month operating cash flow was $15.4 million, compared with $12.6 million in 2015. Investing cash outflow was $152.7 million, principally for product-rights acquisitions and $5.0 million placed in restricted escrow; financing cash outflow was $1.2 million. Cash and cash equivalents declined to $16.2 million from $154.7 million at year-end 2015. The filing reports substantial cash use for acquisitions and working capital, including a $25.5 million increase in accounts receivable on the cash-flow statement.
- Balance sheet and debt: Current assets were $95.5 million and current liabilities $30.5 million at September 30, 2016; year-end 2015 figures were $192.6 million and $11.8 million. Total liabilities were $150.5 million and stockholders’ equity $168.8 million. Convertible notes had $143.75 million principal and $118.8 million net carrying value, mature December 1, 2019, and bear a 3.0% coupon; the filing gives their market fair value as $176.6 million. A $30 million asset-based revolving facility was undrawn, with $30 million stated availability at quarter-end. Restricted cash was $5.0 million.
Material changes, outlook, and risks
- Acquisitions: ANI acquired Corticotropin and Corticotropin-Zinc product rights for $75.0 million cash, Inderal LA rights for $60.0 million upfront plus contingent payments, and marketing/distribution rights for two products for $10.0 million total consideration. These acquisitions expanded the portfolio but increased intangible assets and amortization. Intangible assets, net, rose to $188.9 million from $66.4 million at year-end 2015.
- Management outlook: ANI said it expected R&D, SG&A, and depreciation and amortization expense to be higher in 2016 than in 2015, citing portfolio development, growth-related staffing, and 2016 acquisitions. Management believed working capital, anticipated operating revenue, and the revolver would be sufficient for at least the next 12 months. The filing provides no numerical revenue or earnings guidance.
- Regulatory exposure: EEMT and Opium Tincture were marketed without FDA-approved NDAs and generated combined revenue of $26.6 million in the first nine months of 2016 ($8.6 million in Q3). The filing says a change in FDA enforcement approach could require approval applications or withdrawal from market, materially reducing revenue. Some contract-manufactured products and products generating royalties also lacked approved NDAs.
- Other risks and contingencies: The company cited dependence on single-source APIs, occasional imported-ingredient disruptions related to FDA inspections, and DEA quotas for certain controlled-substance products. Three customers represented 66% of Q3 revenue and 72% of accounts receivable at quarter-end. ANI was defending a Louisiana Medicaid lawsuit seeking unspecified damages, fines, penalties, and costs, and disclosed ongoing metoclopramide/Reglan product-liability litigation; outcomes could not be predicted.
- Other items: Q3 SG&A included higher stock-based compensation and personnel costs. A CFO transition generated $0.9 million of stock-based compensation and $0.4 million of other transition expense, all recognized in Q2. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether newly launched and acquired products sustain revenue growth and whether cost of sales and amortization continue to constrain margins.
- Cash conversion, receivables collection, and remaining liquidity after the acquisition-related cash outflows; confirm borrowing-base availability under the revolver.
- Exposure to unapproved products, including potential FDA action and the share of revenue dependent on those products.
- Customer and API supplier concentration, DEA quota availability, and any supply interruptions.
- Updates on the Louisiana Medicaid lawsuit and product-liability cases, as well as contingent payments and royalty obligations tied to acquisitions.