ANI Pharmaceuticals, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 6, 2020. Unaudited consolidated results. ANI develops, manufactures, and markets branded and generic specialty pharmaceuticals, with manufacturing sites in Minnesota and Ontario.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $48.5m | $54.4m | $98.2m | $107.2m |
| Operating income/(loss) | $(11.3)m | $9.3m | $(19.1)m | $13.7m |
| Net income/(loss) | $(12.3)m | $6.6m | $(19.3)m | $7.0m |
| Diluted EPS | $(1.03) | $0.53 | $(1.62) | $0.57 |
| Operating cash flow | Not separately provided | Not separately provided | $22.6m | $19.0m |
- Revenue mix, Q2: Generic products $33.4m, branded products $10.6m, contract manufacturing $2.9m, and royalty and other revenue $1.5m.
- Margins, Q2: Cost of sales excluding depreciation and amortization was 42.7% of revenue, versus 28.8% a year earlier; operating margin was (23.4)% and net margin (25.5)%. The company said cost of sales excluding the $1.4m acquired-inventory fair-value charge was 39.8% of revenue.
- Liquidity at June 30: Cash and cash equivalents were $27.7m, current assets $156.5m, and current liabilities $79.1m, implying working capital of $77.5m and a current ratio of about 2.0. Cash plus restricted cash was $32.7m.
- Debt: Gross principal was approximately $191.7m: $67.7m term loan, $116.5m delayed-draw term loan, and $7.5m revolver. Balance-sheet debt, net of deferred financing costs, was $190.2m. The $75m revolver had $67.5m available. Debt matures in December 2023; the company reported compliance with covenants and a new interest-rate swap intended to substantially fix borrowing rates.
- Cash deployment: Investing activities used $60.4m, mainly for the Amerigen acquisition; financing activities provided $3.1m. Cash and cash equivalents declined $34.6m from year-end 2019. Capital expenditures were $2.3m.
Changes versus the prior comparable period
- Q2 revenue declined 10.8%; first-half revenue declined 8.4%. Q2 generic revenue fell 7.9%, branded revenue fell 24.0%, and contract manufacturing fell 21.3%. First-half generic revenue rose 4.5%, but branded revenue fell 37.3% and contract manufacturing fell 20.4%.
- Q2 and first-half results moved from profit to loss. Higher cost of sales reflected a shift toward lower-priced generic products, profit-sharing product sales, inventory reserves, and acquired Amerigen inventory fair-value charges. Q2 SG&A also included $6.5m of CEO departure costs.
- First-half operating cash flow increased to $22.6m from $19.0m, helped by working-capital movements. Cash fell as the company funded Amerigen largely from cash on hand; that acquisition required $57.4m in cash and included potential contingent payments of up to $25m over four years.
Outlook, commentary, risks, and unusual items
- COVID-19: Management attributed lower Q2 prescription demand and revenue in part to the pandemic, shelter-in-place measures, and fewer elective procedures. It reported no significant manufacturing or supply-chain disruption through the period, but could not predict the pandemic’s future effects.
- Cortrophin: The FDA issued a Refusal to File for the supplemental application in April, citing incomplete chemistry, manufacturing, and controls information. ANI was remediating the filing and anticipated resubmission by no later than Q1 2021. Cortrophin pre-launch charges were $8.2m in the first half; management expected full-year 2020 charges of approximately $14m–$16m. It cautioned that pre-launch materials might not ultimately be usable commercially.
- Other outlook: No revenue or earnings guidance was provided. Management said available working capital, expected operating cash flows, and revolver availability were expected to cover requirements and debt obligations for at least 12 months. It expected second-half Cortrophin-related expenses to approximate first-half levels.
- Leadership and acquisition activity: Former CEO Arthur Przybyl departed in May; the company recognized $6.5m of related expense, including stock compensation, and had $3.0m of cash compensation accrued at quarter-end. In August, ANI announced Nikhil Lalwani would become CEO effective September 8. After quarter-end, ANI acquired a Fluconazole ANDA for $3.0m.
- Regulatory and legal exposure: Two unapproved products, EEMT and Opium Tincture, generated $8.1m of first-half revenue. ANI warned that FDA enforcement could require approval or withdrawal. Matters disclosed include litigation relating to EES, ranitidine-related claims and investigations, a Reglan/metoclopramide claim, and a federal generic-industry investigation; outcomes and reasonably possible losses were not estimable in the filing.
- Concentration and supply risks: Three customers represented 74% of Q2 revenue and 83% of accounts receivable at June 30. ANI generally qualifies only one API source per product; one supplier accounted for about 13% of Q2 inventory purchases.
- Other items: A terminated prior interest-rate swap resulted in a $13.2m accumulated loss to be recognized in interest expense over the remaining terms through 2023. The new swap’s fair-value liability was $16.8m at quarter-end. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- Progress and timing of Cortrophin sNDA remediation and resubmission, approval prospects, and remaining pre-launch spending.
- Whether prescription demand and revenue recover from COVID-19-related weakness, and how product mix and inventory charges affect gross margins.
- Amerigen portfolio contribution, the conditions for contingent payments of up to $25m, and cash generation relative to acquisition spending and debt obligations.
- Compliance with credit-facility covenants, access to the revolver, interest-rate swap costs, and liquidity under adverse operating scenarios.
- Potential exposure from unapproved products, ranitidine and other litigation or investigations, customer concentration, and single-source API dependence.