ANI Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited. ANI is a specialty pharmaceutical company that develops, manufactures, and markets generic and branded prescription drugs and provides contract manufacturing services.
Business context and reporting basis
On June 19, 2013, BioSante Pharmaceuticals acquired ANIP in an all-stock merger, and BioSante was renamed ANI Pharmaceuticals. The transaction was accounted for as a reverse acquisition, with ANIP treated as the accounting acquirer. Accordingly, historical periods before the merger reflect ANIP, while post-merger results include both companies. The filing says former BioSante operations generated no revenue or expense between the merger date and September 30, 2013; comparisons should nevertheless be read in light of the merger and the significant change in share count. A one-for-six reverse stock split was applied retrospectively.
Financial highlights
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $7.84 million | $5.04 million | $19.55 million | $15.05 million |
| Operating income (loss), continuing operations | $810,291 | $(207,401) | $(2.56) million | $974,388 |
| Net income (loss) | $1.19 million | $(377,348) | $(3.13) million | $(351,234) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(2.62) million | $421,605 |
Q3 gross margin, using cost of sales excluding depreciation and amortization, was 66.4% of revenue, versus 53.9% a year earlier. Operating margin was 10.3% in Q3 2013, versus negative 4.1% in Q3 2012; the nine-month 2013 operating margin was negative 13.1%.
At September 30, 2013, cash and cash equivalents were $10.93 million, with an additional $2.26 million of restricted cash acquired in the merger and designated for certain severance liabilities. Current assets were $26.09 million and current liabilities $6.60 million. Accounts receivable, net, was $9.52 million; inventory was $2.81 million. The $4.07 million revolving-credit balance reported at year-end 2012 was repaid in June 2013; no line-of-credit borrowings remained at quarter-end. Total assets were $43.29 million, and stockholders’ equity was $36.69 million. Accumulated deficit was $51.90 million.
Nine-month investing cash flow was positive $18.04 million, principally from $18.20 million of cash acquired in the merger. Financing cash flow was negative $4.50 million, primarily from repayment of the revolver and treasury-stock purchases. Cash paid for interest was $249,612 for the nine-month period.
Material changes versus the prior comparable period
- Q3 revenue rose 55.6%; nine-month revenue rose 29.9%. Generic product revenue increased 98.5% in Q3 and 50.2% year to date. Management attributed growth chiefly to market-share and price gains for Esterified Estrogen with Methyltestosterone tablets, associated with reduced competition, and to gains on other generic products.
- Branded product revenue increased 61.4% in Q3 and 106.3% year to date, mainly on higher Reglan tablet sales. Contract manufacturing revenue decreased 13.5% in Q3 and 14.5% year to date due to lower customer orders.
- Cost of sales increased more slowly than revenue, reducing its share of revenue to 33.6% in Q3 and 36.1% year to date, from 46.1% and 41.8%, respectively. Management cited pricing, product mix, and lower input costs for certain products.
- Nine-month salaries and benefits rose to $8.70 million from $3.52 million, including approximately $4.5 million of merger-related executive transaction-bonus expense. Total merger transaction costs were approximately $7.09 million, of which $6.16 million was incurred in the first nine months of 2013.
- Nine-month interest expense declined to $466,902 from $1.24 million, reflecting prior debt conversion and repayment of the revolving credit facility. The merger added a $10.9 million Teva license intangible and $1.84 million of goodwill.
Outlook, risks, contingencies, and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management said available financial resources, current working capital, and anticipated operating revenue should meet working-capital needs for at least 12 months. The going-concern assessment was based on management’s operating plan through September 30, 2014. The filing also reports a history of losses and negative operating cash flow and says future losses and negative cash flow are expected for the foreseeable future.
- Unapproved products: Esterified Estrogen with Methyltestosterone tablets and Opium Tincture are marketed without FDA-approved NDAs or ANDAs. Together they generated $7.70 million, or 39% of nine-month 2013 revenue, versus $4.30 million in the prior-year period. The FDA previously requested a discussion about Opium Tincture; the company reported no further response to its November 2012 letter. FDA action could require approval or withdrawal and materially affect revenue. The company also has contract-manufacturing and royalty revenue tied to a customer’s unapproved products.
- Customer and supplier concentration: Two customers accounted for 27% and 19% of Q3 revenue; their receivables totaled $6.11 million, approximately 64% of net accounts receivable. Two suppliers represented approximately 54% of Q3 cost of sales. The company relies on limited qualified sources for many active ingredients, and supplier changes may require FDA approval.
- Litigation: A shareholder class action and federal derivative matters were dismissed after plaintiffs did not amend their complaints. A separate Illinois state derivative action was dismissed with prejudice; plaintiffs appealed on October 9, 2013. The company reported no accrual for that matter and could not estimate its outcome or any loss. The company also faces metoclopramide/Reglan product-liability claims: it had been named in 85 complaints involving 2,934 plaintiffs; its insurer assumed the defense, but insurance exclusions apply to Reglan/metoclopramide claims.
- Other items: A $150,337 gain from finalizing liabilities of a discontinued operation contributed to Q3 and nine-month net income. The merger’s preliminary purchase-price allocation remained subject to change. Management concluded disclosure controls were effective; integration of the companies’ business processes, systems, and controls was ongoing.
Important facts for investors to verify
- Whether growth and margins persist if competition returns or prices decline, particularly for Esterified Estrogen with Methyltestosterone.
- FDA status and continuing commercial viability of the company’s unapproved products, and the associated share of revenue and earnings.
- Collection and credit exposure from major customers, along with continuity of supply from concentrated API vendors and the DEA quota required for Opium Tincture.
- Cash generation and liquidity after the merger cash inflow, including the restricted nature of $2.26 million and the company’s ability to meet its stated 12-month needs.
- Outcome and potential financial exposure from the state derivative appeal and remaining product-liability litigation.
- Merger-related expenses, preliminary acquisition accounting, and the comparability of reported per-share data given the reverse acquisition, reverse split, and major share-count change.