Lantheus Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparative periods are the corresponding 2018 periods. Amounts below are in USD millions unless stated otherwise.
Business context
Lantheus develops, manufactures and sells diagnostic medical imaging products, including DEFINITY, an ultrasound contrast agent, and TechneLite, a technetium generator. It reports U.S. and International segments. DEFINITY was its largest product and principal growth driver; other nuclear products include Xenon, Neurolite and Cardiolite.
Financial performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $85.7 | $85.6 | $172.2 | $168.2 |
| Gross profit | $44.6 | $43.8 | $88.7 | $86.2 |
| Gross margin | 52.0% | 51.2% | 51.5% | 51.2% |
| Operating income | $14.5 | $15.9 | $30.7 | $31.1 |
| Operating margin | 17.0% | 18.6% | 17.8% | 18.5% |
| Net income | $6.4 | $9.7 | $16.4 | $18.0 |
| Diluted EPS | $0.16 | $0.25 | $0.41 | $0.45 |
| Operating cash flow | — | — | $31.5 | $19.6 |
| Capital expenditures | — | — | $14.0 | $7.8 |
Q2 revenue was essentially flat year over year, while H1 revenue rose 2.4%. DEFINITY revenue increased 18.5% in Q2 and 16.5% in H1, primarily on higher volume. This was partly offset by lower TechneLite and other nuclear product sales, supply disruptions, and higher rebate provisions. Q2 net income included a $3.2 million loss on extinguishment of debt related to the June refinancing.
At June 30, cash and cash equivalents were $56.9 million, compared with $113.4 million at December 31, 2018. Current assets were $139.9 million and current liabilities $53.4 million. Principal debt outstanding was $200 million; cash less principal debt implies approximately $143.1 million of net debt. The company had no borrowings under its new $200 million revolving facility. H1 investing cash use was $14.0 million; financing cash use was $74.2 million, largely reflecting the refinancing and related cash outflow.
Material changes and unusual items
- U.S. revenue rose 1.5% in Q2 and 3.5% in H1; International revenue fell 8.5% and 4.6%, respectively.
- Operating expenses increased 7.6% in Q2 and 5.2% in H1. Research and development spending rose, including DEFINITY clinical-study costs and a one-time NanoMab collaboration payment; general and administrative expense also increased. Lower sales and marketing costs partly offset these increases.
- In June, Lantheus replaced its $275 million term loan and $75 million revolver with a five-year $200 million term loan and a $200 million revolver, both maturing in June 2024. The new term loan carried a 4.2% interest rate at June 30. The refinancing produced a $3.2 million extinguishment loss.
- H1 operating cash flow improved year over year, while capital expenditures increased. Management attributed working-capital cash use in 2019 mainly to payment of prior-year annual bonuses.
Outlook, commentary and risks
- Management expects DEFINITY to continue growing and to make up a larger share of 2019 product mix, but the filing provides no numerical revenue or earnings guidance.
- Management believes existing cash, operating results and revolver availability will fund liquidity needs for the foreseeable future, subject to operating performance and credit-agreement restrictions.
- Moly supply disruptions at NTP and ANSTO constrained TechneLite production and contributed to lower sales. The company depends on a limited number of suppliers; further outages could reduce product availability, revenue and cash flow. SHINE supply is not expected until the supplier’s facility is operational and approved, which SHINE estimated for 2022.
- JHS is the sole-source manufacturer of DEFINITY and several other products. The company is pursuing additional supply sources and specialized in-house DEFINITY manufacturing, which it expects could be available by early 2021; timing and execution are uncertain.
- DEFINITY faces competition and potential generic entry following expiration of its composition-of-matter patent in June 2019. As of the filing date, Lantheus said it had received no generic applicant notice. LVEF clinical studies and development of a room-temperature modified formulation remain subject to clinical and regulatory outcomes.
- The new credit agreement includes financial covenants, including a minimum interest coverage ratio and maximum leverage limits, and secures substantially all assets of specified entities. Availability under the revolver may be limited by covenant compliance.
- Lantheus is pursuing monetary damages in arbitration with Pharmalucence over a DEFINITY manufacturing and supply agreement; it cannot predict the outcome or any recovery.
Key facts for investors to verify
- Whether DEFINITY growth continues to offset weakness in TechneLite and other nuclear products, and the effect of rebates on net revenue.
- Whether Moly supply stabilizes and whether disruptions affect TechneLite volumes, margins or customer fulfillment.
- Execution, cost and timing of in-house manufacturing and alternative supplier plans, including the anticipated 2021 capability.
- Debt amortization, interest costs, covenant headroom and actual usable availability under the $200 million revolver.
- Progress and outcomes for DEFINITY LVEF studies, the modified formulation, generic competition and the Pharmalucence arbitration.
- How higher R&D spending and capital investment affect future profitability and cash generation.