Lantheus Holdings, Inc. — Q3 2018 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2018, compared with the same 2017 periods. Lantheus develops, manufactures and commercializes diagnostic medical imaging products, including DEFINITY, TechneLite and Xenon, and reports U.S. and International segments.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $88.9 million | $79.9 million | $257.1 million | $250.1 million |
| Gross profit / margin | $44.9 million / 50.5% | $38.5 million / 48.2% | $131.0 million / 51.0% | $124.2 million / 49.7% |
| Operating income / margin | $16.5 million / 18.5% | $12.8 million / 16.0% | $47.5 million / 18.5% | $42.6 million / 17.0% |
| Net income | $9.3 million | $8.5 million | $27.2 million | $26.3 million |
| Diluted EPS | $0.24 | $0.22 | $0.69 | $0.67 |
Cash flow and liquidity. Nine-month operating cash flow was $43.9 million, versus $41.7 million; investing cash use was $11.8 million, including $12.8 million of capital expenditures, and financing cash use was $3.7 million. Cash increased $28.3 million to $104.6 million. Working-capital movements used $12.4 million, chiefly reflecting inventory purchases and receivables associated with temporary international TechneLite demand.
At September 30, 2018, term-loan principal was $270.9 million (carrying amount, net of discounts and costs, was $266.9 million); the term-loan rate was 6.0%. The $75 million revolving facility had no borrowings. The term loan matures June 30, 2022, with most principal due in 2022. Management said cash, operating results and revolver availability should fund requirements for the foreseeable future, while noting that covenant limits may restrict use of the full revolver.
Total assets were $424.8 million and stockholders’ equity was $55.5 million. Current assets were $191.0 million versus current liabilities of $54.6 million. The company reported $79.4 million of net deferred tax assets.
Material changes and drivers
- Q3 revenue rose 11.2%; nine-month revenue rose 2.8%. DEFINITY revenue grew 16.0% in the first nine months to $134.5 million, driven by higher volumes. It represented 52.3% of nine-month revenue and was described as the fastest-growing, highest-margin commercial product.
- U.S. TechneLite revenue fell 17.9% in the first nine months, mainly due to a temporary Moly supply disruption and changes in certain customer contracted volumes. International TechneLite revenue rose 74.1%, largely on temporary incremental demand; management cautioned that this demand may not persist.
- Nine-month U.S. revenue also reflected approximately $5.0 million of prior-year GE Healthcare license revenue that did not recur. Xenon revenue declined 3.8% for the nine months.
- Higher gross profit and operating income reflected DEFINITY growth and stronger international sales. Nine-month interest expense declined about $1.4 million versus 2017 following the 2017 refinancing; the prior-year period also included a $2.2 million debt-extinguishment loss.
- Nine-month tax expense increased to $9.6 million from $2.1 million; the effective tax rate was 26.0% versus 7.5%. The company attributed the difference principally to its prior domestic deferred-tax valuation allowance and current-period income, as well as state taxes and uncertain-tax-position interest, partly offset by stock-compensation tax benefits.
Outlook, risks and unusual items
- No formal numerical earnings or revenue guidance is provided in this filing. Management expected DEFINITY to continue growing and to represent a greater share of product mix in 2019. Enrollment had begun in Phase 3 studies of DEFINITY for a left ventricular ejection fraction indication. A modified formulation could be commercially available in 2020 if approved; specialized in-house manufacturing was expected to be usable by early 2021, subject to execution and regulatory uncertainties.
- Moly supply remained fragile: NTP’s South African facility had been offline again since early June 2018, and an HFR reactor shutdown constrained supply to IRE. Lantheus said it could not meet all TechneLite demand on certain manufacturing days. ANSTO’s expanded facility was expected to enter commercial operation in the first half of 2019; SHINE supply was estimated for 2021. Timing and availability were not assured.
- DEFINITY faces competition and patent risk. Its U.S. composition-of-matter patent expires in June 2019; a method-of-use patent runs to March 2037. Foreign protection or exclusivity was stated to expire in 2019. No generic-applicant notice had been received as of the filing, but future challenges could affect sales.
- Other risks include reliance on third-party manufacturing—JHS was the sole-source manufacturer of several key products—Xenon competition from Curium, customer concentration, reimbursement and regulatory uncertainty, and development-program execution. The Pharmalucence arbitration seeks monetary damages; the company could not predict the outcome or any recovery.
- The company provided a $28.2 million surety bond for facility decommissioning financial assurance; the recorded asset-retirement obligation was $11.3 million. It paid no dividends and had no share-repurchase program.
Investor verification priorities
- Track Moly supply recovery, TechneLite fulfillment and whether temporary international demand normalizes.
- Assess DEFINITY growth, patent challenges and competitive developments as the June 2019 composition patent expiration approaches.
- Monitor debt repayment, leverage-covenant headroom and the actual availability of the revolving facility.
- Verify progress, cost and timing for DEFINITY clinical studies, alternative supply/manufacturing plans, and the North Billerica facility project.
- Review the Pharmalucence arbitration and the effect of tax estimates, rebate accruals and working-capital needs on future cash generation.