Lantheus Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Lantheus develops, manufactures and sells diagnostic medical imaging products, including DEFINITY, TechneLite and Xenon. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Revenue | $76.5 | $74.8 | Up 2.2% |
| Gross profit / margin | $33.7 / 44.1% | $35.8 / 47.8% | Profit down 5.8%; margin compressed |
| Operating income | $17.7 | $11.4 | Includes $5.8 gain on Canadian asset sale |
| Net income | $10.3 | $0.4 | EPS: $0.34 vs. $0.02 |
| Operating cash flow | $3.8 | $15.2 | Down $11.4 |
| Cash and equivalents | $38.9 | $28.6 at Dec. 31, 2015 | Up $10.3 during quarter |
- Revenue gains in DEFINITY and TechneLite were partly offset by lower Xenon and international sales. DEFINITY revenue was $31.4 million, up from $25.7 million; TechneLite was $24.8 million, up from $20.9 million; Xenon was $8.2 million, down from $13.2 million.
- U.S. external revenue rose to $64.9 million from $60.7 million; international revenue declined to $11.5 million from $14.2 million, reflecting the Canadian business sale and unfavorable foreign exchange.
- Cost of goods sold rose 9.5% to $42.8 million, outpacing revenue growth. Management attributed U.S. cost increases particularly to TechneLite and higher Xenon material costs. Lower Xenon and TechneLite selling prices contributed to weaker U.S. gross profit.
- Research and development expense fell 51.0% to $3.0 million, mainly due to lower depreciation after scheduled decommissioning of certain assets, partly offset by higher pharmacovigilance costs. Interest expense declined to $7.0 million from $10.6 million following the 2015 debt refinancing.
- Operating cash flow fell primarily because of working-capital uses, including the timing of debt interest payments and higher receivables. Investing cash flow was positive $7.4 million, including $9.0 million proceeds from the Canadian asset sale; capital expenditures were $1.7 million.
Balance sheet, debt and liquidity
- At March 31, 2016, total assets were $249.3 million and total liabilities were $423.5 million; stockholders’ deficit was $174.2 million.
- Term loan principal was $362.3 million, with a carrying value of approximately $353.0 million including current maturities and net of unamortized discount and issuance costs. The loan bears variable interest; the reported rate was 7.00%. Maturity is June 2022, with $344.9 million of scheduled principal shown for 2021 and thereafter.
- The $50 million revolving facility had no borrowings outstanding. Net borrowing-base availability was approximately $39.4 million after an $8.8 million standby letter of credit and accrued interest. Additional borrowing may be constrained by borrowing-base availability and term-loan covenants, including a total net leverage covenant.
- Management stated that cash, operating results and revolver availability were expected to fund liquidity needs for at least the next 12 months, based on current operating plans. The filing also cautions that covenant limits may restrict access to revolver capacity.
Material changes, outlook and risks
- On January 12, 2016, the company completed the sale of substantially all Canadian radiopharmacy and Gludef business assets for $9.0 million cash, recording a $5.8 million pre-tax gain. The transaction was not presented as discontinued operations. A long-term supply agreement with the buyer includes product purchase commitments and runs through January 2021, subject to specified termination events.
- Management highlighted DEFINITY growth from increased volume and market penetration. Competition is increasing: Bracco’s Lumason competes in ultrasound contrast, and Mallinckrodt received U.S. approval to resume selling packaged Xenon in March 2016. Lantheus expected this Xenon competition to risk volumes and pricing; agreements with some customers were expected to support more predictable volumes but at substantially lower revenue and gross-margin contribution than in 2015.
- Supply concentration is a significant risk. JHS is the sole manufacturer for DEFINITY, Neurolite and TechneLite evacuation vials; Pharmalucence’s DEFINITY technology transfer was delayed, with no projected start date. Nordion is the only Xenon supplier, and the NRU reactor was expected to transition from routine isotope supply in October 2016 to emergency backup through March 2018. The company estimated IRE commercial Xenon production could begin in 2016, subject to development and regulatory approvals.
- The company is pursuing strategic partners for development programs, including flurpiridaz F 18; no specific commercial or financial guidance was provided in the filing. Management cautioned that actual results may differ materially from forward-looking expectations.
- Interest-rate exposure is material because of variable-rate debt. A 100-basis-point adverse rate change above applicable floors was estimated to increase quarterly interest expense by approximately $0.9 million. A uniform 10% stronger U.S. dollar was estimated to reduce quarterly revenue by $0.7 million and net income by $1.0 million.
- The company reported no material ongoing litigation as a defendant or material regulatory proceedings. It is appealing a court ruling against its insurance claim for business-interruption losses; the Second Circuit heard oral arguments on April 21, 2016, and recovery, if any, is uncertain.
Important facts for investors to verify
- How much of the reported operating and net income improvement is attributable to the one-time $5.8 million asset-sale gain, and whether core margins recover.
- Whether DEFINITY and TechneLite volume growth can offset pricing pressure, rising costs and Xenon revenue declines.
- Progress on alternate manufacturing and Xenon supply, including the delayed Pharmalucence transfer and IRE production approvals relative to the NRU transition.
- Term-loan covenant headroom, practical revolver availability and the ability to service substantial variable-rate debt.
- Cash conversion and working-capital trends, including receivable collections and the effects of the Canadian divestiture and supply agreement.
- Whether the insurance appeal produces any recovery; the filing does not provide a clear estimate of potential proceeds.