ANI Pharmaceuticals, Inc. — FY 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017, not a standalone fourth quarter. ANI develops, manufactures, and markets generic and branded prescription drugs, with a focus on complex and niche products. It operates two manufacturing facilities in Minnesota and reported one business segment.
Financial performance and position
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Net revenue | $176.8 million | $128.6 million | Up 37.5% |
| Operating income | $28.3 million | $20.1 million | Operating margin 16.0%, versus 15.6% |
| Net income (loss) | $(1.1) million | $3.9 million | 2017 included $13.4 million of tax expense from remeasuring deferred taxes after U.S. tax-rate changes |
| Operating cash flow | $39.4 million | $27.5 million | Up $11.9 million |
| Cash and cash equivalents | $31.1 million | $27.4 million | Plus $5.0 million restricted cash at year-end 2017 |
| Current assets / liabilities | $131.6 million / $39.2 million | $103.0 million / $31.9 million | Reported working-capital ratio: 3.4 |
| Debt | $143.75 million principal Notes due 2019; $75.0 million term loan | $143.75 million principal Notes | Notes carrying value was $128.2 million; term-loan carrying value, net of financing costs, was about $73.3 million |
Generic product revenue rose 24.4% to $118.4 million; branded product revenue rose 92.6% to $50.9 million; contract manufacturing revenue increased 27.3% to $7.0 million. Contract services and other income fell 69.5% to $0.4 million. Cost of sales increased 62.0% to $79.0 million, and rose to 44.7% of revenue from 37.9%, partly reflecting profit-sharing products and acquired Inderal XL/InnoPran XL inventory costs. Research and development expense increased to $9.1 million from $2.9 million. The testosterone-gel NDA was written off with a $0.9 million impairment charge in 2017, following a $6.7 million charge in 2016.
Cash flow figures include restricted cash in the cash-flow-statement reconciliation: cash, cash equivalents, and restricted cash totaled $36.2 million at year-end 2017. Investing activities used $108.0 million, primarily for product-right acquisitions and $10.4 million in capital expenditures. Financing activities provided $72.4 million, largely from the new term loan. The $50.0 million revolving facility was undrawn at year-end. The company reported total assets of $412.1 million and stockholders’ equity of $174.8 million.
Material changes versus prior period
- Revenue increased by $48.2 million, supported by annualized 2016 launches, new products, and branded sales of Inderal XL and InnoPran XL. Declining EEMT sales and lower Propranolol ER pricing partly offset growth.
- ANI acquired Inderal XL rights for $20.2 million, InnoPran XL rights for $30.6 million, and U.S. rights to Atacand, Atacand HCT, Arimidex, and Casodex for $46.5 million. It launched six products in 2017 and ended the year with 31 marketed products.
- In December, ANI entered a $125.0 million secured credit agreement, including a $75.0 million term loan and $50.0 million revolver; the term loan refinanced $25.0 million of prior borrowings and helped fund the AstraZeneca product acquisition.
- Despite higher operating income, net income turned to a loss because of the one-time $13.4 million deferred-tax remeasurement charge under the Tax Cuts and Jobs Act. Management expected a lower effective tax rate and lower cash tax payments in 2018.
Outlook, risks, contingencies, and unusual items
- Outlook: No numerical revenue or earnings guidance is provided. Management anticipated 2018 revenue growth from a full year of 2017 launches and expected additional launches; it also expected higher R&D, SG&A, cost of sales, and amortization. It expected the 2018 effective tax rate to be significantly below 2017’s rate.
- Cortrophin: ANI reported three intermediate-scale corticotropin API batches and said it planned commercial-scale manufacturing in early 2018, with process validation and registration batches targeted by year-end 2018. Re-commercialization still required manufacturing work, FDA review of a supplemental NDA, market access, and commercialization execution.
- Product and regulatory exposure: EEMT and Opium Tincture are marketed without approved NDAs or ANDAs and generated $27.6 million, or about 15% of 2017 revenue. ANI relies entirely on imported API for EEMT and notes possible supply interruption or FDA enforcement. DEA quotas are required for opioid-related ingredients.
- Customer and supplier concentration: Three wholesalers accounted for 78% of revenue and approximately 85% of net receivables. ANI generally qualifies a single API source per product; two suppliers represented 23% of inventory purchases in 2017.
- Regulatory and legal matters: The FDA issued a Major Complete Response Letter on the Erythromycin Ethylsuccinate supplement; ANI submitted a response in February 2018 and continued marketing while reserving legal options. The company and certain employees received search warrants and/or grand jury subpoenas in a federal generic-drug-industry investigation; ANI said it was cooperating, with outcome and timing uncertain. Other disclosed matters include Louisiana Medicaid litigation and an Arbor Pharmaceuticals false-advertising/unfair-competition complaint. ANI also disclosed metoclopramide litigation; California settlements were reported, while claims in other states remained uncertain.
- Debt and liquidity: The secured credit agreement has financial and operating covenants and liens on substantially all domestic assets. The loan may become due by August 30, 2019 unless specified conditions relating to the Notes are met, and in no event later than December 29, 2022. The $143.75 million Notes mature December 1, 2019. Management believed available resources and expected operating revenue would cover at least 12 months of working-capital needs.
- Accounting and audit: Revenue-related chargeback, rebate, return, and other allowance estimates are significant; aggregate accruals exceed 50% of gross generic and branded product sales. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Progress, FDA requirements, funding needs, and timing for Cortrophin and the planned Vancocin oral solution.
- Revenue, margins, and supply continuity for EEMT and other products exposed to regulatory or single-source API risks.
- Whether 2018 launches and acquisitions deliver expected sales while cost of sales, amortization, and R&D rise.
- Debt covenant headroom and refinancing or repayment plans for the 2019 Notes and secured facility.
- Developments in the generic-industry investigation, EES regulatory matter, and other litigation.
- Changes in chargeback, rebate, returns, and customer-credit exposure given wholesaler concentration.