Lantheus Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. Lantheus develops, manufactures and sells diagnostic medical imaging products, principally DEFINITY ultrasound contrast agent and nuclear imaging products including TechneLite. It reports U.S. and International segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $85.8m | $88.9m | $258.0m | $257.1m |
| Gross profit / margin | $41.6m / 48.5% | $44.9m / 50.5% | $130.2m / 50.5% | $131.0m / 51.0% |
| Operating income / margin | $8.5m / 9.9% | $16.5m / 18.5% | $39.2m / 15.2% | $47.5m / 18.5% |
| Net income | $4.9m | $9.3m | $21.2m | $27.2m |
| Diluted EPS | $0.12 | $0.24 | $0.53 | $0.69 |
| Operating cash flow | Not separately provided for the quarter | $58.0m | $43.9m |
- Revenue mix: Q3 DEFINITY revenue was $52.4m versus $43.8m; TechneLite was $21.7m versus $30.6m. For nine months, DEFINITY rose to $158.1m from $134.5m, while TechneLite declined to $66.0m from $75.5m.
- Profitability: Q3 operating income fell 48% year over year, despite higher DEFINITY sales, reflecting lower nuclear-product volumes, weaker gross profit and higher operating expenses. G&A rose 33% in Q3, primarily from Progenics-related acquisition costs. Nine-month R&D expense increased to $15.6m from $12.5m, including DEFINITY clinical work and a collaboration payment.
- Taxes and unusual items: Q3 income tax expense was $0.5m versus $3.6m; the 2019 quarter included a $1.5m tax benefit from reversal of an uncertain tax position, offset by a $1.5m expense in other income/expense related to reversing the corresponding indemnification receivable. Nine-month results included a $3.2m debt-extinguishment loss.
- Cash and liquidity: Cash was $78.1m at September 30, down from $113.4m at year-end 2018. Nine-month operating cash flow was $58.0m; capital expenditures were $17.3m. Financing activities used $76.1m, mainly reflecting the debt refinancing and repayment of prior borrowings. Current assets were $154.4m and current liabilities $59.6m.
- Debt: Principal outstanding was $197.5m; reported debt and other borrowings, net, totaled $196.5m, including finance leases. The June refinancing established a $200m five-year term loan and a $200m revolving facility; no revolver borrowings were outstanding at quarter-end. Term-loan interest was 3.79% at September 30; maturity is June 2024.
Material changes and management commentary
- Q3 revenue decreased 3.5% year over year; nine-month revenue was nearly flat, up 0.3%. U.S. revenue increased 6.3% in Q3, while International revenue fell 40.3%, primarily due to lower TechneLite sales. Management attributed TechneLite shortfalls to temporary supplier disruptions and unusually strong international demand in the prior-year quarter.
- DEFINITY’s higher unit volume supported U.S. growth. Management described it as its fastest-growing and highest-margin commercial product and estimated it had over 80% of the U.S. echocardiography contrast market at year-end 2018.
- Operating cash flow improved year over year, mainly due to working-capital movements and noncash adjustments, despite lower net income. Capital expenditures increased from $12.8m to $17.3m.
- Management stated that cash, operating results and availability under the revolving facility should be sufficient for liquidity needs for the foreseeable future, while noting that covenant limits may restrict access to the full revolver.
Outlook, risks and contingencies
- Progenics acquisition: On October 1, 2019, after quarter-end, Lantheus agreed to acquire Progenics in an all-stock transaction. Progenics shareholders would own approximately 35% of the combined company. The transaction was expected to close in Q1 2020; HSR early termination was granted October 25, 2019. Completion remained subject to stockholder approvals and other conditions. Lantheus anticipated adjusted EPS accretion by 2022 and GAAP EPS accretion by 2023, but emphasized that these were assumption-dependent estimates. A $18.34m termination fee may apply in specified circumstances.
- Supply and product risks: Moly supply remained constrained by outages and transition problems at suppliers, including ANSTO and NTP, and had limited the ability to fill some TechneLite demand. JHS was the sole-source manufacturer of DEFINITY, Neurolite, Cardiolite and evacuation vials. Risks include further supply interruptions, competition, potential generic DEFINITY entrants following patent expiration, and reimbursement and regulatory uncertainty.
- Development and manufacturing plans: Management expected to complete two DEFINITY LVEF Phase 3 studies by year-end 2019 and said an approved indication could be available as early as 2020. A modified DEFINITY formulation could also be commercially available in 2020 if approved. Specialized in-house manufacturing capability was expected by early 2021. These timelines were not assured. SHINE’s future Moly supply was estimated to begin in 2022, subject to facility operation and approvals.
- Legal matter: In October 2019, Lantheus received an approximately $3.5m Pharmalucence arbitration award; Pharmalucence sought to reduce it to $2.3m. The company said it would record the financial impact when proceeds were received.
- Other: A $28.2m surety bond supports required financial assurance for decommissioning the North Billerica facility; the recorded asset-retirement obligation was $12.6m. Lantheus expected to become a large accelerated filer after December 31, 2019, bringing additional reporting and audit-control requirements and costs. The filing reported effective disclosure controls and no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether DEFINITY growth and margins can offset ongoing weakness and supply-related volatility in TechneLite and other nuclear products.
- Progress in restoring reliable Moly supply, diversifying contract manufacturing, and bringing in-house DEFINITY manufacturing online.
- Progenics transaction approvals, closing timetable, costs, share dilution, and whether projected accretion and integration benefits are realized.
- Debt covenant headroom and practical availability of the $200m revolver alongside cash needs and acquisition-related expenses.
- Resolution and collection of the Pharmalucence award, and the outcome of DEFINITY clinical, regulatory and potential generic-competition developments.