Lantheus Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results; amounts below are in millions of dollars unless otherwise noted. Lantheus develops, manufactures and markets diagnostic medical imaging products, including DEFINITY, TechneLite and Xenon.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $79.9 | $73.1 | $250.1 | $227.5 |
| Gross profit / margin | $38.5 / 48.2% | $33.7 / 46.1% | $124.2 / 49.7% | $103.1 / 45.3% |
| Operating income / margin | $12.8 / 16.0% | $12.6 / 17.2% | $42.6 / 17.0% | $44.4 / 19.5% |
| Net income | $8.5 | $4.2 | $26.3 | $21.9 |
| Diluted EPS | $0.22 | $0.13 | $0.67 | $0.71 |
| Operating cash flow | — | — | $41.7 | $36.9 |
Q3 revenue rose 9.4% and net income roughly doubled year over year. Nine-month revenue increased 9.9% and net income 19.9%, while operating income declined 4.1%; prior-year operating income included $6.5 million in gains on asset sales. Nine-month gross margin improved, but operating margin contracted as operating expenses rose 25.2%.
DEFINITY revenue was $37.7 million in Q3 and $115.6 million for nine months, up 15.7% and 18.5%, respectively. TechneLite and Xenon also grew. The nine-month comparison includes a $5.0 million GE Healthcare upfront license payment recorded as revenue for flurpiridaz F 18; up to $60 million of additional milestones and royalties are contingent on future development, approvals and sales.
Financial position and liquidity
- Cash and cash equivalents were $68.1 million at September 30, up from $51.2 million at year-end 2016. Current assets were $136.6 million and current liabilities $46.1 million.
- Long-term debt had a $273.6 million principal balance ($268.3 million carrying value); $2.8 million was current. No revolving borrowings were outstanding. The $75 million revolver was available subject to facility terms and covenants. Cash less principal debt was approximately $205.5 million.
- Operating cash flow of $41.7 million was offset by $11.6 million of capital expenditures and financing outflows of $14.6 million. Cash increased $16.9 million during the nine-month period. Receivables and inventory movements reduced operating cash flow.
- Stockholders’ deficit was $77.9 million. The company reported no material changes in market-risk exposure and said existing cash, expected operating results and revolver availability should fund requirements for the foreseeable future.
Material changes, outlook and risks
- In March 2017, the company refinanced its prior term loan with a $275 million five-year term facility and replaced its $50 million asset-based facility with a $75 million five-year revolver. The term loan carried a 5.7% rate at quarter-end and matures June 30, 2022. Refinancing generated a $2.2 million debt-extinguishment loss and $1.7 million of related G&A costs; lower debt and refinancing reduced interest expense.
- U.S. revenue increased 11.1% in Q3 and 13.5% for nine months. International revenue was nearly flat in Q3 but down 9.7% for nine months, primarily reflecting the 2016 sale of the Australian radiopharmacy business. International gross profit also declined.
- Management cited DEFINITY growth and higher volumes for TechneLite and Xenon. It provided no formal numerical earnings or revenue guidance. On October 30, the company agreed to supply Cardinal Health with TechneLite, Xenon, Neurolite and other products through 2018, including minimum purchase volumes for certain products.
- Hurricane Maria sharply reduced diagnostic procedures in Puerto Rico from September 20. The radiopharmacy building sustained minimal external damage, but recovery timing and restoration of prior activity levels are uncertain.
- Supply concentration remains significant: Jubilant HollisterStier is the sole-source manufacturer of DEFINITY, Neurolite, Cardiolite and TechneLite evacuation vials. The company is pursuing alternate supply and a next-generation DEFINITY transfer with Samsung BioLogics, but timing is uncertain and Korean peninsula tensions pose a risk. Moly availability and cost are also key exposures.
- Other material risks include DEFINITY competition and patent/exclusivity expirations, Xenon competition, pricing pressure, reliance on a small number of major U.S. customers and distributors, and product-development and reimbursement uncertainty. The company retained a full valuation allowance against domestic net deferred tax assets, citing that sustained profitability had not yet been established. It reported no material ongoing litigation or regulatory proceedings.
Important facts for investors to verify
- Whether DEFINITY growth and margins persist amid competition and approaching patent or exclusivity expirations.
- Progress toward dependable alternate manufacturing, especially for DEFINITY, and continued Moly supply availability.
- Cardinal and other key-customer contract volumes, pricing and renewal terms, including performance under the October 2017 supply arrangement.
- The pace of Puerto Rico recovery and its effect on revenue and cash flow.
- Debt covenant headroom, refinancing costs and the capacity actually available under the revolver.
- Whether operating cash generation remains strong as receivables, inventory and capital spending change, and whether sustained profitability could support release of the deferred-tax valuation allowance.