Lantheus Holdings, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. Lantheus develops, manufactures and sells diagnostic medical imaging products, including DEFINITY, TechneLite and Xenon. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $74.1 | $75.7 | $222.3 | $224.6 |
| Gross profit | $33.7 | $31.6 | $102.1 | $92.8 |
| Gross margin | 45.5% | 41.8% | 46.0% | 41.3% |
| Operating income | $13.4 | $9.2 | $30.1 | $27.7 |
| Interest expense, net | $7.1 | $10.6 | $31.6 | $31.7 |
| Debt extinguishment loss | — | — | $15.5 | — |
| Net income (loss) | $5.4 | $(0.9) | $(18.7) | $(3.8) |
| Operating cash flow | Not presented by quarter | $9.1 | $15.5 |
- Q3 revenue declined 2.1% year over year; nine-month revenue declined 1.1%. DEFINITY and Xenon gains were offset by lower TechneLite and international sales.
- Q3 operating margin was approximately 18.1%, versus 12.2% a year earlier; nine-month operating margin was 13.6%, versus 12.3%.
- Nine-month diluted loss per share was $0.83, compared with a $0.21 loss in 2014. The 2015 loss included the $15.5 million refinancing-related extinguishment charge and $6.5 million Avista agreement termination fee.
- Nine-month capital expenditures were $8.4 million, versus $5.3 million. Operating cash flow less capital expenditures was approximately $0.7 million, versus $10.2 million in the prior-year period.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $21.9 million; current assets were $83.4 million and current liabilities $34.3 million.
- Total liabilities were $426.3 million, including $364.1 million of term-loan principal outstanding ($354.0 million carrying value after unamortized discount and issuance costs). Stockholders’ deficit was $190.1 million.
- In June, the company completed its IPO, issuing 12.3 million shares at $6 per share and receiving approximately $67.2 million net proceeds. It also entered a $365 million, seven-year senior secured term facility and used financing proceeds and cash to redeem $400 million of 9.75% senior notes and repay $8 million drawn on its revolving facility.
- The term loan bears floating-rate interest at LIBOR plus 6.00% (with a 1.00% LIBOR floor) or the base rate plus 5.00%; quarterly amortization began in September 2015. A 100-basis-point adverse rate change above applicable floors would increase annual interest expense by approximately $966,000.
- The $50 million revolving facility had no borrowings at quarter-end. Availability under its borrowing base was approximately $37.3 million after the $8.8 million standby letter of credit and accrued interest. Additional borrowing could be constrained by debt covenants.
- Management said cash, operating results and revolving-facility availability should fund liquidity needs for at least the next 12 months, based on current operating plans.
Changes, outlook and principal risks
- Product and geographic mix: Q3 DEFINITY revenue increased to $28.9 million from $24.3 million, and Xenon to $12.7 million from $8.9 million; TechneLite fell to $17.2 million from $23.6 million. For nine months, DEFINITY rose to $83.0 million from $70.1 million, while TechneLite declined to $55.4 million from $70.2 million. International revenue fell 8.3% in Q3 and 11.7% year to date, affected by foreign exchange and competitive pressures.
- Management outlook: The filing provides no quantified full-year earnings or revenue guidance. Management anticipated remaining 2015 quarterly revenue and profit contribution below Q1 levels and year-ago quarterly levels, while expecting gross-margin comparisons to remain favorable year over year, but less favorable than Q1. It expected higher technology-transfer costs for the balance of 2015.
- Supply and customer exposure: JHS was the sole-source manufacturer for DEFINITY and Neurolite; Cardiolite also relied on a single manufacturer while technology transfer proceeded. The company was working to qualify Pharmalucence for DEFINITY, targeting an FDA filing in 2016. Cardinal supply agreements expired at year-end 2014; orders were being fulfilled on a purchase-order basis, with future volumes and product mix uncertain.
- Xenon and competition: Nordion was the sole Xenon supplier, and supply depended on the NRU reactor, which was expected to shift to emergency-backup status in October 2016. The company targeted commercial Xenon supply from IRE in 2016; delays could interrupt availability. Potential new U.S. Xenon competition and Bracco’s Lumason launch also posed risks to sales and pricing.
- Other matters: A court granted the insurer’s summary-judgment motion in the company’s business-interruption claim; Lantheus appealed on September 4, 2015, and recovery is uncertain. Management reported no other material ongoing litigation or known material-target investigations. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether DEFINITY growth and the improved gross margin can continue amid competition and dependence on contract manufacturing.
- Cardinal’s future order volumes, mix and pricing in the absence of renewed written supply agreements.
- Progress toward alternate DEFINITY and Cardiolite manufacturing and IRE Xenon supply, including regulatory approvals and timing.
- Debt-covenant headroom, floating-rate exposure, and whether cash generation can support debt service and investment needs.
- International revenue and margins, including the effects of foreign exchange, competition and manufacturing costs.
- The appeal outcome and any potential proceeds from the Zurich insurance dispute; the filing does not establish a certain recovery value.