ANI Pharmaceuticals, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context
ANI develops, manufactures, and markets branded and generic prescription pharmaceuticals, focusing on niche and higher-barrier products. It operates three manufacturing facilities in the United States and Canada and reports one operating segment. The August 2018 WellSpring acquisition expanded its Canadian contract-manufacturing and development operations.
Financial performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Net revenue | $54.4 | $47.3 | $107.2 | $93.8 |
| Operating income | $9.3 | $7.3 | $13.7 | $13.8 |
| Net income | $6.6 | $2.8 | $7.0 | $5.0 |
| Diluted EPS | $0.53 | $0.23 | $0.57 | $0.42 |
| Operating margin | 17.1% | 15.3% | 12.8% | 14.7% |
| Operating cash flow | Not separately presented for quarter | $19.0 | $31.5 |
Q2 revenue increased 15.0%; H1 revenue increased 14.4%. Generic and branded product sales and contract manufacturing grew, while royalty and other revenue fell sharply as several acquired products transitioned to sales under ANI’s own labels. Q2 cost of sales, excluding depreciation and amortization, was 28.8% of revenue versus 35.1%; H1 was 28.3% versus 39.8%. The filing attributes the H1 cost ratio improvement partly to non-recurrence of $5.6 million of acquired-inventory costs recorded in 2018 and lower royalty expense.
H1 operating income was nearly flat despite higher revenue: R&D, selling, general and administrative costs, and depreciation and amortization rose substantially. H1 D&A was $25.6 million versus $16.5 million. Q2 income tax benefit was $0.7 million, including discrete effects such as release of ANI Canada’s $1.9 million valuation allowance; H1 tax benefit was $0.2 million. These items helped lift net income relative to operating income.
Balance sheet, debt, and liquidity
- At June 30, cash and cash equivalents were $40.6 million, down from $43.0 million at year-end; restricted cash was another $5.0 million. Current assets were $168.9 million and current liabilities $166.8 million.
- Total assets were $446.9 million; total liabilities $239.3 million; stockholders’ equity $207.7 million. Accounts receivable was $76.3 million and inventory $45.3 million.
- Term-loan principal outstanding was $71.3 million, with $4.5 million scheduled as current. The $75 million revolver and $118 million delayed-draw term loan (DDTL) were undrawn. The DDTL is designated to repay the remaining 3.0% convertible notes due December 2019; the notes’ $118.75 million principal is classified as current.
- The company reported $19.0 million of H1 operating cash flow, $24.2 million used in investing, and $2.8 million provided by financing. Operating cash flow fell $12.5 million year over year, principally due to working-capital increases; investing outflows included the $16.0 million Teva payment, acquisitions, and $3.4 million of capital expenditures.
- Management said available working capital, expected operating revenue, the DDTL, and revolver should fund requirements for at least 12 months. Credit-facility covenants include maximum total leverage and minimum fixed-charge coverage requirements.
Material changes, outlook, and risks
- Revenue drivers: Generic sales increased 20% in Q2, with launches including Ezetimibe-Simvastatin and Candesartan and higher Vancomycin sales. Branded sales rose 33%, supported by products launched under ANI labels in 2018. Contract manufacturing revenue more than doubled, primarily reflecting WellSpring/ANI Canada.
- Acquisitions and unusual costs: ANI paid Teva $16.0 million in January 2019 to end future royalties on products associated with ten ANDAs; it recorded $6.8 million of cumulative amortization. In March, it acquired 35 ANDAs for $2.5 million. A June acquisition of seven development-stage products from Coeptis cost $2.3 million plus transaction costs, expensed as R&D; up to $12 million of development and commercial milestone payments may become payable if estimable and probable.
- Management outlook: ANI expected R&D, SG&A, and D&A to remain higher in 2019 than in 2018. Cortrophin Gel re-commercialization was progressing, with a supplemental NDA filing targeted for Q1 2020; validation and registration-batch work was expected in Q3 2019. Vancocin oral solution received FDA approval of its prior approval supplement in June 2019. The filing provides no specific revenue or EPS guidance.
- Regulatory and operating risks: EEMT and Opium Tincture are marketed without approved NDAs; combined revenue was $5.4 million in Q2 and $10.9 million in H1. FDA enforcement could require approval or withdrawal. Certain contract-manufactured products also lack FDA-approved NDAs. ANI relies in some cases on single-source API suppliers and DEA quotas for controlled-substance ingredients; imports may be disrupted by inspections.
- Concentration and contingencies: Three customers represented 80% of Q2 revenue and 83% of receivables at quarter-end. Disclosed legal matters include Louisiana Medicaid litigation, an Arbor Pharmaceuticals false-advertising action, a newly asserted metoclopramide product-liability claim, and a federal generic-drug-industry investigation with which ANI said it was cooperating. Outcomes and potential financial effects are uncertain.
- Other notable item: Interest-rate swaps had a combined $6.4 million fair-value liability at quarter-end; the H1 fair-value changes contributed $4.6 million of other comprehensive loss, net of tax. The swaps hedge variable-rate exposure on the term loan and DDTL.
Most important facts for investors to verify
- Whether growth in generic, branded, and contract-manufacturing sales offsets the reduction in royalties and the expected higher operating-cost base.
- Whether the DDTL will be available and sufficient to refinance the December 2019 convertible notes, and the resulting debt, interest, and dilution effects.
- Progress toward Cortrophin’s planned Q1 2020 supplemental NDA filing and the regulatory and commercial assumptions behind that timeline.
- Exposure to FDA action involving unapproved products, API supply interruptions, customer concentration, DEA quotas, and the disclosed legal matters.
- Cash conversion and working-capital trends, including receivables, inventory, rebates and returns reserves, and the cash impact of acquisitions and royalty-related payments.