ANI Pharmaceuticals, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Dollar amounts below are in millions unless stated otherwise. ANI develops, manufactures, and markets branded and generic specialty pharmaceuticals.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net revenue | $20.6 | $18.8; up 9.3% |
| Operating income | $5.7 | $9.6 |
| Operating margin | 27.6% | 50.9% |
| Net income | $1.3 | $4.4 |
| Diluted EPS | $0.12 | $0.38 |
| Operating cash flow | $11.0 | $1.1 |
| Investing cash flow | $(85.6) | $(4.6) |
Revenue growth reflected higher generic sales (up 8.1%), branded sales (up 31.0%), and contract manufacturing (up 14.9%). Contract services and other income declined 69.7%, mainly because ANI no longer received royalties on the previously marketed authorized generic of Vancocin. Gross margin before depreciation and amortization was 83.4%, compared with 85.4% a year earlier. Cost of sales rose faster than revenue, partly due to increased sales subject to profit-sharing arrangements.
Operating expenses increased 61% to $14.9 million. Depreciation and amortization rose to $4.6 million from $1.3 million, largely reflecting acquired product rights; R&D increased to $1.0 million and SG&A to $5.9 million. These costs drove the lower operating income and net income despite revenue growth. The effective tax rate was 53.4%, versus 36.8% in Q1 2015.
Cash and cash equivalents were $77.7 million at March 31, down from $154.7 million at year-end. Current assets were $116.6 million and current liabilities $16.2 million. Operating cash flow benefited from working-capital movements, including a $4.0 million increase in accrued expenses, returned goods reserve, and other items. Investing outflows included $75.3 million for Corticotropin and Corticotropin-Zinc rights and $8.8 million cash paid for H2-Pharma rights. The company repurchased $2.5 million of stock.
Convertible notes had $143.8 million principal and a $115.2 million net carrying value; they mature in December 2019, bear a 3.0% coupon, and had a stated annualized effective interest rate of 7.8%. Total liabilities were $131.4 million and stockholders’ equity was $160.2 million at quarter-end.
Material developments, outlook, and risks
- In January, ANI acquired the Corticotropin and Corticotropin-Zinc NDAs for $75.0 million plus a percentage of future net sales, and acquired rights to market two products from H2-Pharma for $10.0 million total consideration ($8.8 million cash and $1.2 million assumed royalties).
- The Inderal LA acquisition closed in April 2016, after quarter-end: $60.0 million cash plus future gross-profit-based milestone payments. ANI also placed $5.0 million in escrow. ANI said current resources and anticipated operating revenue should cover working-capital needs for at least 12 months; it may raise equity or debt to fund further acquisitions.
- Management expected R&D, SG&A, and amortization expense to increase. R&D spending was expected to rise in 2016 to support pipeline expansion; SG&A was expected to rise to support growth. Amortization was expected to increase following the Inderal LA acquisition. Cost of sales as a share of revenue was also expected to remain higher due to profit-sharing products. No numerical earnings or revenue guidance was provided.
- Two products marketed without FDA-approved applications, EEMT and Opium Tincture, generated $9.0 million of Q1 revenue, versus $10.3 million a year earlier. FDA enforcement could require approval or withdrawal, potentially reducing revenue materially. Some contract-manufactured products and related royalties also depend on products marketed without approved applications.
- Other risks include reliance on single-source qualified API suppliers, imported-material disruptions and DEA quotas for controlled-substance inputs; three customers represented 65% of Q1 revenue and 67% of receivables. The filing also describes the Louisiana Medicaid lawsuit and metoclopramide litigation; outcomes and potential exposure are uncertain.
- ANI reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material change to the risk factors in its 2015 Form 10-K.
Key facts for investors to verify
- Whether acquired products, especially Inderal LA and Corticotropin products, generate sales and cash flows sufficient to offset substantial acquisition spending and higher amortization.
- Cash and liquidity after the April Inderal LA cash payment and $5.0 million escrow transfer, together with funding needs for any further acquisitions.
- Drivers and sustainability of operating cash flow, including the quarter’s working-capital benefit from accrued liabilities.
- Exposure to FDA action affecting unapproved products, and the status and potential financial impact of the disclosed legal proceedings.
- Customer and API supplier concentration, product-level competition and price erosion, and the timing and economics of development projects.