ANI Pharmaceuticals, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results are for ANI Pharmaceuticals and its subsidiary. The company develops, manufactures, and markets branded and generic prescription pharmaceuticals, with manufacturing facilities in Minnesota.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2013 period.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $17.4 | $7.8 | $34.9 | $19.6 |
| Operating income (loss) | $8.2 | $0.8 | $9.2 | $(2.6) |
| Net income (loss) | $6.7 | $1.2 | $7.7 | $(3.1) |
| Diluted EPS | $0.59 | $0.13 | $0.70 | $(2.27) |
| Operating margin | 47.2% | 10.3% | 26.5% | (13.1)% |
| Net margin | 38.8% | 15.2% | 22.2% | (16.0)% |
| Operating cash flow | — | — | $11.3 | $(2.6) |
Q3 revenue rose 121.9%; nine-month revenue rose 78.7%. Generic product revenue was $10.2 million in Q3 and $23.1 million for the nine months. Branded product revenue was $4.8 million and $6.1 million, respectively. Contract manufacturing generated $1.4 million and $4.1 million; contract services and other income generated $1.0 million and $1.6 million.
Cost of sales, excluding depreciation and amortization, was 17.6% of revenue in Q3 and 22.3% for the nine months, compared with 34.6% and 37.3% in 2013. Management attributed the improved mix and margins primarily to EEMT pricing and a favorable product mix. Depreciation and amortization increased substantially with acquired product rights and ANDAs.
Liquidity, capital resources, and balance sheet
- At September 30, 2014, cash and cash equivalents were $35.1 million, versus $11.1 million at December 31, 2013. Current assets were $57.6 million and current liabilities $8.1 million; the resulting current ratio was approximately 7.1.
- Total assets were $107.6 million and stockholders’ equity was $99.5 million. The balance sheet lists no borrowings or debt at period-end.
- Nine-month operating cash flow was $11.3 million; investing cash outflow was $35.4 million, mainly for Teva ANDAs and Lithobid and Vancocin rights; financing cash inflow was $48.1 million, primarily from the March follow-on offering.
- The March 2014 offering raised $46.7 million net. The company acquired 31 Teva ANDAs for $12.5 million, Lithobid rights for $11.0 million plus a probable $1.0 million contingent payment, and Vancocin rights for $11.0 million.
Material changes and management commentary
- Generic revenue benefited from higher EEMT prices and increased sales of Fluvoxamine, hydrocortisone enema, and Opium Tincture. Management said a competitor’s return to the EEMT market in early 2014 negatively affected unit sales and was expected to continue; nine-month revenue also included $3.9 million of EEMT price-protection charges.
- New Lithobid and Vancocin sales contributed to branded revenue growth. Higher royalties from Vancocin’s authorized generic contributed to contract services and other income.
- Management said available resources and anticipated operating revenue should meet working-capital needs for at least the next 12 months. It continues to evaluate product and company acquisitions and may fund them with equity, debt, or both. No formal earnings or revenue guidance is provided.
- Research and development spending rose to $2.1 million for the nine months, including work on acquired products, collaborations, and an anti-cancer ANDA submission. The filing reports new collaborations with Sofgen and Dexcel, with products subject to future development and/or FDA approval.
Risks, contingencies, and unusual items
- Unapproved products and regulation: EEMT and Opium Tincture are marketed without FDA-approved applications. Together they generated $19.4 million, or about 56% of nine-month revenue. FDA enforcement could require approval efforts or withdrawal from the market. The FDA confirmed closure of its Opium Tincture inspection in April 2014, but the company gives no assurance about future regulatory action.
- Supply and customer concentration: Two suppliers accounted for 43% of inventory purchases in the first nine months; certain APIs have only one qualified source and may rely on international suppliers. Three customers represented 26%, 20%, and 16% of nine-month revenue; receivables from those customers totaled $9.6 million.
- Legal matters: The Louisiana Medicaid case involving products from a former operation was remanded to state court on September 30, 2014; potential damages, penalties, and fines are unspecified. The company also faces metoclopramide product-liability claims, with 92 complaints covering 2,944 plaintiffs; outcome and any loss range are unclear. Prior shareholder litigation matters described in the filing were concluded.
- Tax attributes: The company’s ability to use certain net operating losses and tax credits may be limited under Section 382 following ownership changes, potentially increasing future tax payments. It recorded $1.6 million of income tax provision for the nine months and maintains a full valuation allowance against net deferred tax assets.
- Other items: Nine-month 2014 results include $2.7 million of stock-based compensation, including a $1.3 million catch-up charge. No merger transaction costs were incurred in 2014; 2013 included significant merger-related expenses. The filing reports no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether EEMT pricing, market share, and price-protection obligations remain sustainable after competitor re-entry.
- Regulatory status and revenue exposure for EEMT, Opium Tincture, and customer-marketed unapproved products.
- Sales, profitability, and amortization burden from the Teva ANDAs, Lithobid, and Vancocin acquisitions.
- Customer concentration, single-source API dependencies, and continuity of DEA quotas for Opium Tincture.
- Potential outcomes and financial exposure from the Louisiana Medicaid and metoclopramide litigation, and future utilization of tax attributes.