Lantheus Holdings, Inc. — Q2 2017 Form 10-Q
Business context and period. Lantheus develops, manufactures and commercializes diagnostic medical imaging products, including DEFINITY, TechneLite and Xenon. This unaudited report covers the three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $88.8 | $78.0 | $170.2 | $154.4 |
| Gross profit | $45.9 | $35.8 | $85.7 | $69.5 |
| Gross margin | 51.7% | 45.9% | 50.4% | 45.0% |
| Operating income | $17.9 | $14.2 | $29.8 | $31.9 |
| Net income | $13.6 | $7.4 | $17.7 | $17.7 |
| Diluted EPS | $0.35 | $0.24 | $0.46 | $0.58 |
| Operating cash flow | Not separately presented | Not separately presented | $26.1 | $21.4 |
- Q2 revenue rose 13.9%; six-month revenue rose 10.2%. Q2 net income increased, while six-month net income was essentially unchanged.
- Q2 gross margin improved to 51.7%. For the six months, operating income declined despite higher gross profit, partly because 2016 included a $5.9 million gain on sale of assets; 2017 also included a $2.2 million debt-extinguishment loss and $1.7 million of refinancing-related G&A expense.
- For the six months, DEFINITY revenue was $77.8 million, up from $64.9 million; TechneLite was $53.5 million, up from $50.1 million; Xenon was $16.0 million, up from $14.9 million. The company attributed growth principally to DEFINITY volume and increased TechneLite customer volumes. The $5.0 million GE Healthcare license payment was recognized as revenue.
- Cash and equivalents were $57.2 million at June 30, versus $51.2 million at December 31, 2016. Current assets were $125.6 million and current liabilities $43.1 million.
- Six-month capital expenditures were $8.3 million. Investing activities used $7.1 million and financing activities used $13.1 million.
- Debt carrying value was $268.7 million, including current portion, versus $278.1 million at year-end. The new term loan principal was $274.3 million; the $75 million revolving facility had no borrowings outstanding. Term-loan interest was 5.5% at June 30.
Material changes versus prior period
- U.S. revenue increased 19.9% in Q2 and 14.7% for the six months; international revenue declined 16.3% and 13.6%, respectively, primarily following the 2016 sale of the Australian radiopharmacy business.
- R&D expense increased 101% in Q2 and 88% for the six months, primarily due to scheduled decommissioning-related depreciation and other charges, higher employee costs, and a European Phase IV study.
- In March 2017, Lantheus refinanced its prior $365 million term facility with a five-year $275 million term facility and replaced its $50 million asset-based facility with a $75 million revolver. The refinancing lowered interest expense, but generated a $2.2 million extinguishment loss.
- Weighted-average shares increased substantially year over year, reflecting a higher share count; six-month diluted EPS was lower despite broadly flat net income.
Outlook, risks and contingencies
- Management stated that current cash, operating results and revolver availability are expected to fund liquidity needs for the foreseeable future. This is not quantified earnings or revenue guidance.
- Management expects DEFINITY to remain a growth driver, but highlights competition, reliance on increased penetration, and U.S. patent expirations in 2019 and 2021. DEFINITY and several other products rely on JHS as sole-source manufacturer; alternate-source transfer to Samsung BioLogics is ongoing, with no assurance on timing or completion.
- Other principal risks include customer concentration and contract renewals, Xenon competition and pricing, Moly isotope availability and cost, product development and regulatory outcomes, reimbursement, and substantial indebtedness. The credit agreement imposes leverage covenants, restrictions and collateral liens.
- The company recorded a full valuation allowance against domestic net deferred tax assets, citing its history of losses and ongoing business risks despite cumulative profitability over the three-year period. A future release could materially affect results.
- Lantheus licensed flurpiridaz F 18 to GE Healthcare, which will lead further development and commercialization. Lantheus received $5.0 million upfront and may receive up to $60.0 million in milestones plus royalties; future development, approval and commercialization remain uncertain.
- No material ongoing litigation or material targeted government investigations were reported as of June 30, 2017. A $28.2 million surety bond provides required facility decommissioning assurance; the recorded asset retirement obligation was $9.9 million.
Important facts for investors to verify
- Whether DEFINITY sales growth and margins persist amid competition, patent timelines and sole-source manufacturing exposure.
- Whether the Samsung BioLogics technology transfer and supply diversification proceed successfully and on schedule.
- Customer contract concentration, TechneLite volumes and Xenon pricing or volume effects from renewed competition.
- Debt covenant headroom and cash generation, including working-capital needs and the ability to access the full revolver.
- Progress, regulatory milestones and potential economics of the GE Healthcare flurpiridaz F 18 collaboration.