Lantheus Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Lantheus develops, manufactures and sells diagnostic medical imaging products, including DEFINITY, TechneLite and Xenon, in U.S. and international markets. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $81.4m | $76.5m | +6.4% |
| Gross profit / gross margin | $39.8m / 48.9% | $33.7m / 44.1% | Margin +4.8 percentage points |
| Operating income / margin | $11.9m / 14.7% | $17.7m / 23.1% | Down; prior period included $5.8m asset-sale gain |
| Net income / diluted EPS | $4.1m / $0.11 | $10.3m / $0.34 | Lower, including refinancing costs and debt-extinguishment loss |
| Cash from operations | $5.5m | $3.8m | +$1.7m |
| Capital expenditures | $4.9m | $1.7m | Free cash flow, defined as operating cash flow less capex: $0.6m vs. $2.1m |
- Revenue gains were led by DEFINITY, up 20.0% to $37.7m, and TechneLite, up 8.0% to $26.8m. Xenon was nearly flat at $8.1m; other revenue declined to $8.8m. U.S. revenue increased 9.4% to $71.0m; international revenue fell 10.5% to $10.3m, mainly following the sale of Canadian and Australian radiopharmacy businesses.
- Operating expenses rose to $27.8m from $21.9m. R&D increased to $5.4m from $3.0m, mainly reflecting depreciation tied to scheduled decommissioning of certain assets. G&A increased to $12.3m, including $1.7m of refinancing-related costs.
- Interest expense decreased to $5.4m from $7.0m. The quarter also included a $2.2m loss on extinguishment of debt. The income tax provision was $0.8m; the company maintained a full valuation allowance against domestic net deferred tax assets.
- Cash and equivalents were $40.9m at quarter-end, down $10.3m from year-end. Total assets were $249.6m and stockholders’ deficit was $101.2m.
- Debt refinancing on March 30 replaced the prior term loan with a five-year $275m term facility and replaced the prior revolver with a $75m revolving facility. The term loan carried a 5.5% interest rate at March 31 and matures June 30, 2022. No revolver borrowings were outstanding. Reported long-term debt, net of discount and issuance costs, was $266.3m, plus a $2.8m current portion. Gross principal was $275m.
Material changes and unusual items
- Gross margin improved as higher DEFINITY volumes and lower material costs lifted U.S. gross profit. The prior-year operating comparison benefited from a $5.8m gain on sale of assets; Q1 2017 had no comparable gain.
- The debt refinancing used approximately $15.3m of cash on hand alongside new loan proceeds, and produced a $2.2m extinguishment loss, $1.7m of G&A costs and $1.6m of capitalized new financing costs.
- Management reported that operating cash flow was partly offset by working-capital outflows, including increased receivables and inventory and payment of prior-year bonuses.
Outlook, risks and contingencies
- No specific numeric revenue or earnings guidance is provided. Management said current cash, expected operating results and revolver availability should fund liquidity needs for the foreseeable future, and stated liquidity was expected to be sufficient for at least the next 12 months. Revolver use may be constrained by credit-agreement covenants.
- Credit terms include a maximum consolidated leverage ratio of 5.00-to-1.00 through Q1 2018, stepping down to 4.75-to-1.00 through Q1 2019 and 4.50-to-1.00 thereafter. The facilities are secured by substantially all relevant assets and impose customary operating and payment restrictions.
- Supply concentration is a significant risk: Jubilant HollisterStier is the sole-source manufacturer of DEFINITY, Neurolite, Cardiolite and TechneLite evacuation vials. Technology transfer for next-generation DEFINITY to Samsung BioLogics is ongoing, with no assurance of completion or supply timing. Moly availability and cost, customer concentration, DEFINITY competition and Xenon competition are also identified risks.
- After quarter-end, Lantheus announced an exclusive flurpiridaz F 18 collaboration and license agreement with GE Healthcare. GE will fund the second Phase III study and worldwide regulatory approvals and commercialization; Lantheus received a $5m upfront payment in April and may receive up to $60m in milestones plus royalties, subject to approvals and commercial success. Lantheus retains a U.S. co-promotion option.
- The company reported no material ongoing litigation or known material regulatory investigations at March 31, 2017. A $28.2m surety bond provides financial assurance for facility decommissioning; the recorded asset-retirement obligation was $9.6m.
Most important facts for investors to verify
- Whether DEFINITY growth continues and whether supply diversification, including the Samsung BioLogics transfer, progresses as planned.
- Whether customer and Moly supply concentration, Xenon competition and product reimbursement conditions affect revenue, margins or cash generation.
- Compliance with leverage covenants and the company’s ability to manage its $275m term debt and preserve access to the undrawn revolver.
- Progress, funding responsibilities, approval prospects and eventual economics of the GE Healthcare flurpiridaz F 18 agreement.
- Whether improving operating cash flow can support capital spending and liquidity while domestic deferred tax assets remain fully reserved.