Lantheus Holdings, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. Lantheus develops, manufactures and sells diagnostic medical imaging products, including DEFINITY, TechneLite and Xenon. Comparisons are with the corresponding 2014 periods. Dollar amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $73.3 | $75.6 | $148.1 | $148.9 |
| Gross profit | $32.7 | $31.1 | $68.4 | $61.1 |
| Gross margin | 44.6% | 41.1% | 46.2% | 41.0% |
| Operating income | $5.4 | $10.0 | $16.7 | $18.5 |
| Net loss | $(24.4) | $(1.6) | $(24.0) | $(2.9) |
| Basic and diluted loss per share | $(1.29) | $(0.09) | $(1.30) | $(0.16) |
| Operating cash flow | Not presented by quarter | $3.7 | $(5.0) | |
| Capital expenditures | Not presented by quarter | $6.1 | $3.5 |
For Q2, revenue fell 3.0%, while gross profit increased 5.2%; for the first half, revenue was down 0.5% and gross profit rose 11.8%. Higher DEFINITY unit volume and higher Xenon selling prices supported U.S. results. Lower TechneLite volumes weighed on revenue. International revenue declined amid unfavorable foreign exchange and competitive pressure, and international gross profit fell substantially.
Q2 operating income declined despite higher gross profit, principally as operating expenses rose, including a $6.5 million Avista termination fee within general and administrative expense. First-half R&D expense increased $2.9 million, including higher depreciation associated with planned asset decommissioning. The company later halted that decommissioning plan, reducing Q2 depreciation expense by $3.7 million versus Q1.
Cash, debt and liquidity
- Cash and cash equivalents were $22.2 million at June 30, 2015, versus $19.7 million at December 31, 2014. Current assets were $79.0 million and current liabilities were $37.5 million.
- Operating cash flow was $3.7 million for the first half, compared with cash use of $5.0 million in 2014. Cash used in investing was $6.1 million; financing provided $5.1 million. Financing cash flows included the IPO and debt refinancing transactions.
- On June 30, the company completed an IPO at $6 per share, issuing 12.26 million shares and receiving approximately $67.2 million net of underwriting discounts, commissions and related expenses.
- It also entered a $365 million, seven-year senior secured term facility and used term-loan proceeds, IPO proceeds and cash to repay the $400 million 9.750% senior notes, pay related costs and premiums, and repay $8 million drawn under the revolver. The reported term-loan carrying amount, net of discount and issuance costs, was $354.6 million; $3.65 million was classified as current. The notes were redeemed on July 30, 2015.
- The term loan bears variable interest at LIBOR plus 6.00% (subject to a 1.00% LIBOR floor) or the defined base rate plus 5.00%. The $50 million revolver had no drawn balance at June 30; net borrowing-base availability was approximately $29.9 million after the standby letter of credit and accrued interest. Use of the revolver may be constrained by debt covenants.
- Management said existing cash, operating results and revolver availability should fund liquidity needs for at least 12 months. Total liabilities were $429.1 million and stockholders’ deficit was $195.6 million.
Material changes, outlook and risks
- Products and customers: Q2 DEFINITY revenue was $28.4 million versus $23.5 million a year earlier; TechneLite was $17.4 million versus $23.5 million; Xenon was $12.0 million versus $8.9 million. Written supply agreements with major customer Cardinal expired at year-end 2014 and had not been replaced. Orders were being fulfilled on a purchase-order basis. Management said it expected quarterly revenue and profit contribution for the rest of 2015 to be below Q1 2015 and the year-ago periods, while the effect on gross margin was expected to remain favorable but moderate from Q1.
- Manufacturing and isotope supply: JHS was the sole-source manufacturer for DEFINITY and Neurolite, and the company was pursuing alternate supply and technology transfers, including a planned FDA filing for Pharmalucence DEFINITY manufacturing in 2015. A planned 2015 NRU reactor shutdown constrained Xenon availability for about two weeks; management reported no material effect on 2015 results. The company expected alternative Xenon supply development to support commercial production in 2016, subject to development and regulatory approvals. Supply disruption remains a risk.
- Competition and development: Management identified competition from newly approved Lumason as a risk to DEFINITY growth. Lantheus was seeking strategic partners for flurpiridaz F 18 and other development programs; the filing gives no specific financial guidance for these programs.
- Debt and interest: Variable-rate borrowings expose the company to higher interest costs; management estimated a 100-basis-point adverse rate change would increase interest expense by about $53,000. Term-loan leverage covenants tighten over time, and additional revolver borrowing could affect compliance.
- Unusual items: The $15.5 million debt-extinguishment loss included a $9.7 million redemption premium and $5.8 million write-off of unamortized note issuance costs. Interest expense also included $3.3 million relating to interest through the notes’ redemption date. The $6.5 million Avista agreement termination fee was recorded in Q2 G&A.
- Contingency: A federal court granted an insurer’s summary-judgment motion in the company’s business-interruption claim related to the NRU reactor shutdown. Lantheus appealed in May 2015; the timing and amount, if any, of recovery are uncertain. The company reported no other material ongoing litigation or regulatory proceedings.
Investor verification priorities
- Track Cardinal order volumes, product mix, pricing and progress toward new written supply agreements.
- Confirm progress and regulatory approvals for alternate manufacturing, especially DEFINITY and Xenon supply.
- Review term-loan interest costs, leverage-covenant headroom and the practical availability of revolver capacity.
- Assess whether DEFINITY growth can continue amid competition and whether international weakness and foreign-exchange effects persist.
- Monitor the insurer appeal and any subsequent developments affecting potential recovery.