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ANI Pharmaceuticals (ANIP) Q4 2018 Earnings Conference Call Transcript

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ANIP earnings call for the period ending December 31, 2018.

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ANI Pharmaceuticals (ANIP -4.72%)
Q4 2018 Earnings Conference Call
Feb. 27, 2019 10:30 a.m. ET


Prepared Remarks:


Good morning, everyone, and welcome to ANI's fourth-quarter 2018 earnings call. [Operator instructions] Please note, this call may be recorded. It is now my pleasure to turn today's program over to Mr. Arthur Przybyl.

Please go ahead.

Arthur Przybyl -- Chief Executive Officer and President

Good morning, everyone, and welcome to ANI's earnings conference call for the full-year and fourth-quarter 2018. Joining me today is Stephen Carey, our chief financial officer. Before we begin, I want to refer everyone to the forward-looking statements language in this morning's press release and ask each of you to review it carefully as important context for this conference call. Discussions will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles.

Reconciliation of both non-GAAP financial measures can be found in our earnings release dated today. Today, we reported our full-year and fourth-quarter results. For the fourth quarter, ANI reported record net revenues of $57.1 million and record adjusted non-GAAP EBITDA of $22.2 million. These numbers represent increases of 21% and 13%, respectively, over the prior-year period.

Fourth-quarter generic product revenues increased by 13%, and our branded product revenues increased by 21% over the prior-year period. These increases are the direct result of new product launches and helped drive our robust quarterly results. Full-year 2018 results generated record net revenues of $201.6 million and record adjusted non-GAAP EBITDA of $84.4 million, increases of 14% as compared to 2017. For the year, adjusted non-GAAP EBITDA was 42% of net revenue, and we generated $67.1 million of cash from operations.

In 2018, research and development expenses increased by $6.3 million, an increase of 70% primarily attributed to our Cortrophin recommercialization effort. During the year, we launched a total of 11 drug products: seven generic and four branded products, increasing our commercial drug portfolio to 42 products, an increase of 35%. Annualizing revenues from our 2018 product launches, combined with anticipated 2019 new product launches and 2019 forecasted contract manufactured revenues, we've estimated 2019 revenues in the range of $231 million to $245 million, estimated revenue increases of 15% to 22%. As a result, we estimated 2019 adjusted non-GAAP EBITDA in the range of $95 million to $105 million, estimated EBITDA increases of 13% to 24%.

Our 2019 financial guidance does not include any additional asset acquisitions and their net effect to our business model and guidance. In 2018, we acquired several generic products from our first FTC divestiture process. In the fourth quarter, we realized a full revenue effect from acquiring and launching four branded products in the ANI label, acquired and began integration of our new manufacturing facility in Canada that is intended to grow our contract manufacturing business and provide additional capacity for our own ANI-labeled products. Since 2013, we have closed 26 total transactions for approximately $378 million and continue to seek additional opportunities to augment the growth of our business model through acquisitions.

We intend to use our cash on hand and available credit line to fund these anticipated future transactions. We also refinanced our debt, providing us with a credit line of $75 million for future acquisitions and allowing us to retire the current convertible debt without any additional dilution to our existing shareholder base, in front of our anticipated Cortrophin supplemental NDA filing. We remain on track to file our Cortrophin supplemental NDA by the first quarter of 2020. In conclusion, our 2019 results and 2020 guidance continue to exemplify a growing business model that generates increasing cash flow from its operations in an admittedly tough but improving business environment for our industry.

Regardless of the macro business climate, we continue to see opportunities that arise from time to time and that our cash flow allows us to pursue in order to strengthen and grow our business. And finally, we have a compelling transformational product in Cortrophin, and we are advancing it ever closer to realizing its commercial potential. I will now turn the conference call over to our CFO Stephen Carey, who'll provide you with more details on our financial results.

Stephen Carey -- Chief Financial Officer

Thank you, Art. Good morning to everyone on the line, and thank you for joining the call to discuss ANI's fourth-quarter and full-year 2018 financial results. We are pleased to report this morning that ANI recorded a strong fourth quarter to close out 2018 and, by extension, posted our fifth consecutive year of record net revenue, adjusted non-GAAP EBITDA and adjusted non-GAAP diluted earnings per share. Full-year net revenue reached $201.6 million, representing a 14% increase versus 2017.

On gross profit pull-through, our new sales gains drove full-year adjusted non-GAAP EBITDA to $84.4 million and adjusted non-GAAP diluted earnings per share to $5.07, representing an increase of 14% and 30% as compared to 2017, respectively. Turning our attention to the highlights of the fourth quarter, for the three months ended December 31, 2018, ANI posted net revenues of $57.1 million and adjusted non-GAAP EBITDA of $22.2 million, representing new quarterly records for the company. Corresponding adjusted non-GAAP EPS was $1.32 per diluted share. At $57.1 million, net revenue for the three months ended December 31, 2018 was up $9.8 million or 21% versus prior year on gains in all four of our product categories.

Revenues of our generic pharmaceutical products increased 13% from prior year to $33.7 million, driven by Ezetimibe-Simvastatin, Diphenoxylate atropine and other products launched in 2018, tempered by declines in lower-margin products, such as fenofibrate and lower sales of Nilutamide. Branded pharmaceutical revenues were $18.8 million in the quarter, an increase of 21% primarily due to sales Atacand and Atacand HCT, which were launched in the ANI label in October of 2018, and sales of Casodex and Arimidex, which were launched in the ANI label in July of 2018. Gains in these products were tempered by lower sales of Inderal LA and Vancocin. Revenues for our contract manufacturing services were $3.7 million, up $1.8 million or 94%, principally due to a full quarter's worth of revenues for ANI Canada.

Royalty and other income was $878,000 for the quarter, driven by royalty income related to sales of Gilead's Yescarta, as well as the impact of a full quarter's worth of product and laboratory development services revenues for ANI Canada. Cost of sales in the current period was $20.1 million or 35% of net revenues. Prior year cost of sales included $2.9 million of costs recorded due to the step-up of basis for finished goods inventory, purchased in conjunction with certain acquisitions. Excluding this amount, prior-year cost of sales was $17.5 million or 37% of net revenues.

The approximate two-point year-over-year improvement in margin is due to favorable product mix, driven by decreased sales of products subject to profit-sharing arrangements. Selling, general and administrative expenses were $13.4 million as compared to $8.9 million in the prior year, driven by approximately $2 million of ANI Canada cost, incremental cost to support the growth of our U.S. business and certain transaction-related expenses incurred in the quarter. Research and development costs totaled $3.5 million in the quarter, up $831,000 or 31% from prior year.

This increase was driven by investment behind our Cortrophin recommercialization program and work related to our underlying generic pipeline including new product and projects acquired in our second quarter 2018 asset purchase from Amneal. Turning our attention to the debt portion of our capital structure. we had a very active quarter. The continued strength of our business, the consistency of our results and the health of our cash flow allowed management to proactively address various components of its debt structure.

As previously announced, on December 7, we utilized cash from our balance sheet to repurchase in privately negotiated transactions $25 million of our outstanding 3% convertible senior notes, which are due December of this year, and correspondingly, unwound a portion of certain hedge transactions related to the notes. The net impact of these transactions was to reduce the face value of the remaining convertible notes outstanding to $118,750,000 and to remove a portion of the equity dilution risk for our shareholders. In addition, as we have previously announced on December 27, we entered an amended and restated five-year senior secured credit facility for up to $265.2 million of financing with our existing syndicate of bank lenders, which is led by Citizens Bank with strong support from Huntington, MUFG, Regions, U.S. Bank and JP Morgan.

This transaction amended our previous $125 million facility and was specifically structured to address the December 2019 maturity of the remaining balance of the convertible senior notes. This is achieved through a new $118 million delayed draw term loan that is fully committed by the bank group and can be accessed by ANI at any time and in multiple tranches through December 1, 2019. In addition, the facility includes the extension of our pre-existing $72 million Term Loan A and increases our pre-existing $50 million revolving credit facility to $75 million. Interest on the facility is LIBOR-based with the traditional leverage-based pricing grid that flexes between 1.5% and 2.75% above LIBOR.

Further, in February of 2019, we entered an interest rate swap with a forward start date to manage our exposure to LIBOR related to the anticipated drawdown of the $118 million delayed draw term loan and fixed the LIBOR component of our rate at 2.47%. We had previously hedged the $72 million term loan at a rate of 2.6%. The culmination of these transactions provides ANI with fully committed financing to address the upcoming December 2019 maturity of our convertible debt with bank debt that will inflate our shareholders from future potential equity dilution as we look forward to the next five years and anticipate continued growth of the company. Further, the interest rate swap transactions provide certitude of the LIBOR portion of our rate at approximately 2.5% through December of 2023.

From a balance sheet perspective, we had unrestricted cash and cash equivalents of $43 million as of December 31, 2018. This balance is reflective of $27.2 million of cash flow from operations during the quarter and is net of the $25 million of cash utilized to repurchase convertible notes during the quarter. On a full-year basis, we've generated 61 -- I'm sorry, $67.1 million of cash flow from operations while investing $27.4 million back into the business through our acquisition of WellSpring Pharma Services; purchase of generic, commercial and pipeline opportunities; and capital expenditures to enhance the capabilities of our manufacturing facilities. Total net debt as of the balance sheet date approximated $148 million, representing just 1.75 times net leverage on a trailing 12-month basis and less than 1.5 turns when utilizing the midpoint of our full-year 2019 guidance.

The newly upsized $75 million revolver portion of our senior secured credit facility remains undrawn, and coupled with our cash flow from operations, continues to provide us with flexibility in pursuing further business development transactions. Looking forward to 2019, we currently project net revenues to reach between $231 million and $245 million, representing a 15% to 22% increase over 2018, driven by the return to full-year growth of our generic product portfolio, continued execution in maximizing the potential of our currently commercialized products and the strength of our plan 2019 product launches; ongoing expansion of our brand revenue base with a full-year impact of marketing Arimidex, Casodex, Atacand and Atacand HCT in the ANI label and successful integration of ANI Pharmaceuticals Canada. Adjusted non-GAAP EBITDA is projected to be between $95 million and $105 million, reflecting 13% to 24% growth over our record 2018 year. Inherent in this guidance is continued investment in research and development spending, driven by increased activity in our Cortrophin Gel recommercialization program.

Our guidance ranges include approximately $14.5 million to $16.5 million of total ANI R&D expense as compared to $15.4 million incurred in 2018. In addition, we assume investment in SG&A expense to support the continued growth of our business and brands. Adjusted non-GAAP diluted earnings per share is projected to reach between $5.57 and $6.21 per diluted share and reflects an anticipated income tax rate of 24% and approximately 11.9 million shares outstanding. In summary, we exit 2018 in a very strong position to continue the growth trajectory of the company.

We have exciting pipeline opportunities to add to our increasingly diverse product base, the ability to leverage new capabilities at ANI Pharmaceuticals Canada, a transformational development asset in Cortrophin and a healthy balance sheet, strong cash flow and access to fully committed capital. As always, we look forward to continuing to build out our capabilities and drive long-term value to our stakeholders. With this, I will turn the call back to our President and CEO Art Przybyl.

Arthur Przybyl -- Chief Executive Officer and President

Thank you, Steve. Moderator, we will now open the conference call to any questions. 

Questions and Answers:


[Operator instructions] Our first question comes from the line of Elliot Wilbur with Raymond James.

Elliot Wilbur -- Raymond James -- Analyst

Thanks. Good morning. I'm no longer allowed to say congratulations on a good quarter during a conference call so I'll just say that it's very encouraging to see a company continue with record results in what has been a very challenging macroenvironment. So based on that comment, if I were to simply look at your second half '18 top-line results and annualize those, I would come up with a number that's about $250 million.

Given what is expected to be a record year in terms of new launches in '19, combined with base portfolio trend, it seems to be pretty stable from what we can tell. Seems like there's quite a bit of conservatism embedded in the forecast. So maybe I'm missing something in terms of some of the expected product movement in 2019 versus 2018 and some of the base products that we just haven't picked up yet, but just sort of want to kind of balance that idea off you in terms of thinking about the robustness of the potential new product story in '19.

Arthur Przybyl -- Chief Executive Officer and President

All right. Elliot, I think that's a very good point. I think from our perspective, I think you know us to be an aggressive management team, but at the same time, a conservative one when it comes to things like balance sheet, leverage, debt and building the company on what we internally described as a wall of worry associated with the environment that we're in. Unfortunately, when we start out looking at the next year's guidance, we always start out with a negative, which is, we anticipate competition on existing generic products, potential new competition coming to market, potential erosion in some of our branded sales.

So we start out, from a glory outlook, all the negatives and then we add positives to it, which are the new product launches. We've stated some of them in the press release, some we haven't. We do not count, obviously, on things we don't have such as putting some of our dollars or cash flow back to work in terms of asset acquisitions that we've described here. And we come with a number.

And we have, admittedly, in the past, missed guidance, either because of being too aggressive or not anticipating something that we didn't forecast. And so we think this number is a good number if you take our fourth quarter results and you annualize them. You get a good feel for maybe where the guidance came from, where the year will turn out for us. But again, we feel comfortable with these.

And these numbers represent from us continued robust growth, even greater than what we saw '18 versus '17, which was 14% on the revenue and adjusted EBITDA line. This year, we're guiding to 19% increases on the revenue and adjusted EBITDA line from what is, admittedly, the law of larger numbers. And so we're, obviously, comfortable putting these numbers out as being representative of our business model for '19. And so I hope that answers your -- answer your comments.

Elliot Wilbur -- Raymond James -- Analyst

No, good color. Appreciate it. And in fact, if I can just ask a second here. A lot of the -- much of the growth and, of course, sort of the focus of attention in the story in the past couple of years has been on incremental ads via transactions and some of the diversification into the branded side.

But you still have this large portfolio of ANDAs. I think it's something north of 70. Most of them already approved, and there hasn't been a lot of movement there. There hasn't been a lot of talk about it.

But if I look at some of these assets and kind of what's happening in the U.S. generic space with Mylan really pulling back from solid oral or those markets or the other players, I mean, just it seems like you're starting to see some of those products move in terms of price. And obviously, I'm suggesting it's getting more favorable. So I'm just kind of wondering how you may be thinking about potentially monetizing those assets in the next 12 to 18 months versus maybe what you have thought about over the past 12 to 18 months.

Arthur Przybyl -- Chief Executive Officer and President

You're going to see -- well, we view those -- we view our ANDA pipeline that can be recommercialized through CBE-30s or PASs as a library for us. And those product launches sometimes fluctuate based on opportunities that arise in the marketplace from exactly what you described as other company's potentially discontinuing products. And supply disruptions in our marketplace play a large part today. We have excellent service levels.

We carry $40 million worth of inventory on the books for a $20 million revenue base business in order to avoid those failure-to-supply penalties, which potentially can drive you into bankruptcy, as you've seen from recent filings that have occurred. And so we are -- I think you're going to see -- remember that we first also attacked from that portfolio that we acquired the easier -- the faster route and some obviously the larger opportunities. But many of those entail products that do not require a change in raw material supplier, and so they could be launched as changes being affecting 30-day type products. So many of the products now are prior approval supplements, and some obviously are filed.

You will certainly see a significant product launch in the second quarter that comes out of that library of ANDAs, and we continue to evaluate those products based on market conditions and obviously time it takes to bring those products to market.

Elliot Wilbur -- Raymond James -- Analyst

Great. Those are my two questions. Thank you.

Arthur Przybyl -- Chief Executive Officer and President

All right. Thank you, Elliot.


Our next question comes from the line of Dewey Steadman with Canaccord.

Dewey Steadman -- Canaccord Genuity -- Analyst

Again, thanks for taking the question. I guess, to build on the prior question. How should we think about phasing for revenue in 2018? Obviously, Concerta and Aggrenox are coming. And you mentioned a library of product, and then there's also the unknown, undisclosed, I guess, rare generic that's coming as well.

So how should we think about how revenue progresses throughout the year?

Arthur Przybyl -- Chief Executive Officer and President

Yes. I think you'll see it climb throughout the year really from the second quarter going forward. I know you'll have a separate call, obviously, with Steve to discuss the cadence later on. You can -- hopefully, it will help guide you a little bit more in terms of research reports that you write in regards to that revenue cadence.

And that's because methylphenidate is a – two of the SKUs are launching in late March. Two additional SKUs are anticipated to launch in the second quarter. And then you know aspirin/dipyridamole is a October 1 date certain. I just mentioned to you that one of those products that we thought is important that's coming out of our, call it, library of ANDAs will launch in the second quarter.

And we are forecasting for and anticipating the launch of Vancomycin oral solution in the fourth quarter. And so I hope that gives you some feel for how we see the cadence of revenues going forward throughout the year.

Dewey Steadman -- Canaccord Genuity -- Analyst

Excellent. And then to build on Vanco oral solution, how do you plan to purchase the marketing for that product? Obviously, this is a new dosage form. And how do you get the word out that an oral solution is available?

Arthur Przybyl -- Chief Executive Officer and President

We will probably utilize many of the same tools that we used for some of our, we'll call it, off-patent brands today, which is a virtual marketing program. I don't think folks realize that we invest in the neighborhood of $2 million to $3 million on virtual marketing programs to those brands. And so we see that potentially as playing well into -- launching Vanco oral solution. There's another also Vanco oral solution on the market today, and we'll certainly be playing off of the success of that product.

But I think primarily, Dewey, this strategy will be to launch the generic and to make sure that we get the word out that this product is available to, obviously, the consortiums, the hospital GPOs, your typical traditional channels that would use a product like this. We have seen, admittedly, some of our Vancomycin oral or capsule sales increase in light of the fact that we have seen compounders continually buying more product -- more Vancomycin product to what we believe -- to put that product into an oral solution. So part of our challenge in launching a FDA-approved Vancomycin oral solution will be also to make an attempt to remove those compounders from the marketplace as well, which will only increase our overall market. But we feel that this is a dosage form that has some pent-up demand associated with it.

And obviously, we have the gold standard, if you will, the brand, as well as a generic. And so we feel pretty good about the prospects for that product once we launch it.

Dewey Steadman -- Canaccord Genuity -- Analyst

And then just on business development with -- in Rob's world, is there an increase or decrease in potential opportunities out there? I know that you were able to capitalize on some mergers within the group. But there's still portfolios out there of interesting products that can be acquired either on the generics or even on the branded side.

Arthur Przybyl -- Chief Executive Officer and President

That's a three-word answer, target-rich environment. I can't actually quite remember as much upheaval going on in the generic marketplace as it is today. And from that upheaval, for a company like us, that is not over-levered, and that is a four-letter word to a generic business when you come right down to it. You just can't be levered up in our business.

And so from all of that, our cash flow, as we described, etc., we think there are compelling opportunities for us to continue that transaction train that we started really when we went public. Not to put pressure on Rob. He does us a tremendous job of finding us some of our deals. I really believe The Street, quite frankly, completely missed the FTC divestiture process and the amount we paid for those assets and the contribution to our business model in '18 and '19 and maybe even beyond that.

And so those are the type of compelling opportunities that we look for. Those are hard to come by. But at the same time, there are more and more assets for sale in the marketplace today. And so as long as we have the cash flow and we've got -- we keep our watchful eye on our leverage, I think we have continued, compelling opportunities for us in terms of transactions in the marketplace.

Dewey Steadman -- Canaccord Genuity -- Analyst

Excellent. Thanks for the color.


And our final question comes from the line of Brandon Folkes with Cantor Fitzgerald.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

Hi. Thanks for taking the questions and congratulations on the quarter. Firstly, can you talk about the competitive dynamics you're seeing from your side in the methylphenidate ER market given that you're all going to launch into that market this year? And that's a meaningful product for you. And how much of that product maybe just -- can you just talk qualitatively how you thought about including that product in guidance or what's in there? And then secondly, maybe just a bigger-picture question.

I think the value drivers within your business model are very clear. And yes, I think the guidance lays out that 2019 will be another good year. I mean, you got Cortrophin coming in 2020 as well. But as we're think of your base business in 2020 and beyond, can you help us just think of some of the value drivers that we may see there?

Arthur Przybyl -- Chief Executive Officer and President

All right. Well, back in -- oh, several years ago when oral solid generics really came under tremendous competitive pressure for two reasons, there was the formation of three consortiums and the price reductions associated with competing for their market share in business. And then it was fact that OGD or the industry in infinite wisdom decided to pay OGD money to approve products on a faster basis and remove the backlog. That also led to a significantly increased competition.

Now if you remember, I don't feel you were covering us back then, but we have always looked at -- at one-time, I think we were -- one product was driving a significant amount of our EBITDA run rate, and we always had a plan to diversify ourselves away from the concentration of risk associated with being a one- or two-product-type EBITDA-driven company and certainly away from the competitive pressures of the consortiums in oral solid generics and obviously the additional -- faster approvals, we'll say, from OGD, from Office of Generic Drugs. And we did so by -- as you know, initially started out by pivoting to brands a little bit. Now if you take a look at our fourth-quarter numbers for brands versus our generic business, our brands are now greater than 50% of our overall generic revenues at very nice margins. So we have, sake of argument, found a way to insulate ourselves from some of the goings-on in terms of the destruction of pricing or price erosion associated with some of those oral solid generic business, OK? We certainly have in mind the continued objective to continue to deconcentrate risk associated with any one specific business platform.

And then you've seen us pivot to -- I'll buy -- we're starting, so sake of argument, from ground up but associated with contract manufacturing. And you've seen some contract manufacturing businesses recently sell for multiples that resemble multiples back in 2015 for generic companies. So we like that pivot, plus it provides additional capacity for us for all the reasons we talked about. You potentially could see us pivot to additional business platforms.

Our largest opportunity brand is an injectable product. And my background is primarily in injectables, and so it's something that interests us, OK? So making I'm making an advertisement right now that we would potentially like to move into an injectable business platform, but these are some of the opportunities that we continually think about don't necessarily always come out publicly and talk about in terms of looking at ourselves strategically in our business model going past 2020, OK? We are, without a doubt, a transaction-based company. And cash flow and EBITDA have been the most compelling objective and drivers for our business model year in and year out. And so we continually have this scenario of putting money to work, OK? We don't buy back our stock.

It's not what we do. We don't pay a dividend. It's not the type of company we are. We want to put our money to work for our shareholders.

And so I don't see that changing over time, and we're not going to go into specifics as to where our strategies are going past 2020 on this call, certainly, but we do discuss them among our senior management group without question. And you asked a little bit about methylphenidate ER. We see approximately seven to eight competitors in that market. We still see it as a compelling market opportunity to us.

It certainly is factored into our guidance. But based on a number of competitors, we are conservative in that approach. And we have nowhere to go but up. And again, that was part of a $2.3 million asset purchase.

If we had launched into the marketplace and been a specific number, we would have to make a milestone payment to Teva associated with that. That will not be the case. So we have nowhere to go but up on the product, and we think we still have a good opportunity for revenue and margin generation when we launch our own version into the marketplace. I hope that answers your question, Brandon.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

It does and thank you very much and congratulations again.

Arthur Przybyl -- Chief Executive Officer and President

And if there is no further questions, I would just like to thank everybody for attending our conference call today and look forward to presenting to all of you our business in the future as well. Thank you very much. Bye-bye.


[Operator signoff]

Duration: 39 minutes

Call Participants:

Arthur Przybyl -- Chief Executive Officer and President

Stephen Carey -- Chief Financial Officer

Elliot Wilbur -- Raymond James -- Analyst

Dewey Steadman -- Canaccord Genuity -- Analyst

Brandon Folkes -- Cantor Fitzgerald -- Analyst

More ANIP analysis

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