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Lantheus Holdings Inc  (NASDAQ:LNTH)
Q2 2019 Earnings Call
Jul. 25, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to the Lantheus Holdings Second Quarter 2019 Earnings Conference Call. This is your operator for today's call. [Operator Instructions] This call is being recorded for replay purposes. A replay of the audio webcast will be available in the Investors section of the company's website approximately 2 hours after the completion of the call and will be archived for 30 days.

I'll now turn the call over to your host for today, Mark Kinarney, Director of Investor Relations. Mark?

Mark Kinarney -- Director of Investor Relations

Thank you and good morning. Welcome to Lantheus Holdings Second Quarter 2019 Earnings Conference Call. Joining me today is our President and CEO, Mary Heino; and our CFO, Bob Marshall. This morning, we issued a press release, which was furnished to the Securities and Exchange Commission under Form 8-K reporting our second quarter 2019 results. You can find the release in the Investors section of our website at lanetheus.com.

Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties. Please note that we assume no obligation to update these forward-looking statements, except as required by applicable law, even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties.

Also, during -- the discussions during this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is also included in the Investors section of our website.

With that, I'll now turn the call over to Mary Anne. Mary Anne?

Mary Anne Heino -- President, Chief Executive Officer and Director

Thank you, Mark, and good morning, everyone. Our second quarter revenue performance was supported by strong DEFINITY growth in the high teens, offset by multiple molybdenum-99 supplier challenges that impacted our ability to meet total TechneLite demand. Despite these challenges, we delivered both solid earnings per share, as well as free cash flow while continuing to make targeted strategic investments in our business to drive long-term sustainable growth.

Regarding Moly supply, I'd like to provide some detail on events during the second quarter, and what we expect for the balance of the year. While, our goal is to always focus on meeting the needs of our patients and customers, we do so with the supply chain that has proven challenging. Throughout the second quarter, we experienced limited supply from NTP, while they continued to work with South African regulators for approval to return to full-scale operations in their processing facility. Additionally, starting in late May another of our moly suppliers ANSTO faced challenges while transitioning to their new processing facility ANSTO Nuclear Medicine or A&M, which impacted their ability to fully supply us.

This was further complicated in late June by a technical issue that led to a temporary shutdown. ANSTO is progressing with their full return to service, and is already producing supply for Australian domestic customers. They are scheduled to have the OPAL reactor's 10-year maintenance shutdown in the month of September, and have communicated to us their expectation to resume supply to international customers thereafter.

These multiple disruptions in Moly supply has resulted in an inability to fill all of our customer demand for TechneLite generators. As frustrating as these supply disruptions have been for us, are concerning with our customers and the patients they serve. Based on the progress our suppliers have made, we now project our Moly supply will be stable beginning in the fourth quarter. Consequently, we believe the issues that caused our temporary supply challenges, this year, should not recur in 2020. Later, I'll speak more about our performance and highlights from the second quarter.

First, I will turn the call over to Bob, who will review our financial results. Bob?

Robert J. Marshall Jr. -- Chief Financial Officer and Treasurer

Thank you, Mary Anne, and good morning, everyone. I will provide highlights of the second quarter financials, focusing on adjusted results unless otherwise noted, and then provide third quarter and updated full year 2019 revenue and earnings guidance. Worldwide revenue for the second quarter totaled $85.7 million, an increase of 0.2% over the prior year. Foreign currency was a negative headwind of approximately $200,000 or a negative impact of approximately 20 basis points on year-over-year growth.

Reported sales of DEFINITY continued with a strong growth at $54.6 million or 18.5% higher, as compared to the prior year quarter. TechneLite, revenue was $20.1 million, a decrease of 14.4% from the prior year quarter due mainly to the prolonged production outage at NTP. Additionally, supply was further constrained by the unexpected supply shortages that Mary Anne has just described. Other nuclear revenues which excludes TechneLite was $15.2 million, a decrease of 21.3%.

Total revenue was offset by rebates and allowances of $4.3 million. Adjusted gross profit margin for the second quarter was 53.2% of net revenue, an increase of 80 basis points over the second quarter 2018, on a similar basis. This quarter's result reflective of favorable product mix, led by DEFINITY's outperformance. Adjusted operating expenses were 190 basis points unfavorable to prior year at 31.4% of net revenue, driven primarily by higher, but planned research and development investment at 5.9% of net revenue, in support of our LVEF clinical studies.

G&A was also higher year-over-year, due mainly to phasing increased investment in strategic IT and business development efforts. Total adjustments in the second quarter were $7.3 million before taxes. Of this amount, $3.4 million is associated with non-cash stock incentive plans. Also in the quarter, we recorded debt extinguishment cost of $3.2 million linked to the prior term loan, when we replace it with our new credit facility, which I'll describe in just a moment. Operating -- adjusted operating income for the quarter, was $18.7 million, a decrease of 4.8% in the prior year.

Adjusted operating income was also negatively affected by our Moly supply challenges, as previously discussed. Net interest expense and other income amounted to $3.2 million. The reported effective tax rate in the quarter was 20.9%. Our adjusted effective tax rate was 29.5%. The resulting net income for the second quarter was $6.4 million or a decrease of 34.2% from the same period, prior year. Adjusted net income was $10.9 million or a decrease of 6.4%. GAAP fully diluted earnings per share were $0.16, a decrease of 35.6% from the same quarter last year. Adjusted fully diluted earnings per share were $0.27, a decrease of 8.3% from the same period prior year. Lastly, second quarter operating cash flow totaled $21.1 million as compared to $20.3 million in the second quarter of 2018.

Capital expenditures totaled $3.4 million, and include ongoing investment in our own strategic manufacturing capabilities on our Billerica campus. Free cash flow which we define as operating cash flow, less capital expenditures was $17.6 million for the quarter. Also, during the quarter, the company used approximately $73 million to pay down its then outstanding Term Loan B and to refinance the $200 million balance with a new Term Loan A at favorable credit terms. Accordingly, cash and cash equivalents totaled $56.9 million at quarter's end. The new $200 million revolving credit facility, replaces a $75 million revolver and will provide the company with increased overall liquidity, which now stands at approximately $260 million.

Credit spreads have been significantly reduced with spreads ranging from 1.25% to 2.25% depending on our then current net leverage ratio. For the balance of 2019, we expect savings of approximately $0.06 per share on reduced interest expense, linked to the outstanding debt balance, in addition to savings associated with utilizing our cash on hand to reduce outstanding debt, while retaining access to those funds. Full year effect of these savings will be realized in 2020.

Turning now to our third quarter guidance and updated full year financial expectations, we expect the third-quarter revenue to be in a range of $83 million to $85 million. Full year revenue growth is now expected to be in a range of 0.8% to 1.9% or $346 million to $350 million. Q3 and full year revenue expectations reflect the updated assessment of Moly supply from ANSTO, which is currently operational for their own domestic market, but will not have export supply for the duration of the third quarter. NTP, of having resumed production is currently producing at lower than full capacity, but it is expected to return to full production later this quarter.

That all said, we expect these issues to be confined to the third quarter, while our fourth quarter revenue and adjusted EPS expectations remain largely consistent with our prior estimates. We now project DEFINITY will outperform our initial expectations, maintaining growth in the mid to high teens. Moving now to earnings. Adjusted fully diluted earnings per share are expected to be in a range of $0.18 to $0.20 for the third quarter. For modeling purposes, forecasted depreciation amortization expense is expected to be approximately $3.5 million for each of the remaining two quarters.

Additionally, you should expect lower gross margin levels in current run rates strictly during the third quarter and then recovering in the fourth quarter. Operating expense savings and lower debt costs are expect to mitigate a significant portion of lost earnings associated with lower TechneLite revenue in the second half of 2019. For the full year, we are also updating our adjusted, fully diluted earnings per share range to be $1.09 to $1.12. Lastly, as you look to future operating periods, we are confident in our ability to restore our nuclear business to normalized levels and deliver on our financial goals in Q4 and full year of 2020.

With that, let me turn the call back over to Mary Anne.

Mary Anne Heino -- President, Chief Executive Officer and Director

Thank you, Bob. Now, let me provide some additional color on our business performance and progress on our strategic programs. Let's start with our microbubble franchise. As Bob mentioned, DEFINITY grew at over 18% versus the prior year. DEFINITY's continued growth fuels our confidence in investing in key pipeline and infrastructure initiatives. We believe these investments support the sustained growth and profitability of our microbubble franchise. The first of these initiatives is our investments in our DEFINITY left ventricular ejection fraction or LVEF clinical program.

We remain on track with our two parallel Phase 3 studies 1 and 2 with patient enrollment now over 80% complete the benefit 1 and over 60% for benefit 2 with total enrollment, on track for completion, later this year. Upon successful completion of these trials, we will use the results to file a supplemental NDA, that, if approved, would enable us to commercialize soon thereafter. In June, new clinical outcomes data presented at the American Society of Echocardiography's Annual Scientific Sessions or ASE 2019 demonstrated the positive impact of contrast echocardiography with DEFINITY in intensive care unit patients as compared to ICU patients who received echocardiography without contrast.

The steady findings showed improved clinical management and decreased length of stay in ICU patients receiving DEFINITY enhanced echocardiography versus non-contrast echocardiography patients. ICU's patients are often difficult to image due to their medical condition impacting diagnostic certainty of the echocardiography exam. This new research data supports to use of DEFINITY, in improving patient outcomes in a critical care environment. Now, moving on to our ongoing initiative to build a specialized manufacturing facility for DEFINITY and potentially other sterile vial products at our North Billerica headquarters.

The project is on schedule and on budget. In the second quarter, we completed installation of equipment, as planned. Having accomplished that, in the second half of the year, we will commence trial runs of placebo product in anticipation of producing qualification batches in the fourth quarter. These steps should keep us, on track, to produce commercial product by early 2021. Finally, regarding the status of a potential generic filer, to date, we have not received notice of an ANDA application. As evidenced by continued investment in our microbubble franchise, we remain confident in DEFINITY's future.

Turning to our nuclear pipeline and to LMI 1195. As we mentioned in our last call, we are designing two Phase 3 clinical trials for the diagnosis and management of neuroendocrine tumors in pediatric and adult populations respectively. During the second quarter, the FDA granted us an orphan drug designation for the use of 1195 in the management indication. With respect to business development efforts, earlier this quarter, we announced entering into a strategic collaboration and licensing agreement with NanoMab Technology Limited, a privately held biopharmaceutical company, focusing on the development of next-generation radiopharmaceuticals for cancer precision medicine.

Under the collaboration agreement Lantheus licensed NanoMab's NM-01 a development-stage imaging biomarker, which identifies tumors expressing PD-L1. Although PD-L1 checkpoint inhibitor therapies have achieved impressive results in certain patient populations, improving response rate and extending survival across multiple tumor types, challenges remain in optimizing the use of these therapies. There is an opportunity for biomarkers that can best predict patient response, which may also serve to avoid unnecessary cost to patients and health systems. NM-01 will be provided by Lantheus to pharmaceutical companies, academical medical centers and other researchers.

NM-01 may be used to optimize clinical trial design of early developmental stage PD-L1 immuno-oncology agents by identifying patients, most likely to benefit from these therapies. We are excited about this opportunity as we believe NanoMab has strong technology, proven by recently published data with very good image resolution. We believe that molecular imaging and analytics could uniquely address current unmet needs, in ongoing drug development of PD-L1 based therapies; especially in patient selection, stratification, as well as predicting drug response.

We are projecting that we will file a DMF with the FDA in the first quarter of 2020 and are currently talking with potential customers. We'll have a better understanding of the market potential as we progress and will keep you updated. Our agreement with NanoMab along with our previously announced collaboration with Cerevast allow us to leverage our core competencies, namely our commercialization capabilities in nuclear isotopes and our expertise in micro bubbles. I'm excited to see where these collaborations go. I remain optimistic about the future and delivering on our strategic vision in the quarters and years to come.

With that, Bob and I are now ready to take your questions. Operator, please go ahead.

Questions and Answers:

Operator

Thank you, ma'am. At this time, I would like to remind everyone to ask your question. [Operator Instructions] First question is coming from the line of Raj Denhoy from Jefferies. Go ahead please.

Raj Denhoy -- Jefferies -- Analyst

Hi good morning.

Mary Anne Heino -- President, Chief Executive Officer and Director

Good morning, Raj.

Raj Denhoy -- Jefferies -- Analyst

Good morning. Good morning. I wonder if maybe I could start a little bit on the Moly supply issue in the quarter. Just so we understand what you're suggesting we do to the model, so the $20 million or so you did here in the second quarter we should assume it sort of runs at that rate into the third quarter, and then sort of picks back up in the fourth quarter? And then we get out to 2020, you should still be at that sort of roughly $100 million annual basis for that product? Is that the right way to think about it?

Robert J. Marshall Jr. -- Chief Financial Officer and Treasurer

Rajbir, I think that's exactly how you should about it. When I look at the models that are out there, I notice that they are probably right around $26 million or so for third -- second and third quarter, and you saw a result as you just pointed out, and yeah, you should probably see that number maybe slightly lower than that number in Q3, but that would be exactly how you should model.

Raj Denhoy -- Jefferies -- Analyst

Okay. Maybe kind of a broader question on kind of the Moly supply issue, right, because this isn't the first time we've had these issues right, over the years, they come up pretty regularly. And I guess, I'm curious, what's your current views on our -- on the sort of fragility of the supply, right, and what it's sort of doing to this market and demand and then ultimately, what it's doing to your competitive position? Because Curium, again they're not as public as you guys are about what goes on there, but when you have a supply outage, they sort of back fill in with supply, and so does that have any long-term implications in terms of share in this market and demand in this market?

Mary Anne Heino -- President, Chief Executive Officer and Director

Well, I think you've got a couple of questions there Raj and I'll try to take them all, and if I miss any, you can help me readdress, what I missed there. But, to your first question about the overall market, and whether these shortages have an impact on the overall market? I think, we worked very hard to ensure that they don't, and the way to do that is to stay focused on patients, and so when we see these shortages, our focus is to get the communication out as early as we can down to our customers, so they can get the supply they need, and you're right, it's got to come from our competitor.

So that's ultimately -- the adequate supply is available if it can be to make sure that patients don't miss studies, and that's got to be kind of job #1 here and I think we've tried to ensure that we do that. From a supply standpoint, you're right, we have had issues and I think we would say, over the last year, year and a half we've seen issues that we had not seen, kind of bunch up in ways that we have not seen too in years passed. And what I'd like to say is, coming out of this period that we see that we'll still last through the third quarter and I think Bob guided you well there.

So, coming out of the third quarter and coming into the fourth quarter, we see a period of stability starting that we hope then will last. And the reason that we're confident about that is, as we come into the fourth quarter and beyond, you have OPAL coming out of what will be a 10-year maintenance schedule, and that's a fairly significant overhaul on a reactor that is a fairly young reactor, and then you will also have ANM now, up and running which would be a brand new processing facility and will have 30% more capacity. So, you have then in the supply chain -- the worldwide Moly supply chain is fairly attractive combination, a reactor that's just been very nicely overhauled and a brand new processing facility with a lot of capacity and that will provide to the most attractive payer in the worldwide supply chain.

And for us, that boosts our confidence and again these are our diversification strategy, which is what we've built our Moly supply strategy on, initially when Nordion announced that they were closing. Quite frankly, and quite honestly, that strategy has not worked for us, this year, and it's because we would not have anticipated that the problems that ANSTO had in trying to transition from their prior processing facility to their new processing facility, would coincide with NTPs struggles in coming back up to speed, but it happens and we're dealing with it. So again, we have confidence coming out of it.

Your comment about our competitive position is also -- it's a fair one, that's my issue to deal with. As you know, we're contracted, we've been contracted -- our customers believe very strongly and having balanced supply because we are essentially two competitors. We are contracted -- two of our contracts already last past 2019. We have two contracts where we will renegotiate for 2020, and I will go to the table with my customers, and I will present what will be my best efforts to maintain my competitive position and I'm confident in that as well. Anything I missed there, Raj?

Raj Denhoy -- Jefferies -- Analyst

No, no, I think that hit all of it. Maybe, just as a follow-up to that competitive question, you're right. So the -- as you mentioned, there are only a couple of contracts, right, 4 or 5 contracts you work on in this market. As you've had these issues, right and again, to your point they've been a little worse than in times past. How does that influence those negotiations with your customers about these contracts?

Mary Anne Heino -- President, Chief Executive Officer and Director

I would say, in some sense Raj, I'm in constant communication with my customers, and so it's an ongoing conversation, it's become a weekly conversation because with what I was talking about, what supply we're getting to them and how we're getting it to them. And so, they're well -- some of the data points, I just made to you are points I've been making to them, and in some ways, they are very aware of what the Moly supply chain looks like and so some of the very points I just made to you about what we see as the emerging strength, so the reemerging stability of the Moly supply chain, they are very well aware of it as well.

Raj Denhoy -- Jefferies -- Analyst

Okay. And then just one last one from me, just -- you have talked a little bit about other sources, right. So, looking to partners like SHINE for instance, here domestically. Are there any updates you have on that in terms of when that might come online or are there other ways you can sort of prevent these kinds of shocks from recurring?

Mary Anne Heino -- President, Chief Executive Officer and Director

So, SHINE just had an announcement the other day. They announced that they received their license -- I'm sorry that I'm blanking on specifically what license, that I can send you the link on it because it was a public press release, but that's not an answer for 2020. That is our destiny -- answer for the 2022, 2023 period. I think, if you look at some of the other announcements that have been out there about other types of domestic supply, none of those are answers for 2020.

And so, I think as we sit here today, we are looking at fourth quarter and beyond, and we're looking at our strategy being the partners we have which ANSTO, NTP and IRE , and I didn't mention in part of the answers I gave you, but IRE has been a stellar partner for us through this whole period. We have upped our access to them and they've upped their delivery to us, and we've done everything we can including changing our own manufacturing schedule to optimize it every time that we can get our hands on, turns into a period that we put into a generator changing our days of the week, our manufacturing and then the logistics out to customers to ensure that we can get everything that we get our hands on out in the form of generate to a customer.

Raj Denhoy -- Jefferies -- Analyst

Okay.

Mary Anne Heino -- President, Chief Executive Officer and Director

There are operating license with the NRC that they filed -- that they announced -- SHINE earlier this week.

Raj Denhoy -- Jefferies -- Analyst

Very good, well, I will leave it there. Thank you.

Mary Anne Heino -- President, Chief Executive Officer and Director

Thanks Raj.

Operator

[Operator Instructions] Next question is from the line of Erin Wright from Credit Suisse. Go ahead please.

Erin Wright -- Credit Suisse -- Analyst

Great, thanks. In terms of the partnerships, can you provide a little bit of an update on Cerevast as well as your PD-L1 that you mentioned. I guess, what sort of contributions in terms of magnitude, as well as in terms of timeline, when do you think that would materialize more meaningfully? Thanks.

Mary Anne Heino -- President, Chief Executive Officer and Director

Sure. So, Erin. It's a great question and I can answer easily to start, I would not have you looking to build into your models anytime soon. Any kind of meaningful contribution from either, both are early stage at this point, especially Cerevast. They are certainly early stage in their development program and that will be a royalty stream, back to us when it does materialize and they will file 2023 is what they're projecting at this time, would be the earliest approval.

And then, 1 will be a revenue -- a partner revenue source for us, as we begin to place the biomarker into early stage developmental trials, and so that will also be a slow build on a revenue base, and I'll have more to speak about that as we begin to get out there and talk to potential partners that, who might access the biomarker from us. And so that's probably something that I would have you wait and hear more from me about. I'm certainly happy to talk about what the product is, and how it might be used. But, it really is quarters to come, before I'll have more specific details about what revenue potential might look like.

Erin Wright -- Credit Suisse -- Analyst

Okay, got it. And can you provide, what's the next development catalyst for you on the R&D front? Would it be the LVEF clinical programs and what could we hear next on that front, and can you give us an update on the timeline there as well?

Mary Anne Heino -- President, Chief Executive Officer and Director

Sure. So, it absolutely is in time. From a time perspective, it's LVEF and the next milestone you'll hear there will be completion of patient enrollment, which we have projected will end by -- complete by the end of this year. But, when it is finally complete, as I mentioned earlier, we're about 80% complete on the first -- the Phase 3, but 60% complete on the second Phase 2, but when we're 100% complete and we've locked enrollment, last patient in I'll announce that we project early by end of the year, and then the development point after that will be the filing of the of the sNDA, that will be the milestone after that, and then probably that would be the -- either the FDA acceptance of the sNDA or the approval depending on which we see.

The other milestones, you'll hear from me about are related to the LMI 1195 neuroblastoma trial in pediatrics and adults. You'll probably hear me talk about the Phase 3 trials, the development of the protocols, perhaps except the protocols, I announced today that we had gotten -- received orphan indication status from the FDA for that, so, that was a significant milestone from us. So, that's the other program that you're likely to hear from.

Any other questions, Erin?

Erin Wright -- Credit Suisse -- Analyst

No, I am good. Thank you so much.

Mary Anne Heino -- President, Chief Executive Officer and Director

You're welcome.

Operator

The other question is coming from the line of Larry Solow from CJS Securities. Go ahead, your question please.

Larry Solow -- CJS Securities -- Analyst

Great, good morning. Thank you. Just to clarify on SHINE. I think they filed their permit with the Nuclear Regulatory Commission this week, starting and they say up to a 2-year approval, so that would be early 2022, but that's it for the public service announcement.

Mary Anne Heino -- President, Chief Executive Officer and Director

Thank you, Larry.

Larry Solow -- CJS Securities -- Analyst

Yeah. My pleasure. A question just on obviously DEFINITY and the TechneLite stuff, I think you pretty well spoke about. Just on other nuclear, I realize Xenon is a big piece of that, that's been coming down. Should that stabilize over time or does that -- I don't know, it's a small piece of your business but does that category sort of continue to sort of flow down or should it stabilize as we look out?

Robert J. Marshall Jr. -- Chief Financial Officer and Treasurer

Hey, Larry, it's Bob. I would tell you that I think that you're absolutely right. Again, when I also look at the models, I also noticed that the current run rates that are in there probably aren't as reflective of what I've been trying to communicate with relation to the fact that Xenon has sort of come down and we would expect it to be at those same levels through the balance of the year. Now, in terms of stabilizing.

Yes. You recall that competitor brought Xenon to the market last May -- in last Q3 and Q4 and in 1 and now 2, we've seen the impact of that coming in. So, what we should start to see is a sort of -- at the comps, you get into the back half of the year and into 2020, yes, it would become a much more stable type of business, which again gets contractual, and we would expect to be able to work with our partners in terms of stabilizing that level and hopefully grow it over time.

Larry Solow -- CJS Securities -- Analyst

Okay, great thank you.

Mary Anne Heino -- President, Chief Executive Officer and Director

Any other questions Larry?

Larry Solow -- CJS Securities -- Analyst

No, no, all set. Thank you.

Mary Anne Heino -- President, Chief Executive Officer and Director

Okay.

Duration: 30 minutes

Call participants:

Mark Kinarney -- Director of Investor Relations

Mary Anne Heino -- President, Chief Executive Officer and Director

Robert J. Marshall Jr. -- Chief Financial Officer and Treasurer

Raj Denhoy -- Jefferies -- Analyst

Erin Wright -- Credit Suisse -- Analyst

Larry Solow -- CJS Securities -- Analyst

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