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ANI Pharmaceuticals Inc (ANIP -1.28%)
Q3Â 2020 Earnings Call
Nov 5, 2020, 10:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to today's program. My name is Nicole, and I'll be your conference operator. At this time, I would like to welcome everyone to the ANI Pharmaceuticals Third Quarter 2020 Earnings Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, November 5, 2020.
It is now my pleasure to turn the floor over to Ms. Lisa Wilson, Investor Relations for ANI Pharmaceuticals. Please go ahead.
Lisa M. Wilson -- Investor Relations, In-Site Communications, Inc.
Thank you, operator. Welcome to ANI Pharmaceuticals' Q3 2020 earnings results call. This is Lisa Wilson of In-Site Communications, Investor Relations for ANI. With me on today's call are Nikhil Lalwani, our new President and Chief Executive Officer; and Stephen Carey, Chief Financial Officer of ANI. You can also access the webcast of this call through the Investors section of the ANI website at anipharmaceuticals.com.
Before we get started, I would like to remind everyone that any statements made on today's conference call that express a belief, expectation, projection, forecast, anticipation or intent regarding future events and the Company's future performance may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to ANI Pharmaceuticals management as of today and involve risks and uncertainties, including those noted in our press release issued this morning and our filings with the SEC. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. ANI specifically disclaims any intent or obligation to update these forward-looking statements, except as required by law.
The archived webcast will be available for 30 days on our website, anipharmaceuticals.com. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on November 5, 2020. Since then, ANI may have made announcements related to the topics discussed, so please reference the Company's most recent press releases and SEC filings.
And with that, I'll turn the call over to Nikhil Lalwani.
Nikhil Lalwani -- President and Chief Executive Officer
Thank you, Lisa. Good morning, everyone, and thank you for joining our call. It is an honor to be with you today in my role as President and CEO of ANI Pharmaceuticals.
Before we dive into our third quarter results and business update, I'd like to express my appreciation to essential workers, healthcare providers, first responders, teachers and scientists everywhere for their unstinted efforts during the COVID-19 pandemic. I'm also grateful for the strong commitment shown by our ANI team in conjunction with our customers, suppliers and manufacturing partners to ensure that we continue to supply medicines to patients.
Let me also share a little bit about my background, why I joined the ANI, and some initial thoughts on ANI's promising opportunities. I've been in the healthcare industry for roughly two decades with the majority of that time spent on specialty pharmaceutical. Prior to joining ANI in September, I held several roles at Cipla, most recently as CEO of Cipla USA, where I oversaw a period of rapid growth. My experience spans branded products, generics and CDMO business lines. And functionally, my responsibilities have included multi-year strategic planning, accelerating growth through M&A and business development, portfolio development and commercialization and overall P&L and balance sheet optimization. I've also worked very closely with the FDA on the launch of several complex products. These broad functional and leadership experiences in biopharma are immediately relevant here at ANI.
I consider myself to be a growth-oriented leader, and I'm proud of my track record of building cohesive and productive teams that deliver results, all of which I believe aligned with ANI's goals.
Which brings me to why I found the ANI opportunity so attractive. I see enormous capacity for growth, both organically and inorganically, and the potential to build on the core strength of the business. ANI has a significant opportunity with Cortrophin Gel. I will discuss that more in a few moments. ANI has a diverse portfolio of commercialized branded and generic products, and a robust portfolio of ANDAs, several of which have limited competition. We also have a strong North American manufacturing footprint that has become more valuable and can be leveraged further, both for serving commercial customers, CDMO clients and the US government. Manufacturing includes the high-potency hormone facility in Baudette. And lastly, we have a very strong track record in finding accretive inorganic branded, generics and CDMO deals to support the organic growth.
In my first two months since joining ANI, I've invested a great deal of time starting Cortrophin and familiarizing myself with the intricacies of the supplemental New Drug Application or sNDA. Based on my observations to date, I can confirm that all stakeholders are working toward a successful refiling in Q1 of 2021 and a subsequent launch. In addition, I have worked diligently to better understand the drivers of operating performance, execution, capabilities, talent and culture. I toured the Baudette, Minnesota facility in person. And due to COVID constraints, toured the Oakville plant in Canada virtually. I have conducted dozens of one-on-ones and several small group discussions with our team. I have also been speaking with our commercial customers, CDMO clients, key suppliers, and other stakeholders. This has allowed me to get a preliminary understanding of where we are strong, where improvements need to be made and what we need to do to realize the opportunities ahead of us.
And importantly, moving to third quarter results and business update, we have begun to see some rebound after Q2 in select parts of our branded and generics portfolios. We reported third quarter 2020 net revenues of $53 million, adjusted non-GAAP EBITDA of $17 million and adjusted non-GAAP diluted earnings per share of $0.97. ANI has continued to monitor closely the impact of COVID-related dynamics on our business operations, and we have adapted our plans to deal with its impact. Steve will share a more detailed overview of our Q3 results in a few moments.
Let me turn now to our work on the Cortrophin Gel program. First, on the regulatory process, we are focused on resubmitting our sNDA in Q1 2021. We continue making significant progress in assembling a robust and compelling package to submit to the FDA. In parallel, we are working on the operational and commercial readiness for launch. We remain confident in both the quality of our sNDA filing and our market access, demand generation, and patient support plans for Cortrophin.
Before I turn the call over to Steve, I want to share a few final thoughts as I begin my tenure as CEO. First, I truly appreciate the trust placed in me in this role. Together with our Board members, both the long-standing members and our new Board members, we will be laser focused on driving shareholder returns. I will share our ambition, long-term strategy and operational plan along with the full-year 2020 results in February.
That said, we are not waiting till February to get started. As I speak, we are evaluating strategic inorganic opportunities, working toward increasing the pace of new launches from our ANDA library, leveraging our manufacturing network further and maximizing value capture from current products and we remain focused on the Cortrophin Gel refiling and commercialization, placing the necessary resources and attention required as a crucial priority for the Company.
I'll conclude by saying that I'm excited to be here. I believe I bring fresh energy and perspective to ANI, and I will work tirelessly to bring value to our stakeholders to build relationships between ANI and the investment community and to ensure that patients and prescribers have access to our therapeutics.
With that, I'll turn the call over to Steve.
Stephen P. Carey -- Vice President and Chief Financial Officer
Thank you, Nikhil, and good morning, everyone. On behalf of the entire ANI team, we are very excited to be working alongside Nikhil as we continue to build and strengthen ANI. We have already formed a very significant level of partnership, and the team is confident as we look to the future.
Turning to the quarter. Net revenues for the third quarter of 2020 were $53 million versus $51.3 million in the third quarter of 2019, principally due to increases in sales of generic products. Sales of our generic products were $37.7 million during the quarter, up 19% from the same period in 2019, primarily due to the January 2020 launch of Miglustat, Penicillamine, and Paliperidone. All of these products were acquired from Amerigen and have continued to perform well. The increases were mainly offset by declines in revenues of Ezetimibe Simvastatin, Vancomycin Capsules and Methazolamide, all of which had increased competition in the period as compared to last year.
Net revenues for our branded products were $12.4 million during the third quarter of 2020, down 25% from the prior year period, mainly due to lower unit sales of Inderal XL, Innopran XL and a decline in revenues of Atacand.
Our cost of sales, excluding depreciation and amortization, increased by $5.1 million to $20.1 million in the third quarter of 2020, primarily due to increased volumes related to a negative mix toward generic products and increased sales of products subject to profit-sharing arrangements, driven by the products acquired from Amerigen. Cost of sales as a percentage of net revenues increased to 38% during the third quarter of 2020 from 29.2% during the same period in 2019.
Research and development expenses decreased in the third quarter of 2020 to $2.9 million compared with $5 million in the third quarter of 2019, primarily due to a decrease in expense related to Cortrophin as we begin to complete our development efforts. We currently anticipate that Cortrophin-related expenses in Q4 2020 will be moderately higher than those of the third quarter as we continue to focus on our supplemental NDA resubmission efforts.
Adjusted non-GAAP EBITDA of $17 million was down $2.8 million from the prior year, principally due to the reduction in gross profit. As detailed on Table 4 of this morning's press release, our adjusted non-GAAP diluted earnings per share is $0.97 for the quarter as compared to $1.23 in the prior year period.
As of September 30, we had $17.9 million of unrestricted cash and cash equivalents. Our cash balance is reflective of $21 million of cash flow generated from operating activities during the first nine months of the year, and is net of $7.5 million of repayments of Q1 borrowings from the revolver associated with the Amerigen acquisition.
Total net debt as of September 30, 2020, increased to $171.4 million as compared to $164 million as of June 30 of this year. This figure represents 2.5 times net leverage on a trailing 12-month basis.
From a capital allocation standpoint, we generate healthy levels of positive cash flow from operations and continue to expect to selectively invest in business development opportunities. Currently, $67.5 million of the $75 million revolver portion of our credit facility remains undrawn and provides us with flexibility in continuing to further pursue business development transactions in the balance of 2020.
We continue to closely monitor the impact of the coronavirus pandemic on our business. While we did not incur significant disruptions during the three months ended September 30, we are unable to predict the future impact that COVID-19 pandemic will have on our business, financial condition and results of operations due to numerous uncertainties.
With that, I'll now open the call for questions. Operator, please go ahead.
Questions and Answers:
Operator
[Operator Instructions] The first question comes from the line of Dana Flanders with Guggenheim.
Dana Flanders -- Guggenheim Securities -- Analyst
Great. Thank you very much for the questions. Nikhil, I wanted to just focus in on maybe two comments you said during your prepared remarks and opportunities that you're getting ready for, and two of them were accelerating the -- your ANDA pipeline, bringing those products to market. I was wondering if you could comment on how big of an opportunity for you that is. And, I guess, what's changed across the broader generic market to allow you to do so? Are you seeing more stability and stable competition opening up pockets of opportunity?
And then number two, you mentioned inorganic M&A. I was curious to get your philosophy on leverage and maybe talk around your strategic priorities out of the gate. Are you focused a little bit more on brands, on generics and kind of what strikes you as particularly attractive as you kind of evaluate the landscape? Thank you.
Nikhil Lalwani -- President and Chief Executive Officer
Yeah. Thank you, Dana. So I'll take, I think, the three parts to your question. The first one is on accelerating the ANDA. So we have a large library of about 19-plus ANDAs and a pipeline of ANDAs through various acquisitions and BD deals. And several of these products have limited competition and potentially higher value. And this is something that we're monitoring on a regular basis, both in terms of understanding what's happening with the competitors that are on the market, but also in conversations with our customers. And so, we're working to prioritize and accelerate time-to-market for these launches. This is something that I have done successfully in the past and I'll bring that experience here.
You then asked about the overall trend in the generic market, and I think there is some evidence of improvement in the slope of the decline. I think COVID has made buying groups more conscious of the quality of the supply in addition to price consideration. The competitive intensity remains high. There are still good opportunities in this sector. And with the broad push, regardless of who wins the election, which President wins the election, generics will continue to be part of the answer of bringing the cost down of drugs, 80%-plus of US volume is in generics, and there is a significant push on US manufacturing. And US is -- I'm sorry, and ANI is very well positioned to capture that with almost 200,000 square feet of manufacturing footprint in the US and another 100,000 square feet of manufacturing footprint in Canada.
When it comes to acquisitions, with the deal environment is very rich, especially those that help us enhance our capabilities and scale, there is definitely more activity right now than there was six to nine months ago. Having said that, we continue to take a disciplined, measured approach to evaluating opportunities that will allow us to enhance our scale and capabilities in branded products, CDMO, and generics business lines. This includes pursuing both commercial and pipeline opportunities.
And I think the third part of your question, Dana, was on the overall strategic path forward. So, look, as I mentioned in my prepared remarks, I'm in the process of conducting a comprehensive assessment of drivers of our operating performance, execution, capabilities, talent and culture and putting together a map of where we are strong, where improvements need to be made, and where the attractive opportunities are in the market for ANI. I'll share our ambition, long-term strategy, and operational plan along with the full-year 2020 results in February.
Dana Flanders -- Guggenheim Securities -- Analyst
All right. Thank you.
Operator
The next question will come from the line of Elliot Wilbur with Raymond James.
Elliot Wilbur -- Raymond James -- Analyst
Thanks. Good morning and welcome Nikhil. I wanted to ask a couple of financial questions just real quickly of Steve. Specifically, could you just maybe walk through some of the components of operating cash flow trends in the quarter? Looks like, cash flow from operations was negative $40 million and not sure I can see all the elements that necessarily led to that. Just want to get some perspective there.
And any early commentary on 4Q trends, I guess, in light of resurgence of the pandemic in certain areas? I know that we talked earlier about numbers kind of getting back to pre-COVID levels and sequential growth throughout the year. I'm just wondering if that's still kind of a realistic expectation in the fourth quarter based on what we're seeing currently.
Stephen P. Carey -- Vice President and Chief Financial Officer
Sure. So, good morning, Elliot, and thanks for the insightful question. So, on the cash flow and just, I think you misquoted, I think you said, it looked like the quarter was negative $40 million. I think it's more like $400,000. So, yeah, our year-to-date cash flow generation at -- you added a zero or two there.
Elliot Wilbur -- Raymond James -- Analyst
Just a little off.
Stephen P. Carey -- Vice President and Chief Financial Officer
But that's fine. That's fine. It's early yet. No worries with that. But yeah, so good observation. So, cash flow from ops for the first nine months of the year is essentially equal to cash flow from ops for the first six months of the year. And the main part of that phenomenon is really kind of a continued, I'll call it, a cash flow hangover from the Amerigen acquisition. So, while we purchased a portfolio of currently marketed products, right, and slotted them directly into our sales and marketing group and we're kind of selling them out of the gate day one. That portfolio -- even though we do that from a commercial standpoint, it's essentially operating as if we launch those products day one on January 9 that entire portfolio. And so, given the strength of the customers in this environment, right, and the consortiums and certain clauses in terms of launch products, you do get a delay of cash flow from those "launches." And so, I do anticipate that the start turning here, as we round the corner into the fourth quarter, and certainly, as we round the corner into the first quarter of the coming year. So that's the phenomenon there.
In terms of the fourth quarter trends, look, we -- I think as you see in the sequential numbers today, right, the third quarter numbers were fairly stronger as compared to Q2. As we talked about on the Q2 call, right, ANI is not immune to the COVID-19 impacts that we're seeing kind of industrywide. And in a likewise manner, in the third quarter, we've seen a nice rebound in terms of prescription volume sequentially, but it's still not to the levels of pre-COVID-19 levels. And so, the wild card, right, as everybody looks forward to the fourth quarter is, how does COVID-19 develop? Whether it's in pockets across the US or more nationally? Obviously, we're all hoping that that does not occur, but that's clearly the wild card. For the industry and by extension, it's the wild card for ANI. So, barring any significant trends there, we remain optimistic as we look out to the next couple of quarters here, but we're always going to be cautious, given the evolving COVID-19 situation.
Elliot Wilbur -- Raymond James -- Analyst
Okay, thanks. And then just a couple of questions for Nikhil as well. Just want to get a sense of your perspective of sort of the relative opportunity set the Company has in front of it in terms of being able to reintroduce various pipeline assets, ANDAs have been acquired over the years and whether or not that in and of itself would be sufficient to drive growth in the short-term? I mean, obviously, financial market seem to value the Company in line with other larger generic companies that frankly have declining businesses and no real prospect of turning those around. So, just want to get your perspective on whether or not you think that there is a positive growth outlook here in the short-term based on assets in the books or maybe transactions that are kind of a later stage of evaluation versus having to actually go out and buy assets to drive growth in the business?
Nikhil Lalwani -- President and Chief Executive Officer
Yeah. Thank you, Elliot. So, look, I think in terms of growth drivers, Cortrophin Gel is a crucial opportunity for the Company. We are preparing what we expect will be a robust package ready for refiling in Q1 of 2021 and a subsequent launch. So, I think that would be growth driver number one.
I think, the other areas of growth, which are important to consider is: number one is, leveraging the increasingly important US and North America manufacturing footprint, including the hormone facility that we have in Baudette. So, this is a manufacturing network that we can leverage a lot more given the increasing important and value that is being assigned to US manufacturing.
As we spoke about before, the value capture from bringing accelerated new launches from our portfolio of ANDAs in our pipeline and library, especially those with limited competition, is -- will be an important step and maximizing the value capture from our existing branded and generics assets and the CDMO clients. I mean, remember, we acquired the Amerigen business and a number of those products were launched this year. There is still opportunity to deliver more share and revenues from some of those products. And so, that's something that we will look to continue doing.
And look, even prior to me showing up, ANI has done a tremendous job of doing very thoughtfully and disciplined executed deals. So, we continue to evaluate strategic inorganic opportunities to enhance the scale and capabilities in all three segments, brand products, generics and CDMO businesses.
Elliot Wilbur -- Raymond James -- Analyst
Okay. Maybe Nikhil, if I could just follow-up and ask you a question with respect to kind of where you see sort of the best relative opportunities in terms of discretionary capital deployment, whether it be pure generic assets, branded assets, 505(b)2s, obviously, or all of the above? And, I guess, the question is, the Company historically has done a very good job of doing high ROIC deals in the branded arena, buying products that generate significant returns, but necessarily -- don't necessarily have any growth associated with them. So, just wondering how you are kind of viewing those opportunities vis-a-vis what seems to be sort of an increasing demand from financial markets for evidence of growth versus just high ROIC metrics.
Nikhil Lalwani -- President and Chief Executive Officer
Yeah. So that's a good question, Elliot. I think couple of responses. One is, look, these are good questions that I'm evaluating. As I mentioned previously, I will share our ambition, long-term strategy, and operational plan along with the full-year 2020 results in February. So, I will do that. And then, as I mentioned in the prepared remarks, I am a growth-oriented leader. It's -- I oversaw a period of rapid growth in -- as CEO of Cipla US and that's how I am oriented, and it's fortunate that the markets reward that too. So I do plan to continue that strong track record of delivering results and delivering growth. And the path to that, I will share along with our full-year 2020 results. And the relative, I think your question is allocation of capital and allocation of resources between the business lines, I will share more about that in -- when we share the full-year 2020 results in February.
Elliot Wilbur -- Raymond James -- Analyst
Okay. That was my questions. Thank you.
Operator
[Operator Instructions] The next question will come from the line of Brandon Folkes with Cantor Fitzgerald.
Brandon Folkes -- Cantor Fitzgerald -- Analyst
Hi. Thanks for taking my questions. And Nikhil, congratulations on your appointment. You talked about manufacturing footprint. Can you just give some color in terms of your capacity utilization in those facilities? Is it a fair capacity or should we think about you replacing current clients with maybe higher value line there?
And then, secondly, I know Steve talked about the undrawn revolver. But Nikhil, how do you feel about your financial flexibility to execute on M&A, as well as potentially invest behind the Cortrophin launch next year? Thank you.
Nikhil Lalwani -- President and Chief Executive Officer
Yeah. Thank you, Brandon. I think there was two questions you asked, I think. The first one was on the manufacturing capacity. I'm happy to share with you that there is capacity available across all three sites, both the sites at Baudette, as well as the site in Oakville, Canada. So when we talk about leveraging the manufacturing network, it's by increasing the utilization, and there is material opportunity there. Obviously, we have to work through how to operationalize and capture some of those opportunities, but there is opportunities to drive growth by leveraging that manufacturing network further.
And then coming to the capital allocation, I'll start, but then Steve if you want to jump in. Look, we take to -- continue to take a disciplined, measured approach to where to allocate the capital across the different areas. Regards to -- as regards to Cortrophin, Cortrophin is a crucial priority for ANI, and we have appropriately dedicated our resources to advance this product and plan to continue doing so. As you are aware that we are getting ready for a robust full sNDA submission in Q1. And in parallel, we have started working on operational and commercial readiness for the launch, right? This includes market access, demand generation and patient support plan. So, absolutely, Cortrophin is a crucial priority opportunity for ANI.
Stephen P. Carey -- Vice President and Chief Financial Officer
Yeah.
Nikhil Lalwani -- President and Chief Executive Officer
Steve, would you like to add?
Stephen P. Carey -- Vice President and Chief Financial Officer
Sure. Yeah. I'll just add to that. Clearly -- on the M&A front, clearly, you'll continue to see kind of the diligence and the discipline in terms of balancing the opportunities, which the balance sheet discipline and not getting too far over our skis in terms of leverage profile. I think within that, right, [Phonetic] and kind of what you've historically seen ANI do is to pursue assets that are EBITDA generating, right. And so, whether that's in the form of continued portfolio tuck-ins or something broader that starts to enhance ANI's organizational and structural capabilities. I think in this phase, it's always going to be toward -- with an eye toward EBITDA generating and cash flow generating assets. So, that's part of the balance there, Brandon.
And, obviously, as embedded in your question and as Nikhil says, right, Cortrophin, we're laser focused, not only on the regulatory filing and pushing that to success, but also readying the organization for the efforts that will be required to successfully launch that product. And so, that's part of the plans that we're evaluating. But I would point out in terms of capital allocation, we're not starting from a zero dollar spend there. You would have seen, in 2020, the Company invests behind pre-launch inventories roughly, right, big picture, little bit over $8 million year-to-date. And on a full-year basis, we have -- I think the forecast of between $11 million and $15 million depending on how the timing of certain shipments fall and break around December 31, right? So, some of that spend will not need to be replicated in advance of the launch, right? So, we'll be able to allocate some of that spend toward the sales and marketing efforts and build from there.
Brandon Folkes -- Cantor Fitzgerald -- Analyst
Steve, one follow-up, if I may. That $8 million you referenced in terms of inventory, is that across the portfolio or was that Cortrophin?
Stephen P. Carey -- Vice President and Chief Financial Officer
That's Cortrophin-specific, right? So, if 2020, it's kind of building pre-launch inventory, so I'm not saying there will be zero of that in 2021, but I would expect that to moderate as we start to pivot toward SG&A-type activities.
Brandon Folkes -- Cantor Fitzgerald -- Analyst
And then maybe just following up on that. What is the shelf life of your Cortrophin product? So, I think Atacand [Phonetic] is 18 months. So just any color on your shelf life would be great. Thank you.
Nikhil Lalwani -- President and Chief Executive Officer
Let me take that Steve.
Stephen P. Carey -- Vice President and Chief Financial Officer
Sure.
Nikhil Lalwani -- President and Chief Executive Officer
Sure. Right. I didn't want to say exactly the same thing. But as you're aware, as you will appreciate that, from a competitive standpoint, it is best for us not to share specifics of this information right now. We are confident of the quality of our filing and the quality of our product. And also, this is with the FDA or will be with the FDA and the FDA gets to adjudicate that. So, we would prefer to not share specifics on that right now.
Brandon Folkes -- Cantor Fitzgerald -- Analyst
Fair enough. I appreciate that. Thanks very much for the answers.
Stephen P. Carey -- Vice President and Chief Financial Officer
Thanks, Brandon.
Operator
With that, we are showing no further audio questions. I will now hand the conference back over to Nikhil for closing remarks.
Nikhil Lalwani -- President and Chief Executive Officer
Yeah. Thank you all for your time today. This is Nikhil again. I appreciate the opportunity to lead ANI. I look forward to getting to know many of you personally to invigorating our regular cadence of communications and to taking full advantage of the core strengths of our business. I have every expectation that as we enter this new chapter, we can achieve great things and deliver value to our shareholders. And in these uncertain and unprecedented times, please take care of yourselves and your families and friends and stay safe. Thank you for your support.
Operator
[Operator Closing Remarks]
Duration: 38 minutes
Call participants:
Lisa M. Wilson -- Investor Relations, In-Site Communications, Inc.
Nikhil Lalwani -- President and Chief Executive Officer
Stephen P. Carey -- Vice President and Chief Financial Officer
Dana Flanders -- Guggenheim Securities -- Analyst
Elliot Wilbur -- Raymond James -- Analyst
Brandon Folkes -- Cantor Fitzgerald -- Analyst
