ANI Pharmaceuticals Inc (ANIP) 2017 Q4 法說會逐字稿

Good morning, everyone, and welcome to ANI's Fourth Quarter 2017 Earnings Call. (Operator Instructions) Please note that this call may be recorded.

It is now my pleasure to turn today's program over to Mr. Arthur Przybyl. Please go ahead.

Good morning, everyone, and welcome to ANI's Earnings Conference Call for the Full Year and Fourth Quarter 2017. My name is Art Przybyl, I am the CEO; and 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 those non-GAAP financial measures can be found in our earnings release dated today.

Today, we reported our full year results. Record net revenues of $176.8 million, record adjusted non-GAAP EBITDA of $74.2 million and record adjusted non-GAAP diluted earnings per share of $3.91, increases of 37%, 21% and 32%, respectively, as compared to the prior year. Fourth quarter results include net revenues of $47.3 million; adjusted non-GAAP EBITDA of $19.7 million; and adjusted non-GAAP diluted earnings per share of $1.08, increases of 24%, 10% and 20%, respectively, as compared to the prior year period.

In 2017 our 2 primary business platforms, generic pharmaceutical and branded pharmaceutical products, generated $118.4 million and $50.9 million in net revenues, increases of 24% and 93%, respectively, as compared to 2016. Last year, we launched 6 products: 4 generic and 2 brands that helped generate these year-over-year revenue increases. For perspective, as compared to 2015, our generic pharmaceutical product revenue has more than doubled, increasing by 115% from $55.2 million. Our branded pharmaceutical revenue has increased nearly fourfold, increasing by 363% from $11 million. It's significant to note that our commercial product portfolio increased from 16 to 31 products, an increase of 94% over that 2-year time period.

During this time, we have hedged our generic pharmaceutical business platform by building a small, growing profitable brand pharmaceutical business platform. Brands represent a hedge against our generic portfolio. Nevertheless, our generic portfolio continues to generate year-over-year revenue growth in a very tough macro environment, dominated by price decreases and consortium contracting pressures.

ANI became a public company in 2013, and our strategy has not changed. We remain focused on increasing our revenue and adjusted non-GAAP EBITDA through selective new product introductions. As evidence to that fact, from 2013 to 2017, our compound annual growth rates for net revenue and adjusted non-GAAP EBITDA are 56% and 77%, respectively. And our portfolio of products has increased from 7 to 31 products. We believe this is the best approach to increase shareholder value. Our new product launches are the direct result of internal ANDA development, marketing and licensing partnerships and acquisitions.

We still have a significant pipeline of 74 products from which to pursue and increase our commercial portfolio of products. Our largest pipeline opportunity, Cortrophin gel, was acquired for $75 million. We continue to invest significant development and capital equipment monies dedicated to re-commercialize Cortrophin, and we are committed to the project. We believe the risk/reward for Cortrophin is well worth it. Frankly, this $1.2 billion market monopoly needs a competitive platform, and we intend to provide that platform with our product.

Since 2013, we have deployed nearly $300 million in product acquisitions designed to help build our current portfolio of commercial and pipeline products. At the end of last year, we continued to execute the strategic plan to grow our commercial portfolio by acquiring the NDAs and U.S. product rights for ATACAND, ATACAND HCT, ARIMIDEX and CASODEX. These products can be tech transferred and manufactured by ANI at our containment facility in Baudette, Minnesota. Our approach to our business model was conservative, but not without significant upside opportunity. Our balance sheet and strong capital position remains intact. We are levered less than 2x, have access to capital through an untapped credit facility and an increasing cash position. And as such, we will continue to evaluate acquisition opportunities to expand our business portfolio throughout 2018.

We believe the current industry environment creates a favorable backdrop for ANI as we continue to evaluate potential asset acquisitions. Our strong capital position and our experience in successfully executing transaction places us in a position to continue growing via acquisitions at highly attractive prices. We will continue to look to acquire generic and brand assets through product and/or company acquisitions.

The impact of recent tax reform that Steve will discuss in more detail is certainly a positive one for ANI. Tax reform serves to provide a more equitable playing field for smaller pharmaceutical companies like ANI, and we intend to use our increased cash flow from tax reform in several ways. For example, we intend to invest in a formal internal ANDA development program. We are actively recruiting for a Vice President of Research and Development, who we expect will hire a formulation team, open a new product development site and continue to manage our ongoing ANDA tech transfer effort in our Baudette site. Our objective is to initially file 4 to 6 internally formulated and developed ANDAs in 2020, free from any profit-sharing arrangements.

For 2018, we have provided the following guidance: net revenues of $212 million to $228 million, increases ranging from 20% to 29% as compared to 2017; adjusted non-GAAP EBITDA of $90 million to $100 million, increases ranging from 21% to 35%; and adjusted non-GAAP diluted earnings per share of $5.43 to $6.08, increases ranging from 39% to 55%. This guidance includes an increasing commitment to research and development as well as the effects of recent asset transactions and tax reform.

Cortrophin gel and its re-commercialization effort continues to progress in cadence with our internal time line. In the fourth quarter of 2017, we successfully completed the manufacturing of 3 intermediate-scale batches of purified corticotropin powder, the active pharmaceutical ingredient. All 3 intermediate-scale batches of API exhibit lot-to-lot consistency across many different chemical and biological test methods that we continue to employ in building our comprehensive characterization package.

These methods are also being utilized to successfully demonstrate comparability to historically manufactured commercial lots of API. We have ordered the capital equipment necessary for commercial-scale manufacturing and plan to initiate commercial-scale API manufacturing in early 2018. We have begun to manufacture development-scale batches of the finished drug product, Cortrophin gel, using API from our manufactured intermediate-scale batches. Our goal is to initiate process validation and registration batch manufacturing by the end of 2018.

Also in the fourth quarter of 2017, ANI Regulatory Affairs requested a Type C meeting with the FDA to provide the regulatory plan for the re-commercialization of Cortrophin gel. The FDA granted the Type C meeting, we submitted our briefing book, and the FDA response is scheduled to occur by the end of the first quarter of 2018. In our press release, we have included a Cortrophin gel re-commercialization update and Table 5 that is intended to provide Cortrophin re-commercialization milestone updates as we advance to our supplemental NDA regulatory filing.

We also continued to advance the commercialization for another branded product, Vancocin Oral Solution. We remain on target to file a prior approval supplement in the second half of 2018. We believe the launch of this product will fulfill an unmet patient need for an FDA-approved oral dosage form of the Vancomycin molecule, and we'll compete in a market that currently exceeds $450 million annually.

I will now turn the conference call over to our Chief Financial Officer, Stephen Carey, who will provide you with more details on our financial results.

Thank you, Art. Good morning to everyone on the line, and thank you for joining the call to discuss ANI's full year and fourth quarter 2017 financial results.

ANI recorded another strong quarter to close out 2017, and by extension, post our fourth consecutive year of record net revenue, adjusted non-GAAP EBITDA and adjusted non-GAAP diluted earnings per share. Full year net revenue reached $176.8 million, representing a 37% increase versus 2016 and was driven by 93% growth in our brand product portfolio and 24% growth in our generic product portfolio. Gross profit pull-through of these sales gains drove full year adjusted non-GAAP EBITDA to $74.2 million and adjusted non-GAAP diluted earnings per share to $3.91, representing an increase of 21% and 32% as compared to 2016, respectively. These figures place us well within our 2017 adjusted EPS guidance as a result of favorable mix, as net revenue was short of full year expectations by a modest 2%.

Turning our attention to the highlights of the fourth quarter. Net revenue for the 3 months ended December 31, 2017 was $47.3 million, up 24% versus prior year, driven by growth in our branded product portfolio. Fourth quarter adjusted non-GAAP EBITDA was $19.7 million, representing a $1.8 million or 10% increase from the year-ago period. This result was achieved while increasing our year-over-year investment in research and development by $2.5 million as we continue to advance our Cortrophin re-commercialization program and invest behind our Vancocin oral solution pipeline opportunity.

GAAP EPS reflects a loss of $0.83 per diluted share, entirely driven by a onetime $13.4 million charge recognized in conjunction with devaluing our net deferred tax asset due to the change in the federal statutory income tax rate from 35% to 21% under the Tax Cuts and Jobs Act of 2017. In addition, during the fourth quarter, we recognized a $900,000 noncash writeoff of a finite-lived noncore intangible asset. This intangible related to our NDA for testosterone gel, an asset that was acquired and accounted for in our 2013 merger with BioSante. This asset was previously written down in fourth quarter of last year.

We have now officially discontinued this filing with the FDA and ascribe no further value on our balance sheet for this product. Our adjusted non-GAAP earnings per share metric, which excludes these items, was $1.08 per diluted share, an increase of $0.18 or 20% from the prior year.

Turning to the details of our fourth quarter sales performance. Net revenue of our branded products more than doubled, increasing from $6.5 million in the fourth quarter of 2016 to $15.5 million in the current year period, driven by the addition of InnoPran XL and Inderal XL, which were introduced into our product portfolio in February of this year, coupled with gains in our Inderal LA franchise. Net revenues of our generic products increased $533,000 or 2% as gains from 2017 launches and certain other key products were tempered by the non-recurrence of initial launch quantities of key products that were launched in the third and fourth quarter of 2016.

In addition, revenues from contract manufacturing services were up $335,000 or 21%. Cost of sales, as recorded on a GAAP basis, includes $2.9 million of costs recorded due to the step-up of basis for finished goods inventory purchased in conjunction with the Inderal XL and InnoPran XL product acquisitions. Comparatively, the fourth quarter of 2016 included $2.8 million of such costs associated with the inventory step-up of previous acquisitions. Excluding these amounts, cost of goods sold was consistent, at 37% of net revenues for both the fourth quarter of 2017 and 2016.

Selling, general and administrative expenses were $8.9 million as compared to $7.4 million in the prior year, driven by employment and related costs to support the growth of our business, as well as increased legal expenses. SG&A as a percentage of revenues decreased from 19.3% in the prior year to 18.8% in the current year. Research and development costs totaled $2.7 million in the quarter, approaching 6% of net revenues, driven by continued investment and momentum behind our Cortrophin recommercialization program.

From a balance sheet perspective, we had unrestricted cash and cash equivalents of $31.1 million as of December 31, 2017, representing an increase of $13.1 million from the September 30 balance sheet, driven by $15.8 million of cash flow from operations during the quarter. On a full year basis, we generated free cash flow of $29 million, reflective of cash flow from operations of $39.4 million and capital expenditures of $10.4 million.

In December, we executed a $125 million senior secured credit facility whereby we refinanced the $25 million that was previously drawn down on our asset-based revolver into a new $75 million 5-year term loan and $50 million revolving credit facility. The term loan portion of this facility supported our asset transaction with AstraZeneca, while the undrawn revolver portion of the facility provides ANI with a greater level of flexibility as we anticipate future development opportunities. As of the balance sheet date, we had net debt of $188 million, representing approximately 2x net leverage, utilizing forward-looking 2018 guidance.

Looking forward to 2018, we currently project net revenues to reach between $212 million and $228 million, representing a 20% to 29% increase over 2017, driven by the ongoing expansion of our brand revenue base with the addition of revenues from the 4 brands recently acquired from AstraZeneca and the annualization of InnoPran XL and Inderal XL, continued execution in maximizing the potential of our current re-commercialized generic product portfolio and successful execution of 2018 generic product launches.

Adjusted non-GAAP EBITDA is projected to be between $90 million and $100 million, reflecting 21% to 35% growth over our record 2017 year. Inherent in this guidance is continued growth in research and development spending, driven by increased investment in our Cortrophin gel re-commercialization program. Our guidance ranges include approximately $14 million to $16 million of total ANI R&D expense as compared to the $9.1 million incurred in 2017. In addition, we assume continued select investments in SG&A expense to support the continued growth of our business and our brands.

Adjusted non-GAAP diluted earnings per share is projected to reach between $5.43 and $6.08 per diluted share, and reflects an anticipated combined federal and state effective tax rate of 23% and approximately 11.7 million shares outstanding. As a wholly domestic corporation, the recently enacted Tax Cuts and Jobs Act of 2017 will have a significant favorable impact on ANI. Given our U.S. geographic and legal entity footprint, we are a full U.S. taxpayer, and as such, anticipate that our combined federal and state marginal rate will decrease by a full 14 points from 37% in 2017 to 23% in 2018 and beyond.

We currently anticipate that the favorable impact of reduced cash tax burden in 2018 to be worth approximately $10 million to $13 million. We look forward to reinvesting this additional cash flow back into our business. With $31 million of cash as of year-end, accelerating cash flow generation, further enhanced by tax reform, and access to $50 million under our revolving credit facility, we believe that we are in a strong position to pursue business development opportunities in the coming year. In addition, we plan to invest approximately $7 million of CapEx behind our internal capabilities.

In summary, we exit 2017 in a very strong position to capitalize on opportunity in 2018. We have an increasingly diverse product base; a healthy balance sheet; strong cash flow; a more level playing field thanks to U.S. tax reform; strong banking relationships and access to capital. We look forward to continuing to build out our capabilities and drive long-term value to all of our stakeholders.

With this, I will turn the call back to our President and CEO, Art Przybyl.

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

(Operator Instructions) And our first question comes from the line of Elliot Wilbur with Raymond James.

First question for yourself, Art. And just wanted to get a little bit of additional color commentary or insight into current trends in the generic business. Look back over the last couple of quarters, the business has kind of been sort of capped roughly at the $30 million per quarter level. So just sort of curious what we should expect in 2018 in terms of number of potential approvals. And maybe just provide us a metric with respect to how many products are actually filed at FDA. Then as a corollary to that, I wanted to see if -- I mean, there seems to be -- have been a fairly significant slowdown in terms of the number of ANDA approvals. And I'm wondering if some of the same issues that may be impacting the overall rate of ANDA approvals might or might not have an impact on your pipeline sort of, given the unique nature that many of these are, of course, are reintroductions of products or prior approval supplements.

Yes. Thank you, Elliot. I've read your report on the FDA slowdown. It may be due to the government slowdown. I think there are other issues alongside that, that are potentially slowing down approvals. You've seen a new effort on the part of the agency to include a subject matter called elemental impurities. And I think you've seen some of the comprehensive review letters occasionally pop up with requesting that information. Any time there's a new effort on the part of the agency to [maybe] perhaps include something like elemental impurities more formally, as compared to just putting it in an annual report, it has a tendency to slow down approvals. Now in our particular case -- and I would have to get you the exact number of approvals that we have filed at the agency, I don't have that off the top. But in our particular case, we are still picking and choosing from previously approved ANDA products that we are re-commercializing through tech transfer efforts in our facilities in Baudette, Minnesota. And so we are affected somewhat by a slowdown in approvals as it only relates to prior approval supplements that we would submit against previously approved products that perhaps had a change in raw material supplier that would necessitate a new -- a prior approval supplement. We certainly are not affected when the product is -- a change is being effected in 30 days-type product and submitting for that. So there's no slowdown associated with that scenario. It remains to be seen how potentially the industry is impacted by any slowdown on FDA's part. I think that's still an open question. We don't see ourselves as necessarily slowed in any shape or form only because we haven't been -- we haven't seen it, Elliott. So we have a number of generic product launches that are certainly teed up for this year. I don't want to -- I have not -- as you can tell, I have not stated the amount in the press release. I am going to be a bit cautious. But the ones that are included in our guidance from our perspective are launches that we feel, obviously, extremely confident about, okay? So part of the answer to your question is, I don't know the answer. I don't know whether the slowdown is for real or not. They approved -- the agency approved, I believe, a record number of ANDAs last year. That's good for the industry, from my perspective. And I certainly support their efforts and hope that they continue that going forward to -- into 2018.

Okay. And I got just one follow-up for you, Art, as well maybe just sort of get your current perspective on the acquisition landscape. You guys obviously have had a good amount of success acquiring these more durable branded assets and provided a nice kind of buffer to some of the generic pricing headwinds that have been out there. But just sort of wondering what -- given what seems to be more and more generic assets coming to market at more and more depressed levels, if in fact maybe the return characteristics have shifted a little bit, and maybe those are potentially more attractive assets at this point than maybe what you're seeing on the branded side. Just try to get a little bit more perspective in terms of deployment of capital.

Sure. Well, look, first and foremost we -- Elliott, it's an excellent point. I mean, first and foremost, we have, I think, I'll say it upfront. We probably have the best business development individual, Rob Schrepfer, that's working for us, and I would say, generating a significant amount of value opportunities in the transactions that we have acquired. Even at the height of the asset fever in terms of multiples, we have always kept a -- he's always kept us in a very disciplined fashion to not overpay. Now certainly, we believe that this is, today, a target-rich environment for asset opportunities coming to the market, both in brands and generics. In brands, you have somewhat of a more stable environment and understanding how those brands will react and the value you can extract from a transaction over time. Generics are very different. You have to be -- there's a crystal ball approach associated with it. You have to be very careful because we have seen companies' EBITDA, and we have seen specific product EBITDA on generics literally get cut in half overnight. So you don't want to catch a falling knife in regards to an asset transaction for generics. So do I believe that there will be a significant amount of both generic and branded opportunities coming to market in 2018? I think we've already seen that. And obviously for us, we're not speaking towards billion-dollar transactions. We're more of the string of pearls type of transactions that you've seen us execute over the last several quarters and years. But I think this sets up very well for us because we are clearly a strategic buyer because of our strong capital position. And so the message to the marketplace is, if you're selling assets, please include ANI as a potential buyer of those assets.

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

I guess can you comment a little as much as you can without disclosing any competitive -- putting yourself at a competitive disadvantage. Can you disclose through the phasing of revenue and EPS throughout the year, is it more back half-weighted as those of 2018 mantras really take hold? Or is this something where we'll see some early year launches to propel earnings growth?

Steve?

Sure. Good morning, Dewey. Yes, I think that it is kind of a moderate phase-in as the year goes on. So I think that, obviously, as the 2018 generic launch cadence kicks in, that comes in over the course of the year. I think the launch cadence there really starts to kick in around, say, the back half of the second quarter and then flow out from there. So you would expect some acceleration to the quarters as the year goes on. And so, I would say it's a moderate build off of the base that we enter 2018 on.

All right. Great. And I guess to -- Art, to second your support of Rob, I tend to agree with that, too. But has Rob seen or have you seen a substantial revaluation of assets both in the generics and branded space? I know valuations have gotten pretty pricey and some private sellers are still -- still appear unwilling to sell at reasonable valuation.

So yes and no. I mean, you obviously know in the macro environment for public companies, multiples are different than they were in 2015, that's for sure -- lower. And I think it really is dependent upon the specific situation. So that's a tough question to answer because, again, it really depends on the transaction. And I mean, yes, so we have certainly seen -- there's a few ways to answer this. Number one, there doesn't seem to be a large amount of strategic buyers in the United States. My perspective is that many companies are somewhat tapped out, associated with capital positions in their balance sheets. And I think many companies' focus has turned to reducing debt on their balance sheets, in our space. So that precludes some of those folks from larger transactions. We've seen the FTC approach to some of these transactions, and we still don't know how that entirely plays out. So it really depends on -- I think it really depends on the transaction, the company you're dealing with. Is it a distressed transaction? Is it one from a position of strength? But I wouldn't put any overall cover on what's happening out there yet, I mean, again, our focus is specific to us, the assets we're going after. And I think you know us, we have a combination of assets that we've bought that fit into our product launch, pipeline and cadence for future periods of launches. And at the same time, we always are looking at instantaneously accretive asset transactions that make sense for us; obviously there's some tie into manufacturing or lower cost, et cetera. And I think that you should just expect that from us going forward. That's how we're going to approach the opportunities in the marketplace.

All right, great. And then my final question just on -- further on business development. Obviously you guys have benefited from acquiring sets of assets that you can plug eventually into Baudette. Are there opportunities out there that may be outside of your normal dosage forms that can be plugged into Baudette that are interesting at this point?

Outside of our normal dosage forms that could be plugged into Baudette, we wouldn't be able to do that (inaudible)...

No, I mean that can't be plugged into Baudette, sorry.

Oh, that can't be plugged in -- yes, there's -- well, our largest one is an obvious one, and that's Cortrophin gel, which is obviously an injectable product. So if you're asking me if the company envisions moving into different platforms like injectable drugs or ophthalmic drugs, drugs that require aseptic sterile manufacturing, we are always looking at those opportunities. We've always felt that we can successfully market any AA- or AB-rated generic drug, and --whether it's in the institutional marketplace -- that's my background, in injectables and in hospitals -- or certainly with the consortiums and the consolidation of scripts in the oral solid market. So we would not be -- we would not shy away from an acquisition, or a merger if it made sense, that would increase our portfolio without any overlap. And that would include injectables and ophthalmic. So we'll see. We'll see what the future brings us.

And I'd like to just thank everybody for attending our year-end earnings conference call today. Wish you a nice afternoon and (technical difficulty) [time off]. Thank you very much, everybody. Bye-bye.

Thank you.

Thank you. This includes ANI's Fourth Quarter 2017 Earnings Call. You may now disconnect your lines at this time, and have a wonderful day.