Lantheus Holdings Inc (LNTH) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Lantheus Holdings First Quarter 2016 Earnings Conference Call. This is your operator for today's call. (Operator Instructions) This call is being recorded for replay purposes. A replay of this call will be available approximately three hours of conclusion of the live call through May 17.

I would now like to turn the call over to your host for today, Ms. Meara Murphy.

Thank you, and good afternoon, everyone. Welcome to Lantheus Holdings first quarter 2016 earnings conference call. We appreciate you joining us. I'm Meara Murphy, Director of Investor Relations and Corporate Communications for Lantheus. With me on the call today are Mary Anne Heino, President and Chief Executive Officer; and Jack Crowley, Chief Financial Officer.

Please note that this afternoon we issued a press release reporting first quarter 2016 results. We are also filing with the SEC our Form 10-Q for the quarter ended March 31, 2016. You will be able to find both of these documents in the Investor Relations section of the Lantheus website at lantheus.com. The agenda for this call will include an opening summary from Mary Anne, a review of our financial results and an update to our financial guidance from Jack, and then a corporate priority review from Mary Anne before we move into our question-and-answer session.

Before we begin, I would like to remind you that remarks during this call will include some forward-looking statements, including statements about our outlook for 2016 and other predictions or estimates regarding the future of our business. Matters addressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations. The forward-looking statements made in today's call speak only as of this original date, and except to the extent required by law, we do not undertake any obligation to update any forward-looking statements. We caution you against placing undue reliance on any forward-looking statements.

Additional information regarding forward-looking statements appears in the Safe Harbor section of today's press release. Information about our specific risks and uncertainties is contained in our SEC filings, including our annual report on Form 10-K filed with the SEC on March 02, 2016 and in our subsequent quarterly reports on Form 10-Q including that which we're filing today with the SEC. Copies may be obtained at sec.gov and on our website at lantheus.com.

On today's call, we will also discuss certain non-GAAP financial measures with respect to our performance. We use these non-GAAP indicators for financial and operational decision-making and as a means to evaluate our performance. The definitions of EBITDA, adjusted EBITDA, operating income as adjusted, and net income as adjusted, along with the reconciliations to GAAP metrics, are set forth in our earnings release, which was filed today on Form 8-K. Copies may be obtained at sec.gov and on the company's website at lantheus.com. Please note that unless indicated otherwise, all of our commentary on today's call will make reference to as adjusted results.

With that introduction, it is now my pleasure to turn the call over to our CEO, Mary Anne Heino. Mary Anne?

Thank you, Meara, and welcome to everyone joining us today on our conference call. I'm pleased to be here with Jack Crowley, our Chief Financial Officer. Jack who previously served as our Chief Accounting Officer before assuming the interim CFO role was promoted to CFO on March 28, 2016, as announced in the press release we shared at that time.

I'll begin our discussions today with a high level summary of our first quarter 2016 results before handing the call over to Jack for more detailed review of our performance and guidance. Then I'll return to provide an update of progress against our three corporate priorities for 2016.

So let me start with a review of our first quarter 2016 performance. We had a strong start to the year with $76.5 million in revenue exceeding our first quarter [2016] (corrected by company after the call) revenue guidance of $72 million to $74 million. Year-over-year, our first quarter 2016 revenue increased by 2.2% as reported and 3.2% on a constant currency basis. We also exceeded our first quarter adjusted EBITDA guidance posting $18.4 million versus our guidance of $14 million to $16 million.

Our robust first quarter results were organically driven by three factors. First, DEFINITY continued its strong performance in the increasingly competitive contrast echo market. This performance was driven by growth in the echo market, growth in the contrast penetration rate, strong share position, and consistent average selling price. Second, our contracting strategy with nuclear customers is working. First quarter delivered the revenue associated with the volume levels specified in those contracts. And third, we were able to capture incremental sales of our nuclear product, TechneLite, to fill higher than contracted customer orders.

Overall, we are pleased with our first quarter results and the performance of our key products. I'll expand further on the success we are seeing with our contacting strategy when I update you on our corporate priorities later in the call.

Now let me turn the call over to Jack for a detailed review of our first quarter 2016 financial results and an update on our financial guidance. Jack?

Thanks, Mary Anne, and good afternoon, everyone. The tables included in today's press release, as previously noted, include reconciliation of our GAAP results to the as adjusted performance I will be covering with you today. Of particular note, those tables include the reconciliation of our GAAP net income to adjusted EBITDA, which is a metric we consider to be particularly relevant at this time due to the variability of our technology transfer activities and related costs. In total, first quarter 2016 delivered $76.5 million in revenue. As Mary Anne stated, we feel that our continued attention to DEFINITY, combined with the successful execution of our contracting strategy for our nuclear medicine products, are the key drivers of this performance.

Looking at our revenue results on a product line basis, DEFINITY outperformed delivering revenue of $31.4 million in growth, totaling 22% and 9% on an as reported basis as compared to the year ago and prior quarter respectively. Our TechneLite business posted worldwide revenue of $24.8 million for the first quarter, increasing by 21% and 47% on a constant currency basis compared to the year ago and prior quarter respectively. This improvement was the result of increased purchases from two significant customers who are now under contract. Additionally, we're able to capture incremental sales of TechneLite with customers who purchased at volumes higher than their contractual commitments in the first quarter.

Xenon revenues, which represented 11% of our total sales during the first quarter, totaled $8.2 million, a decrease of $5 million or 38% versus the prior year. This decrease was expected and driven by the execution of the nuclear customer contracting strategy we discussed with you on our last call.

Our other product category, which represents approximately 16% of our total revenue, totaled $12 million during the first quarter, decreasing by 18% in constant currency as compared to the first quarter of 2015. This decrease in revenue was primarily driven by the divesture of our Canadian radiopharmacy business in early 2016, whereby the divestiture resulted in a decrease in revenue but an increase in adjusted EBITDA.

Moving below the revenue line, our first quarter 2016 gross margin, excluding technology transfer activities, totaled 45.2%, 380-basis-point decrease from the 49% gross margin we reported in our first quarter of 2015. This decrease was anticipated and driven primarily by the higher non-contract supply prices paid by a key nuclear products customer in the first quarter of 2015.

Moving now to operating expenses as adjusted. First quarter 2016 operating expenses totaled $21.9 million, increasing by 4.9%; with the primary contributor being increased public company costs. Operating income as adjusted was $11.8 million for the first quarter of 2016, a decrease of 21% over the last year with the corresponding decrease in operating margin of 450 basis points to 15.5%. This was driven by the same dynamics I previously described for gross margin and operating expenses.

Moving below operating income. First quarter interest expense totaled $7 million, an improvement of $3.6 million or 34% in comparison with the first quarter of 2015. This is consistent with our expected go-forward quarterly interest expense levels following our June 2015 refinancing activities.

Pre-tax earnings for the quarter totaled $10.7 million, an increase of $10.3 million in comparison to pretax earnings of $0.4 million in the first quarter of 2015. The first quarter income tax provision totaled $0.4 million, consisting exclusively of taxes on foreign income and discrete items unrelated to our U.S. pretax earnings. As previously noted, our U.S. pre-tax earnings are currently being offset both for GAAP and cash tax purposes by the utilization of our significant federal net operating losses.

Moving now to our balance sheet cash flow and liquidity. As of March 31, 2016, we had cash and equivalents totaling $38.9 million. Our ABL facility with an outstanding loan balance of zero and outstanding letter of credit totaling the $8.8 million provided us with net availability of $39.4 million as of March 31st. Our total liquidity including cash on hand was $78.3 million as of March 31st, providing ample liquidity to support our operating needs.

Our first quarter 2016 operating cash flow totaled deposit of $3.8 million as compared to $15.2 million for the first quarter of 2015. The key driver of this decrease was the timing of interest payments on long term debt as we now pay interest each quarter under our new facility as compared to a semiannual interest payments under our prior facility.

As for the other key components of our cash flow, capital expenditures during the first quarter of 2016 were $1.7 million compared to $3.5 million in the first quarter 2015 and $4.7 million in the fourth quarter 2015. Within financing activities, we used $0.9 million of cash during the first quarter of 2016 as our quarterly payment for our term loan principal commitment.

Now I will discuss our guidance for the remainder of 2016 as well as for the second quarter of 2016. As stated in today's press release, we are increasing our guidance for revenue for the full year 2016 to the range of $287 million to $292 million from our initial guidance of $285 million to $290 million. It is important to note that we are increasing full year guidance despite the entrance of a Xenon competitor into the market as of the second quarter. We believe that our ability to increase our full year revenue guidance even with this new competitor demonstrates the overall strength of our portfolio of products and the current contracts we have with key customers. For the second quarter of 2016, we expect to see revenue in the range of $72 million to $74 million.

As also stated in today's press release, we have increased our guidance for adjusted EBITDA for full year 2016 to the range of $62 million to $66 million from our initial guidance of $60 million to $64 million. For the second quarter of 2016, we expect to see adjusted EBITDA in the range of $14 million to $16 million. Our second quarter adjusted EBITDA guidance reflects a onetime shift in certain operating expenses of over a $0.5 million from the first and second quarter which will put downward pressure on the second quarter net earnings that we do not expect to see for the balance of the year.

We're very pleased with our Q1 performance and we will continue to focus on driving strong financial results as we move through 2016 and beyond. And with that I will turn the call back over to Mary Anne.

Thank you, Jack. I'd now like to share an update on progress against our 2016 priorities. To refresh, our 2016 priorities are: one, grow revenue and unit volumes of our commercial portfolio; two, advance our pipeline assets and business development opportunities; and three, create efficiencies in our operations and optimize our capital structure. First, with respect to growing revenue and unit volumes of our commercial portfolio, DEFINITY continues to perform exceptionally well and posted a 22% increase in sales year-over-year despite the presence of two competitors in the ultrasound contrast market. Both the echo market and contrast penetration continue to grow as anticipated.

We remain committed to DEFINITY worldwide expansion through additional market entries and next generation programs. In the first quarter, we executed a distribution agreement with CS Diagnostics for the distribution of DEFINITY in Austria and Germany. We're in advanced discussions with other prospective strategic partners and expect to reenter additional EU markets in 2016. As anticipated, we are also seeing higher sales of DEFINITY in Canada as well sales in South Korea.

Our U.S. nuclear product performance is driven by the multi-year agreements we have in place with the four largest radiopharmacy groups. As we shared on last quarter's call these agreements provide predictable revenue and unit volumes for our key nuclear products, including Xenon, in 2016, as well as incremental growth in 2017. Our agreement with UPPI ends on December 31 of this year. We are already in negotiations to extend this long standing relationship.

We became aware of the commercial availability of a competitive Xenon product at the end of the first quarter. As Jack noted we are raising both revenue and EBITDA guidance for the balance of the year. We're able to do this despite the entrance of a Xenon competitor because of the overall strong performance of our portfolio of products.

With respect to Xenon, we will continue to compete vigorously in this important segment. Our strategy includes ensuring future supply through our program with the Institute of Radioelements or IRE. Our Xenon Program with IRE is on track. We anticipate providing commercial supply sourced from IRE before the planned October 2016 shutdown of the NRU reactor, our current supplier of processed Xenon. As a final update to our progress against our corporate priority of increasing unit volumes and revenue, I am also pleased to announce we saw our first commercial sale of Neurolite in the EU in Q1 after having been out of that market since 2011.

Now let me update you on our second priority of advancing our pipeline assets and business development opportunities. For DEFINITY in China, active work on protocols for the two small confirmatory trials, one in echocardiography and the other in abdominal ultrasound, is underway. We will keep you apprised of the expected start date of those trials which will be conducted by our partner, Double-Crane.

For flurpiridaz F 18, our PET MPI agent, we have progressed to active negotiations with multiple prospective partners. Our goal is to finalize as soon as possible one or more agreements for the development and commercialization of this promising agent, after which we will then commence the second phase three clinical trial. We will continue to keep your apprised of these important discussions.

Our third and final priority is relentless attention to creating efficiencies in our operations and optimizing our capital structure. In January 2016, we announced the divesture of our Canadian radiopharmacy business and the commencement of a long-term supply agreement with Isologic. While this transaction will decrease revenue for 2016, as expected, we have experienced improved EBITDA and margin for our Canadian business during the first quarter as a result of our new supply relationship. In addition, we implemented further changes to our organization in Canada that we believe better align with our new business footprint in that market. This resulted in further efficiencies and reduced operating expenses.

In summary we're pleased with our Q1 results and the outlook for the remainder of the year. DEFINITY continues its robust performance and maintains its leadership position in the increasingly competitive echo market. The nuclear product contracting strategy we initiated is working, and we believe will deliver the predictable revenue and product volumes we have forecasted. We're pleased that we are raising our annual guidance despite the entrance of a competitor to our Xenon product. I look forward to reporting on our continued progress throughout the year

With that, I'll conclude my comments and open the call for questions.

(Operator Instructions) And our first question comes from the line of Matthew Keeler with Credit Suisse. Your line is now open.

Hey, guys, thanks for taking the questions and congrats on the quarter. I guess just first on guidance, you've beaten the first quarter. It looks like you raised by about $2 million for the full year at the midpoint; so somewhat less than the first quarter beat. And I just want to see -- was there anything in the first quarter that maybe you don't expect to recur through the year or just reflect conservatism about what you'll see in Xenon?

Yes, it's Jack. I'll take that. Just as a reminder, we gave you full year guidance on our last call. We did not contemplate the entrance of a Xenon competitor. So probably the biggest change in the landscape of the guidance we're now providing is we are contemplating that Xenon competition throughout the rest of the year. So that's baked into this updated guidance.

That's helpful. And is there anything you can share with us that you've seen? You said new entry at the end of the first quarter, anything you can share with us about behavior of your competitor as things progress in April?

I think, Matt -- this is Mary Anne. Thanks for the question. And what I'd say is we are aware that the second Xenon product entered the market essentially with the second quarter. As Jack mentioned, we had not originally because we could not predict when they would enter. We had chosen not to bake that into our original 2016 forecast. Now we have and it's reflected in our updated forecast.

With the contracting strategy that we executed, we are able to somewhat have a good line of sight as to what the impact of that competitor will be for the rest of the year, and that those assumptions in that line of sight is baked into our new forecast.

Got it. Thanks. That's very helpful. I'll get back in queue.

And our next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is now open.

Hey, guys, good afternoon and congratulations on a good quarter. Let me start with DEFINITY, strong results this quarter; I think 22% growth, if I'm not mistaken. Can you talk a little bit about, first, the competitive environment. Mary Anne, you said, you talked about an increasingly competitive market, but also what drove the [beat] in the quarter? What drove acceleration and the growth. Was it the echo market growing faster? Penetration growing a little bit more than we've seen? Just a little bit more color on the metrics and the outlook in 2016. Can you continue to grow [effective space]? And I think I'd have a follow-up. Thanks.

Happy to discuss, Larry, and thanks for joining the call. DEFINITY, I think, what we cited is 22% year-over-year growth and 9% quarter-over-quarter growth, and we're very pleased with that. What I would share with you is the net performance is really balanced right across the four vectors that drive this market: so size of the echo market growing as we had anticipated; the use of contrast or what we call the contrast penetration rate, also right on target with our forecast; and then if we look at the two kind of product-specific attributes, which are share and price, we continue to hold a commanding share in that marketplace despite now what is the presence of two competitors since at least October '14, one competitor before that, and price is held strong for us. And I have shared this on earlier calls, price for us is an investment that we used to protect volume where we need to, and in the first quarter we held on to price really well.

That's very helpful.

As we look out for the year for us as a flagship product, we will, as we do with Xenon, we will defend and invest and protect this product vigorously in the market that we compete in.

That's helpful. On TechneLite, could you talk a little bit about what drove the strength this quarter and any outlook there? I know you talked about a little bit in the prepared remarks but a little bit more color I mean I think, you know, you had one of the strongest quarters for TechneLite in a couple of years, almost 20% growth there, and that had been a declining product. So can you help us think about how to model that for the rest of this year and maybe even beyond? Thank you.

Absolutely. So, Larry, this is a little bit different because if we look at the quarter-over-quarter growth, there's a very strong dynamic from that versus a slightly different dynamic if we look year-over-year. So let me speak first to quarter-over-quarter. The most dramatic change between fourth quarter of '15 and Q1 of '16 is our contracting strategy. So as of January 1st, we now have contracts with all four of the major radiopharmacy chains in the United States, and those contracts specified committed volumes of TechneLite and other key nuclear products for us. So that's what is really driving that quarter-over-quarter performance.

And in similar vein, the year-over-year performance, the addition of the contracted customers is also driving that. As I mentioned in the call, we now have contracted committed volumes for TechneLite and in our other key nuclear products with all four of the radiopharmacy chains; so that what you see driving that.

In first quarter, we had, as Jack and I both referenced in the call, some further incremental sales of TechneLite where we were able to supply our customers beyond their committed volumes because in short notice, they came to us with extra need and asked if we could fill in that extra volume for them, and we were happy to do that.

Is that something, Mary Anne, you have visibility on the extra need, customers, in the remainder of this year? I assume one of your competitors probably has a shortage that's driving that. Can you give any color on that?

I can only offer you the color, Larry, that it's completely unpredictable. So, I think the way for you to think about our nuclear business is with our contracting strategy now fully executed, we have a very good line of sight for minimal committed volume across our key products. We look to fill that in by meeting customers' extra needs. However, those needs come to be [cause] whether if it's a market disruption or something else that's happening, somewhere else in the channel, we're always happy to step up and offer our customers with quick notice even additional product that satisfy what they need in their market.

But let me just ask a follow-up on that. Can you quantify the incremental sales or the extra need so we kind of know the base and what portion is unpredictable? [And from there, I'll drop]. Thanks.

So, I can't give forward-looking guidance on a specific product. I think as we report Q2 and beyond, you will see then for our key products, for DEFINITY, TechneLite, and Xenon, you will see the quarterly revenue performance for each of those products.

Sorry, Mary Anne, I meant for Q1, how much was above and beyond the contracted amount? Or are you willing to [connect to that] for Q1?

I did understand your question, Larry.

Okay.

And I chose my answer carefully. I will not comment specifically on what the overperformance was because we don't give quarterly product level guidance.

Understood. And congrats on the quarter. Thanks,

And our next question comes from the line of Jeff Johnson with Robert W. Baird. Your line is now open.

Thank you. Good afternoon, Mary Anne and Jack. Congrats on the quarter as well. I'll try not to do an eight-part single question maybe like the last caller. And I say that with a smile on my face. So, Mary Anne, wondering if I could ask, first off, just on the time lines on the confirmatory trials in China on the echo and the abdominal, just kind of what, if we expect to see some results there in the next six to 12 months and if you have a time line on the potential entry of DEFINITY into China then any update there from the last time you updated that time line. Thank you.

Sure, Jeff. Thanks for joining the call. The way I will respond about China is, the best I can do Jeff is cite what the Chinese FDA publishes as their estimated time lines for each portion of the approval process. So we're currently in the -- CTA has been approved. We're in the portion of the process during which the trials are done. By their website what they estimate a fair amount of time to consider here is approximately six months. And the reason is compared to if we think about the U.S. market, these are small trials and they're meant to be confirmatory and not exploratory, and so they are easier to get through.

Post that, once those data are completed and then included in the application, the final phase of the program for the Chinese FDA is actual IDL or Import Drug License approval. If we look at the time lines cited by the Chinese FDA and we apply those to our current program what we estimate is that our product could be approved for commercial sale as early as the end of 2017.

In actuality, we have seen a program really kind of hit along the published milestones with a little bit of flexibility. And so, we're encouraged that the program will continue on the expected milestone.

Got it. And then my other question would just be around Xenon. Jack, I just wanted to understand, or maybe it's for you, Mary Anne, but the $8 million, I think, revenue -- I'm on the road, so I'm sorry I don't have it in front of me, but I think you said $8 million in Xenon revenues this quarter. The year-over-year decline there is just the pricing and the change with Cardinal. The competitive impact you've not yet included or we haven't yet seen an impact from a competitive standpoint with Mallinckrodt with Xenon in the second quarter. Is that a fair characterization?

Yes, Jeff. And you're right, it was $8 million for the quarter. And the primary driver of that quarter over last year's quarter is the pricing related to our contracting strategy. And you're right, that we did not see any impact of the competitor in Q1 that we have baked the expected impact of that competitor throughout the rest of our guidance.

Okay. And then my last one, and then on the EBITDA guidance moving up slightly here this year, if Xenon is coming down, that's kind of your second highest gross margin product, anyway, I believe, DEFINITY sounds like it should probably be moving up. Is it just the offset that DEFINITY, higher margin DEFINITY moved up a little bit more, the second highest margin Xenon moved down a little bit less than DEFINITY moved up and that kind of drives the better profitability? Or is there something on the cost side that's also contributing?

I would think that's probably a fair high level way to look at it, but really the guidance reflects the breadth of all of our products not necessarily just the DEFINITY growth. So when we updated the guidance both the revenue and adjusted EBITDA, we did consider the margin. Not a significant shift is expected in expenses from what we thought at the beginning of the year, so I think your assessment is at a high level directionally correct.

Thank you.

(Operator Instructions) And our next question comes from the line of Christian Moore with Jefferies. Your line is now open.

Good afternoon. Congrats on a nice quarter here. Just on flurpiridaz F 18, understand that you guys are still in active negotiations looking for partner to fund the Phase 2, the second Phase 3 trial. But is there any update there on the time line of when we could see that beginning? And when can see that product coming to market?

Christian, thanks for joining the call and thanks for the question. I think what we're trying to signal with flurpiridaz F 18 is that, versus our last comment included in the last call, we've got active progress forward. And you're right, one of the key parts that will come out of this partnership is the funding of the second Phase 3 clinical trials. And we look to have that commence as quickly as possible once we announce and finally execute the partnership agreement.

At this time, I'm not going to offer a program date for approval of the product. I think it would be premature and I really wouldn't guesstimating. So I'm not sure that that would be essentially helpful to you with your modeling.

Great. Thank you. And then just one other one on some of the moving parts of the revenue. It just seems like our revenue model is going to get a little shaken up this quarter. Could you provide any guidance on how much you took down the relative amount you expected from a contribution of Xenon for the entrance of Mallinckrodt into the market in terms of how much you took down there to kind of back out what you expect the other segments to accelerate in? If you can provide any detail there at all, that would be helpful for the full year.

Christian, it's Jack. We have a policy, we just are not providing forward-looking product level guidance and revenue, and so I appreciate the challenge. I guess the way I'd look at it -- I think Jeff's comment was directionally accurate. We saw great growth in DEFINITY over the quarter and some other TechneLite favorability. We're now modeling Xenon for the rest of the year. So thinking at a high level, you kind of do the math with DEFINITY, Xenon, and some of the other products favorability, I think you can get there. And I think as you see the second quarter revenue by product results that will help your model for the rest of the year.

Great. Thank you very much.

And I am not showing any further questions at this time. Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.