Lantheus Holdings Inc (LNTH) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Lantheus Holdings' Third Quarter 2016 Earnings Conference Call. (Operator Instructions) A replay of this call will be available approximately three hours after the conclusion of the live call through November 15.

I would now like to turn the call over to your host for today, Ms. Meara Murphy, Director of Investor Relations and Corporate Communications. Ms. Murphy, you may begin.

Good afternoon, everyone. Welcome to the Lantheus Holdings' third quarter 2016 earnings conference call. We appreciate you joining us. With me on the call today are Mary Anne Heino, President and Chief Executive Officer; and Jack Crowley, Chief Financial Officer.

Please note that earlier this afternoon, we issued a press release reporting third quarter 2016 results. We will also file with the SEC our Form 10-Q for the quarter ended September 30, 2016 later today. You will be able to find both of these documents in the Investor section of our website at lantheus.com.

Remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed in the Risk Factors section of our Form 10-K for the year-ended December 31, 2015 as well as our subsequent SEC filings.

In addition, any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we might update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

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 reconciliations to GAAP metrics are set forth in our earnings release, which was filed today on Form 8-K and is available on our website.

I would now like to turn the call over to Mary Anne Heino. Mary Anne?

Thank you, Meara. And welcome to everyone joining us today on our conference call.

I'll begin our discussion today with a high-level summary of our third quarter 2016 results and financial activities before handing the call over to Jack for a 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 third quarter financial results. We posted third quarter revenue of $73.1 million, exceeding our third quarter guidance of $68 million to $70 million. Net income for the third quarter totaled $4.2 million.

We exceeded third quarter adjusted EBITDA guidance with $18.7 million versus guidance of $14 million to $16 million.

We are pleased to report during the third quarter, we consummated a successful follow-on primary stock offering, raising approximately $40 million in net proceeds. We used this cash, along with cash from our balance sheet, to pay down $55 million of our outstanding debt. Continued deleveraging has been an important goal since our IPO, and this pay down is a further step towards that goal. Even with this pay down we maintain a healthy amount of cash on our balance sheet which totaled approximately $53 million as of September 30.

Overall, we are very pleased with our third quarter and year-to-date financial results and activities, which reflect the solid performance of our flagship product DEFINITY, continued execution of our nuclear product contracting strategy and our consistent focus on optimizing our capital structure. I'll explain further when I update you on our corporate priorities later in the call.

Now, let me turn over the call to Jack for a detailed review of our third 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 non-GAAP performance I'll 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, third quarter 2016 delivered $73.1 million in revenue. As Mary Anne stated, we feel that the continued attention to driving DEFINITY revenue and the continued successful execution of our nuclear products contracting strategy are the key drivers of this performance. Looking at our revenue results on a product line basis, DEFINITY delivered, posting revenue of $32.6 million in the third quarter, an increase of 13% as compared to the prior year.

Our TechneLite business posted worldwide revenue of $24.5 million for the third quarter increasing by 42% as compared to the year ago quarter. The improvement versus prior year was the result of our nuclear products contracting strategy.

Xenon revenues totaled $6.7 million, a decrease of 48% versus the prior year. As shared on previous calls, our nuclear contracting strategy is a portfolio approach for our nuclear products based on volume commitments for certain products in exchange for reduced pricing, including Xenon.

Our Other Product category, which represents approximately 13% of our revenue, totaled $9.2 million during the third quarter, decreasing by 40% as compared to the prior year quarter. This decrease was primarily driven by the divestiture of our Canadian and Australian radio pharmacy businesses in the first and third quarters of 2016, respectively.

Moving below the revenue line, our third quarter 2016 gross margin, excluding technology transfer activities, which we refer to in our reconciliations as new manufacturing costs, totaled 47.2%, a 44 basis point improvement versus the third quarter of 2015. This improvement was driven primarily by the strong performance of our higher margin products and our continued focus on efficiencies along with the new distribution models in Canada and Australia.

Moving now to operating expenses, as adjusted, third quarter 2016 operating expenses totaled $21.6 million representing an increase of 6.6% over the prior year. These results primarily reflect the impact of increased employee related expenses, business development activities, and depreciation related to investment in technology.

Operating income, as adjusted, was $12 million for the third quarter of 2016, a decrease of 10% as compared to the prior year. These decreases were driven by the revenue, gross profit, and expense dynamics I previously described.

Moving below operating income, third quarter interest expense totaled $6.8 million, an improvement of $0.3 million, or approximately 4% in comparison with the third quarter of 2015. We expect our go-forward quarterly interest expense to decrease by approximately $900,000 following our $55 million repayment on the principal of our term facility.

Pre-tax earnings for the quarter totaled $4.2 million, a decrease of $1.9 million in comparison to the pretax earnings of $6.1 million in the third quarter of 2015. The key driver of this decrease recorded in the quarter was a write-off of $1.4 million in debt retirement costs.

As previously noted, U.S. pretax earnings are currently being offset, both for GAAP and cash tax purposes, by the utilization of our significant federal net operating loss carry forwards.

Moving on to our balance sheet, cash flow and liquidity, as of September 30, 2016, we had cash and cash equivalents totaling $53.2 million. Our ABL facility, with an outstanding loan balance to zero and an outstanding letter of credit totaling $8.8 million, provided us with net availability of $31.5 million as of September 30. Our total liquidity, which includes cash on hand and availability under our revolving credit facility, was $84.7 million as of September 30 providing substantial liquidity to support our operating needs.

Our third quarter 2016 operating cash flow totaled $15.4 million, as compared to $5.4 million in the third quarter of 2015. As for the other key components of our cash flow, capital expenditures during the third quarter of 2016 were $2.6 million, compared to $2.3 million in the third quarter of 2015. Within financing activities, during the third quarter of 2016, we raised approximately $40 million from our follow-on offering. We used these proceeds, along with cash from our balance sheet, to prepay $55 million of our Term Facility, which has substantially improved our leverage ratio.

Now I'll turn to discuss our 2016 guidance.

As stated in today's press release, as a result of overachieving our Q3 revenue guidance, we are again increasing our guidance for revenue for the full year 2016 to the range of $296 million to $299 million from our prior guidance of $291 million to $295 million. We believe that our ability to increase our full year revenue guidance demonstrates the overall strength of our portfolio of products.

Also as stated in today's press release, we have increased our guidance for adjusted EBITDA for full year 2016 to the range of $73 million to $75 million, from our prior guidance of $70 million to $73 million.

We are very pleased with our Q3 performance, and we will continue to focus on driving strong financial results as we close out 2016.

With that, I will turn the call back over to Mary Anne.

Thank you, Jack. I'd like to now share an update on our progress against our 2016 corporate priorities which are; one, grow revenue and unit volume of our commercial portfolio; two, advance our pipeline assets and business development opportunities; and three, create efficiencies in operations and optimize our capital structure.

First with respect to growing revenue and unifying of our commercial portfolio, DEFINITY continued to perform strongly during the third quarter, delivering a 13% increase in sales for the year-over-year quarter. DEFINITY continues to maintain its strong leadership position in the U.S. market and contrast penetration rate continues to trend up.

To ensure continued supply for our increasing demand, we have expanded our manufacturing and supply agreement with Jubilant HollisterStier for the manufacture of DEFINITY through January 2022. Our nuclear product portfolio continues to deliver increased revenue and unit volume consistent with the contracting strategy we have discussed previously. TechneLite sales are up 42% year-over-year and the product continues to perform at higher than contract committed volumes.

Xenon remains an important contributor to our nuclear portfolio. We have ensured continued Xenon supply to meet our contracted commitment with the successful sourcing transition to IRE. We remain the leading supplier of this critical agent to the U.S. medical marketplace.

We are pleased to announce a new multi-year agreement with the UPPI, covering TechneLite, Xenon, and our other nuclear products through December 2019. Previously, our UPPI agreement was set to expire in December 2016. UPPI is a major provider of unit dose radiopharmaceuticals in the U.S. market and we look forward to continuing our longstanding relationship with this important customer.

Internationally, we are committed to continually expanding our DEFINITY footprint throughout Europe and Asia. We are excited to report that we've already had sales of DEFINITY in Germany, U.K., Netherlands, and Austria through our distribution partners, CS Diagnostics and Lamepro B.V.

Now let me update you on our second priority of advancing our pipeline assets and business development opportunities.

In August, we announced the divestiture of our radiopharmacy servicing operation in Australia and the simultaneous signing of a long-term supply and distribution agreement with the buyer, Global Medical Solution or GMS. The transaction simplifies our service and distribution model in Australia and expands the international reach of our products while improving operational efficiencies. Through our long-term supply and distribution agreement with GMS, we will continue to provide nuclear medicine products and DEFINITY to healthcare providers and their patients in Australia as well as a number of other Asia Pacific markets served by GMS.

We continue our active negotiations with potential strategic partners to assist with the further development, manufacture and commercialization of flurpiridaz F-18. We are making good progress and will continue to keep you apprised of our negotiations.

In addition, we continue to actively evaluate new tuck-in acquisition opportunities to broaden and enrich our current portfolio and to position the company for future profitable growth.

Our third and final priority is relentless attention to creating efficiencies in our operations and optimizing our capital structure. As noted, we recently paid down $55 million of the outstanding principal balance under our term facility, reducing our leverage ratio, while at the same time maintaining a healthy $53 million of cash on our balance sheet as of quarter-end.

The sale of our radiopharmacy business in Australia, combined with the Canadian divesture earlier in the year and the simultaneous commencement of long-term supply and distribution agreements, allow us to more efficiently serve these international markets with the potential to reach additional customers end markets.

In summary, we are very pleased with our performance; also with the outlook for the remainder of the year and the state our business as we look forward to 2017. I look forward to updating you on our continued progress and our financial projections for 2017.

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

Thank you. [Operator Instructions] And our first question comes from Erin Wilson from Credit Suisse. Your line is open.

I guess can you give us an update on the competitive environment across your core product lines particularly DEFINITY? And then also if you could comment on international trends within that segment, that would be helpful. Thanks so much.

You're very welcome, this is Mary Anne and I'll take that question. The competitive environment in the U.S. marketplace is unchanged as of this quarter versus what we've shared with you throughout the year. In our DEFINITY market or the echo contrast phase, we have two primary competitors, an offering by GE and an offering by Bracco. As I mentioned in my comments, I am pleased to share that we retain and maintain a strong leadership position in market share in that phase.

I'll speak internationally to DEFINITY before I turn to nuclear products. As I shared also in this call, we had announced on earlier calls in the year that we had signed distribution partnerships with both [DB Lamapro] and CS Diagnostics; the updates that I'm offering in this call is that we've actually seen first sales into those markets, and we'll continue to monitor not only the markets that we're in, which are the four countries that I mentioned, but also the opportunity to enter additional European and Asian markets.

We do have a very active development program underway in Asia, it includes both South Korea and Taiwan, as well as a very exciting partnership that we have in China that is under development so those are all markets that we're actively engaged in, and we continue our presence in Australia through our relationship with GMS, Global Medical Solutions.

On the nuclear products front that is also for the purpose for this quarter, an unchanged competitive dynamic. We announced earlier this year that a new competitor for our Xenon product had entered the market commencing in the second quarter. We monitored our activity there, and I think Jack shared on the last call and happy to speak to again this call, we've seen very stable maintenance of our revenue in that market. The decrease that Jack mentioned year-over-year in Xenon's performance really reflects more of price concessions that were given as part of our nuclear contract strategy.

Did that answer your question?

Yes, that was very helpful. Thank so much.

[Operator Instructions] Our next call comes from Raj Denhoy of Jefferies. Mr. Denhoy, your line is open.

Good afternoon, this is actually Christian on for Raj. I hope you guys are well. Just maybe a first question on DEFINITY, obviously another good quarter at 13% growth, we were modeling at more for 17%. And just wondering if there is any update on -- I know you mentioned that you're not losing any market share, but I think the last update on market share and new U.S. [CCG] market was around 78%. Do you have an update to that number? And then maybe just the dynamics with the deceleration we've seen through this year and just a lower quarter versus 2Q. Thank you.

Christian, this is Mary Anne and I'll speak to -- there is several dynamics that you mentioned. We continue to see strong high-teens growth year-on-year. As I mentioned, for this particular quarter, it's 13% over the prior year quarter. When we look at market share, there is actually four levers that we look at in that market. There is the overall size of the echo market, how many procedures are done; then there is the subset of those that are done with contrast -- we call that contrast pen rate; then there is market share; and there is price. It's a combination of those four that really define and calculate our performance in the market.

Q3 is an interesting period when it comes to the overall echo market because it is mainly contained vacation months or summer months, we typical see a deceleration in the total number of echos that are done in that period versus the prior period, but not versus the prior year quarter, but versus the prior sequential quarter and we did see that this year. And in fact, if I look at the numbers and again, I'll ask you to take whatever I'm going to say with a grain of skepticism because it is survey data, and that's why we don't share exact numbers with you. But based (technical difficulty) data, we did see a decrease in the total echo market of echo procedures done of 2.6% in Q3 of 2016 versus Q2 of 2016. In the same period, we saw a decrease of only 2.1% for DEFINITY.

So DEFINITY outperformed what was a softening of the market, and this is something that we expect to see every year that there is a period in high summer months, were just due to the intersection of staff, patient and physician vacations. There tends to be somewhat a rescheduling or putting off non-urgent echo procedures until late summer, early fall which is a period we're in now.

You mentioned market shares also, briefly the market share -- again, because those are survey data, we have stopped sharing exact numbers, but I am happy to confirm to you that versus the number that you said to me, which was 78%, I am happy to report back to you that DEFINITY's current surveyed market share is higher than that.

Great, thank you very helpful with all the detail there. And then maybe just a quick question on TechneLite. It came in much stronger than we were expecting in the quarter, if you could talk about some of the excess orders that you're seeing and whether that's getting any easier to forecast into the future and how we should think about modeling that product going forward?

I think there, Christian, you see the stance that Jack and I have taken consistently this year. We have shared frequently and consistently with yourself and your peers that it's our intent not to attempt to forecast what our sales that are above committed contract volumes for TechneLite. Again, we're happy to receive those extra orders and sell them whenever we can, you see that again happening in Q3. And while we didn't report to you what the sequential sales were quarter-over-quarter, what you will note if you go back and crunch your own math, is you'll see that essentially the amount of over opportunistic sales in Q2 for TechneLite was actually higher than the amount of opportunistic sales in Q3, still present, but just not to the same expense.

For those reasons and many other as we look through value for the rest of the year and as we look into 2017, we'll continue to take our stand that we will not bake into our forecast any assumption for opportunistic sales, although we gladly accept them whenever they come our way.

Christian, if I can just add in, this is Jack. If you put some of the guidance in perspective, so as Mary Anne noted our over performance in DEFINITY versus the overall market actually led to some of our over performance versus our guidance as well as some of the TechneLite over performance.

Okay, thank you, that's helpful. Just one last question on F 18, just wondering if there's any update, I think we're expecting to hear about a firm partnership by year end. Just if that's in the pipeline and if you are still expecting to make that announcement by the end of the fiscal year, and I'll let some others to have questions. Thank you.

Christian, what I will say about F 18 is that they are complex negotiations and my stand as CEO of this company is I am obliged and determined to bring the absolute best deals to our company, not only in the moment, but for the future value. I can't confirm that that will happen by year end. What I will absolutely commit to, is that it is a high priority for us, it gets a lot of our attention and when we feel we have the right deal of hands, we'll be happy to announce that not only to our analyst but to the public as well.

And our next question comes from Larry Biegelsen from Wells Fargo. Your line is open.

Hi, it's Lei calling in for Larry, and thanks for taking my question. I want to start with just a couple questions on the numbers. So on the Q2 call, you had mentioned that there'd be fewer selling days in second half of the year versus first half. Can you provide any color on what the selling day difference was in Q3 versus Q2, and if you can quantify any of the impact.

Yes, hi, Lei, it's Jack. So the -- that is true, the second half of the year does have less selling days, we call them shipping days, than the first half of the year, but those really occur in Q4, so Q3 shipping days is consistent with Q2, which is consistent with Q1 for 2016. We will see a couple day decrease in Q4.

In terms of quantification of that, I won't offer the quantification, we don't want to give sales by day, but we don't think it's going to be that significant, but it is a data point for us that we look at especially if it falls upon high volume days for us with our products.

Got it, that's helpful, thanks. And then the second question is, so if I look at your updated guidance, I back into a Q4 range for sales and adjusted EBITDA, it looks like the midpoint of sales range for Q4 goes up a little bit versus what it was based on last quarter's guidance. So it looks like the adjusted EBITDA margin is actually lower for Q4 based on your current guidance versus the previous guidance. I just wanted to make sure my math is correct; and two, if it's correct, what is accounting for that.

Yes, I guess the way that I would look at it is as we guide and what Mary Anneand I have talked about is we will never forecast for some of these opportunistic TechneLite sales, but when we do enjoy them, which we do, they are at a very high margin because what ends up happening is we don't have that much incremental cost of sales in order to supply those markets, so those come in at very high margins for us. And since we don't forecast for those, when we end up updating guidance, the dynamic can be that the following quarters, or the quarters that you fill in the numbers, end up showing a little bit less EBITDA margin.

And so it's -- that's really just the math of it. There's nothing from our perspective that will cause a decrease in gross margin. Actually as I look at it, I think about as we fully transition our Xenon supply from IRE to our own manufacturing we will see some apples-to-apples improvement in gross margin Q4 versus Q3.

Okay. So does that mean your contract of volume was pulled forward in Q3, so maybe there's is a little bit less in Q4?

So what ends up happening is we will forecast to our contracted volume, but then when we actually report results, if there is incremental sales or what we have been calling opportunistic sales, those come in at a much higher margin, so we do end up seeing higher results in the quarters that we report.

Impacts EBITDA even more strongly than it impacts revenue because the margin on it is higher, if we were talking about our nuclear products.

Lei, I want to just respond to something that you said because I think -- I think you said that when you crunch your math and I'm not just using the midpoint of the ranges, that it seems to you that we are taking Q4 EBITDA down versus earlier guidance, that is not our intention and I frankly wouldn't agree that is inherent in our numbers. It is really all about what part of the guidance you use I guess and what you had in your models before this.

Okay. I'll go back, I was using the range of your guidance for the full year for 3Q from last quarter versus your full year guidance versus your reported results this quarter, but I'll check my math and maybe I'll follow up with you guys offline on that one.

One other question, just on DEFINITY and the competition, so a few weeks ago, GE announced that the FDA agreed to change the Optison label moving some of things from contraindication to warning and precaution. I believe Lantheus is doing the same for DEFINITY, can you just confirm that and can you talk about if that's a big deal?

So I can -- I'm going to (inaudible) before I confirm, you're talking about the removal of shunt language from contraindication into just the warning section?

Exactly, cardiac shunts and intra-arterial injection?

So I can confirm to you that we have a similar conversation underway with FDA with the similar request for application. You are -- I won't opine on whether it's a big deal. I think any time that you can update your label with information that speaks to the safety of your product is always the positive thing for the perception of your product and I think that will be true here.

What I would also share though is from experientially, there is vast experience with DEFINITY in the U.S. marketplace. We've been available for 15 years just based on the volume in the market share, we've held our - DEFINITY has vastly more experience than the competitive product in the U.S. marketplace and we feel that that experience in and of itself and the tracking that goes along with it, speaks volumes to the safety of the product.

Great. And then just lastly, can you give an update on your Moly supply, the Nordion agreement, I believe that just expired? So, can you comment on kind of the supply from other -- your other sources?

Sure. So Nordion is not our agreement that expired but Nordion has closed operations with supplying commercial Molybdenum and Xenon to the U.S. medical marketplace. This is an event that has been long in coming, well anticipated and very well planned for. As I noted during my comments, we had already successfully transitioned our Xenon supply fully to IRE from the Nordion before Nordion's final day of operation and the same is true for all of our Moly needs. We had been anticipating this for years. We've been adjusting our contracts and our shipping to allow for it, always assuming that it would happen, and it has. And so we are fully prepared and already ready for that change in marketplace.

Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.