Lantheus Holdings Inc (LNTH) 2017 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. I would like to welcome everyone to the Lantheus Holdings' First Quarter 2017 Earnings Conference call.

(Operator Instructions)

This call is being recorded for replay purposes. A replay of the audio webcast will be available in the investor section of the Company's website, approximately two hours after completion of the call through June 2, 2017.

I would now like to turn the call over to your host for today, Gary Santo, Head of Capital Markets and Investor Relations.

Good afternoon, everyone, and thank you for joining us for Lantheus Holdings' First Quarter 2017 Earnings Conference Call. With me on the call today are Mary Anne Heino, our President and Chief Executive Officer, and Jack Crowley, our Chief Financial Officer.

Please note that earlier this afternoon, we issued a press release also filed with the Securities and Exchange Commission under Form 8-K, reporting our first quarter 2017 results. Later this afternoon, we anticipate filing our Form 10-Q with the SEC for the quarter ended March 31, 2017. You can find these documents, as well as a replay of this call, in the investor section of our website at www.lantheus.com.

Remarks that we make today regarding future expectations, plans, and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor Provisions 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, which we disclose in more detail in the risk factor section of our Form 10-K.

We remind you that 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 may update any such forward-looking statements in the future, we specifically disclaim any obligation to do so.

Finally, on today's call we may reference 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, adjusted operating income, adjusted net income, adjusted net income per diluted common share, and free cash flow, along with reconciliations to GAAP metrics, are set forth in our earnings press release.

Of particular note, these tables include the reconciliation of our GAAP net income to adjusted EBITDA, a metric we consider to be particularly relevant at this time due to the variability of our technology transfer activities and related costs.

Mary Anne will begin her comments today with a high-level review of our first quarter accomplishments. After which, Jack will provide a more detailed review of our financial performance during the quarter. Mary Anne will then return with closing comments.

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

Thank you, Gary, and welcome to everyone joining us today on our conference call. We entered 2017 with a goal to build upon the momentum established in 2016. And with the first quarter now behind us, I am pleased to report that the momentum has persisted. During the first quarter of 2017, we once again grew revenue and volume in our higher-margin products and improved our liquidity and capital structure through the refinancing of our debt facility.

Shortly following the end of the quarter, we finalized our collaboration agreement with GE Healthcare for the worldwide development and commercialization of Flurpiridaz F 18. Further, as disclosed in our earnings release earlier today, we have exceeded our first quarter guidance, and as Jack will discuss in more detail shortly, have raised our guidance for the full year. In short, it is clear that 2017 is off to a strong start.

During the first quarter, we continued to grow revenue of our flagship imaging agent DEFINITY with US revenues up 20% year-over-year. Our reintroduction of DEFINITY in UK, Germany, Austria, and the Netherlands continues to gain traction with international revenues up by 25% over that same time period. We have also continued to successfully pursue regulatory approval to sell DEFINITY in other markets around the world; most recently with our approval in Taiwan.

Our nuclear product portfolio was once again anchored by TechneLite sales growth worldwide. Regarding our nuclear medicine product contracting strategy, we have now renewed multi-year commercial supply agreements with two of the four major radiopharmacy groups.

In addition to our UPPI contract that runs through 2019 announced last year, we recently announced a new expanded contract with GE Healthcare that runs through 2020. Under the GE agreement, Lantheus will supply TechneLite, Xenon-133, and Gallium-67 at committed pricing and increased volume levels for these products.

Focusing now on our continued effort to improve upon our capital structure, we announced during the first quarter the closing of a $275 million term loan facility, as well as a new $75 million five-year cash flow revolver.

The transaction, led by J.P. Morgan Chase with Citizens Bank and Wells Fargo Securities acting as joint lead arrangers, replaced our previous term loan and asset based loan facilities. We believe the more attractive provisions under this term loan should yield an improvement to our cash flow of approximately $5 million per year over the term. Additionally, the revolver provides increased liquidity and flexibility to support strategic initiatives.

Finally, a few words on our flurpiridaz F 18 collaboration with GE Healthcare. We are thrilled to have GE Healthcare as our global partner to bring this next generation PET cardiac imaging agent to market.

GE Healthcare's presence across the entire PET diagnostic spectrum creates exciting opportunities for this agent on a global basis. Following the signing of the definitive agreement last week, we received our initial upfront payment of $5 million.

The process will now focus on executing the knowledge transfer necessary for GE to assume responsibility for future development and commercialization of this agent.

We will continue to collaborate in both the development and commercialization of this promising agent through a joint steering committee, as GE drives the development and commercialization process and timelines.

I now invite Jack to provide a more detailed review of our first quarter 2017 results, as well as our updated guidance for the year, after which I will provide closing comments.

Good afternoon, everyone. As a reminder, the tables included in today's press release include a reconciliation of our GAAP results to the as-adjusted non-GAAP performance I'll be covering with you today.

Lantheus delivered 81.4 million in revenue for the first quarter of 2017, an increase of 6.4% compared to the first quarter of 2016. These results were driven by continued growth of DEFINITY, and the successful execution of our nuclear contracting strategy.

Looking at our revenue results on a product line basis, DEFINITY posted worldwide revenue of 37.7 million in the first quarter for a 20% increase over the same period in 2016. Our TechneLite business also grew during the first quarter, posting worldwide revenue of 26.8 million, an improvement of 8% compared to the first quarter of 2016.

Worldwide Xenon revenue totaled 8.1 million in the first quarter, consistent with performance from one year ago. Finally, worldwide revenue from our Other product category, which represents approximately 11% of our total revenue, was 8.8 million during the first quarter of 2017, down 3.3 million as compared to the same period last year.

This decrease was attributable to the divestiture of our Canadian and Australian radiopharmacy businesses in the first and third quarters of 2016 respectively.

Moving below the revenue line, our first quarter 2017 gross profit margin, excluding technology transfer activities, which we refer to in our reconciliations as new manufacturing costs, totaled approximately 50%, an increase of 500 basis points on a year over year basis.

This improvement demonstrates the impact of higher DIFINITY revenues in savings related to Xenon production costs, as we now process and finish Xenon at our Billerica facility.

Operating expenses were $27.8 million for the first quarter of 2017, an increase of $6 million from the same period one year ago. This is primarily attributable to $2.4 million in R&D expense related to accelerated depreciation under our campus consolidation plan, $1.7 million in GNA expense related to costs associated with our debt refinancing, as well as continued investment in our Echo business.

Operating income for the first quarter of 2017 was $11.9 million, a decrease of $5.8 million on a year over year basis.

Excluding last year's gain on the sale of the Canadian radiopharmacy business, as well as this year's accelerated depreciation and debt refinancing and offering costs, adjusted operating income for the first quarter of 2017 grew by 4.5 million, or 38% compared to the prior year period.

Moving below operating income. First quarter interest expense totaled 5.4 million, a 23% improvement over the same period of one year ago as a result of our aggregate 75 million of voluntary prepayments made on the principal of our term facility over the course of 2016.

A lower interest rate and additional reduction in principal associated with our financing - refinancing activities during the first quarter did not have material impact on interest expense for the quarter, as the transaction closed one day prior to quarter end.

We believe that the more attractive provisions under the term loan should yield an improvement to our cash flow of approximately $5 million per year over the term of the facility.

Net income for the first quarter of 2017 was $4.1 million or .11 cents per diluted share compared to $10.3 million or .34 cents per diluted share for the first quarter of 2016. Excluding last year's gain on the sale of the Canadian radiopharmacy business as well as this year's accelerated depreciation, debt refinancing and offering costs and loss on debt extinguishment, adjusted net income for the first quarter of 2017, grew by $6.2 million or 138% compared to the prior year period.

Moving on to our quarter-end balance sheet, cash flow and liquidity, as of March 31, 2017 we had cash and cash equivalents totally $40.9 million. Borrowing capacity under our revolving credit facility was $75 million, making our total liquidity, including cash on hand, $115.9 million, providing substantial support for our operating needs and representing a 48% improvement compared to the same period one year ago.

First quarter 2017 operating cash flow totaled $5.5 million compared to $3.8 million for the first quarter of 2016. Capital expenditures during the first quarter of 2017 were $4.9 million compared to $1.7 million in the first quarter of 2016.

Turning to our guidance for both the upcoming quarter and full year, as Mary Anne mentioned earlier, we exceeded our first quarter guidance for both total revenue and Adjusted EBITDA.

As a result, we are increasing our full year guidance to a total revenue range of $313 to $318 million and a range of $80 to $83 million for Adjusted EBITDA. For the second quarter of 2017 we anticipate a total revenue range of $79 to $82 million and Adjusted EBITDA range of $18 to $20 million.

Please note our guidance does not reflect any impact of the partnership for flurpiridaz F 18. In closing, we are very happy with our performance for the first quarter of 2017 and look forward to building upon our early success throughout the remainder of the year.

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

Thank you Jack. On our last earnings call, I shared our vision that 2017 would be the start of the story about growth. Our accomplishments during the first few months of 2017 demonstrate this.

We are very excited by our prospects. Our ability to continually advance our other pipeline assets, deploy additional resources towards our next generation program for DEFINITY, and opportunistically pursue additional near term business development activities, should also help us to realize this vision. In the months to come, you will hear me speak in more detail about some of these projects and how they can contribute to the Lantheus growth story.

In the meantime, we remain committed to building value for our shareholders. With that I'll conclude my comments and open the call for questions.

(Operator Instructions)

Larry Biegelsen with Wells Fargo.

Let me start with the strength we saw with DEFINITY this quarter Mary Anne. So what's driving the acceleration there in the US. Is it penetration, is it share and is it price and what's the outlook for 2017. I had a couple follow ups.

No problem Larry and welcome to the call. Your questions are good ones and what I say in response is actually a little bit of all of that and just great execution from our sales team. It's a market that has unmet demand that we're still tapping into and we find that physicians are very responsive to our sales messages and you're seeing it in our results.

We look forward to continuing that type of performance.

Mary Anne one clarification on that you said it's a little bit of all of that. Has price, it was negative a few years ago, is price neutral or positive at this point?

You're right Larry, especially I would say in 2015 you heard us talking about using price as somewhat of a competitive strategic lever in the market place. That dynamic will continue.

I think that what I will share is that versus the percent drop we saw in 2015 we're probably seeing more of a stabilizing of what that percent drop looks like over time.

And then Jack, the gross margin was also very strong. I assume that was driven by DEFINITY. I mean I think if I heard you correctly it was about 48.9 percent in Q1. How sustainable is that and I did have one more follow up.

Sure, thanks Larry. Yes, you're right. I mean a lot of it was driven because as we move the sales toward the higher margin DEFINITY product, that certainly has a positive impact. The other item I mentioned, which is also meaningful for us is the transition of Xenon production into our facility. If you recall during the fourth quarter of last year, we transitioned Xenon sourcing from Nordion in Canada and as part of that activity we brought a lot more of the inspection and finishing activities onto our Billerica Campus so we're also seeing some uptick from that.

Having said that, we had about a really closer to 50 percent of gross margin when you exclude the technology transfer activities. I don't know if that's completely sustainable. We do expect to see some transition of expenses from Q1 into Q2 which is kind of reflected in the guidance. But we're looking at the high 40's as our target range for gross margin.

That's very helpful. And then lastly, the GE press release stated that you guys have extended and expanded the current commercial agreement for TechneLite and Xenon. And Mary Anne I think you talked about some expanded sales there or I can't remember the exact term you used. What does that agreement mean for your business and I'll drop. Thank you.

So the - I cited three products that are key to the agreement, Larry, TechneLite, Xenon 133, and Gallium 67. And as I noted about the agreement, not only is it longer now it goes out to 2020, but it also has committed volumes that are increased versus prior, the prior contracts for those products. So it's really a win-win for us, and we think it's a great relationship with GE.

Erin Wright with Credit Suisse.

Great thanks. You spoke to some investment opportunities in your press release as well as in your prepared remarks. What does that necessarily entail and can you provide some greater detail on your priorities from an investment standpoint and broadly maybe an update on your capital deployment, I guess capital structure optimization kind of going forward and what sort of flexibility generally you have now.

I'll speak to some of the opportunities and then I'll turn over to Jack for capital structure, Erin. I think the way that we look at ourselves now is as a company, we've gotten to a point where we've been able to build a level of stability and liquidity that really now puts us on the offensive for looking out around the landscape whether it be in our nuclear business or in our echo business to build out those franchises. They are very different. Our echo business is a growth business. There's a lot of untapped demand there and there's a lot of ways to spread out both vertically and horizontally there.

Our nuclear business is more of a mature business and so as we look at opportunities there, we look at more tuck in opportunities that generally either expand our portfolio offerings or make expanded use of the facilities that we have on our campus for manufacturing. I'm not ready at this point to share specifics with you. I did, I will say tease you in my remarks, that as we move into the rest of year, you will hear me speaking more specifically about taking action on some of those opportunities. Jack?

Yes, thanks Mary Anne. So Erin as we look at our capital structure and the flexibility under that, we we're really excited obviously about the refinancing activities in Q1 to get a much better interest rate and to do an additional pay down of debt. You know we feel we're in a really good position from a leverage ratio perspective now.

In terms of the additional flexibility, I think the swapping out of an asset backed loan with a revolving cash flow, not only did we increase the capacity of 50 million under the asset-backed loan to 75 million under the revolving cash flow, but there's a lot more flexibility under the cash flow. It's just not restricted by the limiting amount of assets that get calculated. So we feel we have a lot more flexibility to be able to react to any opportunistic investments that Mary Anna spoke about.

Excellent, thanks. And then can you speak to some of the opportunities for DEFINITY in international markets and what geographies you would highlight as more meaningful drivers for you over the next three to five years?

Sure, so Erin, you may not be aware because of when you joined coverage on us but DEFINITY was approved initially in Europe when the asset belonged to Bristol Meyer Squib and it had what is called common act approval in the EU which includes 22 countries. Those approvals went dormant when Lantheus was formed because Lantheus did not have a commercial footprint in Europe. That's why you hear us talking about the re-introduction of DEFINITY into European markets. And as you saw me note, we're -- we've already entered back into some of the larger markets and I would specifically cite the U.K. Obviously, the other kind of G5 type markets are attractive to us as well as some of the Asia PAC markets.

We have a partnership under way for China which is with a partner named Double-Crane which is still in the regulatory process of -- of application approval and our partner at Double-Crane is handling that for us. But we certainly see that as a very large market for the future.

Great, thank you so much.

Anthony Petrone with Jeffries.

Maybe a couple on radiopharmacy and I'll jump over to Flurpiridaz but you know, maybe just an update on timing for Cardinal and Triad. It looks like that could be those two contracts could be a 2017 event and maybe just anything on the pricing discussions whether it be with GE, Cardinal, and Triad on the radiopharma side and then I'll follow up with F-18.

Sure. So as we disclosed, we have four major contracted customers that somewhat govern the nuclear pharmacy space and we have contracted all four of them. The contracts that you're referring to, Anthony, with Cardinal and with Triad isotopes do kind of close out or kind of end at the end of this year.

Having said that, I will tell you we are in constant communication and conversation about how to take our relationship forward and certainly part of that discussion are price volume discussions that look at what are the commitments of the customers for percent of their volume to us.

And for having offered, I will say higher volumes, there are certainly price concessions that we will consider. I will note that the discussions we have now about price volume are different than those you heard us talk about at the end of 15 when we launched our nuclear product contracting strategy.

That was more specifically related to Xenon. As we looked out at the market and we looked out at the very high likelihood, which did happen, of a Xenon competitor coming into the market.

We had a very concerted effort at that time to shore up our contracts and make sure that there were committed volume commitments for Xenon. These are more now, I would say, renegotiation and extension of existing contracts with partners and I would certainly hope to announce them to you for the end of 17.

That's helpful. And then just one last one on radio which would be the competitive dynamics now that Mallinckrodt has closed on the sale of those assets to IBA. Is there anything notably different in the marketplace with the transfer of that asset?

I would not say there is yet, Anthony, and I'm not surprised by that because they would have inherited with that transaction the contracts that were in place. The one note I will make is that the companies have renamed themselves the joint company and that includes the assets from Mallinckrodt as well as the assets from IBA are now called Curium. My -- my true kind of trend here and you'll hear me repeat this often. I don't talk about my competitors.

I would prefer they not talk about me. I'm happy to refer to them as you say to offer you that piece of information about the naming but I never try to guess or especially publically comment on their strategy.

Great and then the last one just on GE and Flurpiridaz is there anything just in terms of timing on the tech transfer that you could just share and perhaps timing on when we'll learn more about the clinical pathway that GE may embark on for Flurpiridaz-18? Thank you.

Sure. We are now deep into the process with the signing of the finalized signing of the collaboration agreement but the kind of the doors were open for knowledge transfer. And we are actively working to take all the knowledge that we had housed here about the molecule, the studies done to date, and transfer that over to our partners at GE.

They, as we mentioned, they are now in charge of and responsible for the regulatory path to commercialization to approval and commercialization.

We're still in the early days here, otherwise I would say we're on time for how we thought the partnership would roll out and we have great confidence in GE to drive the process forward. They obviously have by their size and the popularity of the products that they offer. They have an ongoing relationship with the FDA and we're confident that they will pick that up and run smoothly with it.

This concludes today's conference. Thank you for participating. You may now disconnect.