Lantheus Holdings Inc (LNTH) 2018 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Lantheus Holdings First Quarter 2018 Earnings Conference Call. This is your operator for today's call. (Operator Instructions) This call is being recorded for replay purposes. A replay of the audio webcast will be available in the Investors section of the company's website approximately 2 hours after completion of the call and will be archived for 30 days.

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

Thank you. Good afternoon, everyone, and thank you for joining us for Lantheus Holdings first quarter earnings conference call.

With me today are Mary Anne Heino, our President and Chief Executive Officer; and Jack Crowley, our Chief Financial Officer.

Earlier this afternoon, we issued a press release, which was also filed with the Securities and Exchange Commission under Form 8-K, reporting our first quarter results. You can find the release as well as a replay of this call in the Investors section of our website at lantheus.com.

Please note that the remarks we make today regarding future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, which we disclose in more detail on the Risk Factors section of our annual report filed under Form 10-K with the SEC and available on our website.

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 except as otherwise required by applicable law.

Also, please note that on today's call, we will 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. Reconciliations to GAAP metrics for EBITDA, adjusted EBITDA, adjusted operating income, adjusted net income, adjusted net income per diluted common share and free cash flow 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 overview of Q1, and Jack will follow with an overview of our financial performance along with Q2 and full year guidance. Mary Anne will then provide updates regarding our corporate growth strategy and program. After their prepared remarks, both Mary Anne and Jack will take questions.

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

Thank you, Meara, and good afternoon, everyone. Q1 was a strong start to the year for us, with effective and continuous execution on our investment programs and corporate growth strategy. We met the top end of our first order -- first quarter guidance for total revenue and exceeded our guidance for adjusted EBITDA. Importantly, the brief Moly supply interruption we experienced with one supplier, NTP in South Africa, is behind us. The NTP processing facility has been back online since mid-February, and we began receiving Moly supply from them at that time. Although the disruption did temporarily weigh on revenue for our TechneLite generators, the impact was ultimately in line with our initial expectations, and we currently do not expect any further Moly shortages that would have a material effect on our 2018 results.

From a big-picture perspective, we see this year as the beginning of an important period of strategic investment in our business and believe the right mix of cash flow generation, internal investment and acquisition or in-licensing activity will be key to achieving our long-term growth objectives. Our 3-pronged corporate growth strategy is to: one, enhance the growth trajectory and profitability of our core microbubble franchise; two, augment and invest in our pipeline with focus on emerging technologies; and three, pursue complementary external opportunities that fit with our objective to deliver long-term sustainable growth and profitability.

I'll provide an update on each area of our corporate growth strategy after Jack reviews our Q1 numbers in detail. Jack?

Thanks, Mary Anne, and good afternoon, everyone. At the onset, let me remind you that 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.

We're excited, of course, to have achieved the high end of our revenue guidance while exceeding guidance for adjusted EBITDA, which reflected fundamentally strong performance in Q1. The outperformance of adjusted EBITDA stemmed from a combination of strong cost management and to a lesser extent, timing of certain R&D and promotional expenses that we will incur during the remainder of 2018. It is important to note that the timing of that spend will have no impact on our ability to achieve planned overall timelines of our clinical development programs.

Diving into the numbers and starting from the top line, Lantheus delivered $82.6 million in worldwide revenue for the first quarter of 2018, an increase of 1.6% compared to the first quarter of 2017.

We continued our strong DEFINITY performance with worldwide revenues totaling $44.7 million for the quarter, an increase of 18.4% over last year, as we continued to drive the appropriate use of contrast in echo studies.

TechneLite revenue in the first quarter was $21.4 million, a decrease of 20% over the prior year, which, as Mary Anne mentioned, was primarily a result of the temporary disruption in Moly supply.

Xenon revenue for the quarter was $7.9 million compared to $8.1 million in the first quarter of 2017.

Finally, revenue from our Other Product category was $8.7 million in the first quarter compared to $8.8 million 1 year ago.

Moving below the revenue line, our first quarter 2018 gross profit margin, excluding technology transfer activities, which we refer to in our reconciliations as new manufacturing cost, totaled 51.6%, an increase of 175 basis points on a year-over-year basis. This improvement reflects the increased contribution of DEFINITY to our total revenue mix.

Operating expenses were $27.2 million for the quarter, a decrease of $700,000 from Q1 of last year.

Operating income for the first quarter was $15.1 million, an increase of $3.2 million on a year-over-year basis.

Adjusted operating income for the first quarter of 2018 decreased by $700,000 or 4% compared to the prior year period, which included accelerated depreciation and debt refinancing and operating costs. The decrease also reflects the increased investment in our strategic programs.

Moving below operating income, first quarter interest expense totaled $4.1 million, a 25% improvement over the same period 1 year ago, reflecting the lower interest rate obtained through our 2017 refinancing activities.

Net income for the first quarter of 2018 was $8.2 million or $0.21 per diluted share compared to $4.1 million or $0.11 per diluted share for the first quarter of 2017. Adjusted net income for the first quarter of 2018 was relatively flat compared to the prior year period.

Moving on to our quarter-end balance sheet. As of March 31, 2018, we had cash and cash equivalents totaling $73.7 million. Borrowing capacity under our revolving credit facility remained at $75 million, making our total liquidity, including cash on hand, $148.7 million. This provides substantial support for our operating and investment needs and represents a 28% improvement compared with the same period 1 year ago.

First quarter 2018 operating cash flow totaled $700,000 in cash used compared to $5.5 million in cash generated for the first quarter of 2017, substantially driven by a purposeful inventory build of DEFINITY.

Capital expenditures for the first quarter of 2018 were $2.1 million compared to $4.9 million in the first quarter of 2017.

I'll now turn to our guidance for both the upcoming quarter and the full year. For the second quarter of 2018, we anticipate total revenue in the range of $85 million to $90 million and adjusted EBITDA in the range of $20 million to $23 million. For the year, we are maintaining our guidance for revenue in the range of $337 million to $342 million, and for adjusted EBITDA, in the range of $85 million to $90 million. We are pleased with our performance with both revenue and adjusted EBITDA for the first quarter, and we will continue to reevaluate our guidance as we monitor our positive operating trends.

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

Thank you, Jack. Let's start by reviewing the progress under our 3-pronged corporate growth strategy, which is focused on enhancing the growth trajectory and profitability of our core microbubble franchise, augmenting and investing in our pipeline with focus on emerging technologies and pursuing external opportunities that fit with our objective to deliver long-term, sustainable growth and profitability. As the foundation of our microbubble franchise, DEFINITY is the leading echo contrast agent worldwide. We have patents covering certain facets of DEFINITY through the year 2037, and our research, development and patent work continues. Moreover, the use of microbubbles in therapeutic and diagnostic applications is gaining more interest in the market, and we believe it will emerge as a valuable platform for increased uses. With the expertise we have built in microbubble technology, our goal is to lead in these growing markets.

I shared previously, we believe a left ventricular ejection fraction, or LVEF, indication for DEFINITY would allow for even greater penetration in the echo market. LVEF is an important measurement of heart function, and it is used as a tool for clinicians to identify the presence of certain diseases and conditions that decrease the pumping efficiency of the heart. We believe DEFINITY-enhanced echocardiography produces LVEF measurements that are superior to unenhanced echocardiography. And if an LVEF indication is approved, the use of DEFINITY would expand to a large patient population that would benefit from more accurate measurements.

In terms of market size, we believe that a new LVEF indication for DEFINITY could approximately double the addressable echo patient population in which DEFINITY could be used. Approval would also provide DEFINITY with 3 years of marketing exclusivity for that indication. We are working with FDA on a Special Protocol Assessment, or SPA, for our LVEF trial design and anticipate completing that process in the first half of this year. We will then conduct 2 identical clinical trials, which, together, would have a total enrollment of about 300 patients. We will update you as our clinical trials progress.

Importantly, an SPA represents the agency's preliminary agreement that our planned Phase III design is appropriate to form the basis of an efficacy claim. It is a critical, validating milestone and will provide regulatory clarity and enable us to submit a new drug application if the trial's primary endpoint is achieved.

Additionally, we are leveraging our in-house expertise by building microbubble manufacturing capabilities at our campus in Billerica. This investment will help ensure reliable supply by creating supply chain redundancy, while at the same time, improving our cost of goods sold and enhancing gross margin.

In terms of our PET product pipeline, we've completed the agreed-upon technology transfer and other preparatory activities for the second Phase III trials, Flurpiridaz F 18, which is the focus of our collaboration and license agreement with GE Healthcare. GE is executing the Phase III trial and has indicated that patient recruitment will begin in the first half of 2018. This perspective open-label international multicenter trial of Flurpiridaz F 18 for PET MPI will enroll up to 650 participants and has a target completion date in the second half of 2020. The primary outcome measure for this trial is the diagnostic efficacy of Flurpiridaz F 18 MPI in the detection of significant coronary artery disease. Secondary analyses will be performed in patients of special clinical interest, including women and obese and diabetic patients, where current spec MPI technologies have demonstrated limitations in their diagnostic performance.

Next up is an update on our Phase III LMI 1195 program. We believe 1195, a Fluorine-18 based PET agent represents a first-in-class and useful diagnostic tool for a population of patients at risk for sudden cardiac death. Nuclear imaging provides a unique tool capable of measuring changes at the molecular level, including cardiac function of the norepinephrine transporter, or NET, in a noninvasive and repeatable manner. We developed 1195 to target the NET, and we are encouraged by data obtained from collaborations with academic centers, which have allowed us to progress the 1190 (sic) [1195] program to this stage.

Internationally, our DEFINITY China program with Double-Crane continues to advance, with patient enrollment complete for the cardiac and pharmacokinetic studies and enrollment in the kidney and liver studies ongoing. We project submitting an application for an Import Drug License to the China FDA in the second half of 2018.

Addressing the third element of our revenue and profitability growth strategy, pursuit of external opportunities, we continue top-line assessments of a large number of opportunities. From a strategic standpoint, we look for opportunities that fit within or complement our current capabilities, and that would address significant unmet needs in markets and patient settings in which we are already successful. With that in mind, we continue to evaluate the broader imaging landscape and therapeutic adjacencies as key areas for potential expansion through M&A and in-licensing. From a financial perspective, we are mainly focused on assets that are or can soon be accretive to revenue and create the ability to improve our profit margins and cash flow. We are open to a broad range of deal sizes and structures with an eye towards strategic fit and assets that are already commercial or close to commercialization that will then be accretive to earnings within a short time horizon. We expect to capitalize on our collective expertise and create positive synergies that will help to ensure our commercial success. In closing, as we implement our 3-pronged corporate growth strategy, we are focused on internal investments and acquisition and in-licensing opportunities that, we believe, in Lantheus' hands will deliver excellent returns on our investments.

With that, Jack and I are now available to take your questions. Operator?

(Operator Instructions) Our first question comes from the line of Raj Denhoy from Jefferies.

Wonder if, Mary Anne, I could ask a question not about this quarter but about the messaging really on the fourth quarter call that caused a lot of, kind of, consternation in the stock and the sell-off. I know the stock has recovered back, but I think maybe it's worth revisiting some of the -- and I think you reiterated a lot of this on the call today. But some of the spending plans and what the goal really is here for 2018 for the business. I think the adjusted EBITDA as you've described it is going to be down year-over-year as you're investing in the business. But perhaps you could maybe just flush out a little bit more about, sort of, the thinking behind the strategy and ultimately, where you think that'll settle the business out?

Happy to talk about that, Raj. I do want to clarify, though, the comment you made about adjusted EBITDA being down year-over-year. While I recognize that's true, if you include the milestone payment made to us by GE Healthcare in 2017. I think it's fair to subtract that from the year-over-year comparison. And when you do that, essentially, our EBITDA is tracking with our guidance to be equal to 2017. So just wanted to clarify, that's to start.

(inaudible)

Yes, well, it still applies but Raj, I will say, and this is what we talked about in Q4 as well, that is a purposeful decision we've taken because we're investing back in our business with some of the programs that I've spoken about. And we think it's the right time, and we also think it's the right investment because it -- we feel it services our future in a way that keeps us not only sustainable but has us growing and offers us the ability to grow in future years. And that's been our decision, invest to grow, and it starts in '18. You're right. I think there was some response to the stock after we offered that message. But as you say, also, we've seen the stock recover, and we hope that with the good earnings that we reported today and the progress we've made on our programs that people will continue to believe in the stock and what we're doing to run the company.

No, that's fair. Maybe I could just take a couple of finer points on that. I mean, you did note that it was a good quarter, and your adjusted EBITDA did come in better than you had guided. And it sounded like, Jack, from some of your comments that that's just a spending -- a timing of investment phenomenon more than anything. But maybe you could help us understand about why this quarter was so much better, again, relative to the guidance and when that spending is going to start to kick in?

Yes. Thanks, Raj. Yes, that's correct. I mean, the comments I made was the combination of strong cost management as well as some of the timing of the programs. And as you can appreciate, the timing of clinical development programs is hard to really pin down week-to-week. And I think the important message I would reiterate is, we do expect to see that cost flow through in '18 and it has no impact on our expected timelines or our goal. So I think the important message that I would ask folks to take away is that although the timing may have slipped from Q1 to a later quarter, it doesn't impact the overall timelines of our programs.

And it doesn't represent the -- all of the EBITDA overperformance in Q1. As Jack said, there's a sizable chunk of that that is related directly to our efforts in management for cost management.

Fair enough. Maybe just for my last question and I'll jump back in queue. So it strikes me a lot of what you're doing this year from an investment standpoint is around the IP position for DEFINITY, and you put up another very strong quarter in DEFINITY. Maybe just some broad comments, Mary Anne, about where you think that stands. I mean, one of the big questions is, what happens when that IP starts to expire over the next couple of years? How exposed or at risk do you really view that business at this point? And maybe I'll just leave it there and you can answer the question.

Sure. So Raj, it is one of my primary attention -- areas of attention that I personally attend to, and there're several prongs to our strategy here. First and foremost, we believe we have the right to protect the intellectual property that we've developed for DEFINITY. And so we do have ongoing investment in work that we see as having been, especially recently, very successful. We had another Orange Book-listed patent awarded in October of 2017, and more recently, we had another patent listed with the Patent Office. It's not an Orange Book-listable patent, but it is another patent that continues to define what we see as the unique specifications of DEFINITY that are required to deliver the efficacy and the safety that we've been delivering for 17 years with this product. And our efforts are not done there. I think our decision to invest in an additional indication for DEFINITY is partly driven by our belief that we can rightfully defend our product, and we think it's a product that continues to serve the market from a patient-value perspective. The LVEF indication will double the addressable patient population that we currently address with DEFINITY, and we think it serves a very important value-added diagnostic tool for the physicians who will use it. I'll never say never because I can't. But the -- our first patent is set to expire in mid-2019, and that's a patent that is our method-of-use patent, Orange Book-listed. As such, that is a patent that currently, were there to be other filers, would require a paragraph 4 certification to us. And I can say we have received no paragraph 4 certification.

Your next question comes from the line of Erin Wright from Crédit Suisse.

In terms of capital deployment, I guess, can you speak to some of -- or how you see the potential M&A opportunities coming about and what sort of size makes sense for you? And what does the general pipeline just look like? And on the in-licensing opportunities, I guess, any examples, even just anecdotally, what that could potentially entail, that would be great.

Yes, Erin, it's Jack. Let me start out and kind of give you an overall view of the size and then I'll ask Mary Anne to comment on anything additional. So from an overall size perspective, as we've talked about on a number of quarters, we've really worked to put ourselves in a position that we feel, from our existing balance sheet right now, we're in a strong position for a midsized acquisition. If you kind of think about our cash position has been hovering in the mid-70s, the revolver of that we haven't touched has remained at about $75 million. And then we are in a good leverage position. So as we look at our first acquisition, we recognize the criticalness of hitting a good one and making sure it makes sense, and we can absorb it. And so I think we would be looking at probably not a significantly large acquisition that would cause us to lever up immediately, but something that we can probably handle within our existing balance sheet with, perhaps, some expansion of our debt. Having said that, we will, again, as Mary Anne said, we would never say never, and we are carefully evaluating each and every opportunity that does present itself.

I'll just add, Erin, because you asked about any particular examples of things we're interested in. And there are several, and we're looking at them. Two areas really. One is, we have a very well-demonstrated history of success in being able to supply into hospital environments for patient care settings, unique patient-ready dosing that aids either in diagnosis, or sometimes, in guiding intervention for that patient. Right now, we are focused on the echocardiography lab and the nuclear medicine imaging department. But there're many other areas inside the hospital and in adjacent hospital settings, such as hospital outpatient centers or surgery centers, where those types of activities are also going on. And we are very interested in them, because we have, as I said, we've kind of really understand how to sell into that environment, and we have all of our learnings from DEFINITY to replicate that would allow us to, we believe, to be successful there. So that's one area. And that includes currently commercialized assets that are already out there. The other area that I referred to is microbubbles. As -- if you look at the literature, what you see is that the use of microbubbles is expanding beyond simply as an imaging agent. They have the capability to be carriers and to be interventional in and of themselves in certain medical settings. And when you look at the possibilities of how they can be used and the folks who're looking at that, the DEFINITY bubble rises to the top as approvement in bubble not only by its size but by its stability and by its kind of noninvasive ease of administration. And so those are some partnering efforts that we are looking at to ensure that we stay on the forefront of how microbubbles are being used. And that's really all I can offer now, but I think it's offered some clarity into the main areas of interest that we have.

That's really helpful. And then lastly just, can you give us an update on the manufacturing initiatives? I guess, what's the next step there? And what you need to do to sort of ramp up?

So this is an on-site project. We're using an existing building, so we don't have actual groundbreaking. We're going to do a fake groundbreaking with a pile of dirt. But it is a plan that has already been discussed with and presented to the FDA so that we are ensuring that we're within all their guidances for what finished has to look like. And so it is a well thought-out process to get to done on what's done needs to look like. That -- our fake groundbreaking is actually next week, and then as we continue to bring in different assets and prepare the building we're putting it in, we'll see continual progress over the next 18 months or so. And I'll be happy to update on the calls with obvious milestones.

(Operator Instructions) Your next question comes from the line of Lei Huang from Wells Fargo.

This is Lei calling in for Larry. I just want to ask -- to start, a couple of questions on the quarter. So in Q4, your revenue was affected modestly by Hurricane Maria. I believe it was about $300,000 or so. Did you see any of that reverse in Q1?

Lei, it's Jack. I'll take that. I don't know if I'd call it reverse. But I would say that from a Puerto Rico perspective, we are back up and -- we never really had that much of impact as you -- I'm not sure we quoted that exact number, but it was a very minimal number in Q4, and we are now back and fully operational. Obviously, the island still continues to get back to its full operations. But from our ability to supply the hospitals, we've been back and running since probably end of last year.

Okay. And then in terms of selling days, were there any differences between Q1 this year and Q1 '17?

In terms of what, Lei? I didn't understand the -- that word.

The selling days. Any differences in selling days?

Selling days.

Selling days. I'm sorry, Lei, I don't have that in front of me. Jack, you have it?

Yes, I do. And the answer is no. There was no difference in the change of Q1 last year over Q1 of this year. In Q1 of -- in Q4 of last year, we did pick up a day sequentially but not a day year-over-year.

Got it. And then just looking at your guidance, so Q1 revenue was up a little under 2%. Your Q2 revenue guidance, obviously, implies an acceleration closer to, call it, 4% or so, I think, at the midpoint. Your revenue guidance for the full year suggests growth somewhere in the 3% to 5% range, I believe, excluding the GE payment of last year. So there is, obviously, this trend of revenue growth improving over the next 3 quarters to a certain extent. Can you just talk about kind of what's going to drive that improvement? It looks like your comps, last year, they don't really get any easier as the year goes on. So what's driving that?

Look, I think there're 2 kinds of market issues that I'll -- or opportunities that I'll speak to. And then I'll let Jack get finer on the actual dollars associated with them. But what -- one is, we continue to grow the DEFINITY market. So that's a product that you've seen the kind of growth that we've posted year-over-year for the last several years, and we intend to continue that growth with the investments that we make in appropriate medical use contrast with echo. So that's 1 area. And the other area is, we are continuously looking for ways to expand the revenue potential for our nuclear product. It's not as evident or is available because it is a fairly mature market and most sales are contracted. But we do take any opportunity we can to opportunistically supply customers with contracted -- or levels of sales that are above their contracted minimum. So I don't know, Jack, if you want to add on the dollars.

Yes. Probably just more overall, Lei, what I would remind you is, just in Q1, we did see the impact of the Moly disruption -- the Moly supply disruption. We talked about that both in the context of primarily landing in Q1 of '18. So as you look at the guidance and kind of the sequential build in '18, I would attribute most of that lightness, if you will, in Q1 to the NTP, and as that has now returned to service, we see that disruption behind us.

Got it. And I'm sorry, have you quantified how -- what was the impact of the Moly, the dollar amount or the growth rate impact?

No.

Yes.

No, we have not. So no, Lei, we did not quantify. I think Jack offered some qualitative comments in our last call but not quantity.

Yes, I would say, the only thing I'd add to that, Lei, if you think of kind of the consensus that was developed by the analysts versus where we came in, in our guidance, it was probably $2 million to $3 million light. I'm not saying that's the number, but I am saying it's an immaterial number to our overall revenue.

Got it. And then just my last question on the new indication, the EF indication for DEFINITY. You mentioned 3-year exclusivity. Is it reasonable to assume that you are -- you could be working on additional patent protection beyond that 3-year exclusivity? Or do you think that's it pretty much?

So there are 2 different things, Lei. The 3-years exclusivity is related to the indication itself. And so it just means that other products without that indication can't market to that indication during that 3-year period, unless they do the clinical work themselves and are awarded the indication. The patent protection protects all uses of DEFINITY for all indications. And yes, we are absolutely still vested in and confident about the work we're doing for the patent stage related to DEFINITY.

So there are additional patents you're working on specifically for the indication? Or you're talking the general portfolio?

The -- again, the patents go to the molecule, the indication. So the answer is yes to both, but they are separate. The marketing exclusivity only pertains to the specific indication.

There are no further questions at this time. I'll turn the call back over to Meara Murphy.

Thank you for joining us today. We'll be presenting at the UBS Global Healthcare Conference later this month, the Jefferies Global Healthcare Conference in June, and the CJS Securities Ideas Conference in July. With that, we will wrap up today's call.

Thank you.

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