Earnings Call: Q1 2020

Apr 30, 2020

Good morning, ladies and gentlemen. Welcome to the Lantheus Holdings First Quarter 2020 Earnings Conference Call. This is your operator for today's conference call. Please note that all lines have been placed on mute to prevent any background noise. 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 the completion of the call and will be archived for 30 days. I will now turn the call over to your host for today, Mark Cannarni, Director of Investor Relations. Mark? Thank you and good morning. Welcome to Lantheus Holdings' Q1 2020 earnings conference call. Joining me today is our President and CEO, Mary Anne Haino and our CFO, Bob Marshall. This morning, we issued a press release, which was furnished to the Securities and Exchange Commission under Form 8 ks reporting our Q1 2020 results. You can find the release in the Investors section of our website atlantheus.com. Before we get started, I'd like to remind you that our comments during this call will include forward looking statements. Actual results may differ materially from those indicated by forward looking statements due to a variety of risks and uncertainties. In particular, there is significant uncertainty about the duration and contemplated impact of the COVID-nineteen pandemic. This means the results could change at any time and the contemplated impact of COVID-nineteen on the company's business results and outlook is the best estimate based on the information available as of today's date. Please note that we assume no obligation to update these forward looking statements, except as required by applicable law, even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties. Also, discussions during this call will include certain non GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is also included in the Investors section of our website. With that, I'll turn over the call to Mary Anne. Mary Anne? Thank you, Mark, and good morning, everyone. 1st and foremost, Lantheus is proud to serve the life sciences sector, and we want to thank healthcare workers everywhere their extraordinary commitment in these unprecedented times. I hope this finds each of you and your families safe and well as you listen to this call. Lantheus' products have been included in the list of products deemed essential, and we continue to manufacture and ship products from our campus daily, although on a reduced basis as Bob and I will discuss during the call. The safety of our employees is a priority as is that of the patients who receive our products and we have adopted heightened measures to ensure the ongoing production of our microbubble and nuclear medicine products. I am proud of the dedication and support of the entire Lantheus team, whether they are working at home or in our manufacturing facilities during these very challenging times. On April 9, we announced that while business results for the 1st 2 months of the Q1 were ahead of company expectations as COVID-nineteen reached global pandemic levels in mid March, procedural volumes for our products declined. We also noted that we anticipated the 2nd quarter impact of the COVID-nineteen pandemic on our business would be more significant than that seen in the Q1. Accordingly, we had already taken steps at that time to reduce ongoing cost until demand levels for our products impacted by the reduction of elective procedures within healthcare systems recover. In addition to significant reduction of discretionary spending, we have implemented a hiring freeze through the balance of 2020. Further, effective April 13, 2020, and for the balance of the Q2, we reduced our work week from 5 days to 4 days in order to better align manufacturing, supply, distribution and other activities with reduced product demand. We also reduced pay for our personnel, including a 75% reduction for myself, a 35% reduction for members of our executive team, a 25% reduction for our Vice Presidents and across the board reduction of 20% of salaries for our other salaried employees and 20% of hours for our hourly employees for that same period. In addition, our Board of Directors has also reduced director and committee member compensation by 35% for the second half of the year and has elected to receive all remaining compensation payable in 2020 in the form of time based restricted stock units that will vest on the 1st anniversary of the grant date rather than in cash. We are confident that despite these measures, we are poised to meet our customers' needs as elective procedures start to return across the country. The company also strategically implemented other precautionary measures in an effort to ensure business continuity capabilities in our management, supply chain and manufacturing facilities. Our manufacturing employees have always been protected with appropriate personal protective equipment or PPP as we are a manufacturer of nuclear and sterile products. We have adopted additional measures to ensure appropriate social distancing and increased safety measures in our manufacturing suites. At the business level, our product portfolios were demonstrating healthy trends in 2020 prior to the impact of the pandemic. I'll begin with DEFINITY. DEFINITY delivered another strong start to the year for our microbubble franchise and we continue to bolster our patent portfolio. Earlier this month, 3 of our recently issued method of use patents covering DEFINITY were listed in the orange book. 1 of these patents expires at the end of 2,035 and 2 of them expire in 2,037. Our DEFINITY patent portfolio now includes 4 Orange Book patent listed patents in total. Also, as we have disclosed previously, we hold a composition of matter patent that expires at the end of 2,035 for our 2nd generation modified formulation of DEFINITY, which we call DEFINITY RT. Once that product is approved by the FDA, that composition of matter patent would also be eligible for listing in the orange book. We continue to prosecute patents relating to DEFINITY and DEFINITY RT worldwide and we are prepared to vigorously defend our patent portfolio against potential infringers. Regarding the status of a potential generic filer, to date we have not received notice of an ANDA application. We remain confident in our plans to send our DEFINITY intellectual property and growth prospects for the future. Another important development relating to DEFINITY in the quarter was with our Chinese development partner, DoubleCrane Pharmaceutical Company. On March 19, we filed an import drug license application with the NMPA or National Medical Products Administration for the use of DEFINITY for the echocardiography indication. This is an important milestone in our efforts to commercialize DEFINITY in China. DoubleCrane is also in the process of analyzing the clinical results relating to the liver and kidney indications and will also work with us to prepare an import drug license application for those indications. In February, we announced the results of BENEFIT-one, the first of our 2 Phase 3 open label multicenter studies to evaluate left ventricular ejection fraction or LVEF measurement accuracy and reproducibility of DEFINITY contrast enhanced and unenhanced echocardiography where non contrast cardiac magnetic resonance imaging or CMRI was used as a truth standard. After reviewing the BENEFIT-one study results, we concluded there was no statistically significant improvement in the accuracy of LVEF values for contrast enhanced echocardiography versus unenhanced echocardiography as compared to CMRI. In addition, analyses of the secondary endpoints revealed no improvement in inter reader variability between the contrast enhanced and unenhanced echocardiograms for LVEF assessments. We have now had the opportunity to review the study results of BENEFIT 2, our second Phase 3 study, and those results are similar to the previously reported BENEFIT 1 results, namely that the BENEFIT 2 study also did not meet its primary endpoint. Among the secondary endpoints in BENEFIT-two, inter reader variability for left ventricular volume measurements improved when using DEFINITY versus unenhanced ultrasound, while there was no improvement in the LVEF inter reader variability. In both studies, a post hoc analysis did show statistically significant improvements in left ventricular diastolic and systolic volume measurements with contrast enhanced versus unenhanced echocardiography when compared to CMRI. Although we very much see the continued value of the use of contrast in suboptimal echocardiograms to pacify the left ventricular chamber and improve the delineation of the left ventricular endocardial border. At this point, we do not foresee spending additional time or effort pursuing an LVEF indication for DEFINITY. Now I'd like to provide an update on our Moly supply for the Q1 and what we expect for the transportation logistics for inbound supply has been a dynamic situation. While we have been able to secure flights, we have experienced challenges on certain days being able to meet demand for our nuclear products in the U. S. And other markets we serve. Turning now to our pending Progenics acquisition. As you know, in February, we announced with Progenics Ford that we entered into an amended and restated merger agreement. More recently, we jointly announced that we rescheduled our respective special meetings from April 28, 2020 to June 16, 2020, given the high level of volatility in the capital markets caused by the COVID-nineteen pandemic. In addition, on April 14, together with Progenics, we announced that Lantheus had entered into a support agreement with Belling Capital and certain of its affiliates under which they have agreed to vote in favor of approving the proposed merger between Landius and Progenics and to be bound by certain standstill obligations through our 2021 Annual Meeting as set forth in that agreement. Since first announcing the merger in October, the compelling strategic rationale of combining our companies has not changed. I remain convinced about the value that could be unlocked by combining our 2 business and I'm very encouraged by the progress of our integration planning efforts. I am proud to share that as a life science company manufacturing sterile products, we were able to donate 10,000 pieces of PPE, including masks, gowns and gloves. These PPE collected by the National Guard went to first responders in our home state of Massachusetts. We are so grateful for the brave service of first responders everywhere and we're privileged to be able to make such a contribution. With that, I'll turn the call over to Bob. Bob? Thank you, Marianne, and good morning, everyone. I will provide highlights of the Q1 financials focusing on adjusted results unless otherwise noted. Revenue for the Q1 was $90,700,000 an increase of 4.8% over the prior year quarter. While revenue came in at the top end of guidance for the full quarter, we saw a meaningful drop off beginning during the last 2 weeks of March. Sales of DEFINITY in the Q1 were $56,800,000 or 11.1% higher as compared to the prior year quarter. Kekalite revenue was $23,100,000 down 4.3% from the prior year quarter. Other NERR increased 2.5% to $15,500,000 due to the timing of certain NERLYTE sales offset in part by Xenon volume. Rebates and allowances totaled 4,700,000 dollars Gross profit margin for the Q1 was 51.1%, a decrease of 85 basis points from the Q1 2019 on a similar basis. The decrease is due mainly to planned under absorbed overhead costs associated with our new on campus manufacturing facility as was noted earlier this year. Operating expenses were 2 21 basis points favorable to the prior year at 27.4 percent of net revenue, driven primarily by lower relative expenditures in each spending category. Favorability was driven by both the phasing of certain planned expenses as well as conscious decisions to slow discretionary spend during that latter half of the quarter as the COVID-nineteen pandemic began to take shape. Operating profit for the quarter was $21,600,000 or an increase of 11.2% over the same period prior year. Total adjustments in the quarter totaled $14,500,000 before taxes. Of this amount, dollars 3,100,000 is associated with non cash stock and incentive plans. Also in the quarter, we recorded $7,300,000 of expense relating to an asset impairment charge associated with certain of our other nuclear legacy manufacturing assets. Additionally, we recorded $3,800,000 of expense related to our acquisition and pre integration efforts with Progenics. The balance sheet excuse me, balance relates to acquired intangible amortization. Our effective tax rate was 28.5 percent in the quarter. The resulting reported net income for the Q1 was 3,300,000 dollars $14,300,000 on an adjusted basis, an increase of 27.1%. GAAP fully diluted earnings per share were $0.08 $0.36 on an adjusted basis, an increase over the prior year of 26.1%. Now turning to cash flow. 1st quarter operating cash flow totaled $9,400,000 as compared to 10,500,000 dollars in Q1 2019. Capital expenditures totaled $2,700,000 down from the prior year quarter, both as a function of the work taking place in the prior year quarter on our new on campus manufacturing capabilities as well as a slowing of capital investment spend during the quarter. Free cash flow, which we define as operating cash flow less capital expenditures, was $6,700,000 an increase of $6,800,000 over the prior year period. This cash flow performance has brought our cash and cash equivalent balance to $95,700,000 adding to the strength of our balance sheet heading into the pandemic. Also, just following the quarter and as a precaution, the company drew $100,000,000 on our revolver, representing half of the availability. And as a note, we intend to repay this draw ahead of closing the Progenesis transaction to better manage our covenant requirements as a combined company. The net leverage ratio as we exited the Q1 and not including the subsequent facility draw stood at 1.4x. As you know, we withdrew our revenue and adjusted earnings per share full year guidance for 2020 in an April 9 press release. This action was precipitated by the meaningful decrease in revenue directly to patient and hospital actions associated with stay at home orders and advisory stood out of the United States. During the second half of March and throughout April, we have seen our total sales decrease by as much as 50% to 60% from recent quarterly revenue run rates and notably have maintained these levels over the last 3 weeks. We are monitoring customer orders and order trends closely, looking to both regional and national data points to inform our forward looking sensitivity analyses. For modeling purposes, we would expect gross margin to be lower in Q2 than what we experienced in Q1 due to a lower overall absorption trend and lower relative contribution from DEFINITY. As we assess revenue for the balance of 2020, we have attempted to model various sensitivity assumptions for recovery of elective procedures and of patients to hospitals and related points of care where our products are most often utilized. However, due to the uncertainties of recoveries within each geographic segment of the country, the uncertainties of each state governors' decisions to reopen parts of their respective economies, the uncertainty surrounding any potential reemergence of COVID-nineteen severity later in 2020 and many other COVID-nineteen related issues, we are unable to provide investor guidance at this time. We continue to assess the impact of COVID-nineteen on our business and remain vigilant to day to day indications that could challenge the validity of our assumptions and allow ourselves the opportunity to make cost savings and capital spending decision adjustments as business conditions warrant to protect the long term prospects of our business. With that, let me turn the call back over to Mary Anne. Mary Anne? Thank you, Bob. In closing, I'd like to give a special thank you to Lantheus employees, both those essential workers coming to our Billerica headquarters daily to manufacture our products as well as those diligently working from home as we do our part to serve patients and fight this virus. You continue to embody the very best of our company's values and I thank you for your commitment. Before I open the call to questions, I'd again like to express my sincere thanks to first responders and those on the front lines everywhere and wishes for the safekeeping of everyone until our next call. With that, Bob and I are now ready to take your questions. Operator, please go ahead. Thank Our first question comes from the line of Larry Solow with CJS Securities. Your line is now open. Good morning and thanks for taking the call. And good to hear your voices. I hope you and your families are all relatively well. Thank you, Larry. You as well. Just obviously unprecedented times, but just on DEFINITY, a lot of this stuff sort of not really effective, I guess, but some I guess in the short run, inability to get to hospitals and closures and whatnot and people are just probably afraid to go to the hospital unless they absolutely have to. How do you view do you view this as somewhat of it is just going to be lost revenue? I guess you can't make up to all this stuff, but inevitably, hopefully we get some break and slowdown in this stuff, especially in some of the major cities and people have to come for these procedures, right? So how do you sort of balance that and any thoughts on that? So Larry, it really is a potpourri here because the range of use of echocardiography really spans so many uses. You have inpatients where echocardiography is used as part of the kind of routine evaluation of patients who are already being part of it's part of their inpatient care. You have echocardiography as part of the pre screening of patients who are being admitted into hospitals for elective procedures. You have echocardiography as part of ongoing cardiac screening of patients who are being monitored for their cardiac status. And you're right, for some of the latter uses that I just mentioned there, right now those uses are suspended because patients aren't being screened. They're not having their pre hospital screening done for elective procedures because those elective procedures have been postponed. Patients aren't going to their physicians' offices for kind of normal ongoing health assessments on a yearly basis. And so those echocardiography studies aren't being ordered. To the question of whether they're lost revenue, the only echocardiograms that we see as lost revenue right now are what we call serial echocardiograms. And those are patients who for what could be a variety of reasons also are currently scheduled to say per se have an echo done every 3 months. So they might be post AAA repair or post some other kind of cardiac repair where they were on a standing schedule of having an echo done every 3 months. And because of the timing of this pandemic, it's very likely that that patient will not have one of those echoes done, that they'll just by the timing move on to what would be the next echo. I can't tell you across the full universe of use of echocardiography what percent those patients represent. That is just not a level of detail of data we have. You heard Bob speak to what we're seeing as the level of reduction in our revenue. It's a really fluid assessment that we're making. It's very different geographically as is the pandemic across the nation. You have and we're seeing that especially now as we see different parts of the country reopen at different rates. We're going to continue to see that. So we're monitoring this in real time. We're with our customers in real time. We will continue to kind of follow it. But I think we're all suffering in some ways from a lack of intricate detail. And I know it's tough because it's a very financial business that we run, but I think we're all doing our best try to understand what's happening in real time. Understood. How about just on the qualitatively maybe on the R and D side, obviously with your programs and then a couple I don't know how much you could speak to Progenics yet, but obviously with their the pending hopeful filing for the PSMA agent antigen in the back half of this year and just R and D trials and work, does some of that I assume, get delayed or pushed out just because of logistics and inability to get patients in the crudes of trials? And how do you view that stuff? So I think there's 2 different you put 2 different questions into one there because you referenced filings versus trials. There's no need to stop forward progress with the preparation of filings. And that's certainly at Progenics Day, the very important work going on for the preparation of the PyL filing. That is filing in progress because those trials are closed. All the patients have been enrolled. That's about data preparation and file preparation. No need there's no lack of forward progress in files like that. From clinical trial enrollment and I'm now I'm speaking generally for the larger fields here, I'd say it's very fair to say there has been a general stop to clinical trial enrollment for very valid reasons. Depending on what you're studying, these are patients who are usually at risk for one reason or another, And these are not the patients. And unless they are so at risk, I think that they truly the risk outweighs a bit and the benefit of the trial drug outweighs the risk of bringing them to a clinical site to administer it in a COVID environment. That's a decision that's being made on trial by trial basis. But for all trials where the benefit of the trial does not outweigh the risk of bringing the patient to a site where there is risk of exposure to COVID, it's fair to say that the enrollment has been paused. Got it. Great. I appreciate that. Thanks very much. Thank you. All right. We show no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.