Good morning, ladies and gentlemen. Welcome to the Lantheus Holdings third quarter 2019 earnings conference call. This is your operator for today's 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 two hours after the completion of the call and will be archived for 30 days. I'll now turn the call over to your host for today, Mark Kinarney, Director of Investor Relations. Mark?
Thank you, and good morning. Welcome to Lantheus Holdings' third quarter 2019 earnings conference call. Joining me today is our President and CEO, Mary Anne Heino, and our CFO, Bob Marshall. This morning, we issued a press release, which was furnished to the Securities and Exchange Commission under Form 8-K, reporting our third quarter 2019 results. You can find the release in the Investors section of our website at lantheus.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. 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.
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 now turn over the call to Mary Anne. Mary Anne?
Thank you, Mark, and good morning, everyone. We delivered strong third-quarter results driven by nearly 20% sales growth for DEFINITY and better-than-expected TechneLite performance despite a challenging molybdenum-99, or moly, supply environment. Before detailing our strong earnings performance for the third quarter, I'll first speak to the announcement we made earlier this month of our proposed acquisition of Progenics Pharmaceuticals, an oncology company with a portfolio of radiopharmaceutical and AI products focused on diagnostic and therapeutic solutions to find, fight, and follow cancer. This is an exciting transaction, and I'd like to walk through some of the key strategic and financial rationale why we believe strongly in the combination and the value it will create for stockholders of both companies.
As mentioned on the transaction announcement, this acquisition is the result of a long and careful evaluation of the opportunities and benefits of the combination, an evaluation that started with our initial conversations with the Progenics team in early 2018. As we learned more about Progenics and their innovative portfolio, especially over the past nine months during extensive due diligence with professional advisors, it became increasingly clear that the fit between our companies is incredibly strong and that the business and operations of Progenics will benefit from Lantheus's strengths. Lantheus has a proven track record of creating long-term shareholder value, as demonstrated by total shareholder returns since our IPO in 2015 of 232%. We've accomplished this through our commercial and operational excellence backed by financial discipline.
With these capabilities and our expertise in managing global complex isotope supply chains, we believe Lantheus is uniquely positioned to optimize Progenics radiopharmaceutical operations and maximize the value of the combined companies' portfolios. Lantheus today is recognized as a leader in two areas: microbubbles, anchored by DEFINITY, and nuclear medical imaging, with a long history of product innovation. We've sustained strong revenue growth and are investing in lifecycle management to maintain our leadership position we have built in ultrasound contrast and emerging uses of microbubbles. We remain positive about the future of this business. Regarding radiopharmaceuticals, Lantheus has always been a pioneer in this field, introducing the first planar and then SPECT products to the market. We have two PET candidates in our pipeline, flurpiridaz F-18 and LMI1195, our neuronal diagnostic agent for the management of neuroendocrine tumors. These represent the next generation of precision diagnostics.
The acquisition of Progenics enhances our radiopharmaceutical offerings in the oncology space. Specifically, one of the most important ways this transaction plays directly to our strengths is with Progenics' AZEDRA, the first and only FDA-approved product used to treat certain rare neuroendocrine tumors, specifically pheochromocytoma and paraganglioma. With Lantheus's core capabilities in just-in-time manufacturing and distribution of radiopharmaceuticals to maximize available supply for its customers, we are best positioned to enhance AZEDRA's launch and deliver substantial revenue growth. We looked extensively at Progenics' manufacturing infrastructure as part of our robust due diligence process, including spending time at Progenics facilities. We are confident that we can apply best practices from our existing radiopharmaceutical manufacturing capabilities, as well as leverage our experience launching and scaling up manufacturing for new launches. In addition, with our commercial demonstrated history of excellence, we believe we will be able to position AZEDRA for enhanced long-term success.
Additionally, this acquisition brings an integrated oncology platform, including a suite of products that provide clinicians a more complete offering for the management of prostate cancer patients. Products range from initial diagnosis through treatment, including an AI algorithm to assist in interpreting images. The diagnostic and therapeutic target, prostate-specific membrane antigen, or PSMA, is a critical marker for prostate cancer, an area with significant unmet patient need and one of the most promising areas in radiopharmaceuticals today. That said, with this transaction, Lantheus will not transform into a biotech company with a typical cash burn profile. First, the acquisition brings three FDA-approved and commercialized products. Second, while Progenics comes with a robust pipeline, several of those products are already licensed to partners who will bear the development costs necessary to advance those product candidates to market.
Finally, for the assets we will advance to market, we will apply Lantheus's disciplined financial approach to R&D across the portfolio to prioritize projects and execute efficient development. Earlier, I referenced the integrated oncology platform of products within Progenics' pipeline. Within that PSMA platform, PyL represents a near-term growth driver and, as a radiopharmaceutical diagnostic agent, fits squarely in Lantheus's core portfolio and expertise. PyL is an F-18 diagnostic agent that enables visualization of both bone and soft tissue metastases to determine the presence or absence of locally advanced, recurrent, and/or metastatic prostate cancer. We believe it has the potential to be a meaningful advancement for the prostate oncology market, as it is highly specific to prostate cancer cells and not confounded by degenerative or inflammatory conditions.
PyL studies have illustrated the impressive clarity and detail of a PyL image, as well as demonstrated early detection of disease, including in men with very low PSMA levels. PyL has the opportunity to be an important tool in the management of patients with biochemically recurrent prostate cancer and, importantly, could represent a significant advancement in the management of prostate cancer patients overall. Progenics' pipeline also includes a prostate cancer therapeutic, I-131 1095. This product recently began enrolling patients in its phase II clinical trial, the ARROW study. The ARROW study is designed to yield interim data, which will further guide development decisions of this important product. Finally, this integrated prostate suite of products is rounded out with an artificial intelligence product, which is in late-stage development and will be a PSMA-based imaging technology.
As we continue to work to bring these two companies together, we are even more confident that Progenics' product portfolio is an ideal fit within Lantheus's vision for growth, both in the near and long term. We see great opportunity to drive success immediately over the next year and a half by capturing the near-term opportunities that I just walked through. Part of the process going forward will include, among other materials, the filing of our Form S-4 with the SEC. This filing will contain additional information about the strategic rationale for the transaction, select financial data for the pro forma company, and our operating strategy for the combined company. With that, I'll turn the call over to Bob, who will walk through some of the financial aspects of the deal and then move to Lantheus's third quarter results.
Later, I'll speak more about our performance and highlights from the third quarter. Bob?
Thank you, Mary Anne, and good morning, everyone. Beginning with the Progenics acquisition. The business model we envision for the combined company is grounded in financial discipline and accountability, consistent with the way we operate at Lantheus. We see a clear, well-defined path to accretion and enhanced free cash flows. Near-term dilution over the next 24 months will be the result of needed investments to bolster commercial, manufacturing, and clinical pathways for certain of the combined company's developmental pipeline ahead of the strong revenue growth that we expect to generate from these products as we ramp their commercialization. We plan to be diligent in our pursuit of accretion and in realizing the value we see in this transaction for stockholders.
For example, with a combined focus on capturing manufacturing efficiencies as well as favorable product mix with a growing diversified revenue stream, we expect gross margins to expand by nearly 800 basis points over the legacy Lantheus run rate by the end of year three. Further, as I mentioned on the announcement call, we will employ a fully dedicated integration project management office in an effort to capture between $15 million and $20 million of G&A synergies from the Progenics 2019 baseline expenses. Also, as we study the third-party models, Progenics appears to have a much higher expense and CapEx profile than it would under Lantheus's management. Our existing infrastructure, notably from a customer service and commercial operations perspective, will allow the combined company to avoid significant assumed expenses in future operating periods that Progenics as a standalone entity would've had to build.
As we mentioned at the time of the transaction announcement, we structured the deal as an all-stock transaction to maintain and protect our financial flexibility going forward. This will provide the company with access to capital in the future and preserve our ability to evaluate disciplined strategies to both create and return value to stockholders. Turning now to our third quarter financial results, I'll focus on adjusted results unless otherwise noted and then provide full year 2019 revenue and updated earnings guidance. Revenue for the third quarter totaled $85.8 million, a decrease of 3.5% from the prior year. Impact from foreign currency was not material in the quarter. Reported sales of DEFINITY continue its strong growth at $52.4 million, or 19.7% higher as compared to the prior year quarter.
TechneLite revenue was $21.7 million, a decrease of 29% from the prior year quarter, due mainly to previously communicated supply shortages at NTP and ANSTO. Further, it is also worth noting that the prior year comparable performance included $7.5 million of ANSTO generator sales, not repeated in this year's results. Other nuclear revenues, which exclude TechneLite, were $15.5 million, a decrease of 11.5%. Total revenue was offset by rebates and allowances of $3.9 million. Adjusted gross profit margin for the third quarter was 49.7% of net revenue, a decrease of 200 basis points from the third quarter 2018 on a similar basis. This quarter's results are in line with our forecast, reflective of unfavorable delivery day and supplier mix for Mo-99, offset in part with a favorable product mix led by DEFINITY's outperformance.
Adjusted operating expenses were 11 basis points favorable to prior year at 29.2% of net revenue, driven primarily by the phasing of certain SG&A expenses, which drove incremental favorability in the quarter, offset by planned research and development investment at 5.2% of net revenue in support of our left ventricular ejection fraction, or LVEF, clinical studies. Total adjustments in the quarter totaled $9 million before taxes. Of this amount, $3.4 million was associated with non-cash stock and incentive plans. In the quarter, we recorded $5.2 million of expenses related to the announced Progenics acquisition. The balance relates to acquired intangible amortization. Operating profit for the quarter was $17.6 million, a decrease of 11.7% over the same period prior year. Net interest expense and other income amounted to $3.2 million. The reported effective tax rate in the quarter was 9.4%. Our adjusted effective tax rate was 21.9%.
During the quarter, the company released certain of its reserves related to an indemnified state tax liability. The resulting GAAP net income for the third quarter was $4.9 million, or a decrease of 47.6%. Adjusted net income was $11.3 million, or a decrease of 2.4%. GAAP fully diluted earnings per share were $0.12, a decrease of 48.8% from the same quarter last year, while adjusted fully diluted earnings per share were $0.28, a decrease of 4.5% from the same period prior year. Lastly, third quarter operating cash flow totaled $26.4 million as compared to $24.3 million in the third quarter of 2018. Capital expenditures totaled $3.3 million, which was largely in line with the prior year, and includes ongoing investment in our own strategic manufacturing capabilities on our Billerica campus. Free cash flow, which we define as operating cash flow less capital expenditures, was $23.1 million for the quarter.
Accordingly, cash and cash equivalents totaled $78.1 million at quarter's end. Turning now to our guidance for the balance of the year. We are narrowing our expected full year revenue target to be in a range of $347 million-$349 million. Revenue guidance for Q4 is therefore a range of $89 million-$91 million. Mo-99 supply continues to make progress, with NTP now returned to production levels sufficient to meet our demand, while ANSTO continues to work toward return to service. As we look to 2020, we remain confident in a return to supply normalcy for the full year and an ability to satisfy customer demand to meet patient procedures. Moving now to earnings. We are raising our full year adjusted fully diluted earnings per share guidance to be in a range of $1.10-$1.13. Previously, we had projected a range of $1.09-$1.12.
Our Q4 guidance is therefore a range of $0.27-$0.30. With that, let me turn the call back over to Mary Anne. Mary Anne?
Thank you, Bob. Let me provide some additional color on our business performance and progress on our strategic programs. Let's start with our microbubble franchise. DEFINITY's continued strong growth is a result of an increasing appreciation of the benefits of echocardiography, as well as our ability to continue to grow the appropriate use of DEFINITY in suboptimal echocardiograms. This strength fuels our confidence in the long-term growth of the existing business, as well as our commitment to key pipeline and infrastructure initiatives, which we believe will support the sustained growth and profitability of our microbubble franchise. The first of these initiatives is our investment in our DEFINITY LVEF clinical program. We remain on track with our two parallel phase III studies, BENEFIT-1 and 2, with patient enrollment complete for BENEFIT-1 and over 80% for BENEFIT-2, with total enrollment set for completion later this year.
Upon successful completion of the trials, we will use the results to file a supplemental NDA that, if approved, would enable us to commercialize soon thereafter. Our on-campus manufacturing project for DEFINITY and other sterile vial products remains on time and on budget. After having completed the construction phase earlier this summer, we have moved on to validation. These steps keep us on track to produce commercial product by early 2021. Regarding the status of a potential generic filer, to date, we have not received notice of an ANDA application. We remain confident in DEFINITY's future. Moving on to our nuclear business, I'd like to provide an update on our moly supply for the third quarter and what we expect for the balance of the year and 2020.
While we experienced limited supply throughout the third quarter, we have been informed by our supply partner, NTP, that they have been able to increase production of moly. This positive news provides increased flexibility and supply that will allow us to meet our requirements. Another of our moly suppliers, ANSTO, continues to experience issues related to their transition to their new processing facility, ANSTO Nuclear Medicine, or ANM. During the third quarter, ANSTO experienced a mechanical issue on the production line at ANM, causing it to shut down. If the timeline to address that mechanical issue stays on track and necessary regulatory approval is granted, ANSTO expects that moly production could resume in mid-November to support its own generator production. IRE has been a consistent moly supplier for the entire year, partially offsetting shortages from NTP and ANSTO, highlighting the strategic importance of having a diversified supply chain.
Let me also note that IRE will continue operations uninterrupted during its ongoing plant conversion to offering moly derived from low-enriched uranium, or LEU. I am pleased to announce that we have extended our supply contracts with our radiopharmaceutical channel partners, Cardinal Health and UPPI, and now have supply contracts in place with all five major U.S. radiopharmacy chains through 2020. Turning to our radiopharmaceutical pipeline and to LMI1195, our PET-based molecular diagnostic agent for the norepinephrine pathway, as we mentioned on our last call, we are designing two phase III clinical trials for the diagnosis and management of neuroendocrine tumors in pediatric and adult populations respectively. In August, the FDA granted orphan drug designation for the use of LMI1195 in the management of neuroendocrine tumors.
We have also received notice of eligibility for a rare pediatric disease priority review voucher for a subsequent human drug application, should LMI1195 be approved by the FDA for its rare pediatric disease indication in accordance with the program's requirements. Last quarter, we announced our oncology diagnostic licensing agreement with NanoMab Technology Limited, a privately held biopharmaceutical company focusing on the development of next-generation radiopharmaceuticals for cancer precision medicine. Under the collaboration agreement, Lantheus licensed NanoMab's NM-01, a development-stage imaging biomarker, which identifies tumors expressing PD-L1. NM-01 may be used to optimize clinical trial design of early developmental stage PD-L1 immuno-oncology agents by identifying patients most likely to benefit from these therapies. We are excited by the opportunity, as we believe that molecular imaging and analytics could uniquely address current unmet needs in ongoing drug development of PD-L1-based therapies, especially in patient selection, stratification, as well as predicting drug response.
Our agreements with Progenics and NanoMab allow us to leverage our core competencies, mainly our commercialization capabilities in nuclear isotopes. Overall, our third quarter results and operational achievements reflect strength across our business. I remain optimistic about the future and delivering on our strategic vision in the quarters and years to come. We are encouraged by our financial performance and business results as we move towards the close of another strong year for Lantheus and the close of the Progenics transaction in the first quarter of 2020. With that, Bob and I are now ready to take your questions. Operator, please go ahead.
Ladies and gentlemen, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile a Q&A roster. Our first question comes from Larry Solow with CJS Securities. Please proceed with your question.
Good morning, and thank you.
Good morning.
Just a couple questions on DEFINITY. Obviously, it continues the strong growth, 19%, really rapid. I think over time, we all bring our models down to sort of that low to mid-teens growth rate. Can you just speak to why wouldn't it continue to grow at this rapid rate that it's grown at for the last three years? Are there reasons why perhaps we're being a little too conservative, most of our models out there?
Larry, I think that's a fair question. This is obviously Mary and not Bob. I think it's a fair question. When we look at the growth and where we see where it's coming from, it really is coming from continued contrast penetration rate. It is really, as I said in my remarks, the continued increased appreciation for use of contrast within studies. It's not growth that we would need to depend upon from the underlying market, just overall growth of use of echocardiography. That really reflects the effort that we put into the market, because that is what we point all of our sales and commercial effort at, is medical education on how to recognize suboptimal echoes as sonographers are performing their exams. We do that with not only the technicians, but that's where we point to our medical education with physicians.
I would say that it is really the result of where we point our efforts, both at the society levels and then at the day-to-day levels with our interactions with sonographers and physicians. I can't tell you how to run your models. It may be that we are somewhat conservative as we plan forward.
Right.
We know from where contrast still sits, there's a lot of headroom left in that market if you compare it to where medical literature would suggest contrast should be. It would suggest that up to 20% of all studies should be done using a contrast agent. I would also say, looking forward, you heard me also mention that our LVEF study should complete patient enrollment by the end of this year. We'll then put together our sNDA, file that NDA with the PDUFA date, PDUFA timing and PDUFA date. That could bring us into the market fairly shortly. That also then expands the patient population that would be addressable with the use of contrast. Another growth driver right back into that same market.
Absolutely. Of course, that would certainly enhance and give more reason to continue to maintain, if not potentially increase this growth. Just in terms of the left ventricular, the timeline there. The trials, the enrollment completes within a couple of months, and then I assume that once enrollment and patients come through, that it's a one-time visit, right? There's no follow-up, so the trial's basically, after the data is analyzed, pretty much done, right? Will there be any notification of that, or we'll just hear that you filed, or how will that play itself out, if you happen to know or can share any of those details?
I haven't shared any of those details yet. I will say, just based on the trial design, there are three different study reads that are done as part of each patient. There's the study without contrast, the echo study without contrast, there's the study with contrast, and then there's the MR study, which is the truth standard for the trial. You're right, there's no follow-on as you'd see in pharma trials.
Right
follow-ons for other reasons. There are three reads of studies for each patient in the trial. I haven't decided yet what I'll announce as far as last patient out, data locks, or whether we'll announce with the sNDA filing. You can be sure there will be announcements related to the reg pathway with that.
Okay. Last, I joined the call a little later, just bouncing between a couple other ones, gross margin was a little bit less than I thought. Was there anything in there, that one-timers in there other than, I guess, the ramp and the manufacturing expense? Anything else higher than expected, or?
Well, actually a little bit more in line with what we had expected. I think if you recall back to our July call, I did mention that we would be witnessing a gross margin below the run rate that we saw in the first half, which was right around 52.5%. That's actually a couple of things, because when we get into these supply shortages, if you will, what we do is what we do best in terms of managing our way through that complex radiopharmaceutical market. In doing so, what that effectively does is that we're buying moly throughout the week, which is not necessarily always the most optimal way to do it. You do that as a bit of a hedge to make sure what you're doing is creating an opportunity to take advantage of demand.
Right.
What you do get is some excess decay that does cost a little bit more. Of course, the margin mix this year, if you remember last year in the third quarter, the TechneLite we were selling to Australia was at a higher margin than what we typically sell.
The generators.
of generators here in the U.S.
Right.
That was a little bit of an unfavorable product mix. Again, a little bit offset by DEFINITY's outperformance. Again, it really was driven mainly by the TechneLite.
Okay, great. Excellent. I know you shared some additional stuff on the Progenics stuff. I just missed part of that. I will review that, and then, if I have any other questions, I'll certainly circle back. Thank you very much.
Thanks, Larry.
You're welcome.
Thank you. As a reminder, ladies and gentlemen, that's star one to ask a question. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating.