Ladies and gentlemen, welcome to the Lantheus Holdings second 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. Good morning. Welcome to Lantheus Holdings' second 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 second 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.
Also, the 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 the call over to Mary Anne. Mary Anne?
Thank you, Mark, and good morning, everyone. Our second quarter revenue performance was supported by strong DEFINITY growth in the high teens, offset by multiple molybdenum-99 supplier challenges that impacted our ability to meet total TechneLite demand. Despite these challenges, we delivered both solid earnings per share as well as free cash flow while continuing to make targeted strategic investments in our business to drive long-term sustainable growth. Regarding moly supply, I'd like to provide some detail on events during the second quarter and what we expect for the balance of the year. While our goal is to always focus on meeting the needs of our patients and customers, we do so with a supply chain that has proven challenging. Throughout the second quarter, we experienced limited supply from NTP, while they continued to work with South African regulators for approval to return to full-scale operations in their processing facility.
Additionally, starting in late May, another of our moly suppliers, ANSTO, faced challenges while transitioning to their new processing facility, ANSTO Nuclear Medicine, or ANM, which impacted their ability to fully supply us. This was further complicated in late June by a technical issue that led to a temporary shutdown. ANSTO is progressing with their full return to service and is already producing supply for Australian domestic customers. They are scheduled to have the OPAL reactor's 10-year maintenance shutdown in the month of September and have communicated to us their expectation to resume supply to international customers thereafter. These multiple disruptions in moly supply have resulted in an inability to fill all of our customer demand for TechneLite generators. As frustrating as these supply disruptions have been for us, our concern remains with our customers and the patients they serve.
Based on the progress our suppliers have made, we now project our moly supply will be stable beginning in the fourth quarter. Consequently, we believe the issues that caused our temporary supply challenges this year should not recur in 2020. Later, I'll speak more about our performance and highlights from the second quarter. First, I'll turn the call over to Bob, who will review our financial results. Bob?
Thank you, Mary Anne, and good morning, everyone. I will provide highlights of the second quarter financials, focusing on adjusted results unless otherwise noted, and then provide third quarter and updated full-year 2019 revenue and earnings guidance. Worldwide revenue for the second quarter totaled $85.7 million, an increase of 0.2% over the prior year. Foreign currency was a negative headwind of approximately $200,000, or a negative impact of approximately 20 basis points on year-over-year growth. Reported sales of DEFINITY continued with a strong growth at $54.6 million or 18.5% higher as compared to the prior year quarter. TechneLite revenue was $20.1 million, a decrease of 14.4% from the prior year quarter, due mainly to the prolonged production outage at NTP. Additionally, supply was further constrained by the unexpected supply shortages that Mary Anne has just described. Other nuclear revenues, which excludes TechneLite, was $15.2 million, a decrease of 21.3%.
Total revenue was offset by rebates and allowances of $4.3 million. Adjusted gross profit margin for the second quarter was 53.2% of net revenue, an increase of 80 basis points over the second quarter of 2018 on a similar basis. This quarter's results are reflective of favorable product mix led by DEFINITY's outperformance. Adjusted operating expenses were 190 basis points unfavorable to prior year at 31.4% of net revenue, driven primarily by higher, but planned, research and development investment at 5.9% of net revenue in support of our LVEF clinical studies. G&A was also higher year-over-year, due mainly to phasing increased investment in strategic IT and business development efforts. Total adjustments in the second quarter were $7.3 million before taxes.
Of this amount, $3.4 million is associated with non-cash stock and incentive plans. Also in the quarter, we recorded debt extinguishment costs of $3.2 million linked to the prior term loan when we replaced it with our new credit facility, which I'll describe in just a moment. Adjusted operating income for the quarter was $18.7 million, a decrease of 4.8% from the prior year. Adjusted operating income was also negatively affected by our moly supply challenges, as previously discussed. Net interest expense and other income amounted to $3.2 million. The reported effective tax rate in the quarter was 20.9%. Our adjusted effective tax rate was 29.5%. The resulting net income for the second quarter was $6.4 million, or a decrease of 34.2% from the same period prior year. Adjusted net income was $10.9 million, or a decrease of 6.4%.
GAAP fully diluted earnings per share were $0.16, a decrease of 35.6% from the same quarter last year. Adjusted fully-diluted earnings per share were $0.27, a decrease of 8.3% from the same period prior year. Lastly, second quarter operating cash flow totaled $21.1 million as compared to $20.3 million in the second quarter of 2018. Capital expenditures totaled $3.4 million and include 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 $17.6 million for the quarter. Also during the quarter, the company used approximately $73 million to pay down its then outstanding term loan B and to refinance the $200 million balance with a new term loan A at favorable credit terms. Accordingly, cash and cash equivalents totaled $56.9 million at quarter's end.
The new $200 million revolving credit facility replaces a $75 million revolver and will provide the company with increased overall liquidity, which now stands at approximately $260 million. Credit spreads have been significantly reduced, with spreads ranging from 1.25%-2.25%, depending on our then current net leverage ratio. For the balance of 2019, we expect savings of approximately $0.06 per share on reduced interest expense linked to the outstanding debt balance, in addition to savings associated with utilizing our cash on hand to reduce outstanding debt while retaining access to those funds. Full year effect of these savings will be realized in 2020. Turning now to our third quarter guidance and updated full year financial expectations, we expect the third quarter revenue to be in a range of $83 million-$85 million.
Full year revenue growth is now expected to be in a range of 0.8% to 1.9%, or $346 to $350 million. Q3 and full year revenue expectations reflect the updated assessment of moly supply from ANSTO, which is currently operational for their own domestic market, but will not have export supply for the duration of the third quarter. NTP, while having resumed production, is currently producing at lower than full capacity, but is expected to return to full production later this quarter. All said, we expect these issues to be confined to the third quarter, while our fourth quarter revenue and adjusted EPS expectations remain largely consistent with our prior estimates. We now project DEFINITY will outperform our initial expectations, maintaining growth in the mid to high teens.
Moving now to earnings, adjusted fully diluted earnings per share are expected to be in a range of $0.18-$0.20 for the third quarter. For modeling purposes, forecasted depreciation amortization expense is expected to be approximately $3.5 million for each of the remaining two quarters. You should expect lower gross margin levels than current run rates strictly during the third quarter and then recovering in the fourth quarter. Operating expense savings and lower debt costs are expected to mitigate a significant portion of lost earnings associated with lower TechneLite revenue in the second half of 2019. For the full year, we are also updating our adjusted fully diluted earnings per share range to $1.09-$1.12.
Lastly, as you look to future operating periods, we are confident in our ability to restore our nuclear business to normalized levels and deliver on our financial goals in Q4 and the full year of 2020. With that, let me turn the call back over to Mary Anne.
Thank you, Bob. Now let me provide some additional color on our business performance and progress on our strategic programs. Let's start with our microbubble franchise. As Bob mentioned, DEFINITY grew at over 18% versus the prior year. DEFINITY's continued growth fuels our confidence in investing in key pipeline and infrastructure initiatives. We believe these investments support the sustained growth and profitability of our microbubble franchise. The first of these initiatives is our investment in our DEFINITY left ventricular ejection fraction, or LVEF, clinical program. We remain on track with our two parallel phase III studies, BENEFIT 1 and 2, with patient enrollment now over 80% complete for BENEFIT 1 and over 60% for BENEFIT 2, with total enrollment on track for completion later this year.
Upon successful completion of these trials, we will use the results to file a supplemental NDA that, if approved, would enable us to commercialize soon thereafter. In June, new clinical outcomes data presented at the American Society of Echocardiography's Annual Scientific Sessions, or ASE 2019, demonstrated the positive impact of contrast echocardiography with DEFINITY in intensive care unit patients as compared to ICU patients who received echocardiography without contrast. The study findings showed improved clinical management and decreased length of stay in ICU patients receiving DEFINITY-enhanced echocardiography versus non-contrast echocardiography patients. ICU patients are often difficult to image due to their medical condition, impacting diagnostic certainty of the echocardiography exam. This new research data supports the use of DEFINITY in improving patient outcomes in a critical care environment.
Moving on to our ongoing initiative to build a specialized manufacturing facility for DEFINITY and potentially other sterile vial products at our North Billerica headquarters. The project is on schedule and on budget. In the second quarter, we completed installation of equipment as planned. Having accomplished that, in the second half of the year, we will commence trial runs of placebo product in anticipation of producing qualification batches in the fourth quarter. These steps should 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. As evidenced by continued investment in our microbubble franchise, we remain confident in DEFINITY's future. Turning to our nuclear pipeline and to LMI 1195.
As we mentioned in 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. During the second quarter, the FDA granted us an orphan drug designation for the use of 1195 in the management indication. With respect to business development efforts, earlier this quarter, we announced entering into a strategic collaboration and 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. Although PD-L1 checkpoint inhibitor therapies have achieved impressive results in certain patient populations, improving response rates and extending survival across multiple tumor types, challenges remain in optimizing the use of these therapies.
There is an opportunity for biomarkers that can best predict patient response, which may also serve to avoid unnecessary cost to patients and health systems. NM-01 will be provided by Lantheus to pharmaceutical companies, academic medical centers, and other researchers. 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 about this opportunity as we believe NanoMab has strong technology proven by recently published data with very good image resolution. 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. We are projecting that we will file a DMF with the FDA in the first quarter of 2020 and are currently talking with potential customers.
We'll have a better understanding of the market potential as we progress, and we'll keep you updated. Our agreement with NanoMab, along with our previously announced collaboration with Cerevast, allow us to leverage our core competencies, namely our commercialization capabilities in nuclear isotopes and our expertise in microbubbles. I'm excited to see where these collaborations go. I remain optimistic about the future and delivering on our strategic vision in the quarters and years to come. With that, Bob and I are now ready to take your questions. Operator, please go ahead.
Thank you, ma'am. At this time, I would like to remind everyone, to ask your question, you can simply press star one on your telephone keypad. First question is coming from the line of Raj Denhoy from Jefferies. Go ahead, please.
Hi, good morning.
Good morning, Raj.
Morning, Raj.
Hi, good morning. I wonder if maybe I could start a little bit on the moly supply issue in the quarter. Just so we understand what you're suggesting we do to the model. The $20 million or so you did here in the second quarter, we should assume it sort of runs at that rate into the third quarter and then sort of picks back up in the fourth quarter, and then we get out to 2020, you should still be at that sort of roughly $100 million annual basis for that product. Is that the right way to think about it?
Raj, I think that's exactly how you should think about it. When I look at the models that are out there, I notice that they're running probably right around $26 million or so for second and third quarter. You saw our result, as you just pointed out. Yeah, you should probably see that number maybe slightly lower than that number in Q3. That would be exactly how you should then model.
Okay. Maybe kind of a broader question on the moly supply issue, right? This isn't the first time we've had these issues, right? I guess I'm curious what your current views on are on the sort of fragility of the supply, right? What it's sort of doing to this market and demand. Ultimately, what it's doing to your competitive position, because Curium, again, they're not as public as you guys are about what goes on there. When you have a supply outage, they sort of backfill in with supply. Does that have any long-term implications in terms of share in this market and demand in this market?
Well, I think you've got a couple of questions there, Raj, and I'll try to take them all, and if I miss any, you can help me readdress what I missed there. To your first question about the overall market, and whether these shortages have an impact on the overall market. I think we work very hard to ensure that they don't, and the way to do that is to stay focused on patients. When we see these shortages, our focus is to get the communication out as early as we can downstream to our customers so that they can get the supply they need. You're right, it's got to come from our competitor so that ultimately the adequate supply is available if it can be, to make sure that patients don't miss studies.
That's got to be job number one here, and I think we've tried to ensure that we do that. From a supply standpoint, you're right. We have had issues, and I think we would say over the last one and a half, we've seen issues that we had not seen bunch up in a way that we have not seen do in years past. What I'd like to say is coming out of this period that we see that will still last through the third quarter, and I think Bob guided you well there. Coming out of the third quarter and coming into the fourth quarter, we see a period of stability starting that we hope then will last.
The reason that we're confident about that is as we come into the fourth quarter and beyond, you have overall coming out of what will be a 10-year maintenance schedule, and that's a fairly significant overhaul on a reactor that is a fairly young reactor. Then you'll also have ANM now up and running, which will be a brand-new processing facility, and we'll have 30% more capacity. You'll have then in the worldwide moly supply chain, this fairly attractive combination of a reactor that's just been very nicely overhauled and a brand-new processing facility with a lot of capacity. That will probably be the most attractive pair in the worldwide supply chain. For us, that boosts our confidence in, again, is our diversification strategy, which is what we built our moly supply strategy on initially once Nordion announced that they were closing.
Quite frankly and quite honestly, that strategy has not worked for us this year, and it's because we would not have anticipated that the problems that ANSTO had in trying to transition from their prior processing facility to their new processing facility would coincide with NTP's struggles in coming back up to speed. It happened, and we're dealing with it. Again, we have confidence coming out of it. Your comment about our competitive position is also a fair one. That's my issue to deal with. As you know, we're contracted. We've been contracted. Our customers believe very strongly in having balanced supply, because we're essentially two competitors. We are contracted, two of our contracts already last past 2019.
I have two contracts that I will renegotiate for 2020, and I will go to the table with my customers, and I will present what will be my best efforts to maintain my competitive position, and I'm confident in that as well. Anything I missed there, Raj?
No, I think that hit on all of it. Maybe just as a follow-up to that competitive question, you're right. As you mentioned, there are only a couple of contracts, right? Four or five contracts you work on in this market. As you've had these issues, again, to your point, they've been a little worse than in times past. Has that influenced those negotiations with your customers about these contracts?
I would say in some sense, no, Raj. I'm in constant communication with my customers. It's an ongoing conversation. It's become a weekly conversation because we're always talking about what supply we're getting to them and how we're getting it to them. Many of the points I just made to you are points I've been making to them. In some ways, they're very aware of what the moly supply chain looks like. Some of the very points I just made to you about what we see as the emerging strengths or the re-emerging stability of the moly supply chain, they're very well aware of as well.
Okay. Just one last one for me. You have talked a little bit about other sources. Looking to partners like SHINE, for instance, here domestically. Are there any updates you have on that in terms of when that might come online or are there other ways you can sort of prevent these kinds of shocks from occurring?
SHINE just had an announcement the other day. They announced that they received their license. I'm sorry that I'm blanking on specifically what license it is. I can send you the link on it because it was a public press release. That's not an answer for 2020. That is at best an answer for the 2022, 2023 period. I think if you look out into some of the other announcements that have been out there about other types of domestic supply, none of those are answers for 2020. I think, as we sit here today, we're looking at fourth quarter and beyond, and we're looking at our strategy being the partners we have, which are ANSTO, NTP, and IRE. I didn't mention in part of the answer I gave you, but IRE has been a stellar partner for us through this whole period.
We have upped our access to them. They've upped their delivery to us. We've done everything we can, including changing out our manufacturing schedule to optimize it. Every curie that we can get our hands on turns into a curie that we put into a generator, changing our days of the week on manufacturing. The logistics out to customers to ensure that we can get everything that we get our hands on out in the form of a generator to a customer.
Okay.
It was their operating license with the NRC that they filed for, that they announced, SHINE, earlier this week.
Okay. Very good. Well, I'll leave it there. Thank you.
Thanks, Raj.
I'd like to remind everyone, to ask your question, hit star one on your phone keypad. Next question is from the line of Erin Wright from Credit Suisse. Go ahead, please.
Great, thanks. In terms of the partnerships, can you provide a little bit of an update on Cerevast as well as your PD-L1 that you mentioned? I guess what sort of contributions in terms of magnitude as well as in terms of timeline? When do you think that would materialize more meaningfully? Thanks.
Sure. Erin, it's a great question, and I can answer it easily to start. I would not have you looking to build into your models anytime soon, any kind of meaningful contribution from either. Both are early stage at this point, especially Ceravave. They are certainly early stage in their development program. That will be a royalty stream back to us when it does materialize. They will file, 2023 is what they are projecting at this time, would be the earliest approval. NM-01 will be a partner revenue source for us as we begin to place the biomarker into early stage developmental trials. That will also be a slow build on a revenue base, and I'll have more to speak about that as we begin to get out there and talk to potential partners about who might access the biomarker from us.
That's probably something that I would have you wait and hear more from me about. I'm certainly happy to talk about what the product is and how it might be used, but it really is quarters to come before I'll have more specific details about what revenue potential might look like.
Okay. Got it. Can you provide what's the next development catalyst for you on the R&D front? Would it be the LVEF clinical programs, and what could we hear next on that front? Can you give us an update on the timeline there as well?
Sure. So it absolutely is, from a time perspective, it's LVEF. The next milestone you'll hear there will be completion of patient enrollment, which we have projected will complete by the end of this year. When it is finally complete, as I mentioned earlier, we're about 80% complete on the first of the phase III, about 60% complete on the second phase III, but when we're 100% complete and we've locked enrollment, last patient in, I'll announce that. We project it will be by end of the year. Then the development point after that will be the filing of the sNDA. That would be the milestone after that. Then probably after that would be either the FDA acceptance of the sNDA or the approval, depending on which we see.
The other milestones you'll hear from me about are related to the LMI-1195 neuroblastoma trial in pediatrics and adults. You'll probably hear me talk about the phase III trials, the development of the protocols, perhaps the acceptance of the protocols. I announced today that we had received orphan indication status from the FDA for that. That was a significant milestone from us. That's the other program that you're likely to hear from.
Okay.
Oh, okay. Any other questions, Erin?
Nope, I'm good. Thank you so much.
You're welcome.
The question coming from the line of Larry Solow from CJS Securities. Go ahead with your question, please.
Great. Good morning. Thank you. Just to clarify on SHINE, I think they filed their permit with the Nuclear Regulatory Commission this week, and they say up to a two-year approval, so that would be early 2022. That's it for the public service announcement.
Thank you, Larry.
Yeah, no, my pleasure. A question just on, obviously, DEFINITY and the TechneLite stuff, I think you pretty well spoke good about. Just on other nuclear, I realize Xenon is a big piece of that that's been coming down. Should that stabilize over time, or It's a small piece of your business, but does that category sort of continue to sort of float down, or should it stabilize as we look out?
Hey, Larry, it's Bob. I would tell you that I think that you're absolutely right. Again, when I also look at the models, I also notice that the current run rates that are in there probably aren't as reflective of what I've been trying to communicate with relation to the fact that Xenon has sort of come down, and we would expect it to be at those same levels through the balance of the year. Now, in terms of stabilizing, yes. You recall that a competitor brought Xenon to the market last May, in last Q3 and 4, and in 1 and now 2, we've seen the impact of that coming in.
What we should start to see is a sort of as the comps, as you get into the back half of the year and into 2020, yes, it would become a much more stable type of business, which again, it's contractual, and we would expect to be able to work with our partners in terms of stabilizing that level, and hopefully grow it over time.
Okay, great. Thank you.
Any other questions, Larry?
No, all set. Thank you.
Okay.