Good afternoon, ladies and gentlemen. I would like to welcome everyone to Lantheus Holdings' first quarter 2018 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 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 the 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 in 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 programs. 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 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 three-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. 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 continue 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 one 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 costs, 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 offering 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 one 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 31st, 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 one 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 will 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-$90 million and adjusted EBITDA in the range of $20 million-$23 million. For the year, we are maintaining our guidance for revenue in the range of $337 million-$342 million and for adjusted EBITDA in the range of $85 million-$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 three-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.
As 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 three 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 two identical clinical trials, which together will 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 would 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 trial for flurpiridaz F18, 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 prospective open label international multi-center trial of flurpiridaz F18 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 F18 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 SPECT MPI technologies have demonstrated limitations in their diagnostic performance. Next up is an update on our phase III LMI1195 program. We believe 1195, our 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 non-invasive 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 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 continued 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 three-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?
Certainly. Ladies and gentlemen, if you have a question at this time, please press star and then the number one key on your touchtone telephone. If your question has been answered, or you wish to remove yourself from this queue, please press the pound key. Our first question comes from the line of Raj Denhoy from Jefferies. Your line is open.
Good afternoon. I wonder if, Marianne, I could ask a question not about this quarter, about the messaging really on the fourth quarter call that caused a lot of consternation in the stock and the sell-off. 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. Perhaps you could maybe just flesh out a little bit more about 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. When you do that, essentially our EBITDA is tracking with our guidance to be equal to 2017. Just want to flag that to start.
Fair enough.
Happy to-
Still flat though.
Yes. Well, still flat, Raj, I will say, 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. We think it's the right time. We also think it's the right investment because 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. That's been our decision, invest to grow, and it starts in 2018. You're right. I think there was some response to the stock after we offered that message.
As you say also, we've seen the stock recover. 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 just a couple of finer points on that. You did note that it was a good quarter. Your adjusted EBITDA did come in better than you had guided. It sounded like, Jack, from some of your comments, that that's just a spending, a timing of investment phenomenon more than anything. 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.
Yeah. Thanks, Raj. Yeah, that's correct. The comments I made was the combination of strong cost management as well as some of the timing of the programs. As you can appreciate, the timing of clinical development programs is hard to really pin down week to week. I think the important message I would reiterate is we do expect to see that cost flow through in 2018, and it has no impact on our expected timelines or our goals. 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.
It doesn't represent all of the EBITDA over-performance 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, then I'll jump back in queue. 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. 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? Maybe I'll just leave it there, and you can answer the question.
Sure. Raj, it is one of my primary areas of attention that I personally attend to, and there's 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. 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 that.
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. 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. 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 our first patent is set to expire in mid-2019. 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 IV certification to us. I can say we have received no Paragraph IV certification.
Okay. That's super helpful. Thank you.
You're welcome.
Your next question comes from the line of Erin Wright from Credit Suisse. Your line is open.
Great. Thanks so much. In terms of capital deployment, I guess, can you speak to some of 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? On the in-licensing opportunities, I guess, any examples, even just anecdotally, what that could potentially entail? That'd be great. Thanks.
Yeah, Erin, it's Jack. Let me start out and kind of give you an overall view of the size. Then I'll ask Mary Anne to comment on anything additional. 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 mid-size acquisition. If you think about our cash position has been hovering in the mid-70s. The revolver that we haven't touched has remained at about $75 million. We are in a good leverage position. 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.
I think we would be looking at probably not a significantly large acquisition that would cause us to lever up immediately. Something that we could probably handle within our existing balance sheet with perhaps some expansion of our debt. Having said that, we would, 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're focused on the echocardiography lab and the nuclear medicine imaging department.
There's 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're 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, we believe, to be successful there. That's one area, and that includes currently commercialized assets that are already out there. The other area is what I refer to as microbubbles. As 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. To be interventional in and of themselves in certain medical settings.
When you look at the possibilities of how they can be used and the folks who are looking at that, the DEFINITY bubble rises to the top as a proven bubble, not only by its size but by its stability, and by its kind of non-invasive ease of administration. Those are some partnering efforts that we're looking at to ensure that we stay on the forefront of how microbubbles are being used. That's really all I can offer now, but I think it offers some clarity into the main areas of interest that we have.
That's really helpful. Lastly, 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? Thanks.
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. It is a plan that has already been discussed with and presented to the FDA so that we're ensuring that we're within all their guidances for what finished has to look like. It is a well-thought-out process to get to done on what done needs to look like. That our fake groundbreaking is actually next week. 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. I'll be happy to update on the calls with obvious milestones.
That's great. Thank you.
You're welcome.
Again, ladies and gentlemen, if you have a question at this time, please press star then the number one on your telephone keypad. Your next question comes from the line of Lei Han from Wells Fargo. Your line is open.
Thanks. Thanks for taking my question. This is Lei calling in for Larry. I just want to ask to start a couple of questions on the quarter. 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, excuse me, reverse in Q1?
Hey, Lei, it's Jack. I'll take that. I don't know if I'd call it reverse, but I would say that from our Puerto Rico perspective, we are back up and we never really had that much of an impact as you, I'm not sure, 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 the probably end of last year.
Okay. Then in terms of selling days, were there any differences between Q1 this year and Q1 2017?
In terms of what, Lei? I didn't understand that word.
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, do you have it?
I do. The answer is no, there is no difference in the change of Q1 last year over Q1 of this year. In Q4 of last year, we did pick up a day sequentially, but not a day year-over-year.
Got it. Thanks. Then just looking at your guidance. 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%-5% range, I believe, excluding the GE payment last year. There is obviously this trend of revenue growth improving over the next three quarters to a certain extent. Can you just talk about 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. What's driving that?
I think there's two kind of market issues or opportunities that I'll speak to, I'll let Jack get finer on the actual dollars associated with them. One is, Lei, we continue to grow the DEFINITY market. 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 of contrast, with echo. That's one area. The other area is we are continuously looking for ways to expand the revenue potential for our nuclear products. It's not as evident or as 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.
I don't know, Jack, do you want to add on the dollars?
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 2018. As you look at the guidance and kind of the sequential build in 2018, I would attribute most of that lightness, if you will, in Q1 to the NTP. As that has now returned to service, we see that disruption behind us.
Got it. Thanks. I'm sorry, have you quantified what was the impact of the moly, the dollar amount or the growth rate impact?
No.
Yes.
No, we have not. No, Lei, we did not quantify. I think Jack offered some qualitative comments in our last call, but not quantitative.
Yeah. I would say the only thing I'd add to that, Lei, is if you think of kind of the consensus that was developed by the analysts versus where we came in in our guidance is probably two to three million light. I'm not saying that's the number, but I'm saying it's an immaterial number to our overall revenue.
Got it. Then just my last question on the new indication, the EF indication for DEFINITY. You mentioned three-year exclusivity. Is it reasonable to assume that you could be working on additional patent protection beyond that three-year exclusivity, or do you think that's it pretty much?
There's two different things, Lei. The three years exclusivity is related to the indication itself. It just means that other products, without that indication, can't market for that indication during that three-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. Yes, we are absolutely still vested in and confident about the work we're doing for the patent stage related to DEFINITY.
There are additional patents you're working on specifically for the indication, or are you talking the general portfolio?
Again, the patents go to the molecule.
Okay
The indications go. The answer is yes to both, but they are separate. The marketing exclusivity only pertains to the specific indication.
Got it. Thanks very much.
You're welcome.
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.