Earnings Call: Q1 2018

May 2, 2018

Good afternoon, ladies and gentlemen. I would like to welcome everyone to Lendias 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 on the Investors section of the company's website approximately 2 hours after completion of the call and will be archived for 30 days. I would now like to turn the call over to your host for today, Mira Murphy, Director of Investor Relations and Corporate Communications. Thank you. Good afternoon, everyone, and thank you for joining us for Lantheus Holdings' Q1 earnings conference call. With me today are Mary Anne Haino, 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 ks, reporting our Q1 results. You can find the release as well as a replay of this call in the Investors section of our website atlantheus.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 ks 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, Mira, 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 1 supplier NTP in South Africa is behind us. The NTP processing facility has been back online since mid February and we began receiving Moly supply from them at that time. Although the disruption did temporarily weigh on revenue for our TechneLite generators, the impact was ultimately in line with our initial expectations and we currently do not expect any further Moly shortages that would have a material effect on our 2018 results. From a big picture perspective, we see this year as the beginning of an important period of strategic investment in our business and believe the right mix of cash flow generation, internal investment and acquisition or in licensing activity will be key to achieving our long term growth objectives. Our 3 pronged corporate growth strategy is to 1, enhance the growth trajectory and profitability of our core microbubble franchise 2, augment and invest in our pipeline with focus on emerging technologies and 3, 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 and 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 $82,600,000 in worldwide revenue for the Q1 of 2018, an increase of 1.6% compared to the Q1 of 2017. We continued our strong DEFINITY performance with worldwide revenues totaling $44,700,000 for the quarter, an increase of 18.4% over last year as we continue to drive the appropriate use contrast in ECHO studies. TechneLite revenue in the Q1 was $21,400,000 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 $7,900,000 compared to $8,100,000 in the Q1 of 2017. Finally, revenue from our other product category was $8,700,000 in the 1st quarter compared to $8,800,000 1 year ago. Moving below the revenue line, our Q1 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 $27,200,000 for the quarter, a decrease of $700,000 from Q1 of last year. Operating income for the Q1 was $15,100,000 an increase of $3,200,000 on a year over year basis. Adjusted operating income for the Q1 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, 1st quarter interest expense totaled $4,100,000 25% improvement over the same period 1 year ago, reflecting the lower interest rate obtained through our 2017 refinancing activities. Net income for the Q1 of 2018 was $8,200,000 or $0.21 per diluted share compared to 4,100,000 dollars or $0.11 per diluted share for the Q1 of 2017. Adjusted net income for the Q1 of 2018 was relatively flat compared to the prior year period. Moving on to our quarter end balance sheet. As of March 31, 2018, we had cash and cash equivalents totaling 73,700,000 dollars Borrowing capacity under our revolving credit facility remained at $75,000,000 making our total liquidity including cash on hand $148,700,000 This provides substantial support for our operating and investment needs and represents a 28% improvement compared with the same period 1 year ago. Q1 2018 operating cash flow totaled 700,000 in cash used compared to 5,500,000 in cash generated for the Q1 of 2017 substantially driven by a purposeful inventory build of DEFINITY. Capital expenditures for the Q1 of 2018 were $2,100,000 compared to $4,900,000 in the Q1 of 2017. I'll now turn to our guidance for both the upcoming quarter and the full year. For the Q2 of 2018, we anticipate total revenue in the range of $85,000,000 to $90,000,000 and adjusted EBITDA in the range of $20,000,000 to 23,000,000 dollars For the year, we are maintaining our guidance for revenue in the range of $337,000,000 to 342,000,000 dollars and for adjusted EBITDA in the range of $85,000,000 to $90,000,000 We are pleased with our performance with both revenue and adjusted EBITDA for the Q1 and we will continue to reevaluate our guidance as we monitor our positive operating trends. With that, I will turn the call back over to Mary Anne. Thank you, Jack. Let's start by reviewing the progress under our 3 pronged corporate growth strategy, which is focused on enhancing the growth trajectory and visibility of our core microbubble franchise, augmenting and investing in our pipeline with focus on emerging technologies 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 2,030 7 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 3 years of marketing exclusivity for that indication. We are working with FDA on a special protocol assessment or SPA for our LVEF trial design and anticipate completing that process in the first half of this year. We will then conduct 2 identical clinical trials, which together would have a total enrollment of about 300 patients. We will update you as our clinical trials progress. Importantly, an SPA represents the agency's preliminary agreement that our planned Phase 3 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 the trial's primary endpoint is achieved. Additionally, we are leveraging our in house expertise by building microbubble manufacturing capabilities at our campus in Vilrica. 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 completed the agreed upon technology transfer and other preparatory activities for the 2nd Phase 3 trial for declared as F-eighteen, which is the focus of our collaboration and license agreement with GE Healthcare. GE is executing the Phase 3 trial and has indicated that patient recruitment will begin in the first half of twenty eighteen. This prospective open label international multicenter trial of pumperidase F18 for pet MPI will enroll up to 6.50 participants and has a target completion date in the second half of twenty twenty. The primary outcome measure for this trial is the diagnostic efficacy of PUMPERIAD 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 spec MPI technologies have demonstrated limitations in their diagnostic performance. Next up is an update on our Phase 3 LMI-eleven ninety five program. We believe 1195, our fluorine 18 based PET agent represents a 1st 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 1190 program to this stage. Internationally, our DEFINITY China program with DoubleCrane 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 twenty eighteen. Addressing the 3rd element of our revenue and profitability growth strategy, pursuit of external opportunities, we continue top line assessments of a large number of opportunities. From a strategic standpoint, we look for opportunities that fit within or complement our current capabilities and that would address significant unmet needs in markets and patient settings in which we are already successful. With that in mind, we continue to evaluate the broader imaging landscape and therapeutic adjacencies as key areas for potential expansion through M and A and in licensing. From a financial perspective, we are mainly focused on assets that are or can soon be accretive to revenue and create the ability to improve our profit margins and cash flow. We are open to a broad range of deal sizes and structures with an eye towards strategic fit and assets that are already commercial or close to commercialization that will then be accretive to earnings within a short time horizon. We expect to capitalize on our collective expertise and create positive synergies that will help to ensure our commercial success. In closing, as we implement our 3 pronged corporate growth strategy, we are focused on internal investments and acquisition and in licensing opportunities that we believe in Lantheus' hands will deliver excellent returns on our investments. With that, Jack and I are now available to take your questions. Operator? Our first question comes from the line of Raj Denhoy from Jefferies. Your line is open. I wonder if Mary Anne, I could ask a question not about this quarter, about the messaging really on the Q4 call that caused a lot of kind of consternation in the stock and the sell off and 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 described it, is going to be down year over year as you're investing in the business. But perhaps you could maybe just flesh out a little bit more about sort of the thinking behind the strategy and ultimately where you think that will settle the business out? Happy to talk about that Raj. I do want to clarify though the comments you made about adjusted EBITDA being down year over year. While I recognize that's true, if you include the milestone payment made to us by GE Healthcare in 2017, I think it's fair to subtract that from the year over year comparison. And when you do that, essentially our EBITDA is tracking with our guidance to be equal to 2017. So just one question for that to start. Still flat. Yes, well still flat, but Raj I will say and this is what we talked about in Q4 as well. That is a purposeful decision we've taken because we're investing back in our business with some of the programs that I've spoken about. And we think it's the right time and we also think it's the right investments 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. And 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. But as you say also, we've seen the stock recover. And we hope that with the 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. I mean, you did note that it was a good quarter and your adjusted EBITDA did come in better than you had guided. And it sounded like, Jack, with some of your comments that that's just a spending timing of investment phenomenon more than anything. But maybe you could help us understand about why this quarter was so much better again relative to the guidance and when that spending is going to start to kick in? Yes. Thanks, Raj. Yes, that's correct. I mean the comments I made was the combination of strong cost management as well as some of the timing of the programs. And as you can appreciate, the timing of clinical development programs is hard to really pin down week to week. And I think the important message I would reiterate is we do expect to see that cost flow through in 2018 and it has no impact on our expected timelines or our goals. So I think the important message that I would ask folks to take away is that although the timing may have slipped from Q1 to a later quarter, it doesn't impact the overall timelines of our programs. And it doesn't represent the all of the EBITDA 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, I'll jump back in queue. So it strikes me a lot of what you're doing this year from an investment standpoint is around the IP position for DEFINITY and you put up another very I mean, one of the big questions is what happens stands. I mean, one of the big questions is what happens when that IP starts to expire over the next couple of years? How exposed risk do you really view that business at this point? And you may also leave it there and you can answer the question. Sure. So Raj, it is one of my primary areas of attention that I personally attend to. And there's several prongs to our strategy here. 1st and foremost, we believe we have the right to protect the intellectual property that we've developed for DEFINITY. And so we do have ongoing investment in work that we see as having been especially recently very successful. We had another Orange Book listed patent awarded in October of 2017. And more recently, we had another patent listed with the patent office. It's not an Orange Book listable patent, but it is another patent that continues to define what we see as the unique specifications of DEFINITY that are required to deliver the efficacy and the safety that we've been delivering for 17 years with this product. And our efforts are not done 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 and we think it's a product that continues to serve the market from a patient value perspective. The LVEF indication will double the addressable patient population that we currently address with DEFINITY. And we think it serves a very important value added diagnostic tool for the physicians who use it. I'll never say never because I can't, but the our first patent is set to expire in mid-twenty 19. And that's a patent that is our method of use patent Orange Book listed. As such, that is a patent that currently where there to be other filers would require a Paragraph IV certification to us. And 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 or how you see the potential M and A opportunities coming about and what sort of size makes sense for you and what does the general pipeline just look like? And on the in licensing opportunities, I guess any examples even just anecdotally what that could potentially entail? That would be great. Thanks. Yes, Erin, it's Jack. Let me start out and kind of give you this an overall view of the size and then I'll ask Marion to comment on anything additional. So from an overall size perspective, as we talked about on a number of quarters, we really work to put ourselves in a position that we feel from our existing balance sheet right now. We're in a strong position for a midsize acquisition. If you kind of think about our cash position has been hovering in the mid-70s. The revolver that we haven't touched has remained at about $75,000,000 and then we are in a good leverage position. So as we look at our first acquisition, we recognize the criticalness of hitting a good one and make sure it makes sense and we can absorb it. And so I think we would be looking at probably not a significantly large acquisition that would cause us to lever up immediately. But something that we can probably handle within our existing balance sheet with perhaps some expansion of our debt. Having said that, we will again, as Marion said, we would never say never and we are carefully evaluating each 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. 2 areas really. 1 is, we have a very well demonstrated history of success in being able to supply into hospital environments for patient care settings unique patient ready dosing that aids either in diagnosis or sometimes in guiding intervention for that patient. Right now, we are focused on the echocardiography lab and the nuclear medicine imaging department. But there'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 learning from DEFINITY to replicate that would allow us to we believe to be successful there. So that's one area and that includes currently commercialized assets that are already out there. The other areas what I referred to is 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 and to be interventional in and of themselves in certain medical settings. And when you look at the possibilities of how they can be used and the folks who 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. And so those are some partnering efforts that we're looking at to ensure that we stay on the forefront of how microbubbles are being used. And that's really all I can offer now, but I think it offers some clarity as the main areas of interest that we have. That's really helpful. And then lastly, just can you give us an update on the manufacturing initiatives? I guess what's the next step there and what you need to do to sort of ramp up? Thanks. So this is an on-site project. We're using an existing building, so we don't have actual groundbreaking. We're going to do a fake groundbreaking with a pile of dirt. But it is a plan that has already been discussed with and presented to the FDA so that we're ensuring that we're within all their guidances for what finished has to look like. And so it is a well thought out process to get to done on what done needs to look like. That our faith groundbreaking is actually next week. And then as we continue to bring in different assets and prepare the building we're putting it in, we'll see continued progress over the next 18 months or so. And I'll be happy to update on the calls with obvious milestones. That's great. Thank you. You're welcome. Your next question comes from the line of Lee Heng 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 a couple of questions on the quarter. So in Q4, your revenue was affected modestly by Hurricane Maria. I believe it was about $300,000 or so. Did you see any of that reverse in Q1? Hey, Leigh, it's Jack. I'll take that. I don't know if I 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 we quoted that exact number, but it was a very minimal number in Q4 and we are now back and fully operational. Obviously, the island still continues to get back to its full operations, but from our ability to supply the hospitals, we've been back and running since probably end of last year. Okay. And then in terms of selling days, were there any differences between Q1 this year and Q1 2017? In terms of what, Leigh, I didn't understand that word. Selling days. Any differences in selling days? Selling days. Oh, selling days. I'm sorry, Lee, I don't have that in front of me. Jack, do you have it? I do. And the answer is no, there is no difference in the change of Q1 last year over Q1 of this year. In Q1 of in Q4 of last year, we did pick up a day sequentially, but not a day year over year. Got it. Thanks. And then just looking at your guidance, so Q1 revenue was up a little under 2%. Your Q2 revenue guidance obviously implies an acceleration closer to call it 4% or so I think at the midpoint. Your revenue guidance for the full year suggests growth somewhere in the 3% to 5% range I believe excluding the GE payment last year. So there is obviously this trend of revenue growth improving over the next three quarters to a certain extent. Can you just talk about kind of what's going to drive that improvement? It looks like your comps last year, they don't really get any easier as the year goes on. So what's driving that? Well, I think there's 2 kind of market issues that I'll or opportunities I'll speak to and then I'll let Jack get finer on the actual dollars associated with them. But what one is, we continue to grow the DEFINITY market. So that's a product that you've seen the kind of growth that we posted year over year for the last several years. And we intend to continue that growth with the investments that we make in appropriate medical use contrast with ECHO. So that's one area. And the other area is we are continuously looking for ways to expand the revenue potential for our nuclear product. It's not as evident or 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. So Anojja, do you want to add on the dollars? Yes, probably just more overall, Lee. 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. So 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. And as that has now returned to service, we see that disruption behind us. Got it. Thanks. And I'm sorry, have you quantified how what was the impact of the Moly, the dollar amount or the growth rate impact? No. Yes. No, we have not. So no, it's really we did not quantify. I think Jack offered some qualitative comments in our last call, but now it's Juan. Yes. I would say the only thing I'd add to that, Les, you think kind of the consensus that was developed by the analysts versus where we came in, in our guidance is probably $2,000,000 or $3,000,000 light. I'm not saying that's the number, but I'm saying it's an immaterial number to our overall revenue. Got it. And then just my last question on the new indication, the ES indication for DEFINITY. You mentioned 3 year exclusivity. Is there a reason to assume that you are you could be working on additional patent protection beyond that 3 year exclusivity? Or do you think that's it pretty much? So there are 2 different things, Leigh. The 3 year exclusivity is related to the indication itself. And so it just means that other products without that indication can't market to that indication during that 3 year period unless they do the clinical work themselves and are awarded the indication. The patent protection protects all uses of DEFINITY for all indications And yes, we are absolutely still vested in and confident about the work we're doing for the patent states related to DEFINITY. So 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, the indications. So 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 Mira 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 CJIS 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.