Q2 2019 Earnings Call
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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 three days I'll now turn the call over to your host for today, Mark can Arnie director of Investor Relations markup.
Thank you and good morning, welcome to Lantheus Holdings second quarter 2019 earnings Conference call.
Joining me today is our president and CEO , Marianne Hannah 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 dotcom.
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 during 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 with that I'll now turn the call over to Maryann Maryann. 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 the free cash flow, while continuing to make targeted strategic investments in our business to drive long term sustainable growth.
Regarding Molly supply I'd like to provide some detail on events during the second quarter and what we expect for the balance of the year.
Well 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 NCP, while they continue 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 Molly suppliers and style faced challenges, while transitioning to their new processing facility and still nuclear medicine, or am 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 and so is progressing with their full returned to service and is already producing supply for Australian domestic customers.
They are schedule to have the Opel reactors tenure 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 long 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 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 will turn the call over to Bob who will review our financial results. Bob. Thank you Marianne 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 $200000 or a negative impact of approximately 20 basis points on year over year growth.
Quoted 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 Maryann has just described.
Other <expletive> 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 2018 on a similar basis. This quarter's results reflected a favorable product mix led by DEFINITY is outperformance.
Adjusted operating expenses were 190 basis points unfavorable to prior year at 31.4% of net revenue driven primarily by higher planned research and development investment at 5.9% of net revenue in support of our Lvs clinical studies.
DNA was also higher year over year, due mainly to phasing increase investment in strategic IP 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 replace it with our new credit facility, which I'll describe in just a moment.
Operating.
Adjusted operating income for the quarter was $18.7 million a decrease of 4.8% from the prior 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%, 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 16 cents, a decrease of 35.6% from the same quarter last year.
Adjusted fully diluted earnings per share were 27 cents 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 in the second quarter of 2018 capital expenditures totaled $3.4 million and include ongoing investment in our own strategic manufacturing capabilities on or below record 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% to 2.25% depending on our then current net leverage ratio.
For the balance of 2019, we expect savings of approximately six cents 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 the range of $83 million to $85 million.
Full year revenue growth is now expected to be in a range of 0.8% to 1.9% or $346 million to $350 million.
Q3, and full year revenue expectations reflect the updated assessment of Mali supply from Enzo, which is currently operational for their own domestic market, but will not have export supply for the duration of the third quarter.
NTP ill, having resumed production is currently producing at lower than full capacity, but is expected to return to full production. Later this quarter that 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 affinity 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 18% to 20 cents for the third quarter.
For modeling purposes, forecasted depreciation and amortization expense is expected to be approximately $3.5 million for each of the remaining two quarters. Additionally, you should expect lower gross margin levels and current run rates.
Strictly during the third quarter, and then recovering in the fourth quarter.
Operating expense savings and lower debt costs are expected mitigated a significant portion of lost earnings associated with lower Technelite revenue in the second half of 2018.
For the full year. We are also updating our adjusted fully diluted earnings per share range to one dollar and nine cents to $1.12.
Lastly, as you look to future operating periods, we are confident in our ability to restore our user business to normalized levels and deliver on our financial goals in Q4 and full year of 2020 with that let me turn the call back over to Maryann.
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 micro bubble franchise.
As Bob mentioned DEFINITY grew at over 18% versus the prior year.
DEFINITY 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 micro level franchise.
The first of these initiatives is our investment in our DEFINITY left ventricular ejection fraction or LDF clinical program.
We remain on track with our two parallel phase III studies benefit went into with patient enrollment now over 80% complete for benefit one and over 60% for benefit too 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 end da that if approved would enable us to commercialize soon thereafter.
In June new clinical outcomes data presented at the American Society of Echocardiography annual scientific sessions or AMC 2019 demonstrated the positive impact of contrast, echocardiography with DEFINITY in intensive care unit patients as compared to IC, you patients who received echocardiography without contrast.
The study findings showed improved clinical management and decreased length of stay in IC patients receiving DEFINITY enhance echocardiography versus non contrast echocardiography patients.
I see you patients are often difficult to image due to their medical conditions 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.
Now moving onto our ongoing initiative to build a specialized manufacturing facility for DEFINITY and potentially other styrofoam vial product at our North America 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 a 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 2020 one.
Finally 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 micro about the franchise, we remain confident in DEFINITY future.
Turning to our nuclear pipeline and to eliminate 11 95, as we mentioned in our last call. We are designing two phase three clinical trials for the diagnosis and management of neuroendocrine tumors in pediatric and adult population respectively.
During the second quarter, the FDA granted us an orphan drug designation for the use of 11 95 in the management indication.
With respect to business development effort earlier this quarter, we announced entering into a strategic collaboration and licensing agreement with Nanomabs Technology Limited a privately held biopharmaceutical company focusing on the development of next generation Radiopharmaceuticals for cancer precision medicine.
Under the collaboration agreement Lantheus license Nanomabs and a one a development stage imaging biomarker, which identifies tumors expressing PD L. One.
Although PD L. One 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.
And no one will be provided by Lantheus to pharmaceutical companies Academical medical centers and other researchers and then a one may be used to optimize clinical trial design of early developmental stage PDL, one immuno immuno oncology agents by identifying patients most likely to benefit from these therapies.
We are excited about this opportunity as we believe Nanomabs 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 PDL, one based therapies, especially in patient selection stratification as well as predicting drug response.
We are projecting that we will file a dms with the FDA in the first quarter of 2020 and are currently talking with potential customers will have a better understanding of the market potential as we progress and we'll keep you updated.
Our agreement with Nanomabs, along with our previously announced collaboration with Sarah vast allow us to leverage our core competencies, namely our commercialization capabilities in nuclear isotopes and our expertise in micro levels I'm excited to see where these collaborations go.
Our unique opportune 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 because simply press star one on your telephone keypad.
First question is coming from the line of Brad Denhoy from Jefferies Go ahead. Please.
Hi, good morning.
Good morning, guys running Raj.
Good morning, Good morning, I Wonder, if maybe I could start a little bit on the.
Molly supply issue in the quarter, just just so we understand what's your.
So just can we do to the model. So this the 20 million or so you had 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 is that the right way to think about it.
Roger I think Thats exactly as you think about it.
When I look at the models that are out there I noticed that theyre running probably right around $26 million or so for third second and third quarter and you saw our result isn't as you just pointed out in yeah, you'd probably see that number may be slightly lower than that number in Q3, but that that would be exactly how you should.
The model.
Okay.
Maybe kind of a broader question on kind of the moly supply issue right. Because this isn't the first time, we've had these issues right over there over the years they come up pretty regularly and I guess I'm curious what's your current views on our on the sort of fragility of the supply right and what it sort of doing to this market and demand and then ultimately.
You know, what it's doing to your competitive position because curian.
Again that they're not as public as you guys are about what goes on there but.
When you have a supply outage, they sort of backfilling with with supply and so 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 Robin I'll try to take them all in if I Miss any you can help me re address what I mean is there but to your first question about the overall market and whether the 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 and so.
When we see the shortages.
Our focus is to get the communication out as early as we can downstream to our customers. So they can get the supply they need and you're right. It's got to come from our competitor.
But ultimately the adequate supply is available if it can be to make sure. The patients. So the studies in that that's got to be kind of 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 we have had issues and I think we would say over the last year and a half we've had we've seen issues that we have not seen kind of fungicides.
In a way that we have not seen due in years past.
And what I'd like to say is coming out of this period that we see that we'll still last through the third quarter and I think Bob you do well there so coming out of the third quarter and coming into the fourth quarter, we see a period of stability. Starting now we hope that will will last and 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 not to have a fairly significant overhaul on a reactor that is a fairly young reactor and then you will also have an end now up and running literally a brand new processing facility.
And we will have 30% more capacity. So you will have then in the supply chain to Mount the worldwide Molly supply chain. This fairly attractive combination of reacted as just in very nicely overhaul and a brand new processing facility with a lot of capacity and now probably the most attractive payer in the in the worldwide supply chain and for us with that boost our confidence in again is our diversification strategy, which is what we built our Molly supply strategy on initially once noridian.
Announced that they were 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 and still had in in trying to transition from their prior processing facility to their new processing facility would coincide with NTP struggles in coming back up to speed, but it happened and we are dealing with it but again, we have confidence coming out of it.
Your comments about our competitive position is also you know it's a fair one that's that's my issue to deal with as you know we are contracted we have been contracted are our customers believe very strongly in having balanced supply.
Because we are.
We are essentially two competitors, we are contracted two of our contracts already last past 2019, I have two contracts I will re negotiate for 2020 and I will go to the table with my customers and I will present, what will be my best efforts to maintain our competitive position and I'm confident in that as well.
Anything I Miss there Ross no no I think that that hit it all of it.
Maybe just as a follow up to that competitive question you're right. So the.
As you mentioned there are only a couple of contracts rate four or five contract you work on in this market.
As you've had these issues right and again to your point there have been a little worse than in times past, how does that influence those negotiations with your customers about these contracts.
It.
I would say in some sense no rush on in constant communication with my with my customers.
And so it's an ongoing conversation it's become a weekly conversation because we're always talking about what why we're getting to them and how we're getting it.
To them and so they are well some data points I just made to you our points I've been on been making to them.
And in some in some ways, they're very aware of what the Molly supply chain looks like and so some of the very points I just made to you about what we see as the emerging strength. So that was the re emerging stability of the modeling supply chain. They are very well aware of as well.
Okay and just one last one for me just to you have talked a little bit about.
Other sources right so looking to.
Partners like Shine for instance, here domestically.
Is there any update you have on that in terms of when when that might come online or other other.
As you can sort of.
Prevent these kinds of shocks from recurring.
So shine just had it.
An announcement the other day, they announced that they.
They received their license I'm, sorry that I'm blanking on specifically what licenses I can send you the link on it because it was a public press release, but that's not an answer for 2020 that is that definitely is there for the 20 to 23.
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, and so I think.
As we sit here today, we are looking at the fourth quarter and beyond and we're looking at our strategy being the partners, we have which are and so NTP, an IRA and I didn't mention in part of the as I gave you, but IRA has been a stellar partner for us through this whole period, we have upped our access to them and theyve up their delivery to us and we've we've done everything we can as including changing out our manufacturing schedule to optimize it every carry that we can get our hands on turns into a period that we put into a generator changing on our days of the days of the week on manufacturing and then the logistics out to customers.
To ensure that we can get everything we that we get our hands on out in the form of January to a customer.
Okay was there they are operating license with the NRC that they that they filed for that they announced shine earlier this week.
Okay very good well leave it there thank you.
Thanks Raj.
I'd like to remind everyone to ask a question that 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 partnership can you provide a little bit of an update on Sarah vast as well as I suppose your PDL. One that you mentioned I guess, what sort of contribution in terms of magnitude as well as in terms of timeline. When do you think that would materialize more meaningfully thanks.
Sure. So erinn, 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 or early stage. This at this point, especially service. They are certainly early stage in their development program.
And that will be a royalty stream back to us when it does.
Materialize and they will file 2020 three is what they're what they're projecting at this time would be the earliest approval and then a one will be a revenue of partner revenue source for us as we begin to.
Place the biomarker into early dividend.
Stage developmental trials and so 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 out who might access the biomarker from us.
And so thats, probably something that I would 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 and can you provide what the next development catalyst for you on the R&D front would it be the Lv AFE clinical programs and and what could we hear next on that front end and can you given an update on the timeline there as well.
Sure. So it's absolutely is in time from a time perspective Adobe he asked.
And the next milestone you'll hear there will be.
Completion of patient enrollment, which we have projected will end by a complete by the end of this year, but when it is finally complete as I mentioned earlier, we're about 80% complete on the first of the phase three that 66% complete on the second phase three but when we're 100% complete.
And weve locked enrollment.
Last patient in all announced that we reject that lead by end of the year and then the development point after that will be the filing of the of the San Diego that will be the milestone after that.
And then probably as that will be the either the FDA acceptance of the NDA or the approval.
Depending on on which we see the other milestones you'll hear from me about our the related to the element elements of a 95 neuroblastoma trial in pediatrics and adults.
You'll probably hear me talk about the.
The phase three.
Trials the development of the protocols, perhaps the acceptance of the protocols I announced today that we had gotten received orphan indication status from the FDA for that so that was a significant milestone from us. So that's the other program that you're likely to hear from.
Okay period as as art.
Thanks.
Any other questions Aaron.
No I'm good. Thank you so much.
You are welcome.
The other question coming from the line of Larry Solow from CJS Securities Go ahead. Your question. Please.
Great. Good morning, Thank you.
Just to clarify on Sean I think they filed.
[noise] their permanent with with the nuclear regulatory Commission. This week, so again and they say up to two year approval. So that would be early 22.
But that's that's that's it for the public service announcement.
[laughter]. Thank you Larry Yes, my pleasure.
A question just on.
Obviously, DEFINITY and then on the tunnel itself I think is pretty well split good about some other nuclear I realize you Don is a big piece of that that's been coming down.
She does stabilize over time or does that.
It's a small piece of your business, but does that category sort of continuing to sort of slow down or should stabilize as we look out.
Hey, Larry it's Bob.
I would I would tell you that I think that you're you're absolutely right again when they also look at the model to also noticed 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 the non 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 to us out to the market last may.
In last Q3, and four and one and now too we've seen the impact of that coming into what we should start to see is a sort of a as the comps as you get into the back half of the year and then into 2020, yes, it would become a much more stable.
Type of business, which you know is going because contractual and we would expect to be able to work with our partners in terms of stabilizing that level.
And hopefully grow it.
Overtime.
Okay, great. Thank you.
Any other questions Larry I know not all set thank you okay.
Operator.