Earnings Call Transcript - ANIP Q3 2020

Operator, Operator

Good morning. And welcome to today’s program. My name is Nicole, and I will be your conference operator. At this time, I would like to welcome everyone to the ANI Pharmaceuticals Third Quarter 2020 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. As a reminder, this call is being recorded today, November 5, 2020. It is now my pleasure to turn the floor over to Ms. Lisa Wilson, Investor Relations for ANI Pharmaceuticals. Please go ahead.

Lisa Wilson, Investor Relations

Thank you, Operator. Welcome to ANI Pharmaceuticals Q3 2020 earnings results call. This is Lisa Wilson of In-Site Communications, Investor Relations for ANI. With me on today’s call are Nikhil Lalwani, our new President and Chief Executive Officer; and Stephen Carey, Chief Financial Officer of ANI. You can also access the webcast of this call through the Investors section of the ANI website at anipharmaceuticals.com. Before we get started, I would like to remind everyone that any statements made on today’s conference call that express a belief, expectation, projection, forecast, anticipation or intent regarding future events and the company’s future performance may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to ANI Pharmaceuticals’ management as of today, and involve risks and uncertainties, including those noted in our press release issued this morning and our filings with the SEC. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. ANI specifically disclaims any intent or obligation to update these forward-looking statements, except as required by law. The archived webcast will be available for 30 days on our website anipharmaceuticals.com. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on November 5, 2020. Since then, ANI may have made announcements related to the topics discussed, so please reference the company’s most recent press releases and SEC filings. And with that, I will turn the call over to Nikhil Lalwani.

Nikhil Lalwani, President and CEO

Thank you, Lisa. Good morning, everyone, and thank you for joining our call. It is an honor to be with you today in my role as President and CEO of ANI Pharmaceuticals. Before we dive into our third quarter results and business update, I’d like to express my appreciation to essential workers, healthcare providers, first responders, teachers and scientists everywhere for the unstinted efforts during the COVID-19 pandemic. I am also grateful for the strong commitment shown by our ANI team in conjunction with our customers, suppliers and manufacturing partners to ensure that we continue to supply medicines to patients. Let me also share a little bit about my background, why I joined ANI and some initial thoughts on ANI’s promising opportunities. I have been in the healthcare industry for roughly two decades, with the majority of that time spent on specialty pharmaceuticals. Prior to joining ANI in September, I held several roles at Cipla, most recently as CEO of Cipla USA, where I oversaw a period of rapid growth. My experience spans branded products, generics and CDMO business lines, and functionally, my responsibilities have included multiyear strategic planning, accelerating growth through M&A and business development, portfolio development and commercialization, and overall, P&L and balance sheet optimization. I have also worked very closely with the FDA on the launch of several complex products. These broad functional and leadership experiences in biopharma are immediately relevant here at ANI. I consider myself to be a growth-oriented leader and I am proud of my track record of building cohesive and productive teams that deliver results. All of which I believe align with ANI’s goals, which brings me to why I found the ANI opportunities so attractive. I see enormous capacity for growth, both organically and inorganically, and the potential to build on the core strength of the business. ANI has a significant opportunity with Cortrophin Gel. I will discuss that more in a few moments. ANI has a diverse portfolio of commercialized branded and generic products and a robust portfolio of ANDAs, several of which have limited competition. We also have a strong North American manufacturing footprint that has become more valuable and can be leveraged further, both through serving commercial customers, CDMO clients and the U.S. Government. Manufacturing includes a high potency hormone facility in Baudette. And lastly, we have a very strong track record in finding accretive, inorganic, branded generics and CDMO deals to support the organic growth. In my first two months since joining ANI, I have invested a great deal of time starting Cortrophin and familiarizing myself with the intricacies of the supplemental New Drug Application or sNDA. Based on my observations to date, I can confirm that all stakeholders are working toward a successful refiling in Q1 of 2021 and a subsequent launch. In addition, I have worked diligently to better understand the drivers of operating performance, execution, capabilities, talent and culture. I toured the Baudette, Minnesota facility in person and due to COVID-19 constraints, toured the Oakville plant in Canada virtually. I have conducted dozens of one-on-ones and several small group discussions with our team. I have also been speaking with our commercial customers, CDMO clients, key suppliers and other stakeholders. This has allowed me to get a preliminary understanding of where we are strong, where improvements need to be made and what we need to do to realize the opportunities ahead of us. And importantly, moving to third quarter results and business update, we have begun to see some rebound after Q2 in select parts of our branded and generics portfolios. We reported third quarter 2020 net revenues of $53 million, adjusted non-GAAP EBITDA of $17 million and adjusted non-GAAP diluted earnings per share of $0.97. ANI has continued to monitor closely the impact of COVID-related dynamics on our business operations and we have adapted our plans to deal with its impact. Steve will share a more detailed overview of our Q3 results in a few moments. Let me turn now to our work on the Cortrophin Gel program. First, on the regulatory process, we are focused on resubmitting our sNDA in Q1 2021. We continue making significant progress in assembling a robust and compelling package to submit to the FDA. In parallel, we are working on the operational and commercial readiness for launch. We remain confident in both the quality of our sNDA filing and our market access, demand generation and patient support plans for Cortrophin. Before I turn the call over to Steve, I want to share a few final thoughts as I begin my tenure as CEO. First, I truly appreciate the trust placed in me in this role. Together with our Board members, both the longstanding members and our new Board members, we will be laser-focused on driving shareholder returns. I will share our ambition, long-term strategy and operational plan along with the full year 2020 results in February. That said, we are not waiting until February to get started. As I speak, we are evaluating strategic inorganic opportunities, working towards increasing the pace of new launches from our ANDA library, leveraging our manufacturing network further and maximizing value capture from current products, and we remain focused on the Cortrophin Gel refiling and commercialization, placing the necessary resources and attention required as a crucial priority for the company. I will conclude by saying that I am excited to be here. I believe I bring fresh energy and perspectives to ANI, and I will work tirelessly to bring value to our stakeholders, to build relationships between ANI and the investment community and to ensure that patients and prescribers have access to our therapeutics. With that, I will turn the call over to Steve.

Stephen Carey, CFO

Thank you, Nikhil, and good morning, everyone. On behalf of the entire ANI team, we are very excited to be working alongside Nikhil as we continue to build and strengthen ANI. We have already formed a very significant level of partnership and the team is confident as we look to the future. Turning to the quarter, net revenues for the third quarter of 2020 were $53 million versus $51.3 million in the third quarter of 2019, principally due to increases in sales of generic products. Sales of our generic products were $37.7 million during the quarter, up 19% from the same period in 2019, primarily due to the January 2020 launch of Miglustat, Penicillamine and Paliperidone. All of these products were acquired from Amerigen and have continued to perform well. The increases were mainly offset by declines in revenues of Ezetimibe Simvastatin, Vancomycin Capsules and Methazolamide. All of which had increased competition in the period as compared to last year. Net revenues for our branded products were $12.4 million during the third quarter of 2020, down 25% from the prior year period, mainly due to lower unit sales of Inderal XL, Innopran XL and a decline in revenues of Atacand. Our cost of sales, excluding depreciation and amortization, increased by $5.1 million to $20.1 million in the third quarter of 2020, primarily due to increased volumes related to a negative mix towards generic products and increased sales of products subject to profit-sharing arrangements, driven by the products acquired from Amerigen. Cost of sales as a percentage of net revenues increased to 38% during the third quarter of 2020 from 29.2% during the same period in 2019. Research and development expenses decreased in the third quarter of 2020 to $2.9 million, compared with $5 million in the third quarter of 2019, primarily due to a decrease in expense related to Cortrophin as we begin to complete our development efforts. We currently anticipate that Cortrophin related expenses in Q4 2020 will be moderately higher than those of the third quarter, as we continue to focus on our supplemental NDA resubmission efforts. Adjusted non-GAAP EBITDA of $17 million was down $2.8 million from the prior year, principally due to the reduction in gross profit. As detailed on table four of this morning’s press release, our adjusted non-GAAP diluted earnings per share is $0.97 for the quarter, as compared to $1.23 in the prior year period. As of September 30th, we had $17.9 million of unrestricted cash and cash equivalents. Our cash balance is reflective of $21 million of cash flow generated from operating activities during the first nine months of the year and is net of $7.5 million of repayments of Q1 borrowings from the revolver associated with the Amerigen acquisition. Total net debt as of September 30, 2020, increased to $171.4 million, as compared to $164 million as of June 30th of this year. This figure represents 2.5 times net leverage on a trailing 12-month basis. From a capital allocation standpoint, we generate healthy levels of positive cash flow from operations and continue to expect to selectively invest in business development opportunities. Currently, $67.7 million of the $75 million revolver portion of our credit facility remains undrawn and provides us with flexibility in continuing to further pursue business development transactions in the balance of 2020. We continue to closely monitor the impact of the Coronavirus pandemic on our business. While we did not incur significant disruptions during the three months ended, business, financial condition and results of operations due to numerous uncertainties. With that, I will now open the call for questions.

Dana Flanders, Analyst

Great. Thank you very much for the questions. Nikhil, I wanted to just focus in on maybe two comments you said during your prepared remarks and opportunities that you are getting ready for, and two of them were accelerating your ANDA pipeline, bringing those products to market. I was wondering if you could comment on how big of an opportunity for you that is, and I guess, what’s changed across the broader generic market to allow you to do so, are you seeing more stability and stable competition opening up pockets of opportunity? And then number two, you mentioned inorganic M&A. I was curious to get your philosophy on leverage and maybe talk around your strategic priorities out of the gate? Are you focused a little bit more on brands, on generics and kind of what strikes you as particularly attractive as you kind of evaluate the landscape? Thank you.

Nikhil Lalwani, President and CEO

Yeah. Thank you, Dana. So I will take, I think, the three parts to your question. The first one is on accelerating the ANDA. So we have a large library of about 90-plus ANDAs and a pipeline of ANDAs through various acquisitions and BD deals. Several of these products have limited competition and potentially higher value and this is something that we are monitoring on a regular basis, both in terms of understanding what’s happening with the competitors that are on the market, but also in conversations with our customers. And so, we are working to prioritize and accelerate time to market for these launches. This is something that I have done successfully in the past and I will bring that experience here. You then asked about the overall trend in the generic market. And I think there is some evidence of improvement in the slope of the decline. I think COVID has made buying groups more conscious of the quality of the supply in addition to price consideration. The competitive intensity remains high. There are still good opportunities in the sector and with the broad push, regardless of who wins the election, generics will continue to be part of the answer to bringing the cost down of drugs, with 80% plus of U.S. volume in generics and there is a significant push on U.S. manufacturing. And ANI is very well-positioned to capture that with almost 200,000 square feet of manufacturing footprint in the U.S. and another 100,000 square foot of manufacturing footprint in Canada. When it comes to acquisitions, look, the deal environment is very rich, especially those that help us enhance our capabilities and scale. There is definitely more activity right now than there was six months to nine months ago. Having said that, we continue to take a disciplined measured approach to evaluating opportunities that will allow us to enhance our scale and capabilities in branded products, CDMO and generics business lines. This includes pursuing both commercial and pipeline opportunities. And I think the third part of your question, Dana, was on the overall strategic path forward. So, look, as I mentioned in my prepared remarks, I am in the process of conducting a comprehensive assessment of drivers of our operating performance, execution capabilities, talent and culture. I am putting together a map of where we are strong, where improvements need to be made and where the attractive opportunities are in the market for ANI. I will share our ambition, long-term strategy and operational plan along with the full year 2020 results in February.

Elliot Wilbur, Analyst

Thanks. Good morning, and welcome, Nikhil. I am going to ask a couple of financial questions just real quickly, Steve. Specifically, could you just maybe walk through some of the components of operating cash flow trends in the quarter, looks like cash flow from operations was negative $40 million and I am not sure I can see all the elements that necessarily led to that. Just want to get some perspective there? And then any early commentary on 4Q trends, I guess, in light of a resurgence of the pandemic in certain areas? I know that we talked earlier about numbers kind of getting back to pre-COVID levels and sequential growth throughout the year. I am just wondering if that’s still kind of a realistic expectation in the fourth quarter based on what we are seeing currently?

Stephen Carey, CFO

Sure. Good morning, Elliot, and thank you for the insightful question. Regarding the cash flow, I believe you may have misquoted the figures. Instead of the quarter being negative $40 million, it's actually closer to $400,000. Our year-to-date cash flow generation is indeed better than what you mentioned. Cash flow from operations for the first nine months is essentially the same as for the first six months. This situation primarily results from the ongoing effects of the Amerigen acquisition. While we acquired a portfolio of marketed products and instantly integrated them into our sales and marketing group, that portfolio is performing as if we launched those products on January 9th. The strong demand from customers and various launch-related factors have led to a delay in cash flow from these launches. I expect this to change as we move into the fourth quarter and into the first quarter of the following year. Concerning fourth-quarter trends, as you can see from the sequential numbers, our third-quarter results were notably stronger compared to Q2. As discussed during the Q2 call, ANI experienced impacts from COVID-19 that affected our performance across the industry. However, in the third quarter, we've seen a nice rebound in prescription volume sequentially, though it's still not back to pre-COVID levels. The uncertainty around COVID-19, whether in certain areas of the U.S. or nationally, remains a significant factor. We hope to avoid further outbreaks, but it is undeniably a wildcard for the industry and for ANI specifically. Unless there are substantial changes, we remain optimistic about the upcoming quarters while remaining cautious about the ongoing COVID-19 situation.

Nikhil Lalwani, President and CEO

Yeah. Thank you, Elliot. So, look, I think, in terms of growth drivers, Cortrophin Gel is a crucial opportunity for the company. We are preparing what we expect will be a robust package ready for re-filing in Q1 of 2021 and a subsequent launch. So I think that would be growth driver, number one. I think the other areas of growth, which are important to consider is, number one is leveraging the increasingly important U.S. and North America manufacturing footprint, including the hormone facility that we have in Baudette. So this is a manufacturing network that we can leverage a lot more given the increasing important and value that is being assigned to U.S. manufacturing. As we spoke about before, the value capture from bringing accelerated new launches from our portfolio of ANDAs in our pipeline and library, especially those with limited competition will be an important step in maximizing the value capture from our existing branded and generics assets and the CDMO clients. I mean, remember, we acquired the Amerigen business and a number of those products were launched this year. There’s still opportunity to deliver more share and revenues from some of those products and so that’s something that we will look to continue doing. And look, even prior to me showing up, ANI has done a tremendous job of doing very thoughtfully and disciplined executed deals. So we continue to evaluate strategic inorganic opportunities to enhance the scale and capabilities in all three segments, brand products, generics and CDMO businesses.

Elliot Wilbur, Analyst

Okay. Nikhil, can you elaborate on where you see the best opportunities for deploying discretionary capital? Specifically, do you think pure generics, branded assets, or 505(b)(2) products are the best options? Historically, the company has excelled in making high return on invested capital deals in the branded sector by acquiring products that yield significant returns, but these often lack growth. I'm curious about how you are balancing these opportunities against the growing demand from financial markets for evidence of growth, rather than just focusing on high return metrics.

Nikhil Lalwani, President and CEO

That's a great question, Elliot. I have a couple of thoughts on this. First, I want to emphasize that I'm currently evaluating these important issues. As I mentioned earlier, I will share our long-term strategy and operational plans alongside the full year 2020 results in February. I'm committed to maintaining a growth-focused approach, having successfully overseen a phase of rapid growth as CEO of Cipla USA. I'm pleased that the market recognizes and rewards this. I intend to keep delivering strong results and growth, and I'll outline the path to achieving this when we present the full year 2020 results. Regarding your inquiry about capital and resource allocation among our business lines, I will provide more details in February during that announcement.

Brandon Folkes, Analyst

Hi. Thanks for taking my questions, and Nikhil, congratulations on your appointment. You talked about the manufacturing footprint. Can you just give some color in terms of your capacity utilization in those facilities? Is there spare capacity or should we think about you replacing current lines with maybe higher value lines there? And then, secondly, I know, Steve, talked about the undrawn revolver, but Nikhil, how do you feel about your financial flexibility to execute on M&A, as well as potentially invest behind the Cortrophin launch next year? Thank you.

Nikhil Lalwani, President and CEO

Thank you, Brandon. I understand you had two questions. The first was about our manufacturing capacity. I'm pleased to inform you that we have available capacity at all three sites, including those in Baudette and Oakville, Canada. When we discuss utilizing our manufacturing network, it involves increasing utilization, and there are significant opportunities for that. We need to strategize on how to operationalize and capitalize on those opportunities, but there are chances to drive growth by further leveraging our manufacturing network. Now, regarding capital allocation, I’ll start, and then Steve can add. We continue to take a disciplined approach to how we allocate capital across various areas. Cortrophin is a vital priority for ANI, and we have committed the necessary resources to advance this product and plan to keep doing so. As you know, we are preparing for a comprehensive sNDA submission in Q1, and concurrently, we are working on operational and commercial readiness for the launch. This includes strategies for market access, demand generation, and patient support plans. Therefore, Cortrophin remains an essential priority opportunity for ANI.

Stephen Carey, CFO

Sure. I will add that we will continue to approach M&A with diligence and discipline, balancing opportunities with our financial health to avoid excessive leverage. Historically, ANI has pursued EBITDA-generating assets, whether through small portfolio additions or larger initiatives that enhance our organizational capabilities. In this phase, our focus will remain on assets that generate EBITDA and cash flow. Regarding Cortrophin, we are focused not only on a successful regulatory filing but also on preparing our organization for the necessary efforts to launch the product. It's important to note that we are not starting from scratch in terms of capital allocation. In 2020, the company invested about $8 million in prelaunch inventories, and we anticipate spending between $11 million and $15 million for the full year depending on shipment timing. Some of this spend will not need to be repeated before the launch, allowing us to allocate funds toward sales and marketing efforts.

Brandon Folkes, Analyst

Steve, one-follow up, if I may, and that $8 million you referenced in terms of inventory. Is that across the portfolio or was that Cortrophin?

Stephen Carey, CFO

That’s Cortrophin specific, right? So, if 2020 is kind of building prelaunch inventories, I am not saying there will be zero of that in 2021. But I would expect that to moderate as we start to pivot towards SG&A type activities.

Brandon Folkes, Analyst

And then maybe just following up on that, what is the shelf life of your Cortrophin product? I think I thought it has 18 months. So just any color on your shelf life would be great? Thank you.

Nikhil Lalwani, President and CEO

Let me take that, Steve. I didn’t want to say exactly the same thing. But as you are aware, as you will appreciate that from a competitive standpoint, it is best for us not to share specifics of this information right now. We are confident of the quality of our filing and the quality of our product and also this is with the FDA or will be with the FDA and the FDA gets to adjudicate that. So we would prefer to not share specifics on that right now.

Stephen Carey, CFO

That’s right.

Nikhil Lalwani, President and CEO

Yeah. Thank you all for your time today. This is Nikhil again. I appreciate the opportunity to lead ANI. I look forward to getting to know many of you personally to invigorate our regular cadence of communications and to take full advantage of the core strengths of our business. I have every expectation that as we enter this new chapter, we can achieve great things and deliver value to our shareholders. And in these uncertain and unprecedented times, please take care of yourself and your families and friends and stay safe. Thank you for your support.

Operator, Operator

This does conclude today’s conference call. Thank you. We appreciate your participation and ask that you please disconnect your lines.