Earnings Call Transcript - ANIP Q4 2020

Operator, Operator

Good morning, and welcome to today's program. My name is Maria, and I'll be your conference operator. At this time, I'd like to welcome everyone to ANI Pharmaceuticals Fourth Quarter and Year End 2020 Earnings Results and Business Update 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 conference call is being recorded today, March 9, 2021. It's 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, Maria. Welcome to ANI Pharmaceuticals Q4 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, President and Chief Executive Officer and Steve 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 at anipharmaceuticals.com. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on March 9th, 2021. 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'll turn the call over to Nikhil Lalwani.

Nikhil Lalwani, CEO

Thank you, Lisa. Good morning, everyone, and thank you for joining our call. I'm very pleased to be here to update you on our recent progress and to set forth for you my plan to drive sustainable growth for ANI. This morning, we announced the acquisition of Novitium Pharma. I'll share the details and the value of this important transaction in a few minutes. COVID-19 continues to impact just about every aspect of our personal and professional lives. The impact continues to be felt throughout the pharmaceutical industry, and our team has been focused on managing our business through these challenges. I remain grateful and proud of 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 in need. Our established brands business experienced the greatest impact from the constraints imposed by the pandemic, and our full year results reflect a significant dip commencing in March of last year. Steve will provide the full details of our financials, including 2021 guidance in a few moments. As promised, I will now take you through my strategy to deliver sustainable future growth and create value for our shareholders, while most importantly, serving patients in need. During the past six months, I have taken time to understand the evolving biopharma market dynamics, potential market opportunities, the approaches developed by other players, and ANI's current competitive position. This has helped me crystallize how to build ANI into a successful and sustainable biopharma company and to maximize value for current shareholders. Let me now walk you through the four key pillars of our growth strategy. Our top priority is building a successful Cortrophin franchise. Our goal is to submit as robust a package as possible, one that gives us the highest degree of confidence that it will be accepted and ultimately approved by the FDA. Over the past few months, we have actively engaged with the FDA to refine the regulatory path forward. Accordingly, we have made refinements to what we will submit. Based on the refinements, we now believe we are well positioned for resubmission in Q2 of 2021. In addition, we have increased our manufacturing batch size to match our commercial aspirations. Although this impacts our timeline by one quarter, we believe it will result in a more comprehensive and robust re-filing to ultimately support approval of Cortrophin. In fact, as part of the Novitium acquisition, the Cortrophin re-filing approach has been evaluated by prominent regulatory firms outside of the one that we're currently using and other consultants, and they have each given the thumbs-up to the Novitium sellers and Ampersand Capital Partners. To strengthen our commercialization efforts around Cortrophin, we recently brought on Chris Mutz as Chief Commercial Officer and Head of Rare Diseases. He has been tasked with leading the Cortrophin commercial franchise, including our launch strategy and commercial plan. He brings deep experience in the successful commercialization of rare diseases at both Alexion and Merck, and we look forward to his leadership and guidance of this important franchise. The second pillar to our growth strategy is strengthening our generics business by enhancing development capabilities and increasing focus on niche opportunities. The acquisition of Novitium Pharma announced this morning for $163.5 million is an important step towards achieving this goal. Let me share some of the compelling reasons that led us to do this transaction. First, Novitium creates a sustainable generics growth engine with over 25 anticipated product launches in 2021 and 2022, including products with competitive generic therapy designation. Furthermore, they have 21 ANDAs on file with the FDA and more than 30 additional products under development. Their leadership team has an excellent track record of execution and efficiency from filing to launch. Importantly, they are currently advancing three 505(b)(2) candidates in oncology and hypertension. These products will enable us to build on ANI's increasing focus on niche opportunities, including a Paragraph IV filed in 2020 and the anticipated filing of injectables this year. The transaction will also serve to expand our manufacturing footprint and enhance the scale of our CDMO business. Novitium adds nine new customers to ANI's growing CDMO business. Novitium has a 50,000 square foot facility for finished dose, R&D, commercial manufacturing, and packaging right here in New Jersey, with a further 20,000 square feet expansion plan. Novitium's annual production capacity is approximately 2 billion units across tablets, capsules, liquid suspensions, solutions, powders for oral suspension, controlled release, and potent compounds. The third component of our growth strategy is to maximize value within our established brands portfolio through continued programmatic business development and use of innovative market access and go-to-market strategies. The environment continues to provide good opportunities which leverage our existing brand infrastructure. Additionally, we have been adopting innovative programs that expedite the resolution of prior authorization issues and digital tools for engaging prescribers and reducing patient burden. The fourth pillar of my growth strategy is to expand our CDMO business, leveraging our unique North America-based manufacturing capabilities. I just shared how the Novitium acquisition expands our customer base and enhances the scale in manufacturing capacity. I believe we could leverage our fully contained high potency facility that can manufacture hormonal steroid and oncolytic products in Baudette. Our ambition will be delivered by our collaborative, purposeful and empowered team members with a high-performance orientation. Our strong internal talent pool, complemented by targeted external hires, will accelerate our growth. Our recent hires of Chris Mutz, Ori Gutwerg, and Davinder Singh have all hit the ground running from day one. Finally, we are taking steps to strengthen our capital structure with new credit facilities and a PIPE. We will share the details with you shortly. This capital structure further facilitates the achievement of ANI's aspirations. In summary, we have a clear growth strategy and have already taken a major step towards that goal with the acquisition of Novitium and a clear plan laid out for refiling Cortrophin Gel in Q2 of 2021. With that, I'll turn the call over to Steve to discuss our Q4 financials as well as provide guidance for 2021.

Stephen Carey, CFO

Thank you, Nikhil, and good morning, everyone. And thank you for joining us on this exciting day in ANI's evolving growth story. Net revenues for the fourth quarter of 2020 were $57.3 million versus $48 million in the fourth quarter of 2019, principally due to increases in sales of our generic products. Sales of our generic products were $38.7 million during the fourth quarter, an increase of 32.7% as compared to the $29.1 million for the same period in 2019. The increase primarily reflects the January 2020 launches of Paliperidone, Miglustat, Mixed Amphetamine Salts, Tolterodine, Bexarotene, and other products acquired from Amerigen; the January 2020 launch of Potassium Citrate ER; and increased revenues of Candesartan. These increases were tempered by decreases in revenues of Ezetimibe Simvastatin, EEMT, and Methazolamide. Net revenues for our branded products were $15.8 million during the fourth quarter, an increase of 0.9% compared to the $15.6 million for the same period in 2019, primarily reflecting increased revenues of Inderal LA, which were tempered by a decrease in unit sales of Innopran XL. Our cost of sales, excluding depreciation and amortization, increased by $6.7 million to $24.5 million in the fourth quarter of 2020, primarily as a result of increased volumes during the quarter including a shift in product mix towards generic products, and an increase in sales of products subject to profit-sharing arrangements coupled with fourth quarter 2020 inventory reserve charges. The increases were partially tempered by the non-recurrence of the fourth quarter 2019 inventory reserve charges related to our exit from the market of Methylphenidate Extended Release. Cost of sales as a percentage of net revenues increased to 42.9% during the fourth quarter of 2020 from 37.1% during the same period in 2019, primarily due to the same factors previously discussed. Research and development expenses decreased in the fourth quarter of 2020 to $3.7 million compared to $4.7 million in the fourth quarter of 2019, primarily due to a decrease in expense related to the Cortrophin re-commercialization project and the non-recurrence of 2019 milestone expenses related to Bretylium. We recognized Cortrophin prelaunch inventory charges of $3 million in the fourth quarter of 2020 compared to $6.5 million in the prior year quarter. Adjusted non-GAAP EBITDA of $17.2 million was essentially flat as compared to last year, down $200,000. As detailed on Table 4 of this morning's press release, our adjusted non-GAAP diluted earnings per share is $0.80 for the quarter as compared to $1.08 in the prior year period. As of December 31st, we had $7.9 million of unrestricted cash and cash equivalents. Total net debt as of December 31st increased to $179.1 million as compared to $171.4 million as of the September 30th balance sheet. This figure represents 2.7 times net leverage on a trailing 12-month basis. As highlighted in this morning's press release and in Nikhil's comments, we are very happy to announce our plans to acquire Novitium Pharma. Upon close of the transaction, we will pay day one consideration of $163.5 million comprised of $89.5 million of cash and approximately $74 million in equity to the selling shareholders. The transaction is structured to contain additional contingent consideration of up to $46.5 million or a total potential transaction value of $210 million. Of this amount, $25 million of the contingent consideration may be earned in the first 24 month period post close, based upon the achievement of certain financial and FDA filing metrics. In addition, up to $21.5 million may be earned in the form of royalties on sales of certain 505(b)(2) products anticipated to be launched in the future. In conjunction with the transaction, we have secured committed financing in the form of a $340 million senior secured credit facility that has been committed by Truist Securities. This facility will be anchored by a $300 million syndicated term loan B and a $40 million revolver. In addition, we have secured a $25 million PIPE investment from Ampersand Capital Partners. This PIPE will be in the form of convertible preferred equity. The transaction is subject to approval by ANI's shareholders and clearance by the Federal Trade Commission. We currently expect the transaction to be completed in the second half of 2021. In conjunction with today's announcements, we are re-instituting annual guidance. It is very important to note that the following guidance figures assume that total U.S. pharmaceutical prescription activity continues to rebound to pre-COVID-19 levels. Any further COVID related depression of physician and script activity will materially impact the Company's ability to reach the following goals. In addition, the following guidance figures assume the completion of Cortrophin-related R&D activities and the initiation of Cortrophin sales and marketing related activities. These are key milestones as we progress towards our goal of bringing Cortrophin to market. With that said, we currently anticipate ANI's standalone net revenues for 2021 to be in the range of $207 million to $218 million; adjusted non-GAAP EBITDA of between $60 million to $65 million, and adjusted non-GAAP diluted earnings per share to be in a range of $3.30 to $3.59 per diluted share. For illustrative purposes only, these figures on a non-GAAP pro forma basis, assuming a full year of forecast 2021 Novitium performance would translate to approximately net revenues of between $277 million and $294 million and adjusted non-GAAP EBITDA of between $85 million and $95 million. With that, I'd like to turn back to the operator to now open the call for questions.

Operator, Operator

Thank you. Our first question comes from the line of Brandon Folkes of Cantor Fitzgerald.

Brandon Folkes, Analyst

Hi, thanks for taking my questions and congratulations on the acquisition. Maybe just two from me. Any additional color you can provide on the earn-out? Is this sort of across a broad swath of products you're acquiring in this acquisition or is it more heavily tied to one or two products? And then secondly, now you're bringing an R&D engine and I think that's the right thing to do, so congratulations there. But how do we think about balancing investments in R&D going forward with the need to invest in the commercial infrastructure for Cortrophin? And I assume it's too early, but anything you can say about your assumptions around investment required for Cortrophin's commercial infrastructure would be great. Thank you.

Nikhil Lalwani, CEO

Yes. So Steve, maybe I can start and you can jump in. Yes. So, thank you, Brandon, for your question. First one, on the earn-out, they are not related to one product. They are in fact related to the entire portfolio and is meant to do two things. I think one is meant to recognize and reward the performance from the pipeline that is about unlocking or that is unlocking as we speak for Novitium. And then second, you know a part that we're very excited about, when we talk about this R&D engine, we're really talking about the magic of Samy, Chad, Vijay and their teams. And this is a way for them to, again, be recognized and rewarded for continuing to perform as they join the management team of ANI. So that's what the earn-outs are for. The second question regarding investment in the R&D engine versus investment in Cortrophin. Look, as you heard, we are ready to refile in Q2. We have brought Chris Mutz on board, and he is refining the commercial game plan, and I think we will have a little more to share about our investments for Cortrophin as we go forward. Having said that, we have factored in a certain level of spending on Cortrophin in the EBITDA guidance that Steve just shared.

Stephen Carey, CFO

Yes, I would like to add to that, Nikhil, to further unpack Brandon's question. Good morning, Brandon, and thank you for your thoughtful questions. Regarding our future R&D investment, the acquisition of Novitium Pharma and establishing a Center of Excellence to drive growth for ANI Pharmaceuticals has been a strategic priority for some time. We are eager to continue investing in generic R&D. Post-acquisition of Novitium, we expect our spending to become more efficient, as the founders and employees of Novitium have a strong track record in optimizing R&D expenditures. The synergy between Novitium's R&D expertise and ANI's established excellence will create significant value in the future, and we look forward to allocating R&D funds between our combined team at that time. Additionally, concerning the investment in Cortrophin and SG&A, we recognize the importance of making key hires like Chris and supporting the Cortrophin SG&A efforts, which marks a crucial turning point. Deciding when to increase SG&A spending for Cortrophin has been a challenging internal discussion as we have progressed with the redevelopment program. We are confident that the management team is now ready to invest in SG&A for this program. Finally, regarding the financing for the Novitium transaction, while securing funding for the acquisition was our top priority, we also expect to gain some benefits from transitioning to the term loan B market. We believe this will result in a more flexible financing structure, which is important as the management team addresses multiple needs currently. The term loan B structure will provide the team with more room to maneuver while maintaining a focus on leverage ratios, which has always been a core principle at ANI. I hope this clarifies our approach.

Brandon Folkes, Analyst

That does. Thank you to both of you. That was very helpful.

Operator, Operator

Our next question comes from the line of Elliot Wilbur of Raymond James.

Elliot Wilbur, Analyst

Thanks, good morning and congratulations on the transaction. I know that the establishment of internal product development capabilities has been a long-running goal of the Company; so congrats on finally completing that piece of the puzzle. I have a couple of questions. With respect to Novitium, but first I want to ask a question around Cortrophin and the revised timeline. I guess, there's not a lot of surprise that the company at some point chose to meet with the FDA in advance of the filing. But it seemed like that opportunity was on the table following the Refusal to File development last year. So, I'm wondering what has changed with respect to prompting the Company to sit down with the agency. And then, Nikhil, thinking about the commercialization strategy behind the asset, you recently brought in some new talent in terms of leadership with experience in the branded and the rare disease area. The strategy originally behind Cortrophin was more of a price strategy to lead with aggressive discounting and the product would sort of sell itself on that basis. And I'm wondering if that thinking maybe has changed or evolved now that you've had fresh eyes sort of take a look at the strategy?

Nikhil Lalwani, CEO

Got it. Well, thank you for that question, Elliot. So, I guess I'll answer your questions on Cortrophin first. Regarding the meeting with the FDA, look when we got the Refusal to File, as we've explained in the past, Pat had done this when he was the Interim CEO, is that we spent a lot of time first just analyzing the file ourselves and saying what could we have done better. And what we found, and you know we brought in a strong external consultant or consultants to help us do a full gap analysis on the submission that we had made, and what they found was that there were a number of things that we could have done better in the file itself. So it's not just the points that were there in the FDA Refusal to File letter, but it was also other gaps that they had identified. And so, at that point, we restructured our internal team and we started addressing those gaps. Now when we start addressing those gaps, we realized that there are a few questions that would be helpful to get FDA's guidance on before we refile. So rather than making assumptions, we had a Type B meeting with the FDA, and we've also had engagement with the FDA since then to understand and refine our understanding of what will make a robust package to submit to the FDA and that's what's driving the slight shift in timeline for the Cortrophin refiling. That was in terms of the meeting with the FDA. The second question on commercialization, you're absolutely correct. Our approach to commercialization of Cortrophin will be holistic. Market access and pricing will only be one component of the commercialization approach. I know that our competitors or competitor Mallinckrodt is likely trying to figure out what exactly we're doing. And therefore, I would like to not give further color on what our approach is, but you should be assured that the approach will be a more holistic approach rather than one of just price discounting.

Elliot Wilbur, Analyst

Okay. And then I wanted to ask a couple of questions around the Novitium transaction as well. I guess just simplistically, expect that business to contribute or to generate roughly 25 new launches in 2021 and 2022, they obviously have 21 ANDAs pending. So there is some already approved products that are going to be launched, but how many of those pending 21 ANDAs are embedded within the expectations for the 25 launches? And then question on the EBITDA expectation for the second half. I'm assuming that's just a sort of base Novitium number. Obviously wouldn't have the benefit of any potential cost savings or synergies from combining the two companies. So I wanted to confirm that. And can you give us a sense of where they are currently in terms of EBITDA? What has to happen in terms of the approval cadence for that $15 million number to happen? And then, one final question. I know you mentioned that several members of the management team of Novitium are going to be joining ANI. I know that management team is quite well regarded in the industry. So I'm wondering what type of commitments you've been able to secure from them. Given they seem to have a fairly significant residual stake in the combined company, I'm assuming they'll stay on board for some period. But if any color you could share there would be appreciated. Thanks.

Nikhil Lalwani, CEO

Got it. Let me start with your last question first, regarding the commitment. Our goal, alongside Chad, Samy, Vijay, and the rest of the team, is to create a unified organization that will grow and succeed together. We believe that Samy, Chad, Vijay, and the team will remain with us for several years, which shapes our view of the partnership. They hold significant equity in ANI moving forward after the transaction closes, along with earn-outs, providing strong incentives for them. However, their impact will extend beyond that. Steve mentioned our R&D Center of Excellence, and our robust internal R&D capabilities will be further enhanced, allowing us to operate as a unified development engine going forward. Regarding your second question about the launch plans, we are sharing an indicative range for the anticipated launches. This team has consistently delivered results, and we have consulted with them to understand their launch timeline expectations. While we anticipate some adjustments, this has been incorporated into the estimated 25-plus launches. At this stage, we will also reevaluate our overall portfolio to determine the most value-generating collection to advance. We will ensure that the filed ANDAs are launched, and there’s an earn-out tied to the filing of ANDAs that the teams will collaboratively finalize, allowing the portfolio to evolve over time. Your second question was about R&D synergy, correct?

Stephen Carey, CFO

Yes. Nikhil and Elliott, I’d like to add that in many acquisitions and mergers, the other party can often be somewhat unknown, which can lead to value loss post-transaction due to cultural differences. In this case, a significant advantage of this deal is that both ANI and Novitium's management teams are very confident in their cultural alignment. Our teams are well aware of the differing management styles, making it a natural fit as we unite the two organizations. This synergy is expected to enhance our combined team's ability to achieve future success.

Operator, Operator

Thank you. Our next question comes from the line of Dana Flanders of Guggenheim.

Dana Flanders, Analyst

Great, thank you very much for the questions. I had a couple that I'll just ask upfront. And so, my first one is just with the acquisition, Nikhil, can you talk about kind of the expectations for the number of ANDA filings that you expect to be able to file with the FDA going forward? And you talk about focusing on niche opportunities, are there particular, any dosage forms that you're seeing kind of better opportunities across the space and does that align with your capabilities? I mean, I know you mentioned filing an injectable product, some Paragraph IV opportunities. Just kind of curious how you're thinking about the types of opportunities across generics with your capabilities now? My second question was wondering if you could provide any more color on the 505(b)(2)s that they have in the pipeline and if you expect that to be a bigger focus for your R&D engine going forward? And then my last one was hoping you could elaborate a little bit on the CDMO strategy you're putting into place. I know with this acquisition, you're adding some new customers. It seems like they have an ongoing expansion at their facility. The CDMO space is obviously very attractive. How much capacity are you bringing on with this acquisition and talk about the strategy to continuously add new customers going forward and just what that could look like for ANIP? Thank you.

Nikhil Lalwani, CEO

Thank you for your questions. I'll address them one at a time. Regarding the ANDA filings, we anticipate being in the range of 15 filings. It's important to evaluate our combined portfolio and consider its potential. Novitium has a highly effective team focused on execution and efficiency, while ANI has a successful history of launching high-value products. Therefore, our focus will be on the value of the ANDA filings rather than just the quantity. I expect the number of filings to be in the 15-plus range. As for niche areas, prior to the Novitium acquisition, we began exploring additional niche areas through our business development efforts. We are currently pursuing a group of injectable ANDAs in collaboration with partners, rather than at our own facilities. We also initiated our first Paragraph IV filing at the end of 2020 and are actively searching for similar investment opportunities. Concerning our 505(b)(2) pipeline, Novitium is concentrating on oncology and hypertension, focusing on dosage forms and addressing unmet medical needs. We have multiple programs underway, and improving our capital structure will enable further investment in these opportunities and the expansion of our 505(b)(2) business. We also engaged a financial partner, Ampersand Capital, which was a strategic choice. Finally, regarding CDMO, there is significant potential not only at Novitium but also at our two sites in Baudette and our site in Canada. We have substantial capacity available to grow the CDMO business. Our goal is to identify attractive and durable CDMO opportunities. I mentioned in my prepared remarks the unique capabilities of our hormonal and oncolytic facility in Baudette, which we plan to leverage as we focus on expanding our CDMO operations.

Operator, Operator

Our next question comes from the line of Elliot Wilbur of Raymond James.

Elliot Wilbur, Analyst

Steve, can you provide some commentary on the interest rate for the new credit facility? Also, I didn't catch the timeline for the second tranche of the earn-out structure related to the 505(b)(2)s. I know the first part is within 24 months, but is there a timeline for the 505(b)(2)s? Additionally, Nikhil, how should we view the integration of Novitium and its pipeline with the 90 plus ANDAs in the ANI library? What is the real opportunity there? Does acquiring Novitium allow you to monetize those assets more quickly than before? I'm trying to understand how the acquisition may have added value to those legacy assets. Thank you.

Stephen Carey, CFO

Yes, absolutely. To begin, Elliott, regarding the transition to a term loan B structure, it’s important to note that this will be the first time ANI undergoes the rating agency process and a syndicated approach for the debt. We are eager to collaborate with the leadership at Truist on these pathways. For our planning purposes, and subject to change based on future developments, we expect to have an all-in interest rate around 5.75% for the term loan B. Regarding the contingent consideration, you are correct that the first tranche tied to financial performance and FDA filing metrics will be evaluated in the 24-month period after closing. The second tranche of potential earn-outs related to the 505(b)(2)s will be structured as a traditional royalty on those products. This means that when the products are launched, royalties will accumulate for the selling shareholders of Novitium, and they can potentially earn up to $21.5 million in cash over time, with a timeframe that can extend up to 10 years. Nikhil, I believe the last part of the question might be for you.

Nikhil Lalwani, CEO

Thank you, Steve. It's interesting that you asked that question, Elliot. During our discussions about opportunities, we have identified at least two products from our collection of dormant ANDAs that Samy and the team at Novitium believe can reach the market much more quickly. This process has already started as part of a separate co-development deal. While not all 90 dormant ANDAs hold the same value, our plan definitely includes accelerating the time to market for those that are needed and valuable.

Operator, Operator

And ladies and gentlemen, we've reached the allotted time for questions, I'd like to turn the floor back over to Nikhil Lalwani for any additional or closing remarks.

Nikhil Lalwani, CEO

Thank you, Maria. So look, this is a very exciting and active time for ANI. We weathered a difficult year and believe that we are well positioned to take advantage of opportunities as the headwinds from COVID begin to dissipate. We feel confident that we have established a clear regulatory path forward for Cortrophin, our top priority. We are thrilled to acquire Novitium, a well-run company with a portfolio that immediately gives us an established R&D engine and contributes to our EBITDA. We believe that the future is bright. As always, we appreciate your support as we accelerate our growth plans and bring high-quality medications to the patients who can benefit. Thank you all for your time today.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.