Lantheus Holdings, Inc. Q3 FY2022 Earnings Call

Good morning, and welcome to the Lantheus Third Quarter 2022 Conference Call. This is your operator for today's call. I will now turn the call over to our host for today, Mr. Mark Kinarney, Vice President of Investor Relations. Mark?

Thank you, and good morning. Welcome to Lantheus' Third Quarter 2022 Conference Call. With me on today's call are Mary Anne Heino, our President and CEO; Bob Marshall, our Chief Financial Officer; and Paul Blanchfield, our Chief Operating Officer. Mary Anne will begin the call with introductory remarks and then turn the call over to Paul for an operational update. Bob will cover our financial results and updated guidance, then we will open the call for Q&A, and finally Mary Anne will provide closing remarks. This morning we issued a press release, which was furnished to the Securities and Exchange Commission under Form 8-K released in the Investors section of our website at lantheus.com. For those of you not on the webcast, you can find the slide presentation in the Investors section of our website under the Presentations tab. Before we get started, I would 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, 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, it's my pleasure to now turn the call over to Mary Anne.

Thank you, Mark, and good morning to everyone joining us. We delivered an exceptional third quarter as we continue to find, fight, and follow disease to deliver better patient outcomes. Our strategy to accelerate growth and diversify our portfolio and revenue streams, which we outlined at the beginning of this year, is succeeding. I am pleased to note we reported revenue of $239.3 million, up more than 134% year-over-year. I'll take a few minutes now to highlight some of our recent progress across our portfolio. Almost 18 months into our launch, we are thrilled that PYLARIFY is firmly established as the leading PSMA PET imaging agent. We are particularly proud of the difference it is making for the U.S. prostate cancer community. With commanding market leadership and continued growth of the overall market, our business has continued to grow even amidst increasing competition. We believe we will see continued growth as more patients and health care professionals become aware of the benefits of PSMA PET imaging and PYLARIFY, in particular. Since our last call, we further expanded our U.S. footprint with additional sites activated for our PRT manufacturing facility or PMF partners, increasing our overall capacity and adding redundancy. Our European partner, Curium, is making progress with their efforts to bring our product to market as the first commercially available F 18-based PSMA PET imaging agent in Europe, having filed their marketing authorization application with the European Medicines Agency in June. Last month, Curium presented top-line results from their pivotal Phase III PYTHON clinical trial at the European Society for Nuclear Medicine or EANM. The trial enrolled prostate cancer patients with biochemical recurrence who underwent definitive radical prostatectomy, external beam radiotherapy, or brachytherapy. The clinical trial results highlighted that pipoflelostat F 18 showed a significantly higher detection rate as compared with 18 F-fluorocholine and had a higher impact on intended patient management. We are excited that we are one step closer to our leading U.S. F 18-based PSMA PET imaging agent, making a difference to the European prostate cancer community. We were also in attendance at EANM with several presentations on aPROMISE, which is branded as PYLARIFY AI in the U.S. Of note, in a top-rated oral presentation, we reviewed the results from a retrospective analysis using aPROMISE to evaluate PSMA PET CT scan pre and post androgen deprivation therapy of men with treatment-naive castrate-sensitive prostate cancer. The results demonstrated that a change in automated PSMA scores in bone and lymph nodes is strongly associated with PSA response. The analysis also indicated that a quantitative automated PSMA score may assess treatment response in bone, which is not feasible with conventional imaging. We are pleased to share that we signed an agreement with Siemens Healthineers to integrate aPROMISE into the latest software for the company's workstations in the U.S. and Europe. Through this collaboration, along with our collaboration with GE Healthcare that we announced earlier this year, our AI technology can be broadly distributed and integrated into the leading workstation system that facilitates the nuclear medicine clinical workflow across the majority of PET sites in the U.S. and Europe. Switching now to our microbubble portfolio. In our 22nd year since launch, I am proud to say DEFINITY remains the most chosen, most studied, and most trusted diagnostic ultrasound-enhancing agent in the U.S. We have continued to grow our franchise and are sustaining our 80-plus percent share of the market. With respect to a key partnership, in September, GE Healthcare, our partner for the product candidate flurpiridaz, announced that the AURORA Phase III pivotal trial met its co-primary endpoints for both sensitivity and specificity for detecting coronary artery disease, or CAD, the most common form of heart disease and the leading cause of death globally. The trial also met its key secondary endpoint, demonstrating higher diagnostic efficacy for flurpiridaz PET as compared with SPECT myocardial perfusion imaging or MPI, the predominant procedure used in nuclear cardiology today. In the U.S., there are approximately 6 million MPI procedures performed each year. The Phase III open-label study, which enrolled over 600 patients across sites in the U.S., Europe, and Canada, assessed the diagnostic efficacy of flupiridaz in detecting CAD with invasive coronary angiography as the standard of truth. If flurpiridaz is approved, given the advantages of the F 18 isotope, this product would have broad available distribution and also be suitable for exercise stress testing, which is challenging with the currently available cardiac PET radiotracer. Under the terms of our agreement with GE Healthcare, we are eligible to receive up to $60 million in regulatory and sales milestone payments, tiered double-digit royalties on U.S. sales, and mid-single-digit royalties on sales outside the U.S. Now let me turn the call over to Paul for an operational update on our business.

Good morning, everyone. As Mary Anne noted, we continue to execute on our strategy during the quarter, specifically for PYLARIFY and DEFINITY, which I'll highlight now. I'm pleased to announce that PYLARIFY, the U.S. market leader in PSMA-targeted PET imaging, generated net sales of $143.8 million and was used in over 30,000 patient scans during the quarter. Our success derives from significant unmet need, innovation, and execution. Prostate cancer is one of the leading causes of death for men, and conventional imaging does not offer sufficient sensitivity or specificity to adequately identify metastatic disease. PYLARIFY's innovation is its ability as a PSMA PET imaging agent to selectively bind to prostate cancer cells. In fact, PSMA binds to over 90% of prostate cancer cells, which in turn allows physicians to identify the location and extent of disease. In our clinical trial, two-thirds of men had a change in their intended treatment plan based on their PYLARIFY image, demonstrating that these new insights are actionable by healthcare professionals. And finally, execution; since we acquired Progenics, the team successfully gained FDA priority review, which accelerated our time to approval and secured widespread reimbursement, established manufacturing and distribution capabilities at scale, and built a commercial infrastructure to support a best-in-class launch that has already impacted the lives of over 90,000 men to date. Since the beginning of the third quarter, we further expanded PYLARIFY's U.S. footprint with new PMFs, including the first academic PMF to self-supply PYLARIFY, increase capacity at existing sites, added redundancies in key geographic areas, broadened our customer base, and made progress with PYLARIFY AI. Our new PMFs include Somerset, New Jersey, Nashville, Denver, Birmingham, and most recently Davenport, Iowa and Salt Lake City. These new PMFs enhance our capacity in the New York City Metro area and Tennessee markets and expand our footprint into Colorado, Alabama, and now Iowa and Utah. We have now successfully served patients in 46 of the 48 contiguous states and the District of Columbia. As I mentioned last quarter, we modified our existing agreement with a key PMF partner to double the number of their PMF locations manufacturing PYLARIFY and extend the agreement to 2027. By the end of 2023, we expect our existing PMF network to increase by over 50%, further enhancing capacity and redundancy. In turn, our customer base continues to grow. We have been pleased with the rate of adoption and note that more than 1,000 customers have now ordered PYLARIFY, with 97% of them being repeat customers. Our promotional efforts are increasingly focused on ensuring that referring healthcare professionals, namely urologists, medical oncologists, and radiation oncologists are aware of the benefits that PYLARIFY can offer the U.S. prostate cancer community. In market access, we continue to make progress, and are pleased that now 5 of 7 Medicare administrative contractors or MACs, have confirmed an agnostic approach to patient selection for PSMA-targeted radioligand therapy such as Pluvicto. Meaning, any approved PSMA PET agent, including PYLARIFY can be used. Finally, we established a European collaboration with Curium for the commercialization of aPROMISE, as they anticipate approval for piflupolastat F 18 in Europe in mid-2023. Turning now to DEFINITY, the market-leading ultrasound-enhancing agent. Sales for the third quarter were $60.7 million, up 5.4% from the prior year period. We continue to grow the franchise and maintain market leadership even amidst staffing challenges and a decrease in referring physician patient visits that continue to impact the broader health care market, including echocardiography. I'll now turn it over to Bob.

Thank you, Paul, and good morning, everyone. I will provide highlights of the third quarter financials, focusing on adjusted results, unless otherwise noted. Turning to the quarter. Revenue for the third quarter was $239.3 million, an increase of 134.4% over the prior year period. Earnings per share for the third quarter was $0.99, an increase of approximately $0.91 over the prior year. Now I will turn to the details, beginning with Precision Diagnostics. Revenue of $89 million increased 1.3% over the prior year quarter. Sales of DEFINITY net of rebates and allowances were $60.7 million, 5.4% higher as compared to the prior year quarter and in line with prior expectations for the third quarter. TechneLite net revenue was $22.1 million, down 2.6% or about $590,000 from the prior year and included a modest amount of opportunistic sales as guided on our last earnings call. I would like to note we have exited our thallium and gallium businesses effective at the end of the third quarter as capital expenditures necessary to keep our facilities current do not meet our internal return hurdle metrics given the declining market opportunity for these two products. Year-to-date sales totaled approximately $2.3 million and have been reported within other Precision Diagnostics. Radiopharmaceutical oncology contributed $144.7 million of sales, up significantly due to the exceptional performance of PYLARIFY. This result also includes an incremental contribution from AZEDRA. Lastly, strategic partnerships and other revenue was $5.6 million in the quarter. Gross profit margin for the third quarter was 66.2%, an increase of 16.1% over the third quarter of 2021 as a result of 50.1%. As has been the case in recent quarters, the increase is due mainly to favorable product mix led by PYLARIFY and DEFINITY, offset in part by expenses associated with expanding our PMF partner network for increases in redundancy and capacity for PYLARIFY. Operating expenses were 16.7%, favorable from 40.2% in the prior year to 23.4% of net revenue in the current quarter. Overall, operating expenses are in line with our expectations with continued focus on driving PYLARIFY awareness amongst the referring physician community, increased in-person commercial activities in support of commercial products and attendance at congresses, as well as focused investments in business development activities and our ERP program. And as a note, we expect to transition our ERP program from a discovery phase to implementation beginning now in the fourth quarter, amongst other investments, which you expect will incrementally add to our current OpEx run rate. Operating profit for the quarter was $102.2 million or an increase of $92 million or 904.1% over the same period prior year. Total adjustments in the quarter were $16.5 million before taxes. Of this amount, 8.1 and $8.3 million of expense is associated with noncash stock and incentive plans and acquired intangible amortization, respectively. The remainder is related to net changes in our contingent receivables and liabilities as well as acquisition, integration, and other nonrecurring expenses. Our effective tax rate was 29% in the quarter. This rate includes a higher blended state tax provision rate due to PYLARIFY's geographic mix, offset in part by the impact stemming from the resolution of certain of our state tax UTPs in the quarter. The resulting net reported net income for the third quarter was $61.2 and $70.7 million on an adjusted basis, an increase of 74.6 and $65 million, respectively. GAAP fully diluted earnings per share were $0.86 and $0.99 on an adjusted basis, an increase from the prior year of $1.06 and $0.91, respectively. Now turning to cash flow. Third quarter operating cash flow totaled $93.6 million as compared to $4.3 million in Q3 of 2021. Capital expenditures totaled $6.1 million, up $3.7 million over the prior year quarter. Free cash flow, which we define as operating cash flow less capital expenditures, was a record $87.5 million, an increase of $85.6 million over the prior year period. Year-to-date, free cash flows totaled $162.8 million. Cash and cash equivalents net of restricted cash now stands at $257.3 million. We continue to have access to our $200 million undrawn bank revolver and are comfortable with our strong liquidity position. Turning now to our updated guidance for the full year and Q4. We now forecast full-year revenue to be in a range of $915 million to $919 million from the prior range of $885 million to $905 million. This implies a fourth-quarter range of $243 million to $247 million. As a reminder, this updated full-year range includes the recognized revenue from Novartis of $24 million, which was recorded in the first quarter. Turning now to earnings and keeping with the fourth quarter. Adjusted EPS should be in the range of $0.95 to $0.98. Taken together with the increased revenue expectation and year-to-date earnings performance, we are raising our full-year adjusted EPS to be in a range of $3.80 to $3.83 per share versus the prior range of $3.50 to $3.60. With that, Mary Anne, Paul, and I will now take your questions. Operator, please go ahead.

Thank you. We will now begin the question-and-answer session. Our first question comes from Roanna Ruiz with SVB Securities. Roanna, please go ahead.

Great, thanks. Good morning, everyone.

Good morning.

So I had a question about your over 1,000 customers who are ordering PYLARIFY. Maybe could you just elaborate a bit on what the breakdown is between large institutions versus smaller imaging clinics? Just curious how that demographic is evolving over time for PYLARIFY.

Thank you for the question. Of the 1,000 customers that have ordered to date, we've observed a diverse mix. Historically, our business concentration has remained relatively stable. While many are aware of the 80-20 rule, in our case, 80% of our business comes from about 35% of our accounts. These larger accounts include large academic hospitals, freestanding imaging centers, and government facilities. The distribution among hospitals, government facilities, and independent imaging centers has been consistently stable as we've expanded our network of imaging centers. Additionally, we have increased our customer base from approximately 300 at the end of last year to 900 at the end of the second quarter, and now we have reached 1,000. As we have mentioned before, our future growth will heavily rely on engaging the referring physician community, particularly urologists, medical oncologists, and radiation oncologists, to enhance awareness of PSMA PET imaging and specifically PYLARIFY.

Got it. Super helpful. And you sort of started to answer my next question. I was curious how are you thinking about the future growth trajectory of PYLARIFY, like going into 2023? Anything to expect as you start to get more of a sense of how PYLARIFY growth goes year-over-year?

Well, I think first and foremost, we're obviously incredibly pleased with the impact that PYLARIFY has had on the U.S. prostate cancer community. We take great pride in 90,000 patients having been scanned since launch, and that impact we think can continue to grow. There is still significant room to be able to educate additional referring physicians on the benefit that PYLARIFY and PSMA PET imaging can bring to their customer base. There are still imaging centers to add, though we don't expect that number to increase at the same rate as we've seen in the past. But overall, we're incredibly excited about where we've gone to date and even more so with the potential to continue to bring PYLARIFY to the U.S. prostate cancer community in the future.

Interesting. Yes, super helpful. And last question for me. I know you have a new competitive entrant in the market. I'm curious if anecdotally your field force is hearing anything in terms of competitive dynamics or in terms of strategies that you might use to protect PYLARIFY?

So, Roanna, I'll start there and then Paul can jump in and Bob as well. We are very comfortable with our position as the most chosen and leading PSMA PET imaging agent, and we absolutely expect that to continue. We are not in protective mode with our business; rather, we are in growth mode. We continue to open new opportunities, and as Paul mentioned, there is demand to be unlocked among the physicians who generate requests for these exams, and that is where we will stay focused. As a market, we continue to see it expanding as physicians learn how to effectively utilize PYLARIFY. Therefore, we are fully committed to growth and do not view our strategy or operations as being protective at this time. Paul, would you like to add anything?

Yes, Mary Anne, I think that's 100% accurate. I mean, I think we're incredibly excited with the growth, not only of PYLARIFY but of the overall market. If we look at what our competitor has published for their sales in the second quarter combined with ours, the market on an annualized basis was north of $500 million. And with our third quarter results and what we've seen, the annualized market for PSMA PET imaging in the U.S. is already now over $700 million just 1 quarter later. And so, as Mary Anne mentioned, we are absolutely in growth mode. We have expected competition from the very beginning. We think overall it has helped raise awareness across the marketplace of PSMA PET imaging and the role that can play in the prostate cancer community. And we've obviously been very pleased with our results, but also recognize that there is a role for competition. They have had some success, specifically in geographies where we are still ramping up capacity and redundancy. There are some centers that have their own gallium generators that are going to want to provide self-supply, which is entirely appropriate. And then there's also customers that are going to want dual supply, unlike a small molecule or a biological area. This product is made on a daily basis across the country. And so we've also seen that. But we are really focused on growing the overall market and are incredibly pleased not only with the impact we've had on the community to date, but where we see going forward to continue to have that ability to grow this franchise.

Sounds good. Thanks for the clarification.

Our next question comes from the line of Larry Solow with CJS Securities. Larry, please stand by while I open up your line.

I have a quick question, a follow-up on PYLARIFY. Can you provide any insight on your increase from 900 customers to 1,000? I’m sure usage varies, but I assume there is still significant room for growth in terms of doctors and clinics that are utilizing it. Would you say that’s accurate?

Good morning, Larry. This is Mary Anne. I'll begin and then pass it to Paul. It's accurate to say that the current use of PYLARIFY reflects how prostate cancer is treated in various communities. Paul was describing the mix of our customers and their locations. We are present in all areas where prostate cancer is treated. As you noted, we are still at the early stages of what full utilization will look like, as physicians become more familiar with the product and determine how to incorporate it for improved management of prostate cancer.

Yes. Larry, I think the question is, fundamentally we are still incredibly excited about the growth prospects of PYLARIFY. There are only so many centers in the U.S. with PET CT centers. We've seen that number that have been using PYLARIFY grow, as we've mentioned, from 300 to now 1,000. But that number isn't going to continue to grow at the same rates we've seen. We penetrated the vast, vast majority of imaging centers across the country that now have access to and are ordering PYLARIFY, where the growth will come from is now activating those urologists and medical oncologists and radiation oncologists that were not early adopters to help them understand the benefits of prescribing PYLARIFY for those patients and then those referring physicians in turn request scans from their imaging centers. And so we're still very excited at the potential. We still think there's a significant room for opportunity and for growth to reach a significant number of patients that are still not receiving treatment.

Everyone, we just had a significant echo feedback on our lines. I apologize if that was also translated to all of our participants, but it seems to have quieted now. Paul was just completing his comments talking about the growth in the future for PYLARIFY will also come from activating more patient pools as we engage with those physicians who are generating demand for currently for imaging done with conventional approaches, which will translate over to PSMA PET-based imaging.

Great. And just a quick follow-up, Mary, on the pass-through status. I think it's currently set to the end of '24. Can you take a couple of minutes to discuss that and your confidence that it won't necessarily impact pricing once that expires?

Absolutely, Larry. As you correctly pointed out, the pass-through status for PYLARIFY under the current administration will conclude at the end of 2024, having been in effect for three years. We are educating our audience about pass-through to clarify which sites of care and patient populations it applies to. Pass-through is only an administered benefit, which refers to the pricing structure for traditional Medicare patients treated in hospital outpatient settings. We are observing a trend where imaging services are moving away from hospital outpatient centers, while the number of patients insured under the traditional Medicare benefit is declining. These factors combined lead to a reduced number of patients who would typically be covered by pass-through, particularly as we approach the end of 2024. However, we believe that the adoption of PYLARIFY by physicians and their satisfaction with the results from our imaging will foster loyalty to the product, even after the pass-through period ends. Additionally, we are closely monitoring legislation known as the FIND Act, which aims to eliminate the current pass-through pricing structure for radiopharmaceuticals and other products, and could lead to more equitable reimbursement levels for complex radiopharmaceuticals. Pau, would you like to add anything?

No, I think it's very well said, Mary Anne.

Great. Thanks so much. Just last question just for Bob, real quick. Just on the operating expenses. It looks like it kind of trended down sequentially. Was there anything timing related there? SG&A was a little lower, R&D a little lower. Or is that just sort of moving around from quarter-to-quarter?

It's just shifting a bit from quarter to quarter, Larry. Looking at it sequentially, it appears to be relatively consistent on average. There are fluctuations throughout the year. Specifically for the fourth quarter, especially with our ERP program, there are some operating expenses tied to getting that program started. We've been conducting extensive discovery work, and the implementation phase begins in the fourth quarter. Therefore, I expect those expenses to be somewhat higher. We are working on smaller initiatives, not tens of millions, but small amounts. We are also taking this opportunity to advance our efforts in sales and marketing, especially with market research as we explore the different markets we are engaging in, particularly in the prostate cancer field. Thank you for the question.

Great. Appreciate all the color. Thank you.

Our next question will come from the line of Mr. Anthony Petrone with Mizuho Group. Anthony, will you please stand by while I open up your line. Anthony?

Hello?

Yes. Your line has been opened.

Okay. Great. Thank you. Going back to a couple on PYLARIFY stay on the 1,000 sites at the end of 3Q and across 46 states. Just wondering, Paul, when we think about the actual number of sites out there in the United States, what is that number? So are we kind of at the upper bound just in terms of sites? And then when you think about penetration into the site, certainly the growth going forward would be getting additional physicians trained and prescribing PYLARIFY. So when you think about the penetration level at sites on a physician level, where is that number on average across the 1,000? And I'll have a couple of follow-ups.

Yes. Thanks for the question. So I think when we think of the total number of sites, IMV is probably the best source to kind of look to. I will note that the number is not exact because many centers around the country have mobile sites that may have a mobile camera 1 or 2 days a week. But when you think of kind of full cameras on an annualized basis, anywhere in that 2,000 plus or minus range. I think we've naturally focused on the big centers. And so when we think about growth from 1,000, we think that number will continue to grow, but at a decreasing rate. There are certainly PET CT centers in geographies where we are still to open additional PMS. If you refer to clarify.com, you can see where our PMF coverage is. We still do have some areas to build in as we add additional capacity across the country in those areas, and those are where we really add PET CT centers. But to your point, the bulk of the growth is going to come from driving more volume through those existing centers, and that comes from activating the urologists and oncologists that are not early adopters that have not been excited for years and expecting PSMA PET imaging, but as an example, in urology. The initial staging indication, we were the first commercial PET agent in prostate to have that indication. So that's a market we're still very much building. PET agents were not necessarily used in that space before. And so your community urologists, your large urology group practices, there's still a tremendous amount of education to have there to be able to activate them to ensure that all appropriate candidates are being prescribed PYLARIFY. And so we haven't put a number on it, but we're incredibly excited for the future and see continued growth for PYLARIFY as we continue to activate those marketplaces.

And just a follow-up on competition. Blue Earth out there with the spotlight results at ASTRO and seems a little bit more comparable than the Gallium-68 PSMA PET imaging agent. Just wondering how you think the competitive dynamic shifts when we have a similar agent come on market? Any thoughts there? And then again, the last one for me, I just want to throw one in on F 18 with GE. Maybe just a reminder on the total available market statistics that are out there for Flurpiridaz 18 and how you think that market proceeds in 2023? Thanks.

Good morning, Anthony. It's Mary Anne. I'll address your questions, and others here can add their insights if they wish. We are not shifting into a defensive stance; rather, we are committed to leading the market. This is akin to what we have done with DEFINITY over time, and maintaining this focus amid competition is essential. The arrival of a second F 18-based product may resemble PYLARIFY, but we are confident that our PMF networks will ensure PYLARIFY remains the leading agent in the PSMA market even after new products are introduced. Regarding Flurpiridaz and our relationship with GE Healthcare, we are familiar with the NPI market, which is the current standard of care for coronary artery disease imaging in the U.S., involving approximately 6.1 million procedures annually. I liken this situation to the transition we witnessed with PSMA-based PET imaging following the introduction of PYLARIFY and the academic products, which led to a significant shift in standard imaging for prostate cancer. This shift can be attributed to the superior specificity, sensitivity, and clarity provided by using an F 18 isotope with PET imaging. The same clarity is now emerging in cardiac imaging, a field where we have operated for over 40 years, initially using SPECT-based methods. The transition to F 18 products like Flurpiridaz offers a dramatic improvement in image quality, almost like moving from black and white television to high definition. We are eager for our partner GE to lead market awareness following product approval, and we believe that physicians will adopt this new product similarly to how they embraced PSMA-based PET imaging.

Maybe I'll just add specifically on the Blue Earth and really F 18 competition. One, as Mary and I have both said, greater voice and awareness around PSMA PET imaging will help grow the overall market. We've seen this grow already. We mentioned from a combined annualized north of $500 million in 2Q to now north of $700 million in 3Q. And so we're incredibly excited to continue to grow that overall market. I think you're right to note that they've published data on one of their clinical trials. We have not yet seen data on the other trial. But regardless of how that plays out, we do think there's a significant first-mover advantage. The progress we've made in contracting with now 1,000 sites using PYLARIFY, the significant progress we've made on market access, including pass-through and coverage, when we think of all those pieces put in place as a first mover advantage. And then I would also note our PMS network is already up and is active. We have contracts through some of the major players through 2027 with preferred cyclotron status making F 18. And so we feel well positioned to continue to be the market leader in what is an ever-growing PSMA market with many more patients left to scan going forward. So we're incredibly excited.

Thank you. Thanks.

And our next question comes from the line of Mr. Richard Newitter with Truist. Please stand by while I open up his line. Mr. Richard Newitter of Truist, your line should be open.

Hi. Thanks for taking the questions. I'm not sure if I missed it. Did you guys give specific clarified guidance or update the range there? And if so, could you provide that?

So Rich, we did not give specific, but I mean it is implied when you do the math around the guidance that I did give. So in the prior guidance range, I think we had implied a full-year range of about 480 to 500. Now that range is now sort of in the 513 to 516 type range for the full year, which then gives you a Q4 number in the sort of right around bracketing about 150 if you will.

For 4Q?

For 4Q.

Yes, I understand you are referring to the increased capacity and the larger user base. It seems that the sequential improvement is not significant. How should we approach that? Additionally, you have mentioned previously about reaching capacity for PYLARIFY towards the end of 2022, aiming for a range of 150,000 to 200,000 doses. What is the current status of that ramp-up? What do you expect for the end of 2022? Is there a reason to believe that all units you can produce right now are not being utilized? In other words, is demand still exceeding supply? Thank you.

So Rich, I'll begin with that, and then Paul can provide more specific numbers. Regarding your last question about our confidence that every dose is being utilized, I want to remind you that this is a batch manufactured product. In certain more rural areas, while they produce a full batch as they do with F 18, there may not be enough demand on a given day for the optimal number of doses that can be produced from that batch, which could be over 20 doses. This aspect is already factored into our economics and assumptions. Additionally, as we ramp up, we are very pleased with the rollout plan we've implemented. However, there are regions where we are still adding capacity and redundancy, especially because these are large geographic markets. Paul noted that one of the sites we recently opened was in the Greater New York area, where we see significant opportunities to meet more demand through increased capacity or redundancy. Paul, do you want to add anything?

Yes, thanks, Mary Anne. Regarding your question, we are continuously increasing our overall capacity and redundancy. Since the end of the second quarter, we've added new PMF regions in Colorado, Alabama, Utah, and Iowa, where we have been serving patients and facilities. The local manufacturing significantly benefits customers and patients by providing more flexibility in the number of doses and the timing of their delivery to meet the workflow needs of PET CT centers. As Mary Anne mentioned, we have been building redundancy in areas like the New York City Metro and Tennessee. We've invested in existing sites, continuously adding trace boxes, and some PMS now have multiple cyclotrons, allowing us to run several batches throughout the day to better meet our customers' needs. In terms of overall capacity, as you noted, we highlighted a range of 150,000 to 200,000 doses. However, I believe we will exceed that on an annualized basis by the end of the year based on our capacity and redundancy. While the national number is important, local market conditions matter significantly. There are still markets where we need to enhance capacity and redundancy to align with the evolving medical practices. We're excited about future growth as well. Does that clarify things?

Yes. Yes, it does. And just maybe the underlying assumptions in the implied 4Q ramp?

The underlying assumption around demand. Richard, can you just clarify your question?

You have an implied guide of 150. So maybe just talk to us a little bit about how you arrived at that? Why is that the right number? You historically you guided sequentially flat to up slightly, I guess, is your approach to guidance any different? And then what are the key assumptions kind of to get to that level? Thanks.

Our approach to guidance remains consistent, which is something we've established as a company for communicating our forward outlook. We are still in the launch phase of PYLARIFY, and while it may seem like we've been discussing it for a long time, we haven't fully grasped the level of intent from the medical community to adopt PYLARIFY across the full range of prostate cancer. This presents an ongoing opportunity as we focus on demand generation within our labeled indication, while also observing the choices made by the medical community regarding these products. Paul is conducting specific market research to help us better understand this community. Until we gain more insights, we will continue with our current practice of providing bracketed implied guidance. Operationally, you have seen us exceed our guidance in each of the quarters.

And Rich, I also want to highlight that we are entering a time of year with major holidays within the quarter. Based on last year's experience, where we achieved around $35 million to $36 million in the quarter, this is our first year with a significantly expanded network as we approach that holiday season. Therefore, we want to ensure that we fully understand how these dynamics play out during that time of year.

Thank you.

Our next question comes from the line of Matt Taylor. Matt, please stand by while I open your line up for you to pose your questions. Mr. Matt Taylor with Jefferies, your line is open.

Thank you. Can you hear me okay?

Yes, sir.

Good morning, everybody.

Good morning.

Good morning, Bob. So I wanted to follow up on 2 things. So one is, when you think about the next couple of years, I know this is kind of an unprecedented launch. Maybe you could talk about what you think market growth could be and your ability to grow within that framework given some of the advantages that you have, being first move or setting up this network, etc., as you see more competition come online. Could you give us any high-level thoughts on that?

So Matt, we understand that there is interest in how the next year looks as we approach the end of this year. As we consider 2023 and 2024, we anticipate healthy growth for the overall business, particularly from our key products, PYLARIFY and DEFINITY. From our perspective, we are confident in our ability to continue growing the business profitably and seeing our free cash flow increase, as evidenced by our record free cash flow of nearly $90 million in the third quarter. We believe these positive numbers will continue to rise, allowing us to strengthen the company's position in the near-term planning horizon we are discussing.

I want to emphasize that we are not providing annual guidance for 2023. However, in our two primary markets, we anticipate significant ongoing growth in the PSMA imaging market. This is driven not only by the demand we've created for patient initial staging and recurrence but also by the continued introduction of therapeutic agents into that space. Regarding DEFINITY, while we didn't elaborate much during the call, we have noticed some softness in the overall echocardiography market. Historically, we haven't sought to influence the total number of echocardiography studies conducted in the U.S. medical market. Our medical education efforts have always focused on promoting the use of an ultrasound-enhancing agent. Currently, two studies are in progress, but we've observed a decline in the overall number of echocardiography studies, attributed to a decrease in in-office cardiology visits year-over-year and ongoing staffing challenges at both the nursing and sonography technician levels. If these issues improve in the coming year, we expect to see better growth rates for DEFINITY, stemming from an increase in echo studies and the heightened demand for ultrasound-enhancing agents.

Thank you for your insights. I wanted to ask about the cash flow you've mentioned and the significant amount of cash you're accumulating. Can you share your strategic plans for this cash as you continue to increase it? What types of acquisitions do you see as beneficial and complementary to your portfolio? How do you approach the idea of making acquisitions?

I'm going to start quickly, Matt, and then it will be more of a question for Bob. However, I want to mention that as a company, we see ourselves as a highly chosen and attractive partner for companies that have assets and are looking for that type of relationship. The Progenics acquisition already demonstrates our talent and what we can do with assets that come under our care.

Yes. In my prepared remarks, I mentioned that we are actively working to build a pipeline of opportunities regarding our operational expenses. Referring back to our Investor Day, we are concentrating on late-stage or near-commercial assets that offer high growth potential and high margins. These assets will leverage our core capabilities in commercial manufacturing. We also want to ensure we conduct thorough due diligence on these targets and the market conditions for their products or candidates. Financially, we aim to maintain long-term double-digit growth, targeting assets that can help us achieve this while maximizing profitability margins. Our successful transformation of the company through the Progenics acquisition has helped us expand our gross margins and EBITDA margins. We are determined to meet the criteria necessary to support long-term sustainable and profitable growth.

Thanks, Bob. I have one last question. When you analyze the dollars per customer this quarter, it seems you added 10% more customers and also achieved 10% more sales. This suggests that same-store sales did not change significantly. However, I'm unsure about the factors such as seasonality or inventory that might have influenced this. Could you share your expectations for same-store sales moving forward and your projections for where those could go?

Well, Matt, that's a new one. I've never encountered the concept of same-store sales applied to radiopharmaceuticals before, so congratulations on your unique question. This ties back to some of the discussions we've had in the Q&A, particularly regarding the ability to manage same-store sales. In significant regions of the U.S., we are working to increase capacity and redundancy to better penetrate and serve those markets. From that standpoint, it's not calculated in the manner you've described. However, in the larger geographic areas where patient concentration is higher, we anticipate continued improvement in what you're referring to as same-store sales.

Yes, Matt, maybe just some added color there, and totally understand the question. I think the key piece, and I'll go back to a bit of information I shared earlier, is that about 80% of our business comes from about 35% of our customer base. That core customer base hasn't materially changed in terms of the percentage. And so while we're adding new imaging centers, those are by and large smaller imaging centers, smaller regional hospitals, the vast majority of large academic centers of significantly sized freestanding imaging centers are in place and have been in place. And so I think we're seeing continued growth and that the ad imaging centers are not necessarily a key driver of growth. It really is the volume at existing sites, and that's what we're focused on continuing to grow in our parlance same-store sales, which I understand, we're driving more same-store sales, if you will, by activating those referring physicians, and that's really going to be driving future growth.

Okay. Thank you. Thank you very much.

Your welcome.

Our next call will come from the line of Justin Walsh with Jones Trading. Justin, please stand by as I open your line up for you to pose your questions. Justin, your line should be open.

Hi. Thanks for taking the question. It was great seeing PYLARIFY AI showcased at EANM. How would you characterize its reception at the meeting? And maybe some feedback that you received from users as PYLARIFY has continued its rapid market penetration?

Mary Anne here. We were very pleased with the response at EANM, which we believe reflects the ongoing changes in medical practice and therapy usage. There is a growing mandate for products that come with complementary offerings that enhance their effectiveness. In the case of PYLARIFY AI, it provides consistent quantification across vital body regions for PSMA imaging, enhancing what physicians can see and interpret. This tool is seen as essential and complementary, and we are committed to its full integration. We recently announced additional collaborations that complement our previous ones. This development aims to make PYLARIFY AI widely available in the workstations used by nuclear medicine physicians and radiologists for image analysis, which is an important trend we are actively supporting. Regarding adoption, such products and additional software tend to be initially embraced in research settings, as they help clarify their role in clinical workflows. We are also encouraged by the adoption rates we are seeing in major academic centers in the U.S., especially for research purposes, which we believe will lead to broader commercial adoption.

Our final question will come from the line of Yuan Zhi with B. Riley. Yuan, please stand by as I promote you to open up your lines. Yuan, your line is open.

Good morning. I guess I will be the first one today to say congrats on another strong quarter. Thank you for taking our questions.

Thank you.

Thank you, Yuan.

So first, have you heard any staffing shortages of radio imaging technicians in the last quarter that might have impacted the yield of PYLARIFY in the quarter?

Yuan, I can address that question. We haven't received anecdotal feedback regarding staffing shortages. However, the PET CT imaging center market is not as familiar to us historically as echocardiography suites. We have deeper insights into echocardiography due to long-standing relationships. Therefore, I can't confirm or deny if there are any staffing shortages at PET CT imaging centers. Among our PMS partners, we've observed strong responses and support to ensure they can produce effectively, and there are no staffing shortages reported there.

Got it. That's very helpful. Our second question is about the Phase II clinical trial of NM-01, the PD-L1 imaging agent. You had the first patient dosed in May. Can you provide an update on the trial enrollment and the timeline for obtaining the top-line data?

So, Yuan, at this time I cannot offer an update on trial enrollment. If not, we will speak to it as we hit significant milestones. But at this time, we are only publicly still having reported the first patient in, and I would anticipate it will be probably first quarter of 2023 when we next make an update on that trial.

That concludes our question-and-answer session. I will now turn the call back over to Mary Anne for her closing remarks.

Thank you, everyone, for joining us on today's call. In closing, the third quarter was another strong one for our business as 2022 proves to be a historic year for Lantheus. Building on more than 65 years of life-changing science, we continue to innovate to deliver on what matters for health care professionals and patients. I'm extremely proud of the results the Lantheus team has delivered. Their hard work, focus, and dedication to our patients and our corporate strategy are evident in the results we outlined today. As the year comes to a close, we continue to be driven by our purpose to find, fight, and follow disease to deliver better patient outcomes. Thanks, everyone.

This concludes the Lantheus third quarter earnings call. You may now disconnect.

Great. Thank you very much. Thanks, gentlemen.