Earnings Call Transcript - LNTH Q2 2022

Operator, Moderator

Good morning, everyone. Welcome to the Lantheus Second Quarter 2022 Conference Call. I will be your operator for today's call. I will now hand it over to your host for today, Mark Kinarney, Vice President of Investor Relations. Please proceed.

Mark Kinarney, Vice President of Investor Relations

Thank you, and good morning. Welcome to Lantheus' Second 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 to provide an operational update. Bob will cover our financial results and updated guidance. Mary Anne will provide closing remarks, and then we will open the call for Q&A. This morning, we issued a press release, which was furnished to the Securities and Exchange Commission under Form 8-K, reporting our second quarter 2022 results. You can find the release 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 I 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 the call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is also included on the Investors section of our website. With that, it's my pleasure to now turn the call over to Mary Anne.

Mary Heino, President and CEO

Thank you, Mark, and good morning to everyone joining us. We had another outstanding quarter as we continue to execute on our strategy to accelerate growth, diversify our portfolio and position Lantheus as a category leader in the markets in which we compete. I'm particularly pleased to share that, for the second quarter in a row, we reported record revenue, up 121% year-over-year, led by PYLARIFY growth in our radiopharmaceutical oncology category. Having launched PYLARIFY just over a year ago, we are delighted with the impact PSMA-targeted PET imaging is making on the U.S. prostate cancer community. In fact, at our inaugural Investor Day in May, Dr. E. David Crawford, an internationally renowned urologist at the University of California San Diego, highlighted that he believes PET PSMA imaging is one of the most important steps forward he has seen in prostate cancer in the last few decades. We believe that endorsements from experts in the field such as Dr. Crawford's, along with inclusion in the guidelines for both the National Comprehensive Cancer Network, or NCCN, and the Society of Nuclear Medicine and Molecular Imaging or SNMMI, speak to the importance of PSMA-targeted PET imaging for the U.S. prostate cancer community. In the EU, we are pleased to note that Curium completed its Phase III PYTHON clinical trial for piflufolastat F-18 in May and submitted its marketing authorization application to the European Medicines Agency, or EMA, on June 27. We also worked with Curium to add PYLARIFY to its U.S. ECLIPSE trial, a multicenter open-label randomized Phase III trial comparing the safety and efficacy of Curium's PSMA-targeted therapeutic versus hormone therapy in patients with metastatic castration-resistant prostate cancer. PYLARIFY will be used to determine PSMA avidity as part of patient selection. PYLARIFY will now be included in the vast majority of late-stage U.S. trials for the study of PSMA-targeted therapies. We also noted progress with our AI offering, having received an additional FDA clearance for PYLARIFY AI during the second quarter. The updated deep learning algorithm of PYLARIFY AI has been trained and validated on one of the largest and rapidly growing databases of contextualized PYLARIFY PSMA PET/CT images in the world. The enhanced performance of PYLARIFY AI was presented by Dr. Jeremie Calais at the SNMMI annual meeting, along with the results from our prospectively planned and independently validated study of PYLARIFY AI in our Phase III CONDOR study. These results independently validated and confirmed the efficiency, consistency and diagnostic accuracy of AI-assisted image interpretation in detecting and quantifying disease in patients with prostate cancer. PYLARIFY AI provides a standardized approach to identifying and quantifying prostate cancer and further enhances the clinical utility of PYLARIFY as an imaging agent. Earlier this year, in the American Urological Association's annual meeting, Dr. Nicholas Nickols presented data on the AI-enabled quantification of disease by PSMA PET and how PYLARIFY AI could serve as an imaging biomarker to predict response to androgen deprivation therapy. PYLARIFY AI continues to add real-world evidence and enhance the utility of PYLARIFY in the effective care and management of prostate cancer patients. We are pleased to continue to support the U.S. prostate cancer community with PYLARIFY and PYLARIFY AI to find and follow disease. Our market-leading ultrasound-enhancing agent, DEFINITY, grew despite headwinds associated with a decrease in referring physician visits and staffing-related challenges consistent with the trends noted by other companies in the healthcare sector. While in-person U.S. cardiology visits were down during the quarter year-over-year and reported staffing challenges for nurses persisted at U.S. healthcare institutions, DEFINITY grew quarter sales year-over-year. While DEFINITY growth during the second quarter was lower than expected, we believe that contrast-enhanced echocardiography continues to play an important role in cardiac imaging, and we are confident growth levels will normalize as these challenges abate. Moving now to our clinical development programs. We have recently progressed two of our pipeline products: 1095, our PSMA-targeted I-131 prostate cancer therapeutic; and NM-01, our novel imaging agent currently under development for the assessment of PD-L1 expression in non-small cell lung cancer. For 1095, I'm pleased to announce that we have enrolled the last patient in our ARROW trial. In total, 120 patients have been randomized, 80 in the 1095 plus enzalutamide combination group and 40 in the enzalutamide group alone. As a reminder, the primary endpoint in ARROW is prostate-specific antigen or PSA response rate. Key secondary endpoints include time to radiographic-free progression, progression-free survival and overall survival. Patients in the ARROW trial will be followed for one year after their first treatment for all efficacy endpoints. Survival and safety data will be collected for an additional year. That is an important milestone, and I look forward to sharing more information in the future. Moving to NM-01, the preliminary study results of the Phase I PECan study evaluating PD-L1 expression in cancer were presented at SNMMI. These results indicate that NM-01 has the potential to identify non-small cell lung cancer patients who will respond to checkpoint inhibitor therapies and monitor the early response of these patients to these therapies, pending further ongoing investigation. In addition to the Phase I PECan study being run by King's College, we continue to progress this asset with the initiation of a single-arm Phase IIa PELICAN trial and enrolled the first patients in May. The primary endpoint of the PELICAN study is the measurement of PD-L1 expression in non-small cell lung cancer, both primary tumor and metastatic lesions, as assessed using NM-01 compared to immunohistochemistry PD-L1 expression results. We continue to seek ways to further expand our portfolio, evaluating several opportunities to collaborate, in-license or acquire additional assets which match our strategic priorities. We are particularly pleased and focused on late-stage diagnostic and therapeutic product opportunities in oncology that complement our existing portfolio. In addition, certain early-stage opportunities also align with the strategy that drives our pharma services business. For example, we recently entered into a collaboration agreement with Radiopharm Theranostics. Radiopharm is an Australian-based developer of platforms of radiopharmaceutical products for both diagnostic and therapeutic uses. Radiopharm plans to initiate a Phase I therapeutic trial for patients with PD-L1 positive non-small cell lung cancer in Australia. Lantheus will supply our diagnostic product candidate, NM-01, to Radiopharm for their clinical trials, to be used as a clinical research tool to assess PD-L1 expression in patient selection. We have also retained the option to expand our partnership to additional assets in Radiopharm's pipeline. Finally, I would like to share an important change I recently made in the executive team. In June, I promoted Paul Blanchfield to the role of Chief Operating Officer. I've had the pleasure of working with Paul since he joined Lantheus in January 2020 as Chief Commercial Officer. Paul has been an exemplary leader throughout his tenure and combines a strong command of the data that drives the business with attention to longer-term strategy. In his new role, Paul has taken responsibility for commercial, manufacturing and technical operations, quality, and corporate communications. Now let me turn the call over to Paul for an operational update on our business.

Paul Blanchfield, Chief Operating Officer

Good morning, everyone. As Mary Anne noted, we continued to execute on our strategy during the quarter, including for PYLARIFY and DEFINITY. Beginning with PYLARIFY, the market leader in PSMA-targeted PET imaging, I am pleased to announce PYLARIFY net sales for $130.2 million compared to $92.8 million in the first quarter. We continued to make progress during the quarter in our geographic footprint, including capacity and redundancy, new customers, market access and our PYLARIFY AI software, while monitoring medical practice and guidelines as it relates to our total addressable market, or TAM. We expanded our U.S. geographic footprint with the activation of four additional PET manufacturing facilities, or PMFs, since our last quarterly earnings call. These new PMFs are located in New York and West Virginia, which add redundancy and enhanced capacity, and in Colorado and Florida, which are new geographies where we had previously been flying doses. I am also pleased to announce that we have reached an agreement with one of our key PMF partners to nearly double the number of their PMFs that are manufacturing PYLARIFY, and extend our partnership through 2027. This agreement will expand our geographic footprint and provide redundancy and enhance capacity in existing geographies to ensure we can continue to meet the needs of the U.S. prostate cancer community for many years to come. We also continue to focus on adding new customers, whether they be hospitals, freestanding imaging centers or government facilities. We now have almost 900 customers across 45 states and the District of Columbia actively ordering PYLARIFY. This is up from the approximately 700 customers at the end of the first quarter, even with the availability of competing PSMA PET imaging agents. With respect to market access, both NCCN and SNMMI updated their guidelines earlier this year to endorse all PSMA PET imaging agents, including PYLARIFY, for the use of patient selection for PSMA-targeted radioligand therapy, including Pluvicto. We are pleased to note that several commercial payers, including Humana, Aetna and Anthem BCBS, or Blue Cross Blue Shield, have updated their policies to reflect an agnostic approach to the choice of imaging agent used to identify patients with PSMA avid lesions who may be eligible for radioligand therapy. Humana's policy in particular highlights piflufolastat F-18 by name as an alternative to other tracers. We believe these advancements, combined with more than $130 million in sales for this quarter, speak to the clinical benefits of PYLARIFY, its scalable manufacturing network and our operational capabilities. I also want to note the progress we have made with PYLARIFY AI. As Mary Anne mentioned, the FDA cleared an updated version of PYLARIFY AI. In addition, we continue to install PYLARIFY AI at leading institutions and incorporate it into PSMA-targeted therapeutic trials. We believe this continued progress will have a positive impact on patient care and help sustain PYLARIFY's market leadership going forward. During Investor Day in May, I told you there were three key takeaways for PYLARIFY. First, PSMA PET imaging has significant opportunity, with a total addressable market of approximately $1.1 billion that continues to grow. Second, we have a significant first mover advantage that has translated into what we believe is sustainable market leadership. And third, there's significant long-term potential, with the likelihood of labels and guidelines expanding in the future. On the TAM specifically, I would note that we continue to see guidelines and medical practice evolve, as it frequently does in oncology, based on real-world experience. And we expect the same for PSMA PET more broadly and PYLARIFY specifically. We believe the TAM could increase by an additional 100,000 scans from its existing 250,000 scans that we highlighted in April, from two primary areas. First, we believe there could be additional PSMA PET scans for patient selection for metastatic castrate-resistant prostate cancer in the first and second line, in which PSMA-targeted therapeutics are currently being studied. Second, we believe that medical usage of PSMA PET imaging may expand over time to additional patient populations, including but not limited to the intermediate favorable patient population. These additional 100,000 scans would increase the TAM to approximately $1.5 billion, up from $1.1 billion. We will continue to monitor guidelines for both PSMA PET and radio therapeutics, as well as medical practice, and continue to update the total addressable market as it evolves. I am thrilled with our results for the first half of 2022, as well as the opportunity to continue to expand the market, and believe our continued efforts to solidify PYLARIFY as the PSMA PET imaging agent of choice will continue to positively impact the prostate cancer community for the foreseeable future. Turning now to DEFINITY, the market-leading ultrasound-enhancing agent, sales for the second quarter were $62.3 million compared to $59.8 million in the prior year quarter. While we saw increasing momentum in DEFINITY during the first quarter as COVID-19 levels receded, staffing and customer capacity-related challenges impacted growth in the second quarter, particularly at our largest customers. We note a year-over-year decrease in in-person cardiology visits, and many customers noted a backlog of patients needing an echo ultrasound. We continue to have over 80% share of the U.S. ultrasound enhancing agent market, but believe near-term growth will remain constrained until hospitals have adequate staff to support the current demand for echocardiography and ultrasound enhancing agents. Bob will show more about our 2022 expectations when he reviews guidance as part of his financial update.

Robert Marshall, Chief Financial Officer

Thank you, Paul, and good morning, everyone. I will provide highlights of the second quarter financials, focusing on adjusted results unless otherwise noted. Turning to the results. Revenue for the second quarter was $223.7 million, an increase of $122.7 million or 121.4% over the prior year period. Earnings per share for the second quarter were $0.89, an increase of approximately $0.78 over the prior year quarter. Now I'll turn to the details, beginning with Precision Diagnostics. Revenue of $87.1 million was down 3.6% from the prior year quarter. Sales of DEFINITY net of rebates and allowances were $62.3 million, 4.1% higher as compared to the prior year quarter and slightly lower than our expectations for the reasons just explained by Paul. TechneLite net revenue was $19.4 million, down 18.2% from the prior year quarter, due primarily to a contract we exited mid last year with an impact of approximately $2.5 million per quarter as well as a prior year comparable that included opportunistic sales which did not repeat this year in the quarter. Radiopharmaceutical Oncology contributed $131.2 million of sales, up significantly due to the continued rapid ramp in sales of PYLARIFY. This result also includes a sequentially lower contribution from AZEDRA with continued COVID-related constraints. Commercial efforts remain focused on bringing leading sites of care online, increasing share of voice and driving our referral campaign. Lastly, strategic partnerships and other revenue was $5.5 million, driven primarily by the RELISTOR royalty stream. Unfavorability for the category is due to a prior year comparison includes the sale of cREPO digital solution to Fuji, not repeated in the current year. Gross profit margin for the first quarter was 66.0%, an increase of 13.35% over the second quarter 2021 result at 52.6%. 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 increased supply chain and logistics costs. Operating expenses were 15.97% favorable from 42.4% in the prior year to 26.4% of net revenue in the current quarter, highlighting operating leverage while investing for sustainable growth in both sales and marketing and R&D in support of our commercialized and pipeline portfolios. G&A as a percent of net revenue improved by approximately 550 basis points, even amidst higher travel expenditure, rebranding, business development efforts as well as ERP discovery work to drive workflow efficiencies as we grow. Operating profit for the quarter was $88.6 million or an increase of $78.2 million or 752.5% over the same period prior year. Total adjustments in the quarter were $25.4 million before taxes. Of this amount, $7.4 million and $8.3 million of expense is associated with non-cash stock incentive plans and acquired intangible amortization respectively. Also in the quarter, we expensed $8.5 million of net contingent liabilities, of which $8 million is related to the PYLARIFY CVRs or contingent value rights. The liability, now at $99.7 million, is fully accrued up to the maximum amount that may be paid to the CVR holders under the merger agreement dated February 20, 2020, and has been recorded within short-term liabilities on our balance sheet in its entirety. As such, we would expect to pay this amount in the first half of 2023, with no further liability beyond this amount or date. The remainder is related to acquisition, integration and other non-recurring expenses. Our effective tax rate was 28.1% in the quarter. Our effective tax rate is slightly higher than recent run rates with unfavorable mix of PYLARIFY sales and higher state tax jurisdictions. The resulting reported net income for the second quarter was $43.1 million and $62.9 million on an adjusted basis, an increase of $69.7 million and $55.1 million respectively. GAAP fully diluted earnings per share were $0.61 and $0.89 on an adjusted basis, an increase from the prior year of $1 and approximately $0.78 respectively. Now turning to cash flow. Second quarter operating cash flow totaled $72.6 million as compared to $25.9 million in Q2 of 2021. Capital expenditures totaled $4.3 million, up slightly from the prior year quarter. Free cash flow, which we define as operating cash flow less capital expenditures, was $68.3 million, an increase of $45 million over the prior year period. We are beginning to see the impact from ramping PYLARIFY revenue as it converts to cash through the working capital cycle. Cash and cash equivalents net of restricted cash now stand at $171.4 million. We continue to have access to our $200 million undrawn bank revolver and are very comfortable with our strong liquidity position. Turning now to our guidance for Q3 and updated guidance for the full year. We forecast revenue to be in the range of $220 million to $230 million for the third quarter of 2022, an increase of approximately 116% and 125% over the third quarter of 2021. As noted, we are updating our full year view to take into consideration actual first half performance. While DEFINITY has continued to post record dollar level results this year, lower-than-expected cardiology visits coupled with ongoing staffing issues at hospitals have us forecasting DEFINITY in the second half of the year in the mid-single- to high-single-digit range. Our surveys do not indicate any loss of share, and we believe that these trends are transitory. And as I have mentioned, and importantly, DEFINITY continues to grow amidst this backdrop. With regard to PYLARIFY, we now model at $480 million to $500 million with expanding PMF coverage and user uptake. Therefore, we now forecast full year revenue to be in the range of $885 million to $905 million from the prior range of $800 million to $835 million. This updated range includes the recognized revenue from Novartis at $24 million, which was recorded in the first quarter. Turning now to earnings. Adjusted EPS should be in the range of $0.80 to $0.85 for the third quarter. We are raising our full year adjusted EPS to account for relative first half outperformance as well as the incremental contribution from higher PYLARIFY revenue expectations and inclusive of the aforementioned adjusted EPS had an impact of the Novartis agreement of approximately $0.25. We now expect adjusted EPS to be in the range of $3.50 to $3.60 per share versus the prior range of $2.90 to $3.15. With that, let me now turn the call back over to Mary Anne.

Mary Heino, President and CEO

Thank you, Bob. In closing, I'd like to leave you with a few key takeaways. Our mission to find, fight and follow disease to deliver better patient outcomes remains our guiding force. We continue to execute our strategy to accelerate growth, diversify our portfolio and position Lantheus as a category leader in the markets in which we compete. Our record revenue and outstanding financial results for the first half of 2022 reflect the strong execution of our strategy and our ability to deliver on our goal to drive long-term growth and shareholder value. The key drivers of our growth continue to be our category-leading products. For PYLARIFY, our market-defining product, we continue to grow the market and have now solidified it as the PSMA PET imaging agent of choice for the U.S. prostate cancer community. Our market-leading ultrasound enhancement agent, DEFINITY, grew despite headwinds associated with a decrease in referring physician visits and staffing-related challenges. We expect our growth for the second half of the year will continue and will be driven by our passion to find, fight and follow disease to deliver better patient outcomes. With that, Bob, Paul and I are now ready to take your questions.

Operator, Moderator

Your first question comes from the line of Richard Newitter from Truist Company.

Richard Newitter, Analyst

Hi. Thank you for the question and congratulations on another strong quarter. I have a couple of questions. I want to start with the Total Addressable Market (TAM). Paul, I appreciate your insights on the TAM. You're indicating it's around $1.5 billion right now. I'm trying to understand if that's the correct figure. Based on PYLARIFY's performance and your current trajectory, it seems you might be close to penetrating the diagnostic segment of the market, potentially sooner than we originally thought. Is that accurate, or could it be that the diagnostic TAM is larger when you exclude the therapeutics, even beyond the unfavorable intermediate portion you mentioned? Additionally, regarding the therapeutic sector, what assumptions are you using to estimate the potential $400 million to $500 million expansion in TAM? My calculations suggest you're assuming about 1.5 scans per patient. However, if the number were closer to 2, 3, or 4—reflecting what physicians typically consider including follow-up scans—the potential would likely be significantly higher. Can you clarify those TAM considerations for me? Am I on the right track with my thoughts?

Paul Blanchfield, Chief Operating Officer

So Rich, first of all, thank you for the question and obviously the diligent preparation and research that you and your team continue to do. I don't think you're thinking about this incorrectly. We've raised the total addressable market for PSMA PET imaging three times over the last 15 months or so. And the determination of a total addressable market is really a triangulation between our indications, leading institutional guidelines like NCCN and SNMMI, as well as medical practice. We are very pleased with our penetration in both of our indications for the risk of metastases, as well as the recurrent population, and we continue to assess what that total addressable market is, recognizing that we are in oncology and so that does add some nuances as medical practice evolves. We've highlighted that it's currently based on approved guidelines for radioligand therapies at $1.1 billion. But as you know, there are clear opportunities as radioligand therapy is used earlier line and physicians use PSMA PET imaging, and PYLARIFY in particular, earlier in the risk of metastases indication. And so we've highlighted it's grown three times recently. We see future growth. And as you correctly know, this is very sensitive to the assumptions that you make on per patient per scan basis, meaning the number of scans per patient. You're correct to say that we have heard physicians using this, as you know, an increasing number of times, particularly in the therapeutic space, but I think I'd also remind you that Pluvicto in particular has only been approved for a few months, and so medical practice is still very much evolving. I think we're pleased with our penetration and believe that, as we work and PYLARIFY and PSMA PET imaging continues to penetrate the market, that physicians and guidelines will continue to catch up and this will be a growing market for many years to come.

Richard Newitter, Analyst

That's very helpful context, thank you. Regarding the guidance, it seems that $480 million to $500 million for PYLARIFY is suggested. That indicates your second-quarter performance will likely carry through for the remainder of the year. This aligns with your previous guidance for PYLARIFY over the last few quarters, but I'm curious. Since you have considerable capacity coming online and mentioned several PMF approvals, with Florida and New York now significantly operational, is there any reason to expect that growth wouldn't continue to increase sequentially?

Robert Marshall, Chief Financial Officer

I will address that, and Paul can provide additional qualitative details. The data indicates that we should see sequential improvement as the year progresses. Comparing the first half to the total second half, our performance in the second half is expected to be approximately 15% to 20% better overall in terms of PYLARIFY volumes. There is some competition entering the market now, although it is minor, and we will remain vigilant and make necessary adjustments. At this point, we are focusing on significant growth from last year’s $42 million to what could be about $500 million in revenue contribution. Therefore, I don't believe we need to be overly ambitious at this stage. There's still plenty of time left in the year, and we are very satisfied with our current trajectory.

Mary Heino, President and CEO

But I think you said it in the intro to your question: this is consistent with the way that we have guided in recent quarters to PYLARIFY.

Richard Newitter, Analyst

That's helpful. Regarding competition, you mentioned another competitor that is becoming more aggressive in the marketplace with the gallium radioisotope. What is included in your updated guidance related to competition? What trends are you observing in the market now that they are active and benefiting from some reimbursement advantages?

Mary Heino, President and CEO

We want to see continued adoption of PSMA-based PET imaging, which is a significant innovation for the prostate cancer community and our main focus. Typically, I speak about Lantheus and our product performance, but I think it's crucial to address competition and ensure accurate information is provided to analysts and shareholders. I want to correct what I believe are inaccuracies regarding the recent commercial entrants in the PSMA-11 market. Currently, there are four PSMA-11 agents available. Two are academic, approved by late 2020 and used in geographically restricted settings. Recently, two publicly traded companies have entered the market, one of which claims a more successful launch execution than PYLARIFY. However, this company missed its original PDUFA date by three months and, after receiving delayed approval, generated no revenue in its first full quarter. In contrast, PYLARIFY reported $7.4 million in its first full quarter and $35.4 million in the second quarter. The other product reported only $13 million, despite benefiting from the momentum we created in the PSMA market. I firmly believe that Lantheus's launch has been successful, and I'm proud of the sales numbers and our efforts to build capacity, market access, and awareness for our product, making it available for patients and physicians. We remain committed to the prostate cancer community, serving patients and shareholders, and we will continue to ensure access to what we believe are groundbreaking innovations in PSMA-based PET imaging. I'm not sure if that fully answers your question.

Zach Weiner, Analyst

Hey, everyone, thanks for taking the question. And congrats on another great quarter. I just wanted to continue, Mary, if I could, on competition. Can you talk about some of the benefits of F-18 versus gallium in terms of the manufacturing side? I know you've talked about in the past the half-life comparisons, but just curious on the manufacturing side and if you could provide any color there.

Mary Heino, President and CEO

Paul will elaborate on this as he is more involved in some areas, but there are two significant advantages to highlight. First, the half-life of F-18 is essentially double that of gallium, meaning it takes longer for the isotopes to decay. This extended half-life provides greater logistical flexibility for product delivery. The second advantage lies in the scale of manufacturing. F-18 is produced using a cyclotron, allowing for batch production. We can generate about 40 patient doses per batch and can produce multiple batches in a single day. This manufacturing method aligns well with the large patient population for prostate cancer. While gallium is also a viable isotope, it has a shorter half-life of about 68 minutes and is produced via a generator, which restricts the number of doses available at any time, limiting scalability. The crucial point is whether we have sufficient capacity to serve the U.S. prostate cancer market, and I'm pleased to report that we have established our own capacity to meet the needs of this community. There are some geographic areas where population density presents challenges, but we are actively working to expand availability to fulfill the demands of the U.S. prostate cancer community. Paul, would you like to add anything?

Paul Blanchfield, Chief Operating Officer

Yes. A few points to consider. It's important to note that FDG is the most widely used PET imaging agent, with over 2 million doses administered annually. This F-18-based product utilizes the same scalable PMF network across the country, and the healthcare community is very familiar with working with F-18, as it has been part of their practices for decades. We are leveraging an existing PMF network that supplies the top PET agent, FDG. Additionally, we are expanding our network to manufacture PYLARIFY, as mentioned, while ensuring we have enough capacity and backups in place. We are able to supply doses to repeat customers weekly in 45 states and the District of Columbia. However, there are regions like Wyoming, Idaho, Montana, Alaska, and Hawaii where we currently cannot deliver doses due to accessibility challenges. In key regions such as major metropolitan areas like New York, Chicago, Los Angeles, Dallas, and Houston, as well as our new market in Florida, we believe we can maintain a market-leading share. Our comparable share in the second quarter was approximately 90% relative to competitors, and we expect F-18 to continue to provide lasting advantages.

Zach Weiner, Analyst

Thanks. I just had one on DEFINITY and the shift in manufacturing to in-house. Can you provide just a timeline as to when you think you'll sell through all of the historical inventory and we should start to see the margin benefit from DEFINITY being produced in-house? Thanks.

Paul Blanchfield, Chief Operating Officer

Zach, we will continue to blend and source both from our longstanding external partners and from our in-house production. This mix will evolve over the coming years, leading to an incremental benefit. When I discuss gross margin and its potential for expansion, it is largely driven by the increasing volume of PYLARIFY and DEFINITY; as these products grow, margin expansion will happen naturally. The additional advantage of in-house manufacturing is indeed incremental. I anticipate seeing contributions start to come in, likely late this year into next year, as we work through existing inventory and ramp up batch production in the second half of the year. However, benefits will not materialize until we sell those specific products during that period. Therefore, I believe we will begin to see this benefit starting next year, and keep in mind that DEFINITY has a 24-month shelf life, meaning that as we address inventory levels, the timeline for recognizing that benefit will be significant.

Roanna Ruiz, Analyst

Hi, good morning and also my congrats on the progress. So two quick ones from me on PYLARIFY. First, now I noticed you mentioned 900 customers have ordered the product, and how do you expect this number to grow into the second half of the year? And if you can't speak to exact numbers, maybe it would help to just elaborate on the push and pulls that could influence this customer metric. And I have a follow-up.

Paul Blanchfield, Chief Operating Officer

So, as we mentioned, we have about 900 customers, which we define as PET imaging facilities, including freestanding imaging centers, government facilities like the VA, and hospitals. This is an increase from around 700 at the end of the first quarter, and while we expect this number to grow, we do not anticipate it to accelerate significantly due to the finite number of PET imaging centers in the country. The continued growth we expect is in the referrals and prescriptions coming into these imaging centers from the referring community, which includes urologists and medical oncologists managing men with prostate cancer. When a scan is deemed necessary, these doctors send a prescription to one of our current 900 customers to conduct the scan. Thus, as we see growth, we will naturally see an increase in treating sites—hospitals, government facilities, and imaging centers—but this number will eventually slow since we have already penetrated the market significantly. Our commercial efforts are now increasingly focused on these 900 customers, nearly all of whom are repeat customers ordering regularly, to continue driving demand and raising awareness among referring physicians, as many of them can contribute to further demand. We are currently in the demand generation phase within the referring physician community, and that is where we foresee the majority of future growth coming from.

Roanna Ruiz, Analyst

And I also wanted to ask, I noticed that you mentioned PYLARIFY is now included in a majority of the late-stage U.S. trials for PSMA-targeted therapeutics. And I'm curious, what kind of optionality does that give PYLARIFY in terms of possible indication expansion or therapeutic use in the next couple of years, and what do you think we should keep an eye on in terms of future updates?

Mary Heino, President and CEO

To clarify, the trial includes PSMA avidity as a biomarker for patient selection and response to therapy once treatment begins. This highlights the increasing value and utility of PSMA-based imaging agents. We can expect that in the future, labels for therapeutic products will likely acknowledge the role of PSMA-based imaging agents in selecting patients and monitoring their response. While the FDA will determine the specifics of how this will be reflected in the labeling, we do anticipate that these labels will incorporate the usefulness of PSMA-based agents for patient selection and therapy response. Additionally, as I mentioned earlier, there is an ongoing trial with PYLARIFY that is examining responses to androgen deprivation therapy in PSMA avid patients. This trial demonstrates that PSMA-based imaging can still be useful in monitoring responses to current treatments like androgen deprivation.

Paul Blanchfield, Chief Operating Officer

I think this goes really to the increasing potential total addressable market as PSMA PET imaging is being used in these new patient populations, as Mary Anne notes, whether it's patient selection or treatment response or patient following. And so, as PYLARIFY is being used in more and more trials, not only just for radioligand therapy, as she notes, but alternative therapies, this has the opportunity, as these studies progress, to not only benefit the U.S. prostate cancer community, most importantly, but also increase the potential usage and the awareness and comfort of PYLARIFY usage, particularly going forward.

Larry Solow, Analyst

Great, thanks. Good morning, everyone. Mary Anne, I appreciate the clarification regarding the competitor and their recent activities. I completely agree with you. Could you elaborate a bit more on the competitive landscape, particularly in the mid to long term concerning PYLARIFY and the potential introduction of an F-18-based agent? Clearly, you will have a significant first mover advantage. When might we expect to see an F-18-based product? I believe it could be within the next 12 months; is that correct?

Mary Heino, President and CEO

Please let's call it PYLARIFY, not PYL, thank you. Now, regarding the other agents under development, the one we mentioned is being developed by Bracco/Blue Earth, a private company, so we do not have access to data on whether that product has been filed with the FDA yet. I want to reiterate that I believe this is a very large market that can support multiple products. At Lantheus, we aim to be the first and the best wherever we operate, and I have made that clear in my comments throughout this discussion this morning. This market continues to grow and evolve in terms of its full utility. Therefore, we are confident that, no matter how many agents enter the market, we will maintain our leadership position, which will be reflected in both market share and continued revenue growth.

Larry Solow, Analyst

Can you talk about pricing? It seems like you are achieving what you expected, around the $4,000 rate. Could you elaborate on this? I've also heard concerns about a potential reimbursement cliff coming in a couple of years, particularly regarding Medicare. Is there anything you can share about that?

Mary Heino, President and CEO

I'm going to start and then I'll pass it over to Paul. Regarding your comments on our pricing, we don't provide specific pricing points for any of our products, but I can mention that Bob did not indicate that our revenue was affected by price declines. Occasionally, when we discuss DEFINITY, we do touch on the relationship between price and volume. As for PYLARIFY, the pricing is in line with our expectations. Due to the design of benefits in the PET imaging agent class, there is a CMS distinction regarding reimbursement known as the pass-through period, and I'll let Paul explain that and the potential impact it may have on the PSMA imaging agent class.

Paul Blanchfield, Chief Operating Officer

As Mary Anne mentioned, we are satisfied with the overall pricing, which aligns with our expectations and we believe will continue moving forward. Mary Anne highlighted the CMS distinction known as pass-through, a three-year program that offers separate payment for the use of PET imaging, specifically PYLARIFY, in hospital outpatient settings for traditional Medicare. This program currently provides differential payment for traditional Medicare, excluding Medicare Advantage, and is limited to the hospital outpatient setting. We anticipate that this segment represents about one-third to 30% of the overall population, as Medicare Advantage becomes more popular. Significant adoption has also occurred in government facilities and freestanding imaging centers, which are not impacted by the pass-through. This, therefore, affects a small portion of our overall business. We believe there are several opportunities to maintain payment and reimbursement even after the program ends. We have discussed the FIND Act, which is currently being considered in the House and Senate, proposing changes to the pass-through payment and providing permanent reimbursement. Additionally, prostate cancer has high prevalence, and as patients undergo repeated scans, we believe there are advantages to using the same agent for tracking progress. We are also exploring other ways to collaborate with our customers. We have talked about the increasing rollout of PYLARIFY AI to institutions, which enhances stickiness. Overall, we are pleased with our coverage, coding, and payment updates, and we appreciate the positive shift in how payers view radioligand patient selection. We are actively monitoring and seeking to influence payments related to the pass-through in this small patient population in the future.

Larry Solow, Analyst

If I may, I have one more question for Bob regarding the margins. Clearly, PYLARIFY is driving higher performance and an improved mix, which is benefiting the gross margin. How do you see the 66% margin this quarter moving forward in the next couple of quarters? Additionally, while you are increasing operating expenses, you are still achieving leverage. How should we understand the relationship between the gross margin and operating line in the upcoming quarters?

Robert Marshall, Chief Financial Officer

The 66% is a figure we considered when providing guidance above 65%, and I believe it can be sustained in the mid-60s range. However, I won't commit to 66% specifically. We have noticed that our supply chain logistics are becoming increasingly unpredictable, so it is essential to anticipate some uncertainty as we move ahead. Nonetheless, the key drivers, particularly the growth of PYLARIFY and DEFINITY volumes, will continue to support gross margin improvement. I do believe that gross margins in the mid-60s range are sustainable. Regarding operating expenses, you are correct that we are keeping them around 25%. We are also managing to gain leverage while making investments, although some unique investments included in our financials may not recur in the long term. Looking at adjusted EBITDA margins, which are currently around 42%, we aim to improve leverage from gross margin expansion and optimize our operating expense base as we progress, without forgoing investment opportunities.

Unidentified Analyst, Analyst

Hi, good morning. Thank you for taking our question and congratulations on impressive quarter. So maybe two questions from us. First, maybe can you clarify a bit of the milestone payments related to your Curium collaboration in Europe? Will there be a milestone payment after the EMA approval, and do you think the royalty from that part could be a significant driver for your 2023 or beyond revenue?

Mary Heino, President and CEO

So our relationship with Curium for the EU market for what is called PYLARIFY in the U.S. market is a royalty-only-based agreement.

Paul Blanchfield, Chief Operating Officer

The numbers related to their approval and market launch have not been considered in Street estimates as we look ahead, nor have we given any guidance on how we expect this to impact our income stream in 2023 and 2024. We will provide an update as we gain more clarity on the timing and its implications for future financials.

Unidentified Analyst, Analyst

Could you share your thoughts on expanding beyond oncology indications? Many of your current indications are in oncology, and I'm curious if you have considered branching out into neuroscience areas such as Parkinson's and Alzheimer's.

Mary Heino, President and CEO

That is a great question. Within our pharmaceutical services business, we have significant insight into emerging trends related to the use of biomarkers as imaging agents, and there is already notable research happening beyond oncology. However, when discussing therapeutics and companion diagnostics in this area, we will continue to see a strong lead in oncology, particularly in advanced treatment lines. Typically, complex oncology agents enter treatment as a later line therapy, like third line, depending on a patient's previous treatments. With solid data and experience, these treatments often become more widely used among various patient populations. I also see a resurgence in the use of radioligands, both therapeutically and diagnostically, and in the short term, we will likely observe this trend continuing within oncology, especially outside of prostate cancer, which is quite promising.

Operator, Moderator

And your next question is from Anthony Petrone from Mizuho Securities.

Anthony Petrone, Analyst

Thanks. And congratulations on the fantastic launch of PYLARIFY and all success here and obviously it’s reflected in valuation as well as it should be so congratulations to you and the team. I have two on PYLARIFY and then a couple of quick follow-ups. Just to start on PYLARIFY, one would be to just walk through the diversion of ordering patterns across the 900 active accounts. So what would you consider a high-volume account when you consider, for instance, monthly orders, and then what is the average across the 900? So that would be the first question. And then, at the analyst day, we heard of previously untreatable patients moving to curative therapies with PYLARIFY, right? And so they've actively diagnosed prostate cancer or a recurrence, so they move to a treatable therapy. Are those patients in particular being rescanned with PYLARIFY? And I'll have a couple of follow-ups.

Mary Heino, President and CEO

I'm going to address your second question first and then bring Paul in for your first. Regarding the idea of patients, I wouldn't classify any patients as untreatable. There have always been treatment options available for prostate cancer patients. The real innovation has been the role of PSMA imaging, which has significantly aided physicians and their discussions with patients, allowing for a much clearer understanding of the staging of patients, whether they are early or late stage. Additionally, with advancements in therapeutics, we've seen patient responses that provide insights that were not previously available, particularly those that were not PSMA-based. This has been a significant revelation and innovation within the prostate cancer community. However, I wouldn't characterize these patients as untreatable before this development. That said, in response to your question, these patients are where we're already hearing anecdotal evidence of PSMA imaging being embraced. As Paul previously mentioned, our estimates reflect the number of scans we assume will be used per patient, but ultimately it will be the physicians who decide how frequently imaging is useful for making the best decisions regarding treatment—whether to start, switch, or stop treatment. This is what PSMA imaging contributes as a valuable advancement for the prostate cancer community.

Paul Blanchfield, Chief Operating Officer

I completely agree, Mary Anne. The medical practice is continuously evolving, and we are careful to ensure that any total addressable market we publish is substantiated. We will update our findings as we conduct surveys and gather more information to support the evolution in terms of scans per patient. Regarding your initial question, Anthony, I won't disclose specific details about our key customers. However, there's inherent variability among our approximately 900 customers, with some large institutions conducting a significant number of scans. A key statistic to share is that about 97% to 98% of our customers place repeat orders for PYLARIFY. In terms of our larger accounts, roughly 40% of these customers account for about 80% of our volume. If you do the math, it follows the typical 80:20 rule, albeit with a bit more distribution. Additionally, around 40% of these accounts have ordered more than 50 doses so far this year through the second quarter. This includes substantial accounts that you would expect, such as major academic and institutional organizations, along with smaller independent imaging centers throughout the country. That number is on the rise, and our team's role is to continue educating and driving demand from referring physicians to these institutions. We believe there is still ample capacity not only in our supply but also in the available space on PET/CT machines to perform more PYLARIFY scans moving forward.

Anthony Petrone, Analyst

I have a quick follow-up regarding ARROW 2 1095, specifically about the last patient in the quarter and the one-year follow-up. Could you share your thoughts on the timing for the Phase II readout next year, especially considering the staggered enrollment? Also, what might the Phase III protocol look like? Additionally, for Mary Anne or Bob, the cash flow profile has significantly improved, the CVR liability is nearly satisfied, and the debt ratio is at favorable levels. Can you provide updated thoughts on pursuing more aggressive follow-on M&A strategies?

Mary Heino, President and CEO

To address your first question about ARROW, it's important to clarify that we are referring to ARROW and not ARROW 2. You are correct that patient enrollment was staggered, and since there's a one-year follow-up, the data for patients will come in gradually. I don’t have a specific date to share regarding when we will publicly provide a readout on the trial. My response about the Phase III protocol aligns with this situation. Furthermore, given the current dynamics in the market, which is evolving quickly in the radiopharmaceutical space, we want to keep our options open regarding the structure of our Phase III trial to best meet the needs of an evolving market. Therefore, we will hold off on additional comments for now. Regarding your second question, I think you were answering it as you asked. Thank you for the valuable insights into our business; they do set us up well. Thanks to Bob and his excellent work, we are in a strong position capital-wise to pursue any M&A opportunities that align with our strategic goals and the principles of our strategic plan moving forward.

Robert Marshall, Chief Financial Officer

I would like to add that our liquidity position continues to improve, and I anticipate it will keep getting better from our current standing, ending the year with significant cash reserves and a leverage ratio below half a turn on a net basis. We are also in a net cash position as a company, which allows us the flexibility to do what we need while still being conservative regarding our overall capital structure and avoiding overextending ourselves to acquire assets that we believe can drive long-term growth. You're absolutely right, and the company will remain disciplined in its capital deployment.

Operator, Moderator

We show no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.