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EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2014 - Q3
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Executives

Linda Lennox - Senior Director of Investor Relations and Corporate Communications Jeff Bailey - President, Chief Executive Officer, Director John Bakewell - Chief Financial Officer.

Analysts:.

Operator

Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Lantheus Medical Imaging third quarter 2014 earnings conference call. All lines have been placed on mute to prevent any background noise. This call is being recorded for replay purposes.

A replay of this call will be available approximately four hours after the conclusion of the live call through November 26, 2014. I would now turn the call over to your host for today, Ms. Linda Lennox..

Linda Lennox Vice President of Corporate Communications & Chief of Staff

Thank you and good afternoon, everyone. Welcome to Lantheus Medical Imaging's third quarter 2014 earnings conference call. We appreciate you joining us. I am Linda Lennox, Senior Director of Investor Relations and Corporate Communications for Lantheus.

With me on the call today are Jeff Bailey, our President and Chief Executive Officer and John Bakewell, our Chief Financial Officer. Please note that earlier this afternoon we issued a press release reporting the results of our third quarter 2014. We also filed with the SEC our Form 10-Q for the period ended September 30, 2014.

You can find both of these documents in the Investor Relations section of our website at lntheus.com. The agenda for this call will include opening remarks from Jeff, a detailed review of our third-quarter financial results from John and then a business and strategic update from Jeff along with some additional closing remarks.

Please note that consistent with last quarter's call, we are refraining from our traditional practice of conducting a question-and-answer session due to the fact that our parent company, Lantheus Holdings, Inc. is in registration for an offering of its equity securities.

Today's prepared remarks have been expanded in order to anticipate the topics that may otherwise have been on your list of questions.

Before we begin, I would like to remind you that our remarks during this call may include some forward-looking statements including statements related to our products and supply arrangements and expectations for future periods. Matters addressed in these statements are subject to risks and uncertainties.

Words such as believes, expects, anticipates, hopes, plans, may and similar expressions are intended to identify such statements. Actual results may differ materially from our expectations.

Please refer to cautionary statements and risk factors contained in our SEC filings, including our quarterly report on Form 10-Q filed with the SEC today November 12, 2014. A copy may be obtained at sec.gov and on our website at lantheus.com.

Except to the extent required by law, we do not undertake any obligation to update any forward-looking statements and we caution you against relying on any forward-looking statements. On today's call, we will to discuss certain non-GAAP financial measures with respect to our performance.

We use these no-GAAP indicators for financial and operational decision-making and as a means to evaluate our performance.

The definitions of EBITDA, adjusted EBITDA and net income as adjusted along with their reconciliation to GAAP net income are set forth in our earnings release, which was filed with the SEC as of November 12, 2014 as a current report on Form 8-K. Copies may be obtained at sec.gov and on our website at lantheus.com.

Please note that unless we indicate otherwise, all of our commentary on today's call will make reference to as adjusted results. With that introduction, it is now my pleasure to turn the call over to our CEO, Jeff Bailey.

Jeff?.

Jeff Bailey

Thank you, Linda. Good afternoon, everyone and thank you for joining us on our third-quarter 2014 earnings call. I will start today's discussion with some opening commentary before handing the call over to John for his third-quarter financial review.

As most of you are aware, since the start of 2013, we have been undertaking a significant operational transformation of the business. And our success to-date is quite evident and continues with the financial results of our third-quarter.

Year-over-year, third quarter revenues increased by 8% on a worldwide basis, reflecting solid performances throughout our product portfolio but lead, in particular, by another strong contribution from DEFINITY, which posted a 20% increase year-over-year that once again grew sequentially with further market penetration and expanded use in the U.S.

ultrasound contrast market. I will have more on that topic later on our call. At the same time, with accomplished a number of noteworthy goals reflected within our financial results this quarter. During the third quarter, Lantheus achieved quarterly GAAP earnings profitability posting third-quarter net income totaling $1.5 million.

This a significant accomplishment for our business and an obvious marker of the progress we have made with our operating model over the past seven quarters. At the same time, our third quarter operating income crossed the 15% threshold reaching 15.2% revenue while our adjusted EBITDA margin grew past the 25% mark totaling 25.2% for the quarter.

As you would expect, we are delighted with our third-quarter financial results and our progress made to-date. At this time, I will hand the call over to John for a more detailed review of those third-quarter financial results after which I will be back to take you through a more extensive business update and review of our strategic priorities.

So with that, John, it's all yours..

John Bakewell

Thanks, Jeff, and good afternoon, everyone. We are quite pleased with our third-quarter 2014 financial performance, as Jeff just noted and happy to be taking you through the details. Third-quarter revenues totaled $75.7 million, a year-over-year increase of 8%, on both an as reported and constant currency basis.

As I will cover in more detail when we review our revenue performance, consistent with what we have been experiencing all year, the product lines that drove our third-quarter revenue growth are also among our highest gross margin contributors and the resulting favorable mix shift, accompanied by positive cost of sales dynamics delivered significant year-over-year improvement within our gross profit results.

Third-quarter profitability was further improved by operating expense leverage, the result of last year's realignment of our R&D function as well as from the more broadly-based efficiency initiatives.

Altogether, our third-quarter GAAP net income improved on as reported basis by $16.6 million to $1.5 million for the third quarter 2014, compared with $15.1 million net loss in the year-ago quarter. Adjusted EBITDA expanded to $19.1 million for the third quarter 2014, increasing by more than $7 million from the year-ago result of $11.9 million.

Likewise, on a sequential basis, we experienced continued adjusted EBITDA expansion in the third quarter, driven by improved gross margin and lower operating costs, which resulted in sequential growth of 19% compared with the second quarter of 2014.

As we look at our revenue results in detail, on a product line basis, DEFINITY continued its strong performance in the third quarter posting growth, as Jeff noted, up 20% year-over-year. Our DEFINITY revenues, which totaled $24.3 million for the third quarter, once again grew sequentially increasing by $700,000 or 3% over the second quarter 2014.

Both year-over-year and sequential sales were driven by the continued adoption of contrast in echo procedures, as evidenced by the U.S. market penetration rate for the use of contrast, which has been increasing progressively for the past several years and has more than doubled from 2010 levels.

DEFINITY now represents 32% of our worldwide revenue mix and has grown considerably from a mix of 29% of sales for the third quarter 2013. Our TechneLite business posted worldwide revenue of $23.6 million for the third quarter 2014, up slightly from our second-quarter revenue of $23.5 million.

Year-over-year, third-quarter TechneLite revenue grew $1.2 million or 5%, reflecting growing demand from our radiopharmacy customers in particular for generators we derive from low enriched uranium or LEU sources.

Xenon revenues, which represented 12% of our total sales mix during the third quarter 2014 totaled $8.9 million, remaining consistent sequentially versus our second-quarter or growing 9% versus the year-ago quarter.

Of note, we achieved these results despite lower sales in Q3 2014 to one specific customer that began directing its own radiopharmacy customers to purchase Xenon from us through other channels.

Cardiolite revenue, which includes branded Cardiolite as well as its generic equivalent, totaled $4.7 million in the third quarter, compared with $4.6 million in the third quarter 2013 and $4.8 million in the second quarter 2014.

This product, as most of you know, has been off patent since 2008 and has been managed downward to current sales levels where it now competes side-by-side with a number of generic equivalents.

Our other product category, which represents just under 20% of our total revenue, and includes a number of our smaller product lines and revenue-generating activities declined by 5% in the third quarter 2014 compared to the prior year and by 4% on a sequential basis.

The decrease was primarily attributable to various third-party products sold through our international radiopharmacies and the competitive pressures on these products in several of our international markets.

Moving below to revenue line, our third-quarter 2014 gross margin totaled 41.8%, a full eight percentage point improvement over the 33.7% posted for our third-quarter 2013.

As noted previously, year-over-year revenue growth is being driven by our highest margin contributors, specifically DEFINITY and Xenon and the resulting sales mix shift made a significant contribution toward our year-over-year gross margin expansion.

Additionally, as we have discussed in past calls, we have also been working to manage material costs in manufacturing expenses within cost of sales and the progress we have made in those areas is likewise reflected in our year-over-year margin expansion. One final note on gross margin.

On a sequential basis, we are likewise pleased with the progress we have been making throughout this year. Our gross margin has progressively improved as it moved through 2014 and this most recent quarter was no exception.

With our third-quarter gross margin performance improving sequentially by 70 basis points over our second-quarter results driven primarily by the same favorable sales mix shift that's driving our year-over-year improvements. Looking into Q4, we expect those same favorable sales mix dynamics to be present.

However, you should note, that Q4 gross margin will likely be sequentially lower than Q3 due to a heavier weighting of technology transfer costs expected in Q4 and also due to repeat year-end contract fulfillment that occurs with one of our lower margin products. Moving out operating expenses.

We have experienced considerable improvement over the past year. Our combined operating expenses as a percent of revenue totaled 26.6% for the third quarter 2014, a 390 basis point improvement compared with 30.5% in the third quarter 2013, after excluding the $6.8 million land impairment charge we incurred in third quarter of last year.

This operating leverage was driven primarily by the strategic alignment of the R&D function in early 2013 and the corresponding reduced year-over-year expense run rate, offset partially by increases in G&A expense primarily related to performance based employee compensation.

Altogether, our business delivered operating income of $11.5 million and an operating margin of 15.2% for our third quarter 2014, dramatically improved in comparison to our third-quarter 2013 operating loss of $4.6 million and sequentially improved by $1.6 million over the second quarter 2014.

As noted earlier, a similar transformation is evident at our net earnings and adjusted EBITDA lines, with achievement of positive GAAP net income in Q3 and with our adjusted EBITDA margin reaching 25.2% for the quarter. As I noted during our gross margin discussion, we do expect our gross margin in Q4 to be slightly lower than in Q3.

Additionally, we anticipate that Q4 operating expenses will be slightly higher sequentially, mainly the result of timing of certain R&D expenses related to our Flurpiridaz clinical activities. As a result, please note that our fourth-quarter adjusted EBITDA results are likely to not exceed levels reported for Q3.

However the results are expected to be similarly improved in comparison to prior years as the themes of strong positive sales mix, year-over-year margin expansion and operating expense leverage continue into Q4.

Before we leave our P&L discussion and move into review of our balance sheet and cash flow performance, I would like to take you through an important and exciting cost-reduction initiative that we are launching in the fourth quarter.

Present day, Lantheus operates on a sizable corporate campus, a legacy of the company's prior corporate ownership and our past operating history. Since 2008, the size of the company's workforce has decreased considerably as have our requirements for facilities workspace.

We recently completed an evaluation of our current and future needs and identified an opportunity to further rationalize our facilities costs by decommissioning certain of our buildings and further consolidating our campus.

During the fourth quarter, we will begin to move employees, equipment and contents from two of our buildings into other buildings on our campus and prepare those vacated buildings for decommissioning during 2015.

The cash expense associated with consolidation which we are estimating to be approximately $1.5 million, we expect to recover in just over one full year post completion, the result of lower operating costs.

As part of this initiative, in addition to these upfront cash charges, there will also be significant non-cash expenses that will flow through our P&L in the form of accelerated depreciation expense as the remaining net book value of these buildings is depreciated over a very short useful life between now and their decommissioning.

Note that all of these special charges, both cash and non-cash are add-backs in our adjusted EBITDA calculation and will not impact future adjusted EBITDA results.

Additionally, as we report our results in future periods, we will be providing our reported earnings results on both a GAAP and as adjusted basis, so that you can see the underlying P&L performance of our business, exclusive of these special charges.

These charges will begin to appear in results we report for our fourth quarter 2014 and will continue through the first half of 2015 until our project has been completed. We are very much looking forward to launching this initiative as our ongoing effort to identify and harvest operating efficiencies across the business continues.

Before I wrap up, let me cover our key cash flow balance sheet and liquidity considerations, beginning with cash flow. We generated strong cash flow from operations during the third quarter. Q3 cash flow from operations totaled $19.7 million compared sequentially to a negative $4.2 million for Q2 of 2014.

Of note, second-quarter operating cash flow includes the $19.5 million semiannual payment of our bond interest. On a comparative basis, excluding the second quarter interest payment, third-quarter operating cash flow improved by $4.4 million sequentially over Q2.

Within our components of working capital, accounts receivable at September 2014 totaled $41.2 million compared to $42.5 million at June 30, 2014, representing approximately a $1.3 million source of cash.

We had days sales outstanding of 50, representing a one-day uptick from June 30, 2014, attributable entirely to the sequencing of sales throughout the quarter. Inventory on hand totaled $16.4 million as of September 30, 2014 which represents approximately 42 days of inventory on hand in aggregate, as compared to 36 days at June 30, 2014.

As noted on previous calls, we are maintaining higher levels of safety stock associated with DEFINITY as we complete our technology transfer process with Pharmalucence and with Neurolite as we continue to work to have JHS validated as a Neurolite supplier. We currently expect U.S.

approval of JHS for the manufacture of Neurolite in early 2015 and approval of Pharmalucence for the manufacture of DEFINITY later in 2015.

While these safety stock levels do require modest temporary working capital investments, at the same time our radioactive nuclear products are not held in inventory due to their short half-lives and therefore require no meaningful working capital investment.

Overall, the net working capital impact on the third-quarter was a net source of cash of approximately $12.8 million as compared to net working capital representing a net use of cash of $9.2 million for the second quarter.

Excluding debt service, second-quarter working capital impact was a contribution to cash of $10.3 million, underlining the improving fundamentals for balance sheet management. Capital expenditures during the third quarter 2014 were $1.8 million, compared with $900,000 in the third quarter of 2013 and $2 million in the second quarter of 2014.

We continue to tightly manage our capital expenditures. It is important to note that capital expenditures do not include the costs associated with the historic or ongoing technology transfer activities with various contract manufacturing organizations, which are expensed as incurred.

In our third quarter of 2014, we invested $1.2 million to support these important activities versus $900,000 in the third quarter of 2013 and $1 million in the second quarter of 2014. These costs are included in cost of sales. Cash and cash equivalents at September 30, 2014 totaled $25.2 million, compared with $14.1 million at June 30, 2014.

During the second quarter of 2014, we amended our asset-backed loan facility to increase our borrowing limit of our revolving line of credit to $50 million.

As of September 30, 2014 with an outstanding $8.8 million unfunded standby letter of credit and an $8 million loan balance, our resulting net availability as of that date was approximately $30.6 million and our total liquidity, including cash on hand, was $55.8 million, which provides ample liquidity to support our operating needs, including upcoming debt service requirements.

That concludes our third-quarter quarter 2014 financial review and I will now turn the call back over to Jeff..

Jeff Bailey

Thank you, John. As I move into today's business review, let me start with a brief update regarding the ongoing IPO process for our parent company. Lantheus Holdings.

As you know, back in July, we chose to postpone our offering and wait until circumstances became more favorable for us while at the same time continue to focus on growing our revenue and adjusted EBITDA. Throughout this period of time, as we progressed through 2014, we have continued to remain in registration.

In fact, last week, we updated our registration statement with the SEC once again and we anticipate making further updates in the future as needed to keep our registration current. Going forward, we will continue to evaluate the IPO landscape and make the right decision for our business when the timing and circumstances are best for us.

In the meantime, as Linda noted in her preface to our call, we will not be conducting a Q&A session today, but instead try to anticipate the questions you would ask and addresses those topics in the rest of my remarks. So with that I like to provide you with an update on business activities and key developments here at Lantheus.

Let me start with a couple of topics specific to DEFINITY. As part of our strategy to grow our existing commercial portfolio, we continue to work diligently to drive the appropriate use of contrast which is a strategy that is critical to DEFINITY. DEFINITY is our fastest growing commercial product and accounts for more than 30% of our total revenue.

As John noted, year-over-year third-quarter sales of DEFINITY increased by more than 20% and sequential quarterly sales grew by 3.2%. It is our highest margin product and with sales continuing to grow each quarter, we expect gross profit to continue to increase.

As many of you know, we track contrast penetration rate, which is the percentage of all echocardiography studies performed with an imaging agent of any kind.

Our most recent period measured, the rolling three-months to September 2014, this penetration rate once again increased reaching 3.8%, compared with 3.3% for the same period in 2013 at 3.6%, the three-month period ended June 30, 2014. As you may have seen on October 10, the U.S.

FDA approved a third echocardiography contrast imaging agent being introduced by Bracco. That agent has been marketed for a number of years outside the U.S. under the trade name SonoVue. We have been preparing for this possible entrance into the U.S. marketplace since early this year and have strategically and tactically planned accordingly.

How do we think this is going to impact DEFINITY and Lantheus overall? The U.S. ultrasound contrast market is large, significantly under-penetrated and growing. With more than 30 million echos performed in the U.S. each year, analysts are suggesting that approximate 20% or 6 million of those echos are suboptimal.

We believe that another voice in the U.S. ultrasound contrast marketplace will further help raise awareness around the value that contrast brings and expand the reach of the enhanced diagnostic patient care. DEFINITY is the most frequently used echocardiography contrast agent in the U.S. with the broadest clinical and postmarketing U.S.

exposure of any of the approved ultrasound contrast agents. Since its launch in 2001, more than 5.2 million echo studies have been performed with DEFINITY. Our strategy is focused on increasing the appropriate use of contrast overall, while protecting DEFINITY's dominant share in the context of the changing marketplace.

Increasing the overall appropriate use of contrast is important because first, the echo market is sizable. A small advance in contrast penetration means that tens of thousands more patients are getting more accurate and reliable cardiac diagnosis.

Second, we disproportionally benefit by this growth in usage due to our majority share position in the echocardiography contrast imaging space. The additional voice in the U.S.

contrast imaging marketplace could result in accelerated market growth and the combination of this increased voice, our DEFINITY dedicated nationwide sales force and DEFINITY's long history and track record makes us believe we will continue to be a leader in a growing ultrasound contrast marketplace.

While we don't know of our competitor's specific launch plans, we do anticipate that their presence will have some amount of near-term impact on DEFINITY 's growth rate in 2015.

However, we believe that longer-term, the additional voice in the marketplace will benefit us as the appropriate use of contrast gets an additional advocate, which we believe will help drive the continued growth of this market. Another commercial update for you today is a brief status report on recent contract negotiations with Cardinal.

As you probably know, Cardinal is one of our largest customers and it purchased a number products from us for use across the radiopharmacy network. In late 2012, Lantheus entered into a two-year agreement with Cardinal, our current agreement. And that contract is set to expire at the end of this year.

Negotiations are currently underway with Cardinal and we anticipate having more report on this process as we move forward. I would like to spend some time now updating you on our molybdenum or moly supply.

Regarding our TechneLite generators, as we described during past calls we have been very pleased with the breath and the redundancy of our moly supply, which we believe provides us with the most balanced and diversified supply chain in the industry.

To further expand our supply chain, we announced last week that we entered into a strategic agreement for future supply of moly with Wisconsin-based Shine Medical Technologies. This marks our first agreement with a domestic supplier of moly.

While this new source of moly, based on proprietary low-enriched uranium solution technology won't be available to us until 2018, it is important that we proactively work to further diversify our global moly supply ensuring that there is a reliable and secure access to moly to meet the needs of patients for years to come.

On the pipeline front, as we have covered on past calls, the three promising agents in the pipeline for development with Flurpiridaz F 18 being the most advanced program in the pipeline. We continue to move forward with developing this promising agent.

As John mentioned, we anticipate that Q4 operating expenses will be slightly higher sequentially as a result of certain RD expenses related to our Flurpiridaz clinical activities. This will result of continued work in first of our two Phase 3 studies and we will conduct it for the eventual initiation of the second Phase 3 trial.

On September 20, we presented additional data on Flurpiridaz F 18 at the American Association Nuclear Cardiology's 19th Annual Scientific Session, which was held in Boston this year.

The data were collected from the first of our two Phase 3 clinical trials and built upon the previous Phase 2 findings providing further important information regarding the benefit-risk assessment of the agent in myocardial perfusion imaging or MPI.

The data demonstrated a statistically and clinically significant reduction in radiation exposure and significant improvements in image quality and diagnostic certainty with Flurpiridaz F 18 MPI as compared with SPECT.

We believe Flurpiridaz F 18 could significantly reduce patient's exposure to radiation, at the same time provide better, more useful images for clinicians and we continue to see great promise in Flurpiridaz F 18 as a next-generation imaging PET tool for the diagnosis and evaluation of coronary artery disease.

In the meantime, we continue to meet with potential strategic partners to further develop and commercialize Flurpiridaz. We are also seeking strategic partners to develop further our two earlier stage development candidates, our PET based Cardiac Neuronal Imaging Agent and our MRI based Vascular Remodeling Imaging Agent.

Also with respect to business development activities, we continue to pursue opportunities to add to our commercial portfolio to help drive revenue growth. Our improving financials allow us to act upon tuck-in opportunities, and we continue to build opportunistic transactions to strengthen and diversify our system commercial portfolio.

There's nothing specific that I can talk to at this time, however we are active in evaluating a number of potential opportunities and I look forward to updating you on the status of our business development activities on future calls.

Before I conclude the call, I will provide you with a brief update on [AUDIO GAP] On last quarter's call, I updated you that the court granted Zurich leave to file a summary judgment motion, which they did on July 14. We filed a memorandum of law in opposition to Zurich's motion for summary judgment on August 25.

Zurich filed a reply memorandum of law in further support of its motion for summary judgment on September 15, 2014. Expert witness discovery was completed on October 31. We could not be certain what amount, if any, or when, if ever, we will be able to recover for business interruption losses related to this matter.

And with that, I will end my update remarks for this quarter. Altogether, we are quite pleased with the results of our third quarter and the progress we are making on our business on all fronts, including strategic, operational and financial.

Our culture focused on accountability and on metrics tied to quality, efficiency and customer service is serving us well and positioning us for continued growth and expansion. I look forward to updating you on our continue progress on our next earnings call. With that, we will include today's call..

End of Q&A

Ladies and gentlemen, thank you for your participation. You may now all disconnect. Have a great day..

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