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EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2015 - Q2
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Executives

Meara Murphy - Director-Investor Relations and Corporate Communications Jeff Bailey - President and Chief Executive Officer John Bakewell - Chief Financial Officer.

Analysts

Matt Keller - Credit Suisse Raj Denhoy - Jefferies Glenn Novarro - RBC Capital Jeff Johnson - Robert Baird Kevin Casey - Casey Capital.

Operator

Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Lantheus Holdings Second Quarter 2015 Earnings Conference Call. This is your operator for today’s call. Please note that 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 three hours after conclusion of the live call through August 18th. I would now like to turn the call over to your host today, Murphy. Please go ahead..

Meara Murphy

Thank you and good afternoon, everyone. Welcome to Lantheus Holding’s second quarter 2015 earnings conference call. We appreciate you joining us. I’m Meara Murphy, Director of Investor Relations and Corporate Communications for Lantheus.

With me on the call today are Jeff Bailey, President and Chief Executive Officer and John Bakewell, Chief Financial Officer. Please note that earlier this afternoon, we issued a Press Release reporting second quarter 2015 results. We are also filing with the SEC our Form 10-Q for the quarter ended June 30, 2015.

You can find both of these documents in the Investor Relations section of Lantheus’ website at lantheus.com. The agenda for this call will include an opening summary from Jeff, a review of our financial results from John, then followed by a business update from Jeff, before moving into our question-and-answer session.

Before we begin, I would like to remind you that remarks during this call may include some forward looking statements, including statements about our outlook for 2015 and other predictions or estimates regarding the future of our business.

Matters addressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectation.

The forward-looking statements made in today’s call, speak only as of this original date and except to the extent required by law, we do not undertake any obligation to update any forward-looking statements. We caution you against placing undue reliance on any forward-looking statements.

Additional information regarding forward-looking statements appears in the Safe Harbor section of today’s press release.

Information about our specific risk and uncertainties is contained in our SEC filings including our prospectus dated June 24, 2015 and filed with the SEC on June 26, 2015 and in our quarterly report on Form 10-Q, which we are filing today with the SEC.

Copies may be obtained at sec.gov and on our website at lantheus.com On today’s call, we will also discuss certain non-GAAP financial measures with respect to our performance. We use these non-GAAP indicators for financial and operational decision-making and as a means to evaluate our performance.

The definitions of EBITDA, adjusted EBITDA, operating income as adjusted and net income as adjusted along with other reconciliations to GAAP metrics are set forth in our earnings release, which was filed today on Form 8-K. Copies may be obtained at sec.gov and on the Company’s website at lantheus.com.

Please note that unless indicated 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, Meara and welcome to everyone joining us today on our second quarter 2015 earnings call which is our first time reporting financial results since our initial public offering on June 25, 2015. As Meara noted, I’ll begin our discussion today with some opening commentary.

As today’s press release reflects, during the second quarter we continued to make excellent progress, driving our business toward greater efficiency and profitability, both operationally as well as with the execution of our IPO and the concurrent refinancing of our outstanding senior notes.

Our second quarter 2015 performance reflects the continued strong performance of DEFINITY which grew 21% annually and posted its 12th consecutive quarter of sequential growth. It also reflects the progress we’ve made toward achieving better customer balance within our nuclear medicine portfolio.

The net result, the reduced levels of total revenue for that aspect of our business but significantly improved profit margins. Second quarter 2015 revenue totaled $73.3 million representing a decrease of 3% as reported and 1% on a constant currency basis year-over-year.

While the anticipated lower sales volumes and higher average selling prices driven by a customer specific change earlier this year reduced our overall levels of revenue. We expanded our adjusted EBITDA margin 300 basis points, driving our adjusted EBITDA margin to 24.5% of revenue in the second quarter.

Our second quarter 2015 adjusted EBITDA totaled $18 million, increasing by 10% from $16.3 million in the same quarter last year. Altogether, we’re quite pleased with our second quarter performance and the progress we’re making with our key initiatives.

At the same time, we ended the second quarter with completion of our initial public offering and the refinancing of our debt. These are significant milestones and a further advancement of our business.

We’re excited to have brought our investment opportunity to the public equity market, at the same time meaningfully reducing our overall levels of leverage and our go-forward borrowing cost.

On behalf of the Board and the executive team, I’d like to take a moment to thank the 500 plus employees of Lantheus who’ve made our success to date possible through their continuous focus on quality, efficiency and customer service.

At this time, I’ll hand the call over to John for a detailed review of our second quarter financial results after which I’ll be back to take you through the rest of the agenda. So, with that, John, it’s all yours..

John Bakewell

Thanks Jeff. Good afternoon, everyone. As we get started, let me reiterate than unless otherwise noted, all of today’s discussions regarding our sales growth rates refer to our constant currency growth rates and our results of operations refer to our as adjusted results as referenced by Meara during the introduction to our call.

The tables to today’s press release, as previously noted include the reconciliations of our GAAP results to the as adjusted performance I’ll be covering with you today.

Of particular note, those tables include reconciliations of our GAAP, net income to adjusted EBITDA, which is a metric we consider to be particularly relevant at this time and which will be referencing in our guidance outlooks going forward.

Let me also mention before we begin that you may find today’s financial commentary to be more detailed than that of a typical quarterly earnings call, considering this is our first call with public equity investors, we want to be sure we’re providing adequate direction and insight to those of you modelling our outlook.

So, today I’ll be favouring an approach that provides a little more detail in certain areas than what will be the norm going forward. As Jeff noted, second quarter 2015 revenue totaled $73.3 million, decreasing by 1% on a constant currency basis.

Looking at our revenue results on a product line basis DEFINITY continued its strong performance with revenue growth totalling 21% year-over-year. DEFINITY has now grown to represent 39% of our worldwide revenue mix, increasing from 31% of our mix in the second quarter of 2014.

Our second quarter results for the balance of our product portfolio reflect the anticipated outcome of customer specific changes that were initiated at the beginning of the year with Q2 reflecting a full quarter’s effect of the associated lower volumes and higher pertinent selling prices for certain of our products on a year-over-year basis.

Specifically, our TechneLite business posted worldwide revenue of $17.4 million for the second quarter of 2015, decreasing by 25% on a constant currency basis, compared to the year ago quarter.

Sequentially, TechneLite revenue for the previous first quarter of 2015 was $3.5 million higher than Q2, the result of volumes remaining at historic levels early in Q1 before adjusting downward to the new lower levels that carried into Q2 and which consequently brought a full quarter’s effect to our second quarter.

Xenon revenues, which represented 16% of our total sales during the second quarter of 2015 totalled $12 million growing 35% versus prior year, primarily reflecting increased per unit selling prices attributable to our customer specific changes.

Our other product category, which represents 21% of our total revenue totaled $15.5 million, decreased by 15% in constant currency as compared to the second quarter 2015.

The decrease is attributable to certain license fee revenues that ended in December 2014 as well as lower sales of certain other nuclear medicine products impacted by the recent customer specific changes.

Moving below the revenue line, our second quarter 2015 gross margin totaled 44.6% as adjusted, a 350 basis point improvement over gross margin of 41.1% as adjusted, for our second quarter of 2014.

The main drivers of this significant improvement are the increased sales of DEFINITY, our highest margin product and lower volumes with increased per unit selling prices for certain nuclear products associated with the previously noted customer specific changes.

Noted that the effect of our customer specific changes has moderated from the more pronounced impact in Q1, which reflected the benefit of historic TechneLite volumes which I addressed in my TechneLite comments.

Looking ahead to the remainder of this year, we anticipate that gross margins, exclusive of technology transfer costs will continue to be improved versus prior years while more closely resembling our Q2 results than those experienced during Q1.

Those technology transfer costs which are the period expenses associated with our various contract manufacturing initiatives were relatively light in Q2, approximately $800,000. Going forward, we expect considerably higher levels in the remaining quarters of 2015 as our CMO-related activities intensify.

Technology transfer costs are included in our reported cost of sales and all those increased costs will dampen our reported gross profit gross margin results. Please note that they do not impact adjusted EBITDA since they are included as an add-back to that calculation.

Note that our tech transfer costs have historically demonstrated, we believe we’ll continue to demonstrate considerable variability from period to period depending on the timing and the cost of our various transfer related projects.

The exclusion of technology transfer costs makes adjusted EBITDA a particularly meaningful performance measure for our business at this time.

Moving now to operating expenses, second quarter 2015 operating expenses as adjusted totaled $20.8 million and were $300,000 lower than last year, reflecting our continued focus on efficiency and cost control and also the shift of approximately $1 million of DEFINITY focused sales and marketing program activities originally planned for Q2 into the fourth quarter of 2015.

Altogether, on an adjusted basis, we delivered operating income of $11.9 million in the second quarter of 2015, increasing by 19% over last year with operating margin expanding by 300 basis points to 16.2% for the second quarter. Moving below operating income, in light of our recent refinancing let me comment on interest expense.

Second quarter interest expense totaled $13.9 million on a GAAP basis and was $10.6 million when adjusted to exclude additional interest expense incurred due to refinancing of our senior notes.

Going forward, beginning with our third quarter, we will now benefit from a significant decrease in cash interest expense with approximately $13.5 million of improvement in our annual run rate versus refinancing levels.

At the current rate of borrowing, on our new $365 million term loan, which is LIBOR plus 600 basis points subject to a 1% LIBOR floor, we expect interest expense inclusive of related charges and deferred financing cost amortization total approximately $7 million per quarter for the rest of 2015.

Another important P&L consideration I’d like to touch on in some detail today is our income tax provision. We have significant net operating loss carry forwards and credits of approximately $134 million at June 30, 2015. Consequently, we will not be a cash taxpayer in the U.S. for a significant number of years.

In all likelihood, through the year 2020 or beyond from a GAAP reporting perspective, because our NOLs are fully offset by reserves, we anticipate that our income tax provision will total approximately $2 million to $3 million per year through 2017, consisting exclusively of discrete items unrelated to our U.S. pre-tax income.

Thereafter, in 2018 and beyond, following the required takedown of our deferred tax reserves, we expect to report tax expense that reflects the full effective tax rate, while we continue to utilize NOLs that offset any U.S. cash tax obligation.

Note that the discrete items that make up our present day provision can vary in amount, sometimes considerably from quarter to quarter. Finally, per share count, our Q2 per share results are based on an average of 19.3 million diluted shares for Q2 of this year and 18.1 million for Q2 2014. At June 30, 2015 we had 30.3 million shares outstanding.

Moving on to our balance sheet, cash flow and liquidity. At June 30, 2015 we had cash and equivalents totalling $22.2 million. Our IPO and concurrent debt refinancing were both completed near the end of Q2, therefore the full effect of our recent transactions is reflected in our quarter-end balance sheet.

Summarizing our Q2 refinancing activities, the net proceeds from our IPO together with proceeds from our new term loan facility generated cash of $423.4 million, of which $417.8 million was used to fully repay our $400 million of senior notes, repay our $8 million of outstanding borrowings on our ABL facility and pay associated call premiums and financing costs.

Altogether our financing activities reduced previously outstanding debt by $43 million leverage ratios at June 30, 2015 calculated using our 630 15 LTM adjusted EBITDA of $77 million now stands at 4.7 times total leverage and 4.5 times net, which represents a half churn improvement from five times at the end of Q1 2015.

Our ABL facility, with an outstanding loan balance of zero and an outstanding letter of credit totalling $8.8 million, provides us with net availability of $29.9 million at June 30. Our total liquidity including cash on hand is $52.1 million at June 30, providing ample liquidity to support our operating needs.

Our second quarter 2015 operating cash flow was a use of cash totalling $11.4 million. We paid an exceptional amount of interest during this quarter, $27.7 million in total, which is the reason for the net operating use for the quarter.

Interest payments included both the scheduled $19.5 million semi-annual payments on our previously outstanding senior notes and also payments of $4.9 million for interest owed through June 30th and an additional $3.3 million to cover the remaining call period of the notes.

Additionally we incurred $6.5 million of expense to terminate our sponsor management agreement, which is reflected in our operating cash flow for Q2. Within our components of working capital, we had a solid Q2 performance.

Accounts receivable at June 30, 2015 totaled $36.8 million to $38.4 million at March 31, 2015, representing approximately a $1.6 million source of cash.

We had days sales outstanding of 45, representing a two-day improvement from December 31, 2014 and nearly 6 days improvement over June 30, 2014, attributable to both improved collection efforts and the changes with our customer mix, since the beginning of 2015.

Inventory totaled $15.4 million as of June 2015 which represents approximately 37 days of inventory on hand in aggregate. Capital expenditures during the second quarter of 2015 were $2.6 million compared with $2 million in the second quarter of 2014 and $3.5 million in the first quarter of 2015. My final topic today is our 2015 guidance.

I’ll be providing our revenue and adjusted EBITDA outlook for full year 2015 along with some insight on certain line items of our income statement to assist your modelling efforts.

Please note that our guidance ranges and assumptions for 2015 exclude the effect of possible future acquisitions, other unanticipated material future business developments and the adjustments of earnings as reported to earnings as adjusted that are set forth in the reconciliations provided in today’s release.

As stated in today’s release, we anticipate total revenue for full year 2015 in the range of $293 million to $297 million representing constant currency change of negative 1% to positive 1% over 2014. This guidance range includes the negative impact from currency of approximately $6 million for the full year or 2% as compared to 2014.

Our currency assumptions are based on prevailing rates. With respect to individual items within revenue, we believe that the percentage distribution of total revenue represented by each of our product line items during Q2 is a reasonable approximate expectation for our distribution for the second half of 2015.

Q2 of 2015 reflects a full quarter of sales mix changes resulting from the customer specific movements we experienced in the first quarter of this year. Consequently, we expect that our overall mix for the rest of 2015 will resemble what we saw in Q2.

Additionally, specific to our DEFINITY performance, it’s reasonable to assume that some degree of competitive pressure will become evident in our sales results as we exit 2015. Accordingly, we would anticipate some deceleration to DEFINITY’s growth rate in Q4 if indeed the new market entrant begins to develop a commercial presence.

Also as stated in today’s release, we anticipated adjusted EBITDA for full year 2015 in the range of $72 million to $75 million.

As for our expected cadence throughout the remainder of the year, because of the previous noted shift in sales and marketing program activities to the end of the year and also in anticipation of some DEFINITY deceleration in the fourth quarter we expect our third-quarter adjusted EBITDA performance to be slightly stronger than our fourth quarter.

With respect to a couple or more significant components of our adjusted EBITDA calculation, first as noted previously, interest expense is expected to run approximately $7 per quarter for the remainder of the year.

Additionally regarding our technology transfer costs, our 2015 program plans for activities totalling approximately $9 million for the full year. Spending has been relatively light year to date, $1.6 million through June 30 and consequently we’re expecting relatively heavy spending for the second half of 2015.

With that, I’ll conclude our second quarter 2015 financial review and now turn the call back over to Jeff..

Jeff Bailey

Thank you, John. I’ll start my business update today with a focus on our lead product, DEFINITY. As noted previously, DEFINITY continued to perform strongly during our second quarter growing by 21% annually, and posting its 12th consecutive quarter sequential growth.

As the overall echo market represents a large underpenetrated addressable market with literature suggesting at approximately $6 million or 20% of all echos are deemed suboptimal.

Our strategy remains focused on driving the overall appropriate use of contrast imaging in echocardiography by heightening awareness of the clinical value of contrast and how the appropriate use of DEFINITY can improve the diagnostic quality, the suboptimal echos.

To gauge the quarterly growth of the use of contrast, we track contrast penetration rate, which is the percentage of all U.S.

echocardiography studies performed with an imaging agent of any kind, with a dedicated sales team, 100% focused on driving the appropriate use of contrast echocardiography as well as medical societies and key opinion leaders providing a growing voice that contrast penetration rate has continued to increase as more physicians and sonographers recognize the value of contrast.

I am pleased to share that we exited the second quarter with a three-month average, U.S. contrast penetration rate of 4.5% marking 10 quarters of continued contrast penetration growth.

On the nuclear side, on June 19, 2015 we announced a new commercial supply agreement with Triad Isotopes in which we supply Triad with Xenon, Neurolite and Cardiolite products and beginning of 2016 TechneLite generators. The agreement runs through December 31, 2017. It specifies pricing levels and certain minimum purchase requirements.

While Triad had previously purchase purchased certain products from us, we are very pleased to have a long-term supply and more expansive agreement in place with this valued customer. As I shared during last quarter’s call, at this time, our discussions with Cardinal have not yet resulted in written supply agreements.

We are currently accepting and fulfilling product orders from Cardinal at our noncontract prices, including Xenon and Quadramet, for which we were are the sole manufacturer.

We continue to be very interested in reaching mutually acceptable agreements for the benefit of both of our companies, the nuclear medicine industry and most importantly the patients we both serve.

Having said that in the first half of 2015, we’ve seen a shift in volume amongst our radiopharmacy customers and have reached agreement with new customers, resulting in a more balanced customer mix for our business.

Now, I’d like to take a moment to provide a brief update on the status of our regulatory approvals of JHS for the manufacture of Neurolite, our proprietary brain perfusion imaging agent.

Since 2014, we have gained more than 16 regulatory approvals for JHS manufactured Neurolite including the U.S., Australia, Canada, Japan, South Korea and 11 EU markets. Also currently expect to receive three additional market approvals by the end of this year.

Additionally, as many of you know, we are and have been committed to a diversified and balanced Molybdenum-99 or moly supply chain.

To ensure that the needs of imaging community and patients are filled, each year, we work extensively and cooperatively with NTP South Africa, and ANSTO in Australia and IRE in Belgium to prepare and plan for the annual planned shutdown of the NRU reactor for its routine month long inspection and maintenance as required by the Canadian regulators.

This year, the four-week shut down period for the NRU reactor started on April 13 till the reactor came back online on May 12.

Working with NTP and ANSTO and IRE, we were able to arrange alternate moly supplies during the NRU outage, and as a result of these efforts, we were able to source all of our outstanding order customer demand for TechneLite generators during the NRU outage period from our global supply chain.

Currently, we also receive Xenon, which is a by-product of the moly production process through Nordion and the NRU reactor in Canada. As a result of the NRU, four-week shutdown, we experienced a planned Xenon outage of only approximately one week in May, which helped to minimize the impact of the NRU shutdown on Xenon customers.

As is the case each year, the NRU shutdown caused second quarter unit volumes of Xenon to be slightly lower than the first quarter.

Lastly but importantly on the pipeline front, as I mentioned in last quarter’s call, on March 13, 2015, the FDA granted us a special protocol assessment or SPA in connection with our redesigned protocol for a second Phase 3 trial of flurpiridaz F-18, our PET myocardial perfusion imaging agent that may better evaluate patients with known or suspected coronary artery disease.

In May 2015, Dr.

Maddahi of UCLA will be the investigator for the first Phase III clinical trial to present the results from our first Phase III study at the International Conference on Nuclear Cardiology and Cardiac CT held this year in Madrid and illustrated a particular promise in difficult to image patient types, including women and obese patients and also a 50% reduction in patient radiation exposure when compared to SPECT myocardial perfusion studies.

With our first of two phase III trials completed and are SPA approved to the second trial, we are in active discussions with a number of prospective partners for the further development and commercialization of this promising agent. We will keep you apprised of further developments. With that, I’ll end my remarks for this quarter.

Altogether, we are pleased with our second quarter performance and the progress we’ve made in the first half of 2015. To further strength our business, advanced key initiatives including achieving a milestone of our IPO and refinancing. We’re enthusiastic about our progress.

We’ll continue to focus on driving growth and delivering our corporate strategy. With that, we would now like to open the call to take your questions..

Operator

[Operator Instructions] Our first question comes from the line of Matt Keller of Credit Suisse. Your line is now open..

Matt Keller

Hey guys. Thanks for taking the question and congrats on the quarter. Just on the margin guidance for the year, 2Q EBITDA margins were higher than we were looking for and it looks like your full year guidance implies a second half range, 22% to 24%, a little bit below what was on the second quarter.

So I guess, any drivers of that and why you think margins might be a bit lower in the second half?.

John Bakewell

Hi Matt, this is John. We did indeed come in a little bit better than we may have expected to here originally in the second quarter.

The main reason for that is the sales and marketing expense and advertising and promotional programs that we had anticipated would fall in Q2 that now appear to be timed for later in the year and what we’re expecting at this point, it’ll be in Q4. So, that’s going to dampen a little bit the back part of the year.

In addition to that, I mentioned in our commentary that when you take a look at the revenue profile for Q2 within the nuclear medicine product, you can pretty much extend that forward for Q3 and Q4 and get a pretty good picture of how that’s going to roll through the rest of the year.

There’s one small exception to that and that would be in the other product line. We do expect to see a little bit more decline in Neurolite.

When we look at our Q2 run rate, we would expect that, when we get into Q3 that we’ll see our Neurolite run rate decline by about another $400,000 per quarter, and that should hold through the remainder of the year and into next year.

So, the combination of those two items are what dampened just a bit, the second half of the year, but our guidance would still indicate that we’re very much on track for a full year performance that’s consistent with where we had expected to be..

Matt Keller

Great. Thanks for taking the question..

Operator

Thank you, and our next question comes from the line of Raj Denhoy of Jefferies. Your line is now open..

Raj Denhoy

Hi. Thanks for taking the question.

Wondering if I could start with DEFINITY, you made a couple of comments around your views at a competitor coming into the market as the year progresses and I’m curious if you have any updated thoughts on how impactful that new competitor might be, what you’d consider in terms of what might be the pricing as well as share in the market..

Jeff Bailey

Raj, it’s Jeff.

How are you?.

Raj Denhoy

Good, good. Thanks..

Jeff Bailey

So, we take a look at –it’s been pretty quiet out there with this –the new competitor [indiscernible] you take a look at not too much really to record a period in a market place. They were approved back in October 2014 and we’ve seen during the time period since the approval that DEFINITY can continue very strongly, right through the second quarter.

As far as –let me step back and take a look at the overall market.

It’s a pretty unique situation where times we’re having a competitor out there, creating more noise in this marketplace to continue to grow this market to be viewed very much as a positive, but right now, we just haven’t heard much about them in the marketplace and also impacting the marketplace, hasn’t been there as of yet.

I’m going to go ahead and –the price question, I’ll let John go ahead and on that portion of it, but, Raj, as far as just overall, there’s nothing too much to look forward on a new entry..

John Bakewell

Yeah Raj, this is John. Let me just start –by kind of quantifying our expectations for Q2 was consistent with expectations and we think we’re tracking really well with how were expecting the full year to play out.

We’ve been assuming all along that at some point, we would see some competition from a new market entrant that when that competition arrived, for the sake of the conservatism we’ve assumed, we’ve acknowledged that, that will bring with it some pressure as it relates to market share and that ASPs might also see some pressure.

So, in the fourth quarter, we would continue to assume that we would see through your four points of share decline, if indeed this new entrant does establish a competitive threshold and at the same time we are annualizing right now, some year-over-year declines in ASP for DEFINITY.

Those are largely the result of programs that ran –competitive programs that ran a year ago that we’re still annualizing, but Q2 we saw on 29% volume growth roughly an 8% volume decline. We’d expect to see that again next quarter as we continue to annualize. Then that’ll lighten up a little bit.

We still think something in the low to mid-single digits in terms of overall ASP pressure might come along with some competitive pressure from a new entrant..

Raj Denhoy

Okay. So, just so I’m clear.

The pricing environment generally that was you anniversarying these –roughly 8% price cuts last year, you’ll anniversary them in the second half and after that, you would expect a more normalized kind of low single-digit decline?.

John Bakewell

Yeah, that’s correct..

Raj Denhoy

Okay.

Two others questions if I could, in terms of the nuclear contracting situation with the Cardinal loss and the Triad gain, is there any way you can sort of net those two things out for us? If you think about ‘16, when you come back –when the Triad contract kicks in a bit more, how should we think about those two things playing out?.

John Bakewell

Yeah. So, Raj. We’ll not get into ‘16 guidance today. I can tell you that we’ll have a meaningful increase in our TechneLite revenue in 2016 as that business comes into play. 2015 is really all about a transition right.

We’re transitioning the product mix, the customer mix is all transitioning and off of ‘15, we’re –our anticipation is we’re on to our investment thesis at that point of overall mid-single digit top line growth driven by DEFINITY and other growth within our nuclear medicine portfolio and some better than that return on the bottom line.

We’d expect to see a good contribution from Triad on the TechneLite line of our revenue line, 2016. In 2015, we did give up a little bit economically with the addition of Triad, but it’s not significant or noteworthy enough to call out, and so consequently there’s no offset to the Cardinal decline in 2015..

Raj Denhoy

Okay. That’s fair, and just one last one if I could. You know, in terms of the deleveraging that’s taking place, you mentioned 4.7 times at this point.

As you think about the coming years and the cash generation of the Company, do you have a target for where you want to take that leverage ratio and over what period of time and also, when you think about uses of cash for the Company, how do you prioritize putting cash into deleveraging or debt pay down versus other uses of it?.

John Bakewell

Well, and we’ve said this before. Any of you who are familiar with us from the roadshow have heard us say that deleveraging is clearly our priority.

At the same time, we’re going to be mindful of opportunities that might be out there from a business development point of view, but first and foremost, unless there’s a compelling reason to do otherwise, we would look to delever our balance sheet.

I mean, we aim to see leverage get below 4 times as fast as we can get there, whether that’s with cash flow or perhaps with other means, we’ll be opportunistic including consideration of further capital market events even if conditions are attractive but we would like to see our leverage continue to decline and you can count on us working hard to get below 4 in as little amount of time as we can possibly manage to do that..

Raj Denhoy

So, is there a cash balance you look to maintain and above that you would aggressively pay down?.

John Bakewell

Yeah, as we get a little bit closer to year end, I think we’ll have some more color for you on that Raj. I think a minimum of $15 million and I think it’s going to be dictated to some extent, by what our strategic needs are, if we’ve got our gun-sight set on something that might use a little bit of cash but bring some return to the business.

We’ll keep a little bit of cash on hand..

Raj Denhoy

Okay. Great. Thanks for taking all the questions..

Operator

Thank you, and our next question comes from the line of Larry Johnson of Wells Fargo, your line is now open..

Unidentified Analyst

Hi. It’s [indiscernible] calling in for Larry, and thanks for taking my question. I have a couple on DEFINITY and then one on F-18.

So, on DEFINITY, can you give us a market share either average for the quarter or end of the quarter?.

John Bakewell

This is John. On market share, I’ll be a little bit general here, but we’re quite consistent with what we saw entering the year and what we noted in Q1 which is a market share number that’s in the upper 70% range, and just by way of background this is not a metric that blends itself particularly well to a precise quarterly update.

The data that we get on this reflects usage, not actual sales, there’s always a bit of a stocking variability on a three month number but, what we’ve seen in results for the second quarter would indicate, we certainly didn’t lose share, I mean, we grew sequentially $2.8 million from Q1 to Q2 and some of that was driven by improved contrast, so it looks like our market share did well during the quarter, continues to be in the upper 70s and as we move through the year and we kind of collect more than just a three month history, we’ll be updating that number a little bit more precisely..

Unidentified Analyst

Okay great and under next generation product, is there any color you can provide at this point or if you can give us some sense when might be the time –when might be like a good time that you would be providing a more clear update?.

Jeff Bailey

This is Jeff. As far as next generation, for those who are new to tracking our world, our current formulation of patent runs until 2021, the last U.S. patent.

We’ve been working on the DEFINITY next generation formulation and we’re not at a point yet to really go into a lot of details other than just to clearly convey it to you that the development’s been taking place.

We believe that this could extend the IP beyond 2030 and that, as we get –later this year, maybe into early next year, we’ll start to provide more detail regarding this important asset as we get closer to it..

Unidentified Analyst

Okay great. And then last one on DEFINITY.

Is there any update you can provide in terms of your partnership with Double-Crane in China? What’s going on the regulatory or the clinical front?.

John Bakewell

Yeah, good question.

As far as our clinical trial application, which is at the –the CTA is currently in the queue for review by the Chinese FDA, so Double-Crane’s been delivering on there and we’ve delivered on our end and so that’s the point we’re at and of course, we are pursuing two clinical indications, abdominal which of course are liver and kidney disease and also for echocardiography.

We take a look at –bottom line, we just met with our Double-Crane partners at ASE, the American Society of Echocardiography meeting that took place recently in Boston and we’re tracking towards approval end of ‘17, maybe early 2018. This is really all dependent on the Chinese FDA review process.

So, I’m pleased to report that the deliverables put through by Double-Crane and our self, have teed up. It’s really about this –the Chinese regulatory process at this point..

Unidentified Analyst

Okay, so you’re still waiting for the Chinese FDA to approve the application to start the study?.

John Bakewell

Correct. We’ve two small trials. As a matter of them opening up the file and seeing through it. It’s all teed up to them as we speak..

Unidentified Analyst

Okay, and then just last question on F-18, I understand you’re in active partnership discussions, but now that the deal’s done, any new thoughts on kind of going forward on this by yourself versus sharing with the partner especially since the opportunity path on your roadshow seems pretty attractive..

John Bakewell

Yeah, we’re really excited about the progress on flurpiridaz where we see this could go. Our focus right now is very much on having these thorough conversations with the partners.

We’re really viewing this as, right now, the process of being –putting together a [indiscernible] with different partners that have come to the table, some are interested in functional roles, such as development, commercialization, manufacturing and others are focussing on geography, which is really about the specific countries, and so, we really see that there’s the interest there and that’s where our primary focus is on the partnering effort and then see where this takes us, but we also feel like we need a fill in the hole picture within the mosaic to be able to take that next step as far as the phase III, the second phase III study, but is one where, we’ll keep you apprised of all the future developments with this, but we’re in an exciting time right now with this..

Unidentified Analyst

Okay, great. Thanks so much for the questions, you guys..

Operator

Thank you. Our next question comes from the line of Glenn Novarro of RBC Capital. Your line is now open..

Glenn Novarro

Thanks and good afternoon guys. First question is regarding the Cardinal contract. I wonder if, Jeff you can elaborate a little bit more on one discussions that may be going on with Cardinal and the reason I’m asking is because, it seems like you’re managing just fine without this contract.

So, I was just wondering, is this a contract that really needs to be renewed? Thanks..

Jeff Bailey

Thanks Glenn. So, first of all, for those getting –that are newer to following us, following extended discussions throughout 2014, we entered 2015 without a written supply agreement with Cardinal. Our discussions have not yet resulted in a supply agreement and we are currently accepting and fulfilling product orders for Cardinal.

These of course are at non-contracted prices. So, they’re higher prices. We continue to be interested in reaching a mutually acceptable agreement with Cardinal.

Having said that, in the front half of 2015, we’ve seen a shift that has happened, and I think plays to your point, we’ve seen a shift in volumes amongst our pharmacy customers and reached agreements with new customers as we picked up on the Triad et cetera. This resulted in a more balanced customer mix for our business.

So, diversification in a lot of ways is a real positive for us. So, that answers your question, but that’s where we are right now. We’d love to enter in an agreement and hopefully that some where does come into play, but we think we’re in a good place..

Glenn Novarro

Yeah, and I would imagine this probably puts you in a better position if, Cardinal ever wants to enter into another agreement given the fact that you’ve got a more diversified business and maybe a little bit less reliant on Cardinal, but that’s just me speaking. Let me ask you on a DEFINITY in Europe.

Is there any thought or timelines as to maybe when you’d want to DEFINITY in Europe?.

John Bakewell

A good way to think about that is going to be, by the end of this year, early next year, right now we have the in different areas of Europe, we have the JHS, the approval for this produced products, as far as over in Europe, so that’s a good thing. When it comes to our partner in Europe, we’re in active discussions as we speak.

So, by the time we get together again next quarter, hopefully I’ll have more detail for you on that one, Glenn, okay?.

Glenn Novarro

Okay, and then just one last question.

The push out of that marketing spend as it relates to DEFINITY, is that because in the –[indiscernible] appears more in the fourth quarter, therefore let’s put more of that spend into the fourth quarter? Is that what the thinking is behind the spend?.

Jeff Bailey

Yeah, that’s correct Glenn. We moved out due to just plain old lack of necessity here present day. So, we will time that spend with market activity and market presence if that doesn’t need development later in the year..

Glenn Novarro

Okay great. Thanks for taking the questions..

Operator

[Operator Instructions] Our next question comes from the line of Jeff Johnson of Robert Baird. Your line is now open..

Jeff Johnson

Thank you.

Good afternoon guys, can you hear me okay?.

Jeff Bailey

Yes Jeff..

Jeff Johnson

Great. So, Jeff, I guess, let me just ask you one last DEFINITY question here.

Just for my understanding, how does typically a new product in the space roll out? Is that something where you need to go to the hospitals and get annualized contracts with them so the [indiscernible] product would be more of a 2016 or is that something where hospitals could start using it outside of any kind of annualized contracts at this point so we could see more of them mediate? I’m just trying to figure out if the timing of not seeing them now is as good a sign as it sounds, or if that’s just we would’ve expected kind of a few quarter delay anyway..

Jeff Bailey

Yes, I mean, it varies very much on the situation of the individual hospital, GPO contracts, important in the space, but some institutions it’s the individual contract that could come into play. The individual institutions, they have protocol, they have formulary committee, and in that world to be able to work through –it’s going to vary.

There’s some that would be a longer time line to get up and going, there’s some that could be relatively short. So, it’s, the answer Jeff really is that it varies but it’s back to the protocol..

Jeff Johnson

All right, that’s helpful. Then just my only other question was really on Xenon.

It seems like that was coming in a couple of million dollars hotter than we were looking for it seems like, and John if I take your comments on the percentage of revenue and carry those forward the rest of the year, they’re coming in maybe $5 million or even a little more above, then we were thinking as a full supplier of that, obviously the customer mix stuff shouldn’t be impacting much there.

So, is it more on the pricing side there? Is the end market use for Xenon picking up maybe a little more than expected? How should we read kind of the upside we’re seeing in Xenon at this point?.

John Bakewell

Jeff, it really all gets back to the mix that is settling out following our customer status change at the end of the year and we –our expectations, were initially that we would hold on to more TechneLite business, possibly just a small amount of TechneLite business and then we would see perhaps more pressure on the Xenon line and we were pleasantly surprised on the Xenon line and we have in fact seen lower levels of TechneLite purchases.

So, that’s reflected in Q2 and that’s now our –kind of our new expectation going through the rest of the year. In terms of margin contribution, it’s just about a net neutral. It’s really not enough to adjust either Q3 or Q4 from a margin perspective as a result of that trade..

Jeff Johnson

Yeah, understood and it seemed like at some of the nuclear suppliers, maybe 6, 12 months ago, some costs were coming up and were rising and going to get pass through then from you and some others.

What is Xenon pricing maybe ex-Cardinal or your other clients? Where has that pricing been trending here just recently?.

John Bakewell

Is that a cost of sales question or a --?.

Jeff Johnson

No, I’m sorry. More the pass through pricing –not the pass through pricing, but the customer price you are charging for Xenon to customers other than Cardinal..

John Bakewell

Yeah, I’ll tell you. We’ll beg off on a customer specific answer to that. I think, you can think outside of Cardinal, it’s just a status quo, it’s a steady state..

Jeff Johnson

Okay, very helpful. Thanks guys..

Operator

Thank you. Our next question comes from the line of Matt Keller of Credit Suisse, your line is now open..

Matt Keller

Hey guys, thanks. Just two quick follow ups. First on flurpiridaz, can you remind or give us a sense of timing around when you expect to be able to announce something on the partnering front and just to confirm on interest rate, $7 million a quarter, so 8% is that about what we should be thinking going forward? Thanks..

Jeff Bailey

So Matt, this is Jeff. I’ll take the first part of that. So, as far as timing with flurpiridaz partnering discussion, right now what I’d prefer to do is keep that a bit open. I was talking before about the mosaic.

This is taking on a number of different forms and based on functional roles that some players are interested in and then geographical terms as well, so, it’s one where –I think by the time we get to the next call, we’ll probably be able to be a little bit more specific on how the timing is coming together, but right now, I’m not going to speculate on that just based on there’s a lot of activity at this point..

John Bakewell

Matt, to your interest rate question, first just in terms of cash interest presuming that LIBOR stays beneath 1% floor, we would then be at a 7% cash interest rate, which is about $25.5 million per year and then of course, we’ve got the amortization of OID and deferred financing costs that come in there, so that our reported cash –sorry, our reported interest rate is exactly what you just noted.

Roughly $28 million a year, just shy of 8% on a reported basis..

Matt Keller

Okay perfect. Thanks for clarifying..

Operator

Thank you. Our next question comes from the line of Kevin Casey of Casey Capital..

Kevin Casey

Hey, can you talk about the competitive product and some of the advantages your product has with it and why they’ve been slow to come to market?.

Jeff Bailey

Hey Kevin, it’s Jeff, how are you?.

Kevin Casey

Good..

Jeff Bailey

So, when you take a look at –we can’t really speculate on why it’s slow to come to market or where they are [indiscernible] lot of information that’s flowing out there. When it comes to drug comparison versus our competitors, I really can’t go down that road, except to highlight the attributes of what DEFINITY is all about.

What we see is are some clear advantages with more than 5.6 billion echos that we performed [indiscernible] and we really know that the customers have grown [indiscernible] trust DEFINITY and the images that are generated. We take a look at the expensive experience that comes with the play, so really understand the safety of DEFINITY.

That really is a really important aspect for us in the marketplace. The consistent safety profile as the only [indiscernible]. I think also, it’s been engineered for performance with the small bubbles and we have a proprietary tool, which is a file mix, the proprietary device as far as when it comes to activating DEFINITY.

We’re also the only agent that’s been studied in multiple care settings and across gender and race and also with outcomes data and that includes those that are over the age of 65, so the last thing I think is probably also important to management. We’re the only U.S. manufacturer of product.

We think that’s an important aspect where we have a perspective on too. So, there’s obviously a lot of things that we like about DEFINITY. It’s performance is following, because of the attributes it has, and be really well established with customers, Kevin, it really does make a big difference..

Kevin Casey

Okay, and I think I might’ve missed this, the big jump up in G&A year-over-year, what’s the cause of that?.

John Bakewell

Kevin, you’re probably looking at the as reported results and inclusive and as reported results in the second quarter is $6.5 million paid for the termination of our sponsor management fee, exclusive of that, we’re actually on par year-over-year from a G&A standpoint..

Kevin Casey

Okay, so it’s one time. Got it..

Operator

Thank you. I’m showing no further questions at this time. I’d like to hand the call back over to Mr. Jeff Bailey for any closing remarks..

Jeff Bailey

Thank you and I want to thank everyone for joining today’s call. As you can probably tell, we’re very enthusiastic about our progress that you’re seeing during the first half of 2015 and we will remain focused on execution throughout the remainder of the year.

I very much look forward to updating you on our continued progress on the third quarter earnings call and really appreciate your interest and your support. Thanks everybody..

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect..

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