ANI Pharmaceuticals, Inc.

Good morning, everyone, and welcome to ANI's fourth quarter 2019 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and 1 on your touch-tone phone. If you would like to withdraw your question, please press the pound key on your touch-tone phone. Please note, this call may be recorded. It is now my pleasure to turn today's program over to Mr. Arthur Prisbell. Please go ahead, sir.

Thank you, Lori. Good morning, everyone. Welcome to ANI's earnings conference call for the full year and fourth quarter 2019. My name is Art Prisbell. I'm the CEO. Joining me today is Stephen Carey, our Chief Financial Officer. Before we begin, I want to refer everyone to the forward-looking statements language in this morning's press release, and ask each of you to review it carefully as important context for this conference call. Discussions will also include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-GAAP financial measures can be found in our earnings release dated today. ANI reported full-year 2019 net revenues of $206.5 million. Adjusted Non-Gap Gross Profit of $146.9 million, or 71% of net revenues, and Adjusted Non-Gap EBITDA of $83.2 million, or 40% of net revenues. Our 2019 net revenues increased by 2.5%, gross profit dollars increased by 9%, and both are record amounts for ANI. Our net revenues and gross profit on three of our generic products were significantly impacted by competitive price erosion in the third and fourth quarter of 2019. The resulting impact was an annual estimated decline of $21.7 million in net revenues and an annual estimated decline of $21 million in gross profit. In 2020, we expect to offset the impact of these declines through the recent launch of vancomycin oral solution, and the subsequent January 2020 acquisition of Amerigens Marketed Products and Pipeline. For 2020, we are providing midpoint net revenue guidance of $218 million, an increase of 6%, and adjusted non-GAAP EBITDA guidance of $83 million, the same number as compared to 2019. Our 2020 guidance does not include any effect from additional acquisitions, and does not include any effect from the potential launch of Cortrophin Gel. Steve will provide you with additional commentary on our financial results. Much of ANI's growth has been and will continue to be achieved through acquisitions. We recently acquired Amerigyn's U.S. assets for $52.5 million, which we funded entirely from cash on hand. The acquisition included 23 generic products, 12 products are currently commercialized and 11 products are pipeline drugs. The acquisition was immediately accretive to revenues and gross profit and has since expanded our commercial generic drug portfolio to 47 products. Our generic pipeline now includes 118 products with a combined annual market size of $7 billion based on data from Evacua. Over the last several years, we have completed 15 generic drug deals for a total of $135 million. In 2019 alone, these deals contributed $96 million in generic drug revenues. Additionally, most of our branded revenues have been acquired in eight deals for a total of $181 million, not including the $75 million for Cortrofen Gel, our largest pipeline opportunity, which is rapidly approaching its targeted regulatory filing date. From 2015 to 2019, the cumulative branded revenues from these deals has been approximately $260 million, yielding gross margins of better than 90% with minimal SG&A expense. As an important part of our strategy, ANI intends to continue to acquire assets from time to time. The current environment for generic drugs, such as solid oral drugs, that are sold through the three consortiums who control 90% market share remains highly volatile. In addition to simply having too many generic manufacturers chasing too few customers, the industry is littered with companies that are over-levered and under-capitalized, leading to desperation in the marketplace that unduly pressures generic profit margins more than ever before. Consolidation within the generic drug industry must happen before real pricing stability can be achieved amongst those companies doing business with the three consortiums. ANI will continue to explore tucking and acquisition opportunities in this space that meet our strategic and valuation criteria. Nonetheless, as a result of the highly competitive generic market created by the three consortiums, ANI also intends to pivot. and explore acquisition opportunities in areas such as injectables and specialty drugs that can provide both growth opportunities and risk diversification for our business model. In other words, drug products that are not sold through these three consortiums. You have seen us pursue this strategy over the past year as we have expanded our injectable pipeline, launched vancomycin oral solution, a long-term care and hospital product, and launched Bertilium Injection, a critical hospital drug. Our biggest opportunity in this effort is, of course, Cortofen Gel. We are now approximately 30 days away from filing the Supplemental MDA, known as a Prior Approval Supplement, or PAS, for our Cortofen Gel drug product. This has been our targeted filing date for some time now, and all activities continue to advance as planned. Recall that Cortofengel is an already approved NDA, last marketed in the 1990s, that requires a prior approval supplement by the FDA in order to re-commercialize the drug. The supplemental NDA regulatory filing is the result of approximately four years of development and an investment of over $100 million, $75 million to acquire the NDA, and over $25 million to advance the drug to filing. The result of our development effort is a PAS filing that includes 36 analytical methods employed to characterize commercial-scale batches of cortrophin, active pharmaceutical ingredient. Several methods were validated from the approved NDA, and the new methods were employed as part of the modernization process to demonstrate an unparalleled, in-depth understanding of the quality and purity of ANI's corticotropin, active pharmaceutical ingredient. Another major component of the modernization effort was viral clearance validation, which was not required when this product was originally approved. ANI's corticotropin API manufacturing process has successfully completed viral clearance validation. Corticotropin active pharmaceutical ingredient is known to be a complex mixture of peptides, primarily ACTH1 to 39. A&I has completed peptide mapping to identify the related peptides presence at greater than 0.1% in all process validation batches. The results demonstrate consistent peptide levels in all three commercial scale process validation batches and indicate a manufacturing process that is well controlled and consistent. All commercial scale batches of Corticotropin API have consistently met both the historical MDA specifications and also the new modernized API specifications. Results from these methods for all commercial-scale API batches have been assembled in a comprehensive API characterization package that ANI intends to file with the PAS. The supply chain for quatropan gel from the slaughterhouse harvesting of pig pituitaries to the manufacturer of active pharmaceutical ingredient and finished dosage form product is entirely based in the United States, an intentional and integral part of our development effort. We have successfully manufactured three commercial scale process validation batches of finished dosage form cortrophin gel. All commercial scale batches of cortrophin gel have consistently met both the historical NDA specifications and also the new modernized drug product specifications. Two of the commercial scale batches are stable at six months real-time stability and have been analytically consistent with regards to quality and yield and have met all release specifications. The third batch stability pull is today and we expect this batch to yield results consistent with the other two batches. Additionally, we have validated commercial drug product manufacturing by bracketing two batch sizes to facilitate flexibility in order to conserve API needs and manufacture only what is needed to meet market demand. Filter validation and media fill simulations have also been successfully completed. We remain on target to file the PAS in March 2020 and to address and meet the FDA briefing book comments from our types FDA meeting. Commercial launch activities for cortofan gel have already begun. In the third and fourth quarter of 2019, we began building inventory of both pig pitulataries and active pharmaceutical ingredient, and we invested $6.7 million against that effort. We will continue to invest in commercial launch inventory and estimate spending an additional $11.5 million in 2020 for pig pitulataries, API, and finished dosage form Cortofengel. This inventory investment will allow us the opportunity to effectively compete for 50% market share upon launch. Our commercial launch strategy and business model for Cortofengel will be in place and implemented before and at the time of FDA approval. For competitive reasons, we do not intend to publicly describe our launch plan, but continue to be on record that ANI will offer a substantial discount for Cortrophin Gel as compared to Axar Gel market pricing. We strongly believe that the economics of drug pricing is an important dynamic that helps drive utilization and market share in today's pharmaceutical marketplace. As such, we continue to see the public outcry over the price of drugs, and more specifically Axar Gel. As recently as February 2020, a complaint was filed by Marietta, Georgia, that used the words exorbitant and unconscionable to describe Actar's price and even went so far as to accuse Malincrot of illegal kickbacks to doctors. Whether true or not, this complaint is representative of continued public sentiment towards drug pricing and, in this instance, Actar gel. In the past, we have heard that synthetic corticotrophin products could potentially compete against our cortrophin gels. We now know that the two companies who were advancing synthetic versions have abandoned their development efforts. In a recent Assertio press release, recall they acquired the synthetic synactin product from Mallinckrodt in an FTC action. They announced they were abandoning their synactin development effort. This effectively leaves ANI with the only near-term opportunity to compete against Mallinckrodt's Axar gel. as the drug did successfully back in the 1990s. For A&I, Cortrofen Gel remains a transformational opportunity. Not only can we potentially save healthcare hundreds of millions of dollars, but Cortrofen Gel can also potentially provide outside returns to our shareholders and help advance our business model. We believe that once commercial, Cortrofen Gel has the potential to provide annuity-like revenues for A&I because we believe that it is highly unlikely that a competitor could successfully commercialize a generic version. I have described Cortrop & Jell as a potential $200 million free cash flow opportunity for ANI. Let's examine the effect of half that number, $100 million, which would approximate 20% to 25% market share after ANI's ascribed discounted market price. In addition to more than doubling our current free cash flow and likely our equity value, the incremental cash flow could be deployed in additional product development and business development activities to further broaden our commercial portfolio and leverage ANI's brand and generic infrastructure. Not too many pharmaceutical companies with ANI's current size and scale have a near-term opportunity like Quartrofen Gel. This is why we continue to describe our Quartrofen Gel opportunity as transformational. Lastly, a well-deserved hearty congratulations to our dedicated Cortropin gel development and regulatory individuals for all their efforts in helping to advance this important drug back to the healthcare market. What a great job. I will now turn the conference call over to our CFO, Stephen Carey, who will provide you with more details on our financial results.

Thank you, Art, and good morning to everyone on the line this morning. For the year ended December 31st, 2019, A&I posted record net revenues, adjusted non-GAAP gross profit, and adjusted gross margin. Annual net revenues were $206.5 million, up $5 million or 2.5% from prior year. Adjusted non-GAAP gross profit reached $146.9 million, up 12.7 million, or 9%, and adjusted non-GAAP gross margins were over 71%. We generated $45.6 million of cash from operation and, importantly, continued to invest significant levels of cash back into the business while maintaining financial and balance sheet discipline. adjusted non-GAAP EBITDA was off $1.2 million from prior year levels at $83.2 million, while adjusted EPS was down one cent at $5.06 per diluted share. As of the December 31st balance sheet date, we had $62.3 million of unrestricted cash, up $19.3 million from prior year, and up $2.6 million from September. This balance is net of $20.9 million of business development closed during the year in support of expanding our future pipeline opportunities and $6.6 million of capital expenditures made in support of advancing the capabilities of our three manufacturing plants. On December 1st, we successfully refinanced the majority of our 118 $1.75 million convertible debt by exercising our option to borrow $118 million pursuant to the delayed draw term loan feature in our $265 million senior secured credit facility. The company experienced no equity dilution related to the maturity of the convertible note. Total net debt as of the balance sheet date was reduced to $125.2 million, representing 1.5 times net leverage and 2.3 times gross leverage on a trailing 12-month basis. Looking forward, we expect to continue to reinvest our cash flow from operations in business development opportunities. In January of 2020, we used $52.5 million of cash from the balance sheet to acquire 12 currently commercialized and 11 pipeline opportunities from Amerigen. In addition, the $75 million revolver portion of our credit facility remains undrawn and provides us with flexibility in continuing to pursue further business development transactions in 2020. During 2019, we invested approximately $10.5 million in cortofan-related research and development as we continue to progress towards our March 2020 supplemental NDA filing. In addition, we invested $6.7 million in prelaunch raw material and the API inventory in order to ensure that we are ready to launch cortofan into the market shortly after FDA approval of our filings. We currently anticipate investing upwards of $11.5 million behind additional prelaunch inventory in 2020. Please recall, as discussed on our third quarter earnings call, that these prelaunch inventories represent goods that will be utilized in saleable commercial batches upon FDA approval. Ordinarily, materials purchased for commercial sale would be capitalized as inventory, However, since we are dealing with a novel product, it must clear the supplemental NDA regulatory pathway with the FDA. GAAP dictates that such expenditures cannot be capitalized and must be expensed when purchased. In order to shed transparency on the physical build of cortofan inventory, we have broken this activity out on a separate line item on the P&L. and disclosed further information in footnote number 13 to our financial statements. In addition to these Korshofen-related activities, during 2019, we invested $9.2 million in generic research and development. We also continue to invest behind and integrate our ANI Canada subsidiary and manufacturing facility, completing three tech transfers of ANI product into the plant with a fourth nearing completion, and recently securing new third-party business for our contract manufacturing capabilities. These annual figures and accomplishments were achieved despite weathering significant fourth quarter competition against one of our most important generic franchises. During the fourth quarter, we took significant price reductions and shelf stock adjustments in order to defend our share of EES against two competitors that launched within days of one another in early November. These actions, coupled with continued volume declines in EDMT and Inderol LA, led net revenue for the three months ended December 31, 2019 to be down $9.2 million, or 16% from prior year, to $48 million. Resultant gross profit declines led to fourth quarter adjusted non-GAAP EBITDA of 17.4 million, down 4.8 million from prior year, and adjusted non-GAAP EPS of $1.08 per diluted share, down 24 cents from prior year. In addition, during the fourth quarter, we decided to exit the methylphenidate ER market, driven by the fact that this market has become highly commoditized, leading to unattractive price dynamics. In addition, we voluntarily exited the generic reninidine market due to industry-wide FDA investigations of NDMA impurities found in the vast majority of drug product for this compound. In conjunction with these actions, we recognize the $3.5 million P&L charge to reserve for all remaining inventory related to these products. We have added this back for the purposes of our non-GAAP measures. Excluding this charge, our fourth quarter cost of goods sold was 14.3 million or 30 percent of net revenues as compared to 20.1 million or 35 percent of revenues in the prior year period. These challenges occur during a period in which we are building momentum behind our September 2019 launch of vancomycin oral solution. This product provides an FDA-approved alternative to a market that is largely served by compounding pharmacies. It is not a typical AB-related generic launch, and therefore we currently anticipate revenues to ramp up over time as we build market awareness and product adoption through our virtual marketing and awareness campaign. In addition, in December, we launched Bertilium Toxelate Injection, our first marketed injectable product, which is used in emergency room settings. In conjunction with this product, we launched a campaign to reintroduce this life-saving therapy to healthcare providers and hospital formulary decision makers. These products are prime examples of our increasingly diverse commercial product offering. Turning our attention to 2020 guidance, it is important to note that our guidance is exclusive of Cortropin revenues and prelaunch sales and marketing expenses. While we firmly believe that Cortropin has the potential to be the most meaningful product in the company's history, The timing of FDA approval and uptake of demand is inherently uncertain. As such, 2020 guidance as presented today only reflects the remaining anticipated residual R&D spend and the cost to continue to build prelaunch commercial inventories. We will continue to add back the build of commercial inventories, and we will begin to add back prelaunch sales and marketing expenses in our 2020 actual non-GAAP results. Our 2020 net revenue guidance reflects the annualization of negative competitive impacts against three of our largest generic franchises. First, the loss of volume from a key customer of ezetimibe simvastatin, which began around mid-year 2019 and will annualize in 2020. Secondly, the aforementioned significant price reductions for the EES franchise, which occurred in the fourth quarter of 2019. And third, recent competitive challenges to EEMT, which have resulted in the reduction of average price beginning in January of 2020. These declines as well as normal course annual volume declines in our brand business are expected to be more than offset by the addition of generic products acquired from Amerigen in January, continued uptake in the demand for vancomycin oil solution and vertilium, and organic generic pipeline launches. Given these factors, we currently project net revenues to be between 213 and 223 million, representing a 3 to 8 percent increase over 2019. Adjusted non-GAAP EBITDA is projected to be between 80 and 86 million or essentially flat as compared to the 83.2 million posted in 2019. Inherent in this guidance are the following. In anticipation that non-GAAP gross margins will contract by approximately five to seven points from the 71% achieved in 2019, principally resulting from lower price and unfavorable product mix. A reduction in research and development spending driven by the wind down of activity in our Cortrophin Gel Recommercialization Program. A portion of this reduction is anticipated to be reallocated toward generic pipeline opportunities. And finally, moderation of the growth in non-chortrophin-related SDNA expense. Resulted adjusted non-GAAP diluted earnings per share is projected to be between $4.46 and $4.86 per diluted share and reflects an anticipated effective income tax rate of 24% and approximately 12.1 million shares outstanding. Note that the year-over-year changes for our non-GAAP EPS metrics include the impact of additional cash interest resulting from the December 1st refinancing of our convertible debt, which carried a 3% cash coupon, to bank debt, for which we currently anticipate an all-in rate of approximately 4.6%. This change is worth approximately $1.9 million after tax are roughly $0.16 to the EPS calculation. The longer-term benefit of this change in debt structure is to protect our shareholders from future potential equity dilution and to avoid the high upfront costs associated with convertible debt, the costs of which are not reflected in the coupon rate. In addition, our guidance ranges include a straight 24% effective income tax expense rate as compared to an actual tax benefit recorded in the 2019 actual results. When taking these two factors in combination with one another, it accounts for an over 50 cent per share bridge to the ETS calculations. In summary, we exit 2019 with a focus on maximizing near-term vancomycin OS and Bertilium opportunities, leveraging the recently acquired Amerigen generic portfolio, continuing to diversify our product offerings through ongoing business development, expanding the potential for our CMO business and A&I Pharmaceuticals Canada, and most importantly, gaining FDA approval for Cortrophin. With this, I will turn the call back to our President and CEO, Art Griswold.