Lantheus Holdings, Inc.

Good morning, ladies and gentlemen. Welcome to the Lantius Holdings first quarter 2021 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 the webcast will be available in the investor section of the company's website approximately two hours after the completion of the call and will be archived for 30 days. I'll now turn the call over to your host for today, Mr. Mark Tinarny, Senior Director of Investor Relations. Mark?

Thank you, and good morning. Welcome to Lantheus Holdings' first quarter 2021 financial results conference call. With me on today's call are Marian Haino, our President and CEO, and Bob Marshall, our Chief Financial Officer. Marian will begin with some introductory remarks and a business update and then Bob will cover our financial results. Mary Ann will conclude the call with closing remarks, and then we'll open the call for Q&A. This morning, we issued a press release, which was furnished to the Securities and Exchange Commission under Form 8K, reporting our first quarter 2021 results. You can find the release in the Investors section of our website at lantheus.com. For those of you not on the webcast, you can find the slide presentation in the investor section of our website under the Presentations tab. Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties. In particular, the continuing impact of COVID-19 on our business results and outlook is a best estimate based on the information available as of today's date. Please note that we assume no obligation to update these forward-looking statements except as required by applicable law, even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties. Also, discussions during this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is also included in the investor section of our website. With that, it is my pleasure to now turn the call over to Mary Ann.

Thank you, Mark. I hope this finds everyone healthy and vaccinated or well on the way to being so. During the first quarter, we continued to successfully execute against our financial and operational strategies. while keeping the safety of Lantheus employees a top priority. And I am pleased to update you on our progress today. As we approach the one year mark of our acquisition of Progenix, I am proud of what our team has accomplished. You may recall, after announcing the transaction, we established a fully dedicated team to oversee the integration effort to achieve identified strategic and financial goals. The execution against these milestones is well advanced. and we have been able to significantly invest in our business while overachieving on the targeted run rate savings. I cannot be more excited about what the future is that we are creating for this company. While Bob will provide more detail later, I want to bring your attention to a change in our reporting segments that begins with this quarter. Going forward, we are changing our reporting segments from U.S. and international to a single reporting segment. Under that single segment, we will be grouping our reported revenue into three categories. The first is precision diagnostics, the second is radiopharmaceutical oncology, and the third is strategic partnerships and other. This better aligns with our corporate strategy and our current product portfolio and pipeline. I will structure my comments to be consistent with this new format. In the first category, precision diagnostics, I will be discussing the following products. DFINITY, Technolite, and Xenon. I'll start with DFINITY. If you recall, during the fourth quarter 2020, we noted that while results in October and November were in line with our expectations, we did see volume decline in non-urgent echocardiography procedures in late December in those geographic regions that experienced resurgence of COVID-19 infections and related hospitalizations. Starting in early February, we began to see recovery. albeit with regional differences across the country. With steadily increasing availability of vaccines to broader segments of the population, we believe healthcare professionals and patients are becoming more comfortable in administering and receiving in-person care. And with that, we believe echocardiography utilization will continue to return to pre-COVID-19 volumes. Throughout the pandemic, we've engaged our DFINITY customers through digital technology. including virtual training programs, as direct promotional access to hospitals has been restricted. In fact, we've conducted a record number of virtual programs in the past year. While virtual engagement continues, hospitals are now allowing in-person visits for our sales professionals in some areas. While in-person activities are highly geographically dependent and still limited, we are encouraged by the trend and, more importantly, the opportunity to engage with our customers in person. Experience gained over the last year with different forms of digital engagement will inform the full promotional mix of our approach to the echocardiography market going forward. We are committed to the echocardiography specialty and believe these investments, complemented by a return to normalized echocardiography levels and utilization dynamics, will drive definitive revenue growth for the balance of 2021 and beyond. Finally, regarding DFINITY, our in-house manufacturing facility project remains on track. We expect to submit the Supplemental New Drug Application, or SNDA, later this year, with an FDA action date anticipated by year end. During the first quarter, we successfully manufactured batches of DFINITY that will be commercially saleable upon FDA approval. Turning to Technolite, the product performed well in Q1, and we continue to see demand build back towards pre-COVID-19 levels. While the business posted flat revenues on a sequential basis, the recent fourth quarter of 2020 included about $1.9 million of opportunistic generator sales to Amstow, which did not repeat to the same magnitude in the first quarter. While international transportation logistics for Inbound Molybdenum 99, or MOLI, supply remained complex, We are hopeful that international flight patterns will return to more normal levels, which will minimize our need to support custom logistics for Mali delivery. Our Xenon business, however, continues to be negatively impacted by limited utilization of in-hospital respiratory inhalation procedures as a result of COVID-19 transmission concerns. As we said previously, we anticipate aerosol-based studies, of which Xenon is one, may continue to be impacted. while hospitals maintain precautionary protocols to prevent possible COVID-19 transmission by patients who may be infected when undergoing aerosol-based procedures. Switching now to discuss our radiopharmaceutical oncology products and product candidates, I will give an update on the following, Azedra, PYL, and 1095, beginning with Azedra. In March, we announced that updated biochemical tumor marker data from our pivotal Phase II trial of Azedra were presented at the Endocrine Society's 2021 Annual Meeting, ENDO 2021. In the trial, Azedra demonstrated reduction in hypersecreted tumor markers in a majority of patients with advanced pheochromocytoma and paraganglioma tumors, or PGL. In addition, the overall tumor biomarker response correlated significantly with both the primary and secondary endpoint responses in the study. underscoring the clinical utility and relevance of this important biochemical marker to evaluate response to therapy and reinforcing the therapeutic benefit of Azedra in patients with these life-threatening tumors. As a reminder, Azedra is the first and only FDA-approved treatment option for patients with advanced or metastatic PPGL. During the quarter, we introduced new marketing initiatives to increase awareness of the disease and treatment options among the referring physicians. We also developed a new medical affairs plan to facilitate peer-to-peer education while also working with centers of excellence to expand availability of this treatment option for patients. To ensure ongoing adequate product supply, we have increased the manufacturing staff at our Somerset facility. We are also constructing an additional manufacturing suite to provide redundancy for Zedra manufacturing as well as increased overall future capacity of our iodine-based products. While it will take some time to complete the qualification and obtain FDA approval of this suite, we believe the sum of these activities will result in ensuring adequate manufacturing capacity for the increased demand we anticipate for Exedra during the balance of the year and moving forward. Turning now to our product pipeline, I will discuss the product candidates highlighted here, beginning with PYL. PYL is the lead candidate in our prostate cancer portfolio. and is a prostate-specific membrane antigen or PSMA-targeted PET imaging agent for prostate cancer. PYL enables clinicians to visualize both bone and soft tissue metastases in patients with locally advanced, recurrent, and or metastatic prostate cancer. The FDA accepted our new drug application for PYL and assigned priority review to the NDA with an action date of May 28, 2021. In March, we announced the publication of the results of both pivotal studies for PYL. The Osprey Phase 2-3 trial results were published in the Journal of Urology, and the Condor Phase 3 trial results have been published in the Journal of Clinical Cancer Research. We believe these data demonstrate PYL's clinical benefit and that PYL has the potential to play an important role in transforming the management of men with high-risk recurrent or metastatic prostate cancer. We are pleased our studies were published in these prestigious journals. With our Purdue for Action date and potential launch later this month, we're very busy with commercial preparation activities. Over the last several months, we have focused our efforts on scaling up our commercial, medical, and manufacturing capabilities in support of PYL. We've added significant talent throughout our organization, including our commercial, medical, supply chain, quality, and technical departments to help facilitate a successful product launch. On the commercial front, we've been pleased with our ability to recruit professionals with strong backgrounds in urology and nuclear medicine to enhance our sales effort. Our senior commercial leaders are in place, as are our salespeople and medical science liaisons in key markets against a hiring plan that matches our anticipated launch timing. For our medical team, in early April, we announced the addition of two top-tier talents, Dr. Bela Dennis and Dr. Irina Sezlenko. Dr. Dennis, a board-certified urologist, and Dr. Kozlenko, board-certified in radiology diagnostics, both come with extensive experience in both clinical practice and industry, and we are thrilled to have them supporting both PYL and the entire Lantheus medical teams. Our timeline supports launching PYL as soon as we receive FDA approval. We are working on site preparedness and activation with our pet manufacturing facility, or PNF, partners, to ensure nationwide product availability by the end of the year. This timing aligns with the expected approval of our pass-through application with the Center for Medicare and Medicaid Services, or CMS, for Medicare coverage in the hospital outpatient setting. We are also engaging with key payers for appropriate reimbursement for patients with commercial insurance, all to optimize initial adoption of PYO by clinicians. The voice of the patient is critical in prostate cancer. and our work with advocacy groups to build awareness of PSMA PET imaging continues. Most notably, our outreach includes working with organizations such as the Prostate Cancer Foundation and Xero, the End of Prostate Cancer, as well as a number of veterans groups. We are greatly encouraged by the interest we have seen from the healthcare and patient communities in recognition of this novel imaging agent. Moving to 1095, our I-9131 PSMA targeted product candidate for the treatment of metastatic castrate-resistant prostate cancer, or MCRPC, in October 2020, we resumed patient enrollment in our Phase II ARROW trial. I am pleased to report that we now have 24 active clinical sites across the U.S. and Canada, and patient enrollment is progressing well. The ARROW trial is designed to evaluate the safety and efficacy of I-131-1095 radiotherapy in combination with enzuzolamide as compared to endothelomide alone in chemotherapy-naive patients with PSMA-avid NCRPC who have progressed on aviraterone. Patient enrollment is progressing as planned, and we are on target with our time milestones for this trial. Now, I will discuss our progress in our strategic partnerships and others business. In late March, we acquired the exclusive worldwide rights to develop, manufacture, and commercialize NTI-1309. an innovative pet oncology imaging agent from Noria Therapeutics. NTI-1309 targets fibroblast activation protein, or FAP, a target with potential broad imaging applicability and targeting implications for precision oncology. FAP is overexpressed in the tumor microenvironment, specifically in tumor-associated fibroblasts, which are believed to modulate tumor progression and immune response. Already a focus of significant research by academics and the pharmaceutical industry, a FAP biomarker has the potential to address unmet medical needs and to impact the clinical management of stromodense tumors, such as breast, colon, lung, and pancreatic cancer, as well as having broad potential to inform diagnosis and staging, to guide patient selection for therapy, and to monitor response to treatment across multiple tumor types. Upon completion of the Phase 1 study, which we believe will start later this year, NTI-1309 will be integrated into Lantheus' portfolio of imaging biomarkers and will be included as part of our offering to academic centers and pharmaceutical companies for use in oncology drug development programs. Under this agreement with Noria, Lantheus also has the option to acquire the therapeutic rights for this agent. We are enthusiastic about this cutting-edge oncology agent while realizing it is early in its development. This partnership is another example of Lantius' commitment to advancing innovative imaging biomarker solutions that find, fight, and follow cancer. In our Microbubble franchise, last week we announced a strategic collaboration which will use our Microbubble with Allegheny Health Network, or AHN's, ultrasound-assisted non-viral gene transfer technology for the development of a proposed treatment for xerostomia. Xerostomia, a lack of saliva production leading to dry mouth, has a variety of causes, including radiotherapy and chemotherapy and certain diseases. It is also a common side effect of ionizing radiation used to treat head and neck cancer. Thousands of cancer patients suffer from radiation-induced xerostomia, which can cause severe oral and dental issues. Once xerostomia begins, it is a permanent condition. We're excited to support AHN in its efforts to progress this innovative development program. Finally, yesterday we announced we received CE Mark clearance for APromise. CE Mark gives APromise approval in Europe, a milestone in the path to potential U.S. approval. APromise is an artificial intelligence-based medical device software that is used in conjunction with individual reader interpretation and enables healthcare professionals and researchers to locate, detect, and quantify disease in whole-body PSMA PET-CT. Our goal is to seek approval for A-Promise in the U.S. and to add this tool to the portfolio of offerings we bring to the prostate cancer treating community. With that, I will conclude my update on key commercial and strategic programs and turn the call over to Bob. Bob?

Thank you, Mary Ann, and good morning, everyone. I will provide highlights of the first quarter financials, focusing on adjusted results unless otherwise noted. Before I begin, I would like to talk about several reporting changes we are making in our disclosures to better reflect our businesses going forward. First, we are evolving our segment reporting to a single reporting segment. You'll recall that we previously had two segments, U.S. and international. The sale of our last international radiopharmacy operation in January of this year, previously disclosed as our Puerto Rico operation, Together with our acquisition of Progenix last year were factors in prompting our segment analysis. Our conclusion reflects the company's focus on both the performance of the business and resource allocation to be on a consolidated worldwide basis. You will see this reflected in our 10Q to be filed today. In addition to the new revenue categories noted by Mary Ann, we will now present rebates and allowances within each relevant grouping and individual product as appropriate. You can find within the investor relations section of our website under supplemental financial information a listing of each product with its respective revenue grouping as well as historic gross and net revenue for both DFINITY and Technolite to aid with evaluating growth rates going forward. Turning to the quarter, revenue for the first quarter was $92.5 million, an increase of 2% over the prior year quarter, the comparison that included run rate revenues from our Puerto Rico operation now divested. Beginning with precision diagnostics, revenue of $85.8 million were 2.9% lower from the prior year quarter. Sales at DFINITY, net of rebates and allowances were 56 million, 6.6% higher as compared to the prior year quarter, driven by sequentially higher volumes. Technolite net revenue was 22.8 million net, up 0.1% from the prior year quarter. Within other precision diagnostics, Xenon's performance has continued at similar levels to previous sequential three quarters. Radiopharmaceutical oncology contributed 1.5 million of sales, down 23.8% from the prior year quarter, due mainly to the loss of revenue tied to the divestiture of the Puerto Rico operation in comparison. In the future, in addition to Exedra and Quadramet, assuming approval by the FDA, PYL will reside within this revenue category. Strategic partnerships and other revenue was $5.3 million, driven primarily by the Relastore royalty. Gross profit margin for the first quarter was 50.3%, a decrease of 89 basis points from the first quarter of 2020 on a similar basis. The decrease is due mainly to product mix and expanded manufacturing footprint acquired from Ergenix on a year-over-year comparable basis, as well as increased MOLLE distribution and logistics costs due to the COVID-19 pandemic. Operating expenses were 1,314 base points unfavorable to the prior year at 40.5% of net revenue driven primarily by the continued annualization of expenses from Progenix offset in part by synergy achievement. Additionally, as noted by Mary Ann, we have made good progress in our PYL commercialization preparedness efforts along with ongoing patient enrollment in the 1095 Arrow Study. Together, expenses were slightly favorable to our expectations while hitting our intended quarterly objectives. Operating profit for the quarter was $9 million, or a decrease of 58.2% over the same period prior year. Total adjustments in the quarter totaled a $7.8 million gain before taxes. Of this amount, $3.3 and $4.7 million of expense is associated with non-cash stock and incentive plans and acquired intangible amortization, respectively. Also in the quarter, we recorded $15.3 million of gain on the sale of our Puerto Rico operation, as well as a gain of $900,000 on extinguishment of debt. The remainder is related to acquisition, immigration, and other non-recurring expenses. Our effective tax rate was 49.7% in the quarter. As has been the case in prior periods, our tax rate includes certain entries to account for uncertain tax positions for which we are indemnified and doesn't have a direct correlation with profit before tax. The resulting reported net income for the first quarter was $9 million and $3.3 million on an adjusted basis, a decrease of 76.9%. GAAP fully diluted earnings per share were $0.13 and $0.05 on an adjusted basis, a decrease from the prior year of 86.3%. Now turning to cash flow, first quarter operating cash flow totaled $9.8 million as compared to $9.4 million in Q1 2020. Capital expenditures totaled $2.5 million, down slightly from the prior year quarter. Free cash flow, which we define as operating cash flow less capital expenditures, was $7.3 million, an increase of $0.6 million over the prior year period. Also, at the end of the quarter, we utilized $30.9 million of cash to pay off the Relastore royalty-backed loan in full. In doing so, we've reduced our overall net leverage ratio used in our bank facility covenants to 2.5 times, achieving one of our initial deal goals ahead of schedule. Cash and cash equivalents, net of restricted cash, now stand at $68.9 million. We continue to have access to our $200 million undrawn bank revolver and are comfortable with our strong liquidity position. Turning now to guidance for Q2 in the full year, we forecast revenue to be in a range of $93 to $97 million for the second quarter of 2021, an increase of 41% and 47%. or the second quarter of 2020 respectively. We are updating our full year view to take into consideration actual Q1 performance relative to our initial views of revenue impact stemming from the COVID-19 uncertainty which had informed the lower end of our original range. Therefore, we will now forecast full year revenue to be in a range of 390 to 400 million from our prior range of 385 to 400 million dollars. Regarding adjusted earnings per share, we continue to invest in commercial readiness for PYO. Additionally, enrollment in our Phase 2 ERO study with 1095 has been steady and is expected to continue at its current pace. As such, Q2 will carry an expense burden slightly higher than actuals in Q1, but in line with prior guidance on average. Taken together, adjusted EPS should be in a range of 3.6, excuse me, adjusted to be in the range of 3 to 6 cents for the second quarter. We are raising our full-year adjusted EPS to account for relative Q1 outperformance and interest savings from a fully repaid Relastore royalty-backed loan offset in part by incremental investments to advance our pipeline assets. We now expect adjusted EPS to be in the range of 36 to 41 cents per share versus the prior range of 34 to 39 cents. With that, let me turn the call back over to Mary Ann.

Thank you, Bob. The balance of 2021 will be a pivotal period for Lantheus. In just a few short weeks, we may have the opportunity to bring a truly important product to market that will have an impact on the lives of prostate cancer patients. Reaching this important milestone would not be possible without the work of everyone at Lantheus and their dedication to the clinicians and patients we serve. Before I open the call to questions, I would like to express my sincere thanks to all Lanthea's employees and to the patients, customers, and shareholders who trust us to serve you. With that, Bob and I are now ready to take your questions. Operator, please go ahead.

Ladies and gentlemen, if you have a question at this time, simply press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. One moment, please. And our first question comes from the line of Richard, new leader of SBB Living. Your line is open.

Hi, good morning, and thanks for taking the questions. Congrats on the progress you made during the quarter. Maybe just a couple here to start on the PYL, just given that that's such an exciting and important focus for you guys coming up here. Can you, understanding that the FDA has just been a little more unpredictable lately, I'm just wondering if there's anything you can offer us in what you're seeing with respect to, you know, their inspections of your pet manufacturing facilities and are things generally tracking, you know, on time as far as you can tell for the PDUFA at the end of May here? Sure.

So obviously, Rich, since we're now within three weeks of our action date, we're kind of constrained in the comments we can offer. But, you know, I will say we're on track with all our milestones with the FDA. I will also note the PMF are third-party partners. They will be individual manufacturers of the product, so we do not own them. We obviously work very close with them to ensure that they are on track with their own milestones, especially as regards to any potential issues. FDA inspections. But I can confirm that we remain on track with all our milestones related to FDA submission and review.

Got it. And just, you know, based on the way we're modeling PYL, you know, we don't really model any material revenue until 2022. We feel like we've built in some cushion. I think the street, you know, seems to be modeling similarly. I'm just curious, if there were some delays here, can you just talk you know, to how you feel about the commercialization timelines that you kind of laid out in the past relative if there were to be some delays here with the pass-through submission and what it would take for you to build out a commercial infrastructure to still kind of meet some of those targets, even if there were a delay by a few months.

So, Rich, there's actually three different timelines that run concurrently, And what we spoke to today is we feel we have them very strongly aligned. The first is our own internal commercial preparedness. And as I mentioned, we are ready willing and very capable and eager to launch this product as soon as it's FDA approved. And that comes from commercial build out of all of our internal functions. So you heard me speak to quality, sales, medical, technical, manufacturing. So that's been something that we've been on top of for several months now. And as I mentioned, we're also very pleased with our hiring progress. They were really attracting great talent to the organization. The second is the timeline for CMS pass-through. Now, CMS pass-through, let's all remember, this only applies to reimbursement for the procedure in Medicare patients in the hospital outpatient setting. And CMS does have some timelines that are related to when you can submit the application and when the application can be approved. They accept applications on the last month of each quarter. and they approve applications in a timely fashion on the first month of the subsequent quarter. So if you submit, say, on September of a quarter, you would then expect approval by January of that subsequent quarter. Although there have been exceptions where CMS has accepted the application after the last month of the quarter, and in some cases has approved before the first day of the first subsequent quarter. But the way that we've lined up our timeframe here is assuming that we have approval on May 28th, which is our action date, and that that allows us then, because of some of the other inclusion items of the application, we would anticipate submitting our application on September 1st and having pass-through approval for January 1st. The third timeline that runs along with that is availability of the product out in the market among the PMF network. And this is the opportunity to build out your network so that essentially you have broad availability across the United States. And the analogy that I'm encouraged to use, although it's not one that's totally familiar to me, is football cities. And when you say that if you had good PNF coverage in what are the current football cities of the United States, that would represent broad availability to the treatment centers that are close to there and represent broad availability across the prostate cancer patient population. And that is about, I'm told, about 31, I'm sorry that I don't know this, 31 or so teams, and I guess in some of those cities there's actually more than one team, which I find amazing, but hats off to them. And so we are aligning that. We anticipate that we could have that type of coverage built out by the end of the year, which then aligns with our pass-through application approval and gives us all of that time beforehand with our commercial preparedness to go out, drive name awareness, and also to work on commercial insurance availability, which is also very important for some of the major commercial insurers. So I hope that answers your question.

Yeah, no, no, it definitely does. And maybe just to switch, you're clearly breaking out, you know, from a segment reporting standpoint, the partnerships that you have, and there are many, and some really interesting ones more recently that were announced. I'm just curious. How do we think about the contribution from some of these newer recently announced initiatives? It seems like Relastor is the main contributor right now in that segment, but when can we start to think about contribution from some of these newer areas?

So you're right on spot there with Relastor being a very kind of called out and very noticeable contributor right now because that's an ongoing royalty stream. The others are very strategic in nature, and you'll continue to hear me talk about how we are working with our pharma services team to really keep our eye on and ahead of what is emerging as far as technology and targets. in the fields that we're interested in. And a lot of the partnerships you see us signing are somewhat, I would say, you know, mutually valuable partnerships both ways in that we're providing what is a very, very valuable service, which will have revenue associated, but not revenue that would be significant. But more importantly, we're providing a service of needed almost manufacturing capacity and availability for these biomarkers into clinical trials and into academic centers And in exchange, we get early insight into the progress and performance of these biomarkers. And as you heard with me with the Nuria announcement, we get first right of refusal for what could be a very important therapeutic target that we're very excited about going forward, which obviously then any revenue associated, especially with that therapeutic target, would be down the road.

Thank you very much.

And our next question comes from the lineup, Anthony Petroni of Jeffries. Your line is open.

Thanks, and I hope everyone's doing well. Congrats on a strong start to the year here. And, Marianne, hopefully this year is your first year as a big fan of football on Sundays, and we can share draft picks on next year's go-around. Maybe to start with the core business on DFINITY, And you touched on ECG volumes. I'm just kind of wondering, just to kind of splash through the comments, where ECG volumes are versus pre-COVID levels. It sounds like they're approaching normal levels, but perhaps they're not quite there yet. So maybe just to quantify that a bit. And is there any backlog to speak of as we think of affinity volumes, just as we sit at the current phase of the pandemic? and then I'll have a couple of follow-ups on PYL and one on Technoline.

Sure. Welcome, Anthony. I can't say that I'll be sitting on the couch on Sundays because I'm not really a sitter, but I'll try to learn a little bit more about this American sport of football that everyone loves so much. To echocardiography, I'm happy to share some insights with you, but I need to caveat it by saying that these are drawn from market research and from survey data And so they need to be accepted as that is, and therefore accepted as trending and not absolute data points. We do not have access to actual claims databases, and so that's why I caveat my comments that way. But we are seeing at this time, we are seeing activities that suggest that the volume of echocardiography procedures in the United States has returned to what we were at pre-COVID-19. And if you remember back to that time with my comments, that's a market of approximately 35 million procedures on an annual basis, then growing at a few low percentage points. You can call it like two to three percentage points on an annual basis. And so that is something that most recently, and you heard in our comments that we did really begin to see that at the end of first quarter. That is something that we believe is true about the marketplace. And there still is recovery to be had because echocardiography procedures are used in many different ways, and I'm not sure that all those different ways are backed up to full volume. When I say that is one of the many ways is as part of a regular physical. And so, you know, different patients, depending on their age category and their risk factors, as part of their physical cardiac workup might include an echo exam, and that echo exam might have a rest and stress part to it. I'm not sure that that level of procedures is truly back it, but it's coming. To your other question about comments from the field, we are also seeing hearing comments from during our market research about echocardiography suites having to deal with backlog. And this is, you know, again, from, and we talked about this through the pandemic, what would constitute backlog during of echocardiography procedures. But we are hearing some comments about that, and it comes back to us around, you know, scheduling and around needing to extend hours into weekends and the like. So all good signs of what I referenced in my comments, which is that I think we're getting to a point with vaccination levels and with hospital protocols, you know, the wonderful protocols that hospitals are able to put in place, that caregivers and care seekers are both more open to and willing to have that interaction happen in person. And I think that's a great thing for the for the larger healthcare environment.

That's helpful background. Maybe shift gears a little bit to PYL, a couple here. First would be just kind of thinking about the entirety of the sales effort, just sort of head count, you know, where it is today and where is it sort of going once it's fully staffed. That would be the first question. And then, Mary Ann, you mentioned reimbursement and sort of that goes into pricing. And so anything that you can share just on your expected levels of reimbursement, whether that's Medicare and then private and how that translates to pricing going forward. And then one last one I could squeeze in for Bob would just be, as we look at the new reporting structure and sort of think about new products coming into the fold, specifically within the radiopharmaceutical oncology segment, how should we think about the progression of gross margins you know, going forward perhaps over the next several years. Thanks again.

You're very welcome. With respect to hiring and, more importantly, hiring levels, what I would say about that is, you know, we have now, we have one company in the market that's been targeting PET imaging for prostate cancer. We have ourselves entering the market, and there's a third company fairly close behind us. And while I won't speak to relative size, I will very confidently say that we will be at the largest or very much competing for the voice that we will bring into the market across both commercial and medical with the prostate cancer treating community. We feel it's very important because this is a new class. PSMA-based PET imaging agents are a new class, and any time you introduce a new class, there is an obligation, and we feel that is a commitment, to educate and to bring awareness to what the different aspects and value are of the agent you're bringing to the market. So we're very, very committed to that. From an insurance and coverage perspective, you heard me speak to CMS, and CMS will cover very specifically with pass-through outpatient coverage, but then there's also some other classes of patient coverage which have to do with ambulatory centers and the like, which kind of come along with that. I guess the other big group is the commercially insured group, and included among the commercially insured group are also those patients who are CMS eligible but Medicare Advantage covered. So they are a very important group for us, and as you can appreciate prior to any launch, this is work that starts long before launch and continues long after. And for some of these insurer groups, Their policy is such that they will really not entertain you as a product for coverage until after you were approved. You can imagine what their dockets would look like if they allowed presentations from every product that was under evaluation by the FDA. So it is a process, Anthony, and we anticipate that total coverage will build over time. I will, though, say that before coverage is in place, every insurer, has a process by which you can ask for prior authorization or special clearance or special approval for a procedure. And with something as, I would say, novel as PSMA-based PET imaging, we would anticipate that that would be the case. And that is, we believe, a great way to build data, a data set around the value of these procedures and the ability to really use this type of imaging as an ability to change patient management for patients and therefore describe and demonstrate the value of this type of imaging.

Good morning, Anthony. Your question around gross margin progression. As I look at the different categories, you did ask specifically about the radiopharmaceutical oncology, but even as I look at precision diagnostics, which as I reflect on the products in there, it's largely the legacy Lantheus business, which also has gross margin expansion opportunity in the sense of our on-campus manufacturing as an opportunity as well as we recover through the COVID-19 impacts on gross margin. You know, those will abate as we go through the year. So there is still opportunity to go there. With regard to radiopharmaceutical oncology, you know, when we set out along this journey in terms of, you know, looking to add strategic assets to the portfolio, we did so with sort of our own internal mandate to find assets that would be margin accretive. So as is the case with what is PYL and etc., while initially they're going to be at gross margin levels probably on par with the company averages, quickly with scale, these products will be – be appreciated it will accrete to our company average and we have every confidence that in doing you know as we drive volume we will certainly be able to achieve the hundreds of basis points of the margin expansion that we fully expect within you know sort of the near to medium term so from that perspective I'm you know we're very you know focused on driving that level of profitability and ultimately free cash flow strategic partnerships and other A royalty stream is 100% gross margin, so there's not much more you can say. That's a very highly accretive, although much smaller bit of the overall business, but it is additive. But again, I do have sort of an eye on ramping our gross margin and profitability over the next years.

Sorry, Anthony, but I didn't answer one of your questions, and I probably won't now. But I'll be able to say that neither Bob or I will ever speak specifically to pricing of the products. It's just something that we've taken the stand that we do not do.

Of course, of course. Well, thank you very much. I'll hop back in here. Thank you. Take care.

Again, ladies and gentlemen, if you have a question at this time, simply press the start and the number one key on your touch-tone telephone. Our next question comes from the line of Larry Solo of CJS Securities. Your line is open.

Great. Good morning, and thanks for taking my questions. Just a couple, I'll piggyback on Anthony's question there. Just on PYL, forgetting headcount, can you maybe, and I'm sure you won't be able to quantify it exactly, but in terms of the build-out of the infrastructure of costs and whatnot, I assume, you know, the R&D, phase is probably going to sort of bleed more into the manufacturing side of it. But just in terms of your sales force, in terms of dollars, do we still need a significant jump up? I know you've been investing in that, but, you know, should we expect over the next two, three quarters, if all goes well with commercialization, that you'll have to invest significantly more, you know, marketing dollars and sales dollars? How should we look at that over the next, you know, Several quarters, several years, wherever you want to discuss it.

Good morning, Larry. This is Mary, and I'll start, and then I'm going to pass to Bob for actual numbers. But I'll just put some context on my comments where I said that we intended to be competitive with voice and with our presence in this specialty or to this specialty, and I do intend that to be true. However, let me also share that, luckily, it is a fairly efficient way to do this with this voice. This community, and when you're talking about pet imaging, you can focus on pet imaging centers, which is where all of these studies flow through and where all of the orders for these studies come through, and then from a demand creation, the source of demand into it. So unlike some markets that are very broad or have a very diffused, I'd say, demand outreach, this is a very efficient and very concentrated market, and that's reflected in some of the investment profile, and I'll let Bob explain.

Yeah, so Larry, my prior, if you recall back in February, I had said that we would expect sort of OPEX to sort of be in that $40-ish million range per quarter, which is still, I would still point you at that sort of level. Now, when I look at the numbers, even the first quarter, which, you know, if I look over year over year, it's about a $12.5 million increase. in overall spend. What's important to think about though is that the addition of Progenix. Progenix was running at a run rate per quarter of about 21 million or so of OPEX. So what we've been able to do is invest in the business and we have made significant progress but do so in a way that we're actually able to do this within the Achieve Synergies and drive what will ultimately be good leverage in the P&L as that product takes off. So I would still point you to the numbers that I had – I think that's what I was trying to get at in my comments around saying while we may have been slightly favorable, some of that had to do with a little bit of phasing within the quarter based on initial indications. But as we move into Q2 specifically, that's when I was saying you would sort of go back to some of what I was – talking about as our average run rate in the remaining portions of the year. Could it be slightly higher than that? I think that all depends on timing of things, but certainly it would be not materially different than what I had sort of outlined from a dollars perspective.

Okay. And then sticking to that theme, and I know you sort of gave some high-level sort of gross margin targets, on a consolidated pro forma basis when you announced the ProGiants acquisition. Now that's coming up on, I guess, over 18 months ago. Time's going fast. Obviously, there's been a lot of noise, COVID, big noise there, but has anything significantly changed in terms of your sort of accretion timelines and whatnot? Obviously, some things were delayed a little bit, but in terms of closing the acquisition, but has anything really materially moved to the right?

I would say, one, it's been only 12 months. I know during COVID it feels like 18, but no. I mean, one of the things that happened here that was somewhat fortunate in the sense that PYL and its ability to get to where it is today wasn't impacted from a COVID perspective. in the sense that the studies were completed prior to the shutdown, and then it was able to be submitted within a very short window of when we had expected. And then with priority review, it's actually going to be able to hit in the timeline that will help us actually hit these numbers. You're referring to the fact that I had said we would expand by 800 basis points. And I'll go back to my comments, even from Anthony's question, that we still feel that that's extremely achievable. Particularly if you go back and look at 2019 as sort of maybe your true base, because when I look at gross margin progression over the last, you know, four quarters prior to this one, you know, we hit 50 again. And you kind of have to go back to Q1 of, you know, of last year where we were at 51.1. So, you know, sort of the pre-COVID numbers. I think that's sort of your baseline from which I would have you think about that margin expansion. And it certainly is achievable. And as is our ability to hit the other financial metrics because it's not just about gross margin, it's about driving a levered P&L and delivering on EBITDA and cash flow. But more importantly, quite honestly, it has to be more to do with a sustainable top line growth rate that we think can be very healthy over the next number of years.

Okay, great. Just last question on DFINITY and in-house production. It sounds like things are progressing well there. Can you maybe discuss sort of the longer-term outlook? I assume you will dual source for some time period, but do you inevitably think you could bring the majority of that in-house? Any thoughts on how that could improve benefit margins?

So obviously, Larry, there's a benefit margin value for us going forward based on mix of how we source DFINITY. But the strategy here originally, and you haven't been with us long enough to know, but several years back we struggled with the security from just the total capacity perspective of our DFINITY supply. So our in-house project serves a very important benefit of redundancy for us. And so we would anticipate continuing to maintain dual supply so that we have that redundancy. Now, to ratio and to taking advantage of what is obviously will be a better margin on the product's COGS margin for utilizing the larger ratio from our in-house manufacturing plant, that's something that we'd absolutely point to in the future. And you'll hear Bob speaking to that as we move forward over the quarters, how that will come into play. big milestone for us this quarter. The batches we produce, we produce on the commercial process. And for having done so, they sit and having sitting there, they can be used for saleable merchandise once our plant is approved.

Great. I appreciate the call. Thanks so much.

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