Lantheus Holdings, Inc.

Good morning. Welcome to the LAMPIA's first quarter 2023 financial results 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 investors section of the company's website approximately two hours after the completion of the call and will be archived for at least 30 days. I'll now turn the call over to your host for today, Mark Kinnerney, Vice President of Investor Relations. Mark?

Thank you, and good morning. Welcome to Lantheus' first quarter 2023 Financial Results Conference call. With me on today's call are Marianne Haino, our CEO, Paul Blanchfield, our President, and Bob Marshall, our Chief Financial Officer. Mary Ann will begin the call with introductory remarks and then turn the call over to Paul to provide a strategic and operational update. Bob will cover our financial results and provide updated guidance. Mary Ann will provide closing remarks, and then we will open the call for Q&A. This morning we issued a press release, which was furnished to the Securities and Exchange Commission under Form 8K, reporting our first quarter 2023 results. You can find the release and today's slide presentation in the investor section of our website at lantheus.com. I would like to remind you that any comments made during our call today could include forward-looking statements. Actual results may differ materially from those indicated by these statements due to a variety of risks and uncertainties. Please note that we assume no obligation to update our commentary or any 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. 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 on the Investors section of our website. It is my pleasure to now turn the call over to our CEO, Marianne.

Thank you, Mark. And good morning to everyone joining us. Today, I am pleased to discuss our outstanding first quarter results and update you on the state of our business. During the first quarter of 2023, we generated record results with quarterly revenues of $300 million and adjusted earnings per share of $1.47. I am proud to report we impacted the lives of more than 1.5 million patients, which is a testament to the focus and dedication of our employees as we continue to advance our purpose to find, fight, and follow disease to deliver better patient outcomes. Our impressive first quarter growth was led by the continued strong performance of both Polarify and DFINITY, which continue to have the leading market share in their respective categories. Our market-leading commercial portfolio and superior customer experience have been hallmarks of Lantheus and will continue to fuel our growth. Together, Polarify and DFINITY have already impacted the lives of tens of millions of patients, created significant shareholder value, and enabled us to invest in our business to continue to expand our portfolio of commercial and clinical stage radiopharmaceutical assets, including the recently completed in-licensing of two late-stage radiotherapeutic product candidates from Point Biopharma, and the acquisition of Servo Technologies for MK6240, an Alzheimer's disease PET imaging agent. We are extremely excited about our partnership and the progress we are making with PNT2002 and PNT2003, including in the clinical, regulatory, and manufacturing programs, as well as advancing commercial readiness. Most recently, we were pleased to announce the FDA-granted fast-track designation to PNT2002 for the treatment of metastatic castration-resistant prostate cancer, or MCRPC. Fast-Track is a process designed to facilitate the development and expedite the review of new drugs intended to treat serious conditions that fill an unmet medical need. We are encouraged by the FDA's decision, as every year in the U.S., approximately 70,000 men are eligible for treatment for MCRPC. Importantly, this designation will allow us to work closely with the FDA, along with our partner, Point, to quickly advance the PNT2002 program, which has the potential to make a meaningful difference for patients who require new treatment options. We look forward to sharing our progress, including the anticipated top-line data readout for the PNT2002 flash trial in the second half of 2023. Our most recent acquisition, that of Servo Technologies, which closed in the first quarter of 2023, added MK6240 to our pipeline of assets. MK6240 is a novel, clinical-stage, second-generation PET imaging agent that targets tau tangles in Alzheimer's disease and has the potential to aid in diagnosing and staging Alzheimer's disease, as well as guide treatment choices for modifying therapies. Over the last two months, we continue to advance the utilization of MK6240 in clinical development partnerships. MK6240 is currently being used in more than 60 academic and industry late stage clinical trials for Alzheimer's disease therapeutic candidates under development by more than 16 pharmaceutical companies. With the expanding scope and scale of our business, We recently announced the promotions of Paul Blandfield to President and Dan Nizwicki to Chief Administrative Officer. Paul joined Lantheus in 2020 and has been an exemplary leader throughout his tenure, demonstrating strong strategic and leadership skills, most notably with the very successful launch of Polarify. His commitment to excellence and the patience we serve positioned Paul as the ideal person for the role of President. In this role, he will continue to oversee all aspects of commercial, technical operations and manufacturing, and quality, and will now be responsible for our company's R&D function, which includes our medical team. Dan joined Lantheus in 2013 and has been a critical member of the executive team that has transformed Lantheus. His contribution has been key and will continue to be invaluable as Lantheus continues to grow. In his expanded role, Dan will now oversee several critical functions, including legal, compliance, intellectual property, human resources, and corporate communications. Dan will also continue to serve as our general counsel and corporate secretary. I will now turn the call over to Paul to share an update on the Lantius commercial portfolio, pipeline, and key strategic initiatives.

Thank you, Marianne, and good morning, everyone. I am honored to have the opportunity to take on the president role and I'm excited about the future of Lantheus and the radiopharmaceutical industry as a whole. According to third-party research reports, the global radiopharmaceutical market is expected to expand from $6 billion in 2021 to over $35 billion by 2031, fueled by the growth of currently approved products, new approvals, both diagnostic and therapeutic, and most notably, the increasing number of patients diagnosed and treated with radiopharmaceuticals. Radiopharmaceuticals are in the midst of a renaissance and are considered to be disruptive innovations in cancer therapy. Lantheus is uniquely positioned to lead and shape this industry going forward. We are one of the largest radiopharmaceutical-focused companies in the world and further demonstrate our leadership through our market-leading products, diversified pipeline, and our manufacturing, supply chain, and commercial expertise, which we've honed over more than 65 years. Our success is exemplified by the recent expansion of our radiopharmaceutical oncology pipeline, a category that showcases truly exciting innovation and growth potential. Our Point Biopharma partnership puts us on track to potentially launch two additional oncology radiotherapeutics in the next few years. and our most recent acquisition of Cervo, and with it, the addition of MK-6240 to our pipeline moves us into the Alzheimer's diagnostic market. We are excited about the future of the radiopharmaceutical industry. Our differentiated capabilities in development, regulatory, commercialization, and reliable supply will enable Lantheus to continue to lead, and most importantly, improve the lives of the patients and families we serve. Switching to an operational update, PSMA PET with Polarify remains firmly established as the market leading PSMA PET imaging agent with first quarter sales of $195.5 million, representing 110% growth year over year and 22% sequential growth from the fourth quarter of 2022. As we near the second anniversary of Polarify's FDA approval, Our key drivers for success continue to be Polarify's innovation in the market, the significant unmet need in the prostate cancer community, and our best-in-class customer experience. The 22% sequential growth was achieved through continued increased penetration in existing accounts, driven by our focus on referring physicians, and our promotional efforts to increase brand awareness of PSMA PET with Polarify. Also contributing to sequential growth was the addition of new accounts, a modest price increase taken at the beginning of 2023, and an additional selling day versus the prior quarter. Over the course of the first quarter, we also continue to increase our capacity and reliability, out-the-door time flexibility, and geographic reach, including the activation of new pet manufacturing facilities, most notably in northern Florida, Puerto Rico, and Arkansas. For our micro bubble business, the first quarter sales for DFINITY were $68.8 million, up 18% from the prior year. We are pleased with this solid performance as DFINITY remains the number one choice in the ultrasound enhancing agent market. During the quarter, we benefited from an increasing number of patient office visits, which we expect to continue, and the impact of our in-person programs in the second half of 2022. We have made inroads in particular with specific accounts that have benefited from our educational and promotional programs. I will now turn the call over to Bob for a financial update.

Thank you, Paul, and good morning, everyone. I will provide highlights of the first quarter financials, focusing on adjusted results unless otherwise noted. Turning to the quarter, revenue for the first quarter was $300.8 million, an increase of $91.9 million, or 44% over the prior year period. Earnings per share for the first quarter were $1.47, an increase of 50 cents or 51.3% over the prior year quarter. Now we'll turn to the details, beginning with radiopharmaceutical oncology. The category contributed revenue of $196.2 million of sales, up significantly year over year and meaningfully up sequentially from the fourth quarter due to Polarify's continued growth and adoption. Azedra contributed $0.7 million of sales in the quarter. Precision Diagnostics recorded $95.6 million, up 10.9% from the prior year. Sales of DFINITY net of rebates and allowances were 68.8 million, 18% higher as compared to the prior year quarter, and included a $2 million regulatory milestone payment from our China distribution partner, DoubleCrate. Excluding this payment, DFINITY grew 14.6%, exceeding our initial expectations. Technolite net revenue was $21 million, down 7.2% from the prior year quarter due mainly to a comparison that included opportunistic sales not repeated in the first quarter of 2023. Lastly, strategic partnership and other revenue was $9 million, driven primarily by the Relastore royalty, but also included 2.8 million of sales from the newly acquired Tao Imaging Biomarker MK6240. As a reminder, the prior year comparable contained the $24 million license revenue from Novartis not repeated this year. Growth profit margin for the first quarter was 68.6%, an increase of 165 basis points over the first quarter 2022 result on a similar basis. As has been the case in recent quarters, the increase is due mainly to favorable volume and product mix led by polarifying definity, offset in part by higher material and labor costs. Operating expenses were 119 basis points favorable over the prior year at 21.4% of net revenue, which is lower than previously guided, driven by both higher revenue and lower R&D clinical expenditure. We continue to invest in sales and marketing efforts with an expansion of our dedicated Polarify Salesforce intended to support and expand Polarify adoption, as well as our ERP project within G&A. I would now like to note that late in the quarter, we decided to discontinue pursuing lifecycle management plans for Exedra due to changes in the financial business case and the evolved market opportunity. which has now impacted the Azedra book value. Within the reported or GAAP financials, you will note that we have taken impairment charge for the intangible assets within the Azedra group, reflective of the required analysis. The currently marketed asset charge of $116.4 million is found within cost of goods sold, and the IP R&D asset charge of $15.6 million is embedded within the R&D expense line. Operating profit for the quarter was $142 million, an increase of 53.2% over the same period prior year. Total adjustments in the quarter totaled $151.3 million before taxes. Of this amount, $9.7 and $11.1 million of expense are associated with non-cash stock and incentive plans and acquired intangible amortization, respectively. Also, as I have just mentioned, we recorded an impairment charge for the Azedra intangible asset group for 132.1 million. The remainder is related to net contingent liability adjustments, acquisition, and other non-recurring expenses. Our effective tax rate was 27.2% for the quarter. The resulting reported net loss for the first quarter was 2.8 million and net income of $102.2 million on an adjusted basis, an increase of 50.6% over the prior year quarter. GAAP fully diluted earnings per share were a loss of 4 cents and earnings of $1.47 on an adjusted basis, an increase of 51.3% over the prior year quarter. Now turning to cash flow, first quarter operating cash flow totaled $108.5 million as compared to 10.3 million in Q1 2022. Capital expenditures totaled $9.2 million, in line with expectations. Free cash flow, which we defined as operating cash flow less capital expenditures, was $99.3 million, an increase of $92.3 million over the prior year period. During the quarter, we invested $35.3 million, largely to acquire the Servo assets. Cash and cash equivalents, net of restricted cash, now stands at $470.9 million, We continue to have access to our $350 million undrawn bank revolver and are comfortable with our very strong liquidity position. Turning now to our guidance for the second quarter and updated guidance for the full year. We forecast revenue to be in a range of 300 to 310 million for the second quarter of 2023, an increase of approximately 34 and 38.6% over the second quarter of 2022. As noted, we are updating our full year view to take into consideration first quarter Polarify and DFINITY performance. And as such, we now expect DFINITY to grow in high single digits to low double digits on average for the full year, while Polarify will build on its first quarter strength, which we now model at $820 to $860 million. Therefore, we now forecast full year revenue to be in a range of $1.23 to $1.27 billion from the prior range of $1.14 to $1.16 billion. Turning now to earnings. Adjusted EPS should be in a range of $1.25 to $1.33 for the second quarter. We are raising our full year adjusted EPS to account for the increased revenue estimates. We now expect adjusted EPS to be in a range of $5.45 to $5.70 per share versus the prior range of $4.95 to $5.10. Importantly, and for modeling purposes, despite the lower than expected expenses in Q1 due to timing of hiring and activity, We expect operating expenses to be closer to prior guidance, but in a range of 23% to 24% of net revenue for the balance of the year. With that, let me turn the call back over to Marianne.

Thank you, Bob. In summary, the Lantius team continues to make significant progress towards our vision and strategic goals. Our excellent first quarter performance is a result of our passionate team, who are motivated by our purpose to find, fight, and follow disease to deliver better patient outcomes for the patients and families we serve. We are proud to be a recognized industry leader as one of the largest radiopharmaceutical focused companies in the world and are positioning ourselves at the forefront of the Renaissance of radiopharmaceuticals with both a commercial portfolio and an innovative and high potential pipeline. We look forward to updating you on our efforts and reporting our progress over the coming months. With that, Bob, Paul, and I are now ready to take your questions. Operator, please go ahead.

Thank you. At this time, we will conduct the question and answer session. Please limit your questions to one question. You may return to the queue if you wish for additional questions. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Anthony Petrone from Mizuho Securities. Your line is open.

Thank you.

Good morning, Andrea.

Good morning, Mary Ann. How are you? Good morning, Paul.

Well, thanks.

And good morning, Bob. Again, congratulations here, 1Q. Another strong result. Paul, I'm intrigued by the PMF comments. Florida, Utah sites, you opened three new sites, pet manufacturing facilities. Maybe just a little bit on how large are those PMFs, how many hospitals are in their networks, and how impactful to volumes can those three sites be? And I'll have one follow-up on guidance.

Thanks for the question, Anthony. So as we've highlighted, we do continue to expand our PMF network. where we see the need for expanded geographies as well as additional optionality and flexibility for our customer base. We have recently expanded more so in Florida, which naturally, given the demographics, is a relatively large market. We have been able to sustainably supply the Florida market through various means in the past, including other PMFs, but the addition of PMFs allow for updated flexibility of out-the-door times, closer transportation to be able to reach those customers. We have not specifically commented on the number of hospitals in that catchment area, but expanding the PMS network and specifically flexibility and optionality is consistent with our strategy to ensure that we continue to deliver best-in-class customer experience to further cement our leadership in the PSMA PET imaging market.

That's helpful. And then, On guidance here, it looks like almost $100 million raise for Polarify, I guess $90 million right at the midpoint, but certainly at the upper end, north of $100 million. And by our math, the number on Polarify was ahead by $15 million. So certainly the outlook is for continued acceleration. And maybe just a little bit on the bridge on that number, what is the complexion of price? You mentioned a little bit of a price gain here. Certainly volumes are growing and we have new site activations. So maybe just a little bit on the bridge, on the guidance range for Polarify. Thanks again. Congratulations. I'll get back in queue.

So Anthony, I'll start and then Paul, you can jump in. From the way to think about it is as we sat here in February and then we're looking ahead, we had an extremely strong March. And that has helped to inform when I talk about the strength on a look forward basis. When I look at the first half versus second half, it really is a continuation of that strength. But there are a handful of factors. I mean, obviously the price, the modest price increase that Paul has noted, you know, continues to roll through the balance of the year. But as I look at first half, second half, you know, I'm looking at sort of a midpoint of sequential growth somewhere in that sort of 10%, you know, maybe high on the high end, something like 16% first half, second half growth. One of the other things I think it's important to note that as we thought about, you know, the sequential cadence on the go-forward basis is in terms of what we've learned in terms of holidays and the doses impacted. In my holiday weeks, I'm talking about things like Memorial Day, July 4th, Labor Day, Thanksgiving, Christmas. Those all do have an impact on weekly doses, but those kinds of numbers have been cooked into the forecast.

Maybe I'll just add, so as I shared in my prepared remarks, the 22% sequential growth was primarily achieved through continued increased penetration in existing accounts, which we believe is a result of our activity and promotional efforts within the referring physician activity. Also contributing, but to a lesser extent, was adding new accounts, a modest price increase that I mentioned. And while we don't specifically discuss our pricing strategies, I would note that our price increase is consistent with market trends and aligned to the value that we believe we continue to deliver to patients and healthcare professionals across the prostate cancer landscape.

Thank you. One moment while we prepare the next question. Our next question comes from Richard Newiter from Truist Securities. Your line is now open.

Hi, guys. Thanks for taking the questions, and congrats on another outstanding quarter. Thanks, Rich. Thank you, Rich. I wanted to maybe actually – I'm sure there will be plenty more questions on Polarify. I'll give you a break from that one for a second. Just Affinity was a standout this quarter. I appreciate you had maybe the one-timer in there, but still back to solid double digits. Sounds like you expect that outlook for the year to be improving. Would love to just kind of hear if you think, you know, is this a sustainable double-digit grower from here on out? And is that what's assumed in your guide for DFINITY? And then I have one follow-up. Thanks, Rich, for the question.

So with regard to DFINITY, you know, I think we've really entered a new normal. with some of the lingering staffing constraints that we've talked about in the last number of quarters and indeed for the last couple years, have been largely mollified due to improving hospital efficiencies that have enabled them to handle an increase in patient volumes, which we saw in the first quarter, and we would expect that level to be sustained through the remainder of the year. I think in terms of the first quarter, It's also a very different dynamic than we saw in the last few years. Whereas you recall in 2022, Omicron was spiking. We saw an impact of patient visits and similar the alpha variant hit in the first quarter of 2021. And so we think we will see continued patient growth. to be able to support DFINITY's sustained leadership and continued growth going forward. I'll turn it over if Bob wants to add anything.

Yeah, Rich, I mean, I would just point out that if you just reflect on last year's performance, where the first half of the year probably, as Paul was noting, was sort of an easier comp, but that was mainly due to COVID concerns in the early part of the year, and then building on strength, but also importantly, the sales team was able to get more in-person as as last year evolved and really, you know, driving the different programs to, you know, to continue to drive growth, adoption, and utilization. So, you know, we came into the year, you know, with an expectation that it has been exceeded. And I think it's really the benefits of the accumulated sales effort that is now being reflected and that we feel comfortable to point forward to the balance of the year with what I just said in terms of you know, high single digit to low double digit for the, on average, for the balance of the year.

I think, Rich, I'll just add one final comment here. And I think we have seen, and I'm sure you have as well, as the life science sector reports their earnings, there has been a consistent theme of patient volumes returning And with that procedures returning, and that is absolutely also then true for affinity. It is a kind of, I'd say, a rising tide, or both that return to normal, but back to a normal tide, which had been impacted negatively for the last 2 years.

Thank you 1 moment while we prepare the next question. Our next call comes from Rona Ruiz from SVB Securities. Your line is now open.

Great morning, everyone. So a quick one from me. I was curious, are there any updates on your scan per patient assumptions for Polarify given the new guidance? And where are you seeing the most growth across different Polarify patient segments?

Thanks for the question, Rona. So, as we shared in January, we did provide an update on the total addressable market, or TAM, for PSMA PET imaging agents in prostate cancer, where we updated our 2023 TAM to be approximately 350,000 patients, or $1.6 billion. We have not formally updated that number. However, I would note we have seen continued evolution specifically in guidelines. And so, as an example, the American Urology Association recently updated their advanced prostate cancer guidelines with a preference for PSMA imaging and also a recommendation to monitor disease progression at six to 12-month intervals, among other updates, further reinforcing the benefits of PSMA PET imaging and the need for what we would call sequential scanning to monitor patients' progression of disease. In terms of where we are seeing growth, I think we are seeing growth across all patient segments with a specific driven by existing accounts where we've activated referring physicians, both urologists, oncologists, and radiation oncologists to further understand the benefits of PSMA PET with Polarify. And in turn, we're seeing them continuing to refer increasing patients to take PSMA PET with Polarify. I think we had seen a ramp up, I would say at the end of last year and earlier this year, specifically for radioligand therapy patient selection, although naturally with Novartis' announcement at the beginning of March that that would not be adding new patients, we have seen some of that growth temper, but overall we've seen growth across the board.

Thank you. One moment while we prepare our next question. Matt Taylor from Jefferies. Your line is now open.

Thank you for taking the question. I'm going to start by following up on that thread. So, Paul, I was wondering, you know, I know you do a lot of market research, and you mentioned the change in the guidelines. You know, one of your key assumptions, and I think the last came up, they were for recurrence to see, you know, 1.7 or so scans per patient And I guess with radioligand therapy expected to grow here in the future, how would you expect scans per patient to evolve in that group and for recurrence now that you've been able to see a little bit more in the real world?

So thanks for the question, Matt. So I think what I would suggest is that as we've shared, we certainly see room for expansion in the total addressable market from a number of pieces, some of which you mentioned. Right, first would be the expansion of medical practice into the frequency of scans as physicians become more comfortable, more patients are regularly scanned with PSMA PET with Polarify, and therefore that becomes their new baseline. And so we do see that continue to evolve. I would note it's probably too soon three or four months after we shared an update to update those numbers from a scan frequency, but we do see further upside as PSMA PET with Polaroid becomes further embedded in the marketplace. I think the second piece that we've highlighted and you referenced was the addition of radioligand therapy further upstream into first and second line. with potential approvals, including over time PNT2002, which we're developing together with our partner's point, that would create an additional set of patients who would need to be assessed for their applicability for radioligand therapy as well as monitored over time. And so we will see that continue to evolve and potentially impact not only the number of patients who could be scanned, but as you know, the frequency of scanning. And then finally, we also see the potential for further evolution within the staging population, specifically with regard to intermediate favorable, which is not currently in guidelines, but is being explored. And so I think we overall see significant runway for the PSMA PET imaging market in the United States in prostate cancer to continue to grow meaningfully over the coming years, and naturally for PSMA PET with Polarify to continue to lead in that space.

Thank you. One moment while we prepare the next question. Our next question comes from Yuan Zhe from B. Reilly. Your line is now open.

Good morning. Thank you for taking our questions and congrats for another solid quarter. So in many imaging centers, we can imagine that they are using both Pilarify and the competitors Elucyx. Can you remind us what's the value proposition of Pilarify versus ILLUSIX, and what are the feedbacks you are hearing from doctors and imaging centers, why they are using more Pilarify? Then I have a follow-up question.

Happy to answer that question. And I think I start by saying, as we might not have mentioned this specifically, But when we look at the last quarter and estimate what share we believe we had in the marketplace, we believe we had about 75% share of the PSMA PET imaging marketplace, which I think is testament itself to Polarify and the market's choice for what we think is the best product out there for imaging prostate cancer patients. We've talked about this many times about what we see as the product profile advantages of Polarify versus the other available agents. And I think one of the key ones is the choice of isotopes. F18 as an isotope is really much better suited to large-scale production, which matches the patient population in need here. And I think with the work that we've done to build out our PMS network, we've been able to meet that need, not only geographically, but then, you know, pan-America at this point with the network that we've built out. We certainly think our choice also of targeting Moines is stronger and that it leads to clearer images that are more specific and sensitive to the underlying disease. And again, I'll say, you know, I think the market has spoken about that as well.

Great. Thanks for that update. And Paul, in the long term, there is a higher growth potential for radiotherapeutics than diagnostics. Can you maybe provide us an updated thought on how Lancias want to play in the long term? Do you intend to license more late-stage radiotherapeutic assets? Thank you.

So I would say we're incredibly excited about the future potential of the radiopharmaceutical market, as I shared in my prepared remarks, including therapeutics and diagnostics. We have in development with point right now two incredibly exciting assets in the therapeutic space, one PNT2002 for prostate cancer and a second PNT2003 for neuroendocrine tumors. And so we are already active from a therapeutic perspective. We also look to see that there's significant opportunities in the diagnostic space in radiopharmaceuticals, as evident by the acquisition of MK6240 in the Alzheimer's space, which is becoming incredibly exciting. And so I think when we look at our differentiated capabilities in development, in regulatory, in market access, in supply chain, and naturally in commercial execution, we believe those differentiated capabilities position us incredibly well to continue to lead in radiopharmaceuticals, both in therapeutics and in diagnostics going forward, as we undertake and indeed continue to lead in what it truly is a renaissance of innovation.

I'll just tack on from the perspective from a business development, you know, the company's clearly in a very strong balance sheet liquidity position with nearly half a billion dollars in cash, access to further liquidity through our, you know, credit lines, as well as relationships that we've built in the capital markets. The company, you know, has stated that we are interested in finding those assets that can create, you know, continued growth for the balance of the decade and beyond. You know, as Paul pointed out, that are going to leverage our commercial manufacturing supply chain capabilities. And we certainly have built a team that, you know, is capable of robust diligence and, you know, ability to drive shareholder value and create and bring to market solutions for patients and caregivers.

Thank you. One moment while we prepare the next question. Our next question comes from Justin Walsh from Jones Trading. Your line is now open.

Hi, thanks for taking the question. I think the evolving commercial and clinical success of PSMA-targeted therapeutic and diagnostic radiopharmaceuticals is kind of hard to dispute at this point, and it looks like at least one big pharma player is continuing to cite radiopharmaceuticals as a core driver of revenue growth with expected proportional investment on their part. So I think at this point a lot of people are wondering what the next big target is and expecting that might be something with more pan cancer expression such as fiber blast activation protein, which I know you guys have a copper PET imaging agent in the pipeline there. Are there specific targets that you think are particularly exciting for the next generation of assets in oncology? And how are you positioning yourselves to take as good advantage of that as you seem to have taken on the PSMA targeted side.

Justin, as always, I think you're very, very well versed on what's happening in this market and very also insightful about where the market is going. And we certainly echo your thoughts about what the next large targets might be Certainly, if we can make contribution to the diagnosis and treatment of breast cancer, I think that would be an exciting again, an important innovation for the market. But as you say, with with our pipeline and specifically looking at our fast product, and remember, we also have in our pipeline as well. These are both targets that really allow us to look pan-cancer. Now, having said that, we will ultimately specifically target types of cancer within that. We have not released that information. Those programs are also early, but we have not released specific information as to what targets we would choose specifically for those two products.

Thank you. Just a really quick reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. One moment, please, while we prepare the next question. Our next question comes from the line of Larry Salo from CJS Securities. Your line is now open.

Great. Thank you. Good morning, everybody, and congrats on a good start to the year. Just a quick financial question or a couple for Bob. Gross margin obviously continues to sort of creep up along with your better mix. How should we kind of view that going forward? I mean, I think you hit almost 69% this quarter, and same respect to operating margin, getting some leverage on the gross profit there. So operating margin, I think, was 47%, right, which was, I think –

uh significantly higher even than you know last year's average or even even the last couple quarters so how should we kind of look at that going forward thanks as you found it goes to the balance here larry i mean i am calling for you know a bit more absolute dollars in terms of uh opex uh but i'll start with gross margin gross margin did he point out nearly 69 percent that's sustainable um at these levels um particularly as you think about some of the investments that we're going to continue to make in terms of you know paul noted that we you know have three new PMS that does include work that needs to be done to to bring those online as it were so those expenses will continue to be because we did note earlier this year that we would continue to add PMS to the network throughout the balance of this year so furthering that you know chance to continue to grow gross margin into the future as some of those expenses come off and as the DFINITY manufacturing facility comes sort of feathered into our overall gross margin story on a go-forward basis. In terms of OPEX, you know, I've noted before that, you know, in our numbers, if you will, for the balance this year, you know, we do have investment relating to our partnership and collaboration with Point. Also, now, the expense base that comes with the Servo assets in terms of its – as a pharma services, but also you know, the back office and all of the work that it takes to keep that running. April starts sort of where merit, you know, kicks in. So you see that from a headcount, just an employee-based expenses that would continue to grow. But you're right, our intent is always to lever the P&L. That's something that I, you know, talk about often here. And I think that's something that's important to continue to drive shareholder value. which will translate, as we are seeing, into free cash flows that continue on a very solid pace.

Thank you. One moment while we prepare the next question. Our next question comes from the line of Dave Turkoli from JMP. Your line is now open.

Good morning, and congrats. Looking at the updated TAM and the 350K scans that we're targeting for this year, what percent of those do you have covered with the PMS base that you have now? I think you said you added three, but do you need to continue to do that, or are you close to having most of the geography here online?

Thanks for the question, Dave. So what we've said is we can cover the vast majority of the country, and indeed, we have now served patients in 47 of 50 states. We have not served patients in Alaska or Hawaii, given the geographic dynamics. And so we can serve patients in the vast majority of states with our current PNF network. Further expanding is really around optionality, flexibility, and ensuring that we have redundancy to meet customers' needs when they would like to use PSMA Pet with Polarify, which naturally, given the expanding marketplace, continues to be at many different hours of the day every day of the week. And so ensuring that we can be able to provide that is really behind our continued approach to expand our PMFs, recognizing that unlike in a small molecule world, we can't build up inventory. And so radiopharmaceuticals are naturally an incredibly complex supply and manufacturing chain, and it behooves us to continue to ensure that we have best-in-class customer excellence. And so it is less around new geographies that we can't reach than it is around maximizing the customer experience to ensure that PSMA Pet with Polarify remains the market leader for many years to come.

Thank you. One moment, please, while we prepare our next question. Our next question comes from Richard Newiter from Truist Securities. Your line is now open.

Hi. Thanks for the follow-up. Just on the Zedra, I'm just curious a little bit more on the decision to end that program there. And I'm curious if the PNC003 asset and kind of what your plans are for that initiative has influenced it at all. And while we're discussing the topic, can you please provide an update on that asset, how you size the market opportunity? excuse me, and kind of what kind of timelines we should be thinking about there. Thank you.

So, Rich, I'm going to start because I want to make sure we're clear about the comments that we made and where we stand with Azedra. And then Bob can back in with the kind of financial implications of that. But we have not ended the Azedra program. We did discontinue a life cycle management program, but Azedra is still available commercially for patients with PPGLs. And so I'll let Bob fill in in a moment around the financial implications of that. But you also have to have PNC2003, and you're right, we didn't get the specific update here, but I can share with you that that program is also on time and on track with our expectations to complete a program which will bring us into the market for treatment of glioblastoma. I don't have the specific market data for you to offer. I'm sorry. I'm sorry. Neuroendocrine tumors, I think leoblastomas, I'm getting corrected live in the room here, for NETs or neuroendocrine tumors. And I don't have the specific market data here, but as we get closer to that market, we will certainly share that, Sam.

So, Rich, just to follow up on that. So, I mean, it really is about phase gating. If you think about life cycle management or any kind of clinical trial kind of evaluation, you're going to continuously look at the business case. And as we were evolving with the business case, it became apparent to us that the intelligent sort of financial decision to make at that point was to discontinue. But as you think about from an accounting perspective, you look at the entire intangible group together. So when you put it all together with an evolving market opportunity, as I noted, it requires that with this new information that you do a study on the impairment and It just made sense at that juncture after running the business model that we would, you know, take the charge. And so just to be specific, you know, even though as Marianne is pointing out, we are making Exedra continue to manufacture, continue to make it available to patients and caregivers. The currently marketed piece, in other words, the Exedra commercial asset, intangible asset, is what then has been impaired through cost of goods sold. And then, of course, the lifecycle management aspect of it in terms of what we were carrying on the books for that particular program and potential outcome long-term is what is the IPR&D intangible asset that we took through R&D.

I'll just make one other comment there. And you've heard us speak about this, I think, continuously during the pandemic. But Zejra really was very negatively impacted by the pandemic in that the treatment path for patients who receive Azedra is one that is highly labor intensive and requires inpatient hospitalization. And in hospital environments that were already short on staff, and given that the underlying disease of PPGL is what is considered indolent, they're a slow kind of growing, there was very frequently the decision taken to offset having, using hospital resources to offer a treatment such as Azedrin. It's not the only type of treatment that was impacted, but in this case, certainly. And we have continuously seen that. We believe in the product. We know what the product can do. It still remains the only product indicated with an indication for PPGL in the U.S. market, and we think that's an important offering for patients. I'll just update too, again, this is all happening live here, but Mark has shared with me what we have shared most recently as the TAM for the market that P&T 203 will enter, and we currently estimate that TAM to be approximately $800 million.

Thank you. One moment while we prepare our last question. Our last question comes from the line of Juana Reese from SVP Securities.

Your line is now open. Great. Thanks for taking the follow-up. So I wanted to check on the second half 23 SPLASH trial readout timeline, see if that affects a possible regulatory submission for the P&T-2002 asset. I was curious, what are your plans on turning around that data quickly and assembling a data filing package?

So they are directly related, Rowana, because it will be those data from the SLASH trial that will form the basis of the submission, the NDA for PNT2002. As we mentioned in our prepared remarks, we remain on track. It is our partner, Point BioPharma, who is completing that trial, and they have also publicly said that they expect those data to be available in the second half of 2023. We will then proceed with all haste. in moving forward with our program. As we noted in our remarks today, PNT2002 was awarded fast track designation by the FDA. What that means or what that then kind of plays out to be is that the FDA makes themselves available to you more frequently so that as you're preparing your file and then once you've submitted your trial, you have the ability to interact with the FDA more frequently. And you can also have what's called a rolling basis for submitting the different components of what will be the total NDA application, which again, facilitates and makes the whole process more efficient. We're, of course, hopeful and remain positive about what the outcome of the SPLASH trial will be. We think this is a very important addition to those treatment options that are available for patients with metastatic prostate cancer. And this is also, I'll just make one final comment about what FAST-TRACK designation offers. You get iterative feedback from the SEA, so it's not, you know, just waiting for milestones where you get, you know, feedback and then you have to, you know, kind of a linear way react to it. You get to, again, on a rolling basis, interact and ensure that your file meets their expectations.

Ladies and gentlemen, there are no further questions at this time. Thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.