Arthur Przybyl - President and Chief Executive Officer Stephen Carey - Vice President and Chief Financial Officer

Brandon Folkes - Cantor Fitzgerald Elliot Wilbur - Raymond James & Associates, Inc. Dewey Steadman - Canaccord Genuity Inc.

Good morning, everyone. Welcome to ANI's earnings conference call for the third quarter 2018.

My name is Art Przybyl, I am the CEO. And joining me today is Steve Carey, our Chief Financial Officer.

Before we begin, I want to refer everyone to the forward-looking statements language in this morning's press release and ask each of you to review it carefully as important context to this conference call. Discussions will also include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles.

Reconciliation of those non-GAAP financial measures can be found in our earnings release dated today. Today, we reported our third quarter results.

Record net revenues of $50.7 million, adjusted non-GAAP EBITDA of $21.4 million, and adjusted non-GAAP diluted earnings per share of $1.29. Based on these results, we reaffirmed our guidance for 2018.

Our nine month results generated record revenues of $114.5 million, record adjusted non-GAAP EBITDA of $62.2 million and record adjusted non-GAAP diluted earnings per share of $3.74; increases of 11%, 14% and 32% respectively, as compared to the prior year nine month period. Throughout the third quarter we continued to successfully execute on our strategy to expand and grow our generic brand and contract manufacturing business platforms.

Our generic drug portfolio continued to grow with the launch of three new products: Cholestyramine, and authorized generics of Brethine and Atacand HCT. Year to date, we have now launched seven generic products, increasing our total generic drug portfolio to 31 products.

Our key generic pipeline products Methylphenidate Extended Release tablets, Aspirin/Dipyridamole Extended Release capsules, and our undisclosed priority review product continued to track to their announced launch dates. These three generic products are substantial 2019 revenue and gross profit opportunities for ANI.

Methylphenidate Extended Release tablets will be the biggest product launch in ANI's history. Recently, we increased our brand drug portfolio in ANI label to a total of 11 products, with the October 1 launch of Atacand and Atacand HCT.

In September, we filed our prior approval supplement with the FDA for Vancocin Oral Solution and our work continues to progress on re-commercializing Cortrophin and filing the supplemental NDA in the first quarter of 2020. In August, ANI acquired Wellspring Pharma Services to expand our contract manufacturing and development business.

We are currently integrating that business and look forward to making further use of the manufacturing facility to advance work on our pipeline products. As a result of these events, 2018 product launches, 2019 forecast to product launches and our forecasted first quarter 2020 Cortrophin FDA filing, and the expanded investment in our contract manufacturing business, we are excited about our prospects for continued revenue and EBITDA growth in 2019 and beyond.

We remain very bullish on our business model. With that, I will now turn the conference call over to our Chief Financial Officer, Steve Carey, who will provide you with more details on our financial result.

Thank you, Art. Good morning to everyone on the line.

And thank you for joining the call to discuss ANI's third quarter 2018 financial results. For the three months ended September 30, 2018, ANI posted net revenues of $50.7 million, adjusted non-GAAP EBITDA of $21.4 million, and adjusted non-GAAP EPS of $1.29 per diluted share.

This performance yields a new high-water mark for quarterly revenues and represents the represents the first time that quarterly net revenues rose above $50 million for the company. It has been an extremely active period for ANI as we work to integrate our first company-level acquisition.

As previously announced, on August 6, we acquired 100% of the outstanding equity of Wellspring Pharma Services a Canadian company that performs contract development and manufacturing of pharmaceutical products. The transaction was structured as a cash-free, debt-free deal, with the preliminary purchase price for accounting purposes of $17.3 million.

From an operational perspective, we are in the initial phases of integrating ANI Pharmaceuticals Canada and are approximately 100 Canadian colleagues into ANI, with the focus on operational excellence, strengthening of existing CMO relationships, sourcing of new CMO opportunities, and seeding ANI pipeline projects into the Oakville, Ontario plant. For the period of August 6 through September 30, the Canadian operations contributed $1.7 million of revenue, and a GAAP net loss of approximately $170,000 dollars.

From an accounting perspective, we completed the initial purchase price allocation and day one accounting for the transaction. The deal has been accounted for as a business combination under the provisions of ASC 805.

Of the $17.3 million purchase price, approximately $14 million has been allocated to property, plant and equipment, $1 million to working capital, and the resultant $2.3 million of goodwill. To date, we have incurred approximately $1.3 million of transaction and integration related costs inclusive of legal advisors, accounting and tax services, certain employee related costs and deal related insurance.

Turning back to quarterly results, net revenue for the 3 months ended September 30, 2018 was $50.7 million, up $2.5 million or 5% versus prior year, as declines in our generic and branded products were more than offset by revenue from royalties. Revenues of our generic pharmaceutical products declined a modest 1% from prior year to $30.3 million, driven by declines in lower margin products such as Fenofibrate, and lower sales of EEMT, and Nilutamide.

These declines were tempered by the favorable impact of the Ezetimibe-Simvastatin, which was acquired in May of this year. Branded pharmaceuticals revenues were $14.6 million in the quarter, a decrease of 7%.

Prior year comparisons are primarily due to a decrease in unit sales and average price of Inderal LA and volume declines for Vancocin, tempered by higher sales of the InnoPran XL and Inderal XL, coupled with a launch of Arimidex and Casodex in the ANI label in July of this year. Royalty and other income was $3 million for the quarter, driven by approximately $2.1 million related to our profit from the sales of Atacand and Atacand HCT as well as approximately $500,000 related to certain third quarter milestones and sales of Gilead's Yescarta.

This line also benefitted by $500,000 of product development and laboratory work performed by ANI Canada for third-party customers. In addition, revenues for our contract manufacturing services were $2.8 million, up 55% or nearly $1 million principally due to results of ANI Canada.

Cost of sales in the current period was $15.6 million or 31% of net revenues and included a modest $44,000 of step-up cost related to our WellSpring transaction. Prior year cost of sales included $2.8 million of costs recorded due to the step-up of basis or finished goods inventory purchased in conjunction with certain acquisitions.

Excluding this amount, prior year cost of sales was $18.3 million or 38% of net revenues. This seven-point year-over-year improvement is directly attributable to the impact of higher royalty income, which has no corresponding cost of sales, and decreased sales of our products subject to profit sharing arrangements.

On a GAAP basis, selling, general and administrative expenses were $11.8 million as compared to $8 million in the prior year, driven by approximately $1.3 million of underlying ANI Canadian SG&A cost, $900,000 of transaction and integration costs, and incremental employment cost to support the growth of our U.S. business.

Research and development costs totaled $4.7 million in the quarter, up $2 million or 77% from prior year. This increase was driven by investment behind our Cortrophin re-commercialization program, and work related to our underlying generic pipeline, including new projects acquired in our second quarter 2018 purchase from Amneal.

Our effective tax rate for the quarter was 20.9% of pretax income as compared to 25.9% in the prior year period, primarily due to the favorable impact of the federal corporate statutory income tax rate of 21% as established in the Tax Cuts and Jobs Act of 2017. This rate benefited both our GAAP and adjusted non-GAAP diluted earnings per share metrics in the quarter.

From a balance sheet perspective, we had unrestricted cash and cash equivalents of nearly $44.1 million as of September 30, 2018. This balance is reflective of $8.3 million of cash flow from operations during the quarter and is net of the $17 million that we invested behind the acquisition of WellSpring Pharma Services in August.

On a year-to-date basis, we've generated $39.8 million of cash flow from operations, while investing $27 million back into the business through our acquisition of WellSpring, purchase of generic, commercial and pipeline opportunities from Amneal and IDT, and capital expenditures to enhance the capabilities of our manufacturing facilities. Total net debt as of the balance sheet date approximated $171 million, representing two times net leverage on both a trailing 12-month and forward looking basis, when utilizing the midpoint of our full year 2018 guidance.

The $50 million revolver portion of our senior secured credit facility remains undrawn and coupled with our cash flow from operations continues to provide us with flexibility in pursuing further business development transactions. On a year-to-date basis, we have generated $144.5 million of net revenues, $62.2 million of adjusted non-GAAP EBITDA and $3.74 of adjusted non-GAAP diluted earnings per share, representing year-over-year gains of 11%, 14% and 32% respectively.

As Art previously mentioned, all three of these metrics represent new records for the company. With three quarters of 2018 behind us, we are reiterating our full year 2018 guidance as updated during our second quarter earnings call.

We anticipate that our fourth quarter performance will be driven by further leveraging the July launch of Arimidex and Casodex in the ANI label; the October launch of Atacand and Atacand HCT in the ANI label; continued execution in maximizing the potential of our recently acquired and launch generic products, including our recent Terbutaline launch; and successful integration of ANI Pharmaceuticals Canada. In conclusion, we are increasingly optimistic about the future of ANI.

We look forward to delivering significant value to our stakeholders through continued maximization of exciting generic pipeline opportunities, leveraging the capabilities of our newest colleagues at ANI Pharmaceuticals Canada, driving the re-commercialization of Cortrophin and continuing to deploy capital in a judicious manner. With this, I'll call the call back - we turn the call back to our President and CEO, Art Przybyl.

Thank you, Steve. Moderator, we will now open the conference call to any questions.

Hi, thanks for taking my question, and congratulations on the good quarter. Firstly, you presented a really good EPS number this quarter, but you left the guidance unchanged.

So it leaves quite a wide range on the EPS line for 4Q. Can you just talk us through some of the pushes and pulls around EPS in the fourth quarter?

And then, I'll ask my follow up after that. Thank you.

Steve, do you want to take that question?

Sure. Good morning, Brandon, and nice to speak to you.

So I think we are confident with the 9 months behind us that the full year ranges remain intact. And so, thus we reiterated earnings this morning.

Clearly, this has been a year where ANI has performed I think in a macro background that's been difficult within the space. And so, we're confident that the fourth quarter will deliver within the range of the remaining guidance.

And the pushes and pulls really are as I laid out a moment ago, really continuing to maximize our current generic portfolio, and the generics that were acquired in the Impax/Amneal divestiture, which remains a very important transaction for the company. And also, bringing in the AstraZeneca brands that were acquired at the very tail-end of 2017 and brought in to ANI in January of 2018.

As you know, in the beginning of the year, those product sales were represented in our loyalty line. We have now brought all four of those products, as of the beginning of October brought all four of those products into the ANI label.

And those have been second half catalysts for us. And then, lastly of course, early days in the integration of ANI Pharmaceuticals Canada, but as we operationalize that business, that would be in the bucket of push and pull from the fourth quarter.

Great. Thanks very much.

And then, just following on from that, can you perhaps talk us through the ClarusOne agreement and how long it may take you to reach sort of a long-term run rate there in terms of volume? And then secondly, you mentioned R&D spending on your generics pipeline.

Does that insinuate we could see additional products disclosed beyond what you had already disclosed for 2019 and beyond? Thank you.

So, Brandon, the latter part of your question, yes, you should expect to see additional generic products launched. We typically don't disclose our product launches for generic products for competitive reasons.

We have, obviously - because of the impacts transaction, and the fact that the public announcement associated with that, it certainly made sense for us to disclose the Methylphenidate ER and Aspirin/Dipyridamole product, as you know, that one is launching date-certain October 1. And we've guided to obviously the first quarter for Methylphenidate ER.

But you should expect to see cadence of additional generic product launches from our pipeline of 75 products over the course of 2019. We just don't disclose those as a matter, of course.

And so, we - and if I may just ask you the first part of your question again was?

Just to help us think through the volume increases that ClarusOne may…

Oh, right, right. There is no - yeah, so with ClarusOne, we already have products on agreement, okay.

We don't have internally a number that we hope to achieve in terms of revenue runway rates through ClarusOne. We don't look at consortium agreements in that manner.

We tend to, for instance, take Methylphenidate ER, we have a model obviously for that product, a target, gross profit that we think we can achieve. Now, how we achieve that is going to be based on the contracts, obviously, the pricing, the volumes.

And so, but we look at the product in an aggregate basis, okay, not we want to do this amount with ClarusOne, this amount with Red Oak, this amount with WBAD. We don't look at it quite that way.

And so, ClarusOne will grow over time as we add additional products to the agreement. And that is based on product launches that we present to them.

And they certainly do occasionally request for proposals, RFPs, test the market on certain products and pricing. But that's how we view it as a company.

We never look at it as what our target revenues are through one particular consortium. We look at it for the entire market place and how that debuted up is based on what contracts we win with each specific consortium.

Hope that answers your question.

It does. Thank you very much and congratulations again.

Yeah. Thank you, Brandon.

Thank you.

Thanks. Good morning.

First question for Art, maybe just to get some general commentary from you in terms of the current deal environment, obviously, it seems like an acceleration transaction from larger entities looking to re-growth their businesses, both brand and generic assets coming to market at pretty cheap multiple. So just wondering sort of, from your perspective, what are you seeing in terms of deal activity, where do you think the best opportunities are and how do we think about allocation of capital over the next 12 to 18 months with respect to sort of the three buckets brands, generics, and then maybe thinking about development platforms.

Right. So it's a good question Elli.

As you know, we have sake of argument approximately $100 million to put to work, and that's based on today's numbers, obviously, our free cash flow continues to increase. There are certainly targets that we have, if we felt that there was a center for excellence or something that could give us more of an internal product development ANDA approach, we would certainly consider that through acquisition.

But it is difficult sometimes to put a value on a future generic product launches that are coming off of patent, because you just sometimes have a tough time anticipating the amount of competitors for that particular ANDA approval and how many people are chasing the same bucket of dollars. So - but that doesn't mean that we don't continue to look for that internal platform through acquisition, if it made sense.

I would say to you that the environment for generics, and call it, as you know, we buy mature brands, is primarily heavily skewed toward generics right now. There are a number of generic businesses or product opportunities that we see available to us within the amount of cash flow, and cash we have to spend.

So we have certainly a focused attention on that. You might see additional partnership agreements for ANDA type products or generic products.

So we like the partnership model maybe more than just the acquisitive model for some of those - for some generic products. And brands pop up from time to time.

So there is no - I can't give you a set number, but clearly because of the upheaval within the U.S. generic markets, without question, there are a significant amount of transaction opportunities that maybe we can avail ourselves of.

And so, we'll see. We'll see what the - we never know, obviously, going into a new year what might transpire any more than we did this year, but you've seen us pull down several deals this year.

You know that we continue to be acquisitive and put our money to work in that fashion. And we think that's our best use of capital as well as obviously investing internally in R&D.

Thanks, Art. I just want to ask a couple of follow-up financial questions for Steve as well.

Specifically thinking about gross margin level, obviously, strong performance this quarter and if I look at sort of the revenue mix and levels, very similar to what was reported in the second half of 2017, but gross margin 600 or 700 basis points above those levels. So maybe just give, maybe a little bit more color, insight into sort of what drove the relatively strong gross margin performance even though it looks like mix levels were fairly similar.

Sure, sure…

Before you answer that, Steve, I just want to point out one thing, Elliot, that I think is very important, okay. And this is obviously, gross margin levels percentages are important to us, but not as important as aggregate gross profit dollars.

And so, when I speak about the fact that methylphenidate is going to represent the largest potential product launch in the company's history, there are very few generic products, where there is three or four competitors that have an $800 million to $900 million gross profit sales opportunity and an aggregate market opportunity of $1.3 billion. Now - but be aware that, with that particular product we are going to be more interested in gross profit dollars and in the gross profit percentage.

It's going to be less than our current percentage is in the 60s. I just want you to be aware of that, but for us, it's always about the generation of gross profit dollars and cash flow that matters.

But Steve, if you'll take that - if you will take the rest of that question in regards to the fourth quarter, and obviously where our margins are today, I'd appreciate that.

Sure. Yeah.

And good morning, Elli. Yeah, so the biggest item is, I think within two things, within the mix of generic products there has been an improvement in margin and that would be driven by the fact that one of our, probably our biggest headwinds within generic portfolio this year has been on the Fenofibrate product.

And so, we call that that is an authorized generic type distribution agreement and so we have corresponding, say, just the distributors' margin on that product. And so, well, that has been fairly significant headwind on the revenue line this year, the pull-through on that product is relatively small.

So net-net, I think improvement in the gross profit of within the generic portfolio, and then coupled with the strong performance on the royalty line, right. And so dissecting that royalty line, there's really two items going on there.

One is, during the first six months of the year, 100% of our gross margin from the four AstraZeneca products was coming through the royalty line. In the third quarter, we pulled in Arimidex, Casodex into the sales and cost of goods sold line for ANI, but the two Atacands products remained in royalties and that will go away in the fourth quarter.

So all other things being equal, we would expect royalties the decline in the fourth quarter. But the other important component of that revenue - royalty revenue line is the royalty that we receive on Gilead's Yescarta product, and we would hope, of course, that part of the line will continue to grow, not only next quarter, but in future years as Gilead builds out that franchise.

But those are the biggest factors in the gross margin performance this quarter.

Okay. And then, I guess, more specifically I wanted to ask about the issue that sort of rose last quarter with respect to a much higher mix of 340B business in the June period.

And just sort of how that transpired this quarter, whether or not it was the same relative mix or you saw return to more normalized levels?

Yeah, sure. Yeah, so big picture, it came in as expected, right.

So as we discussed on the second quarter earnings call, when the company reset guidance largely on the performance of that one product, Inderal LA, we did set the anticipated mix to historical levels and that mix came through as expected in the third quarter and so versus our revised expectations, I would say right in line. Still on a year-over-year basis it's a negative comp.

And that's why we cited that product, both on average price and volume. But in terms of our expectation for the product going forward, it came in as expected.

Okay, thank you.

You're welcome.

Thanks, Elliot.

Hi. About the recently acquired products in the Astra portfolio, third-party data indicates meaningful increases for Casodex and Arimidex, that corresponds roughly with the label switchover.

Should we expect a similar increase on the Atacand portfolio which just switched over? And how much of that increase are you actually realizing as net pricing?

And then, how should we approach the EES and EEMT markets going forward, just any kind of thoughts on additional competitors or even an approved product potentially entering on EEMT? Thanks.

Well, let's take the latter part of that first, EEMT. Currently, it is a two-player market.

We have been in that market where it's been three players in the past, Dewey. And this might have been before you've covered us, I can't remember.

And so, we always are on the lookout for another player, obviously. But we feel pretty good about our position on that product associated with consortium agreements that we took that drive our market share on that product.

That product, as you know though year-over-year declines in terms of overall use and unit sales, and so we expect that same. We always factor in or forecast in that same level of decline year-over-year on that product.

In regards to - yes, we've actually have seen record sales of units in September, that product that continues to grow. It's not to say that again there won't be another competitor.

As you know, we busted a monopoly on that particular product. It's a nice product for us.

It's an old line antibiotic. There'll be some additional update associated with that product in our Q that's being released after hours today.

So you can - I would invite you to read the narrative section on that product later on today. And so, hopefully, it gives you a little bit of color on EEMT, EES, and the other part of your question, Dewey, one more time?

The pricing for Casodex and Arimidex…

Oh, right, right, right. What we expect to see - so when it comes to - so when we change a brand over to our label, we certainly get what I would say is, sake of argument, 20 to 30 day stocking orders, okay, from the wholesalers to effectuate that brand level increase.

But that, if the product doesn't sell - it certainly does - but if it didn't sell, then we wouldn't see subsequent orders in follow on months. I don't know what the overall unit increases were with Arimidex and Casodex associated with the switch over to the ANI label.

So I can't tell you off the top of my head, and we look it up for you, talk to you later, Dewey, whether [they'll say really] [ph]. We anticipate the same level of unit increases with Atacand and Atacand HCT.

It wasn't unit increases. It was pricing, so revenue divided by - your gross revenue divided by number of units going out.

And so [indiscernible] and pricing, gross pricing.

Right, right, right. I mean, we still expect to be able to generate the same level of sales that the product was currently doing under the AstraZeneca labels.

And perhaps we can give you a little more color on that when we have a - when you talk with Steve later on in the afternoon, if that's okay.

All right, and then on Cortrophin, are there any more FDA interactions that are mandated before filing? And…

No. No, they're not.

I will tell you, Dewey - sorry to interrupt you - Cortrophin, we are past the development. We are into commercial-scale production, our specs versus the old specs and then modernized specs on this.

We look good. We are very bullish on this product.

We are certainly on track to file when we mentioned in the first quarter. We're putting the product up on stability prior to that filing next year and we are very excited about the opportunity for that product.

We think that - again, we are very bullish on that product at this particular point in time. And the most important thing is it's difficult for us to - obviously, you had not seen us put out a filing date for a long time, because we really had to get through the science and the development of it first, the modernization of it, the comparison of that to previous levels, our conversations with the FDA as you know.

At this point in time, we're full speed ahead. And we don't see any showstoppers to filing that sNDA on the timeframe that we mentioned.

So you just have to stay tuned. But it was a big project.

And our team has done a great job of taking, let's say, from paper 30 years ago to putting it into a finished dosage form file. And so, we're excited.

We're excited about the opportunity to break that monopoly as well.

Okay. Thanks.

Well, I'd like to thank everybody for attending our conference call today. I reiterate the fact that we remain very bullish on our business model, now and going into 2019.

We have a lot of shots on goal. And we look forward to reporting our results to you next quarter and providing you 2019 guidance, which will be part of the end of the year 2018 earnings release.

Thank you very much. Have a nice day.

Bye-bye.

Thank you.