Lantheus Holdings, Inc. (LNTH) Earnings Call Transcript & Summary

Good afternoon, and thank you for attending the 2020 Virtual UBS Global Healthcare Conference. My name is Les Franks, and I am your host for today's presentation from Lantheus. Our presenters today are Mary Anne Heino, President and Chief Executive Officer; and Bob Marshall, Chief Financial Officer and Treasurer. There will be a 30-minute presentation, immediately followed by a 10-minute Q&A. To anonymously submit a question, please enter it into the Q&A prompt on your presentation screen. With that, I will now turn it over to Mary Anne and Bob.

Thank you, and good afternoon, everyone. This is Mary Anne Heino, President and CEO of Lantheus. It's my pleasure to have the opportunity to present to all of you this afternoon. And I hope this finds everyone safe and well from wherever you are taking this call. I will be using a presentation this afternoon that I hope you all have access to. And to facilitate the understanding of where I am, I will be referring to the slide numbers as I change slides. Right now, I'll refer everyone to Slides #2 and 3 in my deck, these are the appropriate and necessary safe harbor statements that I'm required to make. All of these statements are also available on our website and as I will be making forward-looking statements while I am making my comments today, I would ask that each person review these statements on our website and in the presentation you have access to today as they are necessary. Thank you. If we all now turn to Slide 4, these are range of topics I'll be speaking to today, including kind of talking about where we are as a market leader today, talking about where we're heading in the markets that we see ourselves involved in, our view that we enter these markets from a position of strength and then also talking about our capital position, and I'll have Bob talk about our financial position. But first, I'll talk about where we are today, and that is -- I'll start with Slide 5. From a Lantheus perspective, we are a market leader in the markets that we operate in. First and foremost, in our market in ultrasound contrast agent, we are #1 worldwide. And from that position, we are also being an innovator, and we continue to innovate in our microbubble franchise. And I'll talk about this frequently in the presentation. From a radiopharmaceutical perspective, we are a rich and long-standing representative in radiopharmaceutical diagnostics. We have successfully led 14 NDAs through the FDA, and we have a long-standing history of innovating in this market. It's also very important to us strategically. And our recent announcements and the transaction that we will soon conclude with Progenics for a merger is a strong demonstration of our intent to continue to lead and to innovate in radiopharmaceuticals. In our pipeline -- in our own pipeline in both microbubbles and radiopharmaceuticals, we continue to find innovative ways to use products and to bring value into the markets we serve. And in our M&A transactions and the interest we have, we continue to look at ways within microbubbles and radioisotopes to bring value into life sciences and into health care options for patients. And finally, we see very strong value contribution in the competencies we have, and we see very unique areas where we bring competencies in operational excellence across our manufacturing, supply chain and areas of commercial expertise. I'm going to flip now to Slide 6. And the purpose of Slide 6 is really to show you the history of Lantheus. As I mentioned, we are a long-standing presence in radiopharmaceuticals. And in fact, this is a company that has been present in that market for over 60 years and a company that has continually and serially innovated in that market. We were the first to innovate with the TechneLite generator, and that was in 1976. We are also, with the product Cardiolite that we launched in 1990, still remain the company that has the most successful diagnostic agent -- nuclear agent worldwide. Our product DEFINITY, which we launched in 2001, is the most successful ultrasound contrast agent worldwide and retains that title today. And as we look to the future with our pending transaction with Progenics, our intent is to make our names in radioisotopes, both therapeutically and diagnostically. While our history certainly has been in diagnostic agents, we see with our competencies the ability and the opportunity to take the competencies that we have demonstrated in isotopes diagnostically and apply them to the emerging field of therapeutics and isotopes and combine that for theranostic opportunities and applications of isotopes. And I'll talk a little bit about that when we look at our pipeline slide. But if we turn to Slide 7, Slide 7 represents our current product portfolio. And this portfolio is currently spread across 2 business units, our ultrasound contrast imaging agents and our radiopharmaceuticals. And here, as you can see, if you look at the first column, revenue, that our revenue is more strongly sourced at this time from our ultrasound contrast agent, DEFINITY. And that represents, for the full year 2019, $218 million of revenue or approximately 63% of our revenue. Our radiopharmaceuticals, which represents products such as TechneLite and Xenon, represented 37% of our revenue. Our product DEFINITY in our ultrasound contrast agent market held a dominant share in the U.S. market of over 80% and continues to grow at 18%. That is the product that we continue to invest in. Our medical education efforts with that product, we believe, lends strongly to that continued growth rate. Our target there are echocardiography labs in the United States market and the sonographers who perform the echocardiography procedures. And our efforts there are really focused on helping them identify those echocardiography procedures where the addition of a contrast agent lends to stronger diagnostic certainty with the exam. In our radiopharmaceuticals market, we have long held a strong position, not only with nuclear cardiology labs, but also with the medical societies that influence them. And we hold strong contracts with the major radiopharmacy chains that supply into the nuclear cardiology labs in the United States market. That is a market with a current basis of products that we sell that is mature. But as I mentioned before, and as I'll speak to again when we look at the Progenics transaction and at our pipeline, this is a market that's emerging and growing with new, recognized and appreciated uses of isotopes in other applications, especially in therapeutics. If we flip to the next slide, this speaks to the unique corporate footprint that Lantheus holds and our unique core competencies. And across the world, there are really only a handful of companies that have core competencies around radiopharmaceuticals. And in fact, that is true as well about microbubbles. These are products that are specialized not only in their manufacturing. But also in the supply channels that bring them out to market, and these are long-standing relationships that Lantheus holds. They're also very complicated from a channel perspective and from an oversight perspective and a regulatory perspective, and that is especially true of nuclear isotopes. These are relationships and competencies that Lantheus holds and that we will use as we move forward and branch out into therapeutics. As you can see in the bottom right-hand corner of this slide, our strong relationships are also across the medical specialties that are most concentrated in offering these products and services. The management team that I've built while at Lantheus and that team that will be strengthened with the merger at Progenics is also an important consideration because deep experience in these areas is not common but very necessary to put together the proper, not only clinical, but then commercial expertise to bring these products to market successfully. And that is something that we see we've done very successfully at Lantheus, and that we will continue to do through the merger and path integration in our transaction with Progenics. Moving into the next section, which is shown on Slide 9. I'll talk a little bit about the markets that we focus on and why we see them as positive markets in which to focus. And that's shown on Slide 10. The global diagnostic imaging market is projected to grow at a 12% CAGR through 2024. More importantly, if you look on the right-hand side of this slide, the global nuclear medicine market is projected to grow at 14% through that same period. And what's important about the nuclear medicine market is really the subsegment of that market that is driving that growth. And that is the use of emerging isotopes in therapeutics applications. These applications are precisely what our interest -- what sparked our interest in the Progenics transaction. As two of their pipeline assets directly speak to this, AZEDRA and the 1095 program, which is currently in Phase II. AZEDRA for PPGL, and the 1095 program, which is a therapeutic product for prostate cancer. The emerging use of radioisotopes and therapeutic applications is projected to grow from a current use to over $30 billion by the year 2030, and that we see as a very strong application of the competencies that we have at Lantheus. If you look at Slide 11, Slide 11 speaks to our continued growth prospects for the echocardiography market in the United States. As I noted on an earlier slide, we saw 18% growth in DEFINITY revenue for the period in 2019, and we remain confident about growth prospects going forward. The 3 drivers of growth for this market are the underlying growth of the use of echocardiography as a diagnostic procedure, which continues to grow at approximately 2% annually, with currently over 35 million echocardiography procedures done annually in the United States alone. The second source of growth for this market is the increasing use of contrast within the echocardiography procedure. As I noted earlier, when during the procedure, it is determined that the procedure is not diagnostically certain because of the poor imaging that is seen, a contrast agent can be added to improve the diagnostic certainty of the procedure. Our promotional and medical educational efforts are targeted specifically at helping sonographers understand when that value can be added with the addition of a contrast agent. And we continue to see significant growth of the use of contrast agents, specifically that of DEFINITY. Finally, we continue to hold a very strong market share in that market. And we have continually held over 80% market share in the U.S. contrast penetration market. Turning to the next slide. I'll speak to the same concepts in the nuclear market. With over 9 million studies done annually using Tc-99 or generator-driven products, the concentration of those studies are done in cardiology. And our current products and our pipeline projects are directed at cardiology studies. Our current product TechneLite, used with Cardiolite, is used most commonly for a cardiac study, usually referred to as NPI. More importantly, our pipeline product, F 18, which is in partnership with GE, and another of our pipeline products, 1195, are being developed for potential use in PET-based cardiology studies, which is the predominant part of PET-based markets -- the PET-based nuclear market going forward. And we see this as the optimal place to focus in that growing market. Turning to Slide 14, I I'll talk about our intention to use what has been strong positions historically to continue to grow our company. And if you turn now to Slide 14, it comes into what we see as our vision moving forward for Lantheus or what we refer to as Lantheus 2.0. We will continue to use what has been our strong history in microbubbles as well as our strong history in nuclear and nuclear product development to project this company forward into areas that we see developing across life sciences. With DEFINITY, that is an evolution from the use of microbubble as a diagnostic agent to the use of microbubbles for interventional agents and also for therapeutic agents. And over the course of 2019, we announced 2 different strategic partnerships that demonstrate that. The Cerevast partnership is the use of a microbubble for the use in intervening in the treatment of retinal vein occlusion. And CarThera will be the use of microbubbles in the therapeutic treatment of cerebral intervention for the introduction of agents. In our nuclear programs, we announced the -- our intention to enter what we call pharma services. And this is the emerging use of radiotracers for better patient selection and better drug selection in clinical trials and post-clinical trials in both diagnostic use and in therapeutic product use in therapy selection for patients. As we look further in the area of theranostics, as I mentioned earlier, our merger acquisition transaction with Progenics takes us immediately into therapeutic uses, with AZEDRA or the only product approved for use in PPGL and with the developmental candidates, PyL and 1095, therapeutic candidates in prostate cancer treatment and diagnosis. And on Slide 15, we lay out what is the strategic rationale for our Progenics acquisition. As I mentioned already, it takes us into therapeutic applications of radioisotopes immediately. There's a robust portfolio and additional pipeline of precision diagnostic and therapeutic products as well as artificial intelligence, diagnostic products, which we feel is a perfect fit to the Lantheus current portfolio as well as to our strategic competencies. The financial profile, and Bob will speak to this as well, we feel our strong balance sheet and the capital structure we have built can accommodate what are the financial investment needs for Progenics and allow us to build out into the future, a sustainable financial profile for a company that will be attractive to our current and to future shareholders. This also allows us to continue what we've already demonstrated during our time as a public company, and that is sustainable and diversified revenue growth with a focus on commercial execution and also with returning value to our shareholders. And finally, with the leadership team that I've built during my tenure at Lantheus, we believe this proven leadership with strong commercial, operational and financial expertise is the right leadership team to drive and to lead this combined company. I won't review the content on Slide 16, other to say that if you look at what will be the combined portfolio of the merged company, it represents a well-balanced portfolio that we believe also becomes a basis for future acquisitions and future transactions to build out in additional areas. What I will say, if you look at Slide 17, is that the -- post merger, we also have the opportunity to enter into what is a key area of unmet need, and that is oncology. Additionally, immuno-oncology or more specifically, immuno-oncology, which, again, the transaction that we announced with NanoMab and our additional interest in pharma services will also allow us to explore further as we move forward into the future and announce additional transactions that we are considering at this time. If you turn to Slide 18, it gives an overview of the combined pipeline. And what I'll stress again here is the diversity of that pipeline. It allows us opportunity to explore not only additional indications for products, including additional life cycle management for AZEDRA but also applications for the diagnostic products that are already in our portfolio. On Slide 19, what I'd like to emphasize is the diversity of experience that my management team has as well as the depth of that experience. That experience covers not only traditional pharmaceuticals, but it also covers device and other outside industry. And we use that diversity of experience to ensure that we're challenging each other around the rationale that we bring to our strategy and the completeness of our strategy, which I will say has been particularly helpful as we've all dealt with this pandemic. We were thrown literally overnight into a need to act as a virtual team and to act on business conditions that I think we can fairly say, none of us have faced before. And I'm very proud to say that we have handled this very well and very successfully. As an essential business, we continue to operate with no loss of business continuity. We've continued to serve our customers. We've continued to meet our customers' demands. And we have an operating plan ready to operate so that as soon as our customers are back up to full scale, we are ready to serve our customers again, and we look forward to the day that, that is the request of our customers. I'm going to turn now to Slide 20, and I'm going to turn to Bob and let Bob speak to our strong capital position to fund our future. Bob?

Thanks, Mary Anne. So if you look at the left side of the slide, you'll see that the company has meaningfully reduced its debt outstanding. It has been a focus of the company for a number of years. This has allowed us to continuously reduce the cost of capital. Just last June, we refinanced our outstanding debt, reducing the balance outstanding by $70 million and substantially reducing the credit spread that we paid on that debt. This has all been supported by very steady and growing free cash flow, a very -- again, a focus of the company. The company has continuously generated good EBITDA that helps to drive that free cash flow. At March 31 of this year, our net leverage ratio at stand-alone company stood at just 1.4x. We had nearly $100 million of cash and cash equivalents on the balance sheet and availability of $200 million on our line of credit. As a note, at the beginning of April, out of an abundance of caution, we did draw $100 million down on that facility, but we do have the intention of paying that back upon successful deal closure. So as we entered into this new world, this COVID-19 world, the company was in a very strong position from a capital structure and perspective. Mary Anne?

Thanks, Bob. I think as we go to closing comments, what I'd like to say is, I think top of mind for everyone is the impact of this pandemic on business. First and foremost, I think we recognize impact on people. We have been closely monitoring all our employees. As an essential business, we continue to have about 100 employees who come to our campus daily to manufacture our products. And our priority has been on the safety and the health of our employees, and we have been -- we have even had a plan from day 1. As a sterile manufacturer, we've always operated in a GMP environment. So some of the measures were actually very easy for us to adopt, but the others were measures that we took on proactively to start. And we -- as I've mentioned, we've been able to continue manufacturing and we've been -- we've also been able to proactively start planning to how to bring the rest of our employees in a very safe fashion in the state of Massachusetts back on to our campus. We've also, though, learned, I think, how to work very effectively remotely. And I think that's a lesson that we're probably a little surprised at, that we could be so effective remotely, and it's one that from just an overall business perspective that I think has been a valuable lesson. As a public company, we are still very much committed to our shareholders to bring the value back to our company that's been lost as a result of this pandemic. It certainly was an external shock that we did not cause ourselves, but still we're committed to bringing value back to our shareholders, and we look forward to continuing to update the public as recovery occurs and as our business returns. I'll finish with that as our prepared comments. And we can open the call to questions.

Great. Thank you, Mary Anne and Bob. So as Mary Anne said, we'll now move to the Q&A portion of the presentation. As just -- as a reminder, to anonymously submit a question, please enter it into the Q&A prompt on your presentation screen. There's a couple of questions here, so I'll just start both about the supply and the demand side. On the supply side, can you comment on the consistency of your moly supply and the logistics related to that?

Sure. So we have enjoyed, I'll almost use that word, we have enjoyed greater consistency of moly supply through Q1, certainly as compared to the disruptions that we saw through 2019. And we've actually had some positive news from our third supplier, which is ANSTO in Australia. They received approval from their regulatory body, which is ARPANSA, to increase their production capacity. And with that increase, they now have excess that they're allowed to export. And we, as their priority customer, are the beneficiary of that excess. So that gives us further kind of relief, I would say, into our supply chain. So we are in at the -- especially at the level that we're manufacturing at now, which is reduced versus full need based on the pandemic, we are at full supply. We have seen issues with logistics. Those issues are driven by the airline industry and what's happened to the airline industry. Over the course of the pandemic, there were significant reductions to flight plans and to flight logistics, especially earlier in the period. And so that caused significant rerouting for us. What happens with rerouting for us is we take negative hits to our cost to goods because our -- this is our nuclear products and our nuclear products decay with delay. And so with those reroutings or with loss of travel options, we did see some logistic-driven hits to either manufacturing time or manufacturing days. But those, I'm happy to report, logistics have continued to improve more recently and have continuously and continue to improve. So we anticipate that, that will be the pattern that we'll see is continuous improvement in those logistics. And supply has been consistent. There have been no COVID-related manufacturing issues at any of our nuclear suppliers, thankfully.

Okay. The next question is really about the demand side. So we've heard a lot of talk in this conference and in earnings about hospital utilization. Do you have any particular geographic concentration? And if so, where and how and what has been your experience with hospital utilization in the past few weeks since earnings?

As a company, we certainly have demand concentration in the U.S. market, and that is especially true of DEFINITY more so than TechneLite. So of our 3 major products, which are DEFINITY, TechneLite and Xenon, DEFINITY is highly concentrated in the U.S. market. As Bob referenced on our first quarter earnings call, at our trough -- at our, I'll say, peak trough, we saw the revenue decline of up to 50% to 60%, which I think is somewhat in line with what most of the analysts are saying about the elective procedures-type market, which we are somewhat bucketed with, although we're not exactly aligned with. I will say we have pristine line of sight into demand levels because we sell directly to our customers. So we sell directly to hospitals, and we sell with DEFINITY, we sell directly to radiopharmacies who are the direct suppliers to hospitals with our nuclear products. So we know demand level changes literally to the customer, to the individual customer on a daily basis because we also ship on a daily basis. So geographically, on a micro basis in the United States market, we can see recovery. We saw a loss, and we can see recovery very specifically to the ZIP code, to the micro ZIP code. And it's been a very different experience for DEFINITY versus the nuclear products. For DEFINITY, there is a mix of inpatient versus outpatient use. And therefore, a mix of elective versus nonelective use. And we were actually -- we are learning about the use of ultrasound and the use of ultrasound contrast agents among COVID patients. And to that end, we actually hosted a webinar, this is now 3 weeks ago, with a leading echocardiologist, Dr. Martin Goldman at Mount Sinai Hospital in New York, 3 weeks ago to educate on the use of echocardiography among or with COVID patients and the use of contrast with those patients as a way to educate the value of using echocardiography as a diagnostic procedure because of the raising -- or rising incidence of cardiology symptomatology in COVID patients and also on educating on how to safely administer echocardiography and contrast for technicians so that they could safely administer the procedure and more quickly administer the procedure, so they have less exposure time with infectious patients. And that is something from a literature perspective, there continues to be more and more in the literature about the cardiac profile of COVID patients as well as the lung and the respiratory profile. So that's something that we continue to see and that we're grateful that we can offer value in either providing data or adding to the literature base that will ultimately help, we hope with this pandemic, help learn our way to an end with this pandemic. On the nuclear side, we've also seen the interesting phenomena that because our nuclear products, in normal health care delivery, our nuclear products may be delivered to a hospital up to 4 different times a day because these products are produced just in time and delivered just in time in alignment with when patient procedures are scheduled. And in response to the pandemic, to limit exposure of drivers to the hospital environment, our nuclear providers have decreased the number of times they deliver to hospitals down to only one delivery a day, and therefore, then to accommodate to have the dosing of our products be correct, they've had to increase the dose amount of radioactivity within dose. So they've actually had to increase the usage or the dosing amount of our product. And so there's been some sparing, some increased product use that's related more to the logistics of how they are having to accommodate delivery times. And so we had a little revenue sparing that was related to that. And that's something that, again, we kind of noticed as a phenomenon that was more [ preventive ] related than product related. And so there's very unique differences among our business units that we have been tracking from a revenue basis, trying to understand what's recovery versus what's logistic related in the pandemic. And we'll talk much more about this when we report second quarter because we'll probably know much more. But I think suffice it to say, we are very much aware, and we have the value of having such rich data about customers. And it lets us, from a business planning perspective, it's allowed us very much to move through the pandemic with a business plan that's acutely tailored to our business and our products. And I think it makes us smarter as we plan on how to rise through and out of the pandemic.

There's a couple of questions here about Progenics product, PyL. And I guess, to sort of going to the same point, talk a little bit about how it's going to be used in prostate cancer diagnosis and treatment and the market potential of it. And then is there a changing view on the value of that market potential as it relates to the inclusion of the CVR and the restructured transaction?

I'm going to answer the last question first because I think it's the clearest one to answer. The inclusion of the contingent value right has had no bearing on the -- on any change we had about the value of the market. It was a way to bridge the difference between what kind of Progenics shareholders wanted in the value of the transaction and give -- and settle that, so we both win. It's a win-win if the CVRs are paid out. But it was a way to kind of, I think, almost settle the difference between what the shareholders wanted as a value offered in the transaction. But there was no -- it had nothing to do with us not wanting to believe that the market could be worth that. From a forward look on how the product will be used, this -- I think the literature may speak for itself, and I think the societies have spoken for themselves. The American Urologic Association has already put out a statement saying that in the -- with the availability of a PSMA-based diagnostic, it becomes the preferred diagnostic agent versus those agents that are not PSMA based. And that type of statement had already been put out by the European Urologic Association, and it's based on the scientific theory that PSMA is the better analog for presence of oncolytic tissue, especially outside the prostate. So I think the medical societies are aligning around that scientific rationale, and our goal will be to support that within -- with medical education and with the availability of the product to have physicians make that choice and have it be their diagnostic agent of choice.

Great. The last question. When the volumes do come back or as they start coming back, do you expect that there'll be a return to normal levels? Or do you think there's an element of backlog burning off with the -- that's been backed up due to the COVID close down?

I struggle with that question, and I'll tell you why. I think, of course, there's backlog with one exception. And I'll -- the one exception I'll say is we know that within the echocardiography market, there is some segment of patients, it's a small segment, but there is some segment of patients for whom their echo procedures are serial. So -- and I'll give an example, a patient who may be post-valve surgery or a patient who might be post-AAA surgery might be scheduled for a series of echos to say that they will have one every 3 months for 18 months as a routine checkup. And I think it's fair to say that, that patient will miss one of those echos, but it would not be made up. It would simply be missed if the pandemic lasts for 3 or 6 months, they might miss one or 2. You're not going to make it up and force them to have 2 in one month when the pandemic subsides and things are back to normal. So that patient would not represent a backlog, they would just go to their next echo. And so I do think that there is -- again, it's very -- that within echo procedures, there's a small backlog, that there's a small group of echos that would simply be lost. But the other piece I struggle with when I think about how you would satisfy backlog demand is, I think, coming out of the pandemic, we have to be smart and being smart will have to be around maintaining perhaps not the same formula for social distancing, but it certainly would not be logical to overcrowd waiting rooms or schedules. So unless there's a way to offer longer, broader schedules, which could be, I guess, opening many of the outpatient departments -- and hospitals do not operate on weekends, they're typically Monday to Friday and they're typically 9 to 5 type schedules, the way -- the only way you could service backlog would be to extend hours. So you'd have to go into evening hours and you'd have to go into weekend hours because what would not make sense scientifically or from a public health perspective would be to jam more people into waiting rooms on a 9 to 5 basis. That would simply be almost irresponsible. And so to extend hours then, you'd have to have adequate staffing to cover those hours. So I think then the consideration is, is there adequate staffing? And is there appetite? I think from a hospital financial perspective, since these are, I think, revenue-generating departments for hospitals, there could be hospital financial institution appetite, but there has to be adequate staffing for it. And so that is not my area of expertise, so I can't speak to whether those conditions could be met.

Great. Well, listen, I appreciate it. That concludes the questions. And I want to thank you, Mary Anne and Bob, for presenting today.

All right. Well, I will hope that everyone out there continues to stay well and safe and that we all get through this as a society quickly and successfully.

Thank you.