ANI Pharmaceuticals Inc: Form 10-Q for the period ended Mar 31, 2024

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited interim condensed consolidated financial statements and the accompanying notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the audited consolidated financial statements and the accompanying notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 Annual Report”), as well as the information contained under Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Risk Factors” contained in the 2023 Annual Report, and Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q , and other information provided from time to time in our other filings with the SEC. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under “Risk Factors” in our 2023 Annual Report and this Quarterly Report on Form 10-Q.

EXECUTIVE OVERVIEW

ANI Pharmaceuticals, Inc. and its consolidated subsidiaries (together, “ANI,” the “Company,” “we,” “us,” or “our”) is a diversified bio-pharmaceutical company serving patients in need by developing, manufacturing, and marketing high quality branded and generic prescription pharmaceuticals, including for diseases with high unmet medical need. Our team is focused on delivering sustainable growth by scaling up our Rare Disease business through the launch of our lead asset, Cortrophin Gel, strengthening our generics business with enhanced development capability, innovation in established brands and leveraging our U.S.-based manufacturing capabilities. Our three pharmaceutical manufacturing facilities, of which two are located in Baudette, Minnesota, and one is located in East Windsor, New Jersey, are together capable of producing oral solid dose products, as well as semi-solids, liquids and topicals, controlled substances, and potent products that must be manufactured in a fully-contained environment. We ceased operations at our subsidiary in Oakville, Ontario, Canada as of March 31, 2023. This action was part of ongoing initiatives to capture operational synergies following our acquisition of Novitium Pharma LLC (“Novitium”) in November 2021. We have fully completed the transition of the products manufactured or packaged in Oakville to one of our three U.S. based manufacturing sites. In February 2024, our Canadian subsidiary entered into an agreement for the purchase and sale of the Oakville site, for a purchase price of $19.2 million Canadian Dollars, or approximately $14.2 million, based on the current exchange rate. The sale closed on March 28, 2024 (see Note 3).

Strategy

Our objective is to build a sustainable and growing biopharmaceutical company serving patients in need and creating long-term value for our investors. Our overall strategy is enabled by an empowered, collaborative, and purposeful team with high performance-orientation, Serving Patients, Improving Lives.

Our growth strategy is driven by the following key growth drivers:

Building a successful Rare Disease platform

We have spent significant time, effort and resources in establishing our Rare Disease platform. We acquired the NDAs for Cortrophin Gel and Cortrophin-Zinc in January 2016 and executed long-term supply agreements with a supplier of our primary raw material for corticotrophin API, a supplier of corticotrophin API with whom we have advanced the manufacture of commercial scale batches of API, and a Cortrophin Gel fill/finish contract manufacturer. During the second quarter of 2021, we submitted a Supplemental New Drug Application (“sNDA”) to the FDA.

On October 29, 2021, the FDA approved the Company’s sNDA for Purified Cortrophin Gel (Repository Corticotropin Injection USP) for the treatment of certain chronic autoimmune disorders, including acute exacerbations of multiple sclerosis (“MS”) and rheumatoid arthritis (“RA”), in addition to excess urinary protein due to nephrotic syndrome. Cortrophin Gel is an adrenocorticotropic hormone (“ACTH”), also known as purified corticotropin.

During 2021 and 2022, we invested significantly in leadership, expertise and infrastructure in the areas of commercialization of rare disease therapies and developed a launch strategy and commercial plan for this product. During this timeframe, we hired a significant number of new employees and assembled and trained our Rare Disease field force. On January 24, 2022, we announced the commercial launch of Cortrophin Gel in the U.S as our foundational Rare Disease asset.

Throughout 2023 and the first quarter of 2024, we continued to build and invest in our infrastructure to support growth in new areas of opportunity, such as pulmonology, ophthalmology, and gout in the ACTH market. On October 2, 2023, we announced FDA approval and commercial availability of a 1-mLvial of Cortrophin Gel, appropriate for adjunctive treatment of certain patients with acute gouty arthritis flares. As a result of the continued investment in our Rare Disease Platform, our expenditures were significantly higher during the first quarter of 2024 as compared to the prior year.

We plan to continue to expand our Rare Disease business, through a combination of organic growth, as described above, and acquisition. While we continue to execute against our strategic initiatives that we believe will result in the long-term, sustainable growth and value to our stockholders, we continue to evaluate potential acquisitions and other strategic transactions of businesses that we believe complement our existing portfolio, infrastructure and capabilities or provide us with the opportunity to expand our existing capabilities.

Strengthening our Generics, Established Brands, and Other segment through continued investment in our generic research and development capability and increased focus on niche opportunities

We have grown our generics business through a combination of market share gains on existing products and new product launches. We have also successfully acquired numerous ANDAs through business and asset acquisitions. Our most recent business acquisition was Novitium, including its portfolio of commercial and pipeline generic products, manufacturing and development facilities and expert workforce. The Novitium acquisition significantly increased our generic pharmaceutical research and development and manufacturing capabilities. We have begun to increase our focus on niche lower competition opportunities such as injectables, Paragraph IV, and competitive generic therapy ("CGT") designation filings. Additionally, we will continue to seek opportunities to enhance our capabilities through strategic partnerships and acquisitions of assets and businesses. During 2022, we completed an asset acquisition of four ANDAs from Oakrum Pharma, including two that were commercial at the time of acquisition. During 2023, we acquired two ANDAs and one pipeline product from the Chapter 7 Trustee for the estates of Akorn Holding Company and certain of its affiliates, acquired an ANDA and registered patents and pending patent applications from Slayback Pharma Limited Liability Company, and acquired additional ANDAs and product rights for two products in the second half of 2023.

We have grown our established brand product offerings through acquisition. We have acquired the NDAs for and market Atacand, Atacand HCT, Arimidex, Casodex, Lithobid, Vancocin, Inderal LA, Inderal XL, InnoPran XL, Oxistat, Veregen, and Pandel. We are innovating in our go-to-market strategy through creative partnerships.

Our overall strategy is enabled by an empowered, collaborative, and purposeful team with a high performance-orientation.

Generic Product Development Considerations

We consider a variety of criteria in determining which products to develop: These criteria include:

• Formulation Complexity. Our development and manufacturing capabilities enable us to manufacture pharmaceuticals that are differentiated and include high potency, modified release, combination, and hormonal products. This ability to manufacture a variety of differentiated products is a competitive strength that we intend to leverage in selecting products to develop and commercialize.
• Market Size and Patient Need. When determining whether to develop or acquire an individual product, we review the current and expected market size for that product. and competitive environment. We endeavor to pursue products with sufficient market size to enable us to enter the market with a strong likelihood of serving patients in need and thus being able to price our products both competitively and at a profit.
• Profit Potential. In determining the potential profit of a product, we forecast our anticipated market share, pricing, competitive environment and the estimated cost to manufacture the products.
• Manufacturing. We generally seek to develop and manufacture products at our own manufacturing plants to ensure quality control of our products, supply chain reliability and to more closely control the economic inputs and outputs of our products.
• Competition. When determining whether to develop or acquire a product, we research existing and expected competition. We seek to develop products for which we can obtain sufficient market share and may decline to develop a product if we anticipate significant competition. Our manufacturing facilities provide a means of entering niche markets, such as hormone therapies, in which fewer generic companies typically compete.

Recent Developments

Restructuring

On February 15, 2024, ANI Pharmaceuticals, Canada, Inc., a wholly owned subsidiary of the Company, entered into an agreement (the "Agreement") with 1540700 Ontario Limited ("Buyer") for the sale of ANI's Oakville, Ontario former manufacturing site (the "Property") for a total purchase price of $19.2 million Canadian Dollars, or approximately $14.2 million, based on the current exchange rate, subject to certain market adjustments. During February 2024, and in accordance with the Agreement, the Buyer deposited a total of approximately $1.9 million Canadian Dollars, or approximately $1.4 million in refundable deposits in escrow as part of the total purchase price.

On March 28, 2024 the Company completed the sale of the Property. After payment of commissions, taxes, and other related costs of approximately $0.6 million, the Company received a net cash amount of approximately $13.5 million at closing. The gain on the sale of the Property was approximately $5.3 million, recorded in the unaudited interim condensed consolidated statements of operations.

Product Launches

Refer to our website at www.anipharmaceuticals.com (http://www.anipharmaceuticals.com) for information on the products, including indications/treatments.

GENERAL

Impacts to our first quarter 2024 and 2023 results of operations, including to net revenues, operating expenses, interest and other expense, net, and income taxes are described below.

The following table summarizes our results of operations for the periods indicated:

(in thousands)

36

The following table sets forth, for all periods indicated, items in our unaudited interim condensed consolidated statements of operations as a percentage of net revenues:

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023

Net Revenues

(in thousands)

We derive substantially all of our revenues from sales of generic, rare disease, and established brand pharmaceutical products, royalties on net sales of certain products, and other pharmaceutical services. Many of our established brand products as well as our generic products face competition from generic products and we expect them to continue to face competition from generic products in the future. The primary means of competition among generic manufacturers are pricing, contract terms, service levels, and reliability. Increased competition generally results in decreased average selling prices of generic and brand products over time. In addition, due to strategic partnerships between wholesalers and pharmacy chains, we have experienced, and expect to continue to experience, increases in net sales to the wholesalers, with corresponding decreases in net sales to the pharmacy chains.

Net revenues for the three months ended March 31, 2024 were $137.4 million compared to $106.8 million for the same period in 2023, an increase of 28.7%, primarily as a result of the following factors:

• Net revenues for generic pharmaceutical products were $70.2 million during the three months ended March 31, 2024, an increase of 10.2% compared to $63.7 million for the same period in 2023, driven by increased volumes on the base business and the inclusion of 2023 launches and new product launches in 2024. From a product perspective, the increase was principally driven by revenues from year over year increases in products such as Colestipol, Nitrofurantoin, Lacosamide, and various other products tempered by a decrease in revenues of Meloxicam, Nebivolol, and Famotidine, among others.
• Net revenues for branded pharmaceutical products, royalties, and other pharmaceutical services were $30.3 million during the three months ended March 31, 2024, an increase of 13.2% compared to $26.7 million for the same period in 2023, driven by a net increase in volume.
• Net revenues of rare disease pharmaceutical products, which consists entirely of sales of Cortrophin Gel, were $36.9 million during the three months ended March 31, 2024, an increase of $20.6 million from $16.3 million for the same period in 2023. This increase was driven by increased volume in this third year of launch (product was launched in late January 2022).

In addition to the above, within our Generics, Established Brand, and Other segment, from time to time we have been successful in supplying incremental volume in markets that were experiencing supply chain disruptions for competing products. This factor favorably impacted the established brand portion of the segment in the current year period as compared to favorably impacting both the generic and established brand portion of the segment in the prior year period. Generally, when opportunities for volume and revenue upside related to our products arise in the marketplace, there is no assurance as to how long these favorable market conditions may persist.

Cost of Sales (Excluding Depreciation and Amortization)

(in thousands)

Cost of sales consists of direct labor, including manufacturing and packaging, active and inactive pharmaceutical ingredients, freight costs, packaging components, and royalties payable related to profit-sharing arrangements. Cost of sales does not include depreciation and amortization expense, which is reported as a separate component of operating expenses on our unaudited interim condensed consolidated statements of operations.

For the three months ended March 31, 2024, cost of sales increased to $49.2 million from $37.7 million for the same period in 2023, an increase of $11.4 million, or 30.4%. The increase is primarily due to a net increase in sales volumes of pharmaceutical products across all segments and a significant net increase in sales of products that bear a royalty payable, including Cortrophin Gel.

Cost of sales, as a percentage of net revenues, increased slightly from 35.3% to 35.8% for the three months ended March 31, 2024, compared to the same period in 2023, primarily due to a shift in product mix year over year.

During the three months ended March 31, 2024, we purchased approximately 25% of our raw material inventory from one supplier. During the three months ended March 31, 2023, no single vendor represented more than 10% of our raw material inventory purchases.

Other Operating Expenses, net

(in thousands)

For the three months ended March 31, 2024, other operating expenses, net increased to $68.0 million from $59.2 million for the same period in 2023, an increase of $8.8 million, or 14.8%, primarily as a result of the following factors:

• Research and development expenses increased from $5.9 million to $10.5 million, an increase of $4.6 million or 77.4%, primarily due to expenses related to a FDA filing fee for a 505(b)(2) for one product of approximately $2.0 million, and a higher level of activity associated with ongoing and new projects in the three months ended March 31, 2024.
• Selling, general, and administrative expenses increased from $36.5 million to $48.0 million, an increase of $11.6 million, or 31.7%, due to increased employment related costs, continued investment in our Rare Disease segment sales and marketing activities, legal expenses, as well as an overall increase in activities required to support the growth of our business.
• Depreciation and amortization expense was $14.7 million for the three months ended March 31, 2024, compared to $14.7 million for the same period in 2023, a nominal decrease of approximately $14.0 thousand year-over-year.
• We recognized losses of $0.1 million and $1.0 million in the three months ended March 31, 2024 and 2023, respectively, for the contingent consideration fair value adjustment. The change in the fair value adjustment during the three months ended March 31, 2024 is primarily related to changes in the anticipated timing of cash flows (i.e., moving closer to the anticipated payment dates of the consideration for the third milestone) and fluctuations in the discount rates, offset by adjustments recorded upon payment of the Gross Profit Earn-Out during the first quarter. Additionally, the fair value measurement adjustment in the three months ended March 31, 2024 is related to only the third milestone, whereas the fair value adjustment at March 31, 2023 related to all three milestones.
• We recognized restructuring activities expenses of $1.1 million in the three months ended March 31, 2023. In 2023 costs included severance and other employee benefits costs of $0.2 million, $0.7 million of accelerated depreciation costs and $0.2 million for other miscellaneous costs accrued in 2022. There were no restructuring expenses recognized in the three months ended March 31, 2024.
• We recognized a gain related to the sale of the former Oakville, Ontario manufacturing site of approximately $5.3 million during the three months ended March 31, 2024. There was no comparable sale in the three months ended March 31, 2023.

Other Income (Expense), net

(in thousands)

For the three months ended March 31, 2024, we recognized total other income of $5.0 million as compared to total other expense of $7.7 million for the same period in 2023, an increase of $12.8 million.

The increase in Unrealized gain on investment in equity securities of approximately $9.7 million is due to the recognition of our investment of CG Oncology upon their January 2024 IPO and the subsequent mark to market to fair value of equity securities held in CG Oncology as of the balance sheet date. There was no comparable gain on investment in the three months ended March 31, 2023.

Interest expense, net for the three months ended March 31, 2024 consists primarily of interest expense on borrowings under our Term Facility of approximately $8.5 million and amortization of deferred debt issuance costs of approximately $0.6 million, offset by dividend income earned on our money market funds and interest earned on our cash balances of approximately $2.8 million, the effects of the interest rate swap of approximately $1.6 million, and interest capitalized into construction in progress. The decrease in interest expense is primarily related to the increase in the dividend income and interest income earned on our larger cash balances during the current period, as interest expense on borrowing under our Term Facility and amortization of deferred debt issuance costs are consistent with the three months ended March 31, 2023.

Income Tax Expense

(in thousands)

Income tax expense consists of current and deferred components, which include changes in our deferred tax assets, our deferred tax liabilities, and our valuation allowance.

For the three months ended March 31, 2024, we recognized an income tax expense of $7.1 million. The Company's effective tax rate was 28.1% after discrete items for the three months ended March 31, 2024. The effective tax rate differed from the federal statutory rate of 21% primarily due to state taxes, stock based compensation, tax on the sale of the Oakville, Ontario manufacturing site, and recording of a withholding tax liability on the proceeds of the sale.

For the three months ended March 31, 2023, we recognized an income tax expense of $0.7 million. The income tax expense resulted from applying an estimated annual worldwide effective tax rate of 34.9% to pre-tax consolidated income of $2.2 million reported during the period. There were no material discrete items occurring during the three months ended March 31, 2023.

LIQUIDITY AND CAPITAL RESOURCES

Debt Financing

On November 19, 2021, the Company, as borrower, entered into a credit agreement (the “Credit Agreement”) with Truist Bank and other lenders, which provides for credit facilities consisting of (i) a senior secured term loan facility in an aggregate principal amount of $300.0 million (the “Term Facility”) and (ii) a senior secured revolving credit facility in an aggregate commitment amount of $40.0 million, which may be used for revolving credit loans, swingline loans and letters of credit (the “Revolving Facility,” and together with the Term Facility, the “Credit Facility”). The Credit Facility is secured by substantially all our assets and the assets of our domestic subsidiaries. As of March 31, 2024, $3.0 million of principal of the loan was recorded as current borrowings in the condensed consolidated balance sheet. As of March 31, 2024, we had not drawn on the Revolving Facility and $40.0 million remained available for borrowing subject to certain conditions.

Equity Financing

In May 2023, through a public offering, we completed the issuance and sale of 2,183,545 shares of ANI common stock, resulting in net proceeds after issuance costs of $80.6 million. The proceeds are intended to be used to in-license, acquire or invest in additional businesses, technologies, products or assets, to fund our commercialization efforts, including, but not limited to, sales and marketing and consulting expenses related thereto, and for general corporate purposes.

We believe that our financial resources, consisting of current working capital, anticipated future operating revenue and corresponding collections from customers, and our Credit Facility, under which $40.0 million remains available for borrowing as of March 31, 2024, will be sufficient to enable us to meet our working capital requirements and debt obligations for at least the next 12 months.

Cash Flows

The following table summarizes the net cash and cash equivalents (used in) provided by operating activities, investing activities, and financing activities for the periods indicated:

(in thousands)

Net Cash Provided by Operations

Net cash provided by operating activities was $18.3 million for the three months ended March 31, 2024, compared to net cash provided by operating activities of $21.4 million during the same period in 2023, a change of $3.2 million. The decrease in cash provided by operating activities was driven by net income in the current year period due to increased sales and gross profit offset by non-recurring transactions such as gain on the sale of the Oakville, Ontario manufacturing site, the gain on investment of equity securities as well as significant fluctuations in our assets and liabilities due to increased activities.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities for the three months ended March 31, 2024 was $8.9 million, principally due to the proceeds received from the sale of the Oakville, Ontario manufacturing site in March 2024 of approximately $13.5 million offset by capital expenditures of approximately $4.6 million. Net cash used in investing activities for the three months ended March 31, 2023 was $2.4 million, principally due to $2.3 million of capital expenditures.

Net Cash Used in Financing Activities

Net cash used in financing activities for the three months ended March 31, 2024 was $19.7 million, principally resulting from $12.5 million paid to the Company Members of Novitium, $8.7 million of treasury stock purchased related to restricted stock vests, $0.8 million maturity payments on the Term Facility, and $0.4 million convertible preferred stock dividends paid, offset by $2.6 million from proceeds from stock option exercises and ESPP purchases. Net cash used in financing activities for the three months ended March 31, 2023 was $4.5 million, primarily resulting from $3.5 million of treasury stock purchased in relation to restricted stock vests, $0.8 million maturity payments on the Term Facility, and $0.4 million convertible preferred stock dividends paid.

CRITICAL ACCOUNTING ESTIMATES

A summary of our significant accounting policies is included in Part II, Item 8. Consolidated Financial Statements, Note 1, Description of Business and Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the year ended December 31, 2023. Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. There have been no material changes to our critical accounting estimates since the 2023 Form 10-K.

CONTRACTUAL OBLIGATIONS

As of March 31, 2024, our contractual obligations have not changed materially from the amounts reported in our 2023 Form 10-K.

Market risks include interest rate risk, equity risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. Of these risks, interest rate risk, equity risk, and foreign currency exchange rate risk could have a significant impact on our results of operations. There have been no material changes in our exposure to market risks since the end of the most recent fiscal year as reported in our 2023 Form 10-K.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management has carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of March 31, 2024. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting, during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this report, please carefully consider the factors described under the heading “Risk Factors” in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2023 in Part I, Item 1A. The risks described are not the only risks facing us. Additional risks and uncertainties not currently known to us, or that our management currently deems to be immaterial, also may adversely affect our business, financial condition, and/or operating results.