ANI Pharmaceuticals, Inc. (ANIP) is a specialty pharmaceutical company that develops, manufactures, and markets branded and generic prescription pharmaceuticals.
ANIP created a very attractive business model, in which it enters markets with few competitors allowing them to increase pricing and improve margins. Their current business model has proven to be highly successful as competition has left the market and they have improved pricing on their two biggest revenue driving products: EEMT & Opium Tincture.
In addition, ANIP has recently acquired 31 products from Teva, which I believe provide material upside from current levels. The acquisition has the added benefit of diversifying the company away from unapproved drugs. After talking to the CEO of ANIP, he stated that they will look for at least 3 acquisitions this year, one of which could potentially be bigger than the Teva deal. ANIP is growing at a faster growth rate than the industry and should continue to do so as they take additional market share in their organic products and expand at faster rates through future acquisitions. Within 2 years, the company will ramp from 7 products to over 40.
With the recent wave of M&A in Specialty Pharma, there continues to be a very high level of interest in the sector, particularly for names recently involved in M&A (ACT, PRGO, TEVA and VRX). Teva, who has been under tremendous financial stress, did the deal with ANIP in order to refocus on other products in their product lines. Possible other mergers will open up further opportunities for ANIP as the large specialty pharmaceutical companies look to streamline smaller divisions while putting more money into higher impact drugs.
Per SEC filings:
On June 19, 2013, BioSante Pharmaceuticals, Inc. ("BioSante") acquired ANIP Acquisition Company ("ANIP") in an all-stock, tax-free reorganization, in which ANIP became a wholly-owned subsidiary of BioSante. BioSante was renamed ANI Pharmaceuticals, Inc. The merger was accounted for as a reverse acquisition pursuant to which ANIP was considered the acquiring entity for accounting purposes. As such, ANIP's historical results of operations replace BioSante's historical results of operations for all periods prior to the merger.
ANIP breaks out revenue in three segments: Generic pharmaceutical products, branded pharmaceutical products & contract manufacturing/services and other income.
1)Esterified estrogens/methyltestosterone (EEMT): Is used in the treatment of hot flashes; menopausal disorders; postmenopausal symptoms and belongs to the drug class sex hormone combinations. EEMT will drive revenues. ANIP's hot flashes drug has seen market share rise from 20% to over 65% following competition leaving the market. Recently the company signed an exclusive agreement with the only API supplier within this market, creating a monopoly in the space for ANIP. The agreement will allow ANI to increase unit pricing significantly to the $1.00/ unit level. Within the first chart ANIP should grow revenue in EEMT from the current $8M level to over $28M in the next year. The main competition previously came from Amneal, although Amneal has stated that they are leaving the market. In my monthly prescription model below(chart 2), I assume that they can increase pricing from the current -~$0.80 price per unit level to $0.90 as the recent agreement with the API supplier will decrease competition further. The quantity is based upon Wolters Kluwer monthly prescription data.
2) Opium Tincture: Is ANIP's second-largest revenue generating product. Opium tincture is a clear, reddish-brown hydroalcoholic solution. The opiates are the most effective and prompt-acting nonspecific antidiarrheal agents. ANIP in the last call indicated that they are taking market share as competitors drop out of the market. ANIP currently has approximately a 65% market share in which I believe they could increase this to greater than 70% in the next year. In addition, I believe they can increase their price per unit from $1.90 to $2.00 in the next couple months as competition continues to lose market share. The main competition within the Opium Tincture market is Edenbridge. Edenbridge currently has about ~20% market share which has declined from 30% share the same time last year.
3) Other Generics: Consist of Metoclopramide, Hydrocortisone Rectal Suspension, Fluvoxamine tablets. Metoclopramide is the generic version of Reglan, while Hydrocortisone is the genetic form of Cortenema which treats inflammatory conditions. Fluvoxamine is used to treat obsessive-compulsive disorder and social anxiety disorder. Similar to the branded products, cash flow is stable as is pricing. On average these three products generate about $5-$6M annually.
4) New generic products internal pipeline: Internally, ANIP is developing 5 generic products that will be set for approval in 1Q15 and launch in 2Q15. They will see a small percentage of revenue from the first product in Q4 2014. They will see 2 products generate at least ~$2M in revenue by FY2015. ANIP's potential for their internal pipeline is greater than $800M.
5) Teva products: ANIP signed a deal on December 26,2013 to acquire 31 previously marketed generic drug products from Teva. The deal cost them $12.5M in cash & a percentage of gross profit given to Teva at which they have not disclosed yet. The acquisition includes 20 are solid-oral immediate release pills, 4 extended release and 7 liquids. They anticipate product launches beginning Q4 2014. The current annual market for these products is close to $1B. The first Teva acquired product will be launched in Q4 of this year. The acquisition expands ANIP's generic portfolio significantly from its current 7 marketed products.
Reglan & Cortenema- Reglan increases muscle contractions in the upper digestive tract. A large amount is sold to the U.S. government. Cortenema treats different types of inflammatory conditions of the colon such as ulcerative colitis and ulcerative proctitis. Cortenema is generally sold internationally. Both of these business are predictable cash flow businesses that generate about $2.5M/yr.
Bio-t-gel: This was initially developed by BioSante the parent company, at which was licensed to Teva. Teva will pay royalties of 5% of sales which could be $1.2M in 2015.
Contract Manufacturing & Services:
The business includes manufacturing for other companies finished products. This division growth should be roughly flat next year. They currently have 5 customers with 11 products. Their pipeline consists of 3 customers with 3 products. They have a partnership with Sterling Pharmaceuticals that was signed on January 6, 2014 which could drive additional upside.
For Opium Tincture & EEMT, I have laid out the breakdown of each quarterly revenue number in the two graphs above within the business section. I believe as ANIP takes greater market share in their two largest revenue divisions they could increase pricing. I assume Metoclop, Fluvox & Hydrocort will have stable growth at ~$1.25M per year as pricing will remain flat. Within their branded Pharma products, management has stated in the last call that they are taking market share, so I increased revenue slightly. The external acquired Teva products should come online in Q4 2014 and early 2015 generating close to $3M by 2015. The addressable market for the 31 Teva products has been projected to be close to $1B per IMS Health, indicating the massive opportunity ANIP has within this segment. Their internal pipeline (new generics) segment I believe will generate $4M in sales in 2015 alone. They have disclosed 5 internal ANDAs under current FDA review. I expect to see material impact in 2016 as all five should be released and enable ANIP to capture significant market share. Management indicated that COGS should remain in the 25%-26% of sales range as they have the ability to leverage expenses through increased pricing in their EEMT & Opium Tincture divisions. I conservatively kept COGS as a percent of sales in the mid to low 26% range and slowly declined COGS to mid 25% as other product revenue and additional price increases occur. By FY2015, I believe ANIP could earn in the range of $1.52-$1.55. Applying a 25X multiple gets me a price target of $39 to $40 sometime in 2015. My model does not include the potential for 3 acquisitions which one could be bigger than the Teva deal.
I support my 25X multiple based upon the below charts graph of emerging generic pharmaceutical companies. I believe a 25X multiple remains modest to current 2014 comparables as I reflect the risks of FDA approval and the ability to increase pricing on their existing products. I expect ANIP to grow at above average growth rates to the industry as their pipeline remains the most robust to competitors.
If competition increases specifically in both their EEMT and their Opium Tincture market, I would assume that they would not have the ability to increase prices and could potentially lose market share. In my downside case, I assume that price per unit stays flat at $1.90 into the future and that the EEMT price per unit remains at $0.60. Assuming the rest of their businesses remain flat and they have relatively similar margins as the prior quarter, I derive $1.00 in EPS. Applying a 20X multiple gets me an absolute downside price of $20. I would like to point out that in this case, ANIP would most likely not trade this low as they have the benefit of the new Teva & Generic launches in early 2015.
- Improving market share gains.
- Ability to increase pricing on existing products.
- Acquisitions that could build upon ANIP's robust pipeline.
- Additional analysts initiating coverage.
- Inability to increase pricing.
- Increased competition in their markets.
- Regulatory risk exists if the FDA may take longer than investors expect to approve ANIP's products.
- Slower launches of pipeline products.
ANIP has begun transforming their business to a highly profitable business model that enables them to improve margins and gain market share. The acquisition of 31 products from Teva in late December will create an attractive opportunity within 2015 to increase revenue at a faster rate and diversify their products into additional markets with few competitors. Within a year, I would expect to hear at least two deals, one that could potentially be bigger than the Teva deal. My optimistic view is based upon recent market share gains, expansion in to new markets and increased pricing and finally the ability to leverage the fast growing top line into higher EPS. Although the price has dramatically moved upwards since the earnings call on 02/18/14, the thesis remains attractive. I expect ANIP to trade in the range of $39 to $40 sometime in 2015.