News Column

LANTHEUS MEDICAL IMAGING, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 5, 2014

Cautionary Note Regarding Forward-Looking Statements

Some of the statements contained in this quarterly report are forward-looking statements. Such forward-looking statements, including, in particular, statements about our plans, strategies, prospects and industry estimates are subject to risks and uncertainties. These statements identify prospective information and include words such as "anticipates," "intends," "plans," "seeks," "believes," "estimates," "expects," "should," "could," "predicts," "hopes" and similar expressions. Examples of forward-looking statements include, but are not limited to, statements we make regarding: (i) our liquidity, including our belief that our existing cash, cash equivalents, anticipated revenues and availability under a revolving line of credit are sufficient to fund our existing operating expenses, capital expenditures and liquidity requirements for at least the next twelve months; (ii) our outlook and expectations including, without limitation, in connection with continued market expansion and penetration for our commercial products, particularly DEFINITY; (iii) expected new product launch dates and market exclusivity periods; and (iv) outlook and expectations related to product manufactured at Ben Venue Laboratories, Inc., or BVL and Jubilant HollisterStier, or JHS. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward- looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. The matters referred to in the forward-looking statements contained in this quarterly report may not in fact occur. We caution you therefore against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following:

our dependence upon third parties for the manufacture and supply of a substantial portion of our products; risks associated with the technology transfer programs to secure production of our products at alternate contract manufacturer sites; the instability of the global supply of Molybdenum-99, or Moly, one of our key radioisotopes; risks associated with the manufacturing and distribution of our products and the regulatory requirements related thereto; our ability to continue to increase segment penetration for DEFINITY in suboptimal echocardiograms; risks associated with both supply and demand for Xenon; our dependence on key customers, primarily Cardinal Health, Inc., or Cardinal, United Pharmacy Partners Inc., or UPPI, and GE Healthcare, for our nuclear imaging products, and our ability to maintain and profitably renew our contracts and relationships with those key customers; continued pricing pressures from our large customers; our ability to compete effectively, including in connection with new market entrants; the dependence of certain of our customers upon third party healthcare payors and the uncertainty of third party coverage and reimbursement rates; uncertainties regarding the impact of U.S. healthcare reform on our business, including related reimbursements for our current and potential future products; our being subject to extensive government regulation and our potential inability to comply with those regulations; potential liability associated with our marketing and sales practices; the occurrence of any side effects with our products; our exposure to potential product liability claims and environmental liability; 23



--------------------------------------------------------------------------------

Table of Contents risks associated with our lead agent in development, flurpiridaz F 18, including our ability to: attract strategic partners to successfully complete the Phase 3 clinical program and possibly commercialize the agent; obtain U.S. Food and Drug Administration, or FDA, approval; and gain post-approval market acceptance and adequate reimbursement; risks associated with being able to negotiate in a timely manner relationships with potential strategic partners to advance our other development programs on acceptable terms, or at all; the extensive costs, time and uncertainty associated with new product development, including further product development relying on external development partners; our inability to introduce new products and adapt to an evolving technology and diagnostic landscape; our inability to protect our intellectual property and the risk of claims that we have infringed on the intellectual property of others; risks related to our outstanding indebtedness and our ability to satisfy those obligations; risks associated with the current economic environment, including the U.S. credit markets; risks associated with our international operations; our inability to adequately protect our facilities, equipment and technology infrastructure; our inability to hire or retain skilled employees and key personnel; and costs and other risks associated with the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 risks related to the ownership of our common stock.



Factors that could cause or contribute to such differences include, but are not limited to, those that are discussed in other documents we file with the Securities and Exchange Commission, including our 2013 Form 10-K. Any forward-looking statement made by us in this quarterly report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward- looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

The following discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and the related notes included in Item 1 of this Quarterly Report on Form 10-Q as well as the other factors described in "Risk Factors" under Part II-Item 1A of this report and the information provided in our 2013 Form 10-K.

Our Products

Our principal products include the following:

DEFINITY is an ultrasound contrast agent used in ultrasound exams of the heart, also known as echocardiography exams. DEFINITY contains perflutren-containing lipid microspheres and is indicated in the United States for use in patients with suboptimal echocardiograms to assist in imaging the left ventricular chamber and left endocardial border of the heart in ultrasound procedures. We launched DEFINITY in 2001, and its last patent in the United States will currently expire in 2021 and in numerous foreign jurisdictions in 2019.

TechneLite is a technetium generator which provides the essential nuclear material used by radiopharmacies to radiolabel Cardiolite and other technetium-based radiopharmaceuticals used in nuclear medicine procedures. TechneLite uses Moly as its main active ingredient.

24



--------------------------------------------------------------------------------

Table of Contents

Xenon is a radiopharmaceutical gas that is inhaled and used to assess pulmonary function and also for imaging blood flow. Xenon is manufactured by a third party and packaged by us.

Cardiolite is a technetium-based radiopharmaceutical imaging agent used in MPI procedures to detect coronary artery disease using SPECT. Cardiolite was approved by the FDA in 1990, and its market exclusivity expired in July 2008.

Sales of our contrast agent, DEFINITY, are made through our sales team of approximately 80 employees. In the United States, our nuclear imaging products, including TechneLite and Cardiolite, are primarily distributed through over 350 radiopharmacies that are controlled by or associated with Cardinal, GE Healthcare, UPPI and Triad Isotopes Inc., or Triad. A small portion of our nuclear imaging product sales in the United States are made through our direct sales force to hospitals and clinics that maintain their own in-house radiopharmaceutical capabilities. Outside the United States, we own five radiopharmacies in Canada and two radiopharmacies in each of Puerto Rico and Australia. We also maintain a direct sales force in each of these countries. In Europe, Asia Pacific and Latin America, we rely on third party distributors to market, sell and distribute our nuclear imaging and contrast agent products, either on a country-by-country basis or on a multicountry regional basis.

The following table sets forth our revenue derived from our principal products:

Three Months Ended March 31, (dollars in thousands) 2014 % 2013 % DEFINITY $ 22,359 30.5 $ 17,030 24.0 TechneLite 23,041 31.4 22,426 31.5 Xenon 9,709 13.2 8,321 11.7 Cardiolite 4,680 6.4 10,910 15.4 Other 13,547 18.5 12,331 17.4 Revenues $ 73,336 100.0 $ 71,018 100.0



Included in Cardiolite revenue are sales of branded Cardiolite and generic sestamibi, some of which we produce and some of which we procure from third parties.

Key Factors Affecting Our Results

Our business and financial performance have been, and continue to be, affected by the following:

Inventory Supply

Our products consist of radiopharmaceuticals and other imaging agents. The radiopharmaceuticals are decaying radioisotopes with half-lives ranging from a few hours to several days. These products cannot be kept in inventory because of their limited useful lives and are subject to just-in-time manufacturing, processing and distribution. We obtain a substantial portion of our other imaging agents from third party suppliers. JHS is currently our sole source manufacturer of DEFINITY, and we have ongoing technology transfer activities at JHS for our Neurolite supply. In the meantime, we have no other currently active supplier of Neurolite, and our Cardiolite product supply is manufactured by a single manufacturer.

Historically, we relied on BVL in Bedford, Ohio as our sole manufacturer of DEFINITY and Neurolite and as one of two manufacturers of Cardiolite. Our products were manufactured at the South Complex, where BVL also manufactured products for a number of other pharmaceutical customers. In July 2010, BVL temporarily shutdown the South Complex, in order to upgrade the facility to meet certain regulatory requirements. BVL had originally planned for the shutdown of the South Complex to run through March 2011 and to resume production of our products in April 2011. In anticipation of the shutdown, BVL manufactured for us additional inventory of these products to meet our expected needs during this period. A series of unexpected delays at BVL, however, resulted in a stockout for Neurolite from the third quarter 2011 until the third quarter 2013, product outages and shortages for DEFINITY in much of 2012 and product outages and shortages for Cardiolite in 2012 and 2013. Until JHS is approved by certain foreign regulatory authorities to manufacture our products, we will also face continued limitations on where we can sell our products outside the United States.

Because of BVL's ongoing regulatory issues and our mutual desire to enter into a new contractual relationship to replace the original arrangement, in March 2012 we terminated the original manufacturing agreement and entered into a new set of contracts with BVL which provided, among other things, cash payments to us of $35 million and an undertaking by BVL to continue to manufacture for us through December 2013.

25



--------------------------------------------------------------------------------

Table of Contents

Although BVL was able to resume some manufacturing under the new agreements, BVL continued to face regulatory and supply challenges and, in October 2013, it announced that it would cease to manufacture further new batches of our products in its Bedford, Ohio facility. In November 2013, in connection with the termination of our manufacturing agreement, we and BVL entered into a settlement agreement which provided, among other things, that BVL pay us an additional $8.9 million. BVL was also obligated to use commercially reasonable efforts to finalize specific batches of DEFINITY, Cardiolite and saline manufactured and not yet released by the BVL quality function for commercial distribution. BVL has since released for commercial distribution all of our remaining manufactured product that was awaiting quality approval.

We are also currently working to secure additional alternative suppliers for our key products as part of our ongoing supply chain diversification strategy. On November 12, 2013, we entered into a Manufacturing and Supply Agreement with Pharmalucence to manufacture and supply DEFINITY.

Growth of DEFINITY

We believe the market opportunity for our contrast agent, DEFINITY, remains significant. DEFINITY is currently our fastest growing and highest margin commercial product. We believe that DEFINITY sales will continue to grow and that DEFINITY will constitute a greater share of our overall product mix. As a result of DEFINITY's continued growth, we believe that our gross profit will increase, and our gross margin will continue to expand. As we better educate the physician and healthcare provider community about the benefits and risks of this product, we believe we will experience further penetration of suboptimal echocardiograms.

Prior to the supply issues with BVL in 2012, sales of DEFINITY continually increased year-over-year since June 2008, when the boxed warning on DEFINITY was modified. Unit sales of DEFINITY had decreased substantially in late 2007 and early 2008 as a result of an FDA request in October 2007 that all manufacturers of ultrasound contrast agents add a boxed warning to their products to notify physicians and patients about potentially serious safety concerns or risks posed by the products. However, in May 2008, the FDA boxed warning was modified in response to the substantial advocacy efforts of prescribing physicians. In October 2011, we received FDA approval of further modifications to the DEFINITY label, including: further relaxing the boxed warning; eliminating the sentence in the Indication and Use section "The safety and efficacy of DEFINITY with exercise stress or pharmacologic stress testing have not been established" (previously added in October 2007 in connection with the imposition of the box warning); and including summary data from the post-approval CaRES (Contrast echocardiography Registry for Safety Surveillance) safety registry and the post-approval pulmonary hypertension study. However, as discussed above under "Inventory Supply," the future growth of our DEFINITY sales will be dependent on the ability of JHS and, if approved, Pharmalucence to continue to manufacture and release DEFINITY on a timely and consistent basis and our ability to continue to increase segment penetration for DEFINITY in suboptimal echocardiograms.

Global Isotope Supply

Currently, our largest supplier of Moly and our only supplier of Xenon is Nordion, which relies on the NRU reactor in Chalk River, Ontario. For Moly, we currently have a supply agreement with Nordion that runs through December 31, 2015, subject to certain early termination provisions (that cannot be effective prior to October 1, 2014) and supply agreements with NTP of South Africa, ANSTO of Australia, and IRE of Belgium, each running through December 31, 2017. For Xenon, we have a purchase order relationship with Nordion. The Canadian government requires the NRU reactor to shut down for at least four weeks at least once a year for inspection and maintenance. The 2014 shutdown period is currently scheduled to run from mid-April 2014 to mid-May 2014. We currently believe that we will be able to source all of our standing order customer demand for Moly during this time period from our other suppliers. However, because Xenon is a by-product of the Moly production process and is currently captured only by NRU, during this shutdown period, we do not currently believe that we will be able to supply all of our standing order customer demand for Xenon during the outage. Because the month-long NRU shutdown was fully anticipated in our 2014 budgeting process, we do not believe the shutdown will have a material adverse effect on our results of operations, financial condition and cash flows.

We believe we are well-positioned with our current supply partners to have a secure supply of Moly, including LEU Moly, when the NRU reactor commercial operations cease in 2016. We are currently pursuing alternative sources of Xenon on a global basis. If we are not able to secure a new producer of Xenon prior to the 2016 and obtain regulatory approval to sell Xenon from that new producer, we will no longer be able to offer Xenon. In addition, Nordion recently announced that it has entered into a definitive agreement to be acquired by Sterigenics. As a result of this transaction, our supplier could change the terms on which we obtain Xenon.

26



--------------------------------------------------------------------------------

Table of Contents

Demand for TechneLite

Since the global Moly supply shortage in 2009 to 2010, we have experienced reduced demand for TechneLite generators from pre-shortage levels even though volume has increased in absolute terms from levels during the shortage following the return of our normal Moly supply in August 2010. However, we do not know if overall industry demand for technetium will ever return to pre-shortage levels.

We also believe that there has been an overall decline in the MPI study market because decreased levels of patient studies during the Moly shortage period have not returned to pre-shortage levels and industry-wide cost-containment initiatives that have resulted in a transition of where imaging procedures are performed, from free standing imaging centers to the hospital setting. We expect these factors will continue to affect technetium demand in the future.

In November 2013, the Centers for Medicare and Medicaid Services, or CMS, announced the 2014 final Medicare payment rules for hospital outpatient settings and physician offices. Under the final rules, each technetium dose produced from a generator for a diagnostic procedure in a hospital outpatient setting is reimbursed by Medicare at a higher rate if that technetium dose is produced from a generator containing Moly sourced from at least 95 percent LEU. We currently understand that CMS expects to continue this incentive program for the foreseeable future. In January 2013, we began to offer a TechneLite generator which contains Moly sourced from at least 95 percent LEU and which satisfies the requirements for reimbursement under this incentive program. Although demand for LEU generators appears to be growing, it is too early to tell whether this incremental reimbursement for LEU Moly generators will result in a material increase in our generator sales.

Cardiolite Competitive Pressures

Cardiolite's market exclusivity expired in July 2008. In September 2008, the first of several competing generic products to Cardiolite was launched. With continued pricing and unit volume pressures from generic competitors, we also sell our Cardiolite product in the form of a generic sestamibi at the same time as we continue to sell branded Cardiolite throughout the MPI segment. We believe this strategy of selling branded as well as generic sestamibi has slowed our market share loss by having multiple sestamibi offerings that are attractive in terms of brand, as well as price.

In addition to pressures due to generics, our Cardiolite products have also faced a volume decline in the MPI segment due to a change in professional society appropriateness guidelines, ongoing reimbursement pressures, the limited availability of Moly during the NRU reactor shutdown, the limited availability of Cardiolite products to us during the BVL outage, and the increase in use of other diagnostic modalities as a result of a shift to more available imaging agents and modalities. We believe the continuing effects from the BVL outage and continued generic competition will result in further market share and margin erosion for our Cardiolite products.

Research and Development Expenses

To remain a leader in the marketplace, we have historically made substantial investments in new product development. As a result, the positive contributions of those internally funded research and development programs have been a key factor in our historical results and success. In March 2013, we implemented a strategic shift in how we intend to fund our important R&D programs. We have reduced our internal R&D resources while at the same time we are seeking to engage strategic partners to assist us in the further development and commercialization of our important agents in development, including flurpiridaz F 18, 18F LMI 1195 and LMI 1174. As a result of this shift, we are seeking strategic partners to assist us with the further development and possible commercialization of flurpiridaz F 18. For our other two important agents in development, 18F LMI 1195 and LMI 1174, we will also seek to engage strategic partners to assist us with the ongoing development activities relating to these agents.

Segments

We report our results of operations in two operating segments: United States and International. We generate a greater proportion of our revenue and net income in the United States segment, which consists of all regions of the United States. We expect our percentage of revenue and net income derived from our International segment to continue to increase in future periods as we continue to expand globally.

27



--------------------------------------------------------------------------------

Table of Contents

Executive Overview

Our results in the three months ended March 31, 2014 reflect the following:

increased revenues and segment penetration for DEFINITY in the suboptimal echocardiogram segment as a result of sustained availability of product supply; decreased revenues from our Cardiolite products resulting from continued generic competition; increased revenues resulting from the return of Neurolite product supply in the third quarter of 2013; under-absorption of manufacturing overhead due to lower production and low lot yields resulting from the continued supply challenges with BVL during 2013; the impact of certain cost savings actions taken in March 2013 as we finish implementing the strategic shift in how we fund our research and development, or R&D, programs; and lower material costs incurred for the production of TechneLite. Results of Operations For the Three Months Ended March 31, (dollars in thousands) 2014 2013 Revenues $ 73,336$ 71,018 Cost of goods sold 43,275 48,206 Gross profit 30,061 22,812 Operating expenses Sales and marketing expenses 9,498 9,797 General and administrative expenses 8,852 10,253 Research and development expenses 3,222 11,998 Total operating expenses 21,572 32,048 Operating income (loss) 8,489 (9,236 ) Interest expense, net (10,552 ) (10,669 ) Other (expense) income, net (414 ) 721 Loss before income taxes (2,477 ) (19,184 ) (Benefit) provision for income taxes (1,192 ) 628 Net loss (1,285 ) (19,812 ) Foreign currency translation (271 ) (597 ) Total comprehensive loss $ (1,556 )$ (20,409 )



Revenues

Revenues are summarized as follows:

Three Months Ended March 31, (dollars in thousands) 2014 2013 United States DEFINITY $ 21,984$ 16,746 TechneLite 20,100 19,572 Xenon 9,705 8,306 Cardiolite 521 6,430 Other 4,501 3,201 Total U.S. revenues $ 56,811$ 54,255 International DEFINITY $ 375$ 284 TechneLite 2,941 2,854 Xenon 4 15 Cardiolite 4,159 4,480 Other 9,046 9,130 Total International revenues $ 16,525$ 16,763 Revenues $ 73,336$ 71,018 28



--------------------------------------------------------------------------------

Table of Contents

Total revenues increased $2.3 million, or 3.3%, to $73.3 million in the three months ended March 31, 2014, as compared to $71.0 million in the three months ended March 31, 2013. U.S. segment revenue increased $2.6 million, or 4.7%, to $56.8 million in the three months ended March 31, 2014, as compared to $54.3 million in the prior year. The increase in the U.S. segment over the prior year is primarily driven by a $5.2 million increase in DEFINITY as a result of higher unit volumes, a $1.8 million increase in Neurolite as the product returned to market in September 2013 and a $1.4 million increase in Xenon primarily due to favorable pricing with a customer. Offsetting these increases was a decrease in Cardiolite revenues of $5.9 million over the prior period as a result of a contract with a significant customer that reduced unit pricing and volume commitments and a $1.0 million decrease in Quadramet revenues due to less unit volume since we transitioned to being the direct manufacturer at the end of 2013.

The International segment revenues decreased $0.2 million, or 1.4%, to $16.5 million in the three months ended March 31, 2014, as compared to $16.8 million in the three months ended March 31, 2013. The decrease in the International segment over the prior year period is due to $1.3 million unfavorable foreign exchange. Offsetting this decrease, in part, was a $0.6 million increase relating to other marketed products, which is driven by the return of Neurolite finished product to certain international markets and increased Thallium sales in Asia Pacific. In addition, TechneLite revenues increased $0.3 million primarily driven by increased volume.

Rebates and Allowances

Estimates for rebates and allowances represent our estimated obligations under contractual arrangements with third parties. Rebate accruals and allowances are recorded in the same period the related revenue is recognized, resulting in a reduction to revenue and the establishment of a liability which is included in accrued expenses. These rebates result from performance-based offers that are primarily based on attaining contractually specified sales volumes and growth, Medicaid rebate programs for certain products, administration fees of group purchasing organizations and certain distributor related commissions. The calculation of the accrual for these rebates and allowances is based on an estimate of the third party's buying patterns and the resulting applicable contractual rebate or commission rate(s) to be earned over a contractual period.

An analysis of the amount of, and change in, reserves is summarized as follows:

(dollars in thousands) Rebates Allowances Total Balance, as of January 1, 2013 $ 1,542$ 66$ 1,608 Current provisions relating to revenues in current year 4,696 243 4,939 Adjustments relating to prior years' estimate (21 ) - (21 ) Payments/credits relating to revenues in current year (3,438 ) (220 ) (3,658 ) Payments/credits relating to revenues in prior years (1,040 ) (69 ) (1,109 ) Balance, as of December 31, 2013 1,739 20 1,759 Current provisions relating to revenues in current year 1,637 76 1,713 Adjustments relating to prior years' estimate 42 - 42 Payments/credits relating to revenues in current year (443 ) (51 ) (494 ) Payments/credits relating to revenues in prior years (652 ) (20 ) (672 ) Balance, as of March 31, 2014 $ 2,323$ 25$ 2,348



Accrued sales rebates were approximately $2.3 million and $1.7 million at March 31, 2014 and December 31, 2013, respectively. The $0.6 million increase in accrued sales rebates is primarily associated with a new rebate program associated with the Quadramet product.

Costs of Goods Sold

Cost of goods sold consists of manufacturing, distribution, intangible asset amortization and other costs related to our commercial products. In addition, it includes the write-off of excess and obsolete inventory.

29



--------------------------------------------------------------------------------

Table of Contents

Cost of goods sold is summarized as follows:

Three Months Ended March 31, (dollars in thousands) 2014 2013 United States $ 31,265$ 34,063 International 12,010 14,143 Total Cost of Goods Sold $ 43,275$ 48,206



Total cost of goods sold decreased $4.9 million, or 10.2%, to $43.3 million in the three months ended March 31, 2014, as compared to $48.2 million in the three months ended March 31, 2013. U.S. segment cost of goods sold decreased approximately $2.8 million, or 8.2%, to $31.3 million in the three months ended March 31, 2014, as compared to $34.1 million in the prior year period. The decrease in the U.S. segment cost of goods sold was primarily due to a decrease of $3.7 million in cost of goods associated with Cardiolite as a result of lower unit volumes sold and lower amortization expense due to a write-down in the Cardiolite trademark intangible asset in the fourth quarter of 2013. Offsetting these decreases was a $1.0 million increase in Neurolite cost of goods due to higher technology transfer costs.

For the three months ended March 31, 2014, the International segment cost of goods sold decreased $2.1 million, or 15.1%, to $12.0 million, as compared to $14.1 million in the prior year period. Cost of goods sold in our International segment decreased primarily due to $1.0 million favorable foreign exchange impact. Additionally, cost of goods sold decreased by $1.0 million as compared to the prior year period primarily due to lower volume of the more expensive substitute products being sold in the current period as a result of the return of supply and reduced costs associated with increased operating efficiencies.

Gross Profit Three Months Ended March 31, (dollars in thousands) 2014 2013 United States $ 25,546$ 20,192 International 4,515 2,620 Total Gross Profit $ 30,061$ 22,812



Total gross profit increased $7.2 million, or 31.8%, to $30.1 million in the three months ended March 31, 2014, as compared to $22.8 million in the three months ended March 31, 2013. U.S. segment gross profit increased $5.4 million, or 26.5%, to $25.5 million, as compared to $20.2 million in the prior year period. The increase in the U.S. segment gross profit primarily due to a $4.7 million increase for DEFINITY gross profit due to higher unit volumes. In addition, Xenon gross profit increased by $1.6 million due to favorable pricing with a customer and Neurolite gross profit increased by $1.8 million since the product returned to market in September 2013. Technelite gross profit increased by $0.6 million primarily due to lower material costs and Ablavar gross profit increased by $0.4 million due to higher unit volumes. Offsetting these increases was a decrease in Cardiolite gross profit of $2.2 million primarily due to lower unit volumes, a $1.1 million decrease in Quadramet gross profit due to lower unit volumes and a $1.0 million decrease in Neurolite gross profit due to higher technology transfer costs.

For the three months ended March 31, 2014, the International segment gross profit increased $1.9 million, or 72.3%, to $4.5 million, as compared to $2.6 million in the prior year period. Gross profit in the International segment increased due to the return of Neurolite finished product to certain international markets, lower volume of the more expensive substitute products sold in the current period as a result of the return of supply and reduced costs associated with increased operating efficiencies. These increases were partially offset by unfavorable foreign exchange impact of $0.3 million.

Sales and Marketing Three Months Ended March 31, (dollars in thousands) 2014 2013 United States $ 8,300$ 8,711 International 1,198 1,086 Total Sales and Marketing $ 9,498$ 9,797 30



--------------------------------------------------------------------------------

Table of Contents

Sales and marketing expenses consist primarily of salaries and other related costs for personnel in field sales, marketing, business development and customer service functions. Other costs in sales and marketing expenses include the development and printing of advertising and promotional material, professional services, market research and sales meetings.

Total sales and marketing expenses decreased $0.3 million, or 3.1%, to $9.5 million in the three months ended March 31, 2014, as compared to $9.8 million in the three months ended March 31, 2013. In the U.S. segment, sales and marketing expense decreased $0.4 million, or 4.7%, to $8.3 million in the same period, as compared to $8.7 million in the prior year. The decrease in the U.S. segment was primarily due to lower headcount related to the reduction in force in the first quarter of 2013 and lower variable compensation.

For the three months ended March 31, 2014, the International segment sales and marketing expenses increased $0.1 million or 10.3%, to $1.2 million as compared to $1.1 million in the prior year period primarily due to higher headcount and employee related expenses.

General and Administrative Three Months Ended March 31, (dollars in thousands) 2014 2013 United States $ 8,281$ 9,698 International 571 555 Total General and Administrative $ 8,852$ 10,253



General and administrative expenses consist of salaries and other related costs for personnel in executive, finance, legal, information technology and human resource functions. Other costs included in general and administrative expenses are professional fees for information technology services, external legal fees, consulting and accounting services as well as bad debt expense, certain facility and insurance costs, including director and officer liability insurance.

Total general and administrative expenses decreased approximately $1.4 million, or 13.7%, to $8.9 million in the three months ended March 31, 2014, as compared to $10.3 million in the three months ended March 31, 2013. In the U.S. segment, general and administrative expenses decreased $1.4 million, or 14.6%, to $8.3 million, as compared to $9.7 million in the prior year period. The decrease in the U.S. segment was primarily due to higher severance expense in the prior year period related to the reduction in force in the first quarter of 2013, lower legal expense due to a reduced amount of services and cost savings achieved through the renegotiation of certain information technology related contracts.

For the three months ended March 31, 2014, general and administrative expenses in the International segment remained flat as compared to the prior year period.

Research and Development Three Months Ended March 31, (dollars in thousands) 2014 2013 United States $ 3,114$ 11,950 International 108 48 Total Research and Development $ 3,222$ 11,998



Research and development expenses relate primarily to the development of new products to add to our portfolio and costs related to its medical affairs, medical information and regulatory functions. We do not allocate research and development expenses incurred in the United States to our International segment.

Total research and development expense decreased $8.8 million, or 73.1%, to $3.2 million for the three months ended March 31, 2014, as compared to $12.0 million in the three months ended March 31, 2013. In the U.S. segment, research and development expense decreased approximately $8.8 million, or 73.9%, to $3.1 million, as compared to $12.0 million in the prior year period. The decrease in the U.S. segment was driven by lower headcount related to the reduction in force in the first quarter of 2013 as a result of a strategic shift to use fewer internal resources and lower external expense as we seek

31



--------------------------------------------------------------------------------

Table of Contents

strategic partners to assist in the future development and commercialization of our development candidates. Additionally, we had a decline in external expense associated with Phase 3 clinical trial for flurpiridaz F 18 as we completed patient enrollment during the third quarter of 2013.

For the three months ended March 31, 2014, research and development expenses in the International segment remained flat as compared to the prior year period.

Other (Expense) Income, Net Three Months Ended March 31, (dollars in thousands) 2014 2013 Interest expense $ (10,560 )$ (10,711 ) Interest income 8 42 Other (expense) income, net (414 ) 721 Total other (expense) income, net $ (10,966 )$ (9,948 )



Interest Expense

For the three ended March 31, 2014, compared to the same period in 2013, interest expense decreased by $151,000 as a result of decreased amortization related to the capitalization of deferred financing costs.

Interest Income

For the three ended March 31, 2014, compared to the same period in 2013, interest income decreased by $34,000 as a result of the change in balances in interest bearing accounts.

Other (Expense) Income, net

For the three months ended March 31, 2014, compared to the same period in 2013, other expense increased by $1.1 million primarily due to a net $1.2 million impact associated with a state tax settlement indemnified by BMS. In addition, during the three months ended March 31, 2013, we received $0.4 million in consideration from the extinguishment of our membership interests in a mutual insurance company.

(Benefit) provision for Income Taxes

Three Months Ended March 31, (dollars in thousands) 2014 2013 (Benefit) provision for income taxes $ (1,192 )$ 628



For the three months ended March 31, 2014 and 2013, our effective tax rate was 48.1% and (3.3)%, respectively. The $1.8 million decrease in the tax provision for the three months ended March 31, 2014, as compared to the same period in 2013, was impacted primarily by discrete events which included a reversal of an uncertain tax position resulting in a $1.8 million tax benefit attributable to a state tax settlement and a $0.7 million tax expense for current year additions. Our tax rate is also affected by recurring items, such as tax rates in foreign jurisdictions, which we expect to be fairly consistent in the near term, as well as other discrete events that may not be consistent from year-to-year. The following items had the most significant impact on the differences between our statutory U.S. federal income tax rate of 35% and our effective tax rate during the three months ended:

March 31, 2014

A $1.1 million decrease in our uncertain tax positions relating to a state tax settlement and state tax nexus and transfer pricing matters. March 31, 2013 A $6.6 million increase to our valuation allowance against net domestic deferred tax assets. A $0.7 million increase in our uncertain tax positions relating to state tax nexus and transfer pricing matters. 32



--------------------------------------------------------------------------------

Table of Contents

Liquidity and Capital Resources

Cash Flows

The following table provides information regarding our cash flows:

Three Months Ended March 31, (dollars in thousands) 2014 2013 $ Change Cash used in: Operating activities $ (15 )$ (150 )$ 135 Investing activities $ (1,462 )$ (1,449 )$ (13 ) Financing activities $ (63 )$ (388 )$ 325



Net Cash Used in Operating Activities

Cash used in operating activities is primarily driven by our earnings and changes in working capital. The decrease in cash used in operating activities for the three months ended March 31, 2014 as compared to 2013 was primarily driven by the decrease in net loss. This increase was offset by cash flow decreases in accrued expenses and other liabilities primarily for the payment of variable compensation and severance during the first quarter of 2014 and cash flow decreases in accounts receivable primarily due to an increase in revenues.

Net Cash Used in Investing Activities

The increase in net cash used in investing activities in the three months ended March 31, 2014 as compared to 2013 primarily reflects increased spending on the purchase of property and equipment.

Net Cash Used in Financing Activities

Our primary historical uses of cash in financing activities are principal payments on our term loan and financing costs. The decrease in net cash used financing activities in the three months ended March 31, 2014 as compared to 2013 was primarily driven by a decrease in payments on a note payable.

External Sources of Liquidity

Since 2010, in addition to revenues provided by the sales of our products, our primary source of external liquidity has been the proceeds from the issuance of the $400.0 million 9.750% Senior Notes due in May of 2017, or the Notes. We also have outstanding a revolving credit facility, or the Facility, that has a borrowing capacity of $42.5 million.

The revolving loans under our Facility bear interest subject to a pricing grid based on average historical excess availability under our Facility, with pricing based from time to time at our election at (i) LIBOR plus a spread ranging from 2.00% to 2.50% or (ii) the Reference Rate (as defined in our Facility) plus a spread ranging from 1.00% to 1.50%. Our Facility also includes an unused line fee of 0.375% or 0.5%, depending on the average unused revolving credit commitments. Our Facility expires on the earlier of (i) July 3, 2018 or (ii) if the outstanding Notes are not refinanced in full, the date that is 91 days before the maturity thereof, at which time all outstanding borrowings are due and payable.

As of March 31, 2014 and December 31, 2013, we had an unfunded Standby Letter of Credit for up to $8.8 million. The unfunded Standby Letter of Credit requires annual fees, payable quarterly, between 2.00% and 2.50% of the face amount, and expires on February 5, 2015, which will automatically renew for a one year period at each anniversary date, unless we elect not to renew in writing within 60 days prior to that expiration.

Our Facility is secured by a pledge of substantially all of our assets together with the assets of Lantheus Intermediate and Lantheus MI Real Estate, LLC, or Lantheus Real Estate, including each such entity's accounts receivable, inventory and machinery and equipment, and is guaranteed by each of Lantheus Intermediate and Lantheus Real Estate. Borrowing capacity is determined by reference to a borrowing base, or the Borrowing Base, which is based on (i) a percentage of certain eligible accounts receivable, inventory and machinery and equipment minus (ii) any reserves. As of March 31, 2014, the aggregate borrowing base was approximately $42.5 million, which was reduced by (i) an outstanding $8.8 million unfunded Standby Letter of Credit and (ii) an $8.0 million outstanding loan balance, resulting in a net borrowing base availability of approximately $25.7 million.

33



--------------------------------------------------------------------------------

Table of Contents

Our Facility contains affirmative and negative covenants, as well as restrictions on the ability of Lantheus Intermediate, us and our subsidiaries to: (i) incur additional indebtedness or issue preferred stock; (ii) repay subordinated indebtedness prior to its stated maturity; (iii) pay dividends on, repurchase or make distributions in respect of capital stock or make other restricted payments; (iv) make certain investments; (v) sell certain assets; (vi) create liens; (vii) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and (viii) enter into certain transactions with our affiliates. Our Facility also contains customary default provisions as well as cash dominion provisions which allow the lender to sweep our accounts during the period (x) certain specified events of default are continuing under our Facility or (y) excess availability under our Facility falls below (i) the greater of $5.0 million or 15% of the then-current Borrowing Base for a period of more than five consecutive Business Days or (ii) $3.5 million. During a covenant trigger period, we are required to comply with a consolidated fixed charge coverage ratio of not less than 1:00:1:00. The fixed charge coverage ratio is calculated on a consolidated basis for Lantheus Intermediate and its subsidiaries for a trailing four-fiscal quarter period basis, as (i) EBITDA (as defined in the agreement) minus capital expenditures minus certain restricted payments, divided by (ii) interest plus taxes paid or payable in cash plus certain restricted payments made in cash plus scheduled principal payments paid or payable in cash.

We may from time to time repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases of any Notes outstanding, prepayments of our term loans or other retirements or refinancing of outstanding debt, privately negotiated transactions or otherwise. The amount of debt that may be repurchased or otherwise retired, if any, would be decided at the sole discretion of our Board of Directors and will depend on market conditions, trading levels of our debt from time to time, our cash position and other considerations.

Funding Requirements

Our future capital requirements will depend on many factors, including:

our ability to have product manufactured and released from JHS and other manufacturing sites in a timely manner in the future; the level of product sales of our currently marketed products, particularly DEFINITY, and any additional products that we may market in the future; the costs of further commercialization of our existing products, particularly in international markets, including product marketing, sales and distribution and whether we obtain local partners to help share such commercialization costs; the costs of investing in our facilities, equipment and technology infrastructure; the costs and timing of establishing manufacturing and supply arrangements for commercial supplies of our products; the extent to which we acquire or invest in products, businesses and technologies; the extent to which we choose to establish collaboration, co- promotion, distribution or other similar arrangements for our marketed products; the legal costs relating to maintaining, expanding and enforcing our intellectual property portfolio, pursuing insurance or other claims and defending against product liability, regulatory compliance or other claims; and the cost of interest on any additional borrowings which we may incur under our financing arrangements.



If JHS is not able to continue to manufacture and release product supply on a timely and consistent basis, or we are unable to continue to grow DEFINITY sales, then we will need to implement certain additional expense reductions, such as a delay or elimination of discretionary spending in all functional areas, as well as other operating and strategic initiatives.

If our capital resources become insufficient to meet our future capital requirements, we would need to finance our cash needs through public or private equity offerings, assets securitizations, debt financings, sale-leasebacks or other financing or strategic alternatives, to the extent such transactions are permissible under the covenants of our Facility and the Indenture.

34



--------------------------------------------------------------------------------

Table of Contents

Additional equity or debt financing, or other transactions, may not be available on acceptable terms, if at all. If any of these transactions require an amendment or waiver under the covenants in our Facility and under the Indenture, which could result in additional expenses associated with obtaining the amendment or waiver, we will seek to obtain such a waiver to remain in compliance with the covenants of our Facility and the Indenture. However, we cannot be assured that such an amendment or waiver would be granted, or that additional capital will be available on acceptable terms, if at all.

At March 31, 2014, our only current committed external source of funds is our borrowing availability under our Facility. We generated a net loss of $1.3 million during the three months ended March 31, 2014 and had $15.1 million of cash and cash equivalents at March 31, 2014. Availability under our Facility is calculated by reference to the Borrowing Base. If we are not successful in achieving our forecasted results, our accounts receivable and inventory could be negatively affected, reducing the Borrowing Base and limiting our borrowing availability.

We took actions during March 2013 to substantially reduce our discretionary spending in order to reposition us to focus our resources on our higher growth products. In particular, we implemented a strategic shift in how we intend to fund our important R&D programs. We have reduced our internal R&D resources during 2013 while at the same time we seek to engage one or more strategic partners to assist us in the further development and commercialization of our important agents in development, including flurpiridaz F 18, 18F LMI 1195 and LMI 1174. Based on our current operating plans, we believe that our existing cash and cash equivalents, results of operations and availability under our Facility will be sufficient to continue to fund our liquidity requirements for at least the next twelve months.

Critical Accounting Estimates

The discussion and analysis of our financial position and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition and related allowances, inventory, impairments of long-lived assets including intangible assets, impairments of goodwill, income taxes including the valuation allowance for deferred tax assets, valuation of investments, research and development expenses, contingencies and litigation, and share-basedpayments.

Goodwill is not amortized, but is instead tested for impairment at least annually and whenever events or circumstances indicate that it is more likely than not that it may be impaired. We have elected to perform the annual test for goodwill impairment as of October 31 of each year. All goodwill has been allocated to our U.S. operating segment.

During the first quarter of 2013, the strategic shift in how we will fund our R&D programs significantly altered the expected future costs and revenues associated with our agents in development. Accordingly, this action was deemed to be a triggering event for an evaluation of the recoverability of our goodwill as of March 31, 2013. We performed an interim impairment test and determined that there was no impairment of goodwill as of March 31, 2013. There were no events as of March 31, 2014 and December 31, 2013 that triggered an interim impairment test. At each annual and interim impairment test date, the fair value of our reporting unit, which includes goodwill, was substantially in excess of our carrying value.

We calculate the fair value of our reporting units using the income approach, which utilizes discounted forecasted future cash flows and the market approach which utilizes fair value multiples of comparable publicly traded companies. The discounted cash flows are based on our most recent long-term financial projections and are discounted using a risk adjusted rate of return, which is determined using estimates of market participant risk-adjusted weighted average costs of capital and reflects the risks associated with achieving future cash flows. The market approach is calculated using the guideline company method, where we use market multiples derived from stock prices of companies engaged in the same or similar lines of business. There is not a quoted market price for our reporting units or the company as a whole, therefore, a combination of the two methods is utilized to derive the fair value of the business. We evaluate and weigh the results of these approaches as well as ensure we understand the basis of the results of these two methodologies. We believe the use of these two methodologies ensures a consistent and supportable method of determining our fair value that is consistent with the objective of measuring fair value. If the fair value were to decline, then we may be required to incur material charges relating to the impairment of those assets.

We test intangible and long-lived assets for recoverability whenever events or changes in circumstances suggest that the carrying value of an asset or group of assets may not be recoverable. We measure the recoverability of assets to be held and used by comparing the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If those assets are considered to be impaired, the impairment equals the amount by which the carrying amount of

35



--------------------------------------------------------------------------------

Table of Contents

the assets exceeds the fair value of the assets. Any impairments are recorded as permanent reductions in the carrying amount of the assets. Long-lived assets, other than goodwill and other intangible assets, that are held for sale are recorded at the lower of the carrying value or the fair market value less the estimated cost to sell.

Fixed assets dedicated to R&D activities, which were impacted by the March 2013 R&D strategic shift, have a carrying value of $5.9 million as of March 31, 2014. We believe these fixed assets will be utilized for either internally funded ongoing R&D activities or R&D activities funded by a strategic partner. If we are not successful in finding a strategic partner, and there are no alternative uses for those fixed assets, they could be subject to impairment in the future.

Please read Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2013 Form 10-K for the year ended December 31, 2013, for a discussion of our critical accounting estimates. There have been no material changes to our critical accounting policies in the three months ended March 31, 2014.

Off-Balance Sheet Arrangements

We are required to provide the U.S. Nuclear Regulatory Commission and Massachusetts Department of Public Health financial assurance demonstrating our ability to fund the decommissioning of our North Billerica, Massachusetts production facility upon closure, though we do not intend to close the facility. We have provided this financial assurance in the form of a $28.2 million surety bond and an $8.8 million letter of credit.

Since inception, we have not engaged in any other off-balance sheet arrangements, including structured finance, special purpose entities or variable interest entities.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters