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LNTH Q2 earnings report: https://investor.lantheus.com/news-releases/news-release-details/lantheus-reports-second-quarter-2024-financial-results
LNTH Q2 earnings webcast: https://edge.media-server.com/mmc/p/ccjcrtu3/
Lantheus (LNTH) — 1.7% position
Introduction
Lantheus is one of the leading radiopharmaceutical-focused companies, with three commercial products currently available: PYLARIFY, DEFINITY, and TechneLite.
PYLARIFY, the company's primary product (which generated almost 70% of total revenue this quarter), is the #1 (PYLARIFY holds approximately 65% of the market share with three other commercial competitors) used PSMA PET imaging agent for the detection of suspected recurrent or metastatic prostate cancer. PYLARIFY is on track to surpass $1 billion in 2024 in sales and be the first radiopharmaceutical diagnostic blockbuster.
DEFINITY is an ultrasound-enhancing agent for patients with suboptimal echocardiograms (which check how the heart's chambers and valves pump blood through the heart). It was the core product (now accounts for 20% of total sales) for years before PYLARIFY took over. While DEFINITY maintains an 80%+ market share among agents used in suboptimal echocardiograms in the US, it continues to deliver double-digit growth.
Finally, TechneLite is a technetium-based generator that provides the essential medical isotope used in nuclear medicine procedures. While its share of total revenue is small, TechneLite has seen a solid increase in sales in the recent quarter, growing faster than PYLARIFY and DEFINITY.
In Q1 2024, Lantheus outlined a strategy to enhance its leadership in the radiopharmaceutical space by actively expanding its pipeline of radiopharmaceuticals with late-stage product candidates through primarily M&A. The company has a strong pipeline of programs that could turn into commercial products in the near term.
If the big pharma does not acquire Lantheus in the next 12 to 18 months, as many radiopharmaceutical companies have been in the past 12 months, I anticipate it could be a $240+ stock in the next 3-4 years.
I got back into LNTH after their Q1 earnings report because I saw growth remaining strong and significantly higher than street estimates. After this Q2 earnings report I believe that is still the case. Coming into this year the analysts thought LNTH revenue growth would decelerate to 9% but now after 2 quarters it looks like LNTH could do 18%.
I did add to my LNTH position today and I’ll continue adding on pullbacks, it’s only a swing trade for now but that might change in the near future because I do think the upside over the next 2-3 years is compelling.
Q2 2024 Analysis
In early July 2024, CMS released the calendar year 2025 Proposed Hospital Outpatient Prospective Payment System (OPPS rule), which recognizes the value and need for broad access to diagnostic radiopharmaceuticals. This rule proposes separate payment for diagnostic radiopharmaceuticals with per-day costs greater than $630, significant progress for the field of diagnostic radiopharmaceuticals, and, most importantly, sustained patient access.
If it gets implemented as a final rule in November this year, CMS will maintain a separate payment for PYLARIFY for approximately 20% of patients with traditional Medicare fee-for-service insurance coverage who are treated in the hospital outpatient setting, in addition to the PET-CT procedural payment.
Lantheus had run almost 60% in just two trading sessions on that news. While it is a substantial catalyst for 2025 and beyond, Lantheus ran far ahead of itself and had to correct. Furthermore, earnings came out mixed: the company did beat on revenue ($394.1 million, +22.5% YoY) by $11.94 million but missed on EPS (reporting $1.80) by $0.03 due to a significant increase in R&D expenses.
PYLARIFY contributed $273.3 million of revenue, up 29.3% YoY, while precision diagnostic revenue was $112.1 million, an increase of 14.9% YoY. DEFINITY contributed $78.1 million, up 10.7% YoY, while TechneLite revenue was $28.2 million, up 30.5% YoY, due to opportunistic sales in the quarter.
Gross profit margin in the second quarter came at 68.4%, a decrease of 121 basis points compared to the same period last year, as was expected due to the previously noted RELISTOR royalty sale mid-last year.
R&D expenses increased notably to $60.60 million, compared to just $15.9 million in the same quarter last year. This increase was primarily due to significant investments to advance the MK-6240 candidate (more on this later). As a result, net income came considerably lower, $62.1 million, compared to $94.13 million in the same period last year. Still, in the first six months of 2024, the company generated $193.13 million in net income, compared to $91.3 million in the first half of 2023.
Lantheus has an exceptionally strong balance sheet with cash and cash equivalents of $757 million. The company is also a strong positive free cash flow generator, posting $73.5 million in FCF, a whopping increase of $116.5 million over the prior year. Strong FCF allows the company to make targeted investments in R&D and acquisitions. Just in this quarter, it invested $32.9 million to acquire NAV-4694, with two further investments in July, which will be reflected in the Q3 financials.
Many investors did not like the increased R&D and acquisition costs, which led to an updated guidance for the full year 2024. While the revenue guidance of $1.5 billion to $1.52 billion remained unchanged, the company lowered the EPS from prior guidance of $7.00 to $7.20 to a new range of $6.60 to $6.70. The prior guidance did not take into account the investments the company decided to make to further grow its pipeline. Management also chose to steer away from quarterly guidance.
LNTH is clearly investing for the long-term while sacrificing the short-term. As a shareholder I have mixed feelings on this. Part me wants them to focus on organic growth and then use excess cash for buybacks to juice the EPS numbers and expand the multiple. The other part of me wants them to use excess cash to invest in promising drugs/therapeutics to expand their pipeline and hopefully hit a homerun on something. The second option is definitely riskier but the payoff could be substantially bigger — the problem is that we won’t know the payoff for many of these newly acquired drugs for 3-5 years, especially since some of them are still in trials.