Lantheus Holdings, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward-Looking Statements Some of the statements contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These 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 can generally be identified by words such as “anticipates,” “believes,” “can,” “could,” “designed,” “estimates,” “expects,” “hopes,” “intends,” “launch,” “may,” “pipeline,” “plans,” “predicts,” “seeks,” “should,” “target,” “will,” “would” and similar expressions, or by express or implied discussions regarding potential marketing approvals or new indications for the collaborations, products candidates or approved products described in this Quarterly Report on Form 10-Q, or regarding potential future revenues from such collaborations, product candidates and products. Examples of forward-looking statements include statements we make relating to our outlook and expectations including, without limitation, in connection with: (i) continued market expansion and penetration for our established commercial products, particularly PYLARIFY and DEFINITY, in a competitive environment in which other imaging agents have been approved and are being commercialized, and our ability to clinically and commercially differentiate our products from other products; (ii) our ability to have third parties manufacture our products and our ability to manufacture DEFINITY in our in-house manufacturing facility; (iii) the global availability of Molybdenum-99 (“Mo-99”) and other raw material and key components; (iv) the efforts and timing for clinical development, regulatory approval and successful commercialization of our product candidates and new clinical applications and territories for our products, in each case, that we or our strategic partners may undertake; (v) our strategies, future prospects, and our projected growth, including revenue related to our collaboration agreements with POINT Biopharma Global Inc. (vi) our ability to successfully continue existing clinical development partnerships using MK-6240 as a research tool and to further develop and commercialize such research tool; and (vii) our ability to identify and acquire or in-license additional diagnostic and therapeutic product opportunities in oncology and other strategic areas. 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, such statements 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. These statements 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 on Form 10-Q may not in fact occur. We caution you, therefore, against relying on any of these forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022, and in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q 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. Available Information Our global Internet site is www.lantheus.com. We routinely make available important information, including copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC, free of charge on our website at investor.lantheus.com. We recognize our website as a key channel of distribution to reach public investors and as a means of disclosing material non-public information to comply with our disclosure obligations under SEC Regulation FD. Information contained on our website shall not be deemed incorporated into, or to be part of this Quarterly Report on Form 10-Q, and any website references are not intended to be made through active hyperlinks. Our reports filed with, or furnished to, the SEC are also available on the SEC’s website at www.sec.gov, and for Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, in an iXBRL (Inline Extensible Business Reporting Language) format. iXBRL is an electronic coding language used to create interactive financial statement data over the Internet. The information on our website is neither part of nor incorporated by reference into this Quarterly Report on Form 10-Q. The following discussion and analysis of our financial condition and results of operations should be read together with the condensed 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 Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, and in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. Overview 22 Table of Contents Our Business With more than 65 years of experience in delivering life-changing science, we are committed to delivering better patient outcomes and improving lives through diagnostics, radiotherapeutics and artificial intelligence solutions that enable clinicians to Find, Fight and Follow disease. We classify our products in three categories: Radiopharmaceutical Oncology, Precision Diagnostics, and Strategic Partnerships and Other Revenue. Our Radiopharmaceutical Oncology diagnostics and therapeutics help healthcare professionals (“HCPs”) Find, Fight and Follow cancer. Our leading Precision Diagnostic products assist HCPs to Find and Follow diseases, with a focus in cardiology. Our Strategic Partnerships focus on enabling precision medicine through the use of biomarkers, digital solutions and pharma services platforms, and includes our license of RELISTOR to Bausch Health Companies, Inc. (“Bausch”). Our commercial products are used by oncologists, urologists, nuclear medicine physicians, cardiologists, sonographers, technologists, radiologists, and internal medicine physicians working in a variety of clinical settings. We believe that our diagnostic products provide improved clinical insight that enables HCPs to better detect and characterize, or rule out, disease, with the potential to achieve better patient outcomes, reduce patient risk and limit overall costs throughout the healthcare system. We produce and market our products throughout the U.S., selling primarily to hospitals, independent diagnostic testing facilities, government facilities, integrated delivery networks, radiopharmacies, clinics, and group practices. We sell our products outside the U.S. through a combination of direct distribution in Canada and third party distribution relationships in Europe, Canada, Australia, Asia-Pacific, Central America and South America. Our executive offices are located in Bedford, Massachusetts, with additional offices in North Billerica, Massachusetts; Somerset, New Jersey; Montreal, Canada and Lund, Sweden. Recent Developments Exclusive License for PNT2002 and PNT2003 On December 20, 2022, we announced the closing of a set of strategic collaborations with POINT Biopharma Global Inc. (“POINT”), in which we were granted a license to exclusive worldwide rights (excluding Japan, South Korea, China (including Hong Kong, Macau and Taiwan), Singapore and Indonesia) to co-develop and commercialize POINT’s PNT2002 and PNT2003 product candidates. With respect to PNT2002, POINT is generally responsible for funding and development activities required for FDA approval, including generating all clinical and nonclinical data, analysis and other information, and we are responsible for preparing for and seeking regulatory approval, as well as performing and funding all future development and commercialization following such approval. POINT will be responsible for all manufacturing of PNT2002, subject to certain exceptions described in the PNT2002 License Agreement. In April 2023, we announced with POINT that the FDA had granted Fast Track designation for PNT2002. Fast Track is a process designed to facilitate the development and expedite the review of drugs to treat serious conditions and address unmet needs. With respect to PNT2003, POINT is responsible for curating all data, analysis and other information necessary for regulatory approval, and supporting us in the preparation of regulatory filings, and we are responsible for preparing for and seeking regulatory approval of all such applications, as well as performing and funding all future development and commercialization following such approval. POINT will be responsible for all manufacturing of PNT2003, subject to certain exceptions described in the PNT2003 License Agreement. For more information, see Note 19, “Acquisition of Assets” in our consolidated financial statements included herein. Acquisition of Cerveau Technologies, Inc. On February 6, 2023, we announced that we acquired Cerveau. Cerveau’s asset is MK-6240, a second-generation F 18-labeled PET imaging agent that targets Tau tangles in Alzheimer’s disease. Under the terms of the agreement, we paid the Selling Stockholders an upfront payment of $35.0 million in February 2023 and paid an additional $10.0 million in May 2023 upon the successful completion of a technology transfer. The Selling Stockholders are also eligible to receive additional development and commercial milestone payments. Additionally, we will pay double-digit royalty payments for research revenue and commercial sales. Research revenue is derived from existing partnerships with pharmaceutical companies that use MK-6240 in clinical trials and includes milestone and dose-related payments. Pursuant to the terms of the stock purchase agreement for Cerveau, certain members of the Selling Stockholders will also provide transition and clinical development services for a prescribed time following the closing of the transaction. 23 Table of Contents For more information, see Note 19, “Acquisition of Assets” in our consolidated financial statements included herein. Key Factors Affecting Our Results Our business and financial performance have been, and continue to be, impacted by the following: Continued Growth of PYLARIFY PYLARIFY, an F 18-labeled PET imaging agent targeting prostate-specific membrane antigen (“PSMA”), was approved by the FDA in May 2021 and commercially launched in the U.S. in June 2021. In March 2022, we announced a strategic collaboration with Novartis to include PYLARIFY in prostate cancer trials with PLUVICTO, Novartis’ PSMA-targeted therapeutic. In addition, in 2022, we entered into an agreement with Curium to add PYLARIFY to its PSMA-targeted therapeutic clinical trial referred to by Curium as ECLIPSE. Both of these collaborations, as well as other collaborations using PYLARIFY are described further under Part I, Item 1. “Business - Strategic Partnerships and Other Revenue – Oncology.” in our Annual Report on Form 10-K for the year ended December 31, 2022. Also, during 2022, the National Comprehensive Cancer Center updated its guidelines and the Society for Nuclear Medicine and Molecular Imaging updated its appropriate use criteria, both noting that PSMA PET imaging agents, including PYLARIFY, can be used for patient selection for PSMA-targeted radioligand therapy. During 2021, 2022 and the first half of 2023, we hired additional employees to assist us with the commercialization of PYLARIFY, including in Sales, Marketing, Reimbursement, Quality and Medical Affairs. In addition to our network of PET manufacturing facilities (“PMFs”), we partnered with academic medical centers in the U.S. that have radioisotope-producing cyclotrons who have expressed an interest in manufacturing PYLARIFY. Our commercial launch required obtaining necessary market access which included, but was not limited to, adequate coding, coverage and payment for PYLARIFY, including coverage from Medicare, Medicaid and other government payors, as well as private payors. We received notification that our Healthcare Procedure Coding System (“HCPCS”) code, which enables streamlined billing, went into effect as of January 1, 2022. In addition, effective January 1, 2022, the Centers for Medicare and Medicaid Services (“CMS”) granted Transitional Pass-Through Payment Status (“TPT Status”) in the hospital outpatient setting for PYLARIFY, enabling traditional Medicare to provide an incremental payment for PET/CT scans performed with PYLARIFY in that setting. TPT Status for PYLARIFY could expire on December 31, 2024. The successful growth of PYLARIFY is dependent on our ability to sustain PYLARIFY as the leading PSMA PET imaging agent in an increasingly competitive marketplace. PYLARIFY’s competition includes two commercially available gallium-68-based PSMA imaging agents, a recently approved fluorine-18-based PSMA imaging agent, and other non-PSMA-based imaging agents, commonly referred to as conventional imaging. In connection with the acquisition of Progenics in June 2020, we issued CVRs tied to the financial performance of PYLARIFY. Each CVR entitled its holder to receive a pro rata share of aggregate cash payments equal to 40% of U.S. net sales generated by PYLARIFY in 2022 and 2023 in excess of $100.0 million and $150.0 million, respectively, but not to exceed, in the aggregate, 19.9% of the total consideration we paid in the acquisition of Progenics. Based on our 2022 PYLARIFY net sales, we determined that the aggregate payment obligation under the CVRs was $99.6 million, which was the maximum amount payable under the CVRs. We paid $99.6 million to the CVR holders during May 2023 in full satisfaction of our obligations under the CVRs. PYLARIFY AI Use During 2021, we announced that EXINI was granted 510(k) clearance by the FDA in the U.S. and received European Conformity Marking (“CE marking”) in Europe for aPROMISE. We commercially launched aPROMISE under the name PYLARIFY AI in the U.S. in November 2021. During the second quarter of 2022, we received a new 510(k) clearance for an updated version of our PYLARIFY AI platform. PYLARIFY AI is artificial intelligence medical device software developed to assist with the reading and quantification of PYLARIFY scans. The technology automatically analyzes a PSMA PET/CT image to segment anatomical regions – 51 bones and 12 soft tissue organs. This image segmentation enables automated localization, detection and quantification of potential PSMA-avid lesions in a PSMA PET/CT image, which data is then incorporated into the reporting system used by physicians. Continued Growth of DEFINITY 24 Table of Contents We believe we will be able to increase use of DEFINITY through continued education of physicians and healthcare providers about the benefits of ultrasound enhancing agents in suboptimal echocardiograms. The U.S. market currently has three echocardiography ultrasound enhancing agents approved by the FDA; we estimate that DEFINITY will continue to hold at least an 80% market share. As we continue to expand our microbubble franchise, our activities include: • Patents - We continue to actively pursue additional patents in connection with DEFINITY and DEFINITY RT, both in the U.S. and internationally. In the U.S. for DEFINITY, we have six Orange Book-listed method of use patents, one of which expires in 2035 and five of which expire in 2037, as well as additional manufacturing patents that are not Orange Book-listed expiring in 2037. • DEFINITY RT - The formulation of DEFINITY that we have branded as DEFINITY RT became commercially available in the fourth quarter of 2021. DEFINITY RT allows both storage and shipment at room temperature and provides clinicians an additional choice and allows for greater utility of this formulation in broader clinical settings. Given its physical characteristics, we believe DEFINITY RT is also well-suited for inclusion in kits requiring microbubbles for other indications and applications (including in kits developed by third parties of the type described in the paragraph entitled Microbubble Franchise below). • VIALMIX RFID – DEFINITY is activated through the use of medical devices branded as VIALMIX and VIALMIX RFID. The activation rate and time are controlled by VIALMIX RFID through the use of radio-frequency identification technology (“RFID”) to ensure reproducible activation of DEFINITY. The RFID tag, which is affixed to the vial label, enables the DEFINITY vial to be appropriately activated with the VIALMIX RFID activation device. Expansion of Strategic Partnerships and Other Revenue We continue to seek ways to further increase the overall value of our portfolio of products and product candidates. We are evaluating a number of different opportunities to collaborate, in-license or acquire additional products, product candidates, businesses and technologies to drive our future growth. In particular, we are focused on late-stage radiopharmaceutical diagnostic and therapeutic product opportunities in oncology and other strategic areas that will complement our existing portfolio. Our Strategic Partnerships and Other Revenue category includes our Strategic Partnerships, Pharma Services and Digital Solutions businesses and is focused on enabling precision medicine with biomarkers and digital solutions. • Strategic Partnerships – We seek to monetize our assets through our Strategic Partnerships business, by optimizing core assets geographically and by driving value through non-core assets. For example, with respect to PYLARIFY, we have licensed the development and commercialization rights of that imaging agent in Europe to Curium. Similarly, we licensed the commercialization rights for RELISTOR to Bausch and the commercialization rights for flurpiridaz fluorine-18 to GE Healthcare Limited. • Pharma Services – We use our Pharma Services business to offer our Biomarkers and Microbubble Platforms to pharmaceutical and start-up companies to support their research and development of therapeutic drugs and devices. The strategic goal of our Pharma Services business is to gain early access to innovation, de-risk the development, data generation and co-funding of our pipeline through collaborations, embed our technologies in the clinical ecosystem and establish the clinical utility of product candidates and research tools in our pipeline. Our Biomarkers are intended to support patient selection and the monitoring of disease progression, primarily with respect to different oncological diseases. For example, piflufolastat F 18 is currently being used by Curium, Novartis, POINT and Regeneron in those companies’ prostate cancer therapeutic drug development programs. Our acquisition of Cerveau in February 2023 added MK-6240 to our biomarker portfolio. MK-6240 is currently being used in more than sixty academic and industry clinical trials for several Alzheimer’s disease therapeutic candidates being developed by more than sixteen pharmaceutical companies. Most recently, in collaboration with Ratio Therapeutics, we initiated a Phase I study for LNTH-1363S to evaluate the pharmokinetics, biodistribution and radiation dosimetry in adult health volunteers. LNTH-1363S is our novel fibroblast activation protein, alpha targeted, copper-64 labeled PET imaging agent candidate. In addition, we continue to expand our Microbubble Platform. In December 2022, we announced a strategic collaboration with SonoThera, Inc. (“SonoThera”), which will use our microbubbles in combination with SonoThera’s ultrasound-guided, non-viral, gene therapy platform and treatments. We also have additional collaborations with other partners that are generally designed to include our microbubble as part of a kit used with our partner’s medical device for therapeutic applications. In these collaborations, our microbubble is intended to be used as a vehicle to deliver a therapeutic drug. • Digital Solutions – Our Digital Solutions are designed to enhance imaging value and the throughput, reproducibility and reliability of image analysis, as well as to inform treatment selection and response to therapy. Our digital solutions include aPROMISE and aBSI (as defined below). aPROMISE, which is currently sold as PYLARIFY AI in the U.S., is artificial intelligence medical device software that is designed to allow healthcare professionals and researchers to perform standardized quantitative assessment of PSMA PET/CT images in prostate cancer, including those images obtained by using 25 Table of Contents PYLARIFY. Automated Bone Scan Index (“aBSI”) automatically calculates the disease burden of prostate cancer by detecting and classifying bone scan tracer uptakes as metastatic or benign lesions using an artificial neural network. aBSI is FDA cleared and CE marked. The software is currently used as one of the correlative objectives of the DORA trial, an open-labeled, randomized, Phase III study of docetaxel versus docetaxel in combination with radium-223 (Ra-223) in subjects with metastatic castration-resistant prostate cancer. We offer our Digital Solutions to HCPs for clinical use and to pharmaceutical companies for development purposes, and in some cases, we also obtain clinical imaging data that we may use to further develop artificial intelligence solutions. Global Mo-99 Supply We currently have Mo-99 supply agreements with Institute for Radioelements (“IRE”), running through December 31, 2023, with auto-renewal provisions that are terminable upon notice of non-renewal, and with NTP Radioisotopes (“NTP”), acting for itself and on behalf of its subcontractor, the Australian Nuclear Science and Technology Organisation (“ANSTO”), running through December 31, 2024. Although we have the most globally diverse Mo-99 supply chain with IRE in Belgium, NTP in South Africa, and ANSTO in Australia, we still face supplier and logistical challenges in our Mo-99 supply chain. When one supplier experiences outages, we generally rely on Mo-99 supply from the other suppliers to limit the impact of the outages. We believe we effectively manage these various supply chain challenges, but depending on reactor and processor schedules and operations, at times we have not been able to fill some or all of the demand for our TechneLite generators on certain manufacturing days. A prolonged disruption of service from one of our three Mo-99 processing sites or one of their main Mo-99-producing reactors could have a negative effect on our business, results of operations, financial condition and cash flows. To augment our current supply of Mo-99, we have a strategic arrangement with SHINE Medical Technologies LLC (“SHINE”) for the future supply of Mo-99. Under the terms of the supply agreement, entered into in November 2014, SHINE will provide Mo-99 produced using its proprietary LEU-solution technology for use in our TechneLite generators once SHINE’s facility becomes operational and receives all necessary regulatory approvals, which SHINE now estimates will occur in 2024. The term of this arrangement provides for three years of supply of Mo-99. However, we cannot provide assurance that SHINE will be able to produce commercial quantities of Mo-99 for our business, or that SHINE, together with our current suppliers, will be able to deliver a sufficient quantity of Mo-99 to meet our needs. Inventory Supply We obtain a substantial portion of our Precision Diagnostics from a third party supplier. Jubilant HollisterStier (“JHS”) is currently a significant supplier of DEFINITY and our sole source manufacturer of select other products. On February 23, 2022, LMI entered into a Manufacturing and Supply Agreement (the “MSA”) with JHS, effective as of February 23, 2022, pursuant to which JHS will manufacture, and LMI will purchase, DEFINITY and select other products. The new MSA supersedes all of the prior agreements of the parties. The initial term of the MSA runs through December 31, 2027 and can be further extended by mutual agreement of the parties. The MSA requires LMI to purchase from JHS specified percentages of its total requirements for DEFINITY, as well as specified quantities of select other products, each year during the contract term, except to the extent that LMI has the right to withhold payment for defective product and cancel orders for untimely delivery without penalty. Either party can terminate the MSA upon the occurrence of certain events, including the material breach or bankruptcy of the other party. In addition to JHS, we rely on Samsung BioLogics as our sole source manufacturer of DEFINITY RT. In 2021, we completed the construction of a specialized in-house manufacturing facility at our North Billerica campus to produce DEFINITY. On February 22, 2022, we received FDA approval of our supplemental new drug application authorizing commercial manufacturing of DEFINITY at our new facility. We believe this facility will allow us to better manage DEFINITY manufacturing and inventory, reduce our costs in a potentially more price competitive environment, and provide us with supply chain redundancy. Radiopharmaceuticals are decaying radioisotopes with half-lives ranging from a few hours to several days. Radiopharmaceutical finished goods, such as doses of PYLARIFY, AZEDRA and TechneLite generators cannot be kept in inventory because of their limited shelf lives and are subject to just-in-time manufacturing, processing and distribution, which takes place at our facilities in North Billerica, Massachusetts and Somerset, New Jersey, as well as at our PMF partner manufacturing facilities across the U.S. Research and Development Expenses To ensure we remain the leading radiopharmaceutical-focused company in our industry, we have historically made and will continue to make substantial investments in new product development and lifecycle management for existing products, including: • For PYLARIFY, our development of PYLARIFY resulted in approval by the FDA in May 2021. 26 Table of Contents • For PYLARIFY AI, our development of PYLARIFY AI resulted in a 510(k) clearance granted by the FDA in the third quarter of 2021 and an additional 510(k) clearance granted during the second quarter of 2022. • For PNT2002 and PNT2003, we were granted a license to exclusive worldwide rights (excluding certain countries) for $260.0 million in upfront payments during the fourth quarter of 2022 and will potentially make additional payments as described below. • For 1095, our PSMA-targeted iodine-131-labeled small molecule product candidate, we enrolled the last patient in our ARROW Phase 2 study during the second quarter of 2022. Patients in this study will be followed for one year after their first treatment for all efficacy endpoints and survival and safety data will be collected for an additional year. • We are also developing additional lifecycle management opportunities for PYLARIFY, including preparing a clinical study in favorable intermediate-risk prostate cancer patients, and exploring other possibilities beyond prostate cancer. PNT2002 Under the terms of the PNT2002 License Agreement, Lantheus Two, LLC paid POINT an upfront cash payment of $250.0 million, and could pay up to an additional $281.0 million in milestone payments upon the achievement of specified U.S. and ex-U.S. regulatory milestones related to PNT2002. POINT is also eligible to receive up to $1.3 billion in sales milestone payments upon the achievement of specified annual sales thresholds of PNT2002. In addition, after Lantheus Two achieves $500.0 million in cumulative gross profit, POINT is eligible to receive royalty payments of twenty percent of net sales of PNT2002. Prior to achieving that financial recoupment threshold, POINT is eligible to receive royalty payments of twenty percent on that portion of annual net sales of PNT2002 that generate annual gross profit in excess of specified levels. PNT2003 Under the terms of the PNT2003 License Agreement, Lantheus Three, LLC paid POINT an upfront cash payment of $10.0 million, and could pay up to an additional $34.5 million in milestone payments upon the achievement of specified U.S. and ex-U.S. regulatory milestones related to PNT2003. POINT is also eligible to receive up to $275.0 million in sales milestone payments upon the achievement of specified annual sales thresholds of PNT2003. In addition, POINT is eligible to receive royalty payments of fifteen percent of net sales of PNT2003. Our investments in these additional clinical activities and lifecycle management opportunities will increase our operating expenses and impact our results of operations and cash flow, and we can give no assurances as to whether any of our clinical development candidates or lifecycle management opportunities will be successful. 27 Table of Contents Results of Operations The following is a summary of our consolidated results of operations: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2023 2022 Change $ Change % 2023 2022 Change $ Change % Revenues $ 321,700 $ 223,723 $ 97,977 43.8 % $ 622,484 $ 432,603 $ 189,881 43.9 % Cost of goods sold 119,053 85,694 33,359 38.9 % 342,761 165,504 177,257 107.1 % Gross profit 202,647 138,029 64,618 46.8 % 279,723 267,099 12,624 4.7 % Operating expenses Sales and marketing 36,456 27,492 8,964 32.6 % 69,073 47,846 21,227 44.4 % General and administrative 26,151 32,598 (6,447) (19.8) % 49,422 70,186 (20,764) (29.6) % Research and development 15,901 14,735 1,166 7.9 % 46,433 26,938 19,495 72.4 % Total operating expenses 78,508 74,825 3,683 4.9 % 164,928 144,970 19,958 13.8 % Operating income 124,139 63,204 60,935 96.4 % 114,795 122,129 (7,334) (6.0) % Interest expense 4,933 1,469 3,464 235.8 % 9,924 2,978 6,946 233.2 % Other income (4,482) (310) (4,172) 1345.8 % (7,713) (795) (6,918) 870.2 % Income before income taxes 123,688 62,045 61,643 99.4 % 112,584 119,946 (7,362) (6.1) % Income tax expense 29,557 18,987 10,570 55.7 % 21,260 33,926 (12,666) (37.3) % Net income $ 94,131 $ 43,058 $ 51,073 118.6 % $ 91,324 $ 86,020 $ 5,304 6.2 % 28 Table of Contents Comparison of the Periods Ended June 30, 2023 and 2022 Revenues We classify our revenues into three product categories: Radiopharmaceutical Oncology, Precision Diagnostics, and Strategic Partnerships and Other Revenue. Radiopharmaceutical Oncology includes PYLARIFY and AZEDRA. Precision Diagnostics includes DEFINITY, TechneLite and other diagnostic imaging products. Strategic Partnerships and Other Revenue includes out-licensing arrangements, partnerships that focus on facilitating precision medicine through the use of biomarkers, digital solutions and radiotherapeutic platforms, and on our other products, such as RELISTOR. Revenues are summarized by product category on a net basis as follows: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2023 2022 Change $ Change % 2023 2022 Change $ Change % PYLARIFY $ 210,522 $ 130,232 $ 80,290 61.7 % $ 405,992 $ 223,009 $ 182,983 82.1 % Other radiopharmaceutical oncology 818 928 (110) (11.9) % 1,535 2,255 (720) (31.9) % Total radiopharmaceutical oncology 211,340 131,160 80,180 61.1 % 407,527 225,264 182,263 80.9 % DEFINITY 70,529 62,306 8,223 13.2 % 139,353 120,634 18,719 15.5 % TechneLite 21,594 19,440 2,154 11.1 % 42,580 42,045 535 1.3 % Other precision diagnostics 5,454 5,363 91 1.7 % 11,261 10,628 633 6.0 % Total precision diagnostics 97,577 87,109 10,468 12.0 % 193,194 173,307 19,887 11.5 % Strategic partnerships and other revenue 12,783 5,454 7,329 134.4 % 21,763 34,032 (12,269) (36.1) % Total revenues $ 321,700 $ 223,723 $ 97,977 43.8 % $ 622,484 $ 432,603 $ 189,881 43.9 % The increase in revenues for the three months ended June 30, 2023, is primarily driven by an increase in PYLARIFY, DEFINITY and TechneLite sales volume, as well as revenue generated by Cerveau, as recorded in Strategic Partnerships and Other Revenue. The increase in revenues for the six months ended June 30, 2023, is primarily driven by an increase in PYLARIFY and DEFINITY sales volume, as well as revenue generated by Cerveau, as recorded in Strategic Partnerships and Other Revenue. The increase is offset, in part, by a decrease in Strategic Partnerships and Other Revenue due to the revenue recognized from the Novartis licensing agreement in the prior year. Rebates and Allowances Estimates for rebates and allowances represent our estimated obligations under contractual arrangements with customers and other 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 and allowances result from performance-based offers that are primarily based on attaining contractually specified sales volumes and growth, Medicaid rebate programs for our products, administrative 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 expected purchases and the resulting applicable contractual rebate to be earned over a contractual period. An analysis of the amount of, and change in, reserves is summarized as follows: (in thousands) Rebates and Allowances Balance, January 1, 2023 $ 13,399 Provision related to current period revenues 13,606 Payments or credits made during the period (15,918) Balance, June 30, 2023 $ 11,087 Gross Profit The increase in gross profit for the three months ended June 30, 2023, as compared to the prior year period, is primarily due to increased PYLARIFY and DEFINITY sales volumes, partially offset by the impairment related to a certain asset group. 29 Table of Contents The increase in gross profit for the six months ended June 30, 2023, as compared to the prior year period, is primarily due to the increased PYLARIFY and DEFINITY sales volumes, partially offset by the impairment of the AZEDRA currently marketed intangible asset, the Novartis licensing settlement in the prior year, amortization of Cerveau intangible assets and the impairment related to a certain asset group. Sales and Marketing Sales and marketing expenses consist primarily of salaries and other related costs for personnel in field sales, marketing 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. Sales and marketing expenses increased $9.0 million and $21.2 million for the three and six months ended June 30, 2023, respectively, as compared to the prior year period. This was primarily driven by the continued promotion activities of PYLARIFY and increased employee-related costs. General and Administrative 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. General and administrative expenses decreased $6.4 million for the three months ended June 30, 2023 compared to the prior period. This was primarily driven by a $16.0 million net reduction for the fair value adjustments to the contingent asset and liabilities in the second quarter of 2023 (refer to Note 4, “Fair Value of Financial Instruments”, for further details on contingent consideration liabilities, including CVRs). This decrease is partially offset by increased employee-related costs, professional fees and investment in technology. General and administrative expenses decreased $20.8 million for the six months ended June 30, 2023 compared to the prior period. This was primarily driven by a $35.8 million net reduction for the fair value adjustments to the contingent asset and liabilities in the first half of 2023 (refer to Note 4, “Fair Value of Financial Instruments”, for further details on contingent consideration liabilities, including CVRs). This decrease is partially offset by increased employee-related costs, professional fees and investment in technology. Research and Development Research and development expenses relate primarily to the development of new products to add to our portfolio and costs related to our medical affairs, medical information and regulatory functions. Research and development expenses increased $1.2 million for the three months ended June 30, 2023 as compared to the prior year period. This was primarily driven by increased employee-related costs. Research and development expenses increased $19.5 million for the six months ended June 30, 2023 as compared to the prior year period. This was primarily driven by the AZEDRA IPR&D asset impairment loss of $15.6 million and higher employee-related costs driven by an increased headcount. These increases were offset, in part, by lower clinical expenses related to our ARROW Phase 2 study. Interest Expense Interest expense increased by approximately $6.9 million for the six months ended June 30, 2023 as compared to the prior year period due to the issuance of the Notes on December 8, 2022, which was partially offset by the interest rate swap agreements from the prior year. Income Tax Expense Our effective tax rate for each reporting period is presented as follows: 30 Table of Contents Six Months Ended June 30, 2023 2022 Effective tax rate 18.9% 28.3% Our effective tax rate for the six months ended June 30, 2023 differs from the U.S. statutory rate of 21% primarily due to the income tax benefit associated with stock compensation deductions, partially offset by state income taxes. The decrease in the effective income tax rate for the six months ended June 30, 2023 is primarily due to the decrease in non-deductible contingency reserve expense and the increase in our stock compensation deductions. 31 Table of Contents Liquidity and Capital Resources Cash Flows The following table provides information regarding our cash flows: Six Months Ended June 30, (in thousands) 2023 2022 Net cash provided by operating activities $ 76,234 $ 82,861 Net cash used in investing activities $ (65,210) $ (5,733) Net cash used in financing activities $ (12,720) $ (4,190) Net Cash Provided by Operating Activities Net cash provided by operating activities of $76.2 million in the six months ended June 30, 2023 was primarily comprised of net income adjusted for the net effect of non-cash items such as impairment of long-lived assets, depreciation, amortization and accretion expense and stock-based compensation expense. The primary working capital sources of cash were the timing of payments to large vendors. The primary working capital uses of cash were a decrease to accruals related to the CVR payment, an increase in trade receivables associated primarily with the increase in PYLARIFY revenues, and an increase in inventory related to the timing of batch processes. Net cash provided by operating activities of $82.9 million in the six months ended June 30, 2022 was primarily comprised of net income adjusted for the net effect of non-cash items such as the change in fair value of contingent assets and liabilities of $26.9 million (refer to Note 4, “Fair Value of Financial Instruments”, for further details on contingent consideration liabilities, including CVRs). The primary working capital sources of cash were the timing of payments to large vendors. The primary working capital uses of cash were an increase in trade receivables associated primarily with the increase in PYLARIFY revenues as well as the timing of inventory purchases. Net Cash Used in Investing Activities Net cash used in investing activities during the six months ended June 30, 2023 was due to $45.3 million for our asset acquisition of Cerveau and $19.9 million of capital expenditures. Net cash used in investing activities during the six months ended June 30, 2022 was primarily due to $7.5 million of capital expenditures offset by cash proceeds of $1.8 million received from the sale of our Puerto Rico subsidiary. Net Cash Used in Financing Activities Net cash used in financing activities during the six months ended June 30, 2023 is primarily attributable to the payments for minimum statutory tax withholding related to net share settlement of equity awards of $12.6 million and the CVR initial valuation as of June 30, 2020 of $3.7 million offset by proceeds of $3.2 million from stock option exercises. Net cash used in financing activities during the six months ended June 30, 2022 is primarily attributable to the payments on long-term debt and other borrowings of $5.2 million related to the 2019 Term Facility and payments for minimum statutory tax withholding related to net share settlement of equity awards of $6.3 million offset by proceeds of $6.8 million from stock option exercises. External Sources of Liquidity In December 2022, we voluntarily repaid our 2019 $200.0 million five-year term loan facility. In addition, we replaced our $200.0 million revolving facility with the 2022 Revolving Facility. The terms of the 2022 Revolving Facility are set forth in the Credit Agreement, dated as of December 2, 2022, by and among us, the lenders from time to time party thereto and Citizens Bank, N.A., as administrative agent and collateral agent (the “2022 Credit Agreement”). We have the right to request an increase to the 2022 Revolver Facility or request the establishment of one or more new incremental term loan facilities, in an aggregate principal amount of up to $335 million or consolidated EBITDA for the four consecutive fiscal quarters most recently ended, plus additional amounts, in certain circumstances. Under the terms of the 2022 Revolving Facility, the lenders thereunder agreed to extend credit to us from time to time until December 2, 2027 consisting of revolving loans in an aggregate principal amount not to exceed $350.0 million at any time. The 2022 Revolving Facility includes a $20.0 million sub-facility for the issuance of Letters of Credit. The 2022 Revolving Facility includes a 32 Table of Contents $10.0 million sub-facility for Swingline Loans. The Letters of Credit, Swingline Loans and the borrowings under the 2022 Revolving Facility are expected to be used for working capital and other general corporate purposes. Please refer to Note 13, “Long-Term Debt, Net, and Other Borrowings” for further details on the 2022 Facility. As of June 30, 2023, we were in compliance with all financial and other covenants under the 2022 Credit Agreement. On December 8, 2022, we issued $575.0 million in aggregate principal amount of the Notes, which includes $75.0 million in aggregate principal amount of Notes sold pursuant to the full exercise of the initial purchasers’ option to purchase additional Notes. The Notes were issued under the Indenture. The net proceeds from the issuance of the Notes were approximately $557.8 million, after deducting the initial purchasers’ discounts and offering expenses payable by us. Our ability to fund our future capital needs will be affected by our ability to continue to generate cash from operations and may be affected by our ability to access the capital markets, money markets or other sources of funding, as well as the capacity and terms of our financing arrangements. 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 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 retired, if any, could be material and would be decided at the sole discretion of our Board of Directors and will depend on market conditions, our cash position and other considerations. Funding Requirements Our future capital requirements will depend on many factors, including: • The level of product sales and the pricing environment of our currently marketed products, particularly PYLARIFY and DEFINITY, as well as any additional products that we may market in the future; • Revenue mix shifts and associated volume and selling price changes that could result from additional competition or changes in customers’ product demand; • The continued costs of the ongoing commercialization of PYLARIFY and PYLARIFY AI; • Our investment in the further clinical development and commercialization of products and development candidates, including PNT2002, PNT2003, 1095 and MK-6240; • The costs of acquiring or in-licensing, developing, obtaining regulatory approval for, and commercializing, new products, businesses or technologies, including any potential related milestone or royalty payments, together with the costs of pursuing opportunities that are not eventually consummated; • The costs of investing in our facilities, equipment and technology infrastructure; • The costs and timing of establishing or amending manufacturing and supply arrangements for commercial supplies of our products and raw materials and components; • Our ability to have products manufactured and released from manufacturing sites in a timely manner in the future, or to manufacture products at our in-house manufacturing facilities in amounts sufficient to meet our supply needs; • 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 legal costs relating to maintaining, expanding and enforcing our intellectual property portfolio, pursuing insurance or other claims and defending against product liability, regulatory compliance, intellectual property or other claims; • The cost of interest on any additional borrowings which we may incur under our financing arrangements; and • The impact of sustained inflation on our costs of goods sold and operating expenses. Disruption in our financial performance could occur if we experience significant adverse changes in product or customer mix, broad economic downturns, sustained inflation, adverse industry or company conditions or catastrophic external events, including pandemics such as COVID-19, natural disasters and political or military conflict. If we experience one or more of these events in the future, we may be required to further implement expense reductions, such as a delay or elimination of discretionary spending in all functional areas, as well as scaling back select operating and strategic initiatives. 33 Table of Contents 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, debt financings, assets securitizations, sale-leasebacks or other financing or strategic alternatives, to the extent such transactions are permissible under the covenants of our 2022 Credit Agreement. 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 2022 Credit Agreement, 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 those covenants. However, we cannot provide assurance that such an amendment or waiver would be granted, or that additional capital will be available on acceptable terms, if at all. At June 30, 2023, our only current committed external source of funds is our borrowing availability under our 2022 Revolving Facility. We had $414.1 million of cash and cash equivalents as of June 30, 2023. Our 2022 Revolving Facility contains a number of affirmative, negative, reporting and financial covenants, in each case subject to certain exceptions and materiality thresholds. Incremental borrowings under the 2022 Revolving Facility may affect our ability to comply with the covenants including the financial covenants restricting consolidated net leverage and interest coverage. Accordingly, we may be limited in utilizing the full amount of our 2022 Revolving Facility as a source of liquidity. Based on our current operating plans, we believe our balance of cash and cash equivalents, which totaled $414.1 million as of June 30, 2023, along with cash generated by ongoing operations and continued access to our 2022 Revolving Facility, will be sufficient to satisfy our cash requirements over the next twelve months and beyond. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are 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 requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses, and other financial information. Actual results may differ materially from these estimates under different assumptions and conditions. In addition, our reported financial condition and results of operations could vary due to a change in the application of a particular accounting standard. There have been no significant changes to our critical accounting policies or in the underlying accounting assumptions and estimates used in such policies in the six months ended June 30, 2023. For further information, refer to our summary of significant accounting policies and estimates in our Annual Report on Form 10-K filed for the year ended December 31, 2022. Off-Balance Sheet Arrangements We are required to provide the Massachusetts Department of Public Health and New Jersey Department of Environmental Protection financial assurance demonstrating our ability to fund the decommissioning of our North Billerica, Massachusetts and Somerset, New Jersey production facilities, respectively, upon closure. We have provided this financial assurance in the form of a $30.3 million surety bond. Since inception, we have not engaged in any other off-balance sheet arrangements, including structured finance, special purpose entities or variable interest entities. Item 3. Quantitative and Qualitative Disclosures About Market Risk For quantitative and qualitative disclosures about market risk, see Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2022. Our exposures to market risk have not changed materially since December 31, 2022.