Amneal Pharmaceuticals, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The comparison with Q1 2018 is not fully like-for-like: the May 2018 combination with Impax and acquisition of Gemini added businesses and revenue to the 2019 results; Specialty had no reported revenue in the 2018 comparison.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net revenue | $446.1 million | $275.2 million |
| Gross profit / gross margin | $83.1 million / 18.6% | $144.6 million / 52.5% |
| Operating income (loss) | $(94.4) million | $63.6 million |
| Net income (loss), consolidated | $(124.8) million | $51.7 million |
| Net loss attributable to Amneal, Inc. / diluted EPS | $(47.9) million / $(0.37) | Not presented |
| Operating cash flow | $(108.4) million | $27.0 million |
| Cash, cash equivalents and restricted cash at quarter-end | $66.7 million | $52.6 million |
Revenue rose 62%, with approximately $143 million of additional revenue from the combination and Gemini and $31 million of growth from the existing U.S. portfolio. Favorable volume of $69 million was partly offset by $38 million of price declines. Generics generated $382.5 million of revenue and an operating loss of $54.6 million; Specialty generated $63.6 million and operating income of $4.6 million.
Gross margin fell substantially, reflecting $76.1 million of intangible-asset impairment charges, $36 million of Levothyroxine transition costs, and higher combination-related costs, including amortization, royalties and site-closure costs. SG&A was $84.4 million, R&D $53.9 million, and net interest expense $43.3 million.
Balance sheet, debt and liquidity
- At March 31, 2019, cash and cash equivalents were $63.9 million; current assets were $1.268 billion and current liabilities $599.5 million.
- Long-term debt, net, was $2.625 billion, with a further $21.4 million current portion. The Term Loan’s principal was $2.7 billion, bears variable interest at one-month LIBOR plus 3.5%, and matures May 2025.
- The $500 million asset-based revolving facility had no borrowings outstanding; management cited it as available liquidity. The company reported compliance with debt covenants.
- Cash, cash equivalents and restricted cash decreased $152.0 million during the quarter. Operating cash use of $108.4 million included a $165.0 million increase in trade receivables; investing cash use was $21.5 million and financing cash use $21.9 million.
- Management said available cash, operating cash generation and borrowing capacity were expected to fund planned operations and obligations over the next 12 months, but noted that additional ABL borrowing might be needed. A $50 million JSP license payment was made in April 2019.
Material changes and unusual items
- Impairments totaled $76.1 million: $53.3 million in cost of goods sold for two marketed generic products and $22.8 million in R&D for two in-process products. Management attributed the marketed-product charges to price erosion and new competition; one development product was no longer being pursued.
- On March 30, the company sold its U.K. operations for $36 million, received in April, and recorded an $8.8 million gain. It entered a supply and license arrangement with the buyer for up to two years.
- The company began a 10-year exclusive U.S. Levothyroxine commercial arrangement with JSP in March and recorded a $50 million license asset and liability; payment followed in April. It had expensed $37 million of Lannett transition payments during the quarter.
- Adoption of the new lease standard on January 1 added operating lease right-of-use assets and liabilities of approximately $85 million and $86 million, respectively. The filing says adoption did not materially affect the income statement.
- The company recorded $6.2 million of restructuring and other charges related to severance and integration. Q1 cash taxes included $13.5 million of tax distributions to non-controlling interests.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management highlighted ongoing integration and restructuring, demand and pricing uncertainty, working-capital needs, variable-rate debt and substantial interest and contractual payments. The tax receivable agreement liability was $193.5 million; future payments could be substantial and adversely affect liquidity.
Legal exposures include opioid-related litigation, generic-drug pricing and antitrust investigations and litigation, patent disputes, and Medicaid reimbursement matters. The company reported a $15 million Medicaid reimbursement reserve; it could not estimate potential losses for many other proceedings. The FTC reversed an earlier favorable administrative ruling in the Opana ER matter and found Impax violated the FTC Act; the company said it intended to appeal. The filing warns that adverse legal outcomes could materially affect results or cash flows.
Three customers represented approximately 79% of gross product sales in Q1 2019. The Amneal Group controlled approximately 57% of voting power, creating concentrated-control and governance risks. Management reported effective disclosure controls as of quarter-end and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash flow and receivables collection improve, and whether the company draws on its $500 million ABL facility.
- Whether generic-product price erosion, competition and impaired-product cash flows continue to pressure margins.
- Progress on integration, restructuring, Specialty performance and the expected economics of the JSP Levothyroxine agreement.
- Developments in opioid, generic-pricing, FTC and other legal matters, including any estimable exposure or settlement.
- Debt service, variable interest rates, tax receivable agreement payments, and the effect of concentrated customer and voting control.