Amneal Pharmaceuticals, Inc. quarterly report, Q3 FY2019

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Amneal Pharmaceuticals, Inc. — Q3 2019 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial statement figures have been converted from thousands to millions where appropriate. The company develops, manufactures and sells generic and specialty pharmaceuticals. Comparisons with 2018 are affected by the May 2018 combination with Impax and acquisition of Gemini; prior-year periods do not include the businesses for the full comparable period.

Financial performance and liquidity

  • Q3 revenue: $378.3 million, down 21% from $476.5 million. Generics revenue fell 26% to $291.0 million; Specialty revenue rose 2% to $87.3 million.
  • Nine-month revenue: $1.229 billion, up 5% from $1.165 billion. The increase included combination and acquisition timing, Levothyroxine sales and new launches, partly offset by generic price and volume erosion and international divestitures.
  • Gross profit and margin: Q3 gross profit was $54.4 million, or 14% of revenue, versus $200.1 million, or 42%, a year earlier. Nine-month gross profit was $242.8 million, or 20%, versus $523.0 million, or 45%. Product impairments, price erosion and inventory charges weighed on results.
  • Operating results: Q3 operating loss was $112.3 million, versus income of $74.6 million. Nine-month operating loss was $225.5 million, versus a loss of $43.0 million.
  • Net results: Q3 net loss was $363.4 million, including a $389.7 million tax provision; the company attributed $265.0 million of loss to Amneal Pharmaceuticals, Inc. (EPS of $(2.03), versus income of $6.95 million and EPS of $0.05). Nine-month net loss was $538.7 million, with $329.8 million attributable to the company (EPS $(2.56), versus $(0.10)).
  • Significant tax items: A $372 million valuation allowance reduced deferred tax assets to zero. Reversing the related tax receivable agreement liability generated a $192.8 million gain. The company said a liability of up to a further $193 million could be recorded if the tax benefits later become more likely than not to be realized.
  • Cash flow: Nine-month operating cash flow was $52.6 million, compared with cash use of $9.4 million in 2018. Investing used $14.8 million; financing used $38.5 million. Cash, cash equivalents and restricted cash ended at $217.1 million, including $212.7 million of cash and equivalents.
  • Debt and liquidity: Long-term debt, net, was $2.614 billion, plus $21.5 million current debt. The $2.7 billion term loan bears interest at one-month LIBOR plus 3.5% and matures in May 2025. No ABL borrowings were outstanding; management reported $433 million of available additional capacity. The company reported compliance with credit-facility covenants. Current assets were $1.206 billion and current liabilities $534.9 million.

Material changes and operating developments

  • Q3 included $79 million of intangible-asset impairment charges: $56.1 million in cost of goods sold and $23.4 million in in-process R&D. Nine-month impairment charges totaled $158.6 million. Management cited price erosion, competition and, for one development asset, a decision to stop pursuing approval.
  • Generic price and volume erosion was a major headwind. For Q3, management estimated $132 million of erosion in existing products, partly offset by Levothyroxine and new launches. Epinephrine auto-injector supply uncertainty and delays in approvals and launches, including generic NuvaRing, also affected performance.
  • The company sold substantially all U.K. operations for approximately $32 million and German operations for approximately $3 million in 2019. It recorded a $6.9 million net gain on international business sales for the nine months.
  • Cash flow benefited from collection timing and lower transaction and integration costs, partly offset by higher interest and restructuring-related payments. Nine-month cash interest paid was $121.9 million.
  • Three customers accounted for approximately 80% of gross product sales in the first nine months of 2019, and three customers represented 85% of gross trade receivables at September 30.

Outlook, risks and unusual items

  • Outlook: Management expected industry and company-specific challenges to persist at least through the remainder of 2019. It did not provide quantified revenue or earnings guidance in the supplied filing text. Management said it believed cash, operating cash flow and financing capacity were sufficient for planned operations and obligations over the next 12 months, while noting that additional ABL borrowing might be needed.
  • Restructuring: A July 2019 plan targets a reduction of approximately 300–350 employees, primarily through closure of the Hauppauge, New York facility. Management expects approximately $40 million of annual cost savings once implemented. Estimated severance cash costs are $6–$8 million; other closure costs were not yet estimable. Q3 restructuring and other charges were $20.9 million.
  • Legal matters: The company recorded $15 million of net legal charges in the first nine months and reported $30 million of liabilities for commercial and governmental legal proceedings at September 30. It disclosed generic-drug antitrust and pricing litigation, opioid-related claims and investigations, and other proceedings; it generally could not estimate potential losses. It reported approximately 800 opioid cases involving the company and affiliates. The company said adverse outcomes could materially affect results, cash flows or financial condition.
  • Ranitidine recall: After quarter-end, following FDA information about possible NDMA contamination, the company decided to voluntarily recall its ranitidine products. It had approximately $6 million of related inventory at September 30 and could not estimate any resulting loss.
  • Other notable items: The CEO transition occurred in August 2019. The Amneal Group held approximately 55% of voting power at quarter-end. An interim goodwill test, prompted by share-price and performance declines, found reporting-unit fair values above carrying amounts, but management warned that changed assumptions or weaker performance could lead to future impairment.

Important facts for investors to verify

  • Whether generic price erosion, supply uncertainty and delayed product launches continued after the filing date, and whether the restructuring delivered the expected savings.
  • Whether the $372 million deferred-tax-asset valuation allowance and the possible future tax receivable agreement liability change as forecasts or tax realizability assessments evolve.
  • Current debt, interest expense, ABL availability, covenant headroom and cash needs, given the debt balance and substantial interest obligations.
  • Developments and potential financial exposure from antitrust, opioid, DEA/DOJ and other legal matters; the filing does not provide a clear estimate of total possible losses.
  • The financial and inventory impact of the ranitidine recall and any related customer, supplier or regulatory consequences.
  • Customer concentration, product-level sales trends and the sustainability of revenue from Levothyroxine and new launches amid generic competition.