Amneal Pharmaceuticals, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Financial statements are unaudited. Amneal combined with Impax on May 4, 2018 and acquired Gemini on May 7, 2018; results include these businesses only after their acquisition dates, limiting comparability with 2017.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $476.5 million | $254.7 million | $1,165.5 million | $740.3 million |
| Gross profit / margin | $200.1 million / 42.0% | $135.0 million / 53.0% | $523.0 million / 44.9% | $374.8 million / 50.6% |
| Operating income (loss) | $74.6 million | $78.8 million | $(43.0) million | $166.1 million |
| Net income (loss) | $17.5 million | $27.1 million | $(181.0) million | $107.1 million |
| Net income (loss) attributable to Amneal, Inc. | $7.0 million; $0.05/share | Not applicable before combination | $(12.2) million; $(0.10)/share | Not applicable before combination |
Management attributed revenue growth chiefly to the Impax and Gemini acquisitions and generic launches. Q3 operating income declined despite higher revenue. Gross margin compression reflected acquisition-related inventory and intangible amortization, other inventory costs, an intangible impairment, and lower-margin Impax products.
- Cash flow: Nine-month operating cash flow was $(9.4) million, versus $168.9 million provided in 2017. Investing cash outflow was $401.7 million, including acquisitions; financing cash inflow was $506.6 million.
- Liquidity: September 30 cash and cash equivalents were $165.2 million, plus $7.0 million restricted cash. Current assets were $1.431 billion and current liabilities $749.3 million.
- Debt: Total debt and financing obligations were $2.833 billion gross ($2.797 billion net of debt issuance costs), including a $2.7 billion variable-rate term loan and $100 million drawn on the ABL. The term loan matures in 2025; the ABL facility provides up to $500 million. The company reported covenant compliance.
- Other: Trade receivables were $641.0 million and inventory $490.8 million at quarter-end. Goodwill was $410.6 million and intangible assets $1.733 billion. Top three customers represented about 83% of Q3 gross product sales.
Material changes and unusual items
- Nine-month results included $216.9 million of acquisition, transaction-related and integration expenses, including $158.8 million for accelerated vesting of profit participation units and $27.7 million in employee bonuses; $42.3 million of restructuring expense; and a $19.7 million debt-extinguishment loss.
- The nine-month period also included $100.7 million of net interest expense, versus $51.1 million in 2017, and $22.5 million of foreign-exchange losses, versus a $25.8 million gain in 2017. The 2017 comparison included a $21.5 million legal settlement gain and a $28.9 million loss on international business sales.
- Amneal recognized $8.5 million of intangible impairment, primarily after losing a customer for a generic product. The Hayward, California facility closure and broader integration plan were underway; the company estimated another $35–$45 million of severance and employee-related cash costs over 15 months.
- Acquisition purchase-price allocations remained preliminary. Acquired businesses contributed $177.5 million of Q3 Impax revenue and $13.4 million of Gemini revenue.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management believed available cash, operating cash flow and borrowing capacity should cover planned operations and obligations over the next 12 months, but noted that additional ABL borrowing might be needed given expected interest, principal, severance, capital expenditures and other payments.
- Subsequent to quarter-end, Amneal repaid $50 million of ABL borrowings on November 5 and paid the $77.2 million Gemini seller note plus accrued interest on November 7. A $50 million payment to JSP is due upon the first sale under the levothyroxine agreement; a further $20 million payment may be due subject to competitor FDA approval conditions.
- Key risks include generic price competition, supply constraints, product concentration, integration and synergy execution, variable-rate debt and foreign-exchange exposure. The company cited ongoing opioid-related litigation and government investigations, generic drug pricing antitrust matters, patent litigation, and Medicaid reimbursement claims. Potential losses for several proceedings could not be estimated; a $15 million Medicaid reimbursement reserve was recorded.
- A $195.8 million tax receivable agreement liability was recorded. The agreement generally requires payment of 85% of specified realized tax savings to eligible holders, creating a potential future cash-flow claim.
Important facts for investors to verify
- How much reported growth reflects acquired businesses versus organic performance; the filing does not provide a directly comparable full-period organic growth figure.
- Whether gross margins and operating cash flow recover as purchase-accounting costs, inventory needs and integration spending normalize.
- Debt service capacity, refinancing and variable-rate exposure. The debt note states the ABL rate was 5.75% at September 30, while the MD&A states 1.5%; this inconsistency should be checked against the filed credit terms.
- Progress on integration, the Hayward closure, and expected restructuring cash costs and savings.
- Developments in opioid, antitrust, patent and government pricing matters, for which some potential losses are not estimable, and the cash impact of the tax receivable agreement.
- Customer concentration, supply constraints affecting product sales, and the final acquisition valuation and impairment assumptions.