Amneal Pharmaceuticals, Inc. — Q3 2020 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2020. Amneal develops, manufactures, markets, and distributes generic and specialty pharmaceuticals. Following its January 2020 acquisition of controlling interests in AvKARE and R&S, it reports Generics, Specialty, and AvKARE segments.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $519.3 million | $378.3 million | $1,482.5 million | $1,229.0 million |
| Gross profit / margin | $133.6 million / 25.7% | $54.4 million / 14.4% | $461.3 million / 31.1% | $242.8 million / 19.7% |
| Operating income (loss) | $2.4 million | $(112.3) million | $71.0 million | $(225.5) million |
| Net income (loss), consolidated | $(22.0) million | $(363.4) million | $75.5 million | $(538.7) million |
| Net income (loss) attributable to Amneal | $(9.0) million | $(265.0) million | $94.1 million | $(329.8) million |
| Diluted EPS attributable to Amneal | $(0.06) | $(2.03) | $0.63 | $(2.56) |
- Revenue drivers: Q3 revenue increased 37%, primarily from $90 million of AvKARE revenue and $51 million from generic launches and commercial initiatives. Nine-month revenue rose 21%, including $211 million from AvKARE and $170 million from generic launches. Generics remained pressured by competition affecting Levothyroxine and Diclofenac Gel.
- Profitability: Higher gross profit reflected lower impairment charges versus 2019, new product contributions, and acquisition-related revenue. Q3 operating income remained modest; corporate and other costs were $37.3 million. Q3 included a $32.4 million cost-of-goods-sold impairment. Nine-month results included $34.6 million of such impairment and $1.0 million of in-process R&D impairment.
- Cash flow and liquidity: Operating cash flow was $273.0 million for the nine months, versus $52.6 million a year earlier; this included substantial CARES Act tax-refund cash receipts and improved operations. Investing cash outflow was $285.8 million, including $251.4 million for acquisitions; financing provided $143.1 million, including acquisition borrowing. Cash and cash equivalents were $281.3 million at September 30, 2020, versus $151.2 million at year-end 2019. Management said available liquidity was expected to fund planned operations and obligations for the next 12 months, subject to business and economic conditions.
- Debt: Debt, net of issuance costs, totaled $2.787 billion, including the $2.639 billion senior term loan and $175.5 million Rondo term loan. Cash less reported debt, net, was approximately $2.506 billion; this calculation excludes lease liabilities and seller notes. The senior term loan bears interest at one-month LIBOR plus 3.5% and matures in May 2025. The revolving facility had $498 million available and no borrowings at September 30; the company reported compliance with debt covenants.
Material changes and notable items
- AvKARE and R&S contributed approximately $94 million of Q3 revenue and $3 million of operating income, including acquired-intangible amortization. For the nine months, they contributed approximately $226 million of revenue and $4 million of operating income.
- The company borrowed $300 million under its revolving facility in March as a COVID-19 precaution and repaid it by June 30. It also received $106 million of CARES Act tax-refund cash in July, plus approximately $4 million of interest; the filing said a further approximately $4 million refund was expected.
- The prior-year comparison is affected by unusual items, including a $193 million gain from reducing the tax receivable agreement liability and a $372 million deferred-tax valuation allowance in 2019. The 2020 nine-month tax benefit was primarily related to CARES Act NOL carrybacks; comparisons of net income therefore do not solely reflect underlying operating performance.
- Q3 impairment reflected a marketed product whose supply agreement ended early under market conditions. Nine-month impairments also reflected price erosion, a terminated contract, a delayed product launch, and a development partner’s withdrawal.
Outlook, risks, and controls
- No specific financial guidance or quantified forward outlook is provided. Management said renewed COVID-19 restrictions or outbreaks could disrupt manufacturing and supply chains and materially affect Q4 2020 results and cash flows. Facilities in New York and New Jersey had experienced constraints in Q2 but returned to normal productivity as restrictions eased.
- Key business risks include generic-drug competition and price erosion, concentration in a limited number of products and customers, reliance on suppliers and distributors, substantial indebtedness and interest-rate exposure, and the effects of COVID-19. The three largest customers represented approximately 84% of gross product sales in both Q3 and the first nine months of 2020.
- Significant legal exposures include generic-drug pricing and antitrust matters, opioid-related litigation, and ranitidine and metformin product litigation. The company reported $16 million of liabilities for legal proceedings and claims at September 30, 2020, but said it generally could not estimate potential losses for the disclosed proceedings. It stated that adverse outcomes could materially affect results, cash flows, or financial condition.
- Management identified a material weakness in controls over cash disbursements: inadequate controls over changes to vendor bank information allowed payments to be redirected to an unrelated account. The company reported no financial loss or material financial-statement impact, but concluded disclosure controls were ineffective at September 30. Remediation was expected before year-end 2020, subject to operating time and testing.
- The company reported a $58 million interest-rate swap liability at September 30, 2020; the nine-month cash-flow-hedge loss recorded in other comprehensive income was $74.0 million, net of tax, across the company and non-controlling interests.
Investor verification priorities
- Assess the sustainability and cash conversion of operating cash flow, particularly the contribution from tax refunds and working-capital timing.
- Track generic price erosion, product impairments, launch performance, and AvKARE’s profitability relative to its revenue contribution.
- Review debt repayment capacity, variable-rate exposure, available revolver capacity, and the separate Rondo seller-note obligations.
- Monitor developments and potential financial exposure in antitrust, opioid, ranitidine, metformin, and other legal proceedings; stated accruals do not quantify all possible losses.
- Verify completion and effectiveness of remediation for the cash-disbursement control weakness and integration of acquired businesses’ controls.
- Check whether expected tax-refund receipts were collected and whether tax attributes could trigger future tax receivable agreement payments; the filing estimates a contingent TRA amount of approximately $203 million if relevant tax benefits become more likely than not to be realized.