Amneal Pharmaceuticals, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2018; filed August 9, 2018. Amneal develops, manufactures and sells generic and specialty pharmaceuticals. On May 4, 2018, Amneal combined with Impax Laboratories; it acquired Gemini Laboratories on May 7. The reported quarter includes those businesses only from their acquisition dates, so year-over-year comparisons are materially affected by the transactions and are not like-for-like. Amneal consolidates the combined operating business despite holding a minority economic interest; non-controlling interests account for much of consolidated results.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $413.8 million | $259.9 million | $689.0 million | $485.6 million |
| Gross profit / margin | $178.3 million / 43.1% | $123.7 million / 47.6% | $322.9 million / 46.9% | $239.7 million / 49.4% |
| Operating income (loss) | $(181.1) million | $44.6 million | $(117.5) million | $87.3 million |
| Net income (loss), consolidated | $(250.1) million | $37.7 million | $(198.4) million | $80.0 million |
| Net loss attributable to Amneal, Inc. | $(19.1) million | Not applicable | $(19.1) million | Not applicable |
| Net loss per share attributable to Amneal, Inc. | $(0.15) | Not applicable | $(0.15) | Not applicable |
- Q2 revenue rose 59%; six-month revenue rose 42%, primarily because Impax and Gemini were added. Generic-segment revenue increased 39% in Q2 and 31% for six months. Reported Q2 specialty revenue was $52.0 million, principally from the acquired businesses.
- Margin compression reflected acquired lower-margin products and purchase-accounting effects, including inventory and intangible amortization. Management cited approximately $20 million of higher cost-of-sales amortization/adjustments and about $8 million of pre-launch inventory write-offs in Q2.
- Operating results included $207.5 million of acquisition, transaction and integration expense, including $158.8 million for accelerated vesting of profit participation units and $27.7 million in transaction-related bonuses; and $44.5 million of restructuring expense. Other expense included $36.6 million net interest, $25.9 million foreign-exchange loss and $19.7 million loss on debt extinguishment.
- Cash and cash equivalents were $61.5 million at June 30, down from $74.2 million at December 31; restricted cash was $7.1 million. Current assets were $1.35 billion and current liabilities $669.7 million. Receivables were $626.5 million and inventory $512.5 million.
- Six-month operating cash flow was $(71.6) million, versus $95.4 million provided in 2017. Investing cash outflow was $360.9 million, including $321.3 million for acquisitions and $36.6 million of capital expenditures. Financing provided $424.0 million.
- Total debt was $2.70 billion before $37.3 million of debt issuance costs; the new $2.7 billion term loan bears variable interest at LIBOR plus 3.5% and matures in May 2025. The $500 million asset-based revolver was undrawn, with full borrowing capacity available at quarter-end. The company reported compliance with credit covenants.
Material changes, outlook and risks
- The May combination expanded the company into specialty pharmaceuticals and significantly changed its balance sheet: goodwill was $386.5 million and intangible assets $1.79 billion at June 30, versus $26.4 million and $44.6 million, respectively, at year-end.
- Management said available cash, operating cash flow and borrowing capacity were expected to support planned operations and obligations over the next 12 months. It also noted possible need to draw on the ABL in the third and fourth quarters. Near-term cash demands include a $77.2 million Gemini note due November 7, 2018, interest, severance and capital spending. No quantified revenue or earnings guidance is provided.
- Integration and cost savings remain execution priorities. The company announced closure of its Hayward, California operations and estimated a further $50–$60 million of severance and other employee costs over 18 months; additional site-exit costs were not yet estimable.
- Key risks include substantial variable-rate debt and cash interest needs; integration and synergy execution; generic price competition and product concentration; dependence on a few large customers (three customers represented about 82% of Q2 gross product sales); regulatory, manufacturing and product-quality risks; and significant patent, antitrust, pricing, opioid and other litigation or investigations. Management could not estimate potential losses for many proceedings. A $15 million Medicaid reimbursement reserve remained recorded.
- The company reported disclosure controls effective at June 30, 2018, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate acquisition-driven revenue growth from underlying performance; review the filing’s pro forma results and product-level trends.
- Track gross margins and the remaining effects of purchase accounting, inventory write-offs and integration costs.
- Assess cash conversion, working-capital needs, ABL usage and capacity to service the $2.7 billion variable-rate loan and Gemini note.
- Monitor restructuring costs, timing of facility closures and realized integration savings against management’s estimates.
- Follow developments in generic-pricing investigations and antitrust, opioid and Medicaid matters, including any change to reserves or loss estimates.
- Review customer concentration, product competition and the company’s ability to maintain sales and pricing as generic competitors enter markets.