Business context and reporting period
Amneal Pharmaceuticals, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company develops, manufactures and sells generic and specialty pharmaceuticals. Results include Generics and Specialty segments. Comparisons with 2018 are affected by the May 2018 combination with Impax and acquisition of Gemini; the 2018 periods include their results only after the respective transaction dates.
Key financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $404.6 | $413.8 | $850.8 | $689.0 |
| Gross profit | $105.2 | $178.3 | $188.3 | $322.9 |
| Gross margin | 26% | 43% | 22% | 47% |
| Operating loss | $(18.9) | $(181.1) | $(113.3) | $(117.5) |
| Net loss | $(50.5) | $(250.1) | $(175.3) | $(198.4) |
| Net loss per share attributable to Amneal, diluted | $(0.13) | $(0.15) | $(0.51) | $(0.15) |
- Q2 revenue fell 2% year over year; six-month revenue rose 23%, largely reflecting the timing of the Impax combination and Gemini acquisition and Levothyroxine sales.
- Q2 gross margin declined to 26%, principally from generic price and volume erosion and inventory charges. Six-month margin also reflected impairment charges and costs associated with the Levothyroxine transition.
- Operating cash flow was a use of $87.3 million in the first half, versus a use of $71.6 million in the prior-year period. Investing activities used $44.8 million; financing activities used $30.9 million.
- Cash and cash equivalents were $54.9 million at June 30, 2019, with restricted cash of $2.1 million. Cash, cash equivalents and restricted cash decreased by $161.8 million during the first half.
- Long-term debt, net, was $2.620 billion, plus $21.4 million of current debt. The senior term loan had $2.7 billion principal, matures May 2025 and bore interest at one-month LIBOR plus 3.5%. No ABL borrowings were outstanding; approximately $489 million of additional ABL capacity was available. The company reported compliance with debt covenants.
- Current assets were $1.186 billion and current liabilities $546.2 million. The balance sheet also included a $193.5 million tax receivable agreement liability and $391.9 million of net deferred tax assets.
Material changes versus comparable periods
- Q2 net loss narrowed substantially from 2018, primarily because the prior-year quarter included large combination-related transaction expenses and restructuring charges. Q2 2019 still had an operating loss and significantly lower gross profit.
- First-half revenue increased with the broader post-combination business, but gross profit fell to $188.3 million from $322.9 million. The company recorded $79.1 million of intangible asset impairment charges and $50.4 million of inventory provisions in the first half.
- Generic price and volume erosion was a key headwind. Management cited $114 million of erosion in the Q2 revenue bridge and $147 million in the six-month bridge, primarily in Generics.
- Cash fell from $213.4 million at December 31, 2018 to $54.9 million at June 30, 2019, reflecting operating cash use, investment and financing outflows.
Outlook, management commentary, risks and unusual items
- Management said results had fallen short of expectations since the start of 2019 and expected industry and company-specific challenges to persist at least through the remainder of 2019. Cited challenges included generic competition, uncertain supply of generic Adrenaclick, and delays in approvals and launches, including generic NuvaRing. No specific revenue or earnings guidance was provided.
- A restructuring plan announced July 10, 2019 is expected to reduce headcount by approximately 550, including through closures of facilities in Hauppauge, New York, and East Hanover, New Jersey. Management expects approximately $50 million of annual cost savings once implemented. Estimated cash severance charges are $10–$12 million; other site-related costs were not estimated.
- On August 5, 2019, CEO Robert A. Stewart and Executive Chairman Paul M. Bisaro departed. Amneal co-founders Chirag Patel and Chintu Patel became co-CEOs; Paul Meister became non-executive chairman.
- UK and German operations were divested in March and May 2019, respectively. The company reported a net gain on international business sales for the first half, principally reflecting the UK sale.
- Other notable items included the $50 million upfront Levothyroxine license payment made in April, $36.4 million of first-half Levothyroxine transition costs, and $79.1 million of intangible impairments tied to price erosion, competition and a decision to discontinue development of one product.
- Legal and regulatory exposure includes generic-drug pricing and antitrust matters, opioid-related litigation and investigations, patent disputes, and Medicaid reimbursement matters. The company recorded a $15 million reserve for potential Medicaid claims; it said it could not estimate potential losses for many proceedings. It stated that adverse outcomes could materially affect results, cash flows or financial condition.
- Revenue and receivables are concentrated: the three largest customers accounted for approximately 81% of Q2 gross product sales, and three customers each represented at least 10% of gross receivables at quarter-end. The Amneal Group controlled approximately 57% of voting power.
Most important facts for investors to verify
- Whether generic pricing and volume pressure, product supply uncertainty and delayed launches continue to weigh on revenue and margins.
- Progress and actual costs of the restructuring, including whether the targeted $50 million annual savings are achieved and when.
- Cash generation, working-capital collection trends, remaining liquidity and ability to service approximately $2.7 billion of term-loan principal.
- Potential impairment risk for goodwill and remaining intangible assets if product pricing, competition or forecasts worsen.
- Developments, reserves and potential financial exposure from antitrust, opioid, patent, Medicaid and controlled-substance matters.
- Execution and governance implications of the August leadership change and the company’s customer and controlling-stockholder concentration.