Business context and reporting period
Amneal Pharmaceuticals, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. The company develops, manufactures and markets generic and specialty pharmaceuticals. The May 4, 2018 combination with Impax and May 7 acquisition of Gemini materially changed the business; 2018 results include their operations only after closing, so comparisons with 2017 are not like-for-like. The quarterly figures below are unaudited supplemental data.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net revenue | $1.663 billion | $1.034 billion |
| Gross profit / margin | $716.4 million / 43.1% | $526.2 million / 50.9% |
| Operating income (loss) | $(19.7) million | $245.1 million |
| Net income (loss) | $(201.3) million | $169.3 million |
| Net loss attributable to Amneal Pharmaceuticals, Inc. / diluted EPS | $(20.9) million / $(0.16) | Not applicable before the combination |
| Cash from operating activities | $250.2 million | $234.2 million |
Fourth-quarter 2018 revenue was $497.5 million and gross profit was $193.4 million. Quarterly net loss was $20.3 million; net loss attributable to Amneal Pharmaceuticals, Inc. was $8.8 million, or $(0.07) per share.
At year-end, cash and cash equivalents were $213.4 million, working capital was $732.8 million, and total assets were $4.353 billion. Debt principal was approximately $2.687 billion (reported debt, net of issuance costs, was $2.652 billion, including $21.4 million current and $2.631 billion long-term). The company reported $143.6 million of net interest expense. The $2.7 billion term loan carries variable-rate interest; management estimated a 1 percentage-point rate change would alter annual interest expense by about $18 million. The $500 million ABL had no borrowings outstanding; reported available capacity was $398 million.
Cash flows were $250.2 million provided by operations, $396.4 million used in investing and $287.7 million provided by financing. The auditor gave an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting.
Material changes versus the prior comparable period
- Revenue rose 61%, mainly because of the Impax and Gemini acquisitions and U.S. product launches; the company said its existing U.S. generics base, excluding launches and Impax, was essentially flat, with volume gains offset by price declines.
- Gross margin fell to 43.1% from 50.9%. Management cited lower-margin acquired products, purchase-accounting inventory and intangible amortization, excess capacity during the Hayward facility wind-down, transition-agreement amortization, impairments and pre-launch inventory write-offs.
- Operating results included $221.8 million of acquisition, transaction and integration expenses, including $158.8 million for accelerated vesting of profit participation units, and $56.4 million of restructuring and asset-related charges. The company also recorded $48 million of intangible-asset impairments.
- Net loss reflected higher debt-related interest expense, foreign-exchange losses and a $19.7 million debt-extinguishment loss. Interest expense rose to $143.6 million from $71.1 million.
- Generics generated $1.439 billion in revenue and $162.9 million in segment operating income. Specialty, newly established through the acquisitions, generated $224.0 million in revenue and $55.6 million in segment operating income. These segment results exclude corporate and other costs.
Outlook, risks and unusual items
No formal earnings or revenue guidance is provided in the supplied filing text. Management said available cash, operating cash flows and financing capacity were expected to fund planned operations and obligations over the next 12 months, while noting that additional ABL borrowing might be needed for projected spending. Significant near-term cash needs include debt service, severance, capital expenditures and a $50 million payment to JSP within 30 days of the first commercial sale of levothyroxine. A potential additional $20 million JSP payment was considered unlikely after FDA approval of a competitor product in January 2019. The company had already paid Lannett $43 million under a transition arrangement and held a $36 million transition contract asset at year-end.
Key disclosed risks include generic-drug price erosion and customer bargaining power; dependence on three wholesalers, which accounted for approximately 83% of 2018 gross revenue; integration and synergy execution; product approvals, supply and manufacturing quality; variable-rate debt and refinancing capacity; and dependence on third-party suppliers. The filing describes ongoing or potential legal and government matters, including DOJ investigations into generic drug pricing and sales practices, generic-drug antitrust litigation, opioid-related claims and investigations, patent disputes, and Medicaid reimbursement matters. The company said it could not estimate potential losses for many proceedings; it maintained a $15 million Medicaid reimbursement accrual. It also reported a $193 million tax receivable agreement liability, under which it generally owes holders 85% of specified realized tax benefits, with possible liquidity effects if payments accelerate.
Most important facts for investors to verify
- Separate acquisition-driven revenue growth from the performance of the legacy business, and review comparable pro forma results and integration progress.
- Track whether gross margins recover and whether pricing pressure, product impairments and manufacturing restructuring continue.
- Assess cash generation against approximately $2.7 billion of variable-rate debt, upcoming principal and interest payments, and the levothyroxine-related cash commitments.
- Monitor the concentration of sales and receivables among the three largest wholesalers and any changes in their orders or commercial terms.
- Follow developments in DOJ and other legal matters, opioid claims, Medicaid exposure and the tax receivable agreement; outcomes and potential losses are uncertain.