Amneal Pharmaceuticals, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results; year-over-year comparisons are to the same 2022 periods. Dollar amounts below are in millions unless stated otherwise.
Business context
Amneal develops, manufactures, markets and distributes generic and specialty medicines. Its reportable segments are Generics, Specialty and AvKARE. The company held 50.3% of Amneal LLC at quarter-end and consolidates its results, including non-controlling interests.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $599.0 | $559.4 | $1,156.6 | $1,057.0 |
| Gross profit | $220.0 | $200.5 | $398.2 | $375.1 |
| Gross margin | 36.7% | 35.8% | 34.4% | 35.5% |
| Operating income (loss) | $80.1 | $(198.6) | $114.5 | $(175.3) |
| Consolidated net income (loss) | $29.7 | $(240.1) | $19.6 | $(246.5) |
| Net income (loss) attributable to Amneal, Inc. | $11.9 | $(120.8) | $5.0 | $(123.0) |
| Basic and diluted EPS | $0.08 | $(0.80) | $0.03 | $(0.82) |
Q2 revenue grew 7.1%; six-month revenue rose 9.4%. Q2 growth came mainly from AvKARE, up 31.7%, and Generics, up 2.4%; Specialty revenue was essentially flat. For the first half, AvKARE grew 30.2%, Generics 5.1% and Specialty 3.6%. The six-month Generics result included a non-recurring $21.0 million customer order, with $11.0 million of associated cost of goods sold.
Q2 gross margin improved year over year, while first-half margin declined. Six-month cost of goods sold included a higher inventory provision of $41.8 million, compared with $17.7 million in the prior-year period. R&D expense declined 26.1% in the first half, primarily due to lower project spend and fewer in-licensing and milestone payments.
Cash flow, debt and liquidity
- First-half operating cash flow was $128.4 million, versus cash used of $5.2 million in 2022. Investing cash outflow was $24.0 million, versus $113.5 million, mainly because the prior year included the $84.7 million Saol acquisition. Financing cash outflow was $25.2 million.
- Cash and cash equivalents were $109.3 million at June 30, 2023; restricted cash was $5.3 million. Current assets were $1.42 billion and current liabilities were $777.4 million.
- Term loans totaled $2.59 billion before debt issuance costs. In addition, $100 million was outstanding on the New Revolving Credit Facility and $20 million on the Rondo Revolving Credit Facility. Available capacity was $245.9 million and $10 million, respectively.
- Net interest expense was $50.9 million in Q2 and $100.2 million for the first half, increasing from $35.6 million and $69.0 million, respectively, primarily due to higher rates on variable-rate debt and increased revolver borrowings.
- Management said cash, operating cash generation and available borrowing capacity should fund planned operations and obligations for the next 12 months. It estimated 2023 capital expenditures of $50–$60 million.
Material changes, outlook and risks
- The prior-year comparison includes a major one-time Opana ER antitrust litigation charge: legal charges were $251.9 million in Q2 2022 versus $2.0 million in Q2 2023. This was a principal reason for the year-over-year swing from loss to profit; the filing also reports higher interest expense in 2023.
- On June 30, 2023, the FDA issued a complete response letter for IPX203, a Parkinson’s disease candidate, requesting additional information on the carbidopa component. The FDA did not identify efficacy or manufacturing issues. Amneal planned to meet with the agency in Q3 2023; the company reported no impairment of the related in-process R&D asset or Specialty goodwill, but noted that changed assumptions could cause future impairment.
- Amneal expects approximately $20 million of inflation-related cost increases in 2023, excluding higher interest costs; actual input, transport and labor inflation could be greater. The filing provides no specific revenue or earnings guidance.
- A $50 million remaining Opana ER settlement payment, plus stated interest, was included in current legal liabilities and was due by mid-January 2024. More than 900 prescription-opioid cases, generic-drug pricing litigation and other investigations or lawsuits remain; outcomes and potential losses are uncertain. The company recorded $2.0 million of Q2 charges for civil prescription-opioid litigation.
- Four customers each represented at least 10% of Q2 revenue; together they represented approximately 71%. Three customers accounted for 84% of trade receivables. Customer concentration, generic price erosion, product competition, supply dependencies and substantial indebtedness are material risks.
- The company disclosed an approximately $202.7 million contingent tax receivable agreement liability, of which approximately $1.9 million was recorded. Future obligations could be substantially larger, and certain change-of-control or similar events could accelerate payments.
Most important facts for investors to verify
- Progress and expected timing for addressing the FDA’s IPX203 requests, and implications for launch assumptions and asset valuations.
- Whether revenue growth persists without the first-half $21 million non-recurring customer order, and how generic price erosion and AvKARE product mix affect margins.
- Operating cash conversion, inventory provisions and receivable collections, particularly given the high customer concentrations.
- Debt repayment capacity, variable-rate interest exposure, revolver usage and the upcoming Opana ER settlement payment.
- Developments in opioid, generic-pricing and other legal matters, and potential TRA obligations beyond amounts currently accrued.