Amneal Pharmaceuticals, Inc. — FY2019 Form 10-K
Reporting period: Year ended December 31, 2019. Although the request references 2019 Q4, this is an annual filing; quarterly results are included below where relevant. Amounts are in U.S. dollars.
Business context and reporting period
Amneal develops, manufactures, markets and distributes generic and specialty pharmaceuticals. Its two segments are Generics and Specialty. The May 2018 combination with Impax means 2019 includes a full year of the combined business, while 2018 includes Impax and Gemini only from their acquisition dates; year-over-year comparisons are therefore not fully like-for-like.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $1,626.4 million | $1,663.0 million |
| Gross profit / margin | $353.0 million / 21.7% | $716.4 million / 43.1% |
| Operating loss | $248.7 million | $19.7 million |
| Net loss | $603.6 million | $201.3 million |
| Net loss attributable to Amneal Pharmaceuticals, Inc. | $361.9 million; $2.74 per share | $20.9 million; $0.16 per share |
| Cash from operating activities | $1.7 million | $250.2 million |
Revenue fell 2%. Generics revenue was $1,308.8 million, down 9%; Specialty revenue was $317.5 million, up 42%, with much of the increase reflecting the timing of the Combination and Gemini acquisition. Generics operating loss was $133.2 million; Specialty operating income was $42.8 million.
Reported gross profit was pressured by price and volume erosion, inventory-related charges, and $173 million of intangible-asset impairment charges ($126 million in cost of goods sold and $47 million in in-process R&D). The $383 million income-tax provision included a $470 million valuation allowance against deferred tax assets; a $192.9 million gain from reversing the accrued tax receivable agreement liability partly offset the reported loss.
Q4 2019: Revenue was $397.3 million versus $497.5 million in Q4 2018; gross profit was $110.2 million versus $193.4 million; net loss was $64.9 million versus $20.3 million. Quarterly attributable loss was $32.1 million, or $0.23 per share, compared with attributable loss of $8.8 million, or $0.07 per share.
Balance sheet, cash flow and liquidity
At year-end, cash and cash equivalents were $151.2 million, working capital was $659.8 million, total assets were $3.666 billion and total equity was $346.8 million. Long-term debt, net of issuance costs and current portion, was $2.609 billion; total debt principal was $2.660 billion. Cash declined by $66.0 million during 2019. Operating cash flow fell sharply, which management attributed primarily to weaker operating performance, timing of receivable collections and higher interest payments.
The company had $478 million of available capacity under its asset-based revolver, with no borrowings outstanding at December 31, 2019. Management said cash, operating cash generation and financing availability were expected to fund operations and obligations for the next 12 months, while noting that additional revolver borrowing might be needed. Term-loan principal payments are about $27 million annually, with the balance due at maturity in May 2025. The debt is variable-rate; a $1.3 billion interest-rate swap was entered into in October 2019.
Changes, outlook, risks and unusual items
- Management cited intense generic price competition, lower sales on existing products, uncertainty of Adrenaclick supply and delays in product approvals and launches. Price and volume declines in existing generics were $378 million, partly offset by new launches, Levothyroxine sales and acquisition timing.
- The 2019 restructuring plan targets annual cost reductions of approximately $40 million once implemented and a reduction of about 300–350 employees, primarily through the planned Hauppauge, New York facility closure. The company recorded $34.3 million of restructuring and other charges in 2019.
- Amneal sold substantially all U.K. and German operations in 2019 for net cash consideration of approximately $32 million and $3 million, respectively. In January 2020, it completed the acquisition of approximately 65% of AvKARE and R&S for $299 million; the purchase was funded partly with cash and new borrowing. These transactions are subsequent to the 2019 balance-sheet date.
- Three customers accounted for approximately 81% of 2019 gross revenue: AmerisourceBergen 32%, Cardinal Health 28% and McKesson 21%. The filing says there are no long-term agreements guaranteeing future business with major customers.
- Material uncertainties include generic-drug pricing and customer concentration, regulatory and manufacturing compliance, supplier dependence, product pipeline execution, and substantial debt with variable-rate exposure. The company also disclosed extensive generic-pricing antitrust litigation and investigations, opioid-related litigation and controlled-substance inquiries. Management said it could not predict outcomes for many matters; legal liabilities recorded for commercial and governmental proceedings were $17 million at year-end.
- The company voluntarily recalled its ranitidine products following concerns about NDMA contamination and recorded a $5 million inventory write-down. Management did not provide formal revenue or earnings guidance in the supplied filing text.
Important facts for investors to verify
- Whether price erosion and reduced demand in Generics stabilize, and whether launches and the product pipeline can offset declines.
- Cash conversion, receivables collection and ongoing liquidity needs, including the impact of the January 2020 acquisition financing.
- Debt-service capacity, refinancing and interest-rate exposure, including the extent and effectiveness of the interest-rate swap.
- Developments in generic-pricing, opioid, controlled-substance and product-liability matters, and whether recorded reserves remain adequate.
- The assumptions supporting the $470 million deferred-tax-asset valuation allowance and the potential for future tax receivable agreement liabilities or payments.
- Restructuring execution, expected savings, facility-closure costs, and the integration and performance of AvKARE and R&S.