Amneal Pharmaceuticals(AMRX) - 2022 Q4 - Annual Report

Part I Item 1. Business Amneal Pharmaceuticals is a global pharmaceutical company specializing in generics, injectables, biosimilars, and specialty branded drugs Overview and Acquisitions The company expands its diverse portfolio of essential medicines through strategic acquisitions in neurology, injectables, and federal sectors - Amneal is a global pharmaceutical company focused on complex generics, injectables, biosimilars, and specialty branded pharmaceuticals, with primary operations in the United States, India, and Ireland[11] - The company has made several strategic acquisitions to expand its portfolio and capabilities: - Baclofen Franchise (2022): Acquired from Saol International to expand its neurology and institutional specialty portfolio for approximately $84.7 million plus contingent royalties[13] - Puniska Healthcare (2022): Acquired the remaining 26% of this Indian injectable manufacturer, having secured a controlling interest in 2021[14] - Kashiv Specialty Pharmaceuticals (2021): Acquired a 98% controlling interest to gain access to innovative drug delivery platforms and complex generics[15] - AvKARE and R&S Northeast (2020): Acquired a 65.1% controlling interest to become a major provider to U.S. federal agencies like the Department of Defense and Department of Veterans Affairs[16] Segments of the Business The company operates through three segments: Generics, Specialty, and AvKARE, with Generics being the largest revenue contributor Segment Financial Performance (2020-2022) | Segment | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | :--- | | Generics | Net Revenue | $1.43B | $1.37B | $1.34B | | | Operating Income | $224.2M | $281.5M | $189.4M | | Specialty | Net Sales | $374.1M | $378.3M | $355.6M | | | Operating Income | $72.6M | $56.4M | $56.5M | | AvKARE | Net Sales | $406.1M | $349.0M | $293.7M | | | Operating Income (Loss) | $3.3M | $6.8M | $(7.7)M | - The Generics segment has a robust pipeline with 105 pending ANDAs and 94 products in development as of December 31, 2022[20] - In 2022, the company launched its first oncology biosimilars in the U.S: Alymsys® (referencing Avastin®) and Releuko® (referencing Neupogen®)[22] - The Specialty segment's key pipeline product, IPX203 for Parkinson's disease, has a Prescription Drug User Fee Act (PDUFA) date of June 30, 2023, for its FDA evaluation[25] Business Operations (Sales, Competition, R&D, Manufacturing) The company faces intense competition and high customer concentration, while managing a global manufacturing and R&D footprint - The company has a high customer concentration, with its four largest customers accounting for approximately 71% of net revenue for the year ended December 31, 2022[32] - Key competitors include Teva, Viatris, Sandoz, and Pfizer in the generics/biosimilar market, and Supernus and Jazz Pharmaceuticals in the specialty market[33] Research & Development Expenses (2020-2022) | Year | R&D Expense | | :--- | :--- | | 2022 | $195.7 million | | 2021 | $201.8 million | | 2020 | $179.9 million | - The company manufactures the majority of its Generics products internally, with U.S. facilities contributing 43% of Generics net revenue in 2022[42] - The company relies on single suppliers for raw materials in some cases and notes that qualifying a new sole-source supplier could take as long as 18 months[40] Government Regulation and Intellectual Property Operations are subject to extensive government regulation, with intellectual property and regulatory exclusivity being critical for market protection - The business is heavily regulated by governmental bodies like the FDA and DEA, covering all stages from development to post-approval monitoring[44][45] - The generic drug approval process relies on filing an Abbreviated New Drug Application (ANDA), which demonstrates bioequivalence to a reference drug[59] - The Hatch-Waxman Amendments are crucial, providing a 180-day generic marketing exclusivity period for the first applicant to challenge a brand's patent[35][65] - Recent healthcare reform, such as the Inflation Reduction Act (IRA), will permit CMS to negotiate maximum prices on certain drugs starting in 2026[69] - The company is subject to numerous data privacy and security regulations, including HIPAA in the U.S. and GDPR in Europe[79][81][86] - Intellectual property is critical for protecting market exclusivity, as sales can decline substantially upon the entry of generic or biosimilar competition[89][90] Human Capital and Corporate Responsibility The company employs a global workforce of 7,600 and focuses on a people-first culture, DEIB initiatives, and ESG framework - As of December 31, 2022, the company had approximately 7,600 employees, with ~2,400 in the U.S. and ~5,200 located internationally[97] - The company highlights its commitment to diversity, stating that six out of ten executives identified as diverse by race, ethnicity, or gender[98] - Key human capital initiatives include the 'Rise, Lead, Succeed' culture, a Total Rewards program, and the Amneal Leadership Lab for talent development[100][101][103][104] - The company has a formal ESG framework and engages in corporate responsibility through partnerships with organizations like Americares[106][107] Item 1A. Risk Factors The company faces significant operational, financial, legal, and regulatory risks, including competitive pressures and substantial indebtedness Operational and Competitive Risks Key risks include new product development challenges, intense price competition, and high customer and product revenue concentration - The company faces challenges in successfully developing and commercializing new products due to regulatory hurdles, clinical testing risks, and patent litigation[111][112] - Intense competition from other pharmaceutical companies leads to significant pricing pressure and potential loss of market share[114][115][120] - A substantial portion of revenue is derived from a limited number of products (24% of consolidated net revenue in 2022) and four major customers (71% of total net sales in 2022)[135][145] - Manufacturing and quality control problems could lead to regulatory action, product recalls, and damage to the company's reputation[140][141] - The business is increasingly dependent on information technology, facing risks of significant disruptions from cybersecurity attacks[163][164] Risks Relating to Indebtedness The company's substantial debt of $2.7 billion increases financial vulnerability and is subject to restrictive covenants and interest rate risk - The company has a substantial level of debt, approximately $2.7 billion as of December 31, 2022, which could increase financial vulnerability[173][178] - A significant portion of the company's debt bears variable interest rates, exposing it to fluctuations such as the transition from LIBOR to SOFR[174][176] - The credit agreements contain restrictive covenants that limit the company's ability to incur additional debt, pay dividends, and sell assets[182] Intellectual Property, Legal, and Regulatory Risks The company is exposed to significant risks from patent litigation, antitrust scrutiny, opioid-related lawsuits, and complex healthcare laws - The company is involved in numerous patent litigations and faces risks from 'at-risk' product launches, which could lead to treble damages[188][192] - Settlements of patent litigation are under scrutiny by the FTC and DOJ, which could lead to antitrust investigations and litigation[186] - The company faces inherent risks of product liability claims and is involved in various legal proceedings, including those related to opioid sales[195][199][200] - Compliance with U.S. federal and state healthcare fraud and abuse laws is critical, with non-compliance potentially leading to severe penalties[200][201][202] - Changes to FDA approval requirements or healthcare reforms affecting drug pricing could adversely impact business[205][207] Other Risks (Economic, Tax, Financial Reporting, and Stock-Related) The company faces risks from international operations, a Tax Receivable Agreement, controlling ownership, and internal control requirements - Operations in foreign jurisdictions like India and Ireland expose the company to risks from economic instability and political uncertainties[219][221] - The company is required to make substantial cash payments under a Tax Receivable Agreement (TRA), with a contingent liability of approximately $202.7 million as of year-end 2022[234][235][236] - The Amneal Group controls the majority of the company's voting power, creating potential conflicts of interest and substantial influence over corporate actions[243][244] - The company does not anticipate paying any cash dividends in the foreseeable future, retaining earnings to fund business growth[253] - Failure to maintain effective internal control over financial reporting could result in inaccurate financial reports and a loss of investor confidence[255][256] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[258] Item 2. Properties The company owns and leases numerous properties globally to support its operations, with key facilities in the U.S., India, and Ireland - The company's principal properties include manufacturing facilities, R&D labs, warehouses, and corporate offices in the U.S., Ireland, and India[259] - Key U.S. properties are located in New Jersey and New York for executive, R&D, and manufacturing purposes, with a major distribution center in Kentucky[260] - International properties include an owned R&D and manufacturing facility in Cashel, Ireland, and multiple facilities in India for manufacturing and R&D[260] Item 3. Legal Proceedings Information regarding legal proceedings is detailed in Note 21 of the consolidated financial statements - Details on legal proceedings are located in Note 21, Commitments and Contingencies[261] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[261] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A Common Stock trades on the NYSE under 'AMRX', and no dividends are currently paid or anticipated - The company's Class A Common Stock is traded on the NYSE under the symbol 'AMRX'[263] - The company has never paid cash dividends on its common stock and has no present plans to do so, retaining earnings for operations and debt reduction[265] - No shares of Class A Common Stock were purchased by the company in the three months ended December 31, 2022[266] Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net revenue grew 5.7% in 2022, but a significant legal charge drove a substantial operating loss and a sharp decline in operating cash flow Results of Operations Revenue growth in 2022 was offset by a major legal charge, resulting in a net loss and compressed gross margin Consolidated Results of Operations (2021 vs. 2022) | Metric | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | $2,212.3M | $2,093.7M | 5.7% | | Gross Profit | $784.7M | $769.0M | 2.0% | | Operating (Loss) Income | $(94.9)M | $152.7M | (162.2)% | | Net (Loss) Income | $(254.8)M | $20.2M | nm | - The significant shift from operating income to an operating loss was primarily driven by a $269.9 million charge related to legal matters[294] - Generics net revenue increased by $65.7 million (4.8%), driven by new product launches and a license revenue payment[285][299] - AvKARE net revenue grew by $57.1 million (16.4%), primarily due to growth in its distribution channel[286][317] - Specialty net revenue decreased by $4.2 million (1.1%), as the loss of exclusivity for Zomig® offset growth for promoted products[286][310] Liquidity and Capital Resources Operating cash flow declined sharply due to legal settlement payments, while liquidity is maintained through cash and a revolving credit facility Summary of Cash Flows (2021 vs. 2022) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Operating Activities | $65.1M | $241.8M | | Investing Activities | $(174.3)M | $(194.2)M | | Financing Activities | $(106.6)M | $(138.1)M | - The significant decrease in operating cash flow was primarily driven by $140.6 million in payments related to legal settlements[331] - As of December 31, 2022, the company had total debt of approximately $2.7 billion and available capacity of $285.9 million on its credit facility[178][321] - The company faces substantial future cash obligations from its Tax Receivable Agreement (TRA), with a contingent liability of approximately $202.7 million[324] - The company projects capital expenditures of $50.0 million to $60.0 million for 2023 to support existing operations[322] Critical Accounting Policies Key financial estimates involve sales deductions, business combinations, goodwill impairment, income taxes, and legal contingencies - Sales-Related Deductions: Gross revenue is reduced by estimated deductions for chargebacks, rebates, and returns, with government rebates being particularly sensitive[340][341] - Business Combinations: Acquired assets and liabilities are recorded at fair value, requiring significant judgment in estimating future cash flows and discount rates[342][343] - Impairment of Goodwill and Intangible Assets: Goodwill is tested for impairment annually, and intangible assets are reviewed when indicators arise, resulting in $24.1 million of impairment charges in 2022[344][346][351] - Income Taxes: The company maintains a full valuation allowance of $434.9 million against its deferred tax assets as of year-end 2022[352][354] - Contingencies: The company accrues for potential losses from legal proceedings when they are probable and reasonably estimable, a process involving high judgment[358][359] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign exchange, inflation, and interest rate risks, with variable-rate debt being the primary financial risk - The company is exposed to foreign exchange rate risk from its international operations, with principal exposures to the Euro, Indian Rupee, and Swiss Franc[365] - Inflation is estimated to have increased costs by approximately $30.0 million in 2022, with an additional impact of $15.0 million expected in 2023[366] - The company has significant interest rate risk due to $2.64 billion of variable-rate debt; a 100 basis point increase would raise annual interest expense by about $26.7 million[368][370] - To manage interest rate risk, the company has an interest rate swap agreement with a notional amount of $1.3 billion[369] Item 8. Financial Statements and Supplementary Data This section incorporates the company's audited consolidated financial statements for the fiscal year ended December 31, 2022 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[371] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[373] - Management's assessment concluded that internal control over financial reporting was effective as of December 31, 2022, which was attested to by Ernst & Young LLP[374][379] - There were no changes in internal control over financial reporting during the fourth quarter of 2022 that materially affected internal controls[375] Item 9B. Other Information Employment agreements for three executives were amended to extend their termination dates to March 31, 2025 - The employment agreements for three executives—Anastasios Konidaris, Andrew Boyer, and Nikita Shah—were amended to extend their termination dates to March 31, 2025[385] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Required information is incorporated by reference from the forthcoming 2023 Proxy Statement[387] Item 11. Executive Compensation Information on executive compensation is incorporated by reference from the 2023 Proxy Statement - Required information is incorporated by reference from the forthcoming 2023 Proxy Statement[389] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference, and details on equity compensation plans are provided Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be issued upon exercise (a) | Weighted-average exercise price of outstanding options (b) | Securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Approved by security holders | 20,577,054 | $4.38 | 10,005,452 | | Not approved by security holders | — | — | — | | Total | 20,577,054 | $4.38 | 10,005,452 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Required information is incorporated by reference from the forthcoming 2023 Proxy Statement[394] Item 14. Principal Accounting Fees and Services Information on accounting fees and services is incorporated by reference from the 2023 Proxy Statement - The company's independent auditor is Ernst & Young LLP; required fee information is incorporated by reference from the forthcoming 2023 Proxy Statement[395] Part IV Item 15. Exhibits, Financial Statement Schedules This section contains the index to the consolidated financial statements and a list of all filed exhibits - This item includes the consolidated financial statements and notes; all other financial statement schedules are omitted[398] Item 16. Form 10-K Summary No Form 10-K summary is provided - None[398]