UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 20182019 |
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ |
Commission file number 333-221707001-38485
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| Amneal Pharmaceuticals, Inc. |
| (Exact name of registrant as specified in its charter) |
| Delaware | | 32-0546926 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| Amneal Pharmaceuticals, Inc. 400 Crossing Boulevard, Bridgewater, NJ | | 08807 |
| (Address of principal executive offices) | | (Zip Code) |
|
| | |
| | (908) 947-3120 | |
| | (Registrant’s telephone number, including area code) | |
| Not applicable |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act: |
| | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Class A Common Stock, par value $0.01 per share | AMRX | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company,”" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):Act:
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| | | |
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer (Do not check if a smaller reporting company) | x | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 31, 2018,23, 2019, there were 114,878,213128,150,558 shares of Class A common stock outstanding 171,260,707and 170,940,707 shares of Class B common stock outstanding, and 12,328,767 shares of Class B-1 common stock outstanding, allboth with a par value of $0.01.
Amneal Pharmaceuticals, Inc.
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018
Table of Contents
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| Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2018 and 2017 | |
| | | | |
| | Consolidated Statements of Changes in Stockholders' / Members' Deficit for the six months ended June 30, 2018 and 2017 | | |
| | Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 | |
| Notes to Consolidated Financial Statements | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | | | |
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Item 5. | Other Information | | | |
Item 6. | Exhibits | | | |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Amneal Pharmaceuticals, Inc.
Consolidated Statements of Operations
(unaudited; in thousands, except per share amounts)
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| Net revenue | $ | 413,787 |
| | $ | 259,871 |
| | $ | 688,976 |
| | $ | 485,552 |
| $ | 404,642 |
| | $ | 413,787 |
| | $ | 850,762 |
| | $ | 688,976 |
|
| Cost of goods sold | 235,492 |
| | 136,138 |
| | 366,086 |
| | 245,803 |
| 296,381 |
| | 235,492 |
| | 606,124 |
| | 366,086 |
|
| Cost of goods sold impairment charges | | 3,012 |
| | — |
| | 56,309 |
| | — |
|
| Gross profit | 178,295 |
| | 123,733 |
| | 322,890 |
| | 239,749 |
| 105,249 |
| | 178,295 |
| | 188,329 |
| | 322,890 |
|
| Selling, general and administrative | 53,003 |
| | 26,938 |
| | 78,124 |
| | 54,640 |
| 67,281 |
| | 56,003 |
| | 151,717 |
| | 81,124 |
|
| Research and development | 50,335 |
| | 47,184 |
| | 94,544 |
| | 86,603 |
| 48,016 |
| | 50,335 |
| | 101,874 |
| | 94,544 |
|
| In-process research and development impairment charges | | — |
| | — |
| | 22,787 |
| | — |
|
| Intellectual property legal development expenses | 4,047 |
| | 4,926 |
| | 8,623 |
| | 11,093 |
| 2,511 |
| | 4,047 |
| | 6,677 |
| | 8,623 |
|
| Legal settlement gains | | — |
| | (3,000 | ) | | — |
| | (3,000 | ) |
Acquisition, transaction-related and integration expenses
| 207,507 |
| | 82 |
| | 214,642 |
| | 82 |
| 3,519 |
| | 207,507 |
| | 9,551 |
| | 214,642 |
|
| Restructuring expenses | 44,465 |
| | — |
| | 44,465 |
| | — |
| |
| Operating (loss) income | (181,062 | ) | | 44,603 |
| | (117,508 | ) | | 87,331 |
| |
| Restructuring and other charges | | 2,835 |
| | 44,465 |
| | 8,996 |
| | 44,465 |
|
| Operating loss | | (18,913 | ) | | (181,062 | ) | | (113,273 | ) | | (117,508 | ) |
| Other (expense) income: |
|
| | | | | | |
|
| | | | | | |
| Interest expense, net | (36,622 | ) | | (17,726 | ) | | (57,673 | ) | | (31,887 | ) | (43,886 | ) | | (36,622 | ) | | (87,167 | ) | | (57,673 | ) |
| Foreign exchange (loss) gain | (25,946 | ) | | 15,332 |
| | (17,381 | ) | | 29,929 |
| |
| Foreign exchange gain (loss), net | | 8,311 |
| | (25,946 | ) | | 2,847 |
| | (17,381 | ) |
| Loss on extinguishment of debt | (19,667 | ) | | (2,531 | ) | | (19,667 | ) | | (2,531 | ) | — |
| | (19,667 | ) | | — |
| | (19,667 | ) |
| Other income (expense) | 791 |
| | (78 | ) | | 1,739 |
| | 22 |
| |
| (Loss) gain on sale of international businesses, net | | (1,888 | ) | | — |
| | 6,930 |
| | — |
|
| Other income, net | | 149 |
| | 791 |
| | 1,256 |
| | 1,739 |
|
| Total other expense, net | (81,444 | ) | | (5,003 | ) | | (92,982 | ) | | (4,467 | ) | (37,314 | ) | | (81,444 | ) | | (76,134 | ) | | (92,982 | ) |
| (Loss) income before income taxes | (262,506 | ) | | 39,600 |
| | (210,490 | ) | | 82,864 |
| |
| (Benefit from) provision for income taxes | (12,416 | ) | | 1,852 |
| | (12,052 | ) | | 2,855 |
| |
| Net (loss) income | (250,090 | ) | | 37,748 |
| | (198,438 | ) | | 80,009 |
| |
| Less: Net loss (income) attributable to Amneal Pharmaceuticals LLC pre-Combination | 200,341 |
| | (37,446 | ) | | 148,806 |
| | (79,299 | ) | |
| Less: Net loss (income) attributable to non-controlling interests | 31,885 |
| | (302 | ) | | 31,768 |
| | (710 | ) | |
| Loss before income taxes | | (56,227 | ) | | (262,506 | ) | | (189,407 | ) | | (210,490 | ) |
| Benefit from income taxes | | (5,701 | ) | | (12,416 | ) | | (14,129 | ) | | (12,052 | ) |
| Net loss | | (50,526 | ) | | (250,090 | ) | | (175,278 | ) | | (198,438 | ) |
| Less: Net loss attributable to Amneal Pharmaceuticals LLC pre-Combination | | — |
| | 200,341 |
| | — |
| | 148,806 |
|
| Less: Net loss attributable to non-controlling interests | | 33,624 |
| | 31,885 |
| | 110,495 |
| | 31,768 |
|
Net loss attributable to Amneal Pharmaceuticals, Inc. before accretion of redeemable non-controlling interest
| (17,864 | ) | | — |
| | (17,864 | ) | | — |
| (16,902 | ) | | (17,864 | ) | | (64,783 | ) | | (17,864 | ) |
| Accretion of redeemable non-controlling interest | (1,240 | ) |
| — |
|
| (1,240 | ) |
| — |
| — |
| | (1,240 | ) | | — |
| | (1,240 | ) |
| Net loss attributable to Amneal Pharmaceuticals, Inc. | $ | (19,104 | ) | | $ | — |
| | $ | (19,104 | ) | | $ | — |
| $ | (16,902 | ) | | $ | (19,104 | ) | | $ | (64,783 | ) | | $ | (19,104 | ) |
| | | | | | | | | | | | | | | |
| Net loss per share attributable to Amneal Pharmaceuticals, Inc.'s common stockholders: | | | | | | | | | | | | | | |
| Class A and Class B-1 basic and diluted | $(0.15) | | | | $(0.15) | | | $ | (0.13 | ) | | $ | (0.15 | ) | | $ | (0.51 | ) | | $ | (0.15 | ) |
| | | | | | | | | | | | | | | |
| Weighted-average common shares outstanding: | | | | | | | | | | | | | | |
| Class A and Class B-1 basic and diluted | 127,112 |
| | | | 127,112 |
| | | 128,016 |
| | 127,112 |
| | 127,852 |
| | 127,112 |
|
TheThe accompanying notes are an integral part of these consolidated financial statements.
Amneal Pharmaceuticals, Inc.
Consolidated Statements of Comprehensive (Loss) IncomeLoss
(unaudited; in thousands)
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| Net (loss) income | $ | (250,090 | ) |
| $ | 37,748 |
|
| $ | (198,438 | ) |
| $ | 80,009 |
| |
| Less: Net loss (income) attributable to Amneal Pharmaceuticals LLC pre-Combination | 200,341 |
|
| (37,446 | ) |
| 148,806 |
|
| (79,299 | ) | |
| Less: Net loss (income) attributable to non-controlling interests | 31,885 |
|
| (302 | ) |
| 31,768 |
|
| (710 | ) | |
| Net loss | | $ | (50,526 | ) | | $ | (250,090 | ) | | $ | (175,278 | ) | | $ | (198,438 | ) |
| Less: Net loss attributable to Amneal Pharmaceuticals LLC pre-Combination | | — |
| | 200,341 |
| | — |
| | 148,806 |
|
| Less: Net loss attributable to non-controlling interests | | 33,624 |
| | 31,885 |
| | 110,495 |
| | 31,768 |
|
Net loss attributable to Amneal Pharmaceuticals, Inc. before accretion of redeemable non-controlling interest
| (17,864 | ) | | — |
| | (17,864 | ) | | — |
| (16,902 | ) | | (17,864 | ) | | (64,783 | ) | | (17,864 | ) |
| Accretion of redeemable non-controlling interest | (1,240 | ) | | — |
| | (1,240 | ) | | — |
| — |
| | (1,240 | ) | | — |
| | (1,240 | ) |
| Net loss attributable to Amneal Pharmaceuticals, Inc. | (19,104 | ) |
| — |
|
| (19,104 | ) |
| — |
| (16,902 | ) | | (19,104 | ) | | (64,783 | ) | | (19,104 | ) |
| Other comprehensive income (loss): |
|
|
|
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|
|
|
|
|
|
|
| |
|
| |
|
| |
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| Foreign currency translation adjustments | 8,932 |
|
| (11,749 | ) |
| (1,025 | ) |
| (10,944 | ) |
|
| |
|
| | | |
|
|
| Less: Other comprehensive (income) loss attributable to Amneal Pharmaceuticals LLC pre-Combination | (11,678 | ) |
| 11,749 |
|
| (1,721 | ) |
| 10,944 |
| |
| Less: Other comprehensive loss attributable to non-controlling interests | 1,576 |
|
| — |
|
| 1,576 |
|
| — |
| |
| Other comprehensive loss attributable to Amneal Pharmaceuticals, Inc. | (1,170 | ) |
| — |
|
| (1,170 | ) |
| — |
| |
| Foreign currency translation adjustments arising during the period | | (6,219 | ) | | 8,932 |
| | (983 | ) | | (1,025 | ) |
| Less: Reclassification of foreign currency translation adjustment included in net loss | | 40 |
| | — |
| | 3,413 |
| | — |
|
Foreign currency translation adjustments, net
| | (6,179 | ) | | 8,932 |
| | 2,430 |
| | (1,025 | ) |
| Less: Other comprehensive income attributable to Amneal Pharmaceuticals LLC pre-Combination | | — |
| | (11,678 | ) | | — |
| | (1,721 | ) |
| Less: Other comprehensive loss (income) attributable to non-controlling interests | | 3,533 |
| | 1,576 |
| | (1,394 | ) | | 1,576 |
|
| Other comprehensive (loss) income attributable to Amneal Pharmaceuticals, Inc. | | (2,646 | ) | | (1,170 | ) | | 1,036 |
| | (1,170 | ) |
| Comprehensive loss attributable to Amneal Pharmaceuticals, Inc. | $ | (20,274 | ) |
| $ | — |
|
| $ | (20,274 | ) |
| $ | — |
| $ | (19,548 | ) | | $ | (20,274 | ) | | $ | (63,747 | ) | | $ | (20,274 | ) |
TheThe accompanying notes are an integral part of these consolidated financial statements.
Amneal Pharmaceuticals, Inc.
Consolidated Balance Sheets
(unaudited; in thousands, except per share amounts)
|
| | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 61,521 |
| | $ | 74,166 |
|
| Restricted cash | 7,069 |
| | 3,756 |
|
| Trade accounts receivable, net | 626,491 |
| | 351,367 |
|
| Inventories | 512,479 |
| | 284,038 |
|
| Prepaid expenses and other current assets | 139,596 |
| | 42,396 |
|
| Related party receivables | 738 |
| | 16,210 |
|
| Total current assets | 1,347,894 |
| | 771,933 |
|
| Property, plant and equipment, net | 569,328 |
| | 486,758 |
|
| Goodwill | 386,475 |
| | 26,444 |
|
| Intangible assets, net | 1,788,533 |
| | 44,599 |
|
| Deferred tax asset, net | 373,705 |
| | 898 |
|
| Other assets | 78,653 |
| | 11,257 |
|
| Total assets | $ | 4,544,588 |
| | $ | 1,341,889 |
|
| Liabilities and Stockholders' Equity / Members' Deficit | | | |
| Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 555,634 |
| | $ | 194,779 |
|
| Note payable-related party | 77,549 |
|
| — |
|
| Current portion of financing obligations | 251 |
| | 311 |
|
| Revolving credit facility | — |
| | 75,000 |
|
| Current portion of long-term debt, net | 21,427 |
| | 14,171 |
|
| Related-party payables | 14,875 |
| | 12,622 |
|
| Total current liabilities | 669,736 |
| | 296,883 |
|
| Long-term debt, net | 2,641,305 |
| | 1,355,274 |
|
| Long-term portion of financing obligations | 39,220 |
| | 39,987 |
|
| Deferred income taxes | 2,491 |
| | 2,491 |
|
| Liabilities under tax receivable agreement | 194,825 |
| | — |
|
| Other long-term liabilities | 45,667 |
| | 7,793 |
|
| Related-party payable- long term | — |
| | 15,043 |
|
| Total long-term liabilities | 2,923,508 |
| | 1,420,588 |
|
| Commitments and contingencies (Notes 5 & 17) |
|
| |
|
|
| Redeemable non-controlling interest | 11,858 |
| | — |
|
| Stockholders' equity / members' deficit: | | | |
| Members' equity, 189,000 units authorized, issued and outstanding at December 31, 2017 | — |
| | 2,716 |
|
| Members' accumulated deficit | — |
| | (382,785 | ) |
| Preferred stock, $0.01 par value, 2,000 shares authorized; none issued and outstanding at June 30, 2018 | — |
| | — |
|
| Class A common stock, $0.01 par value, 900,000 shares authorized; 114,859 shares issued and outstanding at June 30, 2018 | 1,149 |
| | — |
|
| Class B common stock, $0.01 par value, 300,000 shares authorized; 171,261 shares issued and outstanding at June 30, 2018 | 1,713 |
| | — |
|
| Class B-1 common stock, $0.01 par value, 18,000 shares authorized; 12,329 shares issued and outstanding at June 30, 2018 | 123 |
| | — |
|
| Additional paid-in capital | 517,122 |
| | 8,562 |
|
| Stockholders' accumulated deficit | (19,104 | ) | | — |
|
| Stockholders' accumulated other comprehensive loss | (6,502 | ) | | (14,232 | ) |
| Total Amneal Pharmaceuticals, Inc. stockholders' equity/ members' deficit | 494,501 |
| | (385,739 | ) |
| Non-controlling interests | 444,985 |
| | 10,157 |
|
| Total stockholders' equity/ members' deficit | 939,486 |
| | (375,582 | ) |
| Total liabilities and stockholders' equity/ members’ deficit | $ | 4,544,588 |
| | $ | 1,341,889 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Amneal Pharmaceuticals, Inc.
Consolidated Statements of Changes in Stockholders' / Members’ Deficit
(unaudited; in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
|
| Preferred Stock | Class A Common Stock | Class B Common Stock | Class B-1 Common Stock | Additional Paid-in Capital |
| Accumulated Other Comprehensive (Loss) Income | Non-Controlling Interests | Total Equity | | Redeemable Non-Controlling Interest |
| | | Members' Equity | Members' Accumulated Deficit | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Stockholders' Accumulated Deficit | |
| Balance at January 1, 2018 | | $ | 2,716 |
| $ | (382,785 | ) | — |
| $ | — |
| — |
| $ | — |
| — |
| $ | — |
| — |
| $ | — |
| $ | 8,562 |
| $ | — |
| (14,232 | ) | $ | 10,157 |
| $ | (375,582 | ) | | $ | — |
|
| Period Prior to the Combination | | | | | | | | | | | | | | | | — |
| | |
| Net income prior | | — |
| (148,806 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 97 |
| (148,709 | ) | | — |
|
| Cumulative-effective adjustment from adoption of ASU 2014-09 (Topic 606) | | — |
| 4,977 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 4,977 |
| | — |
|
| Capital contribution from non-controlling interest | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 360 |
| 360 |
| | — |
|
| Distributions to members | | — |
| (182,998 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (8,562 | ) | — |
| — |
| — |
| (191,560 | ) | | — |
|
| PPU expense | | 158,757 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| | — |
| — |
| 158,757 |
| | — |
|
| Foreign currency translation adjustment | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,721 |
| — |
| 1,721 |
| | — |
|
| Capital contribution by Amneal Holdings for employee bonuses | | 27,742 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 27,742 |
| | — |
|
| Period Subsequent to the Combination | | | | | | | | | | | | | | | | | | |
| Effect of the Combination | | (189,215 | ) | 709,612 |
| — |
| — |
| 73,289 |
| 733 |
| 224,996 |
| 2,250 |
| — |
| — |
| 325,918 |
| — |
| 9,437 |
| 626,737 |
| 1,485,472 |
| | — |
|
| Redemption of Class B Common Stock for PIPE | | — |
| — |
| — |
| — |
| 34,520 |
| 345 |
| (46,849 | ) | (468 | ) | 12,329 |
| 123 |
| 165,180 |
| — |
| (1,965 | ) | (130,501 | ) | 32,714 |
| | — |
|
| Redemption of Class B Common Stock for distribution to PPU Holders | | — |
| — |
| — |
| — |
| 6,886 |
| 69 |
| (6,886 | ) | (69 | ) | — |
| — |
| 24,293 |
| — |
| (289 | ) | (19,181 | ) | 4,823 |
| | — |
|
| Net loss | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (17,864 | ) | — |
| (31,865 | ) | (49,729 | ) | | — |
|
| Foreign currency translation adjustment | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,170 | ) | (1,576 | ) | (2,746 | ) | | — |
|
| Stock-based compensation | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,644 |
| — |
| — |
| — |
| 1,644 |
| | — |
|
| Exercise of stock options | | — |
| — |
| — |
| — |
| 164 |
| 2 |
| — |
| — |
| — |
| — |
| 2,241 |
| — |
| (4 | ) | (262 | ) | 1,977 |
| | — |
|
| Reclassification of redeemable non-controlling interest | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,240 | ) | — |
| (10,618 | ) | (11,858 | ) | | 11,858 |
|
| Non-controlling interests from acquisition of Gemini | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 3,049 |
| 3,049 |
| | — |
|
| Other | | — |
| — |
| — |
| | — |
| — |
| — |
| | | — |
| (2,154 | ) | — |
| — |
| (1,412 | ) | (3,566 | ) | | — |
|
| Balance at June 30, 2018 | | $ | — |
| $ | — |
| — |
| $ | — |
| 114,859 |
| $ | 1,149 |
| 171,261 |
| $ | 1,713 |
| 12,329 |
| $ | 123 |
| $ | 517,122 |
| $ | (19,104 | ) | $ | (6,502 | ) | $ | 444,985 |
| $ | 939,486 |
| | $ | 11,858 |
|
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 54,893 |
| | $ | 213,394 |
|
| Restricted cash | 2,129 |
| | 5,385 |
|
| Trade accounts receivable, net | 634,666 |
| | 481,495 |
|
| Inventories | 414,627 |
| | 457,219 |
|
| Prepaid expenses and other current assets | 77,062 |
| | 128,321 |
|
| Related party receivables | 2,470 |
| | 830 |
|
| Total current assets | 1,185,847 |
| | 1,286,644 |
|
| Property, plant and equipment, net | 508,086 |
| | 544,146 |
|
| Goodwill | 420,017 |
| | 426,226 |
|
| Intangible assets, net | 1,553,330 |
| | 1,654,969 |
|
| Deferred tax asset, net | 391,881 |
| | 373,159 |
|
| Operating lease right-of-use assets | 59,900 |
| | — |
|
| Operating lease right-of-use assets - related party | 17,031 |
| | — |
|
| Financing lease right-of-use assets - related party | 62,588 |
| | — |
|
| Other assets | 63,459 |
| | 67,592 |
|
| Total assets | $ | 4,262,139 |
| | $ | 4,352,736 |
|
| Liabilities and Stockholders' Equity | | | |
| Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 505,143 |
| | $ | 514,440 |
|
| Current portion of long-term debt, net | 21,445 |
| | 21,449 |
|
| Current portion of operating lease liabilities | 13,313 |
| | — |
|
| Current portion of operating and financing lease liabilities - related party | 3,293 |
| | — |
|
| Related party payables | 2,965 |
| | 17,695 |
|
| Current portion of financing obligation - related party | — |
| | 266 |
|
| Total current liabilities | 546,159 |
| | 553,850 |
|
| Long-term debt, net | 2,619,788 |
| | 2,630,598 |
|
| Deferred income taxes | — |
| | 1,178 |
|
| Liabilities under tax receivable agreement | 193,499 |
| | 192,884 |
|
| Operating lease liabilities | 47,836 |
| | — |
|
| Operating lease liabilities - related party | 14,862 |
| | — |
|
| Financing lease liabilities - related party | 61,990 |
| | — |
|
| Financing obligation - related party | — |
| | 39,083 |
|
| Other liabilities | 28,653 |
| | 38,780 |
|
| Total long-term liabilities | 2,966,628 |
| | 2,902,523 |
|
| Commitments and contingencies (Notes 5, 11 and 13) |
|
| |
|
|
| Stockholders' Equity | | | |
| Preferred stock, $0.01 par value, 2,000 shares authorized; none issued at both June 30, 2019 and December 31, 2018 | — |
| | — |
|
| Class A common stock, $0.01 par value, 900,000 shares authorized at both June 30, 2019 and December 31, 2018; 128,151 and 115,047 shares issued at June 30, 2019 and December 31, 2018, respectively | 1,281 |
| | 1,151 |
|
| Class B common stock, $0.01 par value, 300,000 shares authorized at both June 30, 2019 and December 31, 2018; 170,941 and 171,261 shares issued at June 30, 2019 and December 31, 2018 respectively | 1,710 |
| | 1,713 |
|
| Class B-1 common stock, $0.01 par value, 18,000 shares authorized at both June 30, 2019 and December 31, 2018; none and 12,329 shares issued at June 30, 2019 and December 31, 2018, respectively | — |
| | 123 |
|
| Additional paid-in capital | 544,161 |
| | 530,438 |
|
| Stockholders' accumulated deficit | (80,746 | ) | | (20,920 | ) |
| Accumulated other comprehensive loss | (6,750 | ) | | (7,755 | ) |
| Total Amneal Pharmaceuticals, Inc. stockholders' equity | 459,656 |
| | 504,750 |
|
| Non-controlling interests | 289,696 |
| | 391,613 |
|
| Total stockholders' equity | 749,352 |
| | 896,363 |
|
| Total liabilities and stockholders' equity | $ | 4,262,139 |
| | $ | 4,352,736 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Amneal Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(unaudited; in thousands)
| | | | Six Months Ended June 30, | Six Months Ended June 30, |
| | 2018 | | 2017 | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | |
| Net (loss) income | $ | (198,438 | ) | | $ | 80,009 |
| |
| Adjustments to reconcile net loss to net cash provided by operating activities: |
| |
| |
| Net loss | | $ | (175,278 | ) | | $ | (198,438 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
| Depreciation and amortization | 46,897 |
| | 21,136 |
| 99,574 |
| | 46,897 |
|
| Unrealized foreign currency loss (gain) | 17,032 |
| | (33,089 | ) | |
| Amortization of Levothyroxine Transition Agreement asset | | 36,393 |
| | — |
|
| Unrealized foreign currency (gain) loss | | (3,695 | ) | | 17,032 |
|
| Amortization of debt issuance costs | 2,577 |
| | 2,463 |
| 3,218 |
| | 2,577 |
|
| Loss on extinguishment and modification of debt | 19,667 |
| | 2,531 |
| |
| Gain termination of lease | (3,524 | ) | | — |
| |
| Deferred tax provision | (14,993 | ) | | 244 |
| |
| Loss on extinguishment of debt | | — |
| | 19,667 |
|
| Gain on sale of international businesses, net | | (6,930 | ) | | — |
|
| Gain on termination of lease | | — |
| | (3,524 | ) |
Intangible asset impairment charges
| | 79,096 |
| | — |
|
| Non-cash restructuring and asset-related charges | | 1,314 |
|
| — |
|
| Deferred tax benefit | | (18,209 | ) | | (14,993 | ) |
| Stock-based compensation and PPU expense | | 10,571 |
| | 160,401 |
|
| Inventory provision | 17,426 |
| | 2,047 |
| 50,410 |
| | 17,426 |
|
| Allowance for doubtful accounts provision | (7 | ) | | 124 |
| |
| Stock-based compensation and PPU expense | 160,401 |
| | — |
| |
| Other | 934 |
| | — |
| |
| Other operating charges and credits, net | | 3,155 |
| | 927 |
|
| Changes in assets and liabilities: |
| |
|
| |
|
| Trade accounts receivable, net | (60,051 | ) | | 28,065 |
| (162,954 | ) | | (60,051 | ) |
| Inventories | (71,655 | ) | | (10,890 | ) | (19,658 | ) | | (71,655 | ) |
| Prepaid expenses and other current assets | 711 |
| | (5,955 | ) | |
| Related-party receivables | 11,017 |
| | 3,583 |
| |
| Other assets | (5,818 | ) | | (320 | ) | |
| Accounts payable and accrued expenses | 15,299 |
| | (3,811 | ) | |
| Other liabilities | 4,331 |
| | (1,791 | ) | |
| Related-party payables | (13,356 | ) | | 11,063 |
| |
| Net cash (used in) provided by operating activities | (71,550 | ) | | 95,409 |
| |
| Investing activities: | | | | |
| Prepaid expenses, other current assets and other assets | | 28,614 |
| | (5,107 | ) |
| Related party receivables | | (1,624 | ) | | 11,017 |
|
| Accounts payable, accrued expenses and other liabilities | | (13,538 | ) | | 19,630 |
|
| Related party payables | | 2,225 |
| | (13,356 | ) |
| Net cash used in operating activities | | (87,316 | ) | | (71,550 | ) |
| Cash flows from investing activities: | | | | |
| Purchases of property, plant and equipment | (36,600 | ) | | (54,612 | ) | (29,629 | ) | | (36,600 | ) |
| Acquisition of product rights and licenses | (3,000 | ) | | — |
| (50,000 | ) | | (3,000 | ) |
| Acquisitions, net of cash acquired | (321,324 | ) | | — |
| — |
| | (321,324 | ) |
Proceeds from sale of international businesses, net of cash sold
| | 34,834 |
| | — |
|
| Net cash used in investing activities | (360,924 | ) | | (54,612 | ) | (44,795 | ) | | (360,924 | ) |
| Financing activities: | | | | |
| Cash flows from financing activities: | | | | |
| Payments of deferred financing costs and debt extinguishment costs | (54,955 | ) | | (4,889 | ) | — |
| | (54,955 | ) |
| Proceeds from issuance of debt | 1,325,383 |
| | 250,000 |
| — |
| | 1,325,383 |
|
| Payments on capital leases | (8 | ) | | (45 | ) | |
| Payments on financing obligations | (121 | ) | | (130 | ) | |
| Net (payments) borrowings on revolving credit line | (75,000 | ) | | 25,000 |
| |
| Payments on debt | (603,543 | ) | | (6,448 | ) | |
| Exercise of stock options | 1,977 |
| | — |
| |
| Payments of principal on debt and capital leases | | (13,500 | ) | | (603,551 | ) |
| Payments on revolving credit line | | — |
| | (75,000 | ) |
| Proceeds from exercise of stock options | | 1,385 |
| | 1,977 |
|
| Employee payroll tax withholding on restricted stock unit vesting | | (921 | ) | | — |
|
| Equity contributions | 27,742 |
| | 40 |
| — |
| | 27,742 |
|
| Capital contribution from non-controlling interest | 360 |
| | — |
| — |
| | 360 |
|
| Acquisition of non-controlling interest | | (3,543 | ) | | — |
|
| Tax distribution to non-controlling interest | | (13,494 | ) | | — |
|
| Distributions to members | (182,998 | ) | | (295,265 | ) | — |
| | (182,998 | ) |
| Payments of principal on financing lease - related party | | (866 | ) | | — |
|
| Payments of financing obligation - related party | | — |
| | (121 | ) |
| Repayment of related party note | (14,842 | ) | | — |
| — |
| | (14,842 | ) |
| Net cash provided by (used in) financing activities | 423,995 |
| | (31,737 | ) | |
| Net cash (used in) provided by financing activities | | (30,939 | ) | | 423,995 |
|
| Effect of foreign exchange rate on cash | (853 | ) | | 5,238 |
| 1,293 |
| | (853 | ) |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (9,332 | ) | | 14,298 |
| |
| Net decrease in cash, cash equivalents, and restricted cash | | (161,757 | ) | | (9,332 | ) |
| Cash, cash equivalents, and restricted cash - beginning of period | 77,922 |
| | 37,546 |
| 218,779 |
| | 77,922 |
|
| Cash, cash equivalents, and restricted cash - end of period | $ | 68,590 |
| | $ | 51,844 |
| $ | 57,022 |
| | $ | 68,590 |
|
| Cash and cash equivalents - end of period | $ | 61,521 |
| | $ | 48,217 |
| $ | 54,893 |
| | $ | 61,521 |
|
| Restricted cash - end of period | 7,069 |
| | 3,627 |
| 2,129 |
| | 7,069 |
|
| Cash, cash equivalents, and restricted cash - end of period | $ | 68,590 |
| | $ | 51,844 |
| $ | 57,022 |
| | $ | 68,590 |
|
| Supplemental disclosure of cash flow information: | | | | | | |
| Cash paid for interest | $ | 50,391 |
| | $ | 30,291 |
| $ | 81,103 |
| | $ | 50,391 |
|
| Income taxes paid | $ | — |
| | $ | — |
| |
| Cash received for income taxes | | $ | 8,533 |
| | $ | — |
|
| Supplemental disclosure of non-cash investing and financing activity: | | | | | | |
| Acquisition of product rights and licenses | $ | 10,000 |
| | $ | 19,500 |
| |
| Distribution to members | $ | 8,562 |
| | $ | — |
| $ | — |
| | $ | 8,562 |
|
| Payable for acquisition of product rights and licenses | | $ | — |
| | $ | 10,000 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Amneal Pharmaceuticals, Inc.
Consolidated Statement of Stockholders' Equity / Members’ Deficit
(unaudited; in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Class A Common Stock | Class B Common Stock | Class B-1 Common Stock | Additional Paid-in Capital | Stockholders' Accumulated Deficit | Accumulated Other Comprehensive (Loss) Income | Non-Controlling Interests | Total Equity |
| | | Shares | Amount | Shares | Amount | Shares | Amount |
| Balance at April 1, 2019 | | 115,564 |
| $ | 1,156 |
| 170,941 |
| $ | 1,710 |
| 12,329 |
| $ | 123 |
| $ | 537,159 |
| $ | (63,844 | ) | $ | (4,099 | ) | $ | 327,576 |
| $ | 799,781 |
|
| Net loss | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (16,902 | ) | — |
| (33,624 | ) | (50,526 | ) |
| Foreign currency translation adjustment | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (2,663 | ) | (3,556 | ) | (6,219 | ) |
| Stock-based compensation | | — |
| — |
| — |
| — |
| — |
| — |
| 6,224 |
| — |
| — |
| — |
| 6,224 |
|
| Exercise of stock options | | 8 |
| — |
| — |
| — |
| — |
| — |
| 174 |
| — |
| — |
| 201 |
| 375 |
|
| Restricted stock unit vesting, net of shares withheld to cover payroll taxes | | 250 |
| 2 |
| — |
| — |
| — |
| — |
| 6 |
| — |
| (5 | ) | (924 | ) | (921 | ) |
| Conversion of Class B-1 Common Stock | | 12,329 |
| 123 |
| — |
| — |
| (12,329 | ) | (123 | ) | — |
| — |
| — |
| — |
| — |
|
| Reclassification of foreign currency translation adjustment included in net loss | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 17 |
| 23 |
| 40 |
|
| Other | | — |
| — |
| — |
| — |
| — |
| — |
| 598 |
| — |
| — |
| — |
| 598 |
|
| Balance at June 30, 2019 | | 128,151 |
| $ | 1,281 |
| 170,941 |
| $ | 1,710 |
| — |
| $ | — |
| $ | 544,161 |
| $ | (80,746 | ) | $ | (6,750 | ) | $ | 289,696 |
| $ | 749,352 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Amneal Pharmaceuticals, Inc.
Consolidated Statement of Stockholders' Equity / Members’ Deficit
(unaudited; in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Class A Common Stock | Class B Common Stock | Class B-1 Common Stock | Additional Paid-in Capital | Stockholders' Accumulated Deficit | Accumulated Other Comprehensive (Loss) Income | Non-Controlling Interests | Total Equity |
| | | Shares | Amount | Shares | Amount | Shares | Amount |
| Balance at January 1, 2019 | | 115,047 |
| $ | 1,151 |
| 171,261 |
| $ | 1,713 |
| 12,329 |
| $ | 123 |
| $ | 530,438 |
| $ | (20,920 | ) | $ | (7,755 | ) | $ | 391,613 |
| $ | 896,363 |
|
| Net loss | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| (64,783 | ) | — |
| (110,495 | ) | (175,278 | ) |
| Cumulative-effective adjustment from adoption of Topic 842 | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| 4,957 |
| — |
| 8,604 |
| 13,561 |
|
| Foreign currency translation adjustment | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (425 | ) | (558 | ) | (983 | ) |
| Stock-based compensation | | — |
| — |
| — |
| — |
| — |
| — |
| 10,571 |
| — |
| — |
| — |
| 10,571 |
|
| Exercise of stock options | | 205 |
| 2 |
| — |
| — |
| — |
| — |
| 922 |
| — |
| (7 | ) | 468 |
| 1,385 |
|
| Restricted stock unit vesting, net of shares withheld to cover payroll taxes | | 250 |
| 2 |
| — |
| — |
| — |
| — |
| 6 |
| — |
| (5 | ) | (924 | ) | (921 | ) |
| Redemption of Class B Common Stock | | 320 |
| 3 |
| (320 | ) | (3 | ) | — |
| — |
| 1,124 |
| — |
| (19 | ) | (882 | ) | 223 |
|
| Conversion of Class B-1 Common Stock | | 12,329 |
| 123 |
| — |
| — |
| (12,329 | ) | (123 | ) | — |
| — |
| — |
| — |
| — |
|
| Tax distribution | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (82 | ) | (82 | ) |
| Reclassification of foreign currency translation adjustment included in net loss | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,461 |
| 1,952 |
| 3,413 |
|
| Other | | — |
| — |
| — |
| — |
| — |
| — |
| 1,100 |
| — |
| — |
| — |
| 1,100 |
|
| Balance at June 30, 2019 | | 128,151 |
| $ | 1,281 |
| 170,941 |
| $ | 1,710 |
| — |
| $ | — |
| $ | 544,161 |
| $ | (80,746 | ) | $ | (6,750 | ) | $ | 289,696 |
| $ | 749,352 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Amneal Pharmaceuticals, Inc.
Consolidated Statement of Stockholders' Equity / Members’ Deficit
(unaudited; in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Class A Common Stock | Class B Common Stock | Class B-1 Common Stock | Additional Paid-in Capital | Stockholders' Accumulated Deficit | Accumulated Other Comprehensive (Loss) Income | Non-Controlling Interests | Total Equity | | Redeemable Non-Controlling Interest |
| | | Members' Equity | Members' Accumulated Deficit | Shares | Amount | Shares | Amount | Shares | Amount | |
| Balance at April 1, 2018 | | $ | 2,716 |
| $ | (357,980 | ) | — |
| $ | — |
| — |
| $ | — |
| — |
| $ | — |
| $ | — |
| $ | — |
| $ | (24,189 | ) | $ | 10,634 |
| $ | (368,819 | ) | | $ | — |
|
| Period Prior to the Combination | | | | | | | | | | | | | | | | |
| Net loss | | — |
| (200,341 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (20 | ) | (200,361 | ) | | — |
|
| Cumulative-effective adjustment from adoption of ASU 2014-09 (Topic 606) | | — |
| 1,707 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,707 |
| | — |
|
| Distributions to members | | — |
| (152,998 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (152,998 | ) | | — |
|
| PPU expense | | 158,757 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 158,757 |
| | — |
|
| Foreign currency translation adjustment | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 11,678 |
| — |
| 11,678 |
| | — |
|
| Capital contribution by Amneal Holdings for employee bonuses | | 27,742 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 27,742 |
| | — |
|
| Period Subsequent to the Combination | | | | | | | | | | | | | | | | |
| Effect of the Combination | | (189,215 | ) | 709,612 |
| 73,289 |
| 733 |
| 224,996 |
| 2,250 |
| — |
| — |
| 325,918 |
| — |
| 9,437 |
| 626,737 |
| 1,485,472 |
| | — |
|
| Redemption of Class B Common Stock for PIPE | | — |
| — |
| 34,520 |
| 345 |
| (46,849 | ) | (468 | ) | 12,329 |
| 123 |
| 165,180 |
| — |
| (1,965 | ) | (130,501 | ) | 32,714 |
| | — |
|
| Redemption of Class B Common Stock for distribution to PPU Holders | | — |
| — |
| 6,886 |
| 69 |
| (6,886 | ) | (69 | ) | — |
| — |
| 24,293 |
| — |
| (289 | ) | (19,181 | ) | 4,823 |
| | — |
|
| Net loss | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (17,864 | ) | — |
| (31,865 | ) | (49,729 | ) | | — |
|
| Foreign currency translation adjustment | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,170 | ) | (1,576 | ) | (2,746 | ) | | — |
|
| Stock-based compensation | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,644 |
| — |
| — |
| — |
| 1,644 |
| | — |
|
| Exercise of stock options | | — |
| — |
| 164 |
| 2 |
| — |
| — |
| — |
| — |
| 2,241 |
| — |
| (4 | ) | (262 | ) | 1,977 |
| | — |
|
| Reclassification of redeemable non-controlling interest | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,240 | ) | — |
| (10,618 | ) | (11,858 | ) | | 11,858 |
|
| Non-controlling interests from acquisition of Gemini | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 3,049 |
| 3,049 |
| | — |
|
| Other | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (2,154 | ) | — |
| — |
| (1,412 | ) | (3,566 | ) | | — |
|
| Balance at June 30, 2018 | | $ | — |
| $ | — |
| 114,859 |
| $ | 1,149 |
| 171,261 |
| $ | 1,713 |
| 12,329 |
| $ | 123 |
| $ | 517,122 |
| $ | (19,104 | ) | $ | (6,502 | ) | $ | 444,985 |
| $ | 939,486 |
| | $ | 11,858 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Amneal Pharmaceuticals, Inc.
Consolidated Statement of Stockholders' Equity / Members’ Deficit
(unaudited; in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
|
| Class A Common Stock | Class B Common Stock | Class B-1 Common Stock | Additional Paid-in Capital | Stockholders' Accumulated Deficit | Accumulated Other Comprehensive (Loss) Income | Non-Controlling Interests | Total Equity | | Redeemable Non-Controlling Interest |
| | | Members' Equity | Members' Accumulated Deficit | Shares | Amount | Shares | Amount | Shares | Amount | |
| Balance at January 1, 2018 | | $ | 2,716 |
| $ | (382,785 | ) | — |
| $ | — |
| — |
| $ | — |
| — |
| $ | — |
| $ | 8,562 |
| $ | — |
| $ | (14,232 | ) | $ | 10,157 |
| $ | (375,582 | ) | | $ | — |
|
| Period Prior to the Combination | | | | | | | | | | | | | |
| | |
| Net (loss) income | | — |
| (148,806 | ) | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 97 |
| (148,709 | ) | | — |
|
| Cumulative-effective adjustment from adoption of ASU 2014-09 (Topic 606) | | — |
| 4,977 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 4,977 |
| | — |
|
| Capital contribution from non-controlling interest | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 360 |
| 360 |
| | — |
|
| Distributions to members | | — |
| (182,998 | ) | — |
| — |
| — |
| — |
| — |
| — |
| (8,562 | ) | — |
| — |
| — |
| (191,560 | ) | | — |
|
| PPU expense | | 158,757 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 158,757 |
| | — |
|
| Foreign currency translation adjustment | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,721 |
| — |
| 1,721 |
| | — |
|
| Capital contribution by Amneal Holdings for employee bonuses | | 27,742 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 27,742 |
| | — |
|
| Period Subsequent to the Combination | | | | | | | | | | | | | | | | |
| Effect of the Combination | | (189,215 | ) | 709,612 |
| 73,289 |
| 733 |
| 224,996 |
| 2,250 |
| — |
| — |
| 325,918 |
| — |
| 9,437 |
| 626,737 |
| 1,485,472 |
| | — |
|
| Redemption of Class B Common Stock for PIPE | | — |
| — |
| 34,520 |
| 345 |
| (46,849 | ) | (468 | ) | 12,329 |
| 123 |
| 165,180 |
| — |
| (1,965 | ) | (130,501 | ) | 32,714 |
| | — |
|
| Redemption of Class B Common Stock for distribution to PPU Holders | | — |
| — |
| 6,886 |
| 69 |
| (6,886 | ) | (69 | ) | — |
| — |
| 24,293 |
| — |
| (289 | ) | (19,181 | ) | 4,823 |
| | — |
|
| Net loss | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (17,864 | ) | — |
| (31,865 | ) | (49,729 | ) | | — |
|
| Foreign currency translation adjustment | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,170 | ) | (1,576 | ) | (2,746 | ) | | — |
|
| Stock-based compensation | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,644 |
| — |
| — |
| — |
| 1,644 |
| | — |
|
| Exercise of stock options | | — |
| — |
| 164 |
| 2 |
| — |
| — |
| — |
| — |
| 2,241 |
| — |
| (4 | ) | (262 | ) | 1,977 |
| | — |
|
| Reclassification of redeemable non-controlling interest | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (1,240 | ) | — |
| (10,618 | ) | (11,858 | ) | | 11,858 |
|
| Non-controlling interests from acquisition of Gemini | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 3,049 |
| 3,049 |
| | — |
|
| Other | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (2,154 | ) | — |
| — |
| (1,412 | ) | (3,566 | ) | | — |
|
| Balance at June 30, 2018 | | $ | — |
| $ | — |
| 114,859 |
| $ | 1,149 |
| 171,261 |
| $ | 1,713 |
| 12,329 |
| $ | 123 |
| $ | 517,122 |
| $ | (19,104 | ) | $ | (6,502 | ) | $ | 444,985 |
| $ | 939,486 |
| | $ | 11,858 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Amneal Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Nature of Operations and Basis of Presentation
Amneal Pharmaceuticals, Inc., formerly known as Atlas Holdings, Inc. (the "Company"), was formed along with its wholly owned subsidiary, K2 Merger Sub Corporation, a Delaware corporation ("Merger Sub"), on October 4, 2017, for the purpose of facilitating the combination of Impax Laboratories, Inc. (now Impax Laboratories, LLC), a Delaware corporation then listed on the Nasdaq Stock Market ("Impax") and Amneal Pharmaceuticals LLC, a Delaware limited liability company ("Amneal"). The Company is a holding company, whose principal assets are Amneal Common Units.
Amneal was formed duringin 2002 and operates through various subsidiaries. Amneal is a vertically-integratedvertically integrated developer, manufacturer, and seller of generic pharmaceutical products. Amneal’s pharmaceutical research includes analytical and formulation development and stability. Amneal has operationsoperates principally in the United States, Switzerland, India, Ireland and Ireland. Amneal divested its operations in the United Kingdom on March 30, 2019 and certain other countries, primarily in Western Europe.Germany on May 3, 2019. For additional information, refer to Note 3. Acquisitions and Divestitures. Amneal sells to wholesalers, distributors, hospitals, chain pharmacies and individual pharmacies, either directly or indirectly.
On October 17, 2017, Amneal, Impax, the Company and ImpaxMerger Sub entered into the Business Combination Agreement, dated October 17, 2017, as amended on November 21, 2017 and December 16, 2017 (the "BCA") with the Company, Merger Sub, and Amneal..
On May 4, 2018, (the "Closing"), pursuant to the BCA, Impax and Amneal combined the generics and specialty pharmaceutical business of Impax with the generic drug development and manufacturing business of Amneal to create the Company as a new generics and specialty pharmaceutical company, through the following transactions (together, the "Combination", and the closing of the Combination, the "Closing"): (i) Merger Sub merged with and into Impax, with Impax surviving as a direct wholly-ownedwholly owned subsidiary of New Amneal,the Company, (ii) each share of Impax’s common stock, par value $0.01 per share ("Impax Common Stock"), issued and outstanding immediately prior to the Impax merger,Closing, other than Impax Common Stock held by Impax in treasury, by the Company or by any of their respective subsidiaries, was converted into the right to receive one fully paid and non-assessable share of Class A common stock of the Company, par value $0.01 per share ("Class A Common Stock"), (iii) Impax converted to a Delaware limited liability company, (iv) the Company contributed to Amneal all of the Company’s equity interests in Impax, in exchange for Amneal common units ("Amneal Common Units"), (v) the Company issued an aggregate number of shares of Class B common stock of the Company, par value $0.01 per share ("Class B Common Stock,"Stock", and collectively, with the Class A Common Stock and Class B-1 common stock of the Company, par value $0.01, ("Class B-1 Common Stock"), the "Company Common Stock") to APHC Holdings, LLC, (formerly Amneal Holdings, LLC), the parent entity of Amneal as of the Closing ("Holdings"), and (vi) the Company became the managing member of Amneal.
Immediately upon the Closing, of the Combination, holders of Impax Common Stock prior to the Closing collectively held approximately 25% of the Company and Holdings held a majority interest in the Company with an effective voting interest of approximately 75% on a fully diluted and as converted basis through theirits ownership of Class B Common Stock. Holdings also held a corresponding number of Amneal Common Units, which entitled it to approximately 75% of the economic interests in the combined businesses of Impax and Amneal. The Company ownedheld an interest in Amneal of approximately 25% and is its managing member..
In connection with the Combination, on May 4, 2018, Holdings entered into definitive purchase agreements which provided for a private placement of certain shares of Class A Common Stock and Class B-1 Common Stock (the "PIPE Investment") with select institutional investors (the "PIPE Investors"). Pursuant to the terms of the purchase agreements, upon the Closing, Holdings exercised its right to cause the Company to redeem approximately 15% of its ownership interests in the Company in exchange for 34.5 million shares of Class A Common Stock and 12.3 million unregistered shares of Class B-1 Common Stock (the "Redemption"). The shares of Class A Common Stock and Class B-1 Common Stock received in the Redemption were sold immediately following the Closing by Holdings to the PIPE Investors at a per share purchase price of $18.25 for gross proceeds of $855.0$855 million. Following the PIPE Investment, the PIPE Investors owned collectively approximately 15% of the Company Common Stock on a fully diluted and as converted basis.
On May 4, 2018, Holdings also caused Amneal to redeem (the "Closing Date Redemption") 6.9 million of Amneal Common Units held by Holdings for a like number of shares of Class A Common Stock, for future distribution to certain direct and indirect members of Holdings who were or are employees of the Company and to whom were previously issued (prior to the Closing) profit participation units ("PPUs") in Amneal. As a result of the PIPE Investment and Closing Date Redemption, the voting and economic interest of approximately 75% held by Holdings immediately upon Closing was reduced by approximately 18%. As such, theThe overall interest percentage held by non-controlling interest holders (the "Amneal Group") upon the consummation of the Combination, PIPE Investment and Closing Date Redemption was approximately 57%. The Company is a holding company withAs of both December 31, 2018 and June 30, 2019, the overall interest percentage held by non-controlling interest holders was approximately 57%.
On July 5, 2018, Holdings distributed to its principal assets consisting ofmembers all Amneal Common Units.Units and shares of Class B Common Stock held by Holdings. As a result, as of June 30, 2019, Holdings did not hold any equity interest in Amneal or the Company.
8During the second quarter of 2019, pursuant to the Company's certificate of incorporation, the Company converted all (12.3 million) of its issued and outstanding shares of Class B-1 Common Stock to Class A Common Stock and such shares of Class B-1 Common Stock have been retired and may not be reissued by the Company. The rights of Class A Common Stock and Class B-1 Common Stock are identical, except that the Class B-1 Common Stock had certain director appointment rights and the Class B-1 Common Stock had no voting rights (other than with respect to its director appointment right and as otherwise required by law).
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements, which are prepared in accordance with generally accepted accounting principles in the United States of America, should be read in conjunction with Amneal’s annual audited financial statements for the year ended December 31, 20172018 included in the Company’s Registration Statement2018 Annual Report on Form S-1, as amended, filed with the Securities and Exchange Commission on May 7, 2018.10-K. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the U.S. ("U.S. GAAP") have been omitted from the accompanying unaudited consolidated financial statements. In the opinion of the Company,management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of itsthe Company's financial position as of June 30, 2019, cash flows for the six months ended June 30, 2019 and 2018 and itsthe results of its operations, its comprehensive loss and comprehensive incomechanges in stockholders' equity for the three and six months ended June 30, 20182019 and 2017, and changes in stockholders'/ members’ deficit and cash flows for the six months ended June 30, 2018 and 2017.2018. The consolidated balance sheet data at December 31, 20172018 was derived from the Company's audited annual financial statements, but does not containinclude all disclosures required by accounting principles generally accepted in the United States of America.
The accounting policies of the footnote disclosures from the annual financial statements.
Company are set forth in Note 2. Summary of Significant Accounting Policies contained in the Company’s 2018 Annual Report on Form 10-K, except for the impact of the adoption of new accounting standards discussed under Recently Adopted Accounting Pronouncements.
Principles of Consolidation
Although the Company has a minority economic interest in Amneal, it is Amneal’s sole managing member, having the sole voting power to make all of Amneal’s business decisions and control its management. Therefore, the Company consolidates the financial statements of Amneal and its subsidiaries. The Company’s consolidated financial statements are a continuation of Amneal’s financial statements, with adjustments to equity to reflect the Combination, the PIPE and non-controlling interests for the portion of Amneal’s economic interests that is not held by the Company. Prior to the closing of the Combination and PIPE, the Company did not conduct any activities other than those incidental to the formation of it and Merger Sub and the matters contemplated by the BCA and had no operations and no material assets or liabilities.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the Company's management to make estimates and assumptions that affect the reported financial position at the date of the financial statements and the reported results of operations during the reporting period. Such estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The following are some, but not all, of such estimates: the determination of chargebacks, sales returns, rebates, bill backs,billbacks, allowances for accounts receivable, accrued liabilities, stock-based compensation, valuation of inventory balances, the determination of useful lives for product rights, allowances for deferred tax assets and the assessment of expected cash flows used in evaluating goodwill and other long-lived assets for impairment. Actual results could differ from those estimates.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers and associated ASUs (collectively "Topic 606"), which sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific sections of revenue recognition guidance that have historically existed.
When assessing its revenue recognition, the Company performs the following five steps in accordance with Topic 606: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies the performance obligation. The Company recognizes revenue when it transfers control of its products to customers, in an amount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those products. For further details on the Company’s revenue recognition policies under Topic 606, refer to Note 4. Revenue Recognition.
A rollforward of the major categories of sales-related deductions for the six months ended June 30, 2018 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Contract Charge-backs and Sales Volume Allowances | | Cash Discount Allowances | | Accrued Returns Allowance | | Accrued Medicaid and Commercial Rebates |
| January 1, 2018 | | $ | 453,703 |
| | $ | 20,408 |
| | $ | 45,175 |
| | $ | 12,911 |
|
| Liabilities assumed from acquisitions |
| 221,561 |
|
| 11,781 |
|
| 91,704 |
|
| 49,743 |
|
| Provision related to sales recorded in the period | | 1,401,440 |
| | 47,607 |
| | 24,717 |
| | 33,546 |
|
| Credits issued during the period | | (1,360,391 | ) | | (49,495 | ) | | (25,163 | ) | | (26,002 | ) |
| Balance at June 30, 2018 | | $ | 716,313 |
| | $ | 30,301 |
| | $ | 136,433 |
| | $ | 70,198 |
|
Stock-Based Compensation
The Company’s stock-based compensation consists of stock options and restricted stock units (“RSUs”) awarded to employees and non-employee directors. Stock options are measured at their fair value on the grant date or date of modification, as applicable. RSUs are measured at the stock price on the grant date or date of modification, as applicable. The Company recognizes compensation expense on a straight-line basis over the requisite service and/or performance period, as applicable. Forfeitures of awards are accounted for as a reduction in stock-based compensation expense in the period such awards are forfeited. The Company's policy is to issue new shares upon option exercises and RSUs vesting.
Foreign Currencies
The Company has operations in the U.S., Switzerland, India, the U.K., Ireland, and other international jurisdictions. The results of its non-U.S. dollar based operations are translated to U.S. Dollars at the average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Investment accounts are translated at historical exchange rates. Translation adjustments are accumulated in a separate component of stockholders’/ members’ deficit in the consolidated balance sheet and are included in the determination of comprehensive income. Transaction gains and losses are included in the determination of net income in the Company consolidated statements of operations as a component of foreign exchange gains and losses. Such foreign currency transaction gains and losses include fluctuations related to long term intercompany loans that are payable in the foreseeable future.
Business Combinations
Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, the acquiring entity in a business combination records the assets acquired and liabilities assumed at the date of acquisition at their fair values. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. Acquisition-related costs, primarily professional fees, are expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit and highly liquid investments with original maturities of three months or less. A portion of the Company’s cash flows are derived outside the U.S. As a result, the Company is subject to market risk associated with changes in foreign exchange rates. The Company maintains cash balances at both U.S. based and foreign based commercial banks. At various times during the year, cash balances in the U.S. may exceed amounts that are insured by the Federal Deposit Insurance Corporation (FDIC).
Restricted Cash
At June 30, 2018 and December 31, 2017, respectively, the Company had restricted cash balances of $7.1 million and $3.8 million in its bank accounts primarily related to the purchase of certain land and equipment.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is management’s best estimate of the amount of probable collection losses in the Company’s existing accounts receivable. Management determines the allowance based on historical experience along with the present knowledge of potentially uncollectible accounts. Account balances are charged off against the allowance when management believes it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to customers.
Inventories
Inventories consist of finished goods held for sale, raw materials, and work in process. Inventories are stated at net realizable value, with cost determined using the first-in, first-out method. Adjustments for excess and obsolete inventories are established based upon historical experience and management’s assessment of current product demand. These assessments include inventory obsolescence based on its expiration date, damaged or rejected product, and slow-moving products.
Property, Plant, and Equipment
Property, plant, and equipment are stated at historical cost less accumulated depreciation. Depreciation expense is computed primarily using the straight-line method over the estimated useful lives of the assets, which are as follows:
|
| | |
Asset Classification | | Estimated Useful Life |
Buildings | | 30 years |
Computer equipment | | 5 years |
Furniture and fixtures | | 7 years |
Leasehold improvements | | Shorter of asset's useful life or remaining life of lease |
Machinery and equipment | | 7 years |
Vehicles | | 5 years |
Upon retirement or disposal, the cost of the asset disposed and the accumulated depreciation are removed from the accounts, and any gain or loss is reflected as part of operating income in the period of disposal. Expenditures that significantly increase value or extend useful lives of property, plant, and equipment are capitalized, whereas those for normal maintenance and repairs are expensed. The Company capitalizes interest on borrowings during the construction period of major capital projects as part of the related asset and amortizes the capitalized interest into earnings over the related asset’s remaining useful life.
In-Process Research and Development
The fair value of in-process research and development ("IPR&D") acquired in a business combination is determined based on the present value of each research project’s projected cash flows using an income approach. Revenues are estimated based on relevant market size and growth factors, expected industry trends, individual project life cycles and the life of each research project’s underlying marketability. In determining the fair value of each research project, expected cash flows are adjusted for certain risks of completion, including technical and regulatory risk.
The value attributable to IPR&D projects at the time of acquisition is capitalized as an indefinite-lived intangible asset and tested for impairment until the project is completed or abandoned. Upon completion of the project, the indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the indefinite-lived intangible asset is charged to expense.
Intangible assets with indefinite lives including IPR&D are tested for impairment if impairment indicators arise and, at a minimum, annually. However, an entity is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. The indefinite-lived intangible asset impairment test consists of a one-step analysis that compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The Company considers many factors in evaluating whether the value of its intangible assets with indefinite lives may not be recoverable, including, but not limited to, expected growth rates, the cost of equity and debt capital, general economic conditions, the Company's outlook and market performance of the Company's industry and recent and forecasted financial performance.
Goodwill
Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value based test. The Company reviews goodwill for possible impairment annually during the fourth quarter, or whenever events or circumstances indicate that the carrying amount may not be recoverable.
The impairment model prescribes a two-step method for determining goodwill impairment. However, an entity is permitted to first assess qualitative factors to determine whether the two-step goodwill impairment test is necessary. The qualitative factors considered by the Company may include, but are not limited to, general economic conditions, the Company’s outlook, market performance of the Company’s industry and recent and forecasted financial performance. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. In the first step, the Company determines the fair value of its reporting unit using a discounted cash flow analysis. If the net book value of the reporting unit exceeds its fair value, the Company then performs the second step of the impairment test, which requires allocation of the reporting unit’s fair value to all of its assets and liabilities using the acquisition method prescribed under authoritative guidance for business combinations with any residual fair value being allocated to goodwill. An impairment charge is recognized when the implied fair value of the Company’s reporting unit’s goodwill is less than its carrying amount.
Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Such assumptions include projections of future cash flows and the current fair value of the asset.
Impairment of Long-Lived Assets (Including Intangible Assets with Finite Lives)
The Company reviews its long-lived assets, including intangible assets with finite lives, for recoverability whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company evaluates assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the asset. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value which is generally an expected present value cash flow technique. Management’s policy in determining whether an impairment indicator exists comprises measurable operating performance criteria as well as other qualitative measures.
Intangible assets, other than indefinite-lived intangible assets, are amortized over the estimated useful life of the asset based on the pattern in which the economic benefits are expected to be consumed or otherwise used up or, if that pattern is not readily determinable, on a straight-line basis. The useful life is the period over which the assets are expected to contribute directly or indirectly to future cash flows. Intangible assets are not written-off in the period of acquisition unless they become impaired during that period.
The Company regularly evaluates the remaining useful life of each intangible asset that is being amortized to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of the intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, “Accounting for Income Taxes” (“ASC 740”), which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax bases of its
assets and liabilities by applying the enacted tax rates in effect for the year in which the differences are expected to reverse. Such net tax effects on temporary differences are reflected on the Company’s condensed consolidated statements of financial condition as deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when the Company believes that it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.
ASC 740-10 prescribes a two-step approach for the recognition and measurement of tax benefits associated with the positions taken or expected to be taken in a tax return that affect amounts reported in the financial statements. The Company has reviewed and will continue to review the conclusions reached regarding uncertain tax positions, which may be subject to review and adjustment at a later date based on ongoing analyses of tax laws, regulations and interpretations thereof. To the extent that the Company’s assessment of the conclusions reached regarding uncertain tax positions changes as a result of the evaluation of new information, such change in estimate will be recorded in the period in which such determination is made. The Company reports income tax-related interest and penalties relating to uncertain tax positions, if applicable, as a component of income tax expense.
Comprehensive Income
Comprehensive income includes net income and all changes in equity for cumulative translation adjustments resulting from the consolidation of foreign subsidiaries’ financial statements.
Research and Development
Research and development ("R&D") activities are expensed as incurred. Primarily R&D costs consist of direct and allocated expenses incurred with the process of formulation, clinical research, and validation associated with new product development. Upfront and milestone payments made to third parties in connection with R&D collaborations are expensed as incurred up to the point of regulatory approval or when there is no alternative future use. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the respective intangible asset. Amounts capitalized for such payments are included in intangible assets, net of accumulated amortization.
Intellectual Property Legal Development Expenses
The Company expenses external intellectual property legal development expenses as incurred. These costs relate to legal challenges of innovator’s patents for invalidity or non-infringement, which are customary in the generic pharmaceutical industry, and are incurred predominately during development of a product and prior to regulatory approval. Associated costs include, but are not limited to, formulation assessments, patent challenge opinions and strategy, and litigation expenses to defend the intellectual property supporting the Company' regulatory filings.
Shipping Costs
The Company records the costs of shipping product to its customers as a component of selling, general, and administrative expenses as incurred. Shipping costs were $4.6 million, and $8.6 million for the three and six months ended June 30, 2018, respectively. Shipping costs were $1.5 million, and $3.3 million for the three and six months ended June 30, 2017, respectively.
Reclassifications
Certain prior period balances have been reclassified to conform to the current period presentation, including combining depreciation and amortization expense into the respective cost of goods sold, selling, general and administrative and research and development expense presentation on the statement of operations as well as combining accounts payable and accrued expenses in the balance sheet presentation.
Recently Adopted Accounting Pronouncements
Leases
In May 2017,February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases, which was subsequently supplemented by clarifying guidance (collectively, "Topic 842")to improve financial reporting of leasing transactions. Topic 842 requires a lessee to recognize most leases, including those classified as operating, on its balance sheets as right of use ("ROU") assets and lease liabilities and requires disclose of additional key information about leases.
The Company elected to apply the modified retrospective transition provisions of Topic 842 on January 1, 2019, the date of adoption. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard. This allowed the Company to carry forward historical lease classifications. Adoption of this standard resulted in the recording of operating lease ROU assets and operating lease liabilities of $85 million and $86 million, respectively.
The transition guidance of Topic 842 also required the Company to de-recognize the build to suit accounting associated with a related party lease for integrated manufacturing and office space and recognize that transaction as a financing lease as of January 1, 2019. The resulting de-recognition reduced leasehold improvements and a financing obligation by $24 million and $39 million, respectively, and increased non-controlling interests and stockholders' accumulated deficit, net of income taxes, by $9 million and $5 million, respectively. The arrangement was then recognized as a financing lease with an ROU asset and lease liability of $64 million on January 1, 2019. Leases with related parties, the details of which are described in Note 15. Related Party Transactions, are presented separately in the Company's balance sheets.
The adoption of Topic 842 did not have a material impact on the Company's consolidated statements of operations. ROU assets and lease liabilities for reporting periods beginning on or after January 1, 2019 are presented under the new guidance, while prior periods amounts were not adjusted and continue to be reported in accordance with previous guidance.
All significant lease arrangements after January 1, 2019 are recognized as ROU assets and lease liabilities at lease commencement. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value of the future lease payments using the Company's incremental borrowing rate, which is assessed quarterly.
Operating lease expense is recognized on a straight-line basis over the lease term. At each balance sheet date, operating and financing lease liabilities continue to represent the present value of the future payments. Financing lease ROU assets are expensed using the straight-line method, unless another basis is more representative of the pattern of economic benefit, to lease expense. Interest on financing lease liabilities is recognized in interest expense.
Leases with an initial term of 12 months or less (short-term leases) are not recognized in the balance sheet and the related lease payments are recognized as incurred over the lease term. The Company separates lease and non-lease components. A portion of the Company's real estate leases are subject to periodic changes in the Consumer Price Index ("CPI"). The changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred.
For further details regarding the Company's leases, refer to Note 11. Leases.
Financial Instruments
In January 2016, the FASB issued ASU 2017-09, Compensation-2016-01, Stock Compensation (Topic 718): ScopeFinancial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Modification AccountingFinancial Assets and Financial Liabilities, which provides guidance about which changes to the terms or conditionsaddresses certain aspects of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance will be effective for annualrecognition, measurement, presentation, and interim periods beginning after December 15, 2017, with early adoption permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date.disclosure of financial instruments. The Company adopted ASU 2017-09 on2016-01 as of January 1, 20182019 and it did not have an effect on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), to clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows.
As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance should be applied retrospectively and is effective for the annual period beginning after December 15, 2018. The Company early adopted ASU 2016-18 on January 1, 2018. This guidance was applied retrospectively and, accordingly, prior period amounts have been revised.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, that will require companies to account for the income tax effects of intercompany transfers of assets other than inventory (e.g., intangible assets) when the transfer occurs. The guidance is effective for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted as of the beginning of an annual period (i.e., early adoption is permitted only in the first interim period). The Company early adopted ASU 2016-16 on January 1, 2018 and it did not have an effectmaterial impact on the Company's consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), to clarify how entities should classify certain cash receipts and cash payments on the statement of cash flows. The new guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be applied retrospectively and is effective for the Company for the annual period beginning after December 15, 2018. Early adoption is permitted. The Company early adopted ASU 2016-15 on January 1, 2018 and it did not have an effect on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Subsequent to the issuance of Topic 606, the FASB clarified the guidance through several Accounting Standard Updates. This guidance represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which that company expects to be entitled to receive in exchange for those goods or services. This update sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed.
On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers” and associated ASU's (collectively "Topic 606"), using the modified retrospective method, applied to all contracts not completed as of the date of adoption. This method requires the cumulative effect of the adoption to be recognized as an adjustment to opening retained earnings in the period of adoption.
The Company recorded a $5.0 million reduction to accumulated deficit as of January 1, 2018 due to the cumulative impact of adoption Topic 606. There is an acceleration of revenue for certain product sale arrangements which are designed to include profit share payments upon the customer’s sell-through of certain products purchased from the Company. Previously under Topic 605, the Company deferred revenue until its customers sold the product through to their end customers, at which point the Company considered the profit share payments to be earned and collection reasonably assured. Under Topic 606, an estimate of the profit share payments is included in the transaction price as variable consideration and is recognized at the time the Company transfers control of the product to its customer. This change resulted in a cumulative-effect adjustment upon adoption of the ASU as of January 1, 2018 which was not material to the financial statements. In the second quarter of 2018, the Company made a correction to the cumulative impact adjustment as of January 1, 2018 by reducing accumulated deficit by $1.7 million. The Company does not believe that this adjustment is material to its financial statements and it had no impact on any prior periods. Refer to Note 4. Revenue Recognition for additional disclosures required by Topic 606.
Recently Issued Accounting PronouncementsGoodwill
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge basedThe Company adopted ASU 2017-04 as of April 1, 2019 on a prospective basis and it did not have a material impact on the excess of a reporting unit’s carrying amount over itsCompany's consolidated financial statements.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 82): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value (i.e., measure the charge based on today’s Step 1).measurement. The standard will be applied prospectively andguidance is effective for the Company’s annual and interim impairment tests performed in periods beginning after December 15, 2019. Early2019 and interim periods within those annual periods, and early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.permitted. The Company is evaluating the impact of this new guidance on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, guidance that changes the impairment model for most financial assets including trade receivables and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss”"incurred loss" approach with an “expected loss”"expected loss" model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. Entities will apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The guidance is effective for the Company for the annual period beginning after December 15, 2019. The Company is evaluating the impact of this new guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.
3. Acquisitions and Divestitures
Acquisitions
Impax Acquisition
On May 4, 2018, the Company completed the Combination, as described in Note 1. Nature of Operations and Basis of Presentation.. For the three and six months ended June 30, 2018, transaction costs associated with the Impax acquisition of $16.4$16 million and $23.3$23 million, respectively, were recorded in acquisition, transaction-related and integration expenses.expenses (none for the three and six months ended June 30, 2019).
The Impax acquisition was accounted for under the acquisition method of accounting, with Amneal as the accounting acquirer of Impax. Amneal was identified as the accounting acquirer because: (i) Amneal exchanged Amneal Common Units with the Company for the Company’s interest in Impax, (ii) Holdings held a majority interest in the Company with an effective voting interest of approximately 75% on a fully diluted and as converted basis through their ownership of Class B Common Stock, and (iii) a majority of the directors on the Company's current board of directors were designated by Holdings. As such, the cost to acquire Impax was allocated to the respective assets acquired and liabilities assumed based on their estimated fair values as of the closing date of the Combination.
The measurement of the consideration transferred by Amneal for its interest in Impax is based on the fair value of the equity interest that Amneal would have had to issue to give the Impax shareholders the same percentage equity interest in the Company, which is equal to approximately 25% of Amneal, on May 4, 2018. However, the fair value of Impax's common stock was used to calculate the consideration for the Combination because Impax's common stock had a quoted market price and the Combination involved only the exchange of equity.
The purchase price, net of cash acquired, is calculated as follows (in thousands, except share amount and price per share):
| | Fully diluted Impax share number (1) | | 73,288,792 |
| 73,288,792 |
|
| Closing quoted market price of an Impax common share on May 4, 2018 | | $ | 18.30 |
| $ | 18.30 |
|
| Equity consideration - subtotal | | $ | 1,341,185 |
| $ | 1,341,185 |
|
Add: Fair value of Impax stock options as of May 4, 2018 (2) | | 22,610 |
| 22,610 |
|
| Total equity consideration | | 1,363,795 |
| 1,363,795 |
|
| Add: Extinguishment of certain Impax obligations, including accrued and unpaid interest | | 320,290 |
| 320,290 |
|
| Less: Cash acquired | | (37,907 | ) | (37,907 | ) |
| Purchase price, net of cash acquired | | $ | 1,646,178 |
| $ | 1,646,178 |
|
(1) Represents shares of Impax Common Stock issued and outstanding immediately prior to the Combination | | | |
| | | |
(1) Represents shares of Impax Common Stock issued and outstanding immediately prior to the Combination. | | (1) Represents shares of Impax Common Stock issued and outstanding immediately prior to the Combination. |
(2) Represents the fair value of 3.0 million fully vested Impax stock options valued using the Black-Scholes options pricing model. | | | (2) Represents the fair value of 3.0 million fully vested Impax stock options valued using the Black-Scholes options pricing model. |
The following is a summary of the preliminary purchase price allocation for the Impax acquisition (in thousands):
| | | | | Preliminary Fair Values
As of June 30, 2018 | | Final Fair Values
As of June 30, 2019 |
| Trade accounts receivable, net | | $ | 206,749 |
| | $ | 210,820 |
|
| Inventories | | 182,546 |
| | 183,088 |
|
| Prepaid expenses and other current assets | | 91,415 |
| | 91,430 |
|
| Property, plant and equipment | | 87,472 |
| | 87,472 |
|
| Goodwill | | 358,813 |
| | 398,733 |
|
| Intangible assets | | 1,606,642 |
| | 1,574,929 |
|
| Other | | 57,084 |
| | 55,790 |
|
| Total assets acquired | | 2,590,721 |
| | 2,602,262 |
|
| Accounts payable | | 47,912 |
| | 47,912 |
|
| Accrued expenses and other current liabilities | | 262,838 |
| | 274,979 |
|
| Long-term debt | | 600,000 |
| | 599,400 |
|
| Other long-term liabilities | | 33,793 |
| | 33,793 |
|
| Total liabilities assumed | | 944,543 |
| | 956,084 |
|
| Net assets acquired | | $ | 1,646,178 |
| | $ | 1,646,178 |
|
Intangible Assets
The acquired intangible assets are being amortized over their estimated useful lives as follows (in thousands):
|
| | | | | | |
| | | Preliminary Fair Values | | Weighted Average Useful Life (Years) |
| Marketed product rights | | $ | 1,063,040 |
| | 12.9 |
|
| | | | | | |
| | | Final Fair Values | | Weighted-Average Useful Life (Years) |
| Marketed product rights | | $ | 1,045,617 |
| | 12.9 |
In addition to the amortizable intangible assets noted above, $543.6$529 million was allocated to in-process research and development ("IPR&D,&D"), which is currently not subject to amortization.
The estimated fair value of the in-process research and developmentIPR&D and identifiable intangible assets was determined using the “income"income approach,”" which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. The assumptions, including the expected projected cash flows, utilized in the preliminary purchase price allocation and in determining the purchase price were based on management's best estimates as of the closing date of the Combination on May 4, 2018.
Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each asset or product (including net revenues, cost of sales, research and development costs, selling and marketing costs and working capital / contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, competitive trends impacting the asset and each cash flow stream, as well as other factors. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results.
Goodwill
Of the total goodwill acquired in connection with the Impax acquisition, approximately $346$360 million has been allocated to the Company’s Specialty Pharma segment and approximately $13$39 million has been allocated to the Generic Segment.Generics segment. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company. Factors that contributed to the Company’s recognition of goodwill include the Company’s intent to expand its generic and specialty product portfolios and to acquire certain benefits from the Impax product pipelines, in addition to the anticipated synergies that the Company expects to generate from the acquisition.
Gemini Laboratories, LLC Acquisition
On May 7, 2018, theThe Company acquired 98.0% of the outstanding equity interests in Gemini Laboratories, LLC ("Gemini") for total consideration of $119.5 million, net of $3.9 million cash acquired. At closing, the acquisition was funded by a $42.9 million up-front cash payment (including $2.9 million related to a preliminary working capital adjustment) from cash on hand and a $77.2 million unsecured promissory note. The note payable bears interest at 3% annually and is due on November 7, 2018. Additionally, at June 30, 2018, the Company recorded a liability in related-party payables of $3.3 million for a payment due in August 2018 related to the final working capital adjustment. In connection with the acquisition of Gemini, the Company recorded an amount representing the non-controlling interest of Gemini of $3.0 million.
Gemini is a pharmaceutical company with a portfolio that includes licensed and owned, niche and mature branded products, and a pipeline of 505(b)(2) products for niche therapeutic areas. Gemini was a related party of the Company; refer to Note 20. Related-Party Transactions for further details.
For the three and six months ended June 30, 2018, transaction costs associated with the Gemini acquisition of $0.4 million were recorded in acquisition, transaction-related and integration expenses. The Gemini acquisition was accounted for under the acquisition method of accounting.
The following is a summary of the preliminary purchase price allocation for the Gemini acquisition (in thousands):
|
| | | | |
| | | Preliminary Fair Values
As of June 30, 2018 |
| Trade accounts receivable, net | | $ | 8,158 |
|
| Inventories | | 1,851 |
|
| Prepaid expenses and other current assets | | 3,713 |
|
| Property, plant and equipment, net | | 11 |
|
| Goodwill | | 2,527 |
|
| Intangible assets | | 142,740 |
|
| Other | | 465 |
|
| Total assets acquired | | 159,465 |
|
| | | |
| Accounts payable | | 1,764 |
|
| Accrued expenses and other current liabilities | | 15,189 |
|
| License liability | | 20,000 |
|
| Total liabilities assumed | | 36,953 |
|
| Net assets acquired | | $ | 122,512 |
|
The acquired intangible assets are being amortized over their estimated useful lives as follows (in thousands):
|
| | | | | | |
| | | Preliminary Fair Values | | Weighted Average Useful Life |
| Product rights for licensed / developed technology | | $ | 110,350 |
| | 10 years |
| Product rights for developed technologies | | 5,500 |
| | 9 years |
| Product rights for out-licensed generics royalty agreement | | 390 |
| | 2 years |
| | | $ | 116,240 |
| | |
In addition to the amortizable intangibles noted above, $26.5 million was allocated to IPR&D, which is currently not subject to amortization.
The goodwill recognized of $2.5 million is allocated to the Company's Specialty Pharma segment.
The Company's consolidated statements of operations for the three and six months ended June 30, 2018 include the results of operations of Impax and Gemini subsequent to May 4, 2018 and May 7, 2018, respectively. Impax contributed to net revenue of $118.3 million and losses of $55.9 million and Gemini contributed net revenue of $5.0 million and income of $1.0 million for the period from each respective acquisition date to June 30, 2018.
The Company makesmade an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. The Company obtainsobtained this information during due diligence and through other sources. In the months after closing, as the Company obtainsobtained additional information about these assets and liabilities and learnslearned more about the newly acquired business, it iswas able to refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date are considered for subsequent adjustment. The Company is continuing to evaluate certain pre-acquisition contingencies associated with its 2018 acquisitions. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
Unaudited Pro Forma Information
The unaudited pro forma combined results of operations for the three and six months ended June 30, 2018 and 2017 (assuming the closing of the Combination occurred on January 1, 2017) are as follows (in thousands):
| | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | | | | |
| | | 2018 | 2017 | | 2018 | 2017 | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| Net revenue | | $ | 447,524 |
| $ | 461,953 |
| | $ | 865,068 |
| $ | 872,037 |
| $ | 447,524 |
| | $ | 865,068 |
|
| Net loss | | $ | (86,621 | ) | $ | (4,197 | ) | | $ | (161,050 | ) | $ | (340,311 | ) | $ | (86,621 | ) | | $ | (161,050 | ) |
| Net loss attributable to Amneal Pharmaceuticals, Inc. | | $ | (19,759 | ) | $ | (1,957 | ) | | $ | (28,454 | ) | $ | (141,691 | ) | $ | (19,759 | ) | | $ | (28,454 | ) |
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the closing of the Combination taken place on January 1, 2017. Furthermore, the pro forma results do not purport to project the future results of operations of the Company.
The unaudited pro forma information reflects primarily the following non-recurring adjustments (all of which were adjusted for the applicable tax impact):
Adjustments to costs of goods sold related to the inventory acquired; and
Adjustments to selling, general and administrative expense related to transaction costs directly attributable to the transactions.
UK Divestiture
On March 30, 2019, the Company sold 100% of the stock of its Creo Pharma Holding Limited subsidiary, which comprised substantially all of the Company's operations in the United Kingdom, to AI Sirona (Luxembourg) Acquisition S.a.r.l ("AI Sirona") for net cash consideration of approximately $32 million which was received in April 2019. The carrying value of the net assets sold was $22 million, including intangible assets of $7 million and goodwill of $5 million. As a result of the sale, the Company recognized a pre-tax gain of $9 million, inclusive of transaction costs and the recognition of accumulated foreign currency translation adjustment losses of $3 million, within (loss) gain on sale of international business for the six months ended June 30, 2019. As part of the disposition, the Company entered into a supply and license agreement with AI Sirona to supply certain products for a period of up to two years.
Germany Divestiture
On May 3, 2019, the Company sold 100% of the stock of its Amneal Deutschland GmbH subsidiary ("ADG"), which comprised substantially all of the Company's operations in Germany, to EVER Pharma Holding Ges.m.b.H. (“EVER”) for net cash consideration of approximately $3 million which was received in May 2019. The carrying value of the net assets sold was $7 million, including goodwill of $0.5 million. As a result of the sale, the Company recognized a pre-tax loss of $2 million, inclusive of transaction costs and the recognition of accumulated foreign currency translation adjustment losses, within (loss) gain on sale of international business for the three and six months ended June 30, 2019. As part of the disposition, the Company also entered into a license and supply agreement with EVER to supply certain products for an 18 month period.
4. Revenue Recognition
Performance Obligations
The Company’s performance obligation is the supply of finished generic pharmaceutical products to its customers. The Company’s customers consist primarily of major wholesalers, retail pharmacies, managed care organizations, purchasing co-ops, hospitals, government agencies and pharmaceutical companies. The Company’s customer contracts generally consist of both a master agreement, which is signed by the Company and its customer, and a customer submitted purchase order, which is governed by the terms and conditions of the master agreement. Customers purchase product by direct channel sales from the Company or by indirect channel sales through various distribution channels.
Revenue is recognized when the Company transfers control of its products to the customer, which typically occurs at a point-in-time, upon delivery. Substantially all of the Company’s net revenues relate to products which are transferred to the customer at a point-in-time.
The Company offers standard payment terms to its customers and has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing, since the period between when the Company transfers the product to the customer and when the customer pays for that product is one year or less. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues. The consideration amounts due from customers as a result of product sales are subject to variable consideration, as described further below.
The Company offers standard product warranties which provide assurance that the product will function as expected and in accordance with specifications. Customers cannot purchase warranties separately and these warranties do not give rise to a separate performance obligation.
The Company permits the return of product under certain circumstances, mainly upon product expiration, instances of shipping errors or where product is damaged in transit. The Company accrues for the customer’s right to return as part of its variable consideration. See below for further details.
Variable Consideration
The Company includes an estimate of variable consideration in its transaction price at the time of sale, when control of the product transfers to the customer. Variable consideration includes but is not limited to: chargebacks, rebates, group purchasing organization ("GPO") fees, prompt payment (cash) discounts, consideration payable to the customer, billbacks, Medicaid and other government pricing programs, price protection and shelf stock adjustments, sales returns, and profit shares.
The Company estimates its variable consideration using the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts, and represents the method that best predicts the amount of consideration to which the Company will be entitled to for transferring its products to its customers. The Company assesses whether or not an estimate of its variable consideration is constrained and has determined that the constraint does not apply, since it is probable that a significant reversal in the amount of cumulative revenue will not occur in the future when the uncertainty associated with the variable consideration is subsequently resolved. The Company’s estimates for variable consideration are adjusted as required at each reporting period for specific known developments that may result in a change in the amount of total consideration it expects to receive.
Chargebacks
In the case an indirect customer purchases product from their preferred wholesaler instead of directly from the Company, and the contract price charged to the indirect customer is lower than the wholesaler pricing, the Company pays the direct customer (wholesaler) a chargeback for the price differential. The Company estimates its chargeback accrual based on its estimates of the level of inventory of its products in the distribution channel that remain subject to chargebacks and historical chargeback rates. The estimate of the level of products in the distribution channel is based primarily on data provided by key customers.
Rebates
The Company pays fixed or volume-based rebates to its customers based on a fixed amount, fixed percentage of product sales or based on the achievement of a specified level of purchases. The Company’s rebate accruals are based on actual net sales, contractual rebate rates negotiated with customers, and expected purchase volumes / corresponding tiers based on actual sales to date and forecasted amounts.
Group Purchasing Organization Fees
The Company pays fees to GPOs for administrative services that the GPOs perform in connection with the purchases of product by the GPO participants who are the Company’s customers. The Company’s GPO fee accruals are based on actual net sales, contractual fee rates negotiated with GPOs and the mix of the products in the distribution channel that remain subject to GPO fees.
Prompt payment (cash) discountsPayment (Cash) Discounts
The Company provides customers with prompt payment discounts which may result in adjustments to the price that is invoiced for the product transferred, in the case that payments are made within a defined period. The Company’s prompt payment discount accruals are based on actual net sales and contractual discount rates.
Consideration payablePayable to the customerCustomer
The Company pays administrative and service fees to its customers based on a fixed percentage of the product price. These fees are not in exchange for a distinct good or service and therefore are recognized as a reduction of the transaction price. The Company accrues for these fees based on actual net sales, contractual fee rates negotiated with the customer and the mix of the products in the distribution channel that remain subject to fees.
Billbacks
In the case an indirect customer purchases product from their preferred wholesaler instead of directly from the Company, and the contract price charged to the indirect customer is higher than contractual pricing, the Company pays the indirect customer a billback for the price differential. The Company estimates its billback accrual based on its estimates of the level of inventory of its products in the distribution channel that remain subject to billbacks and historical billback rates. The estimate of the level of products in the distribution channel is based primarily on data provided by key customers.
Medicaid and other government pricing programsOther Government Pricing Programs
The Company complies with required rebates mandated by law under Medicaid and other government pricing programs. The Company estimates its government pricing accruals based on monthly sales, historical experience of claims submitted by the various states and jurisdictions, historical rates and estimated lag time of the rebate invoices.
Price protectionProtection and shelf stock adjustmentsShelf Stock Adjustments
The Company provides customers with price protection and shelf stock adjustments which may result in an adjustment to the price charged for the product transferred, based on differences between old and new prices which may be applied to the customer’s on-hand inventory at the time of the price change. The Company accrues for these adjustments when its expected value of an adjustment is greater than zero, based on contractual pricing, actual net sales, accrual rates based on historical average rates, and estimates of the level of inventory of its products in the distribution channel that remain subject to these adjustments. The estimate of the level of products in the distribution channel is based primarily on data provided by key customers.
Sales returnsReturns
The Company permits the return of product under certain circumstances, mainly upon product expiration, instances of shipping errors or where product is damaged in transit, and occurrences of product recalls. The Company’s product returns accrual is primarily based on estimates of future product returns based generally on actual net sales, estimates of the level of inventory of its products in the distribution channel that remain subject to returns, estimated lag time of returns and historical return rates. The estimate of the level of products in the distribution channel is based primarily on data provided by key customers.
Profit Shares
For certain product sale arrangements, the Company earns a profit share upon the customer’s sell-through of the product purchased from the Company. The Company estimates its profit shares based on actual net sales, estimates of the level of inventory of its products in the distribution channel that remain subject to profit shares, and historical rates of profit shares earned. The estimate of the level of products in the distribution channel is based primarily on data provided by key customers.
Concentration of Revenue
The Company's three largest customers accountaccounted for approximately 82%81% and 80% of total gross sales of products for the three months ended June 30, 2018 and 80% for the six months ended June 30, 2018.2019, respectively. The Company's three largest customers account for approximately 79%82% and 80% of total gross sales of products for the and three and six months ended June 30, 20172018, respectively.
Significant Products
The Company generally consolidates net revenue by "product family," meaning that it consolidates net revenue from products containing the same active ingredient(s) irrespective of dosage strength, delivery method or packaging size. The Company's significant product families, as determined based on net revenue, and 82%their percentage of total gross salesthe Company's consolidated net revenue for each of productsthe three and six months ended June 30, 2019 and 2018 are set forth below (in thousands, except for percentages):
|
| | | | | | | | |
| Segment | | Product Family | | Three Months Ended June 30, 2019 |
| | | | | $ | | % |
| Generics | | Levothyroxine Sodium | | $ | 46,459 |
| | 11% |
| Specialty | | Rytary® | | 33,000 |
| | 8% |
| Generics | | Diclofenac Sodium Gel | | 25,010 |
| | 6% |
| Generics | | Epinephrine Auto-Injector (generic Adrenaclick®) | | 15,959 |
| | 4% |
| Generics | | Yuvafem-Estradiol | | $ | 14,022 |
| | 3% |
|
| | | | | | | | |
| Segment | | Product Family | | Three Months Ended June 30, 2018 |
| | | | | $ | | % |
| Generics | | Diclofenac Sodium Gel | | $ | 31,820 |
| | 8% |
| Generics | | Yuvafem-Estradiol | | 30,827 |
| | 7% |
| Generics | | Aspirin; Dipyridamole ER Capsule | | 27,919 |
| | 7% |
| Specialty | | Rytary® | | 20,520 |
| | 5% |
| Generics | | Epinephrine Auto-Injector (generic Adrenaclick®) | | $ | 19,166 |
| | 5% |
|
| | | | | | | | |
| Segment | | Product Family | | Six Months Ended June 30, 2019 |
| | | | | $ | | % |
| Generics | | Levothyroxine Sodium | | $ | 95,453 |
| | 11% |
| Specialty | | Rytary® | | 61,828 |
| | 7% |
| Generics | | Diclofenac Sodium Gel | | 48,477 |
| | 6% |
| Generics | | Yuvafem-Estradiol | | 32,761 |
| | 4% |
| Generics | | Epinephrine Auto-Injector (generic Adrenaclick®) | | $ | 31,154 |
| | 4% |
|
| | | | | | | | |
| Segment | | Product Family | | Six Months Ended June 30, 2018 |
| | | | | $ | | % |
| Generics | | Diclofenac Sodium Gel | | $ | 52,096 |
| | 8% |
| Generics | | Yuvafem-Estradiol | | 50,094 |
| | 7% |
| Generics | | Aspirin; Dipyridamole ER Capsule | | 44,941 |
| | 7% |
| Generics | | Oseltamivir | | 39,634 |
| | 6% |
| Specialty | | Rytary® | | $ | 20,520 |
| | 3% |
A rollforward of the major categories of sales-related deductions for the six months ended June 30, 20172019 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Contract Charge-backs and Sales Volume Allowances | | Cash Discount Allowances | | Accrued Returns Allowance | | Accrued Medicaid and Commercial Rebates |
| Balance at December 31, 2018 | | $ | 829,596 |
| | $ | 36,157 |
| | $ | 154,503 |
| | $ | 74,202 |
|
| Provision related to sales recorded in the period | | 2,294,169 |
| | 68,883 |
| | 41,682 |
| | 82,981 |
|
| Credits/payments issued during the period | | (2,333,025 | ) | | (78,111 | ) | | (55,500 | ) | | (65,524 | ) |
| Balance at June 30, 2019 | | $ | 790,740 |
| | $ | 26,929 |
| | $ | 140,685 |
| | $ | 91,659 |
|
5. Alliance and Collaboration
The Company has entered into several alliance, collaboration, license, and distribution agreements, and similar agreements with respect to certain of its products and services with third-party pharmaceutical companies. The consolidated statements of operations include revenue recognized under agreements the Company has entered into to develop marketing and/or distribution relationships with its partners to fully leverage the technology platform and revenue recognized under development agreements which generally obligate the Company to provide research and development services over multiple periods. The Company's significant arrangements are discussed below.
Levothyroxine License and Supply Agreement; Transition Agreement
On August 16, 2018, the Company entered into a license and supply agreement with Jerome Stevens Pharmaceuticals, Inc. ("JSP") for levothyroxine sodium tablets ("Levothyroxine"). This agreement designated the Company as JSP's exclusive commercial partner for Levothyroxine in the U.S. market for a 10-year term commencing on March 22, 2019. Under this license and supply agreement with JSP, the Company accrued the up-front license payment of $50 million on March 22, 2019, which was paid in April 2019. The agreement also provides for the Company to pay a profit share to JSP based on net profits of the Company's sales of Levothyroxine, after considering product costs.
On November 9, 2018, the Company entered into a transition agreement ("Transition Agreement") with Lannett Company (“Lannett”) and JSP. Under the terms of the Transition Agreement, the Company assumed the distribution and marketing of Levothyroxine from Lannett beginning December 1, 2018 through March 22, 2019, ahead of the commencement date of the license and supply agreement with JSP described above.
In accordance with the terms of the Transition Agreement, the Company made $47 million of non-refundable payments to Lannett. For the six months ended June 30, 2019 and the year ended December 31, 2018, $37 million and $10 million, respectively, were expensed to cost of goods sold, as the Company sold Levothyroxine (none in the three months ended June 30, 2019). As of December 31, 2018, the Company had a $4 million transition contract liability, which was fully settled in February 2019.
Biosimilar Licensing and Supply Agreement
On May 7, 2018, the Company entered into a licensing and supply agreement, with Mabxience S.L., for its biosimilar candidate for Avastin® (bevacizumab). The Company will be the exclusive partner in the U.S. market. The Company will pay up-front, development and regulatory milestone payments as well as commercial milestone payments on reaching pre-agreed sales targets in the market to Mabxience, up to $71.8$72 million. For the three and six months ended June 30, 2019, the Company expensed a milestone payment of nil and $1 million, respectively, to research and development. For both the three and six months ended June 30, 2018, the Company expensed a milestone payment of $0.5 million in research and development expense.development.
License and Commercialization Agreement
On October 1, 2017, Amneal and Adello Biologics, LLC (“Adello”), a related party, entered into a license and commercialization agreement. Adello granted Amneal an exclusive license, under its New Drug Application, to distribute and sell two bio-similar products in the U.S. Adello is responsible for development, regulatory filings, obtaining FDA approval, and manufacturing, and Amneal is responsible for marketing, selling and pricing activities. The term of the agreement is 10-years from the respective product’s launch date.
In connection with the agreement, Amneal paid an upfront amount of $1.5 million in October 2017 for execution of the agreement which was expensed in research and development expenses. The agreement also provides for potential future milestone payments to Adello of (i) up to $21.0 million relating to regulatory approval, (ii) up to $43.0 million for successful delivery of commercial launch inventory, (iii) between $20.0 million and $50.0 million relating to number of competitors at launch for one product, and (iv) between $15 million and $67.5 million for the achievement of cumulative net sales for both products. The milestones are subject to certain performance conditions which may or may not be achieved, including FDA filing, FDA approval, launch activities and commercial sales volume objectives. In addition, the agreement provides for Amneal to pay a profit share equal to 50% of net profits, after considering manufacturing and marketing costs. The research and development expenses for payments made to Adello during the three and six months ended June 30, 2018 and 2017 were immaterial.
Distribution, License, Development and Supply Agreement with AstraZeneca UK Limited
In January 2012, the Impax entered into an agreement with AstraZeneca UK Limited ("AstraZeneca") to distribute branded products under the terms of a Distribution, License, Developmentdistribution, license, development and Supplysupply Agreement ("AZ(the "AZ Agreement"). The parties subsequently entered into a First Amendment to the AZ Agreement dated May 31, 2016 (as amended, the "AZ Amendment"). Under the terms of the AZ Agreement, AstraZeneca granted to Impax an exclusive license to commercialize the tablet, orally disintegrating tablet and nasal spray formulations of Zomig® (zolmitriptan) products for the treatment of migraine headaches in the United States and in certain U.S. territories, except during an initial transition period when AstraZeneca fulfilled all orders of Zomig® products on Impax’s behalf and AstraZeneca paid to Impax the gross profit on such Zomig® products. Under the terms ofPursuant to the AZ Amendment, under certain conditions, and depending on the nature and terms of the study agreed to with the FDA, Impax agreed to conduct, at its own expense, the juvenile toxicity study and pediatric study required by the FDA under the Pediatric Research Equity Act (“PREA”("PREA") for approval of the nasal formulation of Zomig® for the acute treatment of migraine in pediatric patients ages six through eleven years old, as further described in the study protocol mutually agreed to by the parties (the “PREA Study”"PREA Study"). In consideration for Impax conducting the PREA Study at its own expense, the AZ Amendment provides for the total royalty payments payable by Impax to AstraZeneca on net sales of Zomig® products under the AZ Agreement to be reduced by certainan aggregate amount of $30 million to be received in quarterly amounts specified amountsin the AZ Amendment beginning from the quarter ended June 30, 2016 and through the quarter ended December 31, 2020, with such reduced royalty amounts totaling an aggregate amount of $30.0 million.2020. In the event the royalty reduction amounts exceed the royalty payments payable by Impax to AstraZeneca pursuant to the AZ Agreement in any given quarter, AstraZeneca will be required to pay Impax an amount equal to the difference between the royalty reduction amount and the royalty payment payable by Impax to AstraZeneca. Impax’s commitment to perform the PREA Study may be terminated, without penalty, under certain circumstances as set forth in the AZ Amendment. The Company recognizes the amounts received from AstraZeneca for the PREA Study as a reduction to research and development expense.
In May 2013, Impax’s exclusivity period for branded Zomig® tablets and orally disintegrating tablets expired and Impax launched authorized generic versions of those products in the United States. As discussed above, pursuant to the AZ Amendment, the total royalty payments payable by Impax to AstraZeneca on net sales of Zomig® products under the AZ Agreement is reduced by certain specified amounts beginning from the quarter ended June 30, 2016 and through the quarter ended December 31, 2020, with such reduced royalty amounts totaling an aggregate amount of $30.0$30 million. The Company recorded cost of sales for royalties under this agreement of $1.0$5 million and $9 million for the three and six months ended June 30, 2019, respectively, and $1 million for both the three and six months ended June 30, 2018.
Adello License and Commercialization Agreement
On October 1, 2017, Amneal and Adello Biologics, LLC ("Adello"), a related party, entered into a license and commercialization agreement. Adello granted Amneal an exclusive license, under its New Drug Application, to distribute and sell two bio-similar products in the U.S. Adello is responsible for development, regulatory filings, obtaining FDA approval, and manufacturing, and Amneal is responsible for marketing, selling and pricing activities. The term of the agreement is 10-years from the respective product’s launch date. In connection with the agreement, Amneal paid an upfront amount of $2 million in October 2017 for execution of the agreement which was expensed in research and development. The agreement also provides for potential future milestone payments to Adello of (i) up to $21 million relating to regulatory approval, (ii) up to $43 million for successful delivery of commercial launch inventory, (iii) between $20 million and $50 million relating to number of competitors at launch for one product, and (iv) between $15 million and $68 million for the achievement of cumulative net sales for both products. The milestones are subject to certain performance conditions which may or may not be achieved, including FDA filing, FDA approval, launch activities and commercial sales volume objectives. In addition, the agreement provides for Amneal to pay a profit share equal to 50% of net profits, after considering manufacturing and marketing costs. The research and development expenses for payments made to Adello during the years ended December 31, 2018 and 2017 were immaterial.
6. Restructuring and Other Charges
Restructuring Charges
During the second quarter of 2018, in connection with the Combination, the Company committed to a restructuring plan to achieve cost savings. The Company expects to integrate its operations and reduce its combined cost structure through workforce reductions that eliminate duplicative positions and the consolidation of certain administrative, manufacturing and research and development facilities. In connection with this plan, the Company announced on May 10, 2018 that it willintended to close its Hayward, California based operations (the(collectively these actions comprise the "Plan").
The following table sets forth the components of the Company's restructuring and other charges (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Employee restructuring separation charges (1) | $ | 516 |
| | $ | 44,465 |
| | $ | 2,420 |
| | $ | 44,465 |
|
Asset-related charges(2) | 900 |
| | — |
| | 1,314 |
| | — |
|
| Total employee and asset-related restructuring charges | 1,416 |
| | 44,465 |
| | 3,734 |
| | 44,465 |
|
| Other employee severance charges | 1,419 |
| | — |
| | 5,262 |
| | — |
|
| Total restructuring and other charges | $ | 2,835 |
| | $ | 44,465 |
| | $ | 8,996 |
| | $ | 44,465 |
|
(1) Employee restructuring separation charges include the cost of benefits provided pursuant to the Company’sCompany's severance programs for employees impacted by the Plan at the Company's Hayward, facilityCA and other facilities.
The Company recorded(2) Asset-related charges for restructuring as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| Employee separation charges | $ | 44,465 |
|
| $ | — |
|
| $ | 44,465 |
|
| $ | — |
|
| | | | | | | | |
The charges related to restructuring impacted segment earnings as follows (in thousands):
| |
| Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| Generic | 24,797 |
| | $ | — |
| | 24,797 |
| | $ | — |
| |
| Generics | | $ | 1,317 |
| | $ | 24,797 |
| | $ | 2,313 |
| | $ | 24,797 |
|
| Specialty | 2,421 |
| | — |
| | 2,421 |
| | — |
| — |
| | 2,421 |
| | 178 |
| | 2,421 |
|
| Corporate | 17,247 |
| | — |
| | 17,247 |
| | — |
| 99 |
| | 17,247 |
| | 1,243 |
| | 17,247 |
|
| Total restructuring charges | $ | 44,465 |
| | $ | — |
| | $ | 44,465 |
| | $ | — |
| |
| Total employee and asset-related restructuring charges | | $ | 1,416 |
| | $ | 44,465 |
| | $ | 3,734 |
| | $ | 44,465 |
|
The following table shows the change in the employee separation-related liability associated with the Company's restructuring programs, which is included in accounts payable and accrued expenses (in thousands):
|
| | | |
| Employee Separation |
| Balance at December 31, 2017 | $ | — |
|
| Liabilities assumed in Impax acquisition | 2,199 |
|
| Charges to income | 44,465 |
|
| Payments | (6,353 | ) |
| Balance at June 30, 2018 | $ | 40,311 |
|
|
| | | |
| | Employee Restructuring |
| Balance at December 31, 2018 | $ | 22,112 |
|
| Charges to income | 2,420 |
|
| Payments | (22,075 | ) |
| Balance at June 30, 2019 | $ | 2,457 |
|
AsSee Note 18. Subsequent Events for a discussion of June 30, 2018, the Company currently estimates that it will incur additional aggregate cash expenditures of approximately $50.0 million to $60.0 million related to severance and other employee costs in connection with the Plan over the next 18 months. Since the Company is in the early stages of implementing the Plan, the amount and timing of any cash expenditures related to dismantling and asset removal and other site exit costs cannot be estimated at this time. As the Plan is implemented, the Company's management will reevaluate the estimated expenses and charges set forth above and may revise its estimates as appropriate.a restructuring plan announced July 10, 2019.
7. Loss per Share
7. Acquisition, Transaction-RelatedBasic loss per share of Class A Common Stock and Integration ExpensesClass B-1 Common Stock is computed by dividing net loss attributable to Amneal Pharmaceuticals, Inc. by the weighted-average number of shares of Class A Common Stock and Class B-1 Common Stock outstanding during the period. Diluted loss per share of Class A Common Stock and Class B-1 Common Stock is computed by dividing net loss attributable to Amneal Pharmaceuticals, Inc. by the weighted-average number of shares of Class A Common Stock and Class B-1 Common Stock outstanding, adjusted to give effect to potentially dilutive securities.
The following table sets forth the componentsreconciliations of the Company’s acquisition, transaction-relatednumerators and integration expenses for the threedenominators used to compute basic and six months ended June 30, 2018diluted loss per share of Class A Common Stock and 2017.
Class B-1 Common Stock (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| 2018 |
| 2017 |
| 2018 | | 2017 |
Acquisition, transaction-related and integration expenses 1 | $ | 21,008 |
|
| $ | 82 |
|
| $ | 28,143 |
|
| $ | 82 |
|
Profit Participation Units 2 | 158,757 |
|
| — |
|
| 158,757 |
|
| — |
|
Transaction-related bonus 3 | 27,742 |
|
| — |
|
| 27,742 |
|
| — |
|
| Total | $ | 207,507 |
|
| $ | 82 |
|
| $ | 214,642 |
|
| $ | 82 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Numerator: | | | | | | | |
| Net loss attributable to Amneal Pharmaceuticals, Inc. | $ | (16,902 | ) | | $ | (19,104 | ) | | $ | (64,783 | ) | | $ | (19,104 | ) |
| | | | | | | | |
| Denominator: | | | | | | | |
| Weighted-average shares of Class A Common Stock and Class B-1 Common Stock outstanding - basic and diluted | 128,016 |
| | 127,112 |
| | 127,852 |
| | 127,112 |
|
| | | | | | | | |
| Net loss per share attributable to Amneal Pharmaceuticals, Inc.'s common stockholders: | | | | | | | |
| Class A and Class B-1 basic and diluted | $ | (0.13 | ) | | $ | (0.15 | ) | | $ | (0.51 | ) | | $ | (0.15 | ) |
1 Acquisition, transaction-related and integration expenses include professional service fees (e.g. legal, investment banking and accounting), information technology systems conversions, and contract termination/ renegotiation costs.
2Profit Participation Units expense relatesThe allocation of net loss to the accelerated vestingholders of certain of Amneal's profit participation units that occurred prior to the Closing of the Combination for current and former employees of Amneal for service prior to the Combination (see additional information in the paragraph below and Note 18. Stockholders' Equity/ Members' Deficit).
3 Transaction-related bonus is a cash bonus that was funded by Holdings for employees of Amneal for service prior to the closing of the Combination (see additional information in Note 18., Stockholders' Equity/ Members' Deficit).
Accelerated Vesting of Profit Participation Units
Amneal’s historical capital structure included several classifications of membership and profit participation units. During the second quarter of 2018, the Board of Managers of Amneal Pharmaceuticals LLC approved a discretionary modification to certain profit participation units concurrent with the Combination that immediately caused the vesting of all profit participation units that were previously issued to certain current or former employees for service prior to the Combination. The modification entitled the holders to 6,886,140 shares of Class A Common Stock with a fair value of $126.0 million onand Class B-1 Common Stock began following the dateclosing of the Combination and $32.8 million of cash. The cash and shares will be distributed by Holdings with no additional shares issued byon May 4, 2018. Therefore, loss per share is the Company. As a result of this transaction, the Company recorded a charge in acquisition, transaction-related and integration expenses in the consolidated statements of operations and a corresponding capital contribution of $158.8 millionsame for the three and six months ended June 30, 2018.
Shares of the Company's Class B Common Stock do not share in the earnings or losses of the Company and, therefore, are not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B Common Stock under the two-class method has not been presented.
The following table presents potentially dilutive securities excluded from the computations of diluted earnings per share of Class A Common Stock and Class B-1 Common Stock (in thousands):
|
| | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Stock options(1) | 8,407 |
| | 6,028 |
| | 8,407 |
| | 6,028 |
|
Restricted stock units(1) | 2,894 |
| | 1,320 |
| | 2,894 |
| | 1,320 |
|
Performance stock units(1) | 465 |
| | — |
| | 465 |
| | — |
|
Shares of Class B Common Stock(2) | 170,941 |
| | 171,261 |
| | 170,941 |
| | 171,261 |
|
(1) Excluded from the computation of diluted loss per share of Class A Common Stock and Class B-1 Common Stock because the effect of their inclusion would have been anti-dilutive since there was a net loss attributable to the Company for the three and six months ended June 30, 2019 and 2018.
(2) Shares of Class B Common Stock are considered potentially dilutive shares of Class A Common Stock and Class B-1 Common Stock. Shares of Class B Common Stock have been excluded from the computations of diluted earnings per share of Class A Common Stock and Class B-1 Common Stock because the effect of their inclusion would have been anti-dilutive under the if-converted method.
8. Income taxes
As a result of the Combination (refer to Note 1. 1. Nature of Operations and Basis of Presentation)), the Company became the sole managing member of Amneal, with Amneal being the accounting predecessor for accounting purposes. The operations of Amneal are conducted throughis a limited liability company that is treated as a partnership for U.S. federal and for most applicable state and local income tax purposes. As a partnership, Amneal is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Amneal is passed through to and included in the taxable income or loss of its members, including the Company, on a pro rata basis subject to applicable tax regulations. The Company is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of Amneal, as well as any stand-alone income or loss generated by the Company. Additionally, Amneal provides for income taxes in the various foreign jurisdictions in which it operates.
In connection with the Combination, the Company recorded a deferred tax asset for its outside basis difference in its investment in Amneal which was $303.2 million at May 4, 2018. Also in connection with the Combination, the Company recorded a deferred tax asset of $54.6 million related to the net operating loss of Impax from January 1, 2018 through May 4, 2018 as well as certain federal and state credits of Impax that were attributable to the Company.
The Company records aits valuation allowanceallowances against its deferred tax assets to reduce the net carrying value to an amount thatwhen it believes is more likely than not tothat all or a portion of a deferred tax asset will not be realized. AsThe Company routinely evaluates the realizability of June 30, 2018,its deferred tax assets by assessing the Company concluded,likelihood that its deferred tax assets will be recovered based on the weight of all available positive and negative evidence, thoseincluding scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, the Company considers its historical results and incorporates certain assumptions, including projected new product launches, revenue growth, and operating margins, among others.
As of June 30, 2019, the Company had approximately $392 million in net deferred tax assets recorded as part("DTAs"), which included a U.S. net DTA of $386 million and foreign net DTAs of $6 million. These DTAs include U.S. deferred taxes on the Combination areCompany's investment in Amneal totaling $240 million that can be used to offset taxable income in future periods and reduce the Company's income taxes payable in those future periods. These DTAs also include net operating loss ("NOL") carryforwards which have no expiration. At this time, the Company considers it more likely than not that it will have sufficient taxable income in the future that will allow it to be realized.
realize these DTAs. As such, no additional valuation allowance was recognized. Therecognized as of June 30, 2019. However, if the Company maintainsis unable to generate sufficient taxable income from its future operations, a substantial valuation allowance against Amneal's foreign jurisdictionto reduce the Company's DTAs may be required, which could materially increase the Company's income tax attributes.expense in the period the valuation allowance is recognized and have a material adverse effect on its results of operations and financial condition.
In connection with the Combination, the Company entered into a tax receivable agreement ("TRA"(“TRA”) for which it is generally required to pay to the other holders of Amneal Common Units 85% of the applicable tax savings, if any, in U.S. federal and state income tax that the Companyit is deemed to realize as a result of certain tax attributes of their Amneal Common Units sold to the Company (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Amneal Common Units for shares of Class A common stockCommon Stock and (ii) tax benefits attributable to payments made under the tax receivable agreementTRA (including imputed interest). In connection with the exchanges which occurred as part of the PIPE Investment and the Closing Date Redemption (Note 1. Nature of Operations and Basis of Presentation), theThe Company recorded adid not record an additional TRA liability during the three months ended June 30, 2019 as there were no exchanges during that period. The Company's TRA liability payable was $193 million as of $194.8 million.both June 30, 2019 and December 31, 2018. Such amounts will be paid when such deferred tax assets are realized as a reduction to income taxes due or payable.
The Company’s (benefit from) provision forFor the three months ended June 30, 2019 and 2018, the Company's benefit from income taxes and effective tax rates were $(12.4)$6 million and (4.7)%10.1% and $1.9$12 million and 4.7%, respectively. The Company’s benefit from income taxes and effective tax rate were $14 million and 7.5% and $12 million and 5.7%, for the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2019 and 2018, and 2017, the Company’s (benefit from) provision forrespectively.
The change in income taxes and effective tax rates were $(12.1) million and (5.7)% and $2.9 million and 3.4%, respectively.
The primaryis primarily due to the change in the (benefit from) provision is dueCompany's legal structure subsequent to only certainthe Combination. Prior to the Combination, as a limited liability company, entity-levelincome taxes and foreignwere only provided for the international subsidiaries as all domestic taxes being recorded for Amneal priorflowed to the Combination.members. Subsequent to May 4, 2018, federaldomestic income taxes were also provided related tofor the Company’sCompany's allocable share of income (losses)or losses from Amneal at the prevailing U.S. federal, state, and local corporate income tax rates.
On December 22, 2017, the Tax Cuts and Jobs Act was enactedThe change in the United States, which significantly reforms U.S. tax legislation. In December 2017, the SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting for the effects of the Tax Cuts and Jobs Act. The Company will continue to evaluate the legislative changes during the measurement period allowed under SAB 118.
Given the complexity of the global intangible low-taxed income ("GILTI") provisions, the Company is still evaluating the effects of the GILTI provisions and has not yet determined its accounting policy. The Company's accounting policy election with respect to the new GILTI Tax rules will depend, in part, on analyzing global income to determine whether a reasonably estimate can be made. While the Company currently does not believe GILTI will have a material impact on its 2018 income tax provision, the Company has not completed its analysis and has not determined which method to elect. Adjustments related to the amount of GILTI tax recorded in the Company's consolidated financial statements may be required based on the outcome of this election.
9. Earnings per Share
Basic and diluted net loss per share is as follows (in thousands, except per share amounts):
|
| | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Net loss attributable to Amneal Pharmaceuticals, Inc. | $ | (19,104 | ) | | — |
| | $ | (19,104 | ) | | — |
|
| | | | | | | | |
| Weighted average shares outstanding: | | | | | | | |
| Class A and Class B-1 basic and diluted | 127,112 |
| | — |
| | 127,112 |
| | — |
|
| | | | | | | | |
| Net loss per share attributable to Amneal Pharmaceuticals, Inc.'s common stockholders: | | | | | | | |
| Class A and Class B-1 basic and diluted | $ | (0.15 | ) | | | | $ | (0.15 | ) | | |
The allocation of net loss to the holders of shares of Class A Common Stock and Class B-1 Common Stock began following the closing of the Combination on May 4, 2018. Therefore, the net loss per share is the samebenefit for the three and six months ended June 30, 2018.
2019 is also impacted by the year-over-year decline in pre-tax loss. For the three and six months ended June 30, 2018,2019, the decline in pre-tax loss was primarily attributable to a $204 million and $205 million, respectively, decline in acquisition, transaction-related and integration expenses as well as a $41 million and $35 million, respectively, decline in restructuring and other charges associated with severance benefits.
The Company and its subsidiaries file income tax returns in the U.S. federal, and various state, local and foreign jurisdictions. The Company is not currently under income tax audit in any jurisdiction, and it will file its first income tax returns for the period ended December 31, 2018. Impax's federal tax filings for the 2015, 2016 and 2017 tax years are currently under audit and these are the only tax years open under the IRS statue of limitations for Impax. If there were adjustments to the attributes of Impax, they could impact the carryforward losses at the Company, excluded outstanding stock optionswhich is the successor in interest to Impax. The Amneal partnership was audited for the tax year ended December 31, 2015 without any adjustments to taxable income. Income tax returns are generally subject to examination for a period of 3 years in the U.S. The statute of limitations for the 2016 and restricted stock units from2017 tax years will, therefore, expire no earlier than 2020. However, any adjustments to the computation2016 or 2017 tax years would be pre-transaction when the Company had no ownership interest in Amneal. Under the partnership income tax regulations and audit guidelines, the Company is not responsible for any hypothetical pre-transaction income tax liabilities which pass through to the owners as of diluted net loss per share because their effectthe year of any potential income tax adjustment. Neither the Company nor any of its other affiliates is antidilutive.
currently under audit for state income tax.
Shares of the Company's Class B Common Stock do not share in the earnings or losses of the Company and, therefore, are not participating securities. Shares of the Company's Class B Common Stock are, however, considered potentially dilutive shares of Class A Common Stock. Under the if converted method, 171,261 shares of Class B Common Stock outstanding as of June 30, 2018 were determined to be anti-dilutive and have therefore been excluded from the computations of diluted earnings per share.
10.9. Trade Accounts Receivable, Net
Trade accounts receivable, net is comprised of the following (in thousands):
| | | | June 30, 2018 | | December 31, 2017 | June 30, 2019 | | December 31, 2018 |
| Gross accounts receivable | $ | 1,375,570 |
| | $ | 827,302 |
| $ | 1,454,294 |
| | $ | 1,349,588 |
|
| | | | | |
| Allowance for doubtful accounts | (2,465 | ) | | (1,824 | ) | (1,959 | ) | | (2,340 | ) |
| Contract charge-backs and sales volume allowances | (716,313 | ) | | (453,703 | ) | (790,740 | ) | | (829,596 | ) |
| Cash discount allowances | (30,301 | ) | | (20,408 | ) | (26,929 | ) | | (36,157 | ) |
| Subtotal | (749,079 | ) | | (475,935 | ) | (819,628 | ) | | (868,093 | ) |
| Trade accounts receivable, net | $ | 626,491 |
| | $ | 351,367 |
| $ | 634,666 |
| | $ | 481,495 |
|
Receivables from customers representing 10% or more of the Company’s gross trade accounts receivable reflected three customers at June 30, 2018,2019, equal to 31%32%, 31%29%, and 25%22%, respectively. Receivables from customers representing 10% or more of the Company’s gross trade accounts receivable reflected three customers at December 31, 2017,2018, equal to 36%30%, 27%28%, and 19%24%, respectively.
11.10. Inventories
Inventories, net of reserves, are comprised of the following (in thousands):
| |
| June 30, 2018 |
| December 31, 2017 | June 30, 2019 | | December 31, 2018 |
| Raw materials | $ | 202,760 |
|
| $ | 140,051 |
| $ | 180,188 |
| | $ | 181,654 |
|
| Work in process | 59,156 |
|
| 38,146 |
| 38,376 |
| | 54,152 |
|
| Finished goods | 250,563 |
|
| 105,841 |
| 196,063 |
| | 221,413 |
|
| Inventories | $ | 512,479 |
|
| $ | 284,038 |
| |
| Total inventories | | $ | 414,627 |
| | $ | 457,219 |
|
12. Property, Plant, and Equipment11. Leases
Property, plant, and equipment is comprisedThe majority of the following (in thousands):
|
| | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| Land | $ | 22,859 |
| | $ | 5,275 |
|
| Buildings | 234,756 |
| | 227,864 |
|
| Leasehold improvements | 93,254 |
| | 70,354 |
|
| Machinery and equipment | 305,899 |
| | 260,637 |
|
| Furniture and fixtures | 10,713 |
| | 18,415 |
|
| Vehicles | 1,511 |
| | 1,517 |
|
| Computer equipment | 29,876 |
| | 26,831 |
|
| Construction-in-progress | 49,920 |
| | 32,235 |
|
| Total property, plant, and equipment | 748,788 |
| | 643,128 |
|
| Less: Accumulated depreciation | (179,460 | ) | | (156,370 | ) |
| Property, plant, and equipment, net | $ | 569,328 |
| | $ | 486,758 |
|
Depreciation recognizedCompany's operating and interest capitalizedfinancing lease portfolio consists of corporate offices, manufacturing sites, warehouse space, research and included in property, plant,development facilities and equipment bymanufacturing equipment. The Company's leases have remaining lease terms of 1 year to 25 years. Rent expense for the Company is as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months
Ended June 30, | | Six Months
Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| Depreciation | $ | 15,453 |
| | $ | 9,650 |
| | $ | 28,443 |
| | $ | 19,363 |
|
Interest capitalizedthree and included in property, plant,six months ended June 30, 2019 was $6 million and equipment by the Company during$12 million, respectively. Rent expense for the three and six months ended June 30, 2018 and 2017 was immaterial.
13. Goodwill and Intangible Assets
The changes in goodwill for the six months ended June 30, 2018 and for the year ended December 31, 2017 were are follows (in thousands):
|
| | | | | | | |
| For the six months ended June 30, 2018 | | For the year ended December 31, 2017 |
| Balance, beginning of period | $ | 26,444 |
| | $ | 28,441 |
|
| Goodwill acquired during the period | 361,340 |
| | — |
|
Goodwill divested during the period
| — |
| | (3,895 | ) |
| Currency translation | (1,309 | ) | | 1,898 |
|
| Balance, end of period | $ | 386,475 |
| | $ | 26,444 |
|
As of June 30, 2018, $348$4 million and $38 million of goodwill was allocated to the Specialty Pharma and Generic segments, respectively. As of December 31, 2017, all goodwill was allocated to the Generics segment. For the six months ended June 30, 2018 goodwill acquired was associated with the Impax and Gemini acquisitions.
Intangible assets at June 30, 2018 and December 31, 2017 consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| | Weighted Average Amortization Period (in years) | | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| Amortizing intangible assets: | | | | | | | | | | | | | |
| Product rights | 12.4 | | $ | 1,239,401 |
| | $ | (34,765 | ) | | $ | 1,204,636 |
| | $ | 49,700 |
| | $ | (17,210 | ) | | $ | 32,490 |
|
| Customer relationships | 14.9 | | 7,264 |
| | (1,846 | ) | | 5,418 |
| | 7,421 |
| | (1,072 | ) | | 6,349 |
|
| Marketing authorizations | 6.8 | | 3,075 |
| | (118 | ) | | 2,957 |
| | 76 |
| | (43 | ) | | 33 |
|
| Licenses | 11.5 | | 3,000 |
| | (700 | ) | | 2,300 |
| | 3,000 |
| | (600 | ) | | 2,400 |
|
| Trade names | 14.9 | | 2,641 |
| | (671 | ) | | 1,970 |
| | 2,699 |
| | (522 | ) | | 2,177 |
|
| Total |
| | $ | 1,255,381 |
| | $ | (38,100 | ) | | $ | 1,217,281 |
| | $ | 62,896 |
| | $ | (19,447 | ) | | $ | 43,449 |
|
| In-process research and development |
| | 571,252 |
| | — |
| | 571,252 |
| | 1,150 |
| | — |
| | 1,150 |
|
| Total intangible assets | | | $ | 1,826,633 |
| | $ | (38,100 | ) | | $ | 1,788,533 |
| | $ | 64,046 |
| | $ | (19,447 | ) | | $ | 44,599 |
|
Amortization expense related to intangible assets recognized is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months
Ended June 30, | | Six Months
Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| Amortization | $ | 16,694 |
| | $ | 886 |
| | $ | 18,454 |
| | $ | 1,773 |
|
The following table presents future amortization expense for the next five years and thereafter, excluding $571.3 million of in-process research and development intangible assets (in thousands).
|
| | | | |
| | | Future Amortization |
| Remainder of 2018 | | $ | 52,829 |
|
| 2019 | | 115,988 |
|
| 2020 | | 128,101 |
|
| 2021 | | 144,423 |
|
| 2022 | | 147,528 |
|
| 2023 | | 125,845 |
|
| Thereafter | | 502,567 |
|
| Total | | $ | 1,217,281 |
|
14. Other Accounts
Prepaid expenses and other current assets are comprised of the following (in thousands):
|
| | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
| Deposits and advances | $ | 2,310 |
| | $ | 1,851 |
|
| Prepaid insurance | 8,993 |
| | 3,154 |
|
| Prepaid regulatory fees | 1,621 |
| | 5,926 |
|
| Income tax receivable | 68,334 |
| | — |
|
| Other current receivables | 19,429 |
| | 15,150 |
|
| Other prepaid assets | 38,909 |
| | 16,315 |
|
| Total prepaid expenses and other current assets | $ | 139,596 |
| | $ | 42,396 |
|
Accounts payable and accrued liabilities are comprised of the following (in thousands):
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| Accounts payable | $ | 169,046 |
| | $ | 70,013 |
|
| Accrued returns allowance | 136,433 |
| | 45,175 |
|
| Accrued compensation | 85,663 |
| | 23,954 |
|
| Accrued Medicaid and commercial rebates | 70,198 |
| | 12,911 |
|
| Accrued royalties | 20,628 |
| | 2,970 |
|
Estimated Teva and Allergan chargebacks and rebates 1 | 13,277 |
| | — |
|
| Medicaid reimbursement accrual | 15,000 |
| | 15,000 |
|
| Accrued professional fees | 10,213 |
| | 938 |
|
| Accrued other | 35,176 |
| | 23,818 |
|
| Total accounts payable and accrued expenses | $ | 555,634 |
| | $ | 194,779 |
|
1In connection with Impax's August 2016 acquisition of certain assets from Teva Pharmaceuticals USA, Inc. ("Teva") and Allergan plc ("Allergan"), Impax agreed to manage the payment process for certain commercial chargebacks and rebates on behalf of Teva and Allergan related to products each of Teva and Allergan sold into the channel prior to Impax's acquisition of the products. On August 18, 2016, Impax received a payment totaling $42.4 million from Teva and Allergan, which represented their combined estimate of the amount of commercial chargebacks and rebates to be paid by Impax on their behalf to wholesalers who purchased products from Teva and Allergan prior to the closing. Pursuant to the agreed upon transition services, Teva and Allergan are obligated to reimburse Impax for additional payments related to chargebacks and rebates for products they sold into the channel
prior to the closing and made on their behalf in excess of the $42.4 million. If the total payments made by Impax on behalf of Teva and Allergan are less than $42.4 million, Impax is obligated to refund the difference to Teva and/or Allergan. As of June 30, 2018, $13.3 million remained in accounts payable and accrued expenses.
15. Debt
The following is a summary of the Company's total indebtedness (in thousands):
|
| | | | | | | |
| June 30, 2018 |
| December 31, 2017 |
| Senior Credit Facility – Term Loan due May 2025 | $ | 2,699,376 |
|
| $ | — |
|
| Other | 624 |
|
| — |
|
| Senior Credit Facility – Term Loan | — |
|
| 1,378,160 |
|
| Senior Credit Facility – Revolver | — |
|
| 75,000 |
|
| Total debt | 2,700,000 |
|
| 1,453,160 |
|
| Less: debt issuance costs | (37,268 | ) |
| (8,715) |
|
| Total debt, net of debt issuance costs | 2,662,732 |
|
| 1,444,445 |
|
| Less: current portion of Senior Credit Facility – Revolver | — |
|
| 75,000 |
|
| Less: current portion of long-term debt | 21,427 |
|
| 14,171 |
|
| Total long-term debt, net | $ | 2,641,305 |
|
| $ | 1,355,274 |
|
On May 4, 2018 the Company entered into a senior credit agreement that provided a term loan ("Term Loan") with a principal amount of $2.7 billion and an asset backed credit facility ("ABL") under which loans and letters of credit up to a principal amount of $500.0 million are available (principal amount of up to $25 million is available for letters of credit) (collectively, the “Senior Secured Credit Facilities”). The Term Loan is repayable in equal quarterly installments at a rate of 1.00% of the original principal amount annually, with the balance payable at maturity on May 4, 2025. The Term Loan bears a variable annual interest rate, which is LIBOR plus 3.5% at June 30, 2018. The ABL bears an annual interest rate of 1.5% at June 30, 2018 and matures on May 4, 2023. At June 30, 2018, the ABL had no outstanding borrowings.
The proceeds from the Term Loan were used to finance, in part, the cost of the Combination and to pay off Amneal’s debt and substantially all of Impax’s debt at the close of the Combination. In connection with the refinancing of the Amneal and Impax debt, the Company recorded a loss on extinguishment of debt of $19.7 million for the three and six months ended June 30, 2018.
The proceeds of any loans made under the Senior Secured Credit Facility can be used for capital expenditures, acquisitions, working capital needs and other general purposes, subject to covenants as described below. The Company pays a commitment fee based on the average daily unused amount of the ABL at a rate based on average historical excess availability, between 0.25% and 0.375% per annum. At June 30, 2018, the ABL commitment fee rate is 0.375% per annum.
The Company incurred costs associated with the Term Loan of $38.1 million and the ABL of $4.6 million, which have been capitalized and are being are amortized over the life of the applicable debt agreement to interest expense. The Term Loan has been recorded in the balance sheet net of issuance costs. Costs associated with the ABL have been recorded in other assets because there were no borrowings outstanding on the effective date of the ABL. For the three and six months ended June 30, 2018, amortization of deferred financing costs related to the Term Loan, ABL and historical Amneal debt was $1.4 million and $2.6 million, respectively. For the three and six months ended June 30, 2017, amortization of deferred financing costs related to the historical Amneal debt was $1.5 million and $2.5$5 million, respectively.
The Senior Secured Credit Facilities contain a numbercomponents of covenants that, among other things, create liens on Amneal and its subsidiaries' assets. The Senior Secured Credit Facilities contain certain negative covenants that, among other things and subject to certain exceptions, restrict Amneal’s and its subsidiaries' ability to incur additional debt or guarantees, grant liens, make loans, acquisitions or other investments, dispose of assets, merge, dissolve, liquidate or consolidate, pay dividends or other payments on capital stock, make optional payments or modify certain debt instruments, modify certain organizational documents, enter into arrangements that restrict the ability to pay dividends or grant liens, or enter into or consummate transactions with affiliates. The ABL Facility also includes a financial covenant whereby Amneal must maintain a minimum fixed charge coverage ratio if certain borrowing conditions are met. The Senior Secured Credit Facilities contain customary events of default, subject to certain exceptions. Upon the occurrence of certain events of default, the obligations under the Senior Secured Credit Facilities may be accelerated and the commitments may be terminated. At June 30, 2018, Amneal was in compliance with all covenants.
The Company’s Senior Secured Credit Facility requires payments of $13.5 million for the remainder of 2018, $27.0 million a year for the next five years and the balance thereafter.
On June 4, 2018, Impax completed a tender offer to repurchase all of Impax's 2.00% senior notes due 2022. Pursuant to the tender offer, $599.4 million aggregate principal amount of the senior notes was repurchased.
Financing Obligations
The Company has a non-cancelabletotal lease agreement dated October 1, 2012, for two buildings located in Long Island, New York, that are used as an integrated manufacturing and office facility. Amneal was responsible for a portion of the renovation and construction costs and is deemed, for accounting purposes, to be the owner of the building. As a result, the Company was required to record the property, plant, and equipment and a corresponding financing obligation. The financing obligation is reduced by rental payments through the end of the lease, June 30, 2043.
The remaining financing obligation was $39.5 million and $40.3 million as of June 30, 2018 and December 31, 2017, respectively. The current portion of the remaining financing obligation was $0.3 million as of June 30, 2018 and December 31, 2017.
The monthly payments required under the terms of the non-cancelable lease agreement over the next five years and thereafterwere as follows (in thousands):
|
| | | | |
| | | Payments Due |
| Remainder of 2018 | | $ | 2,600 |
|
| 2019 | | 5,200 |
|
| 2020 | | 5,200 |
|
| 2021 | | 5,200 |
|
| 2022 | | 5,200 |
|
| 2023 | | 5,200 |
|
| Thereafter | | 101,400 |
|
| Total | | $ | 130,000 |
|
|
| | | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Operating lease cost(1) | $ | 4,950 |
| | $ | 10,890 |
|
| |
| |
|
| Finance lease cost: |
| |
|
| Amortization of right-of-use assets | 652 |
| | 1,304 |
|
| Interest on lease liabilities | 1,119 |
| | 2,243 |
|
| Total finance lease cost | 1,771 |
| | 3,547 |
|
| | | | |
| Total lease cost | $ | 6,721 |
| | $ | 14,437 |
|
(1) Includes variable and short-term lease costs.
Supplemental balance sheet information related to the Company's leases was as follows (in thousands):
|
| | | |
| Operating leases | June 30, 2019 |
| Operating lease right-of-use assets | $ | 59,900 |
|
| Operating lease right-of-use assets - related party | 17,031 |
|
| Total operating lease right-of-use assets | $ | 76,931 |
|
| | |
| Operating lease liabilities | $ | 47,836 |
|
| Operating lease liabilities - related party | 14,862 |
|
| Current portion of operating lease liabilities | 13,313 |
|
| Current portion of operating and financing lease liabilities - related party | 2,258 |
|
| Total operating lease liabilities | $ | 78,269 |
|
| | |
| Financing leases | |
| Financing lease right of use assets - related party | $ | 62,588 |
|
| | |
| Financing lease liabilities - related party | $ | 61,990 |
|
| Current portion of operating and financing lease liabilities - related party | 1,035 |
|
| Total financing lease liabilities | $ | 63,025 |
|
Supplemental cash flow information related to leases was as follows (in thousands):
|
| | | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from finance leases | $ | 1,120 |
| | $ | 1,870 |
|
| Operating cash flows from operating leases | 5,107 |
| | 10,004 |
|
| Financing cash flows from finance leases | 247 |
| | 866 |
|
| | | | |
| Non-cash activity: | | | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | — |
| | $ | 360 |
|
The table below reflects the weighted average remaining lease term and weighted average discount rate for the Company's operating and finance leases as of June 30, 2019.
|
| |
| June 30, 2019 |
| Weighted average remaining lease term - operating leases | 6 years |
| Weighted average remaining lease term - finance leases | 23 years |
| |
| Weighted average discount rate - operating leases | 6.1% |
| Weighted average discount rate - finance leases | 7.0% |
Maturities of lease liabilities as of June 30, 2019 were as follows (in thousands):
|
| | | | | | | |
| | Operating Leases | | Financing Leases |
2019(1) | $ | 9,990 |
| | $ | 2,736 |
|
| 2020 | 19,826 |
| | 5,474 |
|
| 2021 | 16,187 |
| | 5,474 |
|
| 2022 | 12,342 |
| | 5,474 |
|
| 2023 | 10,054 |
| | 5,474 |
|
| Thereafter | 26,947 |
| | 106,740 |
|
| Total lease payments | 95,346 |
| | 131,372 |
|
| Less: Imputed interest | (17,077 | ) | | (68,347 | ) |
| Total | $ | 78,269 |
| | $ | 63,025 |
|
(1) Excludes the six months ended June 30, 2019.
As disclosed in the Company's 2018 Annual Report on Form 10-K, under the previous lease accounting standard, the table below reflects the future minimum lease payments, including reasonably assured renewals, due under non-cancelable leases and a financing obligation as of December 31, 2018 (in thousands):
|
| | | | | | | |
| | Operating Leases | | Financing Obligation |
| 2019 | $ | 25,885 |
| | $ | 5,474 |
|
| 2020 | 12,071 |
| | 5,474 |
|
| 2021 | 11,105 |
| | 5,474 |
|
| 2022 | 10,329 |
| | 5,474 |
|
| 2023 | 10,043 |
| | 5,474 |
|
| Thereafter | 28,128 |
| | 107,196 |
|
| Total lease payments | 97,561 |
| | 134,566 |
|
| Less: Imputed interest | — |
| | (95,217 | ) |
| Total | $ | 97,561 |
| | $ | 39,349 |
|
For additional information regarding lease transactions between related parties, refer to Note 15. Related Party Transactions.
16.12. Fair Value Measurements of Financial Instruments
Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, Amnealthe Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Value is determined using pricing models, discounted cash flow methodologies, or similar techniques and also includes instruments for which the determination of fair value requires significant judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification for each reporting period. The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 (in thousands) (there were no material assets or liabilities that were measured at fair value on a recurring basis as of December 31, 2017):
| | | | | | | Fair Value Measurement Based on | | | | Fair Value Measurement Based on |
| | | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
| June 30, 2019 | | | Total | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets | | | | | | | | | | | | | | | | |
Deferred Compensation Plan asset (1) | | $ | 43,213 |
| | $ | — |
| | $ | 43,213 |
| | $ | — |
| | $ | 43,004 |
| | $ | — |
| | $ | 43,004 |
| | $ | — |
|
| Liabilities | | | | | | | | | | | | | | | | |
Deferred Compensation Plan liabilities (1) | | $ | 34,213 |
| | $ | — |
| | $ | 34,213 |
| | $ | — |
| | $ | 24,133 |
| | $ | — |
| | $ | 24,133 |
| | $ | — |
|
| | | | | | | | | | |
| December 31, 2018 | | | | | | | | | |
| Assets | | | | | | | | | |
Deferred Compensation Plan asset (1) | | | $ | 40,101 |
| | $ | — |
| | $ | 40,101 |
| | $ | — |
|
| Liabilities | | | | | | | | | |
Deferred Compensation Plan liabilities (1) | | | $ | 27,978 |
| | $ | — |
| | $ | 27,978 |
| | $ | — |
|
1(1)The As of June 30, 2019, deferred compensation plan liabilities areof $8 million and $16 million were recorded in current and non-current liabilities, respectively. As of December 31, 2018, deferred compensation plan liabilities were recorded in non-current liabilities. They are recorded at the value of the amount owed to the plan participants, with changes in value recognized as compensation expense. The calculation of the deferred compensation plan obligation is derived from observable market data by reference to hypothetical investments selected by the participants and is included in other long-term liabilities. The Company invests participant contributions in corporate-owned life insurance policies, for which the cash surrender value is included in other non-current assets. In July 2019, the Company surrendered corporate-owned life insurance for approximately $43 million in cash proceeds.
There were no transfers between levels in the fair value hierarchy during the six months ended June 30, 2018.2019.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
The carrying amounts of cash, accounts receivable and accounts payable approximate their fair values due to the short-term maturity of these instruments.
The $2.7 billion term loan under the Company’s Term Loansenior credit agreement entered into on May 4, 2018 (the "Term Loan") falls into the Level 2 category within the fair value level hierarchy. The fair value was determined using market data for valuation. The fair value of the Term Loan at June 30, 2019 and December 31, 2018 was approximately $2.70 billion.
As of December 31, 2017, the Company’s prior term loan (which was subsequently paid off at the closing of the Combination with the proceeds of the Term Loan) had a fair value of approximately $1.39$2.7 billion which was based upon market data (Level 2).and $2.5 billion, respectively.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
There were no non-recurring fair value measurements during the six months ended June 30, 20182019 and 2017.2018.
17. Commitments and Contingencies
Contractual Obligations
The Company leases buildings and other tangible property. Rent expense under these leases was $4.3 million and $5.1 million for the three and six months ended June 30, 2018. Rent expense under these leases was $4.3 million and $8.6 million for the three and six months ended June 30, 2017. The table below reflects the future minimum lease payments, including reasonably assured renewals, due under these non-cancelable leases as of June 30, 2018 (in thousands):
|
| | | | |
| | | Operating Leases |
| Remainder of 2018 | | $ | 11,910 |
|
| 2019 | | 25,338 |
|
| 2020 | | 11,840 |
|
| 2021 | | 10,537 |
|
| 2022 | | 9,613 |
|
| 2023 | | 9,278 |
|
| Thereafter | | 26,529 |
|
| Total | | $ | 105,045 |
|
Commitments
Commercial Manufacturing, Collaboration, License, and Distribution Agreements
The Company continues to seek to enhance its product line and develop a balanced portfolio of differentiated products through product acquisitions and in-licensing. Accordingly, the Company, in certain instances, may be contractually obligated to make potential future development, regulatory, and commercial milestone, royalty and/or profit sharing payments in conjunction with collaborative agreements or acquisitions that the Company has entered into with third parties. The Company has also licensed certain technologies or intellectual property from various third parties. The Company is generally required to make upfront payments as well as other payments upon successful completion of regulatory or sales milestones. The agreements generally permit the Company to terminate the agreement with no significant continuing obligation. The Company could be required to make significant payments pursuant to these arrangements. These payments are contingent upon the occurrence of certain future events and, given the nature of these events, it is unclear when, if ever, the Company may be required to pay such amounts. Further, the timing of any future payment is not reasonably estimable.
Contingencies
Legal Proceedings
The Company's legal proceedings are complex, constantly evolving and subject to uncertainty. As such, the Company cannot predict the outcome or impact of the legal proceedings set forth below. And the Company is subject to legal proceedings that are not set forth below. While the Company believes it has valid claims and/or defenses to the matters described below, the nature of litigation is unpredictable, and the outcome of the following proceedings could include damages, fines, penalties and injunctive or administrative remedies. For any proceedings where losses are probable and reasonably capable of estimation, the Company accrues for a potential loss. While these accruals have been deemed reasonable by the Company’s management, the assessment process relies heavily on estimates and assumptions that may ultimately prove inaccurate or incomplete. Additionally, unforeseen circumstances or events may lead the Company to subsequently change its estimates and assumptions. Unless otherwise indicated below, the Company is at this time unable to estimate the possible loss, if any, associated with such litigation.
The Company currently intends to vigorously prosecute and/or defend these proceedings as appropriate. From time to time, however, the Company may settle or otherwise resolve these matters on terms and conditions that it believes to be in its best interest. Resolution of any or all claims, legal proceedings or investigations could have a material adverse effect on the Company's results of operations and/or cash flow in any given accounting period, or on the Company's overall financial condition.
Additionally, the Company manufactures and derives a portion of its revenue from the sale of pharmaceutical products in the opioid class of drugs, and may therefore face claims arising from the regulation and/or consumption of such products. See "Part II, Item IA. Risk Factors - The development, manufacture and sale of our products involves the risk of product liability and other claims by consumers and other third parties, and insurance against such potential claims is expensive and may be difficult to obtain” for more information.
Although the outcome and costs of the asserted and unasserted claims is difficult to predict, based on the information presently known to management, the Company does not currently expect the ultimate liability, if any, for such matters to have a material adverse effect on its business, financial condition, results of operations, or cash flows.
Medicaid Reimbursement Accrual
The Company is required to provide pricing information to state agencies that administer federal Medicaid programs. Certain state agencies have alleged that manufacturers have reported improper pricing information, which allegedly caused them to overpay reimbursement costs. Reserves are periodically established by the Company for any potential claims or settlements of overpayment. Although the Company intends to vigorously defend against any such claims, it had a reserve of approximately $15 million at both June 30, 20182019 and December 31, 2017.2018. The ultimate settlement of any potential liability for such claims may be higher or lower than estimated.
Patent Litigation
There is substantial litigation in the pharmaceutical, biological, and biotechnology industries with respect to the manufacture, use, and sale of new products which are the subject of conflicting patent and intellectual property claims. One or more patents often cover the brand name products for which the Company is developing generic versions and the Company typically has patent rights covering the Company’s branded products.
Under federal law, when a drug developer files an Abbreviated New Drug Application ("ANDA") for a generic drug seeking approval before expiration of a patent which has been listed with the FDA as covering the brand name product, the developer must certify its product will not infringe the listed patent(s) and/or the listed patent is invalid or unenforceable (commonly referred to as a “Paragraph IV”"Paragraph IV" certification). Notices of such certification must be provided to the patent holder, who may file a suit for patent infringement within 45 days of the patent holder’s receipt of such notice. If the patent holder files suit within the 45 days45-day period, the FDA can review and tentatively approve the ANDA, but generally is prevented from granting final marketing approval of the product until a final judgment in the action has been rendered in favor of the generic drug developer, or 30 months from the date the notice was received, whichever is sooner. The Company’s generic products divisionGeneric segment is typically subject to patent infringement litigation brought by branded pharmaceutical manufacturers in connection with the Company’s Paragraph IV certifications seeking an order delaying the approval of the Company’s ANDA until expiration of the patent(s) at issue in the litigation. Likewise, the Company’s branded products divisionSpecialty segment is currently involved in patent infringement litigation against generic drug manufacturers whothat have filed Paragraph IV certifications to market their generic drugs prior to expiration of the Company’s patents at issue in the litigation.
The uncertainties inherent in patent litigation make the outcome of such litigation difficult to predict. For the Company’s generic products division,Generics segment, the potential consequences in the event of an unfavorable outcome in such litigation include delaying launch of its generic products until patent expiration. If the Company were to launch its generic product prior to successful resolution of a patent litigation, the Company could be liable for potential damages measured by the profits lost by the branded product manufacturer rather than the profits earned by the Company if it is found to infringe a valid, enforceable patent.patent, or enhanced treble damages in cases of willful infringement. For the Company’s branded products division,Specialty segment, an unfavorable outcome may significantly accelerate generic competition ahead of expiration of the patents covering the Company’s branded products. All such litigation typically involves significant expense.
The Company is generally responsible for all of the patent litigation fees and costs associated with current and future products not covered by its alliance and collaboration agreements. The Company has agreed to share legal expenses with respect to third-party and Company products under the terms of certain of the alliance and collaboration agreements. The Company records the costs of patent litigation as expense in the period when incurred for products it has developed, as well as for products which are the subject of an alliance or collaboration agreement with a third-party.
Patent Defense Matters
Merck Sharp & Dohme Corp. v. Amneal Pharmaceuticals LLC (Mometasone furoate)
In March 2015, Merck Sharp & Dohme Corp filed suit against Amneal in the U.S. District Court for the District of Delaware alleging patent infringement based on the filing of the Amneal’s ANDA for a generic alternative to Merck’s Nasonex® product. The District Court trial was completed on June 22, 2016. The court issued an opinion finding that Amneal’s proposed generic product did not infringe the asserted patent. Merck filed an appeal of that decision with the Court of Appeals for the Federal Circuit. The Federal Circuit affirmed the District Court’s opinion, denied Merck’s request for rehearing, and issued the mandate on May 11, 2018. Amneal launched its generic version of the product on April 5, 2017, prior to the appellate court decision, and continues to sell the product as of June 30, 2018.
Otsuka Pharmaceutical Co. Ltd. v. Amneal Pharmaceuticals LLC, et. al. (Aripiprazole)
In March 2015, Otsuka Pharmaceutical Co. Ltd. (“Otsuka”) filed suit against Amneal in the U.S. District Court for the District of New Jersey alleging patent infringement based on the filing of Amneal’s ANDA for a generic alternative to Otsuka’s Abilify®Abilify® tablet product. Otsuka filed an appeal withIn 2016, the District Court granted Amneal’s motion to dismiss several of the patents in suit. The Court of Appeals for the Federal Circuit relatedaffirmed the dismissal with respect to rulings fromone such patent and Otsuka did not appeal the District Court regarding someCourt’s decision with respect to the other patents. On July 12, 2019, Otsuka voluntarily dismissed without prejudice all of the patents-in-suit.its claims against Amneal. The District Court has not yet set a trial date forentered an Order of Dismissal, and closed the remaining patents-in-suit. Amneal, like a number of other generic manufacturers, has launched its generic version of Otsuka’s Abilify® “at-risk,” prior to the rendering of an appellate court decision, and continues to sell the product as of June 30, 2018.
case, on July 15, 2019.
Patent Infringement Matters
Impax Laboratories, LLC, et al. v. Lannett Holdings, Inc.and Lannett Company (Zomig®)
In July 2014, Impax filed suit against Lannett Holdings, Inc. and Lannett Company (collectively, “Lannett”) in the United States District Court for the District of Delaware, alleging patent infringement based on the filing of the Lannett ANDA relating to Zolmitriptan Nasal Spray, 5mg, generic to Zomig® Nasal Spray. The case went to trial in September 2016. On March 29, 2017, the District Court issued a Trial Opinion finding the asserted patents valid and infringed. On April 17, 2017, the District Court entered a Final Judgment and Injunction that, inter alia, bars FDA approval of Lannett’s proposed generic product prior to May 29, 2021. On May 12, 2017, Lannett filed a Notice of Appeal with the United States Court of Appeals for the Federal Circuit. On June 28, 2018, the Federal Circuit affirmed the District Court’s decision in full. Lannett has until August 13, 2018 to request a rehearing.
Impax Laboratories, LLC, et al. v. Par Pharmaceutical, Inc. (Zomig®)
On September 23, 2016, Impax filed suit against Par Pharmaceutical, Inc. (“Par”) in the United States District Court for the District of Delaware, alleging patent infringement based on the filing of the Par ANDA relating to Zolmitriptan Nasal Spray, 2.5 mg and 5 mg, generic to Zomig® Nasal Spray. On October 12, 2016, the parties stipulated to stay the case pending the outcome of the related case, Impax Laboratories, LLC, et al. v. Lannett matter described above. On April 24, 2017, the parties stipulated that the stay shall remain in effect until the Impax Laboratories, LLC, et al. v. Lannett matter is fully resolved. On July 10, 2018, Par notified Impax that it had converted its Paragraph IV certification with respect to the sole patent-in-suit to a Paragraph III certification, and requested that Impax dismiss the lawsuit. The stipulation of dismissal was entered into and the lawsuit was dismissed on August 7, 2018.
Impax Laboratories, LLC., et al. v. Actavis Laboratories FL, Inc. and Actavis Pharma Inc. (Rytary®)
In September 2015, Impax filed suit against Actavis Laboratories FL, Inc. and Actavis Pharma Inc. (collectively, “Actavis”) in the United States District Court for the District of New Jersey, alleging patent infringement of U.S. Patent Nos. 7,094,427; 8,377,474; 8,454,998; 8,557,283; 9,089,607; 9,089,608, based on the filing of the Actavis ANDA relating to carbidopa and levodopa extended release capsules, generic to Rytary®. Impax filed related actions alleging infringement of later-issued U.S. Patent No. 9,463,246 in December 2016 and of later-issued U.S. Patent No. 9,533,046 in May 2017. Both related actions were consolidated with the lead action. On December 15, 2017, the Patent and Trademark Office issued an Ex Parte Reexamination Certificate canceling all claims of the ‘427 patent; the parties subsequently stipulated to dismiss with prejudice all claims and counterclaims relating to the ‘427 patent. Fact discovery and claim construction briefing have concluded and a claim construction hearing was held on April 26, 2017. On May 9, 2017, the District Court issued a decision interpreting certain claim terms in dispute in the litigation. Subject to reservation of all rights to appeal the Court’s May 9, 2017 decision, the parties stipulated to dismiss without prejudice all claims and counterclaims relating to the ‘474, ‘998, and ‘607 patents, and the Court entered an order recognizing this stipulation on June 8, 2017. The parties have completed expert discovery and Actavis filed a summary judgment motion on October 23, 2017. On March 8, 2018, the Court issued an Opinion and Order, granting in part Actavis’s motion for summary judgment. A four day trial was held in May 14, 2018. The parties reached a settlement agreement in June 2018, before post-trial briefing was complete. The case has been dismissed.
Impax Laboratories, LLC. v. Sandoz Inc. (Rytary®)
On March 31, 2017, Impax filed suit against Sandoz Inc. in the United States District Court for the District of New Jersey, alleging infringement of U.S. Patent Nos. 7,094,427; 8,377,474; 8,454,998; 8,557,283; 9,089,607; 9,089,608; 9,463,246; and 9,533,046, based on the filing of Sandoz’s ANDA relating to carbidopa and levodopa extended release capsules, generic to Rytary®. Sandoz answered the complaint on February 28, 2018. Fact discovery has not yet commenced.
Impax Laboratories, LLC. v. Zydus Pharmaceuticals USA, Inc. and Cadila Healthcare Ltd. (Rytary®)
On December 21, 2017, Impax filed suit against Zydus Pharmaceuticals USA, Inc. and Cadila Healthcare Ltd. (collectively, “Zydus”"Zydus") in the United States District Court for the District of New Jersey, alleging infringement of U.S. Patent No. 9,089,608, based on the filing of Zydus’s ANDA relating to carbidopa and levodopa extended release capsules, generic to Rytary®. Zydus answered the complaint on April 27, 2018, asserting counterclaims of non-infringement and invalidity of U.S. Pat. Nos. 7,094,427; 8,377,474; 8,454,998; 8,557,283; and 9,089,607. Impax answered Zydus’s counterclaims on June 1, 2018. Zydus filed a motion for judgment on the pleadings regarding its counterclaims. On November 29, 2018, the Court granted Zydus’s motion for judgment as to its counterclaims. A case schedule has been set with trial anticipated in February 2020.
Other Litigation Related to the Company’s Business
Solodyn® Antitrust Class Actions
From July 2013 to January 2016, 18 complaints were filed as class actions on behalf of direct and indirect purchasers, as well as by certain direct purchasers, against manufacturers of the brand drug Solodyn® and its generic equivalents, including Impax.
On July 22, 2013, Plaintiff United Food and Commercial Workers Local 1776 & Participating Employers Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On July 23, 2013, Plaintiff Rochester Drug Co-Operative, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On August 1, 2013, Plaintiff International Union of Operating Engineers Local 132 Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of California on behalf of itself and others similarly situated. On August 29, 2013, this Plaintiff withdrew its complaint from the United States District Court for the Northern District of California, and on August 30, 2013, re-filed the same complaint in the United States Court for the Eastern District of Pennsylvania, on behalf of itself and others similarly situated.
On August 9, 2013, Plaintiff Local 274 Health & Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On August 12, 2013, Plaintiff Sheet Metal Workers Local No. 25 Health & Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On August 27, 2013, Plaintiff Fraternal Order of Police, Fort Lauderdale Lodge 31, Insurance Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On August 29, 2013, Plaintiff Heather Morgan, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On August 30, 2013, Plaintiff Plumbers & Pipefitters Local 178 Health & Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On September 9, 2013, Plaintiff Ahold USA, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated.
On September 24, 2013, Plaintiff City of Providence, Rhode Island, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Arizona on behalf of itself and others similarly situated.
On October 2, 2013, Plaintiff International Union of Operating Engineers Stationary Engineers Local 39 Health & Welfare Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated.
On October 7, 2013, Painters District Council No. 30 Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated.
On October 25, 2013, Plaintiff Man-U Service Contract Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On March 13, 2014, Plaintiff Allied Services Division Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated.
On March 19, 2014, Plaintiff NECA-IBEW Welfare Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated.
On February 25, 2014, the United States Judicial Panel on Multidistrict Litigation ordered the pending actions transferred to the District of Massachusetts for coordinated pretrial proceedings, as In Re Solodyn (Minocycline Hydrochloride) Antitrust Litigation.
On March 26, 2015, Walgreen Co., The Kruger Co., Safeway Inc., HEB Grocery Company L.P., Albertson’s LLC, direct purchasers, filed a separate complaint in the United States District Court for the Middle District of Pennsylvania. On April 8, 2015, the Judicial Panel on Multi-District Litigation ordered the action be transferred to the District of Massachusetts, to be coordinated or consolidated with the coordinated proceedings. The original complaint filed by the plaintiffs asserted claims only against defendant Medicis. On October 5, 2015, the plaintiffs filed an amended complaint asserting claims against Impax and the other generic defendants.
On April 16, 2015, Rite Aid Corporation and Rite Aid Hdqtrs. Corp, direct purchasers, filed a separate complaint in the United States District Court for the Middle District of Pennsylvania. On May 1, 2015, the Judicial Panel on Multi-District Litigation ordered the action be transferred to the District of Massachusetts, to be coordinated or consolidated with the coordinated proceedings. The original complaint filed by the plaintiffs asserted claims only against defendant Medicis. On October 5, 2015, the plaintiffs filed an amended complaint asserting claims against Impax and the other generic defendants.
On January 25, 2016, CVS Pharmacy, Inc., a direct purchaser, filed a separate complaint in the United States District Court for the Middle District of Pennsylvania. On February 11, 2016, the Judicial Panel on Multi-District Litigation ordered the action to be transferred to the District of Massachusetts to be coordinated or consolidated with the coordinated proceedings.
The consolidated amended complaints allege that Medicis engaged in anticompetitive schemes by, among other things, filing frivolous patent litigation lawsuits, submitting frivolous Citizen Petitions, and entering into anticompetitive settlement agreements with several generic manufacturers, including Impax, to delay generic competition of Solodyn® and in violation of state and federal antitrust laws. Plaintiffs seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. On August 14, 2015, the District Court granted in part and denied in part defendants’ motion to dismiss the consolidated amended complaints. On October 16, 2017, the Court certified the Direct Purchaser Plaintiffs’ and End-Payor Plaintiffs’ classes. Trial began on March 12, 2018. During March 2018, Impax separately settled all claims with the direct purchaser plaintiff class, retailer plaintiffs and the end payor plaintiff class for a total settlement amount of $84.5 million prior to the Combination and the cases were dismissed. The settlements with the class plaintiffs are subject to court approval. The settlement with the direct purchaser plaintiff class was preliminarily approved by the Court on March 12, 2018, and the settlement with the end payor plaintiff class was preliminarily approved by the Court on April 5, 2018. Both class settlements were granted final Court approval on July 18, 2018.
Opana ER® FTC Antitrust SuitLitigation
On February 25, 2014, Impax received a Civil Investigative Demand ("CID"(“CID”) from the FTCFederal Trade Commission (“FTC”) concerning its investigation into the drug Opana® ER and its generic equivalents. On March 30, 2016, the FTC filed a complaint against Impax, Endo Pharmaceuticals Inc. ("Endo"), and others in the United States District Court for the Eastern District of Pennsylvania, alleging that Impax and Endo violated antitrust laws when they entered into a June 2010 co-promotion and
development agreement and a June 2010 settlement agreement that resolved patent litigation in connection with the submission of Impax’s ANDA for generic original Opana® ER. In July 2016, the defendants filed a motion to dismiss the complaint, and a motion to sever the claims regarding Opana® ER from claims with respect to a separate settlement agreement that was challenged by the FTC. On October 20, 2016, the Court granted the motion to sever, formally terminating the suit against Impax, with an order that the FTC re-file no later than November 3, 2016 and dismissed the motion to dismiss as moot. On October 25, 2016, the FTC filed a notice of voluntary dismissal. On January 19, 2017, the FTC filed a Part 3 Administrative complaint against Impax with similar allegations regarding Impax’s June 2010 settlement agreement with Endo that resolved patent litigation in connection with the submission of Impax’s ANDA for generic original Opana® ER. Impax filed its answer to the Administrative Complaint on February 7, 2017. Trial concluded on November 15, 2017. On May 11, 2018, the Administrative Law Judge ruled in favor of Impax and dismissed the case in its entirety. The government has appealed this ruling to the five Federal Trade Commissioners, who will reviewFTC. On March 28, 2019, the case de novo. Briefing onFTC issued an Opinion & Order reversing the appealAdministrative Law Judge’s initial dismissal decision. The FTC found that Impax had violated Section 5 of the FTC Act by engaging in an unfair method of competition, and accordingly entered an order enjoining Impax from entering into anticompetitive reverse patent settlements (or agreements with other generic original Opana® ER manufacturers) and requiring Impax to maintain an antitrust compliance program. On June 6, 2019, the Company filed a Petition for Review of the FTC’s Opinion & Order with the United States Court of Appeals for the Fifth Circuit.
On July 12, 2019, the Company received a CID from the FTC concerning an August 2017 settlement agreement between Impax and Endo, which resolved a dispute between the parties regarding, and amended, the above-referenced June 2010 settlement agreement related to Opana® ER. The Company intends to cooperate with the FTC regarding the CID. However, no assurance can be given as to the Federal Trade Commission will conclude on August 24, 2018. Oral arguments have not yet been scheduled.timing or outcome of the FTC’s underlying investigation.
Opana ER® Antitrust Class ActionsLitigation
From June 2014 to April 2015, 14 complaints were filedstyled as class actions on behalf of direct purchasers and end-payor (indirect)indirect purchasers (also known as well as byend-payors) and several separate individual complaints on behalf of certain direct purchasers (the “opt-out plaintiffs”) were filed against the manufacturer of the brand drug Opana ER® and Impax.
On June 4, 2014, PlaintiffThe direct purchaser plaintiffs comprise Value Drug Company and Meijer Inc. The end-payor plaintiffs comprise the Fraternal Order of Police, Miami Lodge 20, Insurance Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On June 4, 2014, Plaintiff Rochester Drug Co-Operative, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. On June 6, 2018, Plaintiff Rochester Drug Co-Operative, Inc. filed a motion to voluntarily dismiss its complaint with prejudice. The court granted that motion on June 11, 2018.
On June 6, 2014, Plaintiff Value Drug Company, a direct purchaser, filed a class action complaint in the United States District Court for the Northern District of California on behalf of itself and others similarly situated. On June 26, 2014, this Plaintiff withdrew its complaint from the United States District Court for the Northern District of California, and on July 16, 2014, re-filed the same complaint in the United States District Court for the Northern District of Illinois, on behalf of itself and others similarly situated.
On June 19, 2014, PlaintiffFund; Wisconsin Masons’ Health Care Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated.
On July 17, 2014, PlaintiffFund; Massachusetts Bricklayers, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On August 11, 2014, PlaintiffBricklayers; Pennsylvania Employees Benefit Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated.
On September 19, 2014, Plaintiff Meijer Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated.
On October 3, 2014, PlaintiffFund; International Union of Operating Engineers, Local 138 Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated.
On November 17, 2014,Fund; Louisiana Health Service & Indemnity Company d/b/a Blue Cross and Blue Shield of Louisiana, an indirect purchaser, filed a class action complaint in the United States District Court for the Middle District of Louisiana on behalf of itselfLouisiana; Kim Mahaffay; and others similarly situated.
Plumbers & Pipefitters Local 178 Health & Welfare Trust Fund. The opt-out plaintiffs comprise Walgreen Co.; The Kroger Co.; Safeway, Inc.; HEB Grocery Company L.P.; Albertson’s LLC; Rite Aid Corporation; Rite Aid Hdqtrs. Corp.; and CVS Pharmacy, Inc.
On December 12, 2014, the United States Judicial Panel on Multidistrict Litigation (the "JPML") ordered the pending class actions transferred to the Northern District of Illinois for coordinated pretrial proceedings, as In Re Opana ER Antitrust Litigation.
On December 19, 2014, Plaintiff Kim Mahaffay, an indirect purchaser, filed a class action complaint in the Superior Court of the State of California, Alameda County, on behalf of herself and others similarly situated. On January 27, 2015, the Defendants removed the action to the United States District Court for the Northern District of California.
On January 12, 2015, Plaintiff Plumbers & Pipefitters Local 178 Health & Welfare Trust Fund, an indirect purchaser,Illinois (“N.D. Ill.”) for coordinated pretrial proceedings, as In Re: Opana ER Antitrust Litigation (MDL No. 2580). (Actions subsequently filed a class action complaint in other jurisdictions also were transferred by the United StatesJPML to the N.D. Ill. to be coordinated or consolidated with the coordinated proceedings, and the District Court likewise has consolidated the opt-out plaintiffs’ actions with the direct purchaser class actions for the Northern District of Illinois on behalf of itself and others similarly situated.
On March 26, 2015 Walgreen Co., The Kruger Co., Safeway Inc., HEB Grocery Company L.P., Albertson’s LLC, direct purchasers, filed a separate complaint in the United States District Court for the Northern District of Illinois.
On April 23, 2015, Rite Aid Corporation and Rite Aid Hdqtrs. Corp, direct purchasers, filed a separate complaint in the United States District Court for the Northern District of Illinois.pretrial purposes.)
In each case, the complaints allege that Endo engaged in an anticompetitive scheme by, among other things, entering into an anticompetitive settlement agreement with Impax to delay generic competition of Opana ER® and in violation of state and federal antitrust laws. Plaintiffs seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. Consolidated amended complaints were filed on May 4, 2015 by direct purchaserDiscovery, including expert discovery, is ongoing. On March 25, 2019, plaintiffs and end-payor (indirect) purchaser plaintiffs.
On July 3, 2015, defendants filed motions for class certification and opening expert reports. Defendants’ oppositions to dismiss the consolidated amended complaints, as well as the complaints of the “Opt-Out Plaintiffs” (Walgreen Co., The Kruger Co., Safeway Inc., HEB Grocery Company L.P., Albertson’s LLC, Rite Aid Corporationclass certification and Rite Aid Hdqtrs. Corp.).
On February 1, 2016, CVS Pharmacy, Inc.rebuttal expert reports are due to be filed a complaint in the United States District Court for the Northern District of Illinois. The parties agreed that CVS Pharmacy, Inc. would be bound by the Court’s ruling on the defendants’ motion to dismiss the Opt-Out Plaintiffs’ complaints.
On February 10, 2016, the court granted in part and denied in part defendants’ motion to dismiss the end-payor purchaser plaintiffs’ consolidated amended complaint, and denied defendants’ motion to dismiss the direct purchaser plaintiffs’ consolidated amended complaint. The end-payor purchaser plaintiffs filed a second consolidated amended complaint and Impax moved to dismiss certain state law claims. On August 11, 2016, the court granted in part and denied in part defendants’ motion to dismiss the end-payor purchaser plaintiffs’ second consolidated amended complaint. Impax has filed its answer.
On February 25, 2016, the court granted defendants’ motion to dismiss the Opt-Out Plaintiffs’ complaints, with leave to amend. The Opt-Out Plaintiffs and CVS Pharmacy, Inc. have filed amended complaints and Impax has filed its answer.
Discovery is ongoing.2019. No trial date has been scheduled.
The Company believes it has substantial meritorious defenses to the claims asserted with respect to the litigation. However, any adverse outcome could negatively affect the Company and could have a material adverse effect on the Company's results of operations, cash flows and/or overall financial condition.
Sergeants Benevolent Association Health & Welfare Fund v. Actavis, PLC, et. al.
In August 2015, a complaint styled as a class action was filed against Forest Laboratories (a subsidiary of Actavis plc) and numerous generic drug manufacturers, including Amneal, in the U.S.United States District Court for the Southern District of New York involving patent litigation settlement agreements between Amneal and Forest Laboratories. Amneal was one of a number of pharmaceutical companies named in the lawsuit. The settlement agreement at issue settled the patent litigation between Forest Laboratories and Amneal regardingthe generic drug manufacturers concerning generic versions of Forest’s Namenda© immediate release tablets. IR product. The complaint (as amended on February 12, 2016) asserts federal and state antitrust claims on behalf of indirect purchasers, who allege in relevant part that during the class period they indirectly purchased Namenda® IR or its generic equivalents in various states at higher prices than they would have absent the defendants’ allegedly
unlawful anticompetitive conduct. Plaintiffs seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. On September 13, 2016, the courtCourt stayed the indirect purchaser plaintiffs’ claims pending factual development or resolution of claims brought in a separate, related complaint by direct purchasers (in which the Company is not a defendant). On September 10, 2018, the Court lifted the stay, referred the case to the assigned Magistrate Judge for supervision of supplemental, non-duplicative discovery in advance of mediation to be scheduled in 2019. The parties thereafter participated in supplemental discovery, as well as supplemental motion-to-dismiss briefing. On December 26, 2018, the Court granted in part and denied the defendants’ motionin part motions to dismiss the indirect purchaser plaintiffs’ claims. On January 7, 2019, Amneal, its relevant co-defendants, and the indirect purchaser plaintiffs informed the Magistrate Judge that they had agreed to mediation, which occurred in April 2019. In June 2019, the Company reached a settlement with respectplaintiffs, subject to Court approval. The amount of the settlement is not material to the federal claimsCompany's consolidated financial statements.
Attorney General of the State of Connecticut Interrogatories and stayedSubpoena Duces Tecum
On July 14, 2014, Impax received a subpoena and interrogatories (the "Subpoena") from the state law claims pending against Amneal and the otherState of Connecticut Attorney General ("Connecticut AG") concerning its investigation into sales of Impax's generic pharmaceutical company defendants until the federal claims are resolved. The court denied the defendants’ motion to dismiss with respectproduct, digoxin. According to the state law claims without prejudiceConnecticut AG, the investigation is to renewdetermine whether anyone engaged in a contract, combination or conspiracy in restraint of trade or commerce which has the motion aftereffect of (i) fixing, controlling or maintaining prices or (ii) allocating or dividing customers or territories relating to the federal claims have been resolved. The court cited the interestssale of judicial economy and the myriaddigoxin in violation of Connecticut state antitrust law. The Company has produced documents and unfair business practices laws asinformation in response to the basis for severing the state law claims and placing them on the court’s inactive docket. The court’s decision places the entirety of the claims pending against Amneal and the other generic pharmaceutical companies on the court’s inactive docket, which effectively stays the litigationSubpoena. However, no assurance can be given as to Amneal until the federal claims are resolvedtiming or until the court removes those claims from its inactive docket.outcome of this investigation.
United States Department of Justice Investigations
Previously onOn November 6, 2014, Impax disclosed that one of its sales representatives received a grand jury subpoena from the Antitrust Division of the United States Department of Justice Department (the “Justice Department”"DOJ"). In connection with this same investigation, on March 13, 2015, Impax received a grand jury subpoena from the Justice DepartmentDOJ requesting the production of information and documents regarding the sales, marketing, and pricing of certain generic prescription medications. In particular, the Justice Department’sDOJ’s investigation currently focuses on four generic medications: digoxin tablets, terbutaline sulfate tablets, prilocaine/lidocaine cream, and calcipotriene topical solution. The Company has been cooperating and intends to continue cooperating with the investigation. However, no assurance can be given as to the timing or outcome of the investigation.
On April 30, 2018, Impax received a CID from the Civil Division of the Justice DepartmentDOJ (the “Civil Division”"Civil Division"). The CID requests the production of information and documents regarding the pricing and sale of Impax’s pharmaceuticals and Impax’s interactions with other generic pharmaceutical manufacturers. According to the CID, the investigation concerns allegations that generic pharmaceutical manufacturers, including Impax, engaged in market allocation and price-fixing agreements, paid illegal remuneration, and caused false claims to be submitted to the Federal government. The Company has been cooperating and intends to continue cooperating with the Civil Division’s investigation. However, no assurance can be given as to the timing or outcome of the investigation.
Attorney General of the State of Connecticut Interrogatories and Subpoena Duces Tecum
On July 14, 2014, Impax received a subpoena and interrogatories (the “Subpoena”) from the State of Connecticut Attorney General (“Connecticut AG”) concerning its investigation into sales of Impax's generic product, digoxin. According to the Connecticut AG, the investigation is to determine whether anyone engaged in a contract, combination or conspiracy in restraint of trade or commerce which has the effect of (i) fixing, controlling or maintaining prices or (ii) allocating or dividing customers or territories relating to the sale of digoxin in violation of Connecticut state antitrust law. The Company has produced documents and information in response to the Subpoena. To the knowledge of the Company, no proceedings by the Connecticut AG have been initiated against the Company at this time; however, no assurance can be given as to the timing or outcome of this investigation.
Texas State Attorney General Civil Investigative Demand
On May 27, 2014, a CID was served on Amneal by the Office of the Attorney General for the state of Texas (the “Texas AG”"Texas AG") relating to products distributed by Amneal under a specific Amneal labeler code. Shortly thereafter, Amneal received a second CID with respect to the same products sold by Interpharm Holding, Inc. (“Interpharm”("Interpharm"), the assets of which had been acquired by Amneal in June 2008. Amneal completed its production of the direct and indirect sales transaction data in connection with the products at issue and provided this information to the Texas AG in November 2015. In May 2016, the Texas AG delivered two settlement demands to Amneal in connection with alleged overpayments made by the State of Texas for such products under its Medicaid programs. For the Amneal and Interpharm products at issue, the Texas AG’s initial demand was for an aggregate total of $36 million based on $16.2$16 million in alleged overpayments. After analyzing the Texas AG’s demand, Amneal raised certain questions regarding the methodology used in the Texas AG’s overpayment calculations, including the fact that the calculations treated all pharmacy claims after 2012 for the products at issue as claims for over-the-counter (“OTC”("OTC") drugs, even though the products were prescription pharmaceuticals. This had the effect of increasing the alleged overpayment because the dispensing fee for OTC drugs was lower than that for prescription drugs. Therefore, the Texas AG’s calculations were derived by subtracting a lower (and incorrect) OTC dispensing fee from the higher (and correct) prescription dispensing fee. The Texas AG later acknowledged this discrepancydiscrepancy. In March 2019, the Texas AG provided Amneal with a re-calculation of the alleged overpayment, and Amneal is in discussions with the process of re-calculating the alleged overpayment.Texas AG.
In reRe Generic Pharmaceuticals Pricing Antitrust Litigation
FromBetween March 2016 to April 2017, 22and January 2019, numerous complaints were filedstyled as antitrust class actions on behalf of direct purchasers and indirect purchasers (or end-payors) and several separate individual complaints on behalf of certain direct and indirect purchasers (the “opt-out plaintiffs”) have been filed against manufacturers of generic digoxin, and doxycycline and Impax alleging a conspiracy to fix, maintain and/or stabilize prices of these generic products. From January 2017 to April 2017, three complaints were filed on behalf of indirect purchasers against manufacturers of generic lidocaine/prilocaine, glyburide-metformin, and Impax alleging a conspiracy to fix, maintain and/or stabilize prices of these generic products.metronidazole, including Impax.
On March 2, 2016,The end-payor plaintiffs comprise Plaintiff International Union of Operating Engineers Local 30 Benefits Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. The plaintiff filed an amended complaint on June 9, 2016.
On March 25, 2016, PlaintiffFund; Tulsa Firefighters Health and Welfare Trust, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On March 25, 2016, PlaintiffTrust; NECA-IBEW Welfare Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On April 4, 2016, PlaintiffFund; Pipe Trade Services MN, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On April 25, 2016, PlaintiffMN; Edward Carpinelli, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On April 27, 2016, PlaintiffCarpinelli; Fraternal Order of Police, Miami Lodge 20, Insurance Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On May 2, 2016, PlaintiffFund; Nina Diamond, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On May 5, 2016, PlaintiffDiamond; UFCW Local 1500 Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On May 6, 2016, PlaintiffFund; Minnesota Laborers Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On May 12, 2016, PlaintiffFund; The City of Providence, Rhode Island, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Rhode Island on behalf of itself and others similarly situated.
On May 18, 2016, Plaintiff KPH Healthcare Services, Inc. a/k/a Kinney Drugs, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On May 19, 2016, PlaintiffIsland; Philadelphia Federation of Teachers Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On June 8, 2016, PlaintiffFund; United Food & Commercial Workers and Employers Arizona Health and Welfare Trust, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On June 17, 2016, PlaintiffTrust; Ottis McCrary, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On June 20, 2016, Plaintiff Rochester Drug Co-Operative, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On June 27, 2016, Plaintiff César Castillo, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On June 29, 2016, PlaintiffMcCrary; Plumbers & Pipefitters Local 33 Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On July 1, 2016, PlaintiffFund; Plumbers & Pipefitters Local 178 Health and Welfare Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itselfFund; Unite Here Health; Valerie Velardi; and others similarly situated.
On July 15, 2016, Plaintiff Ahold USA, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On September 7, 2016, Plaintiff United Here Health, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On September 20, 2016, Plaintiff Valerie Velardi, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.
On January 13, 2017, Plaintiff International Union of Operating Engineers Local 30 Benefits Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated against manufacturers of generic lidocaine/prilocaine and the Company alleging a conspiracy to fix, maintain and/or stabilize prices of this generic drug.
On April 17, 2017, Plaintiff UFCW Local 1500 Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated against manufacturers of generic lidocaine/prilocaine and Impax alleging a conspiracy to fix, maintain and/or stabilize prices of this generic drug.
On April 25, 2017, Plaintiff Louisiana Health Service Indemnity Company. The direct purchaser plaintiffs comprise KPH Healthcare Services, Inc. a/k/a Kinney Drugs, Inc.; Rochester Drug Co-Operative, Inc.; César Castillo, Inc.; Ahold USA, Inc.; and FWK Holdings, L.L.C. The opt-out plaintiffs comprise The Kroger Co.; Albertsons Companies, LLC; H.E. Butt Grocery Company an indirect purchaser, filed a class action complaint in theL.P.; Humana Inc.; and United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated against manufacturers of generic lidocaine/prilocaine and Impax alleging a conspiracy to fix, maintain and/or stabilize prices of this generic drug.Healthcare Services, Inc.
On May 19, 2016, several indirect purchaser plaintiffs filed a motion with the Judicial Panel on Multidistrict Litigation to transfer and consolidate the actions in the United States District Court for the Eastern District of Pennsylvania. The Judicial Panel ordered the actions consolidated in the Eastern District of Pennsylvania and ordered that the actions be renamed “In re Generic Digoxin and Doxycycline Antitrust Litigation.”
On January 27, 2017, plaintiffs filed two consolidated class action complaints.
On April 6, 2017, the Judicial Panel on Multidistrict LitigationJPML ordered the consolidation of all civil actions involving allegations of antitrust conspiracies in the generic pharmaceutical industry regarding 18 generic drugs to the Eastern District of Pennsylvania. The consolidated actions have been renamed In re Generic Pharmaceuticals Pricing Antitrust Litigation. Consolidated class action complaints for each of the 18 drugs were filed on August 15, 2017. Direct purchaser plaintiffs, end-payer plaintiffs, and indirect reseller plaintiffs filed consolidated class complaints against Impax for two products, digoxin and lidocaine-prilocaine.
On October 6, 2017, Impax filed a motion to dismiss the digoxin complaint. Briefing on the motion to dismiss is complete and a decision is pending. On February 9, 2018, the Court issued an order denying the discovery stay and allowing certain fact discovery to proceed.
On January 19, 2018, Plaintiffs The Kroger Co., Albertsons Companies, LLC, and H.E. Butt Grocery Company L.P., opt-outs, filed a complaint in the United States District Court for the Eastern District of Pennsylvania against 35 companies, including(“E.D. Pa.”), as In Re: Generic Pharmaceuticals Pricing Antitrust Litigation (MDL No. 2724). Consolidated class action complaints were filed on August 15, 2017 for each of the 18 drugs; Impax allegingis named as a conspiracy to fix, maintain and/or stabilize prices of 30 drugs and specificallydefendant in the 2 complaints respecting digoxin and lidocaine/prilocainelidocaine-prilocaine. Impax also is a defendant in the class action complaint filed with respect to Impax. No schedule has been set.
Onthe MDL court on June 22, 2018 Plaintiffs Ahold USA, Inc., César Castillo, Inc., FWK Holdings, L.L.C., KPH Healthcare Services, Inc., a/k/a Kinney Drugs, Inc.,by certain direct purchasers of glyburide-metformin and Rochester Drug Co-Operative, Inc. filed a complaint on behalfmetronidazole.
Each of themselves and all others similarly situated against 23 companies, including Impax, and one individual, allegingthe various complaints alleges a conspiracy to fix, maintain, stabilize, and/or raise prices, rig bids, and allocate markets or customers for the particular drug products at issue. Plaintiffs seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. On October 16, 2018, the Court denied Impax and its co-defendants’ motion to dismiss the digoxin complaint. On February 15, 2019, the Court granted in part and denied in part defendants’ motions to dismiss various drugs, specificallystate antitrust, consumer protection, and unjust enrichment claims brought by two classes of indirect purchasers in the digoxin action. The Court dismissed seven state law claims in the end-payor plaintiffs’ complaint and six state law claims in the indirect reseller plaintiffs’ complaint. Motions to dismiss the glyburide-metformin and metronidazole with respect tocomplaint, as well as 2 of the complaints filed by certain opt-out plaintiffs, were filed February 21, 2019. On March 11, 2019, the Court issued an order approving a stipulation withdrawing the direct purchaser plaintiffs’ glyburide-metformin claims against Impax. No schedule has been set.Document discovery otherwise is proceeding.
On June 27, 2018, Plaintiffs Marion Diagnostic Center, LLCMay 10, 2019, the Company was named in a civil lawsuit filed by the Attorneys General of 43 States and Marion Healthcare, LLC filed a motion seeking leave to file a complaintthe Commonwealth of Puerto Rico in the United States District Court for the Eastern District of PennsylvaniaConnecticut against seven named defendants, alleging a horizontalnumerous generic pharmaceutical manufacturers, as well as certain of their current or former sales and vertical distributormarketing executives, regarding an alleged conspiracy to fix prices and allocate salesor divide customers or markets for various products, including, with respect to the Company, bethanechol chloride tablets, norethindrone acetate, and ranitidine HCL tablets, in violation of lidocaine products. The Court has not ruled onfederal and state antitrust and consumer protection laws. Plaintiff States seek, among other things, unspecified monetary damages (including treble damages and civil penalties), as well as equitable relief, including disgorgement and restitution. On June 4, 2019, the Plaintiffs’ motionJPML transferred the lawsuit to the E.D. Pa. for leave to file the new complaintcoordination and no schedule has been set.consolidation with MDL No. 2724.
On August 3, 2018, Plaintiff Humana Inc. filed a complaint against 37 companies, includingJuly 31, 2019, the Company and Impax were served with a Praecipe to Issue Writ of Summons and Writ of Summons filed in the Philadelphia County Court of Common Pleas by 87 health insurance companies and managed health care providers, naming as defendants in the successorputative action the same generic pharmaceutical manufacturers and individuals named in the above-referenced State Attorneys General lawsuit (America’s 1st Choice Of South Carolina, Inc., et al., v. Actavis Elizabeth, LLC, et al., No. 190702094). However, to Impax, alleging a conspiracydate, no complaint has been filed or served in this action.
The Company believes it has substantial meritorious defenses to fix, maintain, stabilize, and/or raise prices, rig bids, and allocate markets or customers for various drugs, specifically digoxin and lidocaine-prilocainethe claims asserted with respect to Impax. No schedule has been set.
Prescription Opioid Litigation. the litigation. However, any adverse outcome could negatively affect the Company and could have a material adverse effect on the Company's results of operations, cash flows and/or overall financial condition.
Prescription Opioid Litigation
The Company orand certain of its affiliates have been named as a defendantdefendants in various matters relating to the promotion and sale of prescription opioid pain relievers. The Company is aware that other individuals and states and political subdivisions are filing comparable actions against, among others, manufacturers and parties that have promoted and sold prescription opioid pain relievers, and additional suits may be filed.
The complaints, asserting claims under provisions of different state law and in one case, Federal law, generally contend that the defendants allegedly engaged in improper marketing of opioids, and seek a variety of remedies, including restitution, civil penalties, disgorgement of profits, treble damages, attorneys’ fees and injunctive relief. None of the complaints specifies the exact amount of damages at issue. The Company and its affiliates that are defendants in the various lawsuits deny all allegations asserted in these complaints and have filed or intend to file motions to dismiss where possible. Each of the opioid-related matters described below is in its early stages. The Company is cooperating with the investigations relating to these matters, which are ongoing, and intends to continue to vigorously defend these cases. In light of those facts and the inherent uncertainties of civil litigation, the Company is not in a position to predict the likelihood of an unfavorable outcome or provide an estimate of the amount or range of potential loss in the event of an unfavorable outcome in any of these matters.
On August 17, 2017, plaintiff Linda Hughes, as the mother of Nathan Hughes, decedent, filed hera complaint in Missouri state court naming Amneal Pharmaceuticals of New York LLC, Impax, five other pharmaceutical company defendants, and three healthcare provider defendants. Plaintiff alleges that use of defendants’ opioid medications caused the death of her son, Nathan Hughes. In her originalThe complaint plaintiff requested damages against the defendants and certification of a class action. Plaintiff abandoned her request for a class action in her December 22, 2017, amended complaint. In her amended complaint, plaintiff alleges causes of action against Amneal and Impax for strict product liability, negligent product liability, violation of Missouri Merchandising Practices Act and fraudulent misrepresentation. The case was removed to federal court on September 18, 2017. It was transferred to the United States District Court for the Northern District of Ohio on February 2, 2018 and is part of the multidistrict litigation pending as In Re:Re National Prescription Opiate Litigation,, MDL No. 2804 (the “MDL”). Plaintiff has filed a motion to remand the case to Missouri state court. That motion remains pending before the MDL court. All activity in the case is stayed by order of the MDL court.
On March 15, 2018, plaintiff Scott Ellington, purporting to represent the State of Arkansas, more than sixty counties and a dozen cities, filed hisa complaint in Arkansas state court naming Gemini Laboratories, LLC and fifty-one other pharmaceutical companies as defendants. Plaintiffs allege that Gemini and the other pharmaceutical company defendants improperly marketed, sold, and distributed opioid medications and failed to adequately warn about the risks of those medications. The complaint also includes claims against distributors and retailers of opioid medications. Plaintiffs allege causes of actions against Gemini and the other pharmaceutical company defendants for negligence and nuisance and alleged violations of multiple Arkansas statutes. Plaintiffs request past damages and restitution for monies allegedly spent by the State of Arkansas and the county and city plaintiffs for “extraordinary and additional services” for responding to what plaintiffs term the “Arkansas Opioid Epidemic.” Plaintiffs also seek prospective damages to allow them to “comprehensively intervene in the Arkansas Opioid Epidemic,” punitive and treble damages as provided by law, and their costs and fees. Plaintiffs’The complaint does not include any specific damage amounts alleged by plaintiffs.amounts. Gemini has filed a general denial and, on June 28, 2018, it joined the other pharmaceutical company defendants in moving to dismiss plaintiffs’ complaint. On January 29, 2019, the Court granted without prejudice Gemini’s motion to dismiss and dismissed Gemini from the litigation on March 22, 2019.
On March 27, 2018, plaintiff American Resources Insurance Company, Inc. filed itsa complaint in the United States District Court for the Southern District of Alabama against Amneal, Amneal Pharmaceuticals of New York, LLC, Amneal Pharmaceuticals, LLC, Impax, the Impax Generics Division, and thirty-five other pharmaceutical company defendants. Plaintiff seeks certification of a class of insurers that since January 1, 2010, allegedly have been wrongfully required to: (i) reimburse for prescription opioids that allegedly were promoted, sold, and distributed illegally and improperly by the pharmaceutical company defendants; and (ii) incur costs for treatment of overdoses of opioid medications, misuse of those medications, or addiction to them. Plaintiff’sThe complaint also includes claims against distributors of opioid medications. Plaintiff alleges causes of action against Amneal, Impax and the other defendants for negligence, recklessness and gross negligence, unjust enrichment, subrogation, fraud, and violations of federal RICO statutes. Plaintiff demandsseeks compensatory and punitive damages, but plaintiff’s complaint does not include any allegation of specific damage amounts. On April 18, 2018, the Judicial Panel on Multidistrict Litigation conditionally transferred the case to the MDL. Two defendants opposed transfer of the case, and there has not been a final determination whether the case will be transferred. On or about May 2, 2018, the case was transferred to the MDL. All activity in the case is stayed by order of the MDL court.
On May 30, 2018, plaintiff William J. Comstock filed hisa complaint in Washington state court against Amneal Pharmaceuticals of New York, LLC, and four other pharmaceutical company defendants. Plaintiff alleges he became addicted to opioid medications manufactured and sold by the pharmaceutical company defendants, which plaintiff contends caused him to experience opioid-induced psychosis, prolonged hospitalizations, pain, and suffering. Plaintiff asserts causes of action against Amneal and the other pharmaceutical company defendants for negligence, fraudulent misrepresentation, and violations of the Washington Consumer Protection Act.
Plaintiff also asserts a claim for medical malpractice against defendant Nadia Toshani, M.D. On July 12, 2018, Amneal and other defendants removed the case to the United States District Court for the Eastern District of Washington. Currently,On August 17, 2018, the case was transferred to the MDL. All activity in the case is stayed by order of the subject of a conditional order to transfer the case to the National Prescription Opiate Litigation Multidistrict Litigation pending in the U.S. District Court for the Northern District of Ohio. An opposition to the transfer was filed by defendants who are expected to be dismissed from the case.MDL court.
On June 18, 2018, a Subpoena and CID issued by the Office of the Attorney General of Kentucky, Office of Consumer Protection was served on Amneal. The CID contains eleven requests for production of documents pertaining to opioid medications
manufactured and/or sold by Amneal, or for which Amneal holds an Abbreviated New Drug Application. The Company is evaluating the CID and has been in communication with the Office of the Attorney General about the scope of the CID, the response to the CID, and the timing of the response. It is unknown if the Office of the Attorney General will pursue any claim or file a lawsuit against Amneal. The Attorney General has filed six lawsuits against manufacturers and distributors of opioid medications asserting that those companies engaged in improper marketing, sales and distribution of opioid medications and failed to adequately warn about the risks of opioid medications. In those lawsuits, the Attorney General has demanded injunctive relief, civil penalties, restitution, compensatory damages, treble damages, punitive damages, and awards of attorney’s fees. If the Attorney General files a lawsuit, the Company intends to vigorously defend the lawsuit. The Company's investigation relative to the CID is ongoing and there is no case or claim to evaluate at this time. Accordingly, the Company is not in a position to predict the likelihood of an unfavorable outcome or provide an estimate of the amount or range of potential loss in the event of an unfavorable outcome if the Attorney General files a lawsuit.
On July 9, 2018, the Muscogee (Creek) Nation filed a First Amended Complaint in its case pending in the National Prescription Opiate Litigation Multidistrict Litigation (The Muscogee (Creek) Nation v. Purdue Pharma, L.P., et al., U.S. District Court, Northern District of Ohio, MDL No. 2804 (In Re: National Prescription Opiate Litigation), Member Case No. 1:18-op-45459-DAP) against the Company and 55 other defendants consisting of pharmaceutical companies, wholesalers, distributors, and pharmacies. Plaintiff describes itself in the First Amended Complaint as a federally recognized Indian tribe with a membership of 83,570 citizens. Plaintiff alleges it exercises sovereign governmental authority over its citizens and within its territory, which it describes as covering 4,867 square miles within the state of Oklahoma. Plaintiff alleges it has been damaged by the Company and the other pharmaceutical company defendants as a result of alleged improper marketing, including off-label marketing, failure to adequately warn of the risks of opioid medications, and failure to properly monitor and control diversion of opioid medications within the Nation. The case has been designated as a bellwether motion to dismiss case for the MDL, meaning it is a test case for arguments directed at the complaints filed by Indian tribes in the MDL cases. It is not a bellwether or test case at this juncture for any other purpose. On July 23,August 31, 2018, the MDL Court issuedCompany moved to dismiss the following scheduling order for briefing on the motion to dismiss: (i)First Amended Complaint, and also joined in separate motions to dismiss are duefiled by August 31, 2018; (ii)different defense subgroups. Plaintiff opposed these motions. Additionally, on September 28, 2018, plaintiff filed a motion to add Amneal and Amneal Pharmaceuticals of New York, LLC, and to dismiss the Company from the complaint. The Company opposed that motion, and plaintiff filed a reply on October 19, 2018. On April 1, 2019, the MDL court's designated magistrate judge issued a Report and Recommendation as to the Company’s motion to dismiss, recommending dismissal of plaintiff’s oppositions are due by October 1, 2018; (iii) amicus briefs (byLanham Act claims and state-law claims based on an alleged duty to correct alleged misrepresentations of brand-name manufacturers, but recommending denial of relief as to all other Indian tribes) are due by October 8, 2018;claims. On April 12, 2019, the magistrate judge overruled the Company’s objection to adding Amneal and (iv) defendants’ reply briefs are due by November 6, 2018, assuming amicus briefs areAmneal Pharmaceuticals of New York, LLC, but dismissed the Company. Amneal and Amneal Pharmaceuticals of New York, LLC, filed October 8 (defendants’ reply briefs are due no later than 28 days afteran objection to the amicus briefs are filed).magistrate’s Report and Recommendation as to the Company’s motion to dismiss on April 29, 2019. On June 13, 2019, the MDL court denied the objections and subsequently ordered the defendants to file Answers to the First Amended Complaint. On July 26, 2019, Amneal and Amneal Pharmaceuticals, LLC filed their respective answers.
On July 18, 2018, the County of Webb, Texas requested waivers of service pursuant to Fed. R. Civ. P. 4 and the MDL Court’s CMOs from Amneal and Amneal Pharmaceuticals of New York, LLC, in its case pending in the National Prescription Opiate Litigation Multidistrict Litigation (County of Webb, Texas v. Purdue Pharma, L.P., et al., U.S. District Court, Northern District of Ohio, MDL No. 2804 (In Re: National Prescription Opiate Litigation), Member Case No. 1:18-op-45175-DAP).MDL. Plaintiff’s Amended Complaint, filed against Amneal and forty-one other defendants consisting of pharmaceutical companies, wholesalers, distributors, and pharmacy benefit managers, contains allegations that plaintiff is a county created under the authority of the State of Texas located in southern Texas with approximately 272,000 residents. Plaintiff alleges damages as a result of Amneal’s and the pharmaceutical company defendants’ improper marketing, failure to adequately warn of the risks of opioid medications, and failure to properly monitor and control diversion of opioid medications in or affecting Webb County. Plaintiff alleges causes of action against Amneal and other pharmaceutical company defendants for negligence, negligence per se, nuisance, gross negligence, fraud, civil conspiracy, violationAmneal Pharmaceuticals of Texas consumer protection and deceptive trade practice acts (Tex. Bus. & Comm. Code § 17.41, et. seq.), unjust enrichment, and violations of federal RICO statutes.New York, LLC have returned the requested waivers. All activity in the case is stayed by order of the MDL court.
On August 24, 2018, the Tucson Medical Center filed a complaint against the Company and 18 other defendants consisting of pharmaceutical companies, distributors, and unidentified John Doe defendants, in the Superior Court of the State of Arizona, Pima County. Plaintiff alleges damages as a result of Amneal’s and the pharmaceutical company defendants’ improper marketing, failure to adequately warn of the risks of opioid medications, and failure to properly monitor and control diversion of opioid medications. Plaintiff seeks economic damages related to its purchase of opioid medications and for the costs of unreimbursed healthcare it has provided as a result of the opioid epidemic over and above ordinary healthcare services. In addition, plaintiff seeks compensatory damages, treble damages, punitive damages, awards of attorney’s fees, and abatement of the alleged public nuisance, as provided by law. On September 24, 2018, the distributor defendants removed the case to the United States District Court for the District of Arizona. Plaintiff filed a motion to remand on September 25, 2018, which the distributor defendants opposed. The Company filed a motion to dismiss on October 1, 2018. On October 8, 2018, following the Court’s denial of its remand motion, plaintiff voluntarily dismissed its Complaint without prejudice. Plaintiff re-filed its Complaint on October 9, 2018, in the Superior Court of the State of Arizona, Pima County, along with a motion to designate the case as “complex.” The distributor defendants filed a notice of removal on October 29, 2018. Plaintiff filed an Emergency Motion to Remand on October 30, 2018. On December 19, 2018, the Court granted plaintiff’s motion and remanded the case to the Superior Court of Pima County, Arizona. On February 13, 2019, the Company again filed a motion to dismiss the complaint. The defendants (including the Company) also moved for a discovery stay pending resolution of their motions to dismiss. The Court entered an order on April 8, 2019 staying discovery until the earlier of June 25, 2019 or when the Court rules on the defendants’ separate motions to dismiss. On June 12, 13, and 14, 2019, the Court held hearings on all pending motions to dismiss. Immediately prior to the hearing on Amneal’s Motion to Dismiss, plaintiff agreed to a voluntary dismissal without prejudice of Amneal, which the parties then entered on the record. The co-defendants are attempting to re-remove the case to federal court; plaintiff is attempting to amend its complaint.
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On October 4, 2018, the City of Martinsville, Virginia, filed a complaint in Virginia state court, naming the Company, Amneal, Amneal Pharmaceuticals of New York, LLC, Impax, and 45 other pharmaceutical companies and other entities as defendants. Plaintiff alleges that the defendants are liable for the economic and non-economic injuries allegedly suffered by resident doctors, health care payors, and opioid-addicted individuals, as well as for the costs incurred in addressing the opioid epidemic. Plaintiff requests an unspecified amount of damages against the defendants. The case was removed to federal court on December 13, 2018
and was conditionally transferred to the MDL on December 27, 2018. Plaintiff opposed the transfer to the MDL and moved to remand the case to Virginia state court. On February 14, 2019, the Western District of Virginia, Roanoke Division, remanded the case to the Martinsville Circuit Court in Martinsville, Virginia. Nine other Virginia municipalities have filed identical complaints naming the same defendants, but none have been served on the Company or its affiliates. The unserved Virginia cases have been removed and are in federal court, though plaintiffs have filed motions to remand and are opposing transfer of those cases to the MDL court. On April 24, 2019, the Court in Martinsville, Virginia, stayed this case until it is determined whether the other Virginia cases that were removed to federal court will be remanded, or until the parties or the court may determine whether consolidation of this case with others is possible in Virginia state court.
AWP LitigationIn October and November 2018, the SouthEast Alaska Regional Health Consortium, the Kodiak Area Native Association, and the Norton Sound Health Corporation requested that the Company execute waivers of service in their cases pending in the MDL. Plaintiffs’ complaints name the Company and 37 other entities as defendants. Plaintiffs allege damages and seek injunctive relief, compensatory and statutory damages, “as well as the means to abate the epidemic” that they allege was “created by Defendants’ wrongful and/or unlawful conduct.” All activity in these cases is stayed by order of the MDL court.
On December 30, 2015, Plumbers’ Local Union No. 690 Health Plan and others similarly situated3, 2018, Appalachian Regional Healthcare, Inc., filed a class actioncomplaint in Kentucky state court, naming Amneal and
32 other pharmaceutical companies and other entities as defendants. Plaintiff alleges that the defendants are liable for the economic and non-economic injuries allegedly suffered by Kentucky’s hospitals and others. Plaintiff requested an unspecified amount of damages against several generic drug manufacturers, including Impax, in the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania, Civil Trial Division, alleging that Impax and others violated the law, including the Pennsylvania Unfair Trade Practices and Consumer Protection law, by inflating the Average Wholesale Price (“AWP”) of certain generic drugs.defendants. The case has sincenow been removed to federal court, and responsive pleading deadlines are suspended pending remand or transfer to the MDL.
On January 23, 2019, Indian Health Council, Inc., requested that the Company execute a waiver of service in its case pending in the MDL. Plaintiff’s complaint names the Company and 18 other pharmaceutical companies and other entities as defendants. Plaintiff, an intertribal health organization which provides healthcare services to its consortium’s member tribes, alleges that the defendants are liable for the economic injuries it allegedly suffered as a result of its role in responding to an alleged opioid epidemic. Plaintiff requests an unspecified amount of damages against the defendants. The case has been transferred to the MDL. All activity in the case is stayed by order of the MDL court.
On February 7, 2019, Kentucky River District Health Department requested that the Company execute a waiver of service in its case pending in the MDL. Plaintiff’s putative class action complaint names Amneal and 20 other pharmaceutical companies and other entities as defendants. Plaintiff alleges that the defendants are liable for the economic injuries it suffered, on behalf of itself and similarly situated Kentucky health departments, as a result of their role in responding to an alleged opioid epidemic. Plaintiff requests an unspecified amount of damages against the defendants. All activity in the case is stayed by order of the MDL court.
In February and March 2019, the Aleutian Pribilof Islands Association and Alaska Native Tribal Health Consortium requested that the Company execute waivers of service in their cases pending in the MDL. Plaintiffs’ complaints name the Company and 37 other entities as defendants. Plaintiffs allege damages and seek injunctive relief, compensatory and statutory damages, “as well as the means to abate the epidemic” that they allege was “created by Defendants’ wrongful and/or unlawful conduct.” All activity in these cases is stayed by order of the MDL court.
In March 2019, Glynn County, Georgia, requested waivers of service from the Company and Amneal in its case pending in the MDL. Plaintiff’s second amended short-form complaint, filed against Amneal and 39 other defendants consisting of pharmaceutical companies, wholesalers, retailers, and distributors, alleges damages as a result of defendants’ alleged improper marketing, fraud, including RICO violations, failure to adequately warn of the risks of opioid medications, failure to properly monitor and control diversion of opioid medications in or affecting Glynn County, negligence, public nuisance, and unjust enrichment. All activity in the case is stayed by order of the MDL court.
On March 14, 2019, the City of Concord, New Hampshire, filed a short-form amendment to its Second Amended Complaint in the MDL court adding the Company, Amneal, and Impax, to 31 other defendants, including pharmaceutical companies, corporate officers of certain brand manufacturer pharmaceutical companies, and distributors. As to the Company, Amneal, and Impax, plaintiff asserts claims for violation of the New Hampshire Consumer Protection Act, public nuisance, unjust enrichment, and violation of RICO. Plaintiff alleges that defendants are liable for economic injuries experienced by plaintiff, including unspecified restitution, civil penalties, disgorgement of unjust enrichment and attorneys’ fees, as well as for injunctive relief as to defendants’ further false or misleading statements as to opioids, and for exemplary damages. Amneal was served on April 25, 2019. All activity in the case is stayed by order of the MDL court.
On March 15, 2019, the International Union of Painters and Allied Trades, District Council No. 21 Welfare Fund, and, separately, the International Brotherhood of Electrical Workers Local 98 Health & Welfare Fund, and International Brotherhood of Electrical Workers Local 98 Sound and Communications Health and Welfare Fund, filed complaints in the Philadelphia County Common
Pleas Court, naming Amneal, Impax, Amneal Pharmaceuticals of New York, LLC, and 29 other pharmaceutical companies as defendants. In each, plaintiffs allege that the defendants are liable for economic injuries allegedly suffered by the respective funds to the extent those funds paid for long term treatment of their benefit members with opioids, and for the costs incurred in addressing the opioid epidemic. Plaintiffs request an unspecified amount of damages against the defendants. On April 17, 2019, Amneal and Amneal Pharmaceuticals of New York, LLC were served with both complaints. On May 30, 2019, the Court stayed the cases pending transfer to Delaware County, Pennsylvania, where numerous other opioid cases currently are pending. The transfer is not yet complete and, until the transfer is complete, all matters are stayed.
In March 2019, the State of New Mexico filed a Second Amended Complaint in its case pending against numerous generic drug manufacturers and distributors in the First District Court of Santa Fe County, naming as defendants Amneal and Amneal Pharmaceuticals of New York, LLC. Plaintiff seeks unspecified damages, and in junctive relief, “to eliminate the hazard to public health and safety caused by the opioid epidemic, to abate the nuisance in [the state], and to recoup State monies that have been spent” on account of defendants’ alleged “false, deceptive and unfair marketing and/or unlawful diversion of prescription opioids.” On July 17, 2019, the Amneal entities moved to dismiss for lack of personal jurisdiction and failure to state a claim upon which relief can be granted. The motions to dismiss remain pending.
In April 2019, several Virginia municipalities (the County Board of Arlington, Dinwiddie County, and Mecklenburg County) filed Complaints in their respective local circuit courts against the Company, Amneal, Amneal Pharmaceuticals of New York, LLC, and Impax along with numerous additional generic drug manufacturers, distributors, and pharmacies. In each Complaint, plaintiffs seek unspecified damages and equitable relief, alleging that defendants were negligent and/or grossly negligent in flooding the relevant municipalities with prescription opioid medications and engaged in civil conspiracies to do so. Each case had been removed to the United States District Court for the Eastern District of Pennsylvania. By virtue of an amended complaint filed on March 29, 2016, the suit hasVirginia, but all three since have been amendedremanded back to comprise a nationwide class of third party payors that allegedly reimbursed or purchased certain generic drugs based on AWP and to assert causes of action under the laws of other states in addition to Pennsylvania. On May 17, 2016, this case was stayed. On January 18, 2017, Impax, along with the other defendants, filed a joint motion to dismiss the complaint. On September 15, 2017, the Court dismissed the complaint with prejudice. The time period to file an appeal has lapsed.Virginia state court. Responsive pleadings are not yet due.
On February 5, 2016, Delaware Valley Health Care CoalitionJune 10, 2019, in their cases currently pending in the MDL, West Virginia municipal-entity plaintiffs Cabell County Commission and the City of Huntington were granted leave to file, then filed, a lawsuit based on substantially similar allegations inJoint and Third Amended Complaint naming approximately 20 additional defendants, including the Court of Common Pleas of Philadelphia County, First Judicial District of Pennsylvania, Civil Trial Division that seeks declaratory judgment. On May 20, 2016, this case was stayed pending resolution of the federal court action described above.
Impax Laboratories, LLC. v. TuringCompany, Amneal, Amneal Pharmaceuticals AG
On May 2, 2016, Impax filed suit against Turing in the United States District Court for the Southern District of New York, alleging breachLLC, and Impax. The plaintiff municipalities, seek unspecified actual, treble, and punitive damages and disgorgement “to eliminate the hazard to public health and safety, to abate the public nuisance caused by the opioid epidemic in the City and County and to compensate both for abatement measures undertaken or underway and damages sustained as a result of the termsopioid epidemic” they allege the defendants “proximately caused.” These actions have been designated “Track Two” bellwether cases by the MDL court (intended to be adjudicated following the “Track One” cases for which bellwether trials are scheduled for October 2019). On December 31, 2018, the MDL court entered an Order directing the then-parties in these Track Two actions to work with one of the contract by which Turing purchased from ImpaxMDL court's appointed Special Masters to prepare case management deadlines. On May 12, 2019, the right to sellSpecial Master entered an Order acknowledging that the drug Daraprim®, as well as the right to sell certain Daraprim® inventory (the “Purchase Agreement”). Specifically, Impax seeks (i) a declaratory judgment that Impax may revoke Turing’s right to sell Daraprim® under Impax's labeler code and national drug codes; (ii) specific performance to require Turing to comply with its obligations under the Purchase Agreement for past due reports and for reports going forward; and (iii) money damages to remedy Turing’s failure to reimburse Impax for chargebacks and Medicaid rebate liability when due, currently in excesspress of $40.9 million and for future amounts that may be due. Turing has filed its answer and a counterclaim against Impax alleging breach of contract and breachissues surrounding ongoing litigation of the dutyTrack One cases had prevented both the parties and the MDL court from acting on the directives of good faiththe prior Track Two Order, and fair dealing. Discovery is closed. On Octobersetting deadlines of June 10, 2019 for plaintiffs to amend their complaints, and June 14, 2016, Impax2019 for the submission of proposals for case management by the then-parties to the cases (the Amneal entities were not served with plaintiffs’ Third Amended Complaints until June 25, 2019). However, to date, none of the existing parties to the cases have filed a motion for summary judgment. The District Court issued its order on September 29, 2017. The Court found that Turing breachedor submitted any case management proposals to the Purchase Agreement by failingSpecial Master. Accordingly, the case management aspect of these Track Two cases remains pending.
In addition to reimburse Impax for Medicaid rebate liability, however, the Court also found that Impax breached the Purchase Agreement by not filing a restatementabove-referenced cases, in connection with the Centers for Medicarefurther extended MDL pleading amendment deadline of March 16, 2019, the Company and Medicaid Services at Turing’s request. Therefore, Impax was not entitled to damages. On October 13, 2017, Impaxcertain of its affiliates recently have been named in approximately 600 additional complaints filed a Motion for Clarification/Reconsiderationin the MDL court and in various state and territorial courts, including by:
Political subdivision / municipal entity plaintiffs from the states of Alabama, Arkansas, Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Tennessee, Texas, Utah, Washington, West Virginia, and Wisconsin;
Third-party payor plaintiffs;
Indian tribe plaintiffs; and
Hospital / healthcare provider plaintiffs.
All activity in these cases is stayed by order of the Summary Judgment Order. Briefing onMDL court. Requests for waivers for service of process have been transmitted by plaintiffs’ counsel to defense counsel in relation to the motion is completeCompany and a decision is pending. On May 29, 2018, Impax filed a letter with the Court informing it of Impax’s submission of a restatementcertain of its Average Manufacturer Price for Daraprim foraffiliates in certain of these cases. Neither the third quarterCompany nor any of fiscal year 2015 and the fourth quarter of fiscal year 2015 and again requesting an order granting its Motion for Summary Judgment.affiliates has been served in these cases.
Telephone Consumer Protection Act Cases
35
On January 31, 2017, Plaintiff Family Medicine Pharmacy LLC filed a class action complaint in the United States District Court for the Southern District of Alabama on behalf of itself and others similarly situated against Impax alleging violation of the Telephone Consumer Protection Act, as amended by the Junk Fax Prevention Act of 2005 (the "Telephone Consumer Protection Act"). On March 27, 2017, Impax filed a motion to dismiss the complaint and plaintiff filed an amended complaint on April 10, 2017. On July 18, 2017, the parties reached an agreement in principle regarding the class settlement. On September 29, 2017, the District Court preliminarily approved the proposed class settlement. The Court held a hearing on March 6, 2018 and issued an order with final approval of the proposed class settlement.
On February 14, 2017, Plaintiff Medicine To Go Pharmacies, Inc. filed a class action complaint in the United States District Court for the District of New Jersey on behalf of itself and others similarly situated against Impax alleging violation of the Telephone Consumer Protection Act. On April 17, 2017, Impax filed a motion to dismiss, transfer, or stay this case in light of the first-filed case described above. This case was transferred to the Southern District of Alabama. On September 15, 2017, the Court stayed this matter pending the final approval of the class settlement described above.
Securities Class Action
On April 17, 2017, Lead Plaintiff New York Hotel Trades Council & Hotel Association of New York City, Inc. Pension Fund filed an amended class action complaint in the United States District Court for the Northern District of California on behalf of itself and others similarly situated against Impax and four current or former Impax officers alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Plaintiff asserts claims regarding alleged misrepresentations about three generic drugs. Its principal claim alleges that Impax concealed that it colluded with competitor Lannett Corp. to fix the price of generic drug digoxin, and that its digoxin profits stemmed from this collusive pricing. Plaintiff also alleges that Impax concealed from the market anticipated erosion in the price of generic drug diclofenac and that Impax overstated the value of budesonide, a generic drug that it acquired from Teva. On June 1, 2017, Impax filed its motion to dismiss the amended complaint. On September 7, 2018, the Court granted Impax’s motion, dismissing plaintiffs’ claims without prejudice and with leave to amend their complaint. Plaintiff filed a second amended complaint October 26, 2018. Impax filed a motion to dismiss the second amended complaint on June 1, 2017December 6, 2018; plaintiffs’ opposition thereto was filed on January 17, 2019; and briefing has been completed.
Impax’s reply in support of its motion to dismiss was filed on February 7, 2019. A hearing before the Court on the motion to dismiss took place on May 2, 2019.
Shareholder Derivative Action
On February 22, 2017, Plaintiffplaintiff Ed Lippman filed a shareholder derivative complaint in the Superior Court for the State of California in the County of Alameda on behalf of Impax against former executives, a current executive, and certain current members of the board of directors alleging breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and corporate waste. This matter hashad been stayed pending the securities class action referenced above.
Securities Class Actions related On May 14, 2019, plaintiff stipulated to the Combination
On December 12, 2017 and December 14, 2017, Plaintiffs Susan Vana and David Stone, respectively, filed class action complaints in the United States District Court for the Northern Districtvoluntarily dismissal of California on behalf of themselves and others similarly situated against Amneal and Impax alleging violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 generally alleging that the Registration Statement on Form S-4 related to the Combination contains false and misleading statements and/or omissions concerning the financial projections of Impax, Amneal, and the combined company; Morgan Stanley & Co. LLC’s valuation analyses and Fairness Opinions relating to Impax and Amneal; potential conflicts of interest associated with one of Impax’s financial advisors and the Combination with Amneal; and background information of the proposed business combination, including confidentiality agreements entered into by Impax in connection with the Combination. On April 4, 2018, plaintiffs filed a Stipulation and Proposed Order voluntarily dismissing the actionshis claims, and on April 5, 2018,May 17, 2019, the court issuedCourt entered an order to dismissOrder dismissing without prejudice the actions. Plaintiffs did not file any petition for an award of attorneys’ fees and expenses by the court-ordered deadline of June 1, 2018.entire action.
Teva v. Impax Laboratories, LLC.
On February 15, 2017, Plaintiffsplaintiffs Teva Pharmaceuticals USA, Inc. and Teva Pharmaceuticals Curacao N.V. (“Teva”("Teva") filed a Praecipe to Issue Writ of Summons and Writ of Summons (precursor to a complaint) in the Philadelphia County Court of Common Pleas against Impax alleging that Impax breached the Strategic Alliance Agreement between the parties by not indemnifying Teva in its two litigations with GlaxoSmithKline LLC regarding Wellbutrin® XL.XL (and therefore that Impax is liable to Teva for the amounts it paid to settle those litigations). Impax filed a Motion to Disqualify Teva’s counsel related to the matter, and on August 23, 2017, the Courttrial court denied Impax's motion. Following the Court’strial court’s order, Teva filed its complaint. On September 6, 2017, Impax appealed the trial court’s decision to the Pennsylvania Superior Court. On September 20, 2017, the Superior Court stayed the trial court action pending the outcome of Impax’s appeal. On November 2, 2018, the Superior Court affirmed the trial court’s decision. On November 16, 2018, Impax filed an appeal regardingapplication for reargument with the disqualificationSuperior Court, which was denied on December 28, 2018. On February 13, 2019, the Superior Court remitted the record to the trial court. On February 15, 2019, Impax filed its answer with new matter to Teva’s complaint. On February 19, 2019, the trial court issued a revised case management order providing that, absent any extensions or amendments thereto, discovery was to have closed on July 1, 2019 and the case is expected to be ready for trial by February 3, 2020. On or about March 4, 2019, Teva filed a decision is pending. The matter is currently stayed pending an appellate decisionmotion for judgment on the disqualification order.pleadings. Impax filed its answer and brief in opposition to Teva’s motion for judgment on the pleadings on March 25, 2019. On April 4, 2019, the trial court denied Teva’s motion. On April 16, 2019, Impax filed a motion to stay the proceedings and compel Teva to arbitrate the dispute pursuant to an Indemnification Release Agreement negotiated and executed by the parties in 2012. Teva’s opposition to the motion was filed on May 7, 2019. On June 11, 2019, the trial court denied Impax’s motion. On June 24, 2019, Impax noticed its intent to appeal to the Superior Court the trial court’s denial of the motion to compel arbitration, and moved both to stay the trial court proceedings pending that appeal and for an extension of case management deadlines. On July 12, 2019, the trial court denied both motions.
California Wage and Hour Class Action
On August 3, 2017, Plaintiffplaintiff Emielou Williams filed a class action complaint in the Superior Court for the State of California in the County of Alameda on behalf of herself and others similarly situated against Impax alleging violation of California Business and Professions Code section 17200 by violating various California wage and hour laws.laws, and seeking, among other things, declaratory judgment, restitution of allegedly unpaid wages, and disgorgement. On October 10, 2017, Impax filed a Demurrer and Motion to Strike Class Allegations. On December 12, 2017, the Court overruled Impax’s Demurrer to Plaintiff’s individual claims, however,claims. However, it struck all of Plaintiff’splaintiff’s class allegations. On March 13, 2018, Plaintiffplaintiff filed her First Amended Complaint once again including the same class allegations. The Company filed a Demurrer and Motion to Strike Class Allegations on April 12, 2018. On September 20, 2018, and hearing is scheduled for August 24, 2018. Discovery is ongoing.the Court again struck plaintiff’s class allegations; plaintiff has appealed this most recent order to the California State Court of Appeal. Plaintiff filed her opening appellate brief on February 22, 2019; Impax’s brief in response
18. Stockholders' Equity/ Members' Deficitwas filed on April 18, 2019; plaintiff filed her reply brief on May 7, 2019; and Impax filed a surreply on May 22, 2019. The appeal has now been fully submitted on the briefs.
Members' Deficit Prior to the CombinationUnited States Department of Justice / Drug Enforcement Administration Subpoenas
As of December 31,
On July 7, 2017, Amneal had 189 million units authorized, issued, and outstanding.
During 2018, the boardPharmaceuticals of managers of Amneal approved a discretionary modification to the profit participation units be concurrent with the Combination that caused the vesting of all PPUs that were previously issued to certain current or former employees for service prior to the Combination. The modification entitled the holders to 6.9 million shares of Class A Common Stock with a fair value of $126.0 million on the date of the Combination and $32.8 million of cash. In July 2018, Holdings distributed the shares itNew York, LLC received in the Redemption to settle the PPUs with no additional sharesan administrative subpoena issued by the Company. Additionally, during 2018, Holdings distributed $27.7 millionLong Island, NY District Office of cash bonusesthe Drug Enforcement Administration (the “DEA”) requesting information related to employees of Amnealcompliance with certain recordkeeping and reporting requirements pursuant to regulations promulgated by the DEA. The Company is cooperating with this request for service priorinformation and has provided relevant information responsive to the Combination. Asrequest. The Company and the U.S. Attorney for the Eastern District of New York (“E.D.N.Y.”) have entered into a resulttolling agreement with respect to the investigation. The material provisions of these transactions,the tolling agreement provide that the investigation is ongoing, that the U.S. Attorney will not file a claim against the Company recorded charges aggregating $186.5 million to acquisition, integrationon or before December 19, 2019, and transaction-related expensesrequests that the Company agree that the applicable statute(s) of limitations be tolled during the three months ended June 30,period from January 19, 2018 and corresponding capital contributions of $158.8 million related tothrough December 20, 2019. The Company cannot predict at this time whether the vesting of the PPUs and $27.7 million related to the cash bonus in members' accumulated deficit. During the six months ended June 30, 2018, Amneal made distributions of $183.0 million to its members.
Pursuant to the BCA, Amneal's units prior to the Combination were canceled and the Amneal Common Units were distributed as discussed in further detail in the paragraph below.
Stockholders' Equity Subsequent to the Combination
Amended Certificate of Incorporation
In connection with the closing of the Combination, on May 4, 2018, the Company amended and restated its certificate of incorporation ("Charter") to, among other things, reflect the change of its name from Atlas Holdings, Inc. to Amneal Pharmaceuticals, Inc. and provide for the authorization of (i) 900 million shares of Class A Common Stock withU.S. Attorney will file a par value of $0.01 per share; (ii) 300 million shares of Class B Common Stock with a par value of $0.01 per share; (iii) 18 million shares of Class B-1 Common Stock with a par value of $0.01 per share; and (iv.) 2 million shares of undesignated preferred stock with a par value of $0.01 per share.
Voting Rights
Holders of Class A Common Stock and Class B Common Stock are entitled to one vote for each share of stock held.
Except as required by law and except in connection with the election of the Class B-1 director, holders of Class B-1 Common Stock are not entitled to vote on any matter. Holders of Class A Common Stock and Class B Common Stock vote together as a single class on each matter submitted to a stockholder vote. Holders of Class A Common Stock and Class B Common Stock are not entitled to vote on any amendment to the Company's Charter that relates solely to the terms of one or more outstanding series of preferred stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote on such terms pursuant to the Company's Charter or law.
Dividend Rights
The holders of Class A Common Stock and Class B-1 Common stock are entitled to receive dividends, if any, payable in cash, property, or securities of the Company, as may be declared by the Company's board of directors, out of funds legally available for the payment of dividends, subject to any preferentiallawsuit or other rights of the holders of any outstanding shares of preferred stock. The holders of Class B Common stock will not be entitled to receive any dividends.
Participation Rights
Under the Company's Charter, the holders of Class A Common Stock, Class B Common Stock and Class B-1 Common Stock have no participation rights. However, the Company's Second Amended and Restated Stockholders Agreement dated as of December 31, 2017 (the "Stockholders Agreement") provides that if the Company proposes to issue any securities, other than in certain issuances, Holdings will have the right to purchase its pro rata share of such securities, based on the number of shares of common stock owned by Holdings before such issuance.
Issuance and Restrictions on Company Common Stock
Pursuant to the Third Amended and Restated Limited Liability Company Agreement of Amneal dated May 4, 2018 (the "Limited Liability Company Agreement"), Amneal will issue to the Company an additional Amneal common unit for each additional share of Class A Common Stock issued by the Company. Additionally, pursuant to the Charter, shares of Class B Common Stock will be issued to Holdings and its permitted transferees only to the extent necessary in certain circumstances to maintain a one-to-one ratio between the number of Amneal Common Units and the number of shares of Class B Common Stock held by such members. Shares of Class B Common Stock are transferable only for no consideration to the Company for automatic retirement or in accordance with the Stockholders Agreement and the Limited Liability Company Agreement.
Liquidation Rights
On the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of Class A Common Stock and Class B-1 Common Stock are entitled to share equally in all assets of the Company available for distribution among the stockholders of the Company after payment to all creditors and subject to any preferential or other rights of the holders of any outstanding shares of preferred stock. The holders of Class B Common stock are not entitled to share in such net assets.
Redemption
The Limited Liability Company Agreement provides that holders of Amneal Common Units may, from time to time, require the Company to redeem all or a portion of their interests for newly-issued shares of Class A Common Stock or Class B-1 Common Stock on a one-for-one basis. Upon receipt of a redemption request, the Company may, instead, elect to effect an exchange of Amneal Units directly with the holder. Additionally, the Company may elect to settle any such redemption or exchange in shares of Class A Common stock, Class B-1 Common Stock or in cash. In the event of a cash settlement, the Company would issue new shares of Class A Common Stock and use the proceeds from the sale of these newly-issued shares of Class A Common Stock to fund the cash settlement, which, in effect, limits the amount of the cash payments to the redeeming member. In connection with any redemption, the Company will receive a corresponding number of Amneal Units, increasing the Company's total ownership interest in Amneal. Additionally, an equivalent number of shares of Class B Common Stock will be surrendered and canceled.
Preferred Stock
Under the Charter, the Company's Board of Directors has the authority to issue preferred stock and set its rights and preferences. As of June 30, 2018, no preferred stock has been issued.
Common Stock Issued
In connection with the Combination, the Company issued 73.3 million shares of Class A Common Stock to the holders of Impax Common Stock and 225 million shares of Class B Common Stock to Holdings. In connection with the PIPE, Holdings redeemed 46.8 million shares of Class B Common Stock and an equal number of Amneal units for 34.5 million shares of unregistered Class A Common Stock and 12.3 million shares of unregistered Class B-1 Common Stock. In connection with the Redemption, Holdings redeemed an additional 6.9 million shares of Class B Common Stock and an equal number of Amneal Units for 6.9 million shares of Series A Common Stock for distribution to members of Holdings whom were previously issued PPUs. No cash was received byclaims against the Company with respect to issuancesthe investigation.
On March 14, 2019, Amneal received a subpoena (the “Subpoena”) from an Assistant U.S. Attorney (“AUSA”) for the Southern District of common stock.Florida. The Combination,Subpoena requests information and documents generally related to the PIPEmarketing, sale, and distribution of oxymorphone. The Company intends to cooperate with the AUSA regarding the Subpoena. However, no assurance can be given as to the timing or outcome of its underlying investigation.
On May 28, 2019, Amneal received a subpoena (the “Subpoena”) from an AUSA for the E.D.N.Y. requesting information and documents generally related to the Company’s compliance with Controlled Substances Act regulations. The Company intends to cooperate with the AUSA regarding the Subpoena. The Company and the Redemption are more fully described in Note 1. NatureU.S. Attorney for the E.D.N.Y. have entered into a tolling agreement with respect to the investigation. The material provisions of Operationsthe tolling agreement provide that the E.D.N.Y. has made no decision as yet as to the appropriate resolution of its pending investigation, that the Company’s time to present evidence and Basis of Presentation.
Non-Controlling Interests
As discussed in Note 2. Summary of Significant Accounting Policies,arguments to the E.D.N.Y. concerning the investigation is extended to November 12, 2019, and that the Company consolidatesagrees that the financial statementsapplicable statute(s) of Amneal and its subsidiaries and records non-controlling interests forlimitations are tolled during the portion of Amneal’s economic interests that is not held by the Company. Non-controlling interests are adjusted for capital transactions that impact Holdings' economic interest in Amneal.
Redeemable Non-Controlling Interest
During July 2018, a non-controlling interest holder in one of Amneal's non-public subsidiaries notified the Company of its intent to redeem its remaining ownership interest for $11.9 million based on the contractual terms of an agreement.period from April 12, 2019 through November 12, 2019. The Company recorded charges to stockholders' accumulated deficit and non-controlling interests of $1.2 million and $1.7 million, respectively, duringcannot predict at this time whether the six months ended June 30, 2018, to accrete the redeemable non-controlling interest to contract value at June 30, 2018. While the charge to stockholders' accumulated deficit did not impact net loss for the three and six months ended June 30, 2018, it did result in an increase in the net loss applicable to the Company during those periods. As of June 30, 2018, $11.9 million has been reclassified to redeemable non-controlling interest.
19. Share-Based Compensation
Amneal Pharmaceuticals, Inc. 2018 Incentive Award Plan
In May 2018, the Company adopted the Amneal Pharmaceuticals, Inc. 2018 Incentive Award Plan ("2018 Plan") under which the Company may grant stock options andU.S. Attorney will file a lawsuit or other equity-based awards to employees and non-employee directors providing services to the Company and its subsidiaries.
The aggregate number of shares of Class A Common Stock authorized for issuance pursuant to the Company's 2018 Plan is 23 million shares. As of June 30, 2018, the Company had 18,288,353 shares available for issuance under the 2018 Plan.
Exchanged Impax Options
As a result of the acquisition of Impax, on May 4, 2018, each Impax stock option outstanding immediately prior to the closing of the Combination became fully vested and exchanged for a fully vested and exercisable option to purchase an equal number of shares of Class A Common Stock ofclaims against the Company with the same exercise price per share as the replaced options and otherwise subjectrespect to the same terms and conditions as the replaced options. Consequently, at the Closing, the Company issued 3 million fully vested stock options in exchange for the outstanding Impax options.investigation.
14. Segment Information
The Company recognizes the grant date fair valuehas two reportable segments, Generics and Specialty. Generics develops, manufactures and commercializes complex oral solids, injectables, ophthalmics, liquids, topicals, softgels, inhalation products and transdermals across a broad range of each optiontherapeutic categories. The Company's retail and shareinstitutional portfolio contains approximately 200 product families, many of restricted stock unit over its vesting period. Stock options and restricted stock unit awards are granted under the Company’s 2018 Plan and generally vest over a four year period and, in the case of stock options,which represent difficult-to-manufacture products or products that have a term of 10 years.high barrier-to-entry, such as oncologics, anti-infectives and supportive care products for healthcare providers.
47Specialty delivers proprietary medicines to the U.S. market. The Company offers a growing portfolio in core therapeutic categories including central nervous system disorders, endocrinology, parasitic infections and other therapeutic areas. The Company's specialty products are marketed through skilled specialty sales and marketing teams, who call on neurologists, movement disorder specialists, endocrinologists and primary care physicians in key markets throughout the U.S.
Specialty also has a number of product candidates that are in varying stages of development.
The following table summarizes allCompany’s chief operating decision maker evaluates the financial performance of the Company's stock option activity forCompany’s segments based upon segment operating income (loss). Items below income (loss) from operations are not reported by segment, since they are excluded from the current year through June 30, 2018:
|
| | | | | | |
| Stock Options | Number of
Shares
Under Option | | Weighted-
Average
Exercise
Price
per Share |
| Outstanding at December 31, 2017 | — |
| | $ | — |
|
| Conversion of Impax stock options outstanding on May 4, 2018 | 3,002,669 |
| | 18.90 |
|
| Options granted | 3,391,199 |
| | 16.48 |
|
| Options exercised | (163,857 | ) | | 12.06 |
|
| Options forfeited | (201,800 | ) | | 27.54 |
|
| Outstanding at June 30, 2018 | 6,028,211 |
| | $ | 17.43 |
|
| Options exercisable at June 30, 2018 | 2,637,012 |
| | $ | 18.66 |
|
Asmeasure of June 30, 2018, stock options outstandingsegment profitability reviewed by the Company’s chief operating decision maker. Additionally, general and exercisable had average remaining contractual lives of 7.4 yearsadministrative expenses, certain selling expenses, certain litigation settlements, and 4.5 years, respectively. Also, as of June 30, 2018, stock options outstandingnon-operating income and exercisable each had aggregate intrinsic values of $10.7 millionexpenses are included in "Corporate and $7.4 million, respectively, and restricted stock units outstanding had an aggregate intrinsic value of $21.7 million.Other." The Company does not report balance sheet information by segment since it is not reviewed by the Company’s chief operating decision maker.
The tables below present segment information reconciled to total Company grants restricted stock unitsfinancial results, with segment operating income or loss including gross profit less direct selling expenses, research and development expenses, and other operating expenses to certain eligible employees as a component of its long-term incentive compensation program. The restricted stock unit award grants are made in accordance with the Company’s 2018 Plan and are subject to forfeiture if the vesting conditions are not met. A summary of the unvested restricted stock units is as follows:
|
| | | | | | |
| Restricted Stock Units | Number of
Restricted
Stock Units | | Weighted-
Average
Grant Date
Fair Value |
| Non-vested at December 31, 2017 | — |
| | $ | — |
|
| Granted | 1,320,448 |
| | 17.06 |
|
| Vested | — |
| | — |
|
| Forfeited | — |
| | — |
|
| Non-vested at June 30, 2018 | 1,320,448 |
| | $ | 17.06 |
|
As of June 30, 2018, the Company had total unrecognized share-based compensation expense of $48.2 million related to all of its share-based awards, which is expected to be recognized over a weighted average period of 3.9 years. The intrinsic value of options exercised during the six months ended June 30, 2018 was $1.2 million.
The Company estimated the fair value of each stock option award on the grant date using the Black-Scholes option pricing model, wherein expected volatility is based on historical volatility of the publicly traded common stock of a peer group of companies. The expected term calculation is based on the “simplified” method described in SAB No. 107, Share-Based Payment, and SAB No. 110, Share-Based Payment, as the result of the simplified method provides a reasonable estimate in comparison to actual experience. The risk-free interest rate is based on the U.S. Treasury yield at the date of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The dividend yield of zero is based on the fact that the Company has never paid cash dividends on its common stock, and has no present intention to pay cash dividends. Options granted under each of the above plans generally vest over four years and have a term of 10 years. The following table presents the weighted average assumptions used in the option pricing model for options granted under the 2018 Plan.
|
| |
| June 30, 2018 |
Volatility | 46.5% |
Risk-free interest rate | 2.9% |
Dividend yield | —% |
Weighted-average expected life (years) | 6.25 |
Weighted average grant date fair value | $8.06 |
The amount of share-based compensation expense recognizedextent specifically identified by the Company is as followssegment (in thousands):
| | | | Three Months Ended June 30, | | Six Months
Ended June 30, | |
| | 2018 | | 2017 | | 2018 | | 2017 | |
| Cost of revenues | $ | 115 |
| | $ | — |
| | $ | 115 |
| | $ | — |
| |
| Three Months Ended June 30, 2019 | | | Generics | | Specialty | | Corporate
and Other | | Total
Company |
| Net revenue | | | $ | 335,064 |
| | $ | 69,578 |
| | $ | — |
| | $ | 404,642 |
|
| Cost of goods sold | | | 263,423 |
| | 32,958 |
| | — |
| | 296,381 |
|
| Cost of goods sold impairment charges | | | 3,012 |
| | — |
| | — |
| | 3,012 |
|
| Gross profit | | | 68,629 |
| | 36,620 |
| | — |
| | 105,249 |
|
| Selling, general and administrative | 1,423 |
| | — |
| | 1,423 |
| | — |
| | 14,379 |
| | 16,150 |
| | 36,752 |
| | 67,281 |
|
| Research and development | 106 |
| | — |
| | 106 |
| | — |
| | 45,448 |
| | 2,568 |
| | — |
| | 48,016 |
|
| Total | $ | 1,644 |
| | $ | — |
| | $ | 1,644 |
| | $ | — |
| |
| Intellectual property legal development expenses | | | 2,511 |
| | — |
| | — |
| | 2,511 |
|
| Acquisition, transaction-related and integration expenses | | | 987 |
| | 1,366 |
| | 1,166 |
| | 3,519 |
|
| Restructuring and other charges | | | 418 |
| | — |
| | 2,417 |
| | 2,835 |
|
| Operating income (loss) | | | $ | 4,886 |
| | $ | 16,536 |
| | $ | (40,335 | ) | | $ | (18,913 | ) |
|
| | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 | | Generics | | Specialty | | Corporate
and Other | | Total
Company |
| Net revenue | | $ | 717,541 |
| | $ | 133,221 |
| | $ | — |
| | $ | 850,762 |
|
| Cost of goods sold | | 542,301 |
| | 63,823 |
| | — |
| | 606,124 |
|
| Cost of goods sold impairment charges | | 56,309 |
| | — |
| | — |
| | 56,309 |
|
| Gross profit | | 118,931 |
| | 69,398 |
| | — |
| | 188,329 |
|
| Selling, general and administrative | | 38,527 |
| | 37,477 |
| | 75,713 |
| | 151,717 |
|
| Research and development | | 95,599 |
| | 6,275 |
| | — |
| | 101,874 |
|
In-process research and development impairment charges
| | 22,787 |
| | — |
| | — |
| | 22,787 |
|
| Intellectual property legal development expenses | | 5,632 |
| | 1,045 |
| | — |
| | 6,677 |
|
| Acquisition, transaction-related and integration expenses | | 3,584 |
| | 3,250 |
| | 2,717 |
| | 9,551 |
|
| Restructuring and other charges | | 2,499 |
| | 178 |
| | 6,319 |
| | 8,996 |
|
| Operating (loss) income | | $ | (49,697 | ) | | $ | 21,173 |
| | $ | (84,749 | ) | | $ | (113,273 | ) |
|
| | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 | | Generics | | Specialty | | Corporate
and Other | | Total
Company |
| Net revenue | | $ | 361,770 |
| | $ | 52,017 |
| | $ | — |
| | $ | 413,787 |
|
| Cost of goods sold | | 211,534 |
| | 23,958 |
| | — |
| | 235,492 |
|
| Gross profit | | 150,236 |
| | 28,059 |
| | — |
| | 178,295 |
|
| Selling, general and administrative | | 19,621 |
| | 13,549 |
| | 22,833 |
| | 56,003 |
|
| Research and development | | 47,206 |
| | 3,129 |
| | — |
| | 50,335 |
|
| Intellectual property legal development expenses | | 4,004 |
| | 43 |
| | — |
| | 4,047 |
|
| Acquisition, transaction-related and integration expenses | | 114,622 |
| | — |
| | 92,885 |
| | 207,507 |
|
| Restructuring and other charges | | 24,797 |
| | 2,421 |
| | 17,247 |
| | 44,465 |
|
Legal settlement gains
| | (3,000 | ) | | — |
| | — |
| | (3,000 | ) |
| Operating (loss) income | | $ | (57,014 | ) | | $ | 8,917 |
| | $ | (132,965 | ) | | $ | (181,062 | ) |
|
| | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 | | Generics | | Specialty | | Corporate
and Other | | Total
Company |
| Net revenue | | $ | 636,959 |
| | $ | 52,017 |
| | $ | — |
| | $ | 688,976 |
|
| Cost of goods sold | | 342,128 |
| | 23,958 |
| | — |
| | 366,086 |
|
| Gross profit | | 294,831 |
| | 28,059 |
| | — |
| | 322,890 |
|
| Selling, general and administrative | | 30,824 |
| | 13,549 |
| | 36,751 |
| | 81,124 |
|
| Research and development | | 91,415 |
| | 3,129 |
| | — |
| | 94,544 |
|
| Intellectual property legal development expenses | | 8,580 |
| | 43 |
| | — |
| | 8,623 |
|
| Acquisition, transaction-related and integration expenses | | 114,622 |
| | — |
| | 100,020 |
| | 214,642 |
|
| Restructuring and other charges | | 24,797 |
| | 2,421 |
| | 17,247 |
| | 44,465 |
|
Legal settlement gains
| | (3,000 | ) | | — |
| | — |
| | (3,000 | ) |
| Operating income (loss) | | $ | 27,593 |
| | $ | 8,917 |
| | $ | (154,018 | ) | | $ | (117,508 | ) |
20. Related-Party15. Related Party Transactions
The Company has various business agreements with certain third-party companies in which there is some common ownership and/or management between those entities, on the one hand, and the Company, on the other hand. The Company has no direct ownership or management in any of such related party companies. The related party relationships that generated income andand/ or expense and in the respective reporting periodperiods are described below.
Financing Lease/Financing Obligation - Related Party
The Company has a financing lease for two buildings located in Long Island, New York, that are used as an integrated manufacturing and office facility. For annual payments required under the terms of the non-cancelable lease agreement over the next five years and thereafter, refer to Note 11. Leases.
Kanan, LLC
Kanan, LLC ("Kanan") is an independent real estate company which owns Amneal’s manufacturing facilities located at 65 Readington Road, Branchburg, New Jersey, 131 Chambers Brook Road, Branchburg, New Jersey and 1 New England Avenue, Piscataway, New Jersey. Amneal leases these facilities from Kanan under two separate triple-net lease agreements that expire in 2027 and 2031, respectively, at an annual rental cost of approximately $2.0$2 million combined, subject to CPI rent escalation adjustments as provided in the lease agreements. Rent expense paid to the related party for both of the three months ended June 30, 20182019 and 20172018 was $0.5 million. Rent expense paid to the related party for both of the six months ended June 30, 2019 and 2018 and 2017 was $1.0$1 million.
AE Companies,Asana Biosciences, LLC
Asana Biosciences, LLC (“AE LLC”Asana”) is an independent company which provides certain shared services and corporate type functions to a number of independent entities with respect to which, from time to time, Amneal conducts business. Amneal has ongoing professional service agreements with AE LLC for administrativeearly stage drug discovery and research and development services. The total amount of expense incurred from these agreements for the three months ended June 30, 2017 was $0.1 million (none in 2018).company focusing on several therapeutic areas, including oncology, pain and inflammation. Amneal provided research and development services to Asana under a development and manufacturing agreement. The total amount of income earned from these agreementsthis arrangement for the three and six months ended June 30, 20172019 was $0.2$1 million and $1.4 million, respectively (none in 2018). At June 30, 2019, receivables of approximately $1 million were due from the related party for research and development related services.
Industrial Real Estate Holdings NY, LLC
Industrial Real Estate Holdings NY, LLC (“IRE”("IRE") is an independent real estate management entity which, among other activities, is the landlord of Amneal’s leased manufacturing facilitiesfacility located at 75 and 85 Adams Avenue, Hauppauge, New York. The lease
at 85 Adams Avenue expired in March 2017 while the lease for 75 Adams Avenue expires in March 2021. Rent expense paid to the related party for the three months ended June 30, 2019 and 2018 and 2017 was $0.2$0.3 million and $0.3$0.2 million, respectively. Rent expense paid tofor the related party for the six months ended June 30, 2019 and 2018 and 2017 was $0.5$0.6 million and $0.6$0.5 million, respectively.
Kashiv PharmaceuticalsBioSciences LLC
Kashiv PharmaceuticalsBioSciences, LLC (“Kashiv”("Kashiv") is an independent contract development organization focused primarily on the development of 505(b) (2) NDA products. Amneal has various business agreements with Kashiv.
In May 2013, Amneal entered into a sublease agreement with Kashiv for a portion of one of its research and development facilities. The sublease automatically renews annually if not terminated and has an annual base rent of $1.8$2 million. Rental income from the related-party sublease for the three months ending June 30, 2017 was $0.1 million (none in 2018). Rental income from the related-party sublease for the six months ended June 30, 2018 and 2017 was $0.4 million and $1.0 million, respectively. On January 15, 2018, Amneal and Kashiv entered into an Assignment and Assumption of Lease Agreement. The lease was assigned to Kashiv, and Amneal was relieved of all obligations. AtRental income from the related party sublease for the three months ended June 30, 2019 was less than $0.1 million (none in 2018). Rental income from the related party sublease for the six months ending June 30, 2019 and 2018 and December 31, 2017, $0.6was less than $0.1 million and $10.4$0.4 million, of receivables were due, respectively.
Amneal has also entered into various development and commercialization arrangements with Kashiv to collaborate on the development and commercialization of certain generic pharmaceutical products. The total reimbursable expenses associated with these arrangements for the three and six month period ended June 30, 2019 was $2 million and $3 million, respectively (none in 2018). Kashiv receives a percentage of net profits with respect to Amneal’s sales of these products. The total profit share paid to Kashiv for the three months ended June 30, 2019 and 2018 and 2017 was $1.6$0.7 million and $5.3$2 million, respectively. The total profit share paid to Kashiv for the six months ended June 30, 2019 and 2018 and 2017 was $2.0$1 million and $9.3$2 million, respectively. At June 30, 20182019 and December 31, 20172018 payables of $1.6approximately $3 million and $0.6$0.8 million, respectively, were due to the related party for royalty-related transactions.
In June 2017, Amneal and Kashiv entered a product acquisition and royalty stream purchase agreement. The aggregate purchase price was $25 million on the closing, which has been paid, plus two potential future $5 million earn outs related to the Estradiol Product. The contingent earn outs willwere to be recorded in the period in which they are earned. The first and second $5 million earn outs were recognized in March 2018 and June 2018, respectively, as an increase to the cost of the Estradiol product intangible asset and will be amortized on a straight-line basis over the remaining life of the Estradiol intangible asset. As of June 30,The first earn out was paid in July 2018 and the $10 millionsecond earn out was due to Kashiv and recordedpaid in related party payables.September 2018.
Pursuant to a product development agreement, Amneal and Kashiv agreed to collaborate on the development and commercialization of Oxycodone HCI ER Oral Tablets. Under the agreement, this product is owned by Kashiv, with Amneal acting as the exclusive marketing partner and as Kashiv’s agent for filing the product ANDA. Under the agreement, Amneal was also responsible for assuming control of and managing all aspects of the patent litigation arising from the filing of the ANDA, including selecting counsel and settling such proceeding (subject to Kashiv’s consent). In December 2017, Amneal and Kashiv terminated the product development agreement and pursuant to the termination and settlement of the agreement, Kashiv agreed to pay Amneal $7.8$8 million, an amount equal to the legal costs incurred by Amneal related to the defense of the ANDA. The $7.8 million settlement was recorded within general and administrative expenses for the year ended December 31, 2017 and related-party receivables as of December 31, 2017. The cash payment was received in February 2018.
Pursuant to a product development agreement, Amneal and Kashiv agreed to collaborate on the development and commercialization of Levothyroxine Sodium. Under the agreement, the IP and ANDA for this product is owned by Amneal and Kashiv is to receive a profit share for all sales of the product made by Amneal. Amneal is precluded from selling the product made by Kashiv during the term of the license and supply agreement with JSP. Under the terms of the amended agreement with Kashiv, Amneal paid $2 million in July 2019 and may be required to pay up to an additional $18 million upon certain regulatory
milestones being met. At June 30, 2019, the Company recorded a $2 million payable to the related party and the cost was recognized as R&D expense to compensate Kashiv for costs incurred to develop the product.
Adello Biologics, LLC
Adello is an independent clinical stage company engaged in the development of biosimilar pharmaceutical products. Amneal and Adello are parties to a master services agreement pursuant to which, from time to time, Amneal provides human resources and product quality assurance services on behalf of Adello. The parties are also party to a license agreement for parking spaces in Piscataway, NJ. The total amount of net expense paid toincome received from Adello from these agreements was less than $0.1 million for both of the three and six months ended June 30, 2018 and 2017 was less than $0.1 million.2019. The total amount of net expense paid to Adello from these agreements for both of the three months and six months ended and June 30, 2018 and 2017 was less than $0.1 million.
In March 2017, Amneal entered into a product development agreement with Adello. The collaboration extended the remaining development process to Adello for a complex generic product, while Amneal retained its commercial rights upon approval. Pursuant to the agreement, Adello paid Amneal $10 million for reimbursement of past development costs, which Amneal deferred as a liability and will pay royalties upon commercialization.
In October 2017, Amneal and Adello terminated their product development agreement pursuant to which Amneal and Adello had been collaborating to develop and commercialize Glatiramer Acetate products. Pursuant to the termination agreement, Amneal owed Adello $10.5$11 million for the up-front payment plus interest. This amount was paid in January 2018 and recognized as a related-party payable in the Consolidated Balance Sheet as of December 31, 2017.
2018.
On October 1, 2017, Amneal and Adello entered into a license and commercialization agreement pursuant to which the parties have agreed to cooperate with respect to certain development activities in connection with two biologic pharmaceutical products. In addition, under the agreement, Adello has appointed Amneal as its exclusive marketing partner for such products in the United States. In connection with the agreement, Amneal paid an upfront amount of $1.5$2 million in October 2017 which was recorded within research and development expenses in the Consolidated Statement of Income.expenses. The agreement also provides for potential future milestone payments to Adello.
In October 2017, Amneal purchased a building from Adello in Ireland to further support its inhalation dosage form. Amneal issued a promissory note for 12.513 million euros ($14.715 million based on exchange rate as of December 31, 2017) which accrues interest at a rate of 2% per annum, due on or before July 1, 2019. AsThe promissory note was paid in full in the second quarter of June 30, 2018, no amounts were due under the promissory note.2018. Refer to Note 5. Alliance and Collaboration for further information on collaboration agreements with Adello.
PharmaSophia, LLC
PharmaSophia, LLC (“PharmaSophia”("PharmaSophia") is a joint venture formed by Nava Pharma, LLC (“Nava”("Nava") and Oakwood Laboratories, LLC for the purpose of developing certain products. Currently PharmaSophia is actively developing two injectable products. PharmaSophia and Nava are parties to a research and development agreement pursuant to which Nava provides research and development services to PharmaSophia. Nava subcontracted this obligation to Amneal, entering into a subcontract research and development services agreement pursuant to which Amneal provides research and development services to Nava in connection with the products being developed by PharmaSophia. The total amount of income earned from these agreements for both of the three months ended June 30, 2019 and 2018 was $0.3 million and 2017 was $0.1 million.million, respectively. The total amount of income earned from these agreements for both of the six months ended June 30, 2019 and 2018 was $0.6 million and 2017 was $0.2 million.million, respectively. At June 30, 20182019 and December 31, 20172018 receivables of $0.1$0.7 million and $0.1 million, respectively, were due from the related party.
Gemini Laboratories, LLC
Prior to the Company's acquisition of Gemini in May 2018, as described in Note 3. Acquisitions, Gemini was an independent specialty pharmaceuticals company focused on promoting niche branded products to endocrinologists, pediatricians, OB/GYNs and other specialist physicians. Gemini also engaged in the wholesale distribution of generic pharmaceuticals to compounding pharmacies and to directly dispensing physicians, and promoted and distributed certain branded or quasi-branded products. Gemini predominantly sold products through branded wholesalers and certain compounding pharmacies and partners that service directly dispensing physicians. Prior to the Company's acquisition of Gemini, Amneal and Gemini were parties to various agreements. Total gross profit earned from the sale of inventory to Gemini for the three months ended June 30, 2018 (through the acquisition date) and 2017 was nil and $0.3 million, respectively. Total gross profit earned from the sale of inventory to Gemini for the six months ended June 30, 2018 (through the acquisition date)was nil and 2017 was $0.1 million and $0.9 million, respectively.million. The total profit share paid by Gemini for the three and six months ended June 30, 2018 (through the acquisition date) and 2017 was $0.8 million and $3.3$5 million, respectively.
Fosun International Limited
Fosun International Limited (“Fosun”) is a Chinese international conglomerate and investment company that is a shareholder of the Company. On June 6, 2019, the Company entered into a license and supply agreement with a subsidiary of Fosun, which is a Chinese pharmaceutical company. Under the terms of the agreement, the Company will hold the imported drug license required for pharmaceutical products manufactured outside of China and will supply Fosun with finished, packaged products for Fosun to then sell in the China market. Fosun will be responsible for obtaining regulatory approval in China and for shipping the product from Amneal’s facility to Fosun’s customers in China. In consideration for access to the Company's U.S. regulatory filings to support its China regulatory filings and for the supply of product, Fosun paid the Company a $1 million non-refundable
fee, net of tax, in July 2019 and will be required to pay the Company $0.3 million for each of 8 products upon the first commercial sale of each in China in addition to a supply price and a profit share. For the three and six months ended June 30, 2019, the Company has not recognized any revenue from this agreement.
Tax Distributions
Under the terms of the Limited Liability Company Agreement, Amneal is obligated to make tax distributions to its members, which are also holders of non-controlling interests in the Company. For further details, refer to Note 19. Stockholders' Equity/ Members' Deficit contained in the Company's 2018 Annual Report on Form 10-K.
Non-Controlling Interests
During December 2018, the Company acquired the non-controlling interests in one of Amneal's non-public subsidiaries for approximately $3 million. As of December 31, 2018, the Company recorded a $3 million related party payable for this transaction which was paid in full as of June 30, 2019.
16. Goodwill and Intangible Assets
The total profit share paid by Geminichanges in goodwill for the six months ended June 30, 2018 (through2019 and for the acquisition date) and 2017 was $4.8 million and $6.1 million, respectively. Atyear ended December 31, 2017, receivables of $5.6 million2018 were due from the related party.as follows (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Balance, beginning of period | $ | 426,226 |
| | $ | 26,444 |
|
| Impax acquisition adjustment | (1,255 | ) | | — |
|
| Goodwill acquired during the period | — |
| | 401,488 |
|
| Goodwill divested during the period | (5,175 | ) | | — |
|
| Currency translation | 221 |
| | (1,706 | ) |
| Balance, end of period | $ | 420,017 |
| | $ | 426,226 |
|
APHC Holdings, LLC (formerly, Amneal Holdings, LLC)
APHC Holdings, LLC (formerly, Amneal Holdings, LLC) was the ultimate parent of Amneal. In connection with the Combination, Amneal is required to reimburse transaction-related costs incurred by APHC Holdings. As of June 30, 2018, no amounts were due to APHC Holdings.
21. Employee Benefit Plans
The Company has voluntary defined contribution plans covering eligible employees in the United States which provide for a Company match. For the three months ended June 30, 2018 and 2017, the Company made matching contributions of $1.32019, $361 million and $0.6$59 million of goodwill was allocated to the Specialty and Generics segment, respectively. As of December 31, 2018, $360 million and $66 million of goodwill was allocated to the Specialty and Generics segment, respectively. For the six months ended June 30, 2019, goodwill divested was associated with the sale of the Company's operations in the United Kingdom and Germany. For the year ended December 31, 2018, goodwill acquired was associated with the Impax and 2017,Gemini acquisitions. Refer to Note 3. Acquisitions and Divestitures for additional information about the Company made matching contributionsacquisition of $4.3 millionImpax and $1.2 million, respectively.the divestiture of the Company's operations in the United Kingdom and Germany.
Intangible assets at June 30, 2019 and December 31, 2018 are comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Weighted-Average Amortization Period (in years) | | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| Amortizing intangible assets: | | | | | | | | | | | | | |
| Product rights | 11.0 | | $ | 1,265,150 |
| | $ | (142,704 | ) | | $ | 1,122,446 |
| | $ | 1,282,011 |
| | $ | (88,081 | ) | | $ | 1,193,930 |
|
| Customer relationships |
| | — |
| | — |
| | — |
| | 7,005 |
| | (1,955 | ) | | 5,050 |
|
| Other intangible assets | 10.5 | | 3,000 |
| | (900 | ) | | 2,100 |
| | 5,620 |
| | (1,561 | ) | | 4,059 |
|
| Total |
| | $ | 1,268,150 |
| | $ | (143,604 | ) | | $ | 1,124,546 |
| | $ | 1,294,636 |
| | $ | (91,597 | ) | | $ | 1,203,039 |
|
| In-process research and development |
| | 428,784 |
| | — |
| | 428,784 |
| | 451,930 |
| | — |
| | 451,930 |
|
| Total intangible assets | | | $ | 1,696,934 |
| | $ | (143,604 | ) | | $ | 1,553,330 |
| | $ | 1,746,566 |
| | $ | (91,597 | ) | | $ | 1,654,969 |
|
The Company also has a deferred compensation planevaluated assets for certain former executives of Impax. Deferred compensation liabilities are recorded atpotential impairment by comparing estimated future undiscounted net cash flows to the valuecarrying amount of the amount owed toasset. For the plan participants, with changesthree months ended June 30, 2019, the Company recognized a total of $3 million of intangible asset impairment charges, which was recognized in valuecost of goods sold. For the six months ended June 30, 2019, the Company recognized as compensationa total of $79 million of intangible asset impairment charges, of which $56 million was recognized in cost of goods sold and $23 million was recognized in research and development expense. The calculationimpairment charges primarily related to four products, two of which are currently marketed products and two of which are IPR&D products, all acquired as part of the deferred compensation plan obligation is derived by referenceCombination. For the currently marketed products, the impairment charges were the result of significant price erosion during the first quarter of 2019, without an offsetting increase in customer demand, resulting in significantly lower than expected future cash flows. For one IPR&D product, the impairment charge was the result of increased competition at launch resulting in significantly lower than expected future cash flows. For the other IPR&D product, the impairment charge was the result of a strategic decision to hypothetical investments selected byno longer pursue approval of the participantsproduct.
During the six months ended June 30, 2019, the Company recognized a $50 million product rights intangible asset for the exclusive rights to sell Levothyroxine in the U.S. market under a license and issupply agreement with JSP. Refer to Note 5. Alliance and Collaboration for additional information.
For the six months ended June 30, 2019, included in other long-term liabilities. the Company's divested United Kingdom operations were a net customer relationship intangible asset and a net trade name intangible asset of $5 million and $2 million, respectively. Refer to Note 3. Acquisitions and Divestitures for additional information.
Amortization expense related to intangible assets recognized is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Amortization | $ | 34,796 |
| | $ | 16,694 |
| | $ | 65,759 |
| | $ | 18,454 |
|
The Company invests participant contributions in corporate-owned life insurance policies,following table presents future amortization expense for which the cash surrender value is included in other non-current assets. Matching contributionsnext five years and thereafter, excluding $429 million of IPR&D intangible assets (in thousands):
|
| | | |
| | Future Amortization |
| Remainder of 2019 | $ | 76,018 |
|
| 2020 | 143,075 |
|
| 2021 | 142,600 |
|
| 2022 | 132,283 |
|
| 2023 | 129,564 |
|
| 2024 | 127,844 |
|
| Thereafter | 373,162 |
|
| Total | $ | 1,124,546 |
|
17. Acquisition, Transaction-Related and Integration Expenses
The following table sets forth the components of the Company’s acquisition, transaction-related and integration expenses for the three and six months ended June 30, 2018 were immaterial.
22. Segment Information
The Company has two reportable segments, the Generics business2019 and the Specialty Pharma business. The Generics business develops, manufactures and commercializes complex oral solids, injectables, ophthalmics, liquids, topicals, softgels, inhalation products and transdermals across a broad range of therapeutic categories. The Company's retail and institutional portfolio contains approximately 200 product families, many of which represent difficult-to-manufacture products or products that have a high barrier-to-entry such as oncologics, anti-infectives and supportive care to healthcare providers.
The Specialty Pharma business delivers proprietary medicines to the U.S. market. The Company offers a growing portfolio in core therapeutic categories including central nervous system disorders, endocrinology, parasitic infections and other therapeutic areas. Our specialty products are marketed through skilled specialty sales and marketing teams, who call on neurologists, movement disorder specialists, endocrinologists and primary care physicians in key markets throughout the U.S.
The Specialty Pharma business also has a number of product candidates that are in varying stages of development.
The Company’s chief operating decision maker evaluates the financial performance of the Company’s segments based upon segment operating (loss) income. Items below income (loss) from operations are not reported by segment, since they are excluded from the measure of segment profitability reviewed by the Company’s chief operating decision maker. Additionally, general and administrative expenses, certain selling expenses, certain litigation settlements, and non-operating income and expenses are included in “Corporate and Other.” The Company does not report balance sheet information by segment since it is not reviewed by the Company’s chief operating decision maker.
The tables below present segment information reconciled to total Company financial results, with segment operating income or loss including gross profit less direct research and development expenses and direct selling expenses as well as any litigation settlements, to the extent specifically identified by segment2018 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 | Generics | | Specialty Pharma | | Corporate and Other | | Total
Company |
| Net revenue | $ | 361,770 |
| | $ | 52,017 |
| | $ | — |
| | $ | 413,787 |
|
| Cost of goods sold | 211,534 |
| | 23,958 |
| | — |
| | 235,492 |
|
| Gross profit | 150,236 |
| | 28,059 |
| | — |
| | 178,295 |
|
| Selling, general and administrative | 16,621 |
| | 13,549 |
| | 22,833 |
| | 53,003 |
|
| Research and development | 47,206 |
| | 3,129 |
| | — |
| | 50,335 |
|
| Intellectual property legal development expenses | 4,004 |
| | 43 |
| | — |
| | 4,047 |
|
| Acquisition and transaction-related expenses | 114,622 |
| | — |
| | 92,885 |
| | 207,507 |
|
| Restructuring expenses | 24,797 |
| | 2,421 |
| | 17,247 |
| | 44,465 |
|
| Operating (loss) income | $ | (57,014 | ) | | $ | 8,917 |
| | $ | (132,965 | ) | | $ | (181,062 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Acquisition, transaction-related and integration expenses(1) | $ | 3,519 |
| | $ | 21,008 |
| | $ | 9,551 |
| | $ | 28,143 |
|
Profit participation units(2) | — |
| | 158,757 |
| | — |
| | 158,757 |
|
Transaction-related bonus(3) | — |
| | 27,742 |
| | — |
| | 27,742 |
|
| Total | $ | 3,519 |
| | $ | 207,507 |
| | $ | 9,551 |
| | $ | 214,642 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 | Generics | | Specialty Pharma | | Corporate and Other | | Total
Company |
| Net revenue | $ | 636,959 |
| | $ | 52,017 |
| | $ | — |
| | $ | 688,976 |
|
| Cost of goods sold | 342,128 |
| | 23,958 |
| | — |
| | 366,086 |
|
| Gross profit | 294,831 |
| | 28,059 |
| | — |
| | 322,890 |
|
| Selling, general and administrative | 27,824 |
| | 13,549 |
| | 36,751 |
| | 78,124 |
|
| Research and development | 91,415 |
| | 3,129 |
| | — |
| | 94,544 |
|
| Intellectual property legal development expenses | 8,580 |
| | 43 |
| | — |
| | 8,623 |
|
| Acquisition and transaction-related expenses | 114,622 |
| | — |
| | 100,020 |
| | 214,642 |
|
| Restructuring expenses | 24,797 |
| | 2,421 |
| | 17,247 |
| | 44,465 |
|
| Operating income (loss) | $ | 27,593 |
| | $ | 8,917 |
| | $ | (154,018 | ) | | $ | (117,508 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2017 | Generics | | Specialty Pharma | | Corporate
and Other | | Total
Company |
| Net revenue | $ | 259,871 |
| | $ | — |
| | $ | — |
| | $ | 259,871 |
|
| Cost of goods sold | 136,138 |
| | — |
| | — |
| | 136,138 |
|
| Gross profit | 123,733 |
| | — |
| | — |
| | 123,733 |
|
| Selling, general and administrative | 14,845 |
| | — |
| | 12,093 |
| | 26,938 |
|
| Research and development | 47,184 |
| | — |
| | — |
| | 47,184 |
|
| Intellectual property legal development expenses | 4,926 |
| | — |
| | — |
| | 4,926 |
|
| Acquisition and transaction-related expenses | — |
| | — |
| | 82 |
| | 82 |
|
| Operating income (loss) | $ | 56,778 |
| | $ | — |
| | $ | (12,175 | ) | | $ | 44,603 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2017 | Generics | | Specialty Pharma | | Corporate
and Other | | Total
Company |
| Net revenue | $ | 485,552 |
| | $ | — |
| | $ | — |
| | $ | 485,552 |
|
| Cost of goods sold | 245,803 |
| | — |
| | — |
| | 245,803 |
|
| Gross profit | 239,749 |
| | — |
| | — |
| | 239,749 |
|
| Selling, general and administrative | 29,808 |
| | — |
| | 24,832 |
| | 54,640 |
|
| Research and development | 86,603 |
| | — |
| | — |
| | 86,603 |
|
| Intellectual property legal development expenses | 11,093 |
| | — |
| | — |
| | 11,093 |
|
| Acquisition and transaction-related expenses | — |
| | — |
| | 82 |
| | 82 |
|
| Operating income (loss) | $ | 112,245 |
| | $ | — |
| | $ | (24,914 | ) | | $ | 87,331 |
|
Significant Products
The Company generally consolidates net revenue by "product family," meaning that it consolidates net revenue from products containing the same active ingredient(s) irrespective of dosage strength, delivery method or packaging size. The Company's significant product families, as determined based on net revenue,(1) Acquisition, transaction-related and their percentage of the Company's consolidated net revenueintegration expenses include professional service fees (e.g. legal, investment banking and accounting), information technology systems conversions, and contract termination/renegotiation costs. These costs for each of the three and six months ended June 30, 2019 consists of integration costs.
(2)Profit participation units expense relates to the accelerated vesting of certain of Amneal's profit participation units that occurred prior to the Closing of the Combination for current and former employees of Amneal for service prior to the Combination (see additional information in the paragraph below and Note 19. Stockholders' Equity/ Members' Deficit in the Company's 2018 Annual Report on Form 10-K).
(3) Transaction-related bonus is a cash bonus that was funded by Holdings for employees of Amneal for service prior to the closing of the Combination (see additional information in Note 19. Stockholders' Equity/ Members' Deficit in the Company's 2018 Annual Report on Form 10-K).
Accelerated Vesting of Profit Participation Units
Amneal’s historical capital structure included several classifications of membership and 2017 are set forth below (in thousands, exceptprofit participation units. During the second quarter of 2018, the board of managers of Amneal Pharmaceuticals LLC approved a discretionary modification to certain profit participation units concurrent with the Combination that immediately caused the vesting of all profit participation units that were previously issued to certain current or former employees for percents):service prior to the Combination. The modification entitled the holders to 6,886,140 shares of Class A Common Stock with a fair value of $126 million on the date of the Combination and $33 million of cash. The cash and shares were distributed by Holdings with no additional shares issued by the Company. As a result of this transaction, the Company recorded a charge in acquisition, transaction-related and integration expenses and a corresponding capital contribution of $159 million for the three and six months ended June 30, 2018.
18. Subsequent Events
Restructuring Plan
On July 10, 2019, the Company announced a plan to restructure its operations that is intended to reduce costs and optimize its organizational and manufacturing infrastructure. Pursuant to the restructuring plan, the Company expects to reduce its headcount by approximately 550, primarily by closing its manufacturing facility located in Hauppauge, NY and its packaging facility located East Hanover, New Jersey. As a result of the restructuring plan, the Company estimates that it will incur a pre-tax restructuring charge of approximately $10 to $12 million of cash expenditures related to severance benefits. Other cash expenditures associated with this restructuring plan, including decommissioning and dismantling the sites and other third party costs cannot be estimated at this time.
Departure of Officers and Directors
On August 5, 2019, the Company announced that President and Chief Executive Officer Robert A. Stewart was leaving the Company and resigning as a director, effective immediately, and would be replaced by Amneal’s co-founders Chirag Patel, who will serve as President and Co-Chief Executive Officer, and Chintu Patel, who will serve as Co-Chief Executive Officer. Each of Chirag Patel and Chintu Patel is a member of the Amneal Group. In connection with this transition, among other changes to the Company's board of directors, Executive Chairman Paul M. Bisaro also resigned from the Company and the board and was replaced on the board by Paul Meister, who will serve as non-executive Chairman of the Board.
|
| | | | | | | | |
| Segment | | Product Family | | Three Months Ended June 30, 2018 |
| | | | | $ | % |
| Generics | | Diclofenac Sodium Gel | | $ | 31,820 |
| 8 | % |
| Generics | | Yuvafem-Estradiol | | $ | 30,827 |
| 7 | % |
| Generics | | Aspirin;Dipyridamole ER Capsul | | $ | 27,919 |
| 7 | % |
| Specialty Pharma | | Rytary® family | | $ | 20,520 |
| 5 | % |
| Generics | | Epinephrine Auto-Injector family (generic Adrenaclick®) | | $ | 19,166 |
| 5 | % |
|
| | | | | | | | |
| Segment | | Product Family | | Three Months Ended June 30, 2017 |
| | | | | $ | % |
| Generics | | Yuvafem-Estradiol | | $ | 40,387 |
| 16 | % |
| Generics | | Diclofenac Sodium Gel | | $ | 22,643 |
| 9 | % |
| Generics | | Ranitidine | | $ | 8,678 |
| 3 | % |
| Generics | | Aspirin;Dipyridamole ER Capsul | | $ | 8,742 |
| 3 | % |
| Generics | | Atovaquone | | $ | 7,234 |
| 3 | % |
|
| | | | | | | | |
| Segment | | Product Family | | Six Months Ended June 30, 2018 |
| | | | | $ | % |
| Generics | | Diclofenac Sodium Gel | | $ | 52,096 |
| 8 | % |
| Generics | | Yuvafem-Estradiol | | $ | 50,094 |
| 7 | % |
| Generics | | Aspirin;Dipyridamole ER Capsul | | $ | 44,941 |
| 7 | % |
| Generics | | Oseltamivir | | $ | 39,634 |
| 6 | % |
| Specialty Pharma | | Rytary® family | | $ | 20,520 |
| 3 | % |
|
| | | | | | | | |
| Segment | | Product Family | | Six Months Ended June 30, 2017 |
| | | | | $ | % |
| Generics | | Yuvafem-Estradiol | | $ | 70,777 |
| 15 | % |
| Generics | | Diclofenac Sodium Gel | | $ | 42,120 |
| 9 | % |
| Generics | | Ranitidine | | $ | 16,498 |
| 3 | % |
| Generics | | Lidocaine | | $ | 15,878 |
| 3 | % |
| Generics | | Aspirin;Dipyridamole ER Capsul | | $ | 15,594 |
| 3 | % |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Financial Condition
The following discussion and analysis summarizes the significant factors affecting the results of operations, financial condition and liquidity position of Amneal as of and for the three and six months ended June 30, 2018 and should be read in conjunction with the consolidated financial statements and related notes of thereto included elsewhere in this Quarterly Report on Form 10-
Q and with our audited consolidated financial statements included in our Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission on May 7, 2018.
The following discussion and analysis contains forward-looking statements that reflect Amneal Pharmaceuticals, Inc.'s plans, estimates and beliefs. Actual results could differ materially from those discussed in the forward-looking statements. Statements included in this Quarterly Report on Form 10-Q that do not relate to present or historical conditions are “forward-looking statements.” Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements may include statements relating to our plans, strategies, objectives, expectations and intentions. Words such as "believes," "forecasts," "intends," "possible," "estimates," "anticipates," and "plans" and similar expressions are intended to identify forward-looking statements. Our ability to predict results or the effect of events on our operating results is inherently uncertain. Such risks and uncertainties include, but are not limited to (i) the impact of global economic conditions, (ii) our ability to integrate the operations of Amneal Pharmaceuticals LLC ("Amneal") and Impax Laboratories, LLC ("Impax") pursuant to the transactions (the "Combination") contemplated by that certain Business Combination Agreement dated as of October 17, 2017 by and among the Company, Amneal, Impax and K2 Merger Sub Corporation as amended on November 21, 2017 and December 16, 2017 and our ability to realize the anticipated synergies and other benefits of the Combination, (iii) our ability to successfully develop and commercialize new products, (iv) our ability to obtain exclusive marketing rights for our products and to introduce products on a timely basis, (v) the competition we face in the pharmaceutical industry from brand and generic drug product companies, (vi) our ability to manage our growth, (vii) the illegal distribution and sale by third parties of counterfeit versions of our products or of stolen products, (viii) market perceptions of us and the safety and quality of our products, (ix) our dependence on the sales of a limited number of products for a substantial portion of our total revenues, (x) our ability to develop, license or acquire and introduce new products on a timely basis, (xi) the ability of our approved products to achieve expected levels of market acceptance, (xii) the risk that we may discontinue the manufacture and distribution of certain existing products, (xiii) the impact of manufacturing or quality control problems, (xiv) the risk of product liability and other claims against us by consumers and other third parties, (xv) risks related to changes in the regulatory environment, including United States federal and state laws related to healthcare fraud abuse and health information privacy and security and changes in such laws, (xvi) changes to FDA product approval requirements, (xvii) risks related to federal regulation of arrangements between manufacturers of branded and generic products, (xviii) the impact of healthcare reform and changes in coverage and reimbursement levels by governmental authorities and other third-party payers, (xix) our dependence on a few locations that produce a majority of our products, (xx) relationships with our major customers, (xxi) the continuing trend of consolidation of certain customer groups, (xxii) our reliance on certain licenses to proprietary technologies from time to time, (xxiii) our dependence on third party suppliers and distributors for raw materials for our products and certain finished goods, (xxiv) the time necessary to develop generic and branded drug products, (xxv) our dependence on third parties for testing required for regulatory approval of our products, (xxvi) our dependence on third party agreements for a portion of our product offerings, (xxvii) our ability to make acquisitions of or investments in complementary businesses and products on advantageous terms, (xxviii) regulatory oversight related to our international operations, (xxix) our increased exposure to tax liabilities due to our international operations and the impact of recent U.S. tax legislation, (xxx) payments required by our Tax Receivable Agreement, (xxxi) our involvement in various legal proceedings, including those brought by third parties alleging infringement of their intellectual property rights, (xxxii) legal, regulatory and legislative efforts by our brand competitors to deter competition from our generic alternatives, (xxxiii) the significant amount of resources we expend on research and development, (xxxiv) our substantial amount of indebtedness and our ability to generate sufficient cash to service our indebtedness in the future, (xxxv) risks inherent in conducting clinical trials, (xxxvi) our reporting and payment obligations under the Medicaid rebate program and other government purchase and rebate programs, (xxxvii) quarterly fluctuations in our operating results, (xxxviii) adjustments to our reserves based on price adjustments and sales allowances, (xix) impairment of our goodwill and other intangible assets, (xl) investigations and litigation concerning the calculation of average wholesale prices, (xli) cybersecurity and data leakage risks, (xlii) our ability to attract and retain talented employees and consultants, (xliii) our ability to protect our intellectual property rights, (xliv) uncertainties involved in the preparation of our financial statements, (xlv) our ability to maintain an effective system of internal controls over financial reporting, (xlvi) the impact of terrorist attacks and other acts of violence, (xlvii) expansion of social media platforms, (xlviii) our need to raise additional funds in the future, (xlix) the restrictions imposed by the terms of our credit agreement, (l) the fact that we are a holding company with nominal net worth, (li) the volatility of the price of our Class A Common Stock, (lii) the impact from future sales of shares by our stockholders on the price of our Class A Common Stock, (liii) the high concentration of ownership of our Class A Common Stock, (liv) the fact that we are controlled by APHC Holdings, LLC, (lv) the impact of our charter specifying the Court of Chancery of the State of Delaware as the sole and exclusive forum for all disputes between us and our stockholders, (lvi) the impact of anti-takeover provisions under Delaware law, (lvii) our current expectation that we will not pay dividends in the future, (lviii) the impact of any changed recommendations regarding our Class A Common Stock from analysts and (lix) such other factors as may be set forth elsewhere in this Quarterly Report, particularly in the section entitled "Risk Factors" and our public filings with the SEC.
Overview
Amneal Pharmaceuticals, Inc. (the "Company," "we," "us," or "our") is a specialty pharmaceutical company specializing in developing, manufacturing, marketing and distributing high-value generic pharmaceutical products across a broad array of dosage forms and therapeutic areas, as well as the development, manufacture and sale of branded products. We were formed fromon October 4, 2017, under the name Atlas Holdings, Inc. for the purpose of facilitating the combination (the "Combination") of Impax Laboratories, Inc. ("Impax") and Amneal Pharmaceuticals LLC ("Amneal"), which closed on May 4, 2018.
The following discussion and Impax pursuant toanalysis for the Combination. Prior tothree and six months ended June 30, 2019 should be read in conjunction with the consummationconsolidated financial statements and related notes of thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements for the Combination, Amnealyear ended December 31, 2018 included in our 2018 Annual Report on Form 10-K.
Our Specialty segment is engaged in the development, promotion, sale and Impax operated separately as independent companies. We operate in two segments, referred to as the Generics business and the Specialty Pharma business. The Generics business concentrates its efforts on generic products, which are the pharmaceutical and therapeutic equivalentsdistribution of brand-name drug products and are usually marketed under their established nonproprietary drug names rather than by a brand name. The Specialty Pharma business utilizes its specialty sales force to market proprietary branded pharmaceutical products, with a focus on products addressing central nervous system ("CNS") disorders, including migraine and Parkinson’s disease. Our portfolio of products includes Rytary®, an extended release oral capsule formulation of carbidopa-levodopa for the treatment of Parkinson’s disease, post-encephalitic parkinsonism, and parkinsonism that may follow carbon monoxide intoxication or manganese intoxication. In addition to Rytary®, our promoted Specialty portfolio includes Zomig® (zolmitriptan) products, for the treatment of CNS disordersmigraine headaches, which is sold under a license agreement with AstraZeneca UK Limited, Emverm® (mebendazole) 100 mg chewable tablets, for the treatment of pinworm, whipworm, common roundworm, common hookworm and American hookworm in single or mixed infections, and Unithroid® (levothyroxine sodium), for the treatment of hypothyroidism, which is sold under a license and distribution agreement with JSP.
For Specialty products, the majority of the product’s commercial value is usually realized during the period in which the product has market exclusivity. In the U.S. and some other select specialty segments.
countries, when market exclusivity expires and generic versions of a product are approved and marketed, there can often be very substantial and rapid declines in the branded product’s sales.
The Company’s Generics business specializes in developing, manufacturing, marketing and distributing high-value generic pharmaceutical products across a broad array of dosage forms and therapeutic areas. We currently marketsegment includes over 200 product families in the United States and our marketed and pipeline generics portfolios covercovering an extensive range of dosage forms and delivery systems, including both immediate and extended release oral solids, such as tablets, capsules and powders, liquids, sterile injectables, nasal sprays, inhalation and respiratory products, ophthalmics (which are sterile pharmaceutical preparations administered for ocular conditions), films, transdermal patches and topicals (which are creams or gels designed to administer pharmaceuticals locally through the skin). We focus on developing products with substantial barriers-to-entry as a result ofresulting from complex drug formulations or manufacturing, or legal and/or regulatory challenges. FocusingGeneric products, particularly in the U.S., generally contribute most significantly to revenues and gross margins at the time of their launch, and even more so in periods of market exclusivity, or in periods of limited generic competition. As such, the timing of new product introductions can have a significant impact on the Company’s financial results. The entrance into the market of additional competition generally has a negative impact on the volume and pricing of the affected products. Additionally, pricing is often affected by factors outside of the Company’s control.
The pharmaceutical industry is highly competitive and highly regulated. As a result, we face a number of industry-specific factors and challenges, which can significantly impact our results. For a more detailed explanation of our business and its risks, refer to our 2018 Annual Report on Form 10-K.
As of the end of the second quarter 2019, our Generics segment experienced both industry-wide and company-specific challenges that resulted in our financial performance falling short of our expectations since the beginning of the year. Such challenges include increased competition on certain key generic products, the uncertainty of supply of epinephrine auto-injector (generic Adrenaclick®) from our third-party supplier, and delays in key product approvals and launches, including generic NuvaRing®. We expect these opportunities allows uschallenges and others to offer first-to-file ("FTF"), first-to-market ("FTM")persist at least for the remainder of 2019.
To address these challenges, we have, among other things, conducted an in depth, company wide review of our organizational structures, operational budgets, current and other “high-value” products,future capital projects and existing capability and infrastructure alignments, resulting in the comprehensive restructuring plan we announced in July 2019. The restructuring plan is designed to reduce costs, optimize our organizational and manufacturing infrastructure, which we define as products with zeroexpect to three generic competitors at timereduce costs by approximately $50 million per year once the plan has been executed. For additional information, refer to Note 18, Subsequent Events, to the unaudited financial statements in Part I, Item 1 of launch. These products generally have limited competition at launch, tendthis report.
Our current year results continue to be more profitable and often have longer life cycles than other generic pharmaceuticals. As of June 30, 2018, we had 156 products approved but not yet launched or pending FDA approval and another 123 products in various stages of clinical development. Over 58%impacted by our Combination with Impax as a result of our total generic pipeline consists of potential FTF, FTMcontinued actions to adjust our operations and high-value products.
cost structure. The Specialty Pharma business is comprisedhistorical financial results of the Impax Specialty business, which we acquired onCompany for the periods prior the May 4, 2018 inclosing of the Combination are the historical financial results of Amneal, and thus the Gemini business acquired on May 7, 2018. Refercurrent period results, and balances, may not be comparable to Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 3. Acquisitions for further information related toprior years as the Combination andcurrent year includes the Gemini acquisition. Prior to these two transactions, we did not have a specialty business. The Specialty Pharma business is engaged in the development, promotion, sale and distribution of proprietary branded pharmaceutical products that we believe represent improvements to already-approved pharmaceutical products addressing CNS disorders, including migraine, multiple sclerosis, Parkinson's disease and post-herpetic neuralgia, and other select specialty segments. We believe that we have the research, development and formulation expertise to develop branded products that will deliver significant improvements over existing therapies.
Our branded pharmaceutical product portfolio currently consists of commercial CNS and other select specialty products, including its internally developed branded product, Rytary® (IPX066), an extended release oral capsule formulation of carbidopa-levodopa for the treatment of Parkinson’s disease, post-encephalitic parkinsonism, and parkinsonism that may follow carbon monoxide intoxication and/or manganese intoxication, which was approved by the FDA on January 7, 2015 and which we began marketing in the United States in April 2015. We received marketing authorization from the European Commission for Numient® (the brand name of IPX066 outside of the United States) during the fourth quarter of fiscal year 2015. In addition to Rytary®, the Amneal Specialty Pharma division is also currently engaged in the sale and distribution of four other branded products; the more significant include Zomig® (zolmitriptan) products, indicated for the treatment of migraine headaches, under the terms of a Distribution, License, Development and Supply Agreement with AstraZeneca UK Limited ("AstraZeneca") in the United States and in certain U.S. territories, and Emverm® (mebendazole) 100 mg chewable tablets, indicated for the treatment of pinworm, whipworm, common roundworm, common hookworm, and American hookworm in single or mixed infections.
Our company was formed in October 4, 2017 under the name Atlas Holdings, Inc. for the purpose of facilitating the combinationresults of Impax and Amneal, including the Combination contemplated by the BCA, which closed onfrom May 4, 2018. Refer to "Item 1. Financial Information - Notes to Consolidated Financial Statements - Note 1. Nature of Operations and Basis of Presentation" for further information related to the Combination.
Results of Operations
Overview
The following table sets forth our summarized, consolidated results of operations for the three and six month periodsmonths ended June 30, 20182019 and 20172018 (in thousands):
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| Net revenue | 413,787 |
| | 259,871 |
| | 688,976 |
| | 485,552 |
|
| Gross profit | 178,295 |
| | 123,733 |
| | 322,890 |
| | 239,749 |
|
| Operating (loss) income | (181,062 | ) | | 44,603 |
| | (117,508 | ) | | 87,331 |
|
| (Loss) income before income taxes | (262,506 | ) | | 39,600 |
| | (210,490 | ) | | 82,864 |
|
| (Benefit from) provision for income taxes | (12,416 | ) | | 1,852 |
| | (12,052 | ) | | 2,855 |
|
| Net (loss) income | (250,090 | ) | | 37,748 |
| | (198,438 | ) | | 80,009 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Net revenue | $ | 404,642 |
| | $ | 413,787 |
| | $ | 850,762 |
| | $ | 688,976 |
|
| Cost of goods sold | 296,381 |
| | 235,492 |
| | 606,124 |
| | 366,086 |
|
| Cost of goods sold impairment charges | 3,012 |
| | — |
| | 56,309 |
| | — |
|
| Gross profit | 105,249 |
| | 178,295 |
| | 188,329 |
| | 322,890 |
|
| Selling, general and administrative | 67,281 |
| | 56,003 |
| | 151,717 |
| | 81,124 |
|
| Research and development | 48,016 |
| | 50,335 |
| | 101,874 |
| | 94,544 |
|
| In-process research and development impairment charges | — |
| | — |
| | 22,787 |
| | — |
|
| Intellectual property legal development expenses | 2,511 |
| | 4,047 |
| | 6,677 |
| | 8,623 |
|
Acquisition, transaction-related and integration expenses
| 3,519 |
| | 207,507 |
| | 9,551 |
| | 214,642 |
|
| Legal settlement gains | — |
| | (3,000 | ) | | — |
| | (3,000 | ) |
| Restructuring and other charges | 2,835 |
| | 44,465 |
| | 8,996 |
| | 44,465 |
|
| Operating loss | (18,913 | ) | | (181,062 | ) | | (113,273 | ) | | (117,508 | ) |
| Total other expense, net | (37,314 | ) | | (81,444 | ) | | (76,134 | ) | | (92,982 | ) |
| Loss before income taxes | (56,227 | ) | | (262,506 | ) | | (189,407 | ) | | (210,490 | ) |
| Benefit from income taxes | (5,701 | ) | | (12,416 | ) | | (14,129 | ) | | (12,052 | ) |
| Net loss | $ | (50,526 | ) | | $ | (250,090 | ) | | $ | (175,278 | ) | | $ | (198,438 | ) |
Consolidated net revenuesNet Revenue
Net revenue for the three month periodmonths ended June 30, 2018 increased2019 decreased by 59%2%, or $153.9$9 million, to $413.8$405 million compared to $259.9$414 million for the three month periodmonths ended June 30, 2017. Consolidated net revenues for the six month period ended June 30, 2018 increased by 42%, or $203.4 million, to $689.0 million compared to $485.6 million for the six month period ended June 30, 2017.2018. The increase wasdecrease is primarily attributable to price and volume erosion of $114 million mainly in our Generics segment, $11 million in divestitures of our international businesses and the loss of exclusivity on Albenza in our Specialty segment which were partially offset by $58 million from the timing of the Combination and the acquisition of Impax on May 4,Gemini Laboratories, LLC ("Gemini"), a $46 million contribution from Levothyroxine sodium tablets ("Levothyroxine") which launched in Q4 2018, and Gemini on May 7, 2018.$12 million from new product launches in our Generics segment.
We recognized a net loss attributable to Amneal of $250.1 million and $198.4 millionNet revenue for the three and six months ended June 30, 2018, respectively. We recognized net income attributable2019 increased by 23%, or $162 million, to Amneal of $37.7$851 million and $80.0compared to $689 million for the three and six months ended June 30, 2017, respectively. Our results for both periods are impacted by the May 4th combination with Impax, including a $158.8 million charge for the vesting of profit participation units, a $28.0 million charge for special employee payments, restructuring charges of $44.5 million primarily related to severance, a $19.7 million loss on extinguishment of debt and approximately $19.0 million incremental interest expense.
Generics Business
The following table sets forth results of operations for our Generics segment for the three and six month periods ended June 30, 2018 and 2017 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| Net revenue | $ | 361,770 |
| | $ | 259,871 |
| | $ | 636,959 |
| | $ | 485,552 |
|
| Cost of goods sold | 211,534 |
| | 136,138 |
| | 342,128 |
| | 245,803 |
|
| Gross profit | 150,236 |
| | 123,733 |
| | 294,831 |
| | 239,749 |
|
| Selling, general and administrative | 16,621 |
| | 14,845 |
| | 27,824 |
| | 29,808 |
|
| Research and development | 47,206 |
| | 47,184 |
| | 91,415 |
| | 86,603 |
|
| Intellectual property legal development expenses | 4,004 |
| | 4,926 |
| | 8,580 |
| | 11,093 |
|
| Acquisition and transaction-related expenses | 114,622 |
| | — |
| | 114,622 |
| | — |
|
| Restructuring expenses | 24,797 |
| | — |
| | 24,797 |
| | — |
|
| Operating income (loss) | $ | (57,014 | ) | | $ | 56,778 |
| | $ | 27,593 |
| | $ | 112,245 |
|
Revenues
Net revenues for the Generics business increased by 39% and 31% for the three and six month periods ended June 30, 2018, respectively, when compared with the same period in 2017.2018. The increase inover the three monthprior year period is primarily attributable to increased sales of Aspirin Dipyridamole ER due to higher volume, higher demand for Diclofenac Sodium Gel, strong new launches from Methylphenidate ER Tabs and Phytonadione, and additional revenuea $211 million timing impact from the combination with Impax. These increases areCombination and the acquisition of Gemini, a $95 million contribution from Levothyroxine, and $17 million from new product launches in our Generics segment which were partially offset by lower salesprice and volume erosion of Lidocaine due to increased competition$147 million mainly in our Generics segment, the loss of exclusivity on Albenza in our Specialty segment and Yuvafem as a result$15 million from the divestitures of lower volumes to wholesalers and reduction in pricing as a result competitor entrance in late 2017. The increaseour international businesses in the six month period is primarily attributable to increased sales of Oseltamavir due to extendedUK and severe flu season, Aspirin Dipyridamole ER, strong new launches from Methylphenidate ER Tabs, Erythromycin and Phytonadione, higher demand for Diclofenac Sodium Gel and the combination with Impax. These increases are offset by lower sales of Yuvafem and Lidocaine.Germany.
Cost of Goods Sold and Gross Profit
Cost of goods sold, including impairment charges, increased 27%, or $64 million, to $299 million for the three month periodmonths ended June 30, 20182019 as compared to $235 million for the three months ended June 30, 2018. The increase in cost of goods sold was $211.5primarily attributable to the timing of the Combination and Gemini acquisition and $20 million an increasein inventory charges in our Generics segment. Cost of $75.4goods sold also increased over the prior year period due to incremental expenses related to the Combination, including amortization of intangible assets of $18 million, site closure costs of $7 million and royalties of $3 million.
Accordingly, gross profit for the three months ended June 30, 2019 was $105 million (26% of total revenues) as compared to gross profit of $178 million (43% of total revenues) for the three months ended June 30, 2018. Our gross profit as a percentage of sales declined compared to the prior year period.period primarily as a result of the price and volume erosion in the Generics segment and our inventory charges.
Cost of goods sold, including impairment charges, increased 81%, or $296 million, to $662 million for the six months ended June 30, 2019 as compared to $366 million for the six months ended June 30, 2018. The increase in cost of goods sold was primarily attributable to higher product sales due to the combination with Impax on May 4, 2018. Additional increases to cost of goods sold occurred due to approximately $20.0Combination and Gemini acquisition, $56 million in intangible impairment in our Generics segment, $36 million of higher amortization of purchase accounting adjustments for inventory and intangibles as well as write-offs of pre-launch inventory of approximately $8.0 million. Cost of goods sold for the six month period ended June 30, 2018 was $342.1 million, an increase of $96.3 million comparedexpenses related to the prior year period. The increaseLevothyroxine transition agreement with Lannett Company ("Lannett"), $33 million of inventory charges in costour Generics segment and incremental expenses related to the Combination and the acquisition of goods sold was primarily caused by higher corresponding product sales for the periodGemini, including first quarter 2018 and purchase accounting adjustments for amortization of intangible assets of $48 million and inventory.royalties of $19 million.
Accordingly, gross profit for the three and six month periodsmonths ended June 30, 20182019 was $150.2$188 million (41.5%(22% of total revenues) and $294.8 million (46.3% of total revenues) respectively as compared to gross profit of $123.7$323 million (47.6% of total revenues) for the three month period ended June 30, 2017 and $239.7 million (49.4%(47% of total revenues) for the six month periodmonths ended June 30, 2017.2018. Our gross profit as a percentage of sales declined compared to boththe prior year periodsperiod primarily due to higher costas a result of sales due to purchase accounting adjustmentsthe impairment charges, increased inventory related charges, and price erosion in our Generics segment as well as lower margin products in the Impax portfolio.other factors described above.
Selling, General, and Administrative Expenses
Selling, general, and administrative ("SG&A") expenses for the three month periodmonths ended June 30, 20182019 were $16.6$67 million, as compared to $14.8$56 million for the three month periodmonths ended June 30, 2017.2018. The $1.8$11 million increase from the prior period was primarily due to the combinationtiming of the Combination and Gemini acquisition, including selling expenses associated with Impax.our Specialty segment, stock-based compensation and higher Corporate functions spend including public company costs that did not exist prior to the Combination. These increases were partially offset by post-merger operating synergies.
Selling, general, and administrativeSG&A expenses for the six month periodmonths ended June 30, 20182019 were $27.8$152 million, as compared to $29.8$81 million for the six month periodmonths ended June 30, 2017.2018. The $2.0$71 million decrease from the prior period was primarily due to savings generated from the prior year divestitures of several international business, offset by a slight increase from the combination with Impax.
Research and Development Expenses
Research and development expenses for the three month period ended June 30, 2018 were $47.2 million, as compared to $47.2 million for the three month period ended June 30, 2017 The minimal change from the prior year was primarily due to lower usagethe timing of materialsthe Combination and lower external developmentGemini acquisition, including selling expenses associated with our Specialty segment, stock-based compensation and higher Corporate functions spend including public company costs duethat did not exist prior to timingthe Combination. These increases were partially offset by an increase in spending on projects acquired inpost-merger operating synergies.
Research and Development
Research and development expenses remained relatively consistent for the combination with Impax.three months ended June 30, 2019 and 2018 at $48 million and $50 million, respectively.
Research and development expenses for the six month periodmonths ended June 30, 20182019 were $91.4$102 million, as compared to $86.6$95 million for the six month periodmonths ended June 30, 2017.2018. The $4.8$7 million increase fromcompared to the prior year period wasis primarily dueattributable to an increasethe timing of the Combination and increased milestone payments in spending fromour Generics segment.
In-Process Research and Development Impairment Charges
There were no in-process research and development ("IPR&D") impairment charges for the first quarterthree months ended June 30, 2019 and 2018.
We recognized IPR&D impairment charges of $23 million for increased external development costs and higher GDUFA filing fees.the six months ended June 30, 2019. The charges are primarily associated with two products in our Generics segment that were acquired as part of the Combination. There were no IPR&D impairment charges for the six months ended June 30, 2018.
Intellectual Property legal development expenseLegal Development Expense
Intellectual property legal development expenses for the three and six month periodsmonths ended June 30, 2018 were $4.02019 was $3 million and $8.6 million, respectively, as compared to $4.9 million and $11.1$4 million for the three and six month periodsmonths ended June 30, 2017 respectively. The $0.9 million decrease for the three months and $2.5 million decrease2018. Intellectual property legal development expenses for the six months ended June 30, 2019 was primarily due$7 million as compared to reduced expenses related to trials on patent challenges during$9 million for the six months ended June 30, 2018. These costs include, but are not limited to, formulation assessments, patent challenge opinions and strategy, and litigation expenses to defend the intellectual property.
Legal Settlement Gains
There were no legal settlement gains for the three and six months ended June 30, 2019.
Legal settlement gains of $3 million for the three and six months ended June 30, 2018 were primarily related to settlements with several innovators of branded pharmaceutical products.
Acquisition, integrationTransaction-Related and transaction related expensesIntegration Expenses
We recognized approximately $114.6$4 million of acquisition, transaction-related and integration related expenses in the period with no comparable charges in 2017. This cost primarily represents a $98.2 million charge for the vestingthree months ended June 30, 2019 as compared to $208 million for the three months ended June 30, 2018. We recognized approximately $10 million of profit participation unitsacquisition, transaction-related and a $16.4integration expenses for the six months ended June 30, 2019 as compared to $215 million charge for special employee bonuses.the six months ended June 30, 2018.
Expenses for the three and six months ended June 30, 2019 were related to the ongoing integration and site closure expenses associated with Impax and Gemini. During the prior year period, expenses were primarily for transaction-related costs associated with pre-Combination activities.
Restructuring and Other Charges
We recorded an approximate $24.8$3 million of restructuring charge inand other charges for the quarterthree months ended June 30, 2019, which consisted of employee restructuring separation charges of approximately $1 million for severance provided pursuant to our severance programs for employees at our Hayward, California facility and other facilities and approximately $2 million of other employee severance charges. The restructuring and other charges for the three months ended June 30, 2018 were $44 million, which was primarily associated with no comparable charge in 2017. This severance charge primarily relates to a reduction in workforce resulting from the combination with Impax.Combination.
We recorded $9 million of restructuring and other charges for the six months ended June 30, 2019, which consisted of employee restructuring separation charges of approximately $4 million for severance provided pursuant to our severance programs for employees at our Hayward, California facility and other facilities and $5 million of other employee severance charges. The restructuring and other charges for the six months ended June 30, 2018 were $44 million, which were primarily associated with a reduction in workforce resulting from the Combination.
Total Other Expense, Net
Total other expense, net was $37 million for the quarter ended June 30, 2019, as compared to $81 million for the quarter ended June 30, 2018. The decrease of $44 million was primarily attributable to a $34 million benefit from the change in foreign exchange rates, primarily as a result of the impact of fluctuations in the Swiss Franc, Indian Rupee and Euro on intercompany loans and a $20 million decline in loss from extinguishment of debt, partially offset by $7 million of additional interest expense associated with an increase in long-term debt related to the Combination and the acquisition of Gemini and a $2 million loss recognized on sale of our operations in the Germany.
Total other expense, net was $76 million for the six months ended June 30, 2019, as compared to $93 million for the six months ended June 30, 2018. The decrease of $17 million was primarily attributable to a $20 million benefit from the change in foreign exchange rates, primarily as a result of the impact of fluctuations in the Swiss Franc, Indian Rupee and Euro on intercompany loans and a $20 million decline in loss from extinguishment of debt, and a net $7 million gain recognized from the sale of our operations in the UK and Germany partially offset by $30 million of additional interest expense associated with an increase in long-term debt related to the Combination and the acquisition of Gemini.
Benefit From Income Taxes
The benefit from income taxes was $6 million for the three months ended June 30, 2019 as compared to the benefit from income taxes of $12 million for the period ended June 30, 2018. The benefit from income taxes was $14 million for the six months ended June 30, 2019, as compared to the benefit from income taxes of $12 million for the six months ended June 30, 2018. Prior to the Combination, as a limited liability company, income taxes were only provided for the international subsidiaries as all domestic taxes flowed to the members. Subsequent to May 4, 2018, domestic income taxes were also provided for our allocable share of income or losses from Amneal at the prevailing U.S. federal, state, and local corporate income tax rates. The decrease in income tax benefit is also associated with the year-over-year decline in pre-tax loss.
The change in income tax benefit for the three and six months ended June 30, 2019 is also impacted by the year-over-year decline in pre-tax loss. For the three and six months ended June 30, 2019, the decline in pre-tax loss was primarily attributable to a $204 million and $205 million, respectively, decline in acquisition, transaction-related and integration expenses as well as $41 million and $35 million, respectively, decline in restructuring and other charges associated with severance benefits.
Net Loss
We recognized a net loss for the three months ended June 30, 2019 of $51 million as compared to net loss of $250 million for the three months ended June 30, 2018. The year over year decrease of $199 million is primarily attributable to a $204 million decline in acquisition, transaction related and integration expenses associated with the Combination and Gemini acquisition, a $41 million decline in restructuring and other charges, a $34 million benefit from the change in foreign exchange rates, primarily as a result of the impact of fluctuations in the Swiss Franc, Indian Rupee and Euro on intercompany loans and a $20 million decline in loss from extinguishment of debt. These decreases were partially offset by incremental cost of goods sold and selling, general and administrative expenses primarily related to the Combination and acquisition of Gemini.
We recognized a net loss for the six months ended June 30, 2019 of $175 million as compared to net loss of $198 million for the six months ended June 30, 2018. The year over year decrease of $23 million is primarily attributable to a $205 million decline in acquisition, transaction related and integration expenses associated with the Combination and Gemini acquisition, a $36 million decline in restructuring and other charges, a $20 million benefit from the change in foreign exchange rates, primarily as a result of the impact of fluctuations in the Swiss Franc, Indian Rupee and Euro on intercompany loans and a $20 million decline in loss on extinguishment of debt. These decreases were partially offset by $79 million of intangible asset impairment charges and incremental expenses related to the Combination and acquisition of Gemini.
Generics
The following table sets forth results of operations for our Generics segment for the three and six months ended June 30, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| Net revenue | $ | 335,064 |
| | $ | 361,770 |
| | $ | 717,541 |
| | $ | 636,959 |
|
| Cost of goods sold | 263,423 |
| | 211,534 |
| | 542,301 |
| | 342,128 |
|
| Cost of goods sold impairment charges | 3,012 |
| | — |
| | 56,309 |
| | — |
|
| Gross profit | 68,629 |
| | 150,236 |
| | 118,931 |
| | 294,831 |
|
| Selling, general and administrative | 14,379 |
| | 19,621 |
| | 38,527 |
| | 30,824 |
|
| Research and development | 45,448 |
| | 47,206 |
| | 95,599 |
| | 91,415 |
|
In-process research and development impairment charges
| — |
| | — |
| | 22,787 |
| | — |
|
| Intellectual property legal development expenses | 2,511 |
| | 4,004 |
| | 5,632 |
| | 8,580 |
|
| Legal settlement gains | — |
| | (3,000 | ) | | — |
| | (3,000 | ) |
| Other operating expenses | 1,405 |
| | 139,419 |
| | 6,083 |
| | 139,419 |
|
| Operating income (loss) | $ | 4,886 |
| | $ | (57,014 | ) | | $ | (49,697 | ) | | $ | 27,593 |
|
Net Revenue
Generics net revenue was $335 million for the three months ended June 30, 2019, a decrease of $27 million or 7% when compared with the same period in 2018. Volume and pricing erosion of $105 million in our existing business as well as a $11 million decline in international revenues from divestitures were partially offset by $46 million in sales of Levothyroxine which launched in Q4 2018, a $32 million impact from the timing of the Combination and $12 million from new product launches. Favorable volume growth increased sales in Levothyroxine, Abiraterone Acetate, Chlorpromazine HCI, Guanfacine and Hydroxyprogesterone Caproate Injection, which were partially offset by price and volume declines in sales of Yuvafem, Diclofenac Gel and Aspirin Dipyridamole ER Capsules.
Generics net revenue was $718 million for the six months ended June 30, 2019, an increase of $81 million or 13% when compared with the same period in 2018. The year over year increase was primarily driven by a $113 million impact from the timing of the Combination, $95 million in sales of Levothyroxine, and $17 million from new product launches partially offset by price and volume declines of $129 million in our existing business primarily in Oseltamavir, Yuvafem, Diclofenac Gel (price only) and Aspirin Dipyridamole ER Capsules and a $15 million decline in international revenues from divestitures.
Cost of Goods Sold and Gross Profit
Generics cost of goods sold, including impairment charges, for the three months ended June 30, 2019 was $266 million, an increase of 26% or $55 million compared to the three months ended June 30, 2018. The year over year increase is primarily associated with sales of Impax products added to portfolio with the Combination and $20 million in inventory charges. Cost of goods sold also increased over the prior year period due to $3 million of impairment charges as well as incremental expenses related to the Combination, including amortization of intangible assets of $9 million and site closure costs of $7 million.
Generics gross profit for the three months ended June 30, 2019 was $69 million (20% of total revenues) as compared to gross profit of $150 million (42% of total revenues) for the three months ended June 30, 2018. Our Generics gross profit as a percentage of sales declined compared to the prior year period primarily as a result of a price erosion and inventory related charges in addition to the other factors noted above.
Generics cost of goods sold, including impairment charges, for the six months ended June 30, 2019 was $599 million, an increase of 75% or $256 million compared to the six months ended June 30, 2018. The year over year increase is primarily associated with sales of Impax products added to portfolio with the Combination, $56 million in impairment charges primarily associated with two marketed products acquired as part of the Combination and $33 million in inventory charges. The impairment charge was the result of significant price erosion during the first quarter of 2019, due to new competition entering the market, resulting in significantly lower expected future cash flows from these products. Cost of goods sold was also unfavorably impacted by $36 million of expenses related to the Levothyroxine transition agreement with Lannett and incremental expenses related to the Combination, including amortization of intangible assets of $18 million, site closure costs of $16 million, and royalties of $12 million.
Generics gross profit for the six months ended June 30, 2019 was $119 million (17% of total revenue) as compared to gross profit of $295 million (46% of total revenue) for the six months ended June 30, 2018. Our Generics gross profit as a percentage of sales declined compared to the prior year period primarily as a result of the $56 million impairment charge, price erosion and other factors described above.
Selling, General, and Administrative
Generics SG&A expenses for the three months ended June 30, 2019 were $14 million, as compared to $20 million for the three months ended June 30, 2018. The $6 million decrease from the prior period was primarily due to post Combination operating synergies and the divesting our UK and Germany businesses.
Generics SG&A expense for the six months ended June 30, 2019 were $39 million, as compared to $31 million for the six months ended June 30, 2018. The $8 million increase from the prior year period was primarily due to the timing of the Combination partially offset by post Combination operating synergies and the divesting of our UK and Germany businesses.
Research and Development
Generics research and development expenses remained relatively consistent for the three months ended June 30, 2019 and 2018 were $45 million and $47 million, respectively.
Generics research and development expenses for the six months ended June 30, 2019 were $96 million, as compared to $91 million for the six months ended June 30, 2018. The $5 million increase is primarily attributable to the timing of the Combination.
In-Process Research and Development Impairment Charges
There were no IPR&D impairment charges for the three months ended June 30, 2019.
For the six months ended June 30, 2019, we recognized IPR&D impairment charges of $23 million associated with two IPR&D products in the Generics segment. For one IPR&D product, the impairment charge was the result of increased competition at launch resulting in significantly lower expected future cash flows from this product. For the other IPR&D product, the impairment charge was the result of a strategic decision to no longer pursue approval of the product.
There were no IPR&D charges for the three and six months ended June 30, 2018.
Intellectual Property Legal Development Expenses
Generics intellectual property legal development expenses for the three months ended June 30, 2019 were $3 million as compared to $4 million for the prior year period. Generics intellectual property legal development expenses for the six months ended June 30, 2019 were $6 million as compared to $9 million for the prior year period. For both the three and six month periods, these costs include, but are not limited to, formulation assessments, patent challenge opinions and strategy, and litigation expenses to defend the intellectual property.
Legal Settlement Gains
There were no legal settlement gains for the three and six months ended June 30, 2019.
Legal settlement gains of $3 million for the three and six months ended June 30, 2018 were primarily related to settlements with several innovators of branded pharmaceutical products.
Other Expenses
For the three and six months ended June 30, 2019, we recorded other expenses of $1 million and $7 million, respectively. For both the three and six months ended June 30, 2018, we recorded other expenses of $139 million. For the three and six month periods, these charges were primarily attributable to integration, site closure, and restructuring expenses associated with the Combination.
Specialty Pharma Business
The following table sets forth results of operations for our Specialty Pharma businesssegment for the three and six month periodsmonths ended June 30, 20182019 and 20172018 (in thousands):
| |
| Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
| Net revenue | $ | 52,017 |
| | $ | — |
| | $ | 52,017 |
| | $ | — |
| $ | 69,578 |
| | $ | 52,017 |
| | $ | 133,221 |
| | $ | 52,017 |
|
| Cost of goods sold | 23,958 |
| | — |
| | 23,958 |
| | — |
| 32,958 |
| | 23,958 |
| | 63,823 |
| | 23,958 |
|
| Gross profit | 28,059 |
| | — |
| | 28,059 |
| | — |
| 36,620 |
| | 28,059 |
| | 69,398 |
| | 28,059 |
|
| Selling, general and administrative | 13,549 |
| | — |
| | 13,549 |
| | — |
| 16,150 |
| | 13,549 |
| | 37,477 |
| | 13,549 |
|
| Research and development | 3,129 |
| | — |
| | 3,129 |
| | — |
| 2,568 |
| | 3,129 |
| | 6,275 |
| | 3,129 |
|
| Intellectual property legal development expenses | 43 |
| | — |
| | 43 |
| | — |
| — |
| | 43 |
| | 1,045 |
| | 43 |
|
| Acquisition and transaction-related expenses | — |
| | — |
| | — |
| | — |
| |
| Restructuring expenses | 2,421 |
| | — |
| | 2,421 |
| | — |
| |
| Operating income (loss) | $ | 8,917 |
| | $ | — |
| | $ | 8,917 |
| | $ | — |
| |
| Other operating expenses | | 1,366 |
| | 2,421 |
| | 3,428 |
| | 2,421 |
|
| Operating income | | $ | 16,536 |
| | $ | 8,917 |
| | $ | 21,173 |
| | $ | 8,917 |
|
Our Specialty Pharma businesssegment is comprised of the Impax Specialty business acquired on May 4, 2018 and the Gemini Laboratories, LLC business acquired on May 7, 2018. Prior to these two transactions, we did not have a specialty business.Specialty segment. Refer to “Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 3. Acquisitions and Divestitures in our 2018 Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q for further information related to these two transactions.
The following table sets forth corporate general and administrative expenses, as well as other items of income and expense presented below income or loss from operationsNet Revenue
Specialty net revenue for the three and six month periodsmonths ended June 30, 20182019 was $70 million, an increase of 34% or $18 million compared to the three months ended June 30, 2018. The increase from the prior year period was primarily due to a $26 million timing impact from the Combination and 2017 (in thousands):Gemini acquisition, which was partially offset by a $8 million decline in our existing business primarily associated with the loss of exclusivity on Albenza.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Net revenue | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Cost of goods sold | — |
| | — |
| | — |
| | — |
|
| Gross profit | — |
| | — |
| | — |
| | — |
|
| General and administrative | 22,833 |
| | 12,093 |
| | 36,751 |
| | 24,832 |
|
| Research and development | — |
| | — |
| | — |
| | — |
|
| Intellectual property legal development expenses | — |
| | — |
| | — |
| | — |
|
| Acquisition and transaction-related expenses | 92,885 |
| | 82 |
| | 100,020 |
| | 82 |
|
| Restructuring expenses | 17,247 |
| | — |
| | 17,247 |
| | — |
|
| Operating (loss) income | $ | (132,965 | ) | | $ | (12,175 | ) | | $ | (154,018 | ) | | $ | (24,914 | ) |
| Other expense, net | (81,444 | ) |
| (5,003 | ) |
| (92,982 | ) |
| (4,467 | ) |
Cost of Goods Sold and Gross Profit
Specialty cost of goods sold for the three months ended June 30, 2019 was $33 million, an increase of 38% or $9 million compared to the three months ended June 30, 2018. The increase from the prior year period was primarily due to increased volume associated with the timing of the Combination and Gemini acquisition, partially offset by the loss of exclusivity on Albenza.
Accordingly, Specialty gross profit for the three months ended June 30, 2019 was $37 million (53% of total revenues) as compared to gross profit of $28 million (54% of total revenues) for the three months ended June 30, 2018.
Specialty cost of goods sold for the six months ended June 30, 2019 was $64 million, an increase of 166% or $40 million compared to the six months ended June 30, 2018. The increase from the prior year period was primarily due to increased volume associated with the timing of the Combination and Gemini acquisition, partially offset by the loss of exclusivity on Albenza.
Accordingly, Specialty gross profit for the six months ended June 30, 2019 was $69 million (52% of total revenue) as compared to gross profit of $28 million (54% of total revenue) for the six months ended June 30, 2018.
Selling, General, and Administrative Expenses
GeneralSpecialty SG&A expenses for the three months ended June 30, 2019 were $16 million, as compared to $14 million for the three months ended June 30, 2018. The $2 million increase from the prior period was primarily due to the timing of the Combination and administrativeGemini acquisition, partially offset by operating post-Combination operating synergies.
Specialty SG&A expense for the six months ended June 30, 2019 were $37 million, as compared to $14 million for the six months ended June 30, 2018. The $23 million increase from the prior period was primarily due to the timing of the Combination partially offset by operating post-Combination operating synergies.
Research and Development
Specialty research and development expenses remained consistent for the three month period ended June 30, 20182019 at $3 million when compared to the prior year period.
Specialty research and development expenses for the six months ended June 30, 2019 were $22.8$6 million, as compared to $12.1$3 million for the three month periodsix months ended June 30, 2017.2018. The $10.7$3 million increase compared tofrom the prior year period was primarily due to general and administrative expenses of the Impax organization since combination, which includes certain public companyclinical costs that will remain on a go-forward basis. The increase is also attributable to stock-based compensation.associated with our bio studies.
General and administrative expenses forOther Expenses
For the six month periodthree months ended June 30, 2018 were $36.82019, we recognized other operating expenses of $1 million asin the Specialty segment compared to $24.8$2 million for the three months ended June 30, 2018. For the six months ended June 30, 2019, we recognized other operating expenses of $3 million in the Specialty segment compared to $2 million for the six month periodmonths ended June 30, 2017. The $11.9 million increase compared to the prior year period was primarily driven by the second quarter increase described above due to the Impax combination.
Acquisition, integration and transaction related expenses
We recognized $92.9 million of acquisition and integration related expenses or the three month period ended June 30, 2018 with no comparable charges in 2017. This cost primarily represents a $60.6 million charge for the vesting of profit participation units, a $12.2 million charge for special employee bonuses at Combination closing and $21.0 million of advisor and other third party costs associated with the Combination and integration.
We recognized approximately $100.0 million of acquisition and integration related expenses or the six month period ended June 30, 2018 with no comparable charges in 2017. This cost primarily represents a $60.6 million charge for the vesting of profit participation units, a $12.2 million charge for special employee bonuses at Combination closing and $28.1 million of advisor and other third party costs associated with the Combination and integration.
Restructuring
We recorded $17.2 million restructuring charge in2018. For the three and six month periodperiods, these expenses were primarily attributable to acquisition, site closure and integration expenses associated with no comparable charge in 2017. This severance charge primarily relates to a reduction in workforce resulting from the combination with Impax.Combination.
We recognized approximately $81.4 million and $93.0 million of other expense for the three and six months ended June 30, 2018, respectively. For the three and six months ended June 30, 2017, the Company recognized $5.0 million and $4.5 million expense respectively. The increase of approximately $76.4 million for the three month period is caused by $18.9 million of additional interest expense associated with an increase in long-term debt, $41.3 million increase in foreign exchange loss caused by fluctuation in the Swiss Franc and Indian Rupee and a $19.7 million loss on extinguishment of debt arising from the debt refinancing executed in connection with the Impax combination.
Liquidity and Capital Resources
Our primary source of liquidity is cash generated from operations, available cash and borrowings under debt financing arrangements, including $489 million of available additional capacity on our undrawn ABL.asset backed revolving credit facility ("ABL"). We believe these sources are sufficient to fund our planned operations, meet our interest and contractual obligations and provide sufficient liquidity over the next 12 months. However, our ability to satisfy our working capital requirements and debt obligations will depend upon economic conditions and demand for our products, which are factors that may be out of our control.
Our primary uses of capital resources are to fund operating activities, including R&Dresearch and development expenses associated with new product filings, and pharmaceutical product manufacturing expenses, license payments, and spending on production facility expansions and capital equipment items.
Over the next 12 months, we are requiredwill make substantial payments for monthly interest and quarterly principal amounts due on our term loan under our senior secured credit facility (the "Term Loan"), any future borrowings under the ABL, severance, and capital expenditures. We made a $50 million payment to settleJSP on April 22, 2019 pursuant to the terms of a $77.2 million note payable associated with the purchase of Gemini Laboratories, LLC,license and supply agreement, as described above under “Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - in Note 3. Acquisitions” in addition to making substantial monthly interest payments on our Senior Secured Credit Facilities, severance payments5. Alliance and capital expenditures.Collaboration. Given the magnitude of projected expenditures, we may require additional funds from our ABL to meet these increased cash needs in the third and fourth quarters.next year.
AsWe are party to a tax receivable agreement that requires us to make cash payments to APHC Holdings LLC (formerly known as Amneal Holdings LLC) ("Holdings") in respect of certain tax benefits that we may realize or may be deemed to realize as a result of redemptions or exchanges of Amneal common units by Holdings. The tax receivable agreement also requires that we make an accelerated payment to Holdings equal to the present value of all future payments due under the agreement upon certain change of control and similar transactions. The timing of any payments under the tax receivable agreement will vary depending upon a number of factors, but we expect that the payments could be substantial, and could be in excess of the tax savings that we ultimately realize. Because of the foregoing, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity. For further details, see Item 1A. Risk Factors and Note 8. Income Taxes in our 2018 Annual Report on Form 10-K.
In addition, pursuant to the limited liability operating agreement of Amneal, in connection with any tax period, Amneal will be required to make distributions to its members, on a pro rata basis in proportion to the number of Amneal Common Units held by each member, of cash until each member (other than the Company) has received an amount at least equal to its assumed tax liability and the Company has received an amount sufficient to enable it to timely satisfy all of its U.S. federal, state and local and non-U.S. tax liabilities, and meet its obligations pursuant to the tax receivable agreement. For the three and six months ended June 30, 2019, Amneal made an aggregate of nil and $13 million, respectively, in tax distributions to Holdings. The amount due to Holdings as of June 30, 2018, we had total cash and cash equivalents of $61.5 million, compared to $74.2 million of cash and cash equivalents as of December 31, 2017. The decrease of $12.7 million during the period resulted primarily from the $40 million up-front payment for the purchase of Gemini, a $20 million payment to a key supplier for a 10-year license and supply agreement, and net outflow from working capital, offset by cash provided by financing activities. 2019 is immaterial.
At June 30, 2018,2019, our cash and cash equivalents consist of cash on deposit and highly liquid investments. A portion of our cash flows are derived outside the United
States. As a result, we are subject to market risk associated with changes in foreign exchange rates. We maintain cash balances at both U.S. based and foreign country based commercial banks. At various times during the year, our cash balances held in the United States may exceed amounts that are insured by the Federal Deposit Insurance Corporation (FDIC). We make our investments in accordance with our investment policy. The primary objectives of our investment policy are liquidity and safety of principal.
Cash Flows
|
| | | | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018 |
| Cash (used in) provided by: | | | |
| Operating activities | $ | (87,316 | ) | | $ | (71,550 | ) |
| Investing activities | (44,795 | ) | | (360,924 | ) |
| Financing activities | (30,939 | ) | | 423,995 |
|
| Effect of exchange rate changes on cash | 1,293 |
| | (853 | ) |
| Net decrease in cash, cash equivalents, and restricted cash | $ | (161,757 | ) | | $ | (9,332 | ) |
Cash Flows from Operating Activities
Net cash used in operating activities was $71.6$87 million for the six months ended June 30, 2018, as2019 compared to $95.4 million cash provided by operations for the six months ended June 30, 2017. The decrease of $167.0 million in net cash provided by operating activities is caused primarily by increased transaction and integration costs, increased purchase of inventory and timing on collections of accounts receivables.
Our net cash used in investingoperating activities was $360.9of $72 million for the six months ended June 30, 2018,2018. The change was primarily attributed to unfavorable timing of collections of trade accounts receivable, increased interest due to additional debt of the combined company, an unfavorable impact from accounts payable and accrued expenses as compared to $54.6a result of the timing of cash disbursements and an increase in payments primarily associated with severance charges partially offset by decreased transaction and integration costs.
Cash Flows from Investing Activities
The decrease in cash used in investing activities of $316 million for the six months ended June 30, 2017. The increase of $306.3 million2019 compared to the six months ended June 30, 2018, was primarily attributedrelated to a decrease in cash paid for acquisitions and an increase in the acquisitionproceeds received on the sale of Impax offset by lower capital expenditure.international businesses.
Our netCash Flows from Financing Activities
The decrease in cash (used in) provided by financing activities was $424.0of $455 million for the six months ended June 30, 2018, as2019 compared to cash used for financing activities $31.7 million for the six months ended June 30, 2017. The increase of $455.7 million2018 was primarily relatedattributable to thea decrease in net proceeds from our $2.7 billion Term Loan B issuanceand an increase in tax distributions to non-controlling interests partially offset by a reductiondecrease in distributions to members.
UK Divestiture
On March 30, 2019, Amneal members.sold 100% of the stock of its Creo Pharma Holding Limited subsidiary, which comprised substantially all of the Company's operations in the United Kingdom, to AI Sirona (Luxembourg) Acquisition S.a.r.l ("AI Sirona") for net cash consideration of approximately $32 million which was received in April 2019.
Germany Divestiture
On May 3, 2019, the Company sold 100% of the stock of its Amneal Deutschland GmbH subsidiary ("ADG"), which compromised substantially all of the Company's operations in Germany, to EVER Pharma Holding Ges.m.b.H. (“EVER”) for net cash consideration of approximately $3 million which was received in May 2019.
Commitments and Contractual Obligations
The contractual obligations of the Company are set forth in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s 2018 Annual Report on Form 10-K. We include herein certain updates to those obligations. The $50 million Levothyroxine license and supply contract liability outstanding at March 31, 2019 was paid in April 2019.
Levothyroxine License and Supply Agreement; Transition Agreement
On August 16, 2018, the Company entered into a license and supply agreement with Jerome Stevens Pharmaceuticals, Inc. ("JSP") for Levothyroxine. This agreement designated the Company as JSP's exclusive commercial partner for Levothyroxine in the U.S. market for a 10-year term commencing on March 22, 2019. Under this license and supply agreement with JSP, the Company accrued the up-front license payment of $50 million on March 22, 2019, which was paid in April 2019. The agreement also provides for the Company to pay a profit share to JSP based on net profits of the Company's sales of Levothyroxine, after considering product costs.
On November 9, 2018, the Company entered into a transition agreement ("Transition Agreement") with Lannett and JSP. Under the terms of the Transition Agreement, the Company assumed the distribution and marketing of Levothyroxine from Lannett beginning December 1, 2018 through March 22, 2019, ahead of the commencement date of the license and supply agreement with JSP described above.
In accordance with the terms of the Transition Agreement, the Company made $47 million of non-refundable payments to Lannett. For the three months ended June 30, 2019 and the year ended December 31, 2018, $37 million and $10 million, respectively, were expensed to cost of goods sold, as the Company sold Levothyroxine. As of December 31, 2018, the Company had a $4 million transition contract liability, which was fully settled in February 2019.
Outstanding Debt Obligations
Term Loan and Revolving Credit Agreements
On May 4, 2018 we entered into a senior credit agreement that provided a term loan ("the Term Loan")Loan with a principal amount of $2.7 billion and an asset backed credit facility ("ABL")the ABL under which loans and letters of credit up to a principal amount of $500.0$500 million are available (principal amount of up to $25 million is available for letters of credit) (collectively, the “Senior"Senior Secured Credit Facilities”Facilities"). The term loanTerm Loan is repayable in equal quarterly installments at a rate of 1.00% or the original principal amount annually, with the balance payable at maturity on May 4, 2025. The Term Loan bears a variable annual interest rate, which is one-month LIBOR plus 3.5% at June 30, 2018.2019. The ABL bears an annual interest rate of one-month LIBOR plus 1.5% at June 30, 20182019 and matures on May 4, 2023. As of June 30, 2019, the annual interest rate for the ABL may be reduced or increased by 0.25% based on step-downs and step-ups determined by the average historical excess availability. At June 30, 2018,2019, we had no outstanding borrowings under the ABL had full borrowing capacity available.ABL.
The proceeds of any loans made under the Senior Secured Credit Facility can be used for capital expenditures, acquisitions, working capital needs and other general purposes, subject to covenants as described below. We pay a commitment fee based on the average daily unused amount of the ABL at a rate based on average historical excess availability, between 0.25% and 0.375% per annum. At June 30, 2018,2019, the ABL commitment fee rate is 0.375% per annum.
Adello License and Commercialization Agreement
On October 1, 2017, Amneal and Adello entered intoThe Senior Secured Credit Facilities contain a license and commercialization agreement. Adello granted Amneal an exclusive license, under its NDA, to distribute and sell two bio-similar products in the United States. Adello is responsible for development, regulatory filings, obtaining FDA approval, and manufacturing, and Amneal is responsible for marketing, selling and pricing activities. The term of the agreement is 10 years from the applicable product’s launch date.
In connection with the agreement, Amneal paid an upfront amount of $1.5 million in October 2017 for execution of the agreement. The agreement also provides for potential future milestone payments to Adello of (i) up to $21 million relating to regulatory approval, (ii) up to $43 million for successful delivery of commercial launch inventory, (iii) between $20 million and $50 million relating to number of competitors at launch for one product,covenants that, among other things, create liens on Amneal's and (iv) between $15 millionits subsidiaries' assets. The Senior Secured Credit Facilities contain certain negative covenants that, among other things and $67.5 million for the achievement of cumulative net sales for both products. The milestones are subject to certain performance conditions, which mayexceptions, restrict Amneal’s and its subsidiaries' ability to incur additional debt or may not be achieved, including FDA filing, FDA approval, launch activities and commercial sales volume objectives. In addition,guarantees, grant liens, make loans, acquisitions or other investments, dispose of assets, merge, dissolve, liquidate or consolidate, pay dividends or other payments on capital stock, make optional payments or modify certain debt instruments, modify certain organizational documents, enter into arrangements that restrict the agreement provides for Amnealability to pay dividends or grant liens, or enter into or consummate transactions with affiliates. The ABL also includes a profit share equalfinancial covenant whereby Amneal must maintain a minimum fixed charge coverage ratio if certain borrowing conditions are met. The Senior Secured Credit Facilities contain customary events of default, subject to 50%certain exceptions. Upon the occurrence of Net Profits, after considering manufacturingcertain events of default, the obligations under the Senior Secured Credit Facilities may be accelerated and marketing costs.the commitments may be terminated. At June 30, 2019, Amneal was in compliance with all covenants under the Senior Secured Credit Facilities.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2018.2019.
Critical Accounting Policies
Our significantFor a discussion of the Company’s critical accounting policies, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K. Other than as set forth below, there have been no material changes to the disclosure presented in our 2018 Annual Report on Form 10-K.
Impairment of Goodwill
In January 2017, the Financial Accounting Standards Board issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge. We adopted ASU 2017-04 as of April 1, 2019 on a prospective basis and have updated our critical accounting policy accordingly.
Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value based test. We review goodwill for possible impairment annually during the fourth quarter, or whenever events or circumstances indicate that the carrying amount may not be recoverable. We performed our most recent annual impairment test on October 1, 2018.
In order to test goodwill for impairment, an entity is permitted to first assess qualitative factors to determine whether a quantitative assessment of goodwill is necessary. The qualitative factors considered by us may include, but are described in “Item 1. Financial Information - Notesnot limited to, Interim Consolidated Financial Statements - Note 2. Summarygeneral economic conditions, our outlook, market performance of Significant Accounting Policies”our industry and recent and forecasted financial performance. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. If a quantitative assessment is required, we determine the fair value of the reporting unit using a discounted cash flow analysis. If the net book value of the reporting unit exceeds its fair value, we recognize a goodwill impairment charge for the reporting unit equal to the lesser of (i)
the total goodwill allocated to that reporting unit and (ii) the amount by which that reporting unit’s carrying amount exceeds its fair value.
Goodwill is allocated and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. We have two reportable segments, Generics and Specialty, which are the same as the respective operating segments and reporting units. As of June 30, 2019, $361 million and $59 million of goodwill was allocated to our Specialty and Generics segments, respectively.
Significant judgment is employed in determining the assumptions utilized as of the acquisition date and for each subsequent measurement period. Accordingly, changes in assumptions described above, could have a material impact on our consolidated results of operations.
For each of our reporting units, there are a number of future events and factors that may impact future results and the outcome of subsequent goodwill impairment testing. For a list of these factors, see Item 1A. Risk Factors.
Recently Issued Accounting Standards
Recently issued accounting standards are discussed in “Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 2. Summary of Significant Accounting Policies”.Policies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our cash is held on deposit in demand accounts at large financial institutions in amounts in excessFor a discussion of the Federal Deposit Insurance Corporation (FDIC) insurance coverage limit of $250,000 per depositor, per FDIC-insured bank, per ownership category. Our cash equivalents are comprised of highly-rated moneyCompany’s quantitative and qualitative disclosures about market funds. We had no short-term investments as of June 30, 2018 or December 31, 2017.
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalentsrisks, see Item 7A. Quantitative and accounts receivable. We limit our credit risk associated with cash equivalents by placing investments with high credit quality securities, including U.S. government securities, treasury bills, corporate debt, short-term commercial paper and highly-rated money market funds. As discussed above under “Term Loan and Revolving Credit Agreement"Qualitative Disclosures About Market Risk, we are party to a Term Loan with a principal amount of $2.7 billion and an ABL under which loans and letters of credit up to a principal amount of $500.0 million are available (principal amount of up to $25 million is available for letters of credit) pursuant to the Senior Secured Credit Facilities. The proceeds for any loans made under our Senior Secured Credit Facility are available for capital expenditures, acquisitions, working capital needs and other general corporate purposes.
We limit our credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary. We do not require collateral to secure amounts owed to us by our customers.
We do not use derivative financial instruments or engage in hedging activities in our ordinary course of business and have no material foreign currency exchange exposure or commodity price risks.
We do not believe that inflation has had a significant impact2018 Annual Report on our revenues or operations to date.Form 10-K.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act)Act of 1934, as amended (the "Exchange Act")) that are designed to ensure information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, were effective as of June 30, 20182019 at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2018,2019, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) which materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
Systems of disclosure controls and internal controls over financial reporting and their associated policies and procedures, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the system of control are achieved. Further, the design of a control system must be balanced against resource constraints, and therefore the benefits of controls must be considered relative to their costs. Given the inherent limitations in all systems of controls, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Accordingly, given the inherent limitations in a cost-effective system of internal control, financial statement misstatements due to error or fraud may occur and may not be detected. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives. We conduct periodic evaluations of our systems of controls to enhance, where necessary, our control policies and procedures.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGSLegal Proceedings
Information pertaining to legal proceedings can be found in "Item 1. Financial Statements - Notes to Interim Consolidated Financial Statements - Note 17.13. Commitments and Contingencies"Contingencies and is incorporated by reference herein.
Item 1A. Risk Factors
Global economic conditions could harm us.Other than as set forth below, there have been no material changes to the disclosure presented in our 2018 Annual Report on Form 10-K under Item 1A. Risk Factors.
While global economic conditions have been fairly stable asWe are controlled by the Amneal Group. The interests of the Amneal Group may differ from the interests of our other stockholders.
As of June 30, 2019, the group of shareholders who owned Amneal prior to the Combination (the "Amneal Group") controlled approximately 57% of the voting power of all of our outstanding shares of common stock.
Through its control of a wholemajority of our voting power and the provisions set forth in recent years, continued concerns aboutour charter, bylaws and the systemic impactSecond Amended and Restated Stockholders Agreement dated December 16, 2017 (the "Stockholders Agreement"), the Amneal Group has the ability to designate and elect and has designated and elected a majority of potential geopolitical issuesour board of directors. The Amneal Group has control over all matters submitted to our stockholders for approval, including changes in capital structure, transactions requiring stockholder approval under Delaware law and economic policy uncertainty, particularlycorporate governance, subject to the terms of the Stockholders Agreement relating to the Amneal Group's agreement to vote in areas in which we operate, could potentially cause economicfavor of directors not designated by the Amneal Group and market instabilitysuch other matters that are set forth in the futureStockholders Agreement. The Amneal Group may have different interests than our other stockholders and could adversely affect our business, including our financial performance.may make decisions adverse such interests.
Challenging economic conditionsAmong other things, the Amneal Group's control could delay, defer, or prevent a sale of the Company that the Company’s other stockholders support, or, conversely, this control could result in tighter credit conditions. The costthe consummation of such a transaction that our other stockholders do not support. This concentrated control could discourage a potential investor from seeking to acquire Class A Common Stock and, availabilityas a result, might harm the market price of credit may be adversely affected by illiquid credit markets and wider credit spreads, which could adversely affect the ability of our third-party distributors, partners, manufacturers and suppliers to buy inventory or raw materials and to perform their obligations under agreements with us, which could disrupt our operations and adversely affect our financial performance.that Class A Common Stock.
Global effortsThe Amneal Group could transfer control of us to contain health care costs continue to exert pressure on product pricing and market access to pharmaceutical products. In many international markets, government-mandated pricing actions have reduced prices of patented drugs. Some countries may be subject to periods of financial instability, may have reduced resources to spend on healthcare or may be subject to economic sanctions, and our business in these countries may be disproportionately affecteda third party by these changes.transferring its shares. In addition, the currenciesCompany believes members of some countries may depreciate against the U.S. dollar substantiallyAmneal Group have pledged Amneal Common Units and if we are unablethe corresponding shares of Class B Common Stock to offsetsecure borrowings, and other members of the impact of such depreciation, our financial performance within such countriesAmneal Group could be adversely affected.
Weenter into similar arrangements. In connection with these arrangements, the Company has entered into agreements with certain Amneal Group members and the lending institutions to whom their securities may be unable to integrate operations successfully and realize the anticipated synergies and other benefitspledged. Because of the Combination
recent drop in our stock price, the value of pledged Amneal securities has decreased, which could increase the likelihood of a margin call on a pledge of Amneal securities. The business combinationvoluntary or forced sale of Impax and Amneal involves the combination of two companies that operated as independent companies prior to the closing of the Combination. The integration of the businesses may be more time consuming and require more resources than initially estimated and we may fail to realize some or all of the anticipated benefits of the Combination if the integration process takes longer than expectedthese units or is more costly than expected. The integration process could also result in the diversion of management’s attention, the disruption or interruption of, or the loss of momentum in, the businesses of Impax and Amneal or inconsistencies in standards, control, procedures and policies, any of which could adversely affect the Company’s abilityshares pursuant to maintain relationships with customers, partners and employees or its ability to achieve the anticipated benefits of the Combination, or could reduce the earningsa margin call or otherwise adversely affectcould cause our businessstock price to decline and financial results.
If we are unablenegatively impact our business. Similarly, a voluntary or forced sale could cause the Company to successfully develop or commercialize new products, our operating results will suffer.
Developing and commercializing a new product is time consuming, costly and subject to numerous factors that may delay or prevent such development and commercialization. Our future results of operations will depend to a significant extent upon our ability to successfully commercialize new products in a timely manner. We face several challenges when developing and commercializing new products, including:
our ability to develop products in a timely and cost-efficient manner and in compliance with regulatory requirements, including delays associated with the FDA listing and approval process and our ability to obtain required regulatory approvals in a timely manner, or at all, and maintain such approvals if obtained;
the success of our clinical testing process to ensure that new products are safe and effective or bioequivalent to the reference listed drug;
the risk that any of our products presently under development, if and when fully developed and tested, will not perform as expected;
the risk that legal action may be brought against our generic drug products by our branded drug product competitors, including patent infringement claims among others;
the availability, on commercially reasonable terms, of raw materials, including active pharmaceutical ingredients ("APIs") and other key ingredients necessary to the development of our generic drug products; and
Our ability to scale-up manufacturing methods to successfully manufacture commercial quantities of generic drug product in compliance with regulatory requirements.
As a result of these and other difficulties, our products currently in development may or may not receive necessary regulatory approvals on a timely basis or at all, which may result in unsuccessful development or commercialization of new products. If any of our products, when acquired or developed and approved, cannot be successfully or timely commercialized, our operating results could be adversely affected. We cannot guarantee that any investment we make in developing or marketing products will be recouped, even if we are successful in commercializing those products.
If we fail to obtain exclusive marketing rights for our products or fail to introduce our products on a timely basis, our revenues, gross margin and operating results may decline significantly.
The Hatch-Waxman amendments to the Federal Food, Drug, and Cosmetic Act (the “FDCA”) provide for a period of 180 days of generic marketing exclusivity for any applicant that is first to file an ANDA containing a certification of invalidity, non-infringement or unenforceability related to a patent listed with respect to the corresponding branded drug (commonly referred to as a “Paragraph IV certification”). “First filers” are often able to price the applicable generic drug to yield relatively high gross margins during this 180-day marketing exclusivity period.
With respect to our generic products, ANDAs containing Paragraph IV certifications generally become the subject of patent litigation that can be both lengthy and costly. There is no certainty that we will prevail in any such litigation, that we will be the first to file and thus granted the 180-day marketing exclusivity period, or, if we are granted the 180-day marketing exclusivity period, that we will not forfeit such period. Even where we are awarded marketing exclusivity, we may be required to share our exclusivity period with other first filers. In addition, branded drug product companies often authorize a generic version of the corresponding branded drug product to be sold during any period of marketing exclusivity that is awarded (described further below), which reduces gross margins during the marketing exclusivity period. Branded drug product companies may also reduce the price of their branded drug product to compete directly with generic drug products entering the market, which would similarly have the effect of reducing gross margins. Furthermore, timely commencement of the litigation by the patent owner imposes an automatic stay of ANDA approval by the FDA for 30 months, unless the case is decided in the ANDA applicant’s favor during that period. Finally, if the court decision is adverse to the ANDA applicant, the ANDA approval will be delayed until the challenged patent expires, and the applicant forfeits the 180-day marketing exclusivity.
Our future profitability depends, to a significant extent, upon our ability to introduce, on a timely basis, new generic drug products that are either the first-to-market (or among the first-to-market) or that otherwise can gain significant market share. The timeliness of our product introductions is dependent upon, among other things, the timing of regulatory approval of our products, which to a large extent is outside of our control, as well as the timing of the introduction of competing products. As additional distributors introduce comparable generic pharmaceutical products, price competition intensifies, market access narrows, and product sales prices and gross margins decline, often significantly and rapidly. Accordingly, our revenues and future profitability are dependent, in large part, upon our ability or the ability of our development partners to file ANDAs with the FDA in a timely and effective manner or, alternatively, to enter into contractual relationships with other parties that have obtained marketing exclusivity. No assurances can be given that we will be able to develop and introduce successful products in the future within the time constraints necessary to be successful. If we or our development partners are unable to continue to timely and effectively file ANDAs with the FDA or to partner with other parties that have obtained marketing exclusivity, our revenues, gross margin and operating results may decline significantly, and our prospects and business may be materially adversely affected.
With respect to our branded products, generic equivalents for branded pharmaceutical products are typically sold at lower prices than the branded products. The regulatory approval process in the United States and European Union exempts generic products from costly and time-consuming clinical trials to demonstrate their safety and efficacy and rely instead on the safety and efficacy of prior products. After the introduction of a competing generic product, a significant percentage of the prescriptions previously written for the branded product are often written for the generic version. In addition, legislation enacted in most U.S. states allows or, in some instances mandates, that a pharmacist dispense an available generic equivalent when filling a prescription for a branded product, in the absence of specific instructions from the prescribing physician. Pursuant to the provisions of the Hatch-Waxman Act, manufacturers of branded products often bring lawsuits to enforce their patent rights against generic products released prior to the expiration of branded products’ patents, but it is possible for generic manufacturers to offer generic products while such litigation is pending. As a result, branded products typically experience a significant loss in revenues following the introduction of a competing generic product, even if subject to an existing patent. Our branded pharmaceutical products are or may become subject to competition from generic equivalents because there is no proprietary protection for some of the branded pharmaceutical products we sell, because our patent protection expires or because our patent protection is not sufficiently broad or enforceable.
We face intense competition in the pharmaceutical industry from both brand and generic drug product companies, which could significantly limit our growth and materially adversely affect our financial results.
The pharmaceutical industry is highly competitive. The principal competitive factors in the pharmaceutical market include:
introduction of other generic drug manufacturers’ products in direct competition with our generic drug products;
introduction of authorized generic drug products in direct competition with our products, particularly during exclusivity periods;
the ability of generic drug product competitors to quickly enter the market after the expiration of patents or exclusivity periods, diminishing the amount and duration of significant profits;
consolidation among distribution outlets through mergers and acquisitions and the formation of buying groups;
the willingness of generic drug customers, including wholesale and retail customers, to switch among products of different pharmaceutical manufacturers;
pricing pressures by competitors and customers;
a company’s reputation as a manufacturer and distributor of quality products;
a company’s level of service (including maintaining sufficient inventory levels for timely deliveries);
product appearance and labeling; and
a company’s breadth of product offerings.
Many of our competitors have longer operating histories and greater financial, R&D, marketing and other resources than us. Consequently, some of our competitors may be able to develop products and/or processes competitive with, or superior to, our products. Furthermore, we may not be able to (i) differentiate our products from those of our competitors, (ii) successfully develop or introduce new products-on a timely basis or at all-that are less costly than those of our competitors, or (iii) offer customers payment and other commercial terms as favorable as those offered by our competitors. The markets in which we compete and intend to compete are undergoing, and are expected to continue to undergo, rapid and significant change. We expect competition to intensify as technological advances and consolidation continues. New developments by other manufacturers and distributors could render our products uncompetitive or obsolete.
We believe our principal competitors in the U.S. generic pharmaceutical market, where we primarily compete, are Teva Pharmaceutical Industries Limited, Sandoz (a division of Novartis AG) (“Sandoz”), Endo International plc (Par) (“Endo”), Mylan N.V. (“Mylan”) and Fresenius Medical Care AG & Co. KGaA /Akorn, Inc. These companies, among others, collectively compete with the majority of our products. We also face price competition generally as other generic manufacturers enter the market. Any such price competition may be especially pronounced where our competitors source their products from jurisdictions where production costs may be lower (sometimes significantly) than our production costs, especially lower-cost foreign jurisdictions. Any of these factors could result in reductions in our sales prices and gross margin. This price competition has led to an increase in demands for downward price adjustments by generic pharmaceutical distributors. Our principal strategy in addressing our competition is to offer customers a consistent supply of our generic drug products, as well as to pursue product opportunities with the potential for limited competition, such as high-barrier-to-entry first-to-file or first-to-market products. There can be no assurance, however, that this strategy will enable us to compete successfully in the generic drug product industry or that we will be able to develop and implement any new or additional viable strategies.
Competition in the generic drug industry has also increased due to the proliferation of authorized generic pharmaceutical products. Authorized generic drug products are generic drug products that are introduced by brand companies, either directly or through third parties,lose its “controlled company” status under the brand’s NDA approval for our own branded drug. Authorized generics do not face any regulatory barriers to introduction and are not prohibited from sale during the 180-day marketing exclusivity period granted to the first-to-file ANDA applicant. The sale of authorized generics adversely impacts the market share of a generic drug product that has been granted 180 days of marketing exclusivity. This is a significant source of competition for us, because an authorized generic drug product can materially decrease the profits that we could receive as an otherwise exclusive marketer of a generic drug product. Such actions have the effect of reducing the potential market share and profitability of our generic drug products and may inhibit us from developing and introducing generic pharmaceutical drug products corresponding to certain branded drugs.
If we are unable to manage our growth, our business will suffer.
We have experienced rapid growth in the past several years, and anticipate continued rapid expansion in the future. This growth has required us to expand, upgrade, and improve our administrative, operational, and management systems, internal controls and resources. Although we cannot assure you that we will, in fact, grow as we expect, if we fail to manage growth effectively or to develop a successful marketing approach, our business and financial results will be materially harmed. We may also seek to expand our business through complementary or strategic acquisitions of other businesses, products or assets, or through joint ventures, strategic agreements or other arrangements. Any such acquisitions, joint ventures or other business combinations may involve significant integration challenges, operational complexities and time consumption and require substantial resources and effort. It may also disrupt our ongoing businesses, which may adversely affect our relationships with customers, employees, regulators and others with whom we have business or other dealings. Further, if we are unable to realize synergies or other benefits expected to result from any acquisitions, joint ventures or other business combinations, or to generate additional revenue to offset any unanticipated inability to realize these expected synergies or benefits, our growth and ability to compete may be impaired,New York Stock Exchange listing requirements, which would require us to focus additional resources on the integration of operations rather than other profitable areas of our business, and may otherwise causecomply over a material adverse effect on our business, results of operations and financial condition.
As our competitors introduce their own generic equivalents of our generic drug products, our revenues and gross margin from such products generally decline, often rapidly.
Revenues and gross margin derived from generic pharmaceutical products often follow a pattern based on regulatory and competitive factors that we believe are unique to the generic pharmaceutical industry. As the patent(s) for a brand name product or the statutory marketing exclusivitytransition period (if any) expires, the first generic manufacturer to receive regulatory approval for a generic equivalent of the product is often able to capture a substantial share of the market. However, as other generic manufacturers receive regulatory approvals for their own generic versions, that market share, and the price of that product, will typically decline depending on several factors, including the number of competitors, the price of the branded product and the pricing strategy of the new competitors. We cannot provide assurance that we will be able to continue to develop such products or that the number of our competitors for any given product will not increase to such an extent that we may stop marketing a generic drug product for which we previously obtained approval, which may have a material adverse impact on our revenues and gross margin.
with certain
The illegal distribution and sale by third parties of counterfeit versions of our products or of stolen products could have a negative impact on our reputation and a material adverse effect on our business, results of operations and financial condition.
Third parties could illegally distribute and sell counterfeit versions of our products, which do not meet the rigorous manufacturing and testing standards that our products undergo. Counterfeit products are frequently unsafe or ineffective, and can be life-threatening. Counterfeit medicines may contain harmful substances, the wrong dose of the active pharmaceutical ingredient or no active pharmaceutical ingredients at all. However, to distributors and users, counterfeit products may be visually indistinguishablecorporate governance requirements from the authentic version.
Reports of adverse reactions to counterfeit drugs or increased levels of counterfeiting could materially affect patient confidence in the authentic product. It is possible that adverse events caused by unsafe counterfeit products will mistakenly be attributed to the authentic product. In addition, thefts of inventory at warehouses, plants or while in-transit, which are not properly stored and which are sold through unauthorized channels could adversely impact patient safety, our reputation and our business.
Public loss of confidence in the integrity of pharmaceutical products as a result of counterfeiting or theft could have a material adverse effect on our business, results of operations and financial condition.
Our business is highly dependent on market perceptions of us and the safety and quality of our products. Our business, products or product pricing could be subject to negative publicity, which could have a material adverse effect on our business, results of operations and financial condition.
Market perceptions of our business are very important to us, especially market perceptions of the safety and quality of our products. If any of our products or similar products that other companies distribute are subject to market withdrawal or recall or are proven to be, or are claimed to be, harmful to consumers, then this could have a material adverse effect on our business, results of operations and financial condition. Also, because our business is dependent on market perceptions, negative publicity associated with product quality, illness or other adverse effects resulting from, or perceived to be resulting from, our products could have a material adverse impact on our business, results of operations and financial condition.
The generic pharmaceutical industry has also in recent years been the subject of significant publicity regarding the pricing of pharmaceutical products more generally, including publicity and pressure resulting from prices charged by competitors and peer companies for new products as well as price increases by competitors and peer companies on older products that the public has deemed excessive. Any downward pricing pressure on the price of certain of our products arising from social or political pressure to lower the cost of pharmaceutical products could have a material adverse impact on our business, results of operations and financial condition.
Accompanying the press and media coverage of pharmaceutical pricing practices and public complaints about the same, there has been increasing U.S. federal and state legislative and enforcement interest with respect to drug pricing. For instance, the United States Department of Justice issued subpoenas to pharmaceutical companies, including to the Company, seeking information about the sales, marketing and pricing of certain generic drugs. In addition to the effects of any investigations or claims brought against us, our business, results of operations and financial condition could also be adversely affected if any such inquiries, of us or of other pharmaceutical companies or the industry more generally, were to result in legislative or regulatory proposals that limit our ability to increase the prices of our products.
A substantial portion of our total revenues is expected to be derived from sales of a limited number of products.
We expect that we will continue to derive a substantial portion of our revenue from sales of a limited number of products. For the three and six months ended June 30, 2018, our significant product families accounted for 33% and 31% of our consolidated net revenue, respectively. The sale of our products may be significantly influenced by market conditions, as well as regulatory actions. We may experience decreases in the sale of our products in the future as a result of actions taken by our competitors, such as price reductions, or as a result of regulatory actions related to our products or to competing products, which could have a material impact on our results of operations. Actions which could be taken by our competitors, which may materially and adversely affect our business, results of operations and financial condition, may include, without limitation, pricing changes and entering or exiting the market for specific products.
Our growth is dependent on our ability to continue to successfully develop and commercialize new products in a timely manner.
Our financial results will depend upon our ability to introduce and commercialize additional generic and branded products in a timely manner. In the generic pharmaceutical products market, revenue from newly launched generic products is typically relatively high during the period immediately following launch and can be expected generally to decline over time. Revenue from generic drugs in general, including prices of generic products that have generic alternatives on the market, can generally be expected to decline over time. Revenue from branded pharmaceutical products can be expected to decline as the result of entry of new competitors, particularly of companies producing generic versions of the branded products. Our growth is therefore dependent upon our ability to successfully introduce and commercialize new generic and branded products.
Our ability to develop or license, or otherwise acquire, and introduce new products on a timely basis in relation to our competitors’ product introductions involves inherent risks and uncertainties.
Product development is inherently risky, especially for new drugs for which safety and efficacy have not been established and the market is not yet proven. Likewise, product licensing involves inherent risks including uncertainties due to matters that may affect the achievement of milestones, as well as the possibility of contractual disagreements with regard to terms such as license scope or termination rights. The development and commercialization process, particularly with regard to new drugs, also requires substantial time, effort and financial resources. The process of obtaining FDA approval to manufacture and market new pharmaceutical products is rigorous, time consuming, costly and largely unpredictable. We, or a partner, may not be successful in obtaining FDA approval or in commercializing any of the products that we are developing or licensing.
Our approved products may not achieve expected levels of market acceptance.
Even if we are able to obtain regulatory approvals for our new products, the success of those products is dependent upon market acceptance. Levels of market acceptance for our new products could be affected by several factors, including:
the availability of alternative products from our competitors;
the prices of our products relative to those of our competitors;
the timing of our market entry;
the ability to market our products effectively at the retail level;
the perception of patients and the healthcare community, including third-party payers, regarding the safety, efficacy and benefits of our drug products compared to those of competing products; and
the acceptance of our products by government and private formularies.
Some of these factors will not be in our control, and our products may not achieve expected levels of market acceptance. Additionally, continuing and increasingly sophisticated studies of the proper utilization, safety and efficacy of pharmaceutical products are being conducted by the industry, government agencies and others which can call into question the utilization, safety and efficacy of products currently or previously marketed by us, Impax or Amneal. In some cases, studies have resulted, and may in the future result, in the discontinuance of product marketing or other risk management programs such as the need for a patient registry.
We may discontinue the manufacture and distribution of certain existing products, which may adversely impact our business, results of operations and financial condition.
We continually evaluate the performance of our products, and may determine that it is in our best interest to discontinue the manufacture and distribution of certain of our products. We cannot guarantee that we have correctly forecasted, or will correctly forecast in the future, the appropriate products to discontinue or that our decision to discontinue various products is prudent if market conditions change. In addition, we cannot assure you that the discontinuance of products will reduce our operating expenses or will not cause us to incur material charges associated with such a decision. Furthermore, the discontinuance of existing products entails various risks, including, in the event that we decide to sell the discontinued product, the risk that we will not be able to find a purchaser for such products or that the purchase price obtained will not be equal to at least the book value of the net assets for such products. Other risks include managing the expectations of, and maintaining good relations with, our customers who previously purchased products from our discontinued products, which could prevent us from selling other products to them in the future. Moreover, we may incur other significant liabilities and costs associated with our discontinuance of products, which could have a material adverse effect on our business, results of operations and financial condition.
Manufacturing or quality control problems may damage our reputation for quality production, demand costly remedial activities and negatively impact our business, results of operations and financial condition.
As a pharmaceutical company, we are subject to substantial regulation by various governmental authorities. For instance, we must comply with requirements of the FDA and other healthcare regulators with respect to the manufacture, labeling, sale, distribution, marketing, advertising, promotion and development of pharmaceutical products. We must register our facilities, whether located in the United States or elsewhere, with the FDA as well as regulators outside the United States, and our products must be made in a manner consistent with current good manufacturing practices (“cGMP”), or similar standards in each territory in which we manufacture. The failure of one of our facilities, or a facility of one of our third party suppliers, to comply with applicable laws and regulations may lead to breach of representations made to our customers or to regulatory or government action against us related to products made in that facility.
In addition, the FDA and other agencies periodically inspect our manufacturing facilities. Following an inspection, an agency may issue a notice listing conditions that are believed to violate cGMP or other regulations, or a warning letter for violations of “regulatory significance” that may result in enforcement action if not promptly and adequately corrected. We remain committed to continuing to improve our quality control and manufacturing practices; however, we cannot be assured that the FDA will continue to be satisfied with our corrective actions and with our quality control and manufacturing systems and standards. Failure to comply strictly with these regulations and requirements may damage our reputation and lead to financial penalties, compliance expenditures, the recall or seizure of products, total or partial suspension of production and/or distribution, withdrawal or suspension of the applicable regulator’s review of our submissions, enforcement actions, injunctions and criminal prosecution. Further, other federal agencies, our customers and partners in our alliance, development, collaboration and other partnership agreements with respect to our products and services may take any such FDA observations or warning letters into account when considering the award of contracts or the continuation or extension of such partnership agreements. Because regulatory approval to manufacture a drug is site-specific, the delay and cost of remedial actions, or obtaining approval to manufacture at a different facility, could negatively impact our business. Any failure by us to comply with applicable laws and regulations and/or any actions by the FDA and other agencies as described above could have a material adverse effect on our business, financial position and results of operations.
The development, manufacture and sale of our products involves the risk of product liability and other claims by consumers and other third parties, and insurance against such potential claims is expensive and may be difficult to obtain.
The development, manufacture and sale of our drug products involves an inherent risk of product liability and other claims and the associated adverse publicity, and insurance against such potential claims is expensive and may be difficult to obtain. Litigation is inherently subject to uncertainties and we may be required to expend substantial amounts in the defense or resolution of this and similar matters. We regularly monitor the use of our products for trends or increases in reports of adverse events or product complaints, and regularly report such matters to the FDA. In some cases, an increase in adverse event reports may be an indication that there has been a change in a product’s specifications or efficacy. Such changes could lead to a recall of the product in question or, in some cases, increases in product liability claims related to the product in question. If the coverage limits for product liability and other insurance policies are not adequate, or if certain of our products are excluded from coverage, a claim brought against us, whether covered by insurance or not, could have a material adverse effect on our business, results of operations, financial condition and cash flows. We also rely on self-insurance to cover product liability and other claims, and these claims may exceed the amounts we have reserved under our self-insurance program.
In the ordinary course of our business, we may also be subject to a variety of other types of claims, proceedings, investigations and litigation initiated by government agencies or third parties. These matters may include compliance matters, product regulation or safety, taxes, employee benefit plans, employment discrimination, health and safety, environmental, antitrust, customs, import/export, government contract compliance, financial controls or reporting, intellectual property, allegations of misrepresentation, false claims or false statements, commercial claims, claims regarding promotion of our products and services, or other similar matters. In addition, government investigations related to the use of our generic drug products may cause reputational harm to us. Negative publicity, whether accurate or inaccurate, about the efficacy, safety or side effects of our generic drug products or product categories, whether involving us or a competitor, could materially reduce market acceptance of our products, cause consumers to seek alternatives to our products, result in product withdrawals and cause our stock price to decline. Negative publicity could also result in an increased number of product liability claims, whether or not these claims have a basis in scientific fact. Any such claims, proceedings, investigations or litigation, regardless of the merits, might result in substantial costs, restrictions on product use or sales, or otherwise injure our business.
We manufacture and derive a portion of our revenue from the sale of pharmaceutical products in the opioid class of drugs. The U.S. Department of Health and Human Services has declared the wide spread addiction to and abuse of such products a public health emergency, and in recent months, the federal government has also announced plans to increase federal oversight on opioid sale and consumption. These plans, along with changing public and clinical perceptions of opioid products and the risks relating to their use may result in the imposition of even stricter regulation of such products and further restrictions on their sale and use. For instance, the Drug Enforcement Administration (the “DEA”) has recently increased its scrutiny and regulation over the manufacture, distribution and sale of opioid products, which may require us to incur significant expenses to comply with such regulations. Any new or stricter regulations imposed by governmental authorities such as the DEA related to opioid products, as well as a potential increase in opioid-related litigation involving us, could result in material adverse effects on our business and results of operations. See “Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 17. Commitments and Contingencies” for more information regarding opioid-related litigation involving the Company.
We are subject to United States federal and state laws related to healthcare fraud and abuse and health information privacy and security, and the failure to comply with such laws may adversely affect our business.
In the United States, many of our products are eligible for reimbursement under federal and state health care programs such as Medicaid, Medicare, TriCare, and/or state pharmaceutical assistance programs, and as a result, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are, and will be, applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include, but are not limited to: (i) the U.S. Anti-Kickback Statute, which applies to our marketing and research practices, educational programs, pricing policies and relationships with healthcare providers or other entities, by prohibiting, among other things, soliciting, receiving, offering or paying remuneration, directly or indirectly, as a means of inducing, or in exchange for, either the referral of an individual or the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs; (ii) federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payers that are false or fraudulent; (iii) the U.S. Health Insurance Portability and Accountability Act of 1996, (“HIPAA”), which among other things created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters, and HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, and our implementing regulations, which impose certain requirements relating to the privacy, security and transmission of individually identifiable health information and place restrictions on the use of such information for marketing communications; (iv) the U.S. Physician Payments Sunshine Act, which among other things, requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under a federal healthcare program to report annually information related to “payments or other transfers of value” made to physicians and teaching hospitals, and ownership and investment interests held by certain healthcare professionals and their immediate family members, and similar state laws; (v) the government pricing rules applicable to the Medicaid, Medicare Part B, 340B Drug Pricing Program, the U.S. Department of Veterans Affairs program, the TRICARE program, and state price reporting laws; and (vi) state and foreign law equivalents of each of the above U.S. laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers, and state and foreign laws governing the privacy and security of health information in certain circumstances, such as the requirements under the European Union General Data Protection Regulation which became effective in May 2018, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. Violations of the fraud and abuse laws may result in severe penalties against us and/or our responsible employees, including jail sentences, large fines, and the exclusion of our products from reimbursement under federal and state programs. Defense of litigation claims and government investigations can be costly, time-consuming, and distract management, and it is possible that we could incur judgments or enter into settlements that would require us to change the way we operate our business. We are committed to conducting the sales and marketing of our products in compliance with the healthcare fraud and abuse laws, but certain applicable laws may impose liability even in the absence of specific intent to defraud. Furthermore, should there be ambiguity, a governmental authority may take a position contrary to a position we have taken, or should an employee violate these laws without our knowledge, a governmental authority may impose civil and/or criminal sanctions.
Any adverse outcome in these types of actions, or the imposition of penalties or sanctions for failing to comply with fraud and abuse laws, could adversely affect us and may have a material adverse effect on our business, results of operations, financial condition and cash flows. Some of the statutes and regulations that govern our activities, such as federal and state anti-kickback and false claims laws, are broad in scope, and while exemptions and safe harbors protecting certain common activities exist, they are often narrowly drawn. While we manage our business activities to comply with these statutory provisions, due to their breadth, complexity and, in certain cases, uncertainty of application, it is possible that our activities could be subject to challenge by various government agencies. In particular, the FDA, the DOJ and other agencies have increased their enforcement activities with respect to the sales, marketing, research and similar activities of pharmaceutical companies in recent years, and many pharmaceutical companies have been subject to government investigations related to these practices. A determination that we are in violation of these and/or other government regulations and legal requirements may result in civil damages and penalties, criminal fines and prosecution, administrative remedies, the recall of products, the total or partial suspension of manufacturing and/or distribution activities, seizure of products, injunctions, whistleblower lawsuits, failure to obtain approval of pending product applications, withdrawal of existing product approvals, exclusion from participation in government healthcare programs and other sanctions.
Any of these types of investigations or enforcement actions could affect our ability to commercially distribute our products and could materially and adversely affect our business, financial condition, results of operations and cash flows.
Approvals for our new generic drug products may be delayed or become more difficult to obtain if the FDA institutes changes to its approval requirements.
The FDA may institute changes to its ANDA approval requirements, such as implementing new or additional fees similar to the fees imposed by the Generic Drug Fee User Amendments of 2012 (“GDUFA”) and its second iteration (GDUFA II), which may make it more difficult or expensive for us to obtain approval for our new generic products. The FDA may also implement other changes that may directly affect some of our ANDA filings pending approval from the FDA, such as changes to guidance from the FDA regarding bioequivalency requirements for particular drugs. Such changes may cause our development of such generic drugs to be significantly more difficult or result in delays in FDA approval or result in our decision to abandon or terminate certain projects. Any changes in FDA requirements may make it more difficult for us to file ANDAs or obtain approval of our ANDAs and generate revenues and thus have a material adverse effect on our business, results of operations and financial condition.
Federal regulation of arrangements between manufacturers of branded and generic products could adversely affect our business.
We are involved in numerous patent litigations in which it challenges the validity or enforceability of innovator companies’ listed patents and/or their applicability to its generic pharmaceutical products, as well as patent infringement litigation in which generic companies challenge the validity or enforceability of our patents and/or their applicability to their generic pharmaceutical products, and therefore settling patent litigations has been and is likely to continue to be an important part of our business. As part of the Medicare Prescription Drug and Modernization Act of 2003, companies, including us, are required to file with the FTC and the DOJ agreements entered into between branded and generic pharmaceutical companies related to the manufacture, marketing and sale of generic versions of branded drugs for their review. The FTC has publicly stated that, in its view, some of the brand-generic settlement agreements violate the antitrust laws and has brought actions against some brand and generic companies that have entered into such agreements. In June 2013, the U.S. Supreme Court in its decision in FTC v. Actavis determined that “reverse payment” settlement agreements between brand and generic companies could violate antitrust laws. The Supreme Court held that such settlement agreements are neither immune from antitrust attack nor presumptively illegal but rather should be analyzed under the “Rule of Reason.” It is currently uncertain the effect the Supreme Court’s decision will have on our existing settlement agreements or its impact on its ability to enter into such settlement agreements in the future or the terms thereof. The Supreme Court’s decision may result in heightened scrutiny from the FTC of such settlement agreements and we may become subject to increased FTC investigations or enforcement actions arising from such settlement agreements. Further, private plaintiffs, including direct and indirect purchasers of our products, may also become more active in bringing private litigation claims against us and other brand and generic pharmaceutical companies alleging that such settlement agreements violate antitrust laws. Accordingly, we have in the past received and may receive formal or informal requests from the FTC for information about a particular settlement agreement, and there is a risk that the FTC, or others, such as customers, may commence an action against us alleging violations of the antitrust laws. Such settlement agreements may further expose us to claims by purchasers of the products for unlawfully inhibiting competition. We have been involved in private antitrust actions involving certain settlement agreements as described in “Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 17. Commitments and Contingencies”.
Antitrust investigation and claims are generally expensive and time consuming, and we can give no assurance as to the timing or outcome of such investigations or claims or of any future private litigation or government action alleging that one of our settlement agreements violates antitrust laws. The impact of federal regulation of arrangements between manufacturers of brand and generic products, further legislation and the potential for private-party lawsuits associated with such arrangements could adversely affect our business.
Healthcare reform and a reduction in the coverage and reimbursement levels by governmental authorities, HMOs, MCOs or other third-party payers may adversely affect our business.
As part of commercializing our products, we have obtained authorization to receive reimbursement at varying levels for the cost of certain products and related treatments from governmental authorities and private health insurers and other organizations, such as health maintenance organizations (“HMOs”) and managed care organizations (“MCOs”). The trend toward managed healthcare in the United States, the growth of organizations such as HMOs and MCOs, and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in product demand. The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law on March 23, 2010 and March 30, 2010, respectively. These laws are referred to herein as “healthcare reform.” A number of provisions of the healthcare reform laws continue to have a negative impact on the price of our products sold to U.S. government entities. For example, the legislation includes measures that (i) significantly increase Medicaid rebates through both the expansion of the program; (ii) substantially expand the Public Health System (340B) program to allow other entities to purchase prescription drugs at substantial discounts; (iii) extend the Medicaid rebate rate to a significant portion of Managed Medicaid enrollees; (iv) apply a 50% discount to Medicare Part D beneficiary spending in the coverage gap for branded and authorized generic prescription drugs; and (v) levy a significant excise tax on the industry to fund healthcare reform. Such cost containment measures and healthcare reform affect our ability to sell our products and have a material adverse effect on our business, results of operations and financial condition. Additionally, the Medicare Part D Prescription Drug Benefit established a voluntary outpatient prescription drug benefit for Medicare beneficiaries (primarily the elderly over 65 and the disabled). These beneficiaries may enroll in private drug plans. There are multiple types of Part D plans and numerous plan sponsors, each with its own formulary and product access requirements. The plans have considerable discretion in establishing formularies and tiered co-pay structures and in placing prior authorization and other restrictions on the utilization of specific products. In addition, Part D plan sponsors are permitted and encouraged to negotiate rebates with manufacturers. The Medicare Part D program, which went into effect January 1, 2006, is administered by the Centers for Medicare & Medicaid Services (“CMS”) within the Department of Health and Human Services.
The CMS has issued extensive regulations and other sub-regulatory guidance documents implementing the Medicare Part D benefit, and the OIG has issued regulations and other guidance in connection with the Medicare Part D program. The federal government can be expected to continue to issue guidance and regulations regarding the obligations of Part D sponsors and their subcontractors. Participating drug plans may establish drug formularies that exclude coverage of specific drugs and payment levels for drugs negotiated with Part D drug plans may be lower than reimbursement levels available through private health plans or other payers. Moreover, beneficiary co-insurance requirements could influence which products are recommended by physicians and selected by patients. There is no guarantee that any drug that we market will be offered by drug plans participating under the Medicare Part D program or of the terms of any such coverage, or that covered drugs will be reimbursed at amounts that reflect current or historical levels. Additionally, any reimbursement granted may not be maintained, or limits on reimbursement available from third-party payers may reduce the demand for, or negatively affect the price of those products, which could significantly harm our business, results of operations, financial condition and cash flows. We may also be subject to lawsuits relating to reimbursement programs that could be costly to defend, divert management’s attention and adversely affect our operating results. Most state Medicaid programs have established preferred drug lists, and the process, criteria and timeframe for obtaining placement on the preferred drug list varies from state to state. Under the Medicaid drug rebate program, a manufacturer must pay a rebate for Medicaid utilization of a product. The rebate for single source products (including authorized generics) is based on the greater of (i) a specified percentage of the product’s average manufacturer price or (ii) the difference between the product’s average manufacturer price and the best price offered by the manufacturer. The rebate for multiple source products is a specified percentage of the product’s average manufacturer price. In addition, many states have established supplemental rebate programs as a condition for including a drug product on a preferred drug list. The profitability of our products may depend on the extent to which they appear on the preferred drug lists of a significant number of state Medicaid programs and the amount of the rebates that must be paid to such states. In addition, there is significant fiscal pressure on the Medicaid program, and amendments to lower the pharmaceutical costs of the program are possible. Such amendments could materially adversely affect our anticipated revenues and results of operations. Due to the uncertainties regarding the outcome of future healthcare reform initiatives and their enactment and implementation, we cannot predict which, if any, of the future reform proposals will be adopted or the effect such adoption may have on our business. Future rulemaking and reform, including repeal of existing law, with respect to the healthcare and pharmaceutical industries, could increase rebates, reduce prices or the rate of price increases for healthcare products and services, or require additional reporting and disclosure. We cannot predict the timing or impact of any future rulemaking, reform or repeal of healthcare laws.
The majority of our products are produced at a few locations and a business interruption at one or more of these locations could have a material adverse effect on our business, financial position and results of operations.
We produce the majority of the products that we manufacture at our manufacturing facilities in New York, New Jersey, California, and India, as well as at certain third party suppliers. A significant disruption at any of these facilities, even on a short-term basis, could impair our ability to produce and ship products to the market on a timely basis, which could have a material adverse effect on our business, financial position and results of operations.
Our profitability depends on our major customers. If these relationships do not continue as expected, our business, condition (financial and otherwise), prospects and results of operations could materially suffer.
We currently have over 200 customers, some of which are part of large purchasing groups. Our three largest customers accounted for approximately 82% and 80% of our total gross sales of products for the three and six months, ended June 30, 2018, respectively, and our three largest customers accounted for approximately 79% and 82% of our total gross sales for products for the three months and six months ended June 30, 2017, respectively. The loss of any one or more of these or any other major customer or the substantial reduction in orders from any one or more of our major customers could have a material impact on our future operating results and financial condition.
We may experience declines in the sales volume and prices of our products as a result of the continuing trend of consolidation of certain customer groups, which could have a material adverse effect on our business, financial position and results of operations.
Our ability to successfully commercialize any generic or branded pharmaceutical product depends in large part upon the acceptance of the product by third parties, including pharmacies, government formularies, other retailers, physicians and patients. Therefore, our success will depend in large part on market acceptance of our products. We make a significant amount of our sales to a relatively small number of drug wholesalers and retail drug chains. These customers represent an essential part of the distribution chain of our pharmaceutical products. Drug wholesalers and retail drug chains have undergone, and are continuing to undergo, significant consolidation. This consolidation may result in these groups gaining additional purchasing leverage and, consequently, increasing the product pricing pressures facing our business. Additionally, the emergence of large buying groups representing independent retail pharmacies and other drug distributors, and the prevalence and influence of managed care organizations and similar institutions, potentially enable such groups to demand larger price discounts on our products. For example, there has been a recent trend of large wholesalers and retailer customers forming partnerships, such as the alliance between Walgreens and AmerisourceBergen Corporation, the alliance between Rite Aid and McKesson Drug Company, and the alliance between CVS Caremark and Cardinal Health. The result of these developments may have a material adverse effect on our business, financial position and results of operations.
From time to time we may need to rely on licenses to proprietary technologies, which may be difficult or expensive to obtain.
We may need to obtain licenses to patents and other proprietary rights held by third parties to develop, manufacture and market products. If we are unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially market our products may be inhibited or prevented, which could have a material adverse effect on our business, results of operations and financial condition.
We depend to a large extent on third-party suppliers and distributors for the raw materials for our products, particularly the chemical compounds comprising the APIs that we use to manufacture our products, as well as for certain finished goods. A prolonged interruption in the supply of such products could have a material adverse effect on our business, financial position and results of operations.
The bulk of the raw materials essential to our manufacturing business are purchased from third parties. If we experience supply interruptions or delays, we may have to obtain substitute materials or products, which in turn would require us to obtain amended or additional regulatory approvals, subjecting us to additional expenditures of significant time and resources. In addition, changes in our raw material suppliers could result in significant delays in production, higher raw material costs and loss of sales and customers, because regulatory authorities must generally approve raw material sources for pharmaceutical products, which may be time consuming. Any significant supply interruption could have a material adverse effect on our business, condition (financial and otherwise), prospects and results of operations. To date, we have experienced no significant difficulties in obtaining raw materials. However, because the federal drug application process requires specification of raw material suppliers, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required. The amount of time required for the FDA to qualify a new supplier and confirm that our manufacturing processes meet the necessary standards could cause delays in the manufacturing and marketing of one or more of our products and could, depending on the particular product, have a material adverse effect on our results of operations and financial condition.
The time necessary to develop generic and branded drugs may adversely affect whether, and the extent to which, we receive a return on our capital.
We generally begin our development activities for a new generic drug product several years in advance of the patent expiration date of the brand-name drug equivalent. The development process, including drug formulation, testing, and FDA review and approval, often takes three or more years. This process requires that we expend considerable capital to pursue activities that do not yield an immediate or near-term return. Also, because of the significant time necessary to develop a product, the actual market for a product at the time it is available for sale may be significantly less than the originally projected market for the product. If this were to occur, our potential return on our investment in developing the product, if approved for marketing by the FDA, would be adversely affected and we may never receive a return on our investment in the product. It is also possible for the manufacturer of the brand-name product for which we are developingcurrently exempt, including having a generic drug to obtain approvals from the FDA to switch the brand-name drug from the prescription market to the OTC market.fully independent compensation committee. If this were to occur, we would be prohibited from marketing our product other than as an OTC drug, in which case revenues could be substantially less than we anticipated.
Developing and commercializing branded pharmaceutical products is generally more costly than developing and commercializing generic products. In order to grow and achieve success in our branded product business, we must continually identify, develop, acquire and license new products that we can ultimately market. There are many difficulties and uncertainties inherent in pharmaceutical research and development, and there is a high rate of failure inherent in new drug discovery and development. Failure can occur at any point in the process, including late in the process after substantial investment. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals and payer reimbursement, limited scope of approved uses, difficulty or excessive costs to manufacture, or infringementall of the patents or intellectual property rightsAmneal Common Units and corresponding shares of others. Products that do reach the market may ultimately be subjectClass B stock were pledged to recalls or other suspensions in sales. Delays and uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunity. Because there issecure borrowings, a high rate of failure inherent in the research and development process of new products, there is a significant risk that funds invested in research and development will not generate financial returns. We cannot be certain when or whether any of our products currently under development will be approved or launched or whether, once launched, such products will be commercially successful. We may be required to spend several years and incur substantial expense in completing certain clinical trials. The length of time, number of trial sites and patients required for clinical trials vary substantially, and we may have difficulty finding a sufficient number of sites and subjects to participate in our trials. Delays in planned clinical trials can result in increased development costs, delays in regulatory approvals and delays in product candidates reaching the market. We rely on independent third-party clinical investigators to recruit subjects and conduct clinical trials in accordance with applicable study protocols and laws and regulations. If regulatory authorities determine that we have not complied with regulations in the development of a product candidate, they may refuse to accept trial data from the site and/or not approve the product candidate, and we would not be able to market and sell that product. If we are not able to market and sell our products after significant expenditures to develop and test them, our business and results of operations could be materially and adversely affected.
The testing required for the regulatory approval of our products is conducted primarily by independent third parties. Any failure by any of these third parties to perform this testing properly and in a timely manner may have an adverse effect upon our ability to obtain regulatory approvals.
Our applications for regulatory approval of our products, including both internally-developed and in-licensed products, incorporate the results of testing and other information that is conducted or gathered primarily by independent third parties (including, for example, manufacturers of raw materials, testing laboratories, contract research organizations or independent research facilities). Our ability to obtain and maintain regulatory approval of the products being tested is dependent upon the quality of the work performed by these third parties, the quality of the third parties’ facilities, and the accuracy of the information provided by third parties. We have little or no control over any of these factors. If this testing is not performed properly, our ability to obtain or maintain regulatory approvals, and to launch or continue selling products, could be restricted or delayed.
We depend on third-party agreements for a portion of our product offerings and any failure to maintain these arrangements or enter into similar arrangements with new partnerscomplete foreclosure could result in a material adverse effect.
We have broadened our product offering by entering into a varietychange of third-party agreements covering any combination of joint development, supply, marketing and/or distribution of products. We cannot provide assurance that the development, supply, marketing and/or distribution efforts of our contractual partners will continue to be successful, that we will be able to renew such agreements or that we will be able to enter into new agreements for additional products. Any alteration to, or termination of, our current distribution and marketing agreements, failure to enter into new and similar agreements, or interruption of our product supply under the such agreements, could have a material adverse effect on our business, condition (financial and otherwise), prospects or results of operations.
We may make acquisitions of, or investments in, complementary businesses or products, which may be on terms that may not turn out to be commercially advantageous, may require additional debt or equity financing, which could increase our leverage and dilute equity holders.
We regularly review the potential acquisition of technologies, products, product rights and complementary businesses and are currently evaluating, and intend to continue to evaluate, potential product and/or company acquisitions and other business development opportunities. We may choose to enter into such transactions at any time. Nonetheless, we cannot provide assurance that we will be able to identify suitable acquisition or investment candidates. To the extent that we do identify candidates that we believe to be suitable, we cannot provide assurance that we will be able to reach an agreement with the selling party or parties, that the terms we may agree to will be commercially advantageous to us, or that we will be able to successfully consummate such investments or acquisitions even after definitive documents have been signed. If we make any acquisitions or investments, we may finance such acquisitions or investments through our cash reserves, debt financing, which may increase our leverage, or by issuing additional equity interests, which could dilute the holdings of our then-existing owners. If we require financing, we cannot provide assurance that we will be able to obtain required financing when needed on acceptable terms or at all.
Our operations in, and anticipated expansion into additional, international markets subjects us to increased regulatory oversight both in those international markets and domestically and regulatory, economic, social and political uncertainties, which could cause a material adverse effect on our business, financial position and results of operations.
We are subject to certain risks associated with having assets and operations located in foreign jurisdictions, including our operations in India, Germany and the United Kingdom. We may also in the future expand our international business and operations into jurisdictions in which we have limited operating experience, including with respect to seeking regulatory approvals, marketing or selling products.
Our operations in these jurisdictions may be adversely affected by general economic conditions and economic and fiscal policy, including changes in exchange rates and controls, interest rates and taxation policies, increased government regulation, and, with respect to India, any reversal of India’s recent economic liberalization and deregulation policies, as well as social stability and political, economic or diplomatic developments in the future. Certain jurisdictions have, from time to time, experienced instances of civil unrest and hostilities, both internally and with neighboring countries. Rioting, military activity, terrorist attacks, or armed hostilities could cause our operations in such jurisdictions to be adversely affected or suspended. We generally do not have insurance for losses and interruptions caused by terrorist attacks, military conflicts and wars. In addition, anti-bribery and anti-corruption laws may conflict with some local customs and practices in foreign jurisdictions. Our international operations may subject us to heightened scrutiny under the Foreign Corrupt Practices Act ("FCPA"), the UK Bribery Act and similar anti-bribery laws, and could subject us to liability under such laws despite our best efforts to comply with such laws. As a result of our policy to comply with the FCPA, the UK Bribery Act and similar anti-bribery laws, we may be at a competitive disadvantage to competitors that are not subject to, or do not comply with, such laws.
We have increased exposure to tax liabilities, including foreign tax liabilities.
As a U.S. company with subsidiaries in, among other countries, India, Germany, Switzerland and England, we are subject to, or potentially subject to, income taxes as well as non-income based taxes in these jurisdictions as well as the United States. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. Changes in tax laws or tax rulings may have a significantly adverse impact on our effective tax rate. In addition, we have potential tax exposures resulting from the varying application of statutes, regulations and interpretations, which include exposures on intercompany terms of cross-border arrangements among foreign subsidiaries in relation to various aspects of our business, including research and development activities and manufacturing. Tax authorities in various jurisdictions may disagree with, and subsequently challenge, the amount of profits taxed in such jurisdictions; such challenges may result in increased tax liability, including accrued interest and penalties, which would cause our tax expense to increase and which may have a material adverse effect on our business, financial position and results of operations and our ability to satisfy our debt obligations.
Recent U.S. tax legislation may materially adversely affect our financial condition, results of operations and cash flows.
Recently enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of U.S. and multinational businesses, including by reducing the U.S. corporate income tax rate, limiting interest deductions, permitting immediate expensing of certain capital expenditures, modifying or repealing many business deductions and credits (including certain foreign tax credits), adopting elements of a territorial tax system, imposing a one-time transition tax (or “repatriation tax”) on all undistributed earnings and profits of certain U.S.-owned foreign corporations, broadening the categories of income earned by certain U.S.-owned foreign corporations that may be subject to current US taxation, revising the rules governing net operating losses, repealing the deduction of certain performance-based compensation paid to an expanded group of executive officers and introducing new anti-base erosion provisions, such as the base erosion and anti-abuse tax. Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and IRS, any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.
Our analysis and interpretation of this legislation is preliminary and ongoing and there may be material adverse effects resulting from the legislation that we have not yet identified. While some of the changes made by the tax legislation may adversely affect us, other changes may be beneficial. We continue to work with our tax advisors and auditors to determine the full impact that the recent tax legislation as a whole will have on us. We urge our investors to consult with their legal and tax advisors with respect to such legislation and its potential effect on an investment in our common stock.
Our Tax Receivable Agreement with Holdings dated May 4, 2018 (the “Tax Receivable Agreement”) requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, and we expect that the payments we will be required to make will be substantial.
We are a party to the Tax Receivable Agreement with Amneal Holdings LLC (now APHC Holdings, LLC), which we refer to as "Holdings". Under the Tax Receivable Agreement, we will be required to make cash payments to Holdings and its permitted transferees equal to 85% of certain tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of redemptions or exchanges of Amneal common units by Holdings and its permitted transferees as set forth in the agreement. We expect that the amount of the cash payments that we will be required to make under the Tax Receivable Agreement will be significant. Any payments made by us to Holdings or its permitted transferees under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us.
The actual amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of Amneal common units, the amount of gain recognized by such holders, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable.
In certain cases, payments under the Tax Receivable Agreement to Holdings or its permitted transferees may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.
The Tax Receivable Agreement provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control or if, at any time, we elect an early termination of the Tax Receivable Agreement, then our obligations under the Tax Receivable Agreement to make payments thereunder would be based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement.
As a result of the foregoing, we could be required to make payments under the Tax Receivable Agreement that (i) are greater than the actual benefits we may ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement and (ii) are based on the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be required to be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement.
We will not be reimbursed for any payments made to Holdings or its permitted transferees under the Tax Receivable Agreement in the event that any tax benefits are disallowed.
Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine, and the Internal Revenue Service (the “IRS”) or another tax authority may challenge all or part of the tax benefits we claim, as well as other related tax positions we take, and a court could sustain such challenge. If the outcome of any such challenge would reasonably be expected to materially adversely affect a recipient’s rights or obligations (including the amount or timing of payments) under the Tax Receivable Agreement, then we will not be permitted to settle or fail to contest such challenge without the consent of Holdings. We will not be reimbursed for any cash payments previously made to Holdings or its permitted transferees under the Tax Receivable Agreement in the event that any tax benefits initially claimed by us and for which payment has been made to Holdings or its permitted transferees are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to Holdings or its permitted transferees will be netted against any future cash payments that we might otherwise be required to make to Holdings or its permitted transferees under the terms of the Tax Receivable Agreement. However, we might not determine that we have effectively made an excess cash payment to Holdings or its permitted transferees for a number of years following the initial time of such payment. As a result, payments could be made under the Tax Receivable Agreement in excess of the tax savings that we ultimately realize in respect of the tax attributes with respect to Holdings or its permitted transferees.
Our competitors or other third parties may allege that we are infringing upon their intellectual property, forcing us to expend substantial resources in litigation, the outcome of which is uncertain. Any unfavorable outcome of such litigation, including losses related to “at-risk” product launches, could have a material adverse effect on our business, financial position and results of operations.
Companies that produce branded pharmaceutical products routinely bring litigation against ANDA or similar applicants that seek regulatory approval to manufacture and market generic forms of their branded products alleging patent infringement or other violations of intellectual property rights. Patent holders may also bring patent infringement suits against companies that are currently marketing and selling approved generic products. Litigation often involves significant expense and can delay or prevent introduction or sale of our generic products. If valid and enforceable patents are infringed by our products, we would need to delay selling the infringing generic product unless we could obtain a license from the patent holder, and, if we were already selling the infringing product, cease selling and potentially destroy existing product stock.
There may be situations in which we may make business and legal judgments to market and sell products that are subject to claims of alleged patent infringement prior to final resolution of those claims by the courts, based upon our belief that such patents are invalid, unenforceable, or are not infringed by our marketing and sale of such products. This is referred to in the pharmaceutical industry as an “at-risk” launch. The risk involved in an at-risk launch can be substantial because, if a patent holder ultimately prevails against us, the remedies available to such holder may include, among other things, damages measured by the profits lost by the patent holder, which can be significantly higher than the profits we make from selling the generic version of the product. We could be liable for substantial damages from adverse court decisions in such matters. We may also be harmed by the loss of any value of such inventory that we are unable to market or sell.
We are involved in various legal proceedings, all of which are uncertain, force us to incur substantial expense to defend and/or expose us to substantial liability.
We are or may become a party to litigation in the ordinary course of our business, including, among others, matters alleging product liability, other intellectual property rights infringement, violations of securities laws, employment discrimination or breach of commercial contract. In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could have a material adverse effect on our business, results of operations and financial condition.
The use of legal, regulatory and legislative strategies by brand competitors, including authorized generics and citizen’s petitions, as well as the potential impact of proposed legislation, may increase our costs associated with the introduction or marketing of our generic products, delay or prevent such introduction and/or significantly reduce the profit potential of our products.
Brand drug companies often pursue strategies that may serve to prevent or delay competition from our generic alternatives to their branded products. These strategies include, but are not limited to:
marketing an authorized generic version of a branded product at the same time that we introduce a generic equivalent of that product, directly or through agreement with a generic competitor;
filing “citizen’s petitions” with the FDA to thwart generic competition by causing delays of our product approvals;
using risk evaluation and mitigation strategies (“REMS”), related distribution restrictions or other means of limiting access to their branded products, to prevent us from obtaining product samples needed to conduct bioequivalence testing required for ANDA approval, thereby delaying or preventing us from obtaining FDA approval of a generic version of such branded products;
seeking to secure patent protection of certain “Elements to Assure Safe Use” of a REMS program, which are required medical interventions or other actions healthcare professionals need to execute prior to prescribing or dispensing the drug to the patient, in an attempt to thwart our ability to avoid infringement of the patents in question or secure approval;
seeking to establish regulatory and legal obstacles that would make it more difficult for us to demonstrate a generic product’s bioequivalence or “sameness” to the related branded product;
initiating legislative and administrative efforts in various states to limit the substitution of generic versions of branded pharmaceutical products for the corresponding branded products;
filing suits for patent infringement that automatically delay FDA approval of our generic products;
introducing “next-generation” products prior to the expiration of market exclusivity for their branded product, which often materially reduces the demand for the generic product for which we may be seeking FDA approval;
obtaining extensions of market exclusivity by conducting clinical trials of branded drugs in pediatric populations or by other methods as discussed below;
persuading the FDA to withdraw the approval of branded drugs for which the associated patents are about to expire, thus allowing the brand company to develop and launch new patented products serving as substitutes for the withdrawn products;
seeking to obtain new patents on drugs for which patent protection is about to expire;
filing patent applications that are more complex and costly to challenge;
seeking temporary restraining orders and injunctions against selling a generic equivalent of their branded product based on alleged misappropriation of trade secrets or breach of confidentiality obligations;
seeking temporary restraining orders and injunctions against us after we have received final FDA approval for a product for which we are attempting to launch at-risk prior to resolution of related patent litigation;
reducing the marketing of the branded product to healthcare providers, thereby reducing the branded drug’s commercial exposure and market size, which in turn adversely affects the market potential of the equivalent generic product; and
converting branded prescription drugs that are facing potential generic competition to over-the-counter products, thereby significantly impeding the growth of the generic prescription market for such drugs.
We expend a significant amount of resources on research and development, including milestones on in-licensed products, which may not lead to successful product introductions.
Much of our development effort is focused on technically difficult-to-formulate products and/or products that require advanced manufacturing technology. We expend significant resources on research and development primarily to enable us to manufacture and market FDA-approved pharmaceuticals in accordance with FDA regulations. We have entered into, and may in the future enter into, agreements that require us to make significant milestone payments upon achievement of various research and development events and regulatory approvals. As we continue to develop and in-license new products, we will likely incur increased research and licensing expenses. Because of the inherent risk associated with research and development efforts in the industry, particularly with respect to new drugs, our research and development expenditures may not result in the successful introduction of FDA-approved pharmaceutical products. Additionally, after we or our development partners submit an ANDA, the FDA may request that additional studies be conducted. As a result, we may be unable to reasonably determine the total research and development costs required to develop a particular product. Finally, we cannot be certain that any investment made in developing products will be recovered, even if we are successful in commercialization. To the extent that we expend significant resources on research and development efforts and are not ultimately able to successfully introduce new products as a result of those efforts, our business, financial position and results of operations may be materially adversely affected.
We have a substantial amount of indebtedness, which could adversely affect our financial health.
We have a substantial amount of indebtedness. In order to finance the Combination, during the three months ended June 30, 2018, we borrowed $2.7 billion in an aggregate principal amount of new senior secured term loans and entered into a new senior secured asset based revolving credit facility with borrowing capacity of up to $500 million, under which no amounts were drawn and outstanding as of June 30, 2018. The net proceeds from the new term loans were used to finance in part the Combination, to pay off certain existing indebtedness of Amneal and Impax and to pay fees and expenses related to the foregoing. For additional details of our debt, see "Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 15. Debt.”
Our substantial level of indebtedness could have important consequences. For example, it could:
increase our vulnerability to adverse economic and industry conditions;
limit our ability to obtain additional financing for future working capital, capital expenditures, raw materials, strategic acquisitions and other general corporate requirements;
expose us to interest rate fluctuations because the interest on certain debt under the credit facilities is imposed at variable rates;
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of cash flow for operations and other purposes;
make it more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and acceleration of such indebtedness;
limit our ability to refinance indebtedness or increase the associated costs;
require us to sell assets to reduce debt or influence the decision about whether to do so;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate or prevent us from carrying out capital spending that is necessary or important to our growth strategy and efforts to improve operating margins or our business; and
place us at a competitive disadvantage compared to any competitors that have less debt or comparable debt at more favorable interest rates and that, as a result, may be better positioned to withstand economic downturn.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors which may be beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. As of June 30, 2018, we had approximately $2.7 billion of indebtedness, with an annual interest expense of approximately $145 million to $155 million and an annual debt amortization of approximately $27 million.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. Our credit agreements restrict our ability to dispose of assets and use the proceeds from those dispositions and also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or obtain proceeds in an amount sufficient to meet any debt service obligations when due.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations, including our indebtedness.
If we cannot make scheduled payments on our debt, we will be in default and, as a result:
our debt holders could declare all outstanding principal and interest to be due and payable;
the lenders under our credit agreements could terminate their commitments to lend us money; and
we could be forced into bankruptcy or liquidation.
The risks and uncertainties inherent in conducting clinical trials could delay or prevent the development and commercialization of our own branded products, which could have a material adverse effect on our business, results of operations and financial condition.
With respect to our branded products which do not qualify for the FDA’s abbreviated application procedures, we must demonstrate through clinical trials that these products are safe and effective for use. We have only limited experience in conducting and supervising clinical trials. The process of completing clinical trials and preparing a NDA may take several years and requires substantial resources. Our studies and filings may not result in FDA approval to market our new drug products and, if the FDA grants approval, we cannot predict the timing of any approval. There are substantial filing fees for NDAs that are not refundable if FDA approval is not obtained.
There are a number of risks and uncertainties associated with clinical trials. The results of clinical trials may not be indicative of results that would be obtained from large scale testing. Clinical trials are often conducted with patients having advanced stages of disease and, as a result, during the course of treatment these patients can die or suffer adverse medical effects for reasons that may not be related to the pharmaceutical agents being tested, but which nevertheless affect the clinical trial results. In addition, side effects experienced by the patients may cause delay of approval or limit the profile of an approved product. Moreover, our clinical trials may not demonstrate sufficient safety and efficacy to obtain approval from the FDA or foreign regulatory authorities. The FDA or foreign regulatory authorities may not agree with our assessment of the clinical data or they may interpret it differently. Such regulatory authorities may require additional or expanded clinical trials. Even if the FDA or foreign regulatory authorities approve certain products developed by us, there is no assurance that such regulatory authorities will not subject marketing of such products to certain limits on indicated use.
Failure can occur at any time during the clinical trial process and, in addition, the results from early clinical trials may not be predictive of results obtained in later and larger clinical trials, and product candidates in later clinical trials may fail to show the desired safety or efficacy despite having progressed successfully through earlier clinical testing. A number of companies in the pharmaceutical industry, including us, have suffered significant setbacks in clinical trials, even in advanced clinical trials after showing positive results in earlier clinical trials. The completion of clinical trials for our product candidates may be delayed or halted for the reasons noted above in addition to many other reasons, including:
delays in patient enrollment, and variability in the number and types of patients available for clinical trials;
regulators or institutional review boards may not allow us to commence or continue a clinical trial;
our inability, or the inability of our partners, to manufacture or obtain from third parties materials sufficient to complete our clinical trials;
delays or failure in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective clinical trial sites;
risks associated with trial design, which may result in a failure of the trial to show statistically significant results even if the product candidate is effective;
difficulty in maintaining contact with patients after treatment commences, resulting in incomplete data;
poor effectiveness of product candidates during clinical trials;
safety issues, including adverse events associated with product candidates;
the failure of patients to complete clinical trials due to adverse side effects, dissatisfaction with the product candidate, or other reasons;
governmental or regulatory delays or changes in regulatory requirements, policy and guidelines; and
varying interpretation of data by the FDA or foreign regulatory authorities.
In addition, our product candidates could be subject to competition for clinical study sites and patients from other therapies under development which may delay the enrollment in or initiation of our clinical trials.
The FDA or foreign regulatory authorities may require us to conduct unanticipated additional clinical trials, which could result in additional expense and delays in bringing our product candidates to market. Any failure or delay in completing clinical trials for our product candidates would prevent or delay the commercialization of our product candidates. We cannot assure that our expenses related to clinical trials will lead to the development of brand-name drugs that will generate revenues in the near future. Delays or failure in the development and commercialization of our own branded products could have a material adverse effect on our business, results of operations and financial condition.
Our reporting and payment obligations under the Medicaid rebate program and other governmental purchasing and rebate programs are complex and may involve subjective decisions. Any determination that we have failed to comply with those obligations could subject us to penalties and sanctions, which could have a material adverse effect on our business.
The regulations applicable to us regarding reporting and payment obligations with respect to Medicaid reimbursement and rebates and other governmental programs are complex. As described in "Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 17. Commitments and Contingencies”, we and other pharmaceutical companies are defendants in a number of suits filed by state attorneys general and have been notified of an investigation by the DOJ with respect to Medicaid reimbursement and rebates. Our calculations and methodologies are subject to review and challenge by the applicable governmental agencies, and it is possible that such reviews could adversely affect us and our business. In addition, because our processes for these calculations and the judgments involved in making these calculations involve, and will continue to involve, subjective decisions and complex methodologies, these calculations are subject to the risk of error and misjudgment. Any governmental agencies that have commenced (or that may commence) an investigation of us could impose, based on a claim of violation of anti-fraud and false claims laws or otherwise, civil and/or criminal sanctions, including fines, penalties and possible exclusion from federal health care programs (including Medicaid and Medicare). Some of the applicable laws may impose liability even in the absence of specific intent to defraud. Furthermore, should there be ambiguity with respect to how to properly calculate and reportpayments, and even in the absence of any such ambiguity, a governmental authority may take a position contrary to a position that we have taken and may impose civil and/or criminal sanctions on us. Any such penalties, sanctions, or exclusion from federal health care programs could have a material adverse effect on our business, financial position and results of operations. From time to time we conduct routine reviews of our government pricing calculations. These reviews may have an impact on government price reporting and rebate calculations used to comply with various government regulations regarding reporting and payment obligations.
Our operating results are affected by many factors and may fluctuate significantly on a quarterly basis.
Our operating results may vary substantially from quarter to quarter and may be greater or less than those achieved in the immediately preceding period or in the comparable period of the prior year. Factors that may cause quarterly results to vary include, but are not limited to, the following:
the number of new product introductions by us;
losses related to inventory write-offs;
marketing exclusivity, if any, which may be obtained on certain new products;
the level of competition in the marketplace for certain products;
our ability to create demand in the marketplace for our products;
availability of raw materials and finished products from suppliers;
our ability to manufacture products at our manufacturing facilities;
the scope and outcome of governmental regulatory actions;
our dependence on a small number of products for a significant portion of net revenue or income;
legal actions against our generic products brought by brand competitors, and legal challenges to our intellectual property rights by generic competitors;
price erosion and customer consolidation; and
significant payments (such as milestones) payable by us under collaboration, licensing, and development agreements to our partners before the related product has received FDA approval.
The profitability of our product sales is also dependent upon the prices we are able to charge for our products, the costs to purchase products from third parties, and our ability to manufacture our products in a cost effective manner. If our revenues decline or do not grow as anticipated, we may not be able to reduce our operating expenses to offset such declines. Failure to achieve anticipated levels of revenues could, therefore, significantly harm our operating results for a particular fiscal period.
In certain circumstances, we issue price adjustments and other sales allowances to our customers. Although we may establish reserves based on our estimates of these amounts, if estimates are incorrect and the reserves are inadequate, it may result in adjustments to these reserves that may have a material adverse effect on our financial position and results of operations.
As described above, the first company to file an ANDA containing a Paragraph IV certification that successfully challenges the patent(s) on a branded product may be granted 180 days of generic market exclusivity by the FDA for such generic product. At the expiration of such exclusivity period, other generic distributors may enter the market, resulting in a significant price decline for the drug (in some instances, price declines have exceeded 90%). When we experience price declines following a period of generic marketing exclusivity, or at any time when a competitor enters the market or offers a lower price with respect to a product we are selling, we may, at our discretion, decide to lower the price of our product to retain market share and provide price adjustments to our customers for the difference between our new (lower) price and the price at which we previously sold the product which is still held in inventory by such customers. Because the entry of a competitive generic product following the expiration of any exclusivity period is unpredictable, we do not establish reserves for such potential adjustments, and therefore the full effect of such adjustments are not reflected in our operating results until such adjustments actually occur. There are also circumstances under which we may decide not to provide price adjustments to certain customers, and consequently, as a matter of business strategy, we may risk a greater level of sale returns of products in a customer’s existing inventory and lose future sales volume to competitors rather than reduce our pricing.
Based on estimates, we establish reserves for sales allowances including, but not limited to: sales discounts and returns, chargebacks, sales volume rebates, shelf stocks, re-procurement charges, cash discounts, and Medicaid rebate obligations at the time of sale. Although we believe our reserves are adequate as of the date of this report, we cannot provide assurances that our reserves will ultimately prove to be adequate. Increases in sales allowances may exceed our estimates for a variety of reasons, including unanticipated competition or an unexpected change in one or more of our contractual relationships. We will continue to evaluate the effects of competition and will record a price adjustment reserve if and when we deem it necessary. Any failure to establish adequate reserves with respect to sales allowances may result in a material adverse effect on our financial position and results of operations.
If we determine that our goodwill and other intangible assets have become impaired, we may record significant impairment charges, which would adversely affect our results of operations.
Goodwill and other intangible assets represent a significant portion of our assets. Goodwill is the excess of cost over the fair market value of net assets acquired in business combinations. In the future, goodwill and intangible assets may increase as a result of future acquisitions. We review our goodwill and indefinite lived intangible assets at least annually for impairment. We review our intangible assets with finite lives for recoverability whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Impairment may result from, among other things, deterioration in the performance of acquired businesses, adverse market conditions and adverse changes in applicable laws or regulations, including changes that restrict the activities of an acquired business. Any impairment of goodwill or other intangible assets would result in a non-cash charge against earnings, which would adversely affect our results of operations.
Investigations and litigation concerning the calculation of average wholesale prices may adversely affect our business.
Many government and third-party payers, including Medicare, Medicaid, HMOs and others, reimburse doctors and others for the purchase of certain prescription drugs based on a drug’s average wholesale price (“AWP”). In the past several years, state and federal government agencies have conducted ongoing investigations of manufacturers’ reporting practices with respect to AWP, as a result of which certain agencies have suggested that reporting of inflated AWPs by manufacturers has led to excessive payments for prescription drugs. Numerous pharmaceutical companies have been named as defendants in actions brought by various State Attorneys General and have faced state law qui tam actions brought on behalf of various states, alleging generally that the defendants defrauded state Medicaid systems by purportedly reporting or causing the reporting of AWP and/or “Wholesale Acquisition Costs” that exceeded the actual selling price of the defendants’ prescription drugs. We, for example, are subject to a civil investigative demand issued by the Texas State Attorney General alleging certain overpayments to us by the Texas Medicaid system as further described in “Item 1. Financial Information - Notes to Interim Consolidated Financial Statements - Note 17. Commitments and Contingencies.” These cases generally seek some combination of actual damages, and/or double damages, treble damages, compensatory damages, statutory damages, civil penalties, disgorgement of excessive profits, restitution, disbursements, counsel fees and costs, litigation expenses, investigative costs, injunctive relief, punitive damages, imposition of a constructive trust, accounting of profits or gains derived through the alleged conduct, expert fees, interest and other relief that the court may have deemed proper.
We can give no assurance that we will be able to settle current or future actions on terms that we deem reasonable, or that such settlements or adverse judgments, if entered, will not exceed the amount of any reserve. Accordingly, such actions could adversely affect us and may have a material adverse effect on our business, results of operations, financial condition and cash flows.
We are increasingly dependent on information technology, and our systems and infrastructure face certain risks, including cybersecurity and data leakage risks.
Significant disruptions to our information technology systems or breaches of information security could adversely affect our business. In the ordinary course of business, we collect, store and transmit large amounts of confidential information, and it is critical that we do so in a secure manner to maintain the confidentiality and integrity of such information. We have also outsourced significant elements of our information technology infrastructure; as a result we manage independent vendor relationships with third parties who are responsible for maintaining significant elements of our information technology systems and infrastructure and who may or could have access to our confidential information. The size and complexity of our information technology systems, and those of our third party vendors, make such systems potentially vulnerable to service interruptions and security breaches from inadvertent or intentional actions by our employees, partners or vendors. These systems are also vulnerable to attacks by malicious third parties, and may be susceptible to intentional or accidental physical damage to the infrastructure maintained by us or by third parties. Maintaining the secrecy of confidential, proprietary, and/or trade secret information is important to our competitive business position. While we have taken steps to protect such information and have invested in systems and infrastructures to do so, there can be no guarantee that our efforts will prevent service interruptions or security breaches in our systems or the unauthorized or inadvertent wrongful use or disclosure of confidential information that could adversely affect our business operations or result in the loss, dissemination, or misuse of critical or sensitive information. A breach of our security measures or the accidental loss, inadvertent disclosure, unapproved dissemination, misappropriation or misuse of trade secrets, proprietary information, or other confidential information, whether as a result of theft, hacking, fraud, trickery or other forms of deception, or for any other cause, could enable others to produce competing products, use our proprietary technology or information, and/or adversely affect our business position. Further, any such interruption, security breach, loss or disclosure of confidential information could result in financial, legal, business, and reputational harm to us and could have a material adverse effect on our business, financial position, results of operations and/or cash flow.
Our future success depends on our ability to attract and retain talented employees and consultants.
Our future success depends, to a substantial degree, upon the continued service of the members of our management team. The loss of the services of members of our management team, or their inability to perform services on our behalf, could have a material adverse effect on our business, condition (financial and otherwise), prospects and results of operations. On August 5, 2019, we announced that President and Chief Executive Officer Robert A. Stewart was leaving the Company and resigning as a director, effective immediately, and would be replaced by Amneal’s co-founders Chirag Patel, who will serve as President and Co-Chief Executive Officer, and Chintu Patel, who will serve as Co-Chief Executive Officer. Each of Chirag Patel and Chintu Patel is a member of the Amneal Group. In connection with this transition, among other changes to the Company's board of directors, Executive Chairman Paul M. Bisaro also resigned from the Company and the board and was replaced on the board by Paul Meister, who will serve as non-executive Chairman of the Board. Any change in senior management involves significant inherent risk, and any failure to effect a smooth transition process could hinder our strategic planning, execution and future performance. While we endeavor to minimize any negative impact associated with changes such as these, there may be uncertainty among investors, employees and others regarding our future direction and performance. Any disruption in our operations, uncertainty regarding our future or negative public perception regarding the change could have a material adverse effect on our business, financial condition, operating results and cash flows.
Our success also depends, to a large extent, upon the contributions of our sales, marketing, scientific and quality assurance staff. We compete with brand and generic pharmaceutical manufacturers for qualified personnel, and our competitors may offer more favorable employment opportunities than we do. If we are not able to attract and retain the necessary personnel to accomplish our business objectives we could experience constraints that would adversely affect our ability to sell and market our products effectively, to meet the demands of our strategic partners in a timely fashion, and to support our research and development programs. In particular, our sales and marketing efforts depend on the ability to attract and retain skilled and experienced sales, marketing and quality assurance representatives. Although we believe that we have been successful in attracting and retaining skilled personnel in all areas of our business, we cannot provide assurance that we can continue to attract, train and retain such personnel. Any failure in this regard could limit the rates at which we generate sales and develop or acquire new products.
If we determine that our goodwill has become impaired, we may record significant impairment charges, which would adversely affect our financial condition and results of operations.
Goodwill represents a significant portion of our assets. Goodwill is the excess of cost over the fair market value of net assets acquired in business combinations. In the future, goodwill may increase as a result of future acquisitions. We dependreview our goodwill and indefinite lived intangible assets at least annually for impairment. Impairment may result from, among other things, deterioration in the performance of acquired businesses, adverse market conditions and adverse changes in applicable laws or regulations, including changes that restrict the activities of an acquired business.
Generic pharmaceuticals have faced regular and increasing price erosion each year, placing even greater importance on our ability to protect our intellectual property and proprietary rights.
Our success depends on our ability to protect and defend the intellectual property rights associated with our current and futurecontinually introduce new products. If these trends continue or worsen, or if we failexperience further difficulty in this market or the Specialty market, this may continue to protectadversely affect our intellectual property adequately, competitors may manufacturerevenues and profits in our Generics and Specialty segments. Furthermore, during the first two quarters of 2019, the Company's market products similarcapitalization decreased significantly. Additional decline in our market capitalization, even if due to macroeconomic or that may be confused with, our products, and our generic competitors may obtain regulatory approval to make and distribute generic versionsindustry-wide factors, could put pressure on the carrying value of our branded products. Some patent applicationsgoodwill in both our Generics and Specialty segments and cause the United States are maintained in secrecy or are not published until the resulting patents issue. We also cannot be certain that patents will be issued with respect to any of our patent applications or that any existing or future patents issued to or licensed by us will provide competitive advantages for our products or will not be challenged, invalidated, circumvented or held unenforceable in proceedings commenced by our competitors or other third parties. Furthermore, our patent rights may not prevent or limit our present and future competitors from developing, making, importing, using or commercializing products that are functionally similar to our products. We rely particularly on trade secrets, trademarks, unpatented proprietary expertise and continuing innovation that we seek to protect, in part, by registering and using marks; and by entering into confidentiality agreements with licensees, suppliers, employees, consultants and other parties-we use this approach to protecting our intellectual property in large part because few of our products are protected by patents. We cannot provide assurance that these agreements will not be breached or circumvented. We also cannot be certain that we will have recourse to adequate remedies in the event of a breach of such agreements. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. We cannot be sure that our trade secrets and proprietary technology will not be independently developed or otherwise become known by our competitors or, if patents are not issued with respect to our internally-developed products, that we will be able to maintain the confidentiality of information relating to these products. In addition, efforts to ensure our intellectual property rights may be costly, time-consuming and/or ultimately unsuccessful. We cannot be sure that we will have the resources to protect our own rights against infringement by third parties.
There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with GAAP. Any future changes in estimates, judgments and assumptions used or necessary revisions to prior estimates, judgments or assumptions could lead to a restatement of our results.
The consolidated financial statements included in this report are prepared in accordance with GAAP. This involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future and any necessary revisions to prior estimates, judgments or assumptions could lead to a restatement. Any such changes could result in corresponding changes to the amounts of assets (including goodwill and other intangible assets), liabilities, revenues, expenses and income.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud.
We are required to comply with Section 404 of the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires public companiesCompany to conduct an annual review and evaluation of their internal controls and attestations of the effectiveness of internal controls by independent auditors. Ensuringinterim impairment test. A determination that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements onall or a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. Our failure to maintain the effectivenessportion of our internal controls in accordance with the requirements of the Sarbanes-Oxley Actgoodwill is impaired, although a non-cash charge against earnings, could have a material adverse effectaffect on our business. We could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on the price of our common stock. In addition, if our efforts to comply with new or changed laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
Our management or our independent registered public accounting firm may also identify material weaknesses in our internal control over financial reporting in the future. The existence of internal control material weaknesses may result in current and potential stockholders and alliance and collaboration agreements’ partners losing confidence in our financial reporting, which could harm our business, the market price of our common stock, and our ability to retain our current, or obtain new, alliance and collaboration agreements’ partners.
In addition, the existence of material weaknesses in our internal control over financial reporting may affect our ability to timely file periodic reports under the Exchange Act. An internal control material weakness may develop in the future and affect our ability to timely file our periodic reports. The inability to timely file periodic reports under the Exchange Act could result in the SEC revoking the registration of our common stock, which would prohibit us from listing or having our stock quoted on any public market. This would have an adverse effect on our business and stock price by limiting the publicly available information regarding us and greatly reducing the ability of our stockholders to sell or trade our common stock.
Terrorist attacks and other acts of violence or war may adversely affect our business.
Terrorist attacks at or nearby our facilities may negatively affect our operations. While we do not believe that we are more susceptible to such attacks than other companies, such attacks could directly affect our physical facilities or those of our suppliers or customers and could make the transportation of our products more difficult and more expensive and ultimately affect our sales.
We carry insurance coverage on our facilities of types and in amounts that we believe are in line with coverage customarily obtained by owners of similar properties. We continue to monitor the state of the insurance market in general and the scope and cost of coverage for acts of terrorism in particular, but we cannot anticipate what coverage will be available on commercially reasonable terms in future policy years. Currently, we carry terrorism insurance as part of our property and casualty and business interruption coverage. If we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged facilities, as well as the anticipated future net sales from those facilities.
The expansion of social media platforms present new risks and challenges, which could cause a material adverse effect on our business, results of operations and financial condition.
The inappropriate use of certain media vehicles could cause brand damage or information leakage or could lead to legal implications fromIf we determine in the improper collection and/or dissemination of personally identifiable information. In addition, negative posts or comments about us on any social networking website could seriously damage our reputation. Further, the disclosure of non-public company sensitive information through external media channels could lead to information loss as there mightfuture that we will not be structured processesable to fully utilize all or part of our deferred tax assets, we would record a valuation allowance through earnings in placethe period the determination was made, which could have an adverse effect on our results of operations and earnings in future periods.
We record valuation allowances against our deferred tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized. We routinely evaluate the realizability of our deferred tax assets by assessing the likelihood that our deferred tax assets will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical
results and incorporate certain assumptions, including projected new product launches, revenue growth, and operating margins, among others.
As of June 30, 2019, we had approximately $392 million in net deferred tax assets ("DTAs"), which included a U.S. net DTA of $386 million and foreign net DTAs of $6 million. These DTAs include U.S. deferred taxes on our investment in Amneal totaling approximately $240 million that can be used to secureoffset taxable income in future periods and protect information.reduce our income taxes payable in those future periods. These DTAs also include NOL carryforwards which have no expiration. At this time, we consider it more likely than not that we will have sufficient taxable income in the future that will allow us to realize these DTAs. However, Generic pharmaceuticals have faced regular and increasing price erosion each year, placing even greater importance on our ability to continually introduce new products. If our non- public sensitive information is disclosedthese trends continue or worsen, or if we experience further difficulty in this market, this may continue to adversely affect our reputationrevenues and profits. If we are unable to generate sufficient taxable income from our future operations, a substantial valuation allowance to reduce our DTAs may be required, which could materially increase our income tax expense in the period the valuation allowance is seriously damaged through social media, it couldrecognized and have a material adverse effect on our business, results of operations and financial condition.
We may need to raise additional funds in the future which may not be available on acceptable terms or at all.
We may consider issuing additional debt or equity securities in the future to fund potential acquisitions or investments, to refinance existing debt, or for general corporate purposes. If we issue equity, convertible preferred equity or convertible debt securities to raise additional funds, our stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our stockholders. If we incur additional debt, we may increase our leverage relative to our earnings or to our equity capitalization, requiring us to pay additional interest expenses and potentially lowering our credit ratings. We may not be able to market such issuances on favorable terms, or at all, in which case, we may not be able to develop or enhance our products, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements.
The terms of our credit agreements restrict our operations, particularly our ability to respond to changes or to take certain actions.
Our credit agreements contain a number of restrictive covenants that impose operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on the ability to:
incur additional indebtedness;
pay dividends or make other distributions or repurchase or redeem capital stock;
prepay, redeem or repurchase certain debt;
make loans and investments;
sell assets;
incur liens;
enter into transactions with affiliates;
alter the businesses conducted by us;
enter into agreements restricting subsidiaries’ ability to pay dividends; and
consolidate, merge or sell all or substantially all of our assets.
A breach of the covenants under such credit agreements could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies which could have a material adverse effect on our business, operations and financial results. Furthermore, if we were unable to repay the amounts due and payable under our credit agreements, those lenders could proceed against the collateral granted to them to secure that indebtedness which could force us into bankruptcy or liquidation. In the event our lenders accelerated the repayment of the borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. Any acceleration of amounts due under the credit agreements would likely have a material adverse effect on us. As a result of these restrictions, we may be:
•limited in how we conduct business;
unable to raise additional debt or equity financing to operate during general economic or business downturns; or
•unable to compete effectively or to take advantage of new business opportunities.
These restrictions may affect our ability to grow in accordance with our strategy.
Risks Related to Our Class A Common Stock
We are a holding company with nominal net worth and depend on dividends and distributions from our subsidiaries to pay any dividends.
We are a holding company with nominal net worth and will not have any material assets or conduct any business operations other than our investments in our subsidiaries. Our business operations are conducted primarily out of our direct operating subsidiary, Amneal, and its subsidiaries, including Impax. As a result, notwithstanding any restrictions on payment of dividends under our existing indebtedness, our ability to pay dividends, if any, is dependent upon cash dividends and distributions or other transfers from our subsidiaries, including from Amneal.
The Class A Common Stock price is expected to be volatile, and the market price of Class A Common Stock may decline.
The market price of our Class A Common Stock could be subject to significant fluctuations. Market prices for securities of pharmaceutical, biotechnology, and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of Class A Common Stock to fluctuate include:
our ability to obtain regulatory approvals for product candidates, and delays or failures to obtain such approvals;
the failure of any of our product candidates, if approved for marketing and commercialization, to achieve commercial success;
issues in manufacturing our approved products or product candidates;
the entry into, or termination of, key agreements, including key licensing or collaboration agreements;
the initiation of material developments in, or conclusion of, litigation to enforce or defend any of our intellectual property rights or defend against the intellectual property rights of others;
announcements by commercial partners or competitors of new commercial products, clinical progress (or the lack thereof), significant contracts, commercial relationships, or capital commitments;
adverse publicity relating to our markets, including with respect to other products and potential products in such markets;
the introduction of technological innovations or new therapies competing with our products or our potential products;
the loss of talented employees;
changes in estimates or recommendations by securities analysts, if any, who cover the Class A Common Stock;
general and industry-specific economic conditions potentially affecting our research and development expenditures;
changes in the structure of health care payment systems;
period-to-period fluctuations in our financial results;
failure to meet or exceed financial and development projections we may provide to the public;
failure to meet or exceed the financial and development projections of the investment community;
the perception of the pharmaceutical industry by the public, legislators, regulators, and the investment community;
adverse regulatory decisions;
disputes or other developments relating to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies;
sales of the Class A Common Stock by us or our stockholders in the future;
trading volume of the Class A Common Stock; and
period-to-period fluctuations in our financial results
Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies or the biotechnology sector. These broad market fluctuations may also adversely affect the trading price of our Class A Common Stock.
In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management’s attention and resources, which could significantly harm the Company’s profitability and reputation.
Future sales of shares by stockholders could cause the Class A Common Stock price to decline.
If our stockholders sell, or indicate an intention to sell, substantial amounts of Class A Common Stock in the public market after the expiration of the lock-up period as described below and the other applicable legal restrictions on resale lapse, the trading price of Class A Common Stock could decline.
The Company’s Second Amended and Restated Stockholders Agreement, dated December 16, 2017 (the “Stockholders’ Agreement”), includes certain lock-up provisions limiting the ability of Holdings and its permitted transferees to transfer shares of our common stock held by such members for a period of 180 days from the closing of the Combination. Upon the expiration of the lock-up restrictions, the 171,260,707 shares of Class A Common Stock subject to outstanding Amneal common units held by Holdings and its permitted transferees, as well as the 6,886,140 shares of Class A Common Stock relating to the redemption by Amneal of Amneal common units on the closing date of the Combination will become eligible for sale or transfer (subject to certain continuing restrictions). If these shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of the Class A Common Stock could decline.
If the ownership of the Class A Common Stock is highly concentrated, it may prevent other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the Class A Common Stock’s stock price to decline.
As of June 30, 2018, our executive officers and directors, and affiliates of our executive officers and directors, beneficially owned or controlled approximately 60%of the outstanding shares of our common stock. Accordingly, these executive officers, directors, and their affiliates, acting as a group, have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation, or sale of all or substantially all of our assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of the Company, even if such a change of control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the trading price of Class A Common Stock due to investors’ perception that conflicts of interest may exist or arise.
We are controlled by Holdings. The interests of Holdings may differ from the interests of our other stockholders.
As of June 30, 2018, Holdings possessed 57% of the voting power of all of our outstanding shares of common stock.
Through its ownership of a majority of our voting power and the provisions set forth in our charter, bylaws and the Stockholders Agreement, Holdings and its permitted transferees have the ability to designate and elect a majority of our board of directors. Holdings and its permitted transferees have control over all matters submitted to our stockholders for approval, including changes in capital structure, transactions requiring stockholder approval under Delaware law and corporate governance, subject to the terms of the Stockholders Agreement relating to Holdings and its permitted transferees’ agreement to vote in favor of directors not designated by Amneal and such other matters that are set forth in the Stockholders Agreement. Holdings and its permitted transferees may have different interests than our other stockholders and may make decisions adverse such interests.
Among other things, Holdings and its permitted transferees’ control could delay, defer, or prevent a sale of the Company that the company’s other stockholders support, or, conversely, this control could result in the consummation of such a transaction that our other stockholders do not support. This concentrated control could discourage a potential investor from seeking to acquire Class A Common Stock and, as a result, might harm the market price of that Class A Common Stock.
Our charter provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit the ability of our stockholders to obtain a favorable judicial forum for disputes with us or our current or former directors, officers or employees.
Our charter provides that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if such court does not have jurisdiction, the Superior Court of the State of Delaware or the federal district court for the District of Delaware) will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of the Company, any action asserting a claim of breach of fiduciary duty owed by any of our current or former director or officer to us or our stockholders, any action asserting a claim arising pursuant to any provision of the DGCL, our charter or bylaws or any action asserting a claim governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our current or former directors, officers or other employees, which may discourage such lawsuits against us and our current or former directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our charter to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm its business, results of operations, and financial condition.
Anti-takeover provisions under Delaware law could make an acquisition of the Company more difficult and may prevent attempts by our stockholders to replace or remove our management.
Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding voting stock of the Company from merging or combining with us. Although we believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of management.
We do not anticipate that we will pay any cash dividends in the foreseeable future.
The current expectation is that we will retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our Class A Common Stock will be the sole source of gain for our stockholders, if any, for the foreseeable future.
If securities or industry analysts change their recommendations regarding our Class A Common Stock adversely, the Class A Common Stock price and trading volume could decline.
The trading market for Class A Common Stock will be influenced by what industry or securities analysts publish in their research and reports about us, our business, our market or our competitors. Analysts that cover us may make adverse recommendations regarding our Class A Common Stock, adversely change their recommendations from time to time, and/or provide more favorable relative recommendations about our competitors. If any analyst who covers us were to cease coverage of the Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the stock price or trading volume of the Class A Common Stock to decline.
Item 2. Unregistered Sales of Equity Securities and useUse of Proceeds
Recent Sale of Unregistered Securities
There were no sales of unregistered securities during the quarter ended June 30, 2018
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were no purchases of equity securities during the quarter ended June 30, 2018.
None.
ITEMItem 3. DEFAULTS UPON SENIOR SECURITIESDefaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
ITEM 5. OTHER INFORMATION
Not applicable.Item 6. Exhibits
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| Exhibit No. | | Description of Document |
| | Business Combination Agreement, dated as of October 17, 2017, by and among Amneal Pharmaceuticals LLC, Impax Laboratories, Inc., Atlas Holdings, Inc. and K2 Merger Sub Corporation (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-1 filed on May 7, 2018).
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| | Amendment No. 1, dated as of November 21, 2017, to the Business Combination Agreement, dated as of as of October 17, 2017, by and among Amneal Pharmaceuticals LLC, Impax Laboratories, Inc., Atlas Holdings, Inc. and K2 Merger Sub Corporation (incorporated by reference to Exhibit 2.2 to the Company’s Registration Statement on Form S-1 filed on May 7, 2018). |
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| | Amendment No. 2, dated as of December 16, 2017, to the Business Combination Agreement, dated as of as of October 17, 2017, as amended by Amendment No. 1 dated as of November 21, 2017 by and among Amneal Pharmaceuticals LLC, Impax Laboratories, Inc., Atlas Holdings, Inc. and K2 Merger Sub Corporation (incorporated by reference to Exhibit 2.3 to the Company’s Registration Statement on Form S-1 filed on May 7, 2018). |
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| | Purchase and Sale Agreement, dated as of May 7, 2018, by and between Amneal Pharmaceuticals LLC, Gemini Laboratories, LLC, the parties signatory thereto and the Sellers’ Representative (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on May 7, 2018). |
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| | Amended and Restated Certificate of Incorporation of Amneal Pharmaceuticals, Inc. adopted as of May 4, 2018.* |
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| | Amended and Restated Bylaws of Amneal Pharmaceuticals, Inc. adopted as of May 4, 2018.* |
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| | Second Supplemental Indenture dated as of May 4, 2018 to the Indenture dated as of June 30, 2015 by and between Impax Laboratories, LLC and Wilmington Trust, N.A. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 7, 2018). |
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| | Term Loan Credit Agreement, dated as of May 4, 2018, by and among Amneal Pharmaceuticals LLC as the borrower, JP Morgan Chase Bank, N.A., as administrative agent and collateral agent, and the lenders and other parties party thereto2019 Severance Plan (incorporated by reference to Exhibit 10.1 to the Company’sCompany's Current Report on Form 8-K, filed on May 7, 2018)9, 2019).† |
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| | RevolvingForm of Tripartite Letter Agreement Credit Agreement, dated as of May 4, 2018, by and among Amneal Pharmaceuticals LLC, as the borrower, the other loan parties from time to time, JP Morgan Chase Bank, N.A., as administrative agent and collateral agent and the lenders and other parties party thereto (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 7, 2018).Suisse* |
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| | Term Loan GuaranteeForm of Tripartite Acknowledgment and Collateral Agreement dated as of May 4, 2018, by and among the loan parties from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 7, 2018).Morgan Stanley* |
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| | Revolving Loan GuaranteeSeparation Agreement between Robert Stewart, Amneal Pharmaceuticals, Inc. and Collateral Agreement,Amneal Pharmaceuticals LLC, dated as of May 4, 2018, by and among the loan parties from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 7, 2018). |
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August 2, 2019 *†
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| | Third Amended and Restated Limited Liability Company Agreement of Amneal Pharmaceuticals LLC adopted as of May 4, 2018 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on May 7, 2018). |
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| | Tax Receivable Agreement,Amendment No. 1, dated as of May 4, 2018,August 2, 2019, to Second Amended and Restated Stockholders Agreement, by and among Amneal Pharmaceuticals Inc., Amneal PharmaceuticalsHolding Company, LLC, a Delaware limited liability company, AP Class D Member, LLC, a Delaware limited liability company, AP Class E Member, LLC, a Delaware limited liability company, AH PPU Management, LLC, a Delaware limited liability company, and the Members of Amneal Pharmaceuticals LLC from time to time party thereto (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on May 7, 2018). |
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| | Form of Indemnification and Advancement Agreement for the directors and officers of the Company (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on May 7, 2018). † |
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| | Amneal Pharmaceuticals, Inc. 2018 Incentive Award Plan.* † |
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| | Form of Amneal Pharmaceuticals, Inc. 2018 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement (incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on May 7, 2018). † |
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| | Form of Amneal Pharmaceuticals, Inc. 2018 Incentive Award Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on May 7, 2018). † |
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| | Amneal Pharmaceuticals, Inc. Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed on May 7, 2018). † |
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| | Employment Agreement, dated May 4, 2018, by and between Amneal Pharmaceuticals, Inc. and Paul M. Bisaro (incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed on May 12, 2018). † |
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| | Unsecured Promissory Note, dated as of May 7, 2018, issued by Amneal Pharmaceuticals LLC to the Sellers (as defined therein) (incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K filed on May 12, 2018). |
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| | Amneal Pharmaceuticals LLC Severance Plan and Summary Plan Description (incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K filed on May 12, 2018). † |
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11.1 | | Statement re computation of per share earnings (incorporated by reference to Note. 9 Earnings Per Share in the Notes to Interim Consolidated Financial Statements in this Quarterly Report on Form 10-Q). |
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| | Certification of the Co - Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
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| | Certification of the Co - Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
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| | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
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| | Certification of the Co - Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* ** |
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| | Certification of the Co - Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* ** |
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| | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* ** |
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| 101 | | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 20182019 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017, (ii) Consolidated Statements of Operations for each of the three and six months ended June 30, 2019 and 2018, and 2017, (iii)(ii) Consolidated Statements of Comprehensive Loss for each of the three and six months ended June 30, 2019 and 2018, (iii) Consolidated Balance Sheets as of June 30, 2019 and 2017,December 31, 2018, (iv) Consolidated Statements of Cash Flows for each of the six months ended June 30, 2019 and 2018, (v) Consolidated Statements of Stockholders' Equity/ Members' Deficit for each the three and six months ended June 30, 2019 and 2018 and 2017 and (v)(vi) Notes to Interim Consolidated Financial Statements.* |
* Filed herewith
**This certificate is being furnished solely to accompany the report pursuant to 18 U.S.C. 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
† Management contract, Denotes management compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: August 9, 20185, 2019 | Amneal Pharmaceuticals, Inc. |
| | | (Registrant) |
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| | By: | /s/ Robert StewartChirag Patel |
| | | Robert StewartChirag Patel |
| | | President and ChiefCo-Chief Executive Officer (Principal Executive Officer)
|
| | | (Co-Principal Executive Officer) |
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| | By: | /s/ Bryan M. ReasonsChintu Patel |
| | | Bryan M. ReasonsChintu Patel |
| | Co-Chief Executive Officer |
| | (Co-Principal Executive Officer) |
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| By: | /s/ Todd P. Branning |
| | Todd P. Branning |
| | | Chief Financial Officer and
Senior Vice President Financeand Chief Financial Officer (Principal Financial and Accounting Officer) |