The unaudited pro forma combined results of operations for the three and six months ended June 30, 20182020 and 2019 (assuming the closing of the CombinationAcquisitions occurred on January 1, 2017)2019) are as follows (in thousands):
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 CombinationAcquisitions taken place on January 1, 2017.2019. Furthermore, the pro forma results do not purport to project the future results of operations of the Company.
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.
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 gain (loss) gain on sale of international businessbusinesses, net 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
Revenue is recognized when the Company transfers control of its products to the customer, which typically occurs at a point-in-time, either upon shipment or 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.
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, distribution fees, 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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
A rollforward of the major categories of sales-related deductions for the six months ended June 30, 20192020 is as follows (in thousands):
11. LeasesPrepaid and Other Current Assets
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, the 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:
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, 20192020 and December 31, 20182019 (in thousands):
There were no transfers between levels in the fair value hierarchy during the six months ended June 30, 2019.
The carrying amounts of cash, accounts receivable and accounts payable approximate their fair values due to the short-term maturity of these instruments.
There were no non-recurring fair value measurements during the six months ended June 30, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | December 31, 2019 | | |
| Derivatives Designated as Hedging Instruments | | Balance Sheet
Classification | | Fair Value | | Balance Sheet
Classification | | Fair Value |
| Variable-to-fixed interest rate swap | | Other long-term liabilities | | $ | 56,058 | | | Other assets | | $ | 16,373 | |
13.
17. Commitments and Contingencies
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.
Certain of these arrangements are with related parties (refer to Note 19. Related Party Transactions).
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. AndAdditionally, 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. ResolutionFor the three and six months ended June 30, 2020, the Company recorded net charges of approximately $1 million and $6 million, respectively, for commercial legal proceedings and claims. The ultimate resolution of any or all claims, legal proceedings or investigations could differ materially from our estimate and 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.
As of June 30, 2020 and December 31, 2019, the Company had liabilities for commercial and governmental legal proceedings and claims of $16 million and $17 million, respectively.
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.
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 Accrualand Price Reporting Matters
The Company is required to provide pricing information to state agencies, including 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. Other agencies have alleged that manufacturers have failed to timely file required reports concerning pricing information. Reserves are periodically established by the Company for any potential claims or settlements of overpayment. Although theThe Company intends to vigorously defend against any such claims, it had a reserve of $15 million at both June 30, 2019 and December 31, 2018.claims. 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" 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-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 GenericGenerics 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 Specialty segment is currently involved in patent infringement litigation against generic drug manufacturers that 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 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, or enhanced treble damages in cases of willful infringement. For the Company’s 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
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® tablet product. In 2016, the District Court granted Amneal’s motion to dismiss several of the patents in suit. The Court of Appeals for the Federal Circuit affirmed the dismissal with respect to one such patent and Otsuka did not appeal the District Court’s decision with respect to the other patents. On July 12, 2019, Otsuka voluntarily dismissed without prejudice all of its claims against Amneal. The District Court entered an Order of Dismissal, and closed the case, on July 15, 2019.
Patent Infringement MattersMatter
Impax Laboratories, LLC. v. Zydus Pharmaceuticals USA, Inc. and Cadila Healthcare Ltd. (Rytary®(Rytary®)
On December 21, 2017, Impax filed suit against Zydus Pharmaceuticals USA, Inc. and Cadila Healthcare Ltd. (collectively, "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 hashad been set with trial anticipated in February 2020.
April 2020, which was postponed indefinitely due to the COVID-19 pandemic. The parties thereafter reached a settlement agreement on or about May 15, 2020, and the case has been dismissed.
Other Litigation Related to the Company’s Business
Opana ER® FTC Antitrust Litigation
On February 25, 2014, Impax received a Civil Investigative Demand (“CID”) from the Federal 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 appealed this ruling to the FTC. On March 28, 2019, the FTC issued an Opinion & Order reversing the Administrative 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 CompanyImpax filed a Petition for Review of the FTC’s Opinion & Order with the United States Court of Appeals for the Fifth Circuit.
Impax filed its opening appellate brief with the Fifth Circuit on October 3, 2019; the FTC filed its brief in response on December 9, 2019 and Impax filed a reply brief on December 30, 2019. Oral argument before the Fifth Circuit, which had been postponed due to the COVID-19 pandemic, was heard on June 9, 2020.
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 has been cooperating and intends to cooperatecontinue cooperating with the FTC regarding the CID. However, no assurance can be given as to the timing or outcome of the FTC’s underlying investigation.
Opana ER® Antitrust Litigation
From June 2014 to April 2015, 14 complaints styled as class actions on behalf of direct purchasers and indirect purchasers (also known as end-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.
The 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; Wisconsin Masons’ Health Care Fund; Massachusetts Bricklayers; Pennsylvania Employees Benefit Trust Fund; International Union of Operating Engineers, Local 138 Welfare Fund; Louisiana Health Service & Indemnity Company d/b/a Blue Cross and Blue Shield of Louisiana; Kim Mahaffay; and 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 United States District Court for the Northern District of Illinois (“N.D. Ill.”) for coordinated pretrial proceedings, as In Re: Opana ER Antitrust Litigation (MDL No. 2580). (Actions subsequently filed in other jurisdictions also were transferred by the JPML 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 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. Discovery, including expert discovery, is ongoing. On March 25, 2019, plaintiffs filed motions for class certification and served opening expert reports. Defendants’ oppositions to class certification and rebuttal expert reports are duewere filed and served on August 29, 2019. On November 5, 2019, plaintiffs filed reply briefs in further support of their motions for class certification. On January 17, 2020, defendants filed a motion for leave to befile joint surreply briefs in response thereto; plaintiffs filed in August 2019. Noresponses on January 24, 2020. On February 5, 2020, the court granted defendants’ motion for leave, and entered a case schedule to which the parties jointly stipulated, setting a trial date has been scheduled.of March 15, 2021, which the MDL court later
re-set for June 7, 2021 in light of COVID-19 pandemic-related delays. On April 15, 2020, defendants filed motions for summary judgment.
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 United States District Court for the Southern District of New York involving patent litigation settlement agreements between Forest Laboratories and the generic drug manufacturers concerning generic versions of Forest’s Namenda 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 Court 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 in 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 plaintiffs, subject to Court approval. The amount of the settlement is not material to the Company's consolidated financial statements.
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. However, no assurance can be given as to the timing or outcome of this investigation.
United States Department of Justice Investigations
On 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 (the "DOJ"). In connection with this same investigation, on March 13, 2015, Impax received a grand jury subpoena from the DOJ requesting the production of information and documents regarding the sales, marketing, and pricing of certain generic prescription medications. In particular, the DOJ’s investigation currently focuses on four4 generic medications: digoxin tablets, terbutaline sulfate tablets, prilocaine/lidocaine cream, and calcipotriene topical solution. The Company has been cooperatingproduced documents and intends to continue cooperatinginformation in connection 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 DOJ (the "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 cooperatingproduced documents and intends to continue cooperatinginformation in connection with the Civil Division’s investigation. However, no assurance can be given as to the timing or outcome of the 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") 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"), 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 2 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 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") 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 discrepancy. In March 2019, the Texas AG provided Amneal with a re-calculation of the alleged overpayment, andoverpayment. In October 2019, Amneal isreached an agreement in discussionsprinciple with the Texas AG.
AG to settle the matter. The parties executed a Settlement Agreement and Release as of March 5, 2020, and the matter is now closed.
In Re Generic Pharmaceuticals Pricing Antitrust Litigation
BetweenBeginning in March 2016, and January 2019, numerous complaints styled 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
“opt-out plaintiffs”) have been filed against manufacturers of generic digoxin, lidocaine/prilocaine, glyburide-metformin, and metronidazole, including Impax.
The end-payor plaintiffs comprisecomprised Plaintiff International Union of Operating Engineers Local 30 Benefits30Benefits Fund; Tulsa Firefighters Health and Welfare Trust; NECA-IBEW Welfare Trust Fund; Pipe Trade Services MN; Edward Carpinelli; Fraternal Order of Police, Miami Lodge 20, Insurance Trust Fund; Nina Diamond; UFCW Local 1500 Welfare Fund; Minnesota Laborers Health and Welfare Fund; The City of Providence, Rhode Island; Philadelphia Federation of Teachers Health and Welfare Fund; United Food & Commercial Workers and Employers Arizona Health and Welfare Trust; Ottis McCrary; Plumbers & Pipefitters Local 33 Health and Welfare Fund; Plumbers & Pipefitters Local 178 Health and Welfare Trust Fund; Unite Here Health; Valerie Velardi; and Louisiana Health Service Indemnity Company. The direct purchaser plaintiffs comprisecomprised 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 comprisecomprised The Kroger Co.; Albertsons Companies, LLC; H.E. Butt Grocery Company L.P.; Humana Inc.; and United Healthcare Services, Inc.
On April 6, 2017, the JPML ordered the consolidation of all civil actions involving allegations of antitrust conspiracies in the generic pharmaceutical industry regarding 18 generic drugs in the United States District Court for the Eastern District of Pennsylvania (“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 is named as a defendant in the 2 complaints respecting digoxin and lidocaine-prilocaine. Impax also is a defendant in the class action complaint filed with the MDL court on June 22, 2018 by certain direct purchasers of glyburide-metformin and metronidazole.
Each of the 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 state antitrust, consumer protection, and unjust enrichment claims brought by two classes of indirect purchasers in the digoxin action. The Court dismissed seven7 state law claims in the end-payor plaintiffs’ complaint and six6 state law claims in the indirect reseller plaintiffs’ complaint. Motions to dismiss the glyburide-metformin and metronidazole complaint, 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. Document discovery otherwise is proceeding.
On May 10, 2019, the Company was named in a civil lawsuit filed by the Attorneys General of 43 States and the Commonwealth of Puerto Rico in the United States District Court for the District of Connecticut against numerous generic pharmaceutical manufacturers, as well as certain of their current or former sales and marketing executives, regarding an alleged conspiracy to fix prices and allocate or divide customers or markets for various products, including, with respect to the Company, bethanechol chloride tablets, norethindrone acetate tablets, and ranitidine HCL tablets, in violation of federal 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 JPML transferred the lawsuit to the E.D. Pa. for coordination and consolidation with MDL No. 2724. On November 1, 2019, the State Attorneys General filed an Amended Complaint in their lawsuit, bringing claims on behalf of 9 additional states and territories against several defendants; the relief sought and allegations concerning the Company (including the products allegedly at issue) are unchanged from the original complaint.
On July 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 (America’s 1st Choice of South Carolina, Inc., et al. v. Actavis Elizabeth, LLC, et al., No. 190702094), naming as defendants in the putative 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).lawsuit. However, to date, no complaint has been filed or served in this action. On December 12, 2019, the court entered an Order placing the case in deferred status pending further developments in MDL No. 2724.
On October 11, 2019, opt-out plaintiff United Healthcare Services, Inc. filed a second complaint, in the United States District Court for the District of Minnesota (United Healthcare Services, Inc. v. Teva Pharmaceuticals USA, Inc., et al., No. 0:19-cv-2696), following on and supplementing its original action, asserting antitrust claims against the Company and other generic pharmaceutical manufacturers arising from the facts alleged in the above-referenced State Attorneys General lawsuit. Plaintiff seeks, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. On October 25, 2019, the lawsuit was transferred by the JPML to the E.D. Pa. for coordination and consolidation with MDL No. 2724.
On October 18, 2019, opt-out plaintiff Humana, Inc. also filed a second complaint, likewise following on supplementing its original action to assert antitrust claims against the Company and other generic pharmaceuticals manufacturers arising from the facts alleged in the above-referenced State Attorneys General lawsuit, and similarly seeking, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. The lawsuit was filed in the E.D. Pa. (Humana Inc. v. Actavis Elizabeth, LLC, et al., No. 2:19-cv-4862), and likely will be incorporated into MDL No. 2724 for coordinated pretrial proceedings.
On November 14, 2019, the Company was named in a complaint filed in the Supreme Court of the State of New York, Nassau County, on behalf of 14 counties in the state of New York, who allege to be both direct and end-payor purchasers of generic pharmaceutical drugs (County of Nassau, et al., v. Actavis Holdco U.S., Inc., et al., No. 616029/2019). The complaint asserts antitrust claims against the Company and other generic pharmaceutical manufacturers arising from the facts alleged in the above-referenced State Attorneys General lawsuit. Plaintiff Counties seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. On December 17, 2019, defendants removed the case to the United States District Court for the Eastern District of New York (No. 2:19-cv-7071) and, on January 3, 2020, the case was transferred by the JPML to the E.D. Pa. for coordination and consolidation with MDL No. 2724.
On December 11, 2019, the Company and Impax were named in a complaint filed in E.D. Pa. by Health Care Service Corp., a customer-owned health insurer opting out of the end-payor plaintiff class (Health Care Service Corp. v. Actavis Elizabeth, LLC, et al., No. 2:19-cv-5819-CMR). Plaintiff alleges a conspiracy among generic pharmaceutical manufacturers to fix prices and allocate or divide customers or markets for various products (including, with respect to the Company, bethanechol chloride tablets, norethindrone acetate tablets, and ranitidine HCL tablets; and with respect to Impax, digoxin, lidocaine-prilocaine, and metronidazole) in violation of federal and state antitrust and consumer protection laws. Plaintiff seeks, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. The lawsuit likely will be incorporated into MDL No. 2724 for coordinated pretrial proceedings.
On December 16, 2019, a complaint was filed in the United States District Court for the District of Connecticut against Impax and against numerous generic pharmaceutical manufacturers on behalf of assignees of claims from third-party health benefit plans, opting out of the end-payor plaintiff class (MSP Recovery Claims, Series LLC, et al. v. Actavis Elizabeth, LLC, et al., No. 3:19-cv-1972-SRU), and alleging a conspiracy to fix prices and allocate or divide customers or markets for various products (including, with respect to Impax, digoxin and lidocaine-prilocaine) in violation of federal and state antitrust and consumer protection laws. Plaintiffs seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. On January 10, 2020, the case was transferred by the JPML to the E.D. Pa. for coordination and consolidation with MDL No. 2724.
On December 19, 2019, the end-payor plaintiffs filed a new complaint, following on and supplementing their putative class action lawsuit pending in MDL No. 2724. Plaintiffs’ new complaint, which names as defendants the Company, Amneal, Impax, and numerous generic pharmaceutical manufacturers, alleges a conspiracy to fix prices and allocate or divide customers or markets for various products (including, with respect to the Company/Amneal, bethanechol chloride tablets, norethindrone acetate tablets, ranitidine HCL tablets, naproxen sodium tablets, oxycodone/acetaminophen tablets, phenytoin sodium capsules, and warfarin sodium tablets; and with respect to Impax, metronidazole, amphetamine salts tablets, dextroamphetamine sulfate ER capsules, cyproheptadine HCL tablets, methylphenidate tablets, and pilocarpine HCL tablets) in violation of federal and state antitrust and consumer protection laws. Plaintiffs continue to seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution.
On December 20, 2019, the indirect-reseller plaintiffs filed a new complaint naming the Company, following on and supplementing their putative class action lawsuit pending in MDL No. 2724. The new complaint is brought on behalf of both independent pharmacies and hospitals, and asserts antitrust claims against the Company and other generic pharmaceutical manufacturers (as well as distributors of generic pharmaceuticals, including AmerisourceBergen Corp., Cardinal Health Inc., and McKesson Corporation) arising from the facts alleged in the above-referenced State Attorneys General lawsuit. Plaintiffs continue to seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution.
On December 27, 2019, the Company and Impax were named in a complaint filed in the United States District Court for the Northern District of California by Molina Healthcare, Inc., a publicly traded healthcare management organization opting out of the end-payor plaintiff class (Molina Healthcare, Inc. v. Actavis Elizabeth, LLC, et al., No. 3:19-cv-8438). Plaintiff alleges a conspiracy among generic pharmaceutical manufacturers to fix prices and allocate or divide customers or markets for various products (including, with respect to the Company, bethanechol chloride tablets, norethindrone acetate tablets, and ranitidine HCL tablets; and with respect to Impax, digoxin, lidocaine-prilocaine, and metronidazole) in violation of federal and state antitrust and consumer protection laws. Plaintiff seeks, among other things, unspecified monetary damages and equitable relief,
including disgorgement and restitution. On February 5, 2020, the case was transferred by the JPML, to the E.D. Pa. for coordination and consolidation with MDL No. 2724.
On February 7, 2020, the direct purchaser plaintiffs filed a new complaint, following on and supplementing their putative class action lawsuit pending in MDL No. 2724. Plaintiffs’ new complaint, which names as defendants the Company, Amneal, Impax, and numerous generic pharmaceutical manufacturers, alleges a conspiracy to fix prices and allocate or divide customers or markets for various products (including, with respect to the Company/Amneal, bethanechol chloride tablets, ranitidine HCL tablets, naproxen sodium tablets, oxycodone/acetaminophen tablets, hydrocodone/acetaminophen tablets, phenytoin sodium capsules, and warfarin sodium tablets; and with respect to Impax, amphetamine salts tablets, dextroamphetamine sulfate ER capsules, methylphenidate tablets, and pilocarpine HCL tablets) in violation of federal and state antitrust and consumer protection laws. Plaintiffs continue to seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution.
On March 2, 2020, the Company, Amneal, and Amneal Pharmaceuticals of NY, LLC, were named in a complaint filed in the United States District Court for the Southern District of Texas by Harris County, Texas, which is the primary county for the Houston Metropolitan Area (Harris County, Texas v. Teva Pharmaceuticals USA, Inc., et al., No. 4:20-cv-733). Plaintiff alleges a conspiracy among generic pharmaceutical manufacturers to fix prices and allocate or divide customers or markets for various products in violation of federal and state antitrust and consumer protection laws; specifically, plaintiff alleges that it has paid approximately $3.86 million since 2013 for products attributable to Amneal entities. On March 30, 2020, the JPML issued a conditional transfer order tagging the case for transfer to the E.D. Pa. for coordination and consolidation with MDL No. 2724.
On June 9, 2020, the Company and Impax were named in a complaint filed in E.D. Pa. by Cigna Corp., the parent company of businesses that operate pharmacies (including Express Scripts Holding Company), as well as of health insurance plans and prescription drug plans (Cigna Corp. v. Actavis Holdco US, Inc., et al., No. 2:20-cv-02711). Plaintiff alleges a conspiracy among generic pharmaceutical manufacturers to fix prices and allocate or divide customers or markets for various products (including, with respect to the Company, bethanechol chloride tablets, norethindrone acetate tablets, ranitidine HCL tablets, and warfarin sodium tablets; and with respect to Impax, digoxin, lidocaine-prilocaine, and metronidazole) in violation of federal and state antitrust and consumer protection laws. Plaintiff seeks, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. The lawsuit likely will be incorporated into MDL No. 2724 for coordinated pretrial proceedings.
On June 10, 2020, the State Attorneys General filed in the United States District Court for the District of Connecticut a new complaint following on and supplementing their lawsuit pending in MDL No. 2724 against numerous generic pharmaceutical manufacturers, as well as certain of their current or former sales and marketing executives, regarding an alleged conspiracy to fix prices and allocate or divide customers or markets for various drug products (chiefly topical drugs), including, with respect to the Company, phenytoin sodium ER capsules, in violation of federal 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 July 20, 2020, the JPML transferred the lawsuit to the E.D. Pa. for coordination and consolidation with MDL No. 2724.
Fact and document discovery in MDL No. 2724 are proceeding. On December 26, 2019, the MDL court entered a case management order extending by stipulation certain pretrial discovery deadlines, including leaving open-ended the date by which, after consultation with MDL court's appointed Special Master, the parties are to agree upon bellwether claims or cases for, inter alia, class certification and/or trials. On February 20, 2020, the Special Master issued a Report & Recommendation and Proposed Order providing for the establishment of two parallel bellwether trial tracks; Track One would involve a jury trial of the overarching conspiracy claims presented in the State Attorneys General’s May 10, 2019 complaint (in which the Company and Amneal are defendants), and Track Two would consist of trials on three different individual drug conspiracy complaints (none of which involve the Company or any Amneal entities). On July 13, 2020, the MDL court entered orders adopting the Special Master’s Report & Recommendation, and requiring the parties within 30 days either to agree upon a schedule or submit competing schedules for the discovery, motions, and other proceedings to bring the two Tracks to trial.
On June 3, 2020, the Company and Impax were named in a proposed class action complaint filed in the Federal Court of Canada in Toronto, Ontario against numerous generic pharmaceutical manufacturers on behalf of a putative class of individuals who have purchased generic drugs in the private sector from 2012 to present (Kathryn Eaton v. Teva Canada Limited, et al., No. T-607-20). Plaintiff alleges a conspiracy in Canada among generic pharmaceutical manufacturers to fix prices and allocate or divide customers or markets for various products (including, with respect to the Company, bethanechol chloride tablets, norethindrone acetate tablets, ranitidine HCL tablets, and warfarin sodium tablets; and with respect to Impax, digoxin and lidocaine-prilocaine) in violation of Canada’s Competition Act. Plaintiff seeks, among other things, $2.75 billion in monetary damages or compensation, pre- and post-judgment interest, and costs.
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.
Xyrem® (sodium oxybate) Antitrust Litigation
Amneal has been named as a defendant, along with Jazz Pharmaceuticals, Inc. (“Jazz”) and numerous other manufacturers of generic versions of Jazz’s Xyrem® (sodium oxybate) product, in several putative class action lawsuits filed in the United States District Court for the Northern District of California on behalf of a regional health plan primarily providing prescription drug coverage for New York residents (New York State Teamsters Council Health and Hospital Fund v. Jazz Pharmaceuticals, Inc., et al., No. 5:20-cv-04056 (filed June 18, 2020)), and two national health plans providing coverage for federal employees and retirees (Government Employees Health Association, Inc. v. Jazz Pharmaceuticals, Inc., et al., No. 3:20-cv-04671 (filed July 13, 2020) and Blue Cross and Blue Shield Association v. Jazz Pharmaceuticals, Inc., et al., No. 4:20-cv-04667 (filed July 13, 2020)), alleging that the generic manufacturers (including Amneal) entered into anticompetitive agreements with Jazz in connection with settling patent litigation related to Xyrem® (sodium oxybate), in violation of state and federal antitrust and competition laws. In addition to class certification, plaintiffs seek, among other things, unspecified monetary damages (including treble damages and civil penalties), as well as equitable relief, including disgorgement and restitution.
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.
Prescription Opioid Litigation
The Company and certain of its affiliates have been named as defendants 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 and 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 intends to continue to vigorously defend these cases. In light of 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 a complaint in Missouri state court naming Amneal Pharmaceuticals of New York LLC, Impax, five5 other pharmaceutical company defendants, and three3 healthcare provider defendants. Plaintiff alleges that use of defendants’ opioid medications caused the death of her son, Nathan Hughes. The complaint 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 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 sixty60 counties and a dozen cities, filed a 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. 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. The complaint does not include any specific damage amounts. Gemini 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 a complaint in the United States District Court for the Southern District of Alabama against Amneal, Amneal Pharmaceuticals of New York, LLC, Impax, and thirty-fiveNaN 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. The complaint seeks compensatory and punitive damages, but plaintiff’s complaint does not include any allegation of specific damage amounts. 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 a complaint in Washington state court against Amneal Pharmaceuticals of New York, LLC, and four 4 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. On July 12, 2018, Amneal and other defendants removed the case to the United States District Court for the Eastern District of Washington. On August 17, 2018, the case was transferred to the MDL. All activity in the case is stayed by order of the 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 eleven11 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.
On July 9, 2018, the Muscogee (Creek) Nation filed a First Amended Complaint in its case pending in the MDL against the Company and 55 other defendants consisting of pharmaceutical companies, wholesalers, distributors, and pharmacies. 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. On August 31, 2018, the Company moved to dismiss the First Amended Complaint, and also joined in separate motions to dismiss filed by 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 Lanham 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 claims. On April 12, 2019, the magistrate judge overruled the Company’s objection to adding Amneal and Amneal Pharmaceuticals of New York, LLC, but dismissed the Company. Amneal and Amneal Pharmaceuticals of New York, LLC, filed an objection to the 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,August 16, 2019, Amneal and Amneal Pharmaceuticals of New York, LLC filed their respective answers. Further activity in the case is stayed by order of the MDL court.
On July 18, 2018, the County of Webb, Texas requested waivers of service from Amneal and Amneal Pharmaceuticals of New York, LLC, in its case pending in the MDL. Plaintiff’s Amended Complaint, filed against Amneal and forty-one other defendants consisting of pharmaceutical companies, wholesalers, distributors, and pharmacy benefit managers, 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. Amneal and Amneal Pharmaceuticals of 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-removeremoved the case to federal court;court, but the federal court re-remanded the case to state court. Plaintiff initially amended its complaint in state court and attempted to name Amneal as a defendant; however, plaintiff did not serve that complaint on Amneal. On February 7, 2020, plaintiff filed a second amended complaint that did not name Amneal as a defendant. Accordingly, Amneal is attempting to amend its complaint.
not presently a defendant in this lawsuit.
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 United States District Court for 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 beenwere removed and are into federal court though plaintiffs have filed motions to remand and are opposing transfer of those casessubsequently transferred to the MDL court.MDL. On April 24, 2019, the Court in Martinsville Virginia,Circuit Court 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. The removed cases were transferred to the MDL, but this case remains stayed in state court.
In 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 3, 2018, Appalachian Regional Healthcare, Inc., filed a complaint 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 the defendants. The case has now been removed to federal court, and responsive pleading deadlines are suspended pending remand or transfer toall activity in these cases is stayed by order of the MDL.
MDL court.
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 “epidemic of opioid epidemic.abuse”. 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“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 opioidan alleged “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,January 7, 2020, Karen Davidson, individually and as administratrix of the estate of John C. Davidson, filed a complaint in the Philadelphia County Common Pleas Court, stayednaming the Company and Amneal, among other parties, as defendants. All three cases pending transferhave been transferred to Delaware County, Pennsylvania, where numerous other opioid cases currently are pending. The transfer is not yet complete and, untilcases are now stayed by order of the transfer is complete, all matters are stayed.
Delaware County court.
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 junctiveinjunctive 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 motionsOn October 15, 2019, the court entered an order dismissing the plaintiff’s negligence per se claims, but declining to dismiss remain pending.
the Amneal entities for lack of personal jurisdiction. The Amneal entities timely filed answers and moved for reconsideration of their jurisdictional motion on January 21, 2020. On March 27, 2020, the court held oral argument and denied the motion for reconsideration from the bench. The court entered an order denying the motion for reconsideration, without explanation, on April 6, 2020. The parties are now engaged in discovery.
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 Virginia, but all three since have been remanded back to Virginia state court. Responsive pleadings areThe Company was nonsuited (dismissed) from the Arlington case. Amended Complaints were
filed in the Dinwiddie and Mecklenburg cases at the end of November 2019, but they did not yet due.include the Amneal entities as defendants.
On June 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 Joint and Third Amended Complaint naming approximately 20 additional defendants, including the Company, Amneal, Amneal Pharmaceuticals of New York, LLC, 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 opioid 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 arehad been 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 MDL court's appointed Special Masters to prepare case management deadlines. On May 12, 2019, the Special Master entered an Order acknowledging that the press of issues surrounding ongoing litigation of the Track One cases had prevented both the parties and the MDL court from acting on the directives of the prior Track Two Order, and setting deadlines of June 10, 2019 for plaintiffs to amend their complaints, and June 14, 2019 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,On December 16, 2019, the MDL court granted plaintiffs’ motion to date, none ofsever all defendants from the existing parties to the cases have filed or submitted any case management proposals to the Special Master. Accordingly, the case management aspect of these Track Two cases remains pending.
except certain distributor defendants (AmerisourceBergen Drug Corporation, Cardinal Health, Inc., and McKesson Corporation). On January 3, 2020, the MDL court ordered that plaintiffs cannot take discovery of any severed Track Two defendant. On January 14, 2020, the Track Two cases were remanded to the United States District Court for the Southern District of West Virginia, without the severed defendants. To the extent Amneal entities were defendants in the Track Two cases but have been severed, the cases are now stayed by order of the MDL court.
In October 2019, the Company, Amneal, Amneal Pharmaceuticals of New York, LLC, and Impax were served with a putative class action complaint, which also names as defendants numerous manufacturers of opioid products (and certain corporate officers thereof), filed in the United States District Court for the Middle District of Tennessee by several individuals who allegedly purchased prescription opioid medication in cash and/or with an insurance co-payment (Rhodes, et al., v. Rhodes Technologies, Inc., et al., No. 3:19-cv-885). Plaintiffs claim that they would not have purchased these prescription opioid products had defendants not allegedly misrepresented the products’ “addiction propensities,” and thereby suffered economic loss. Plaintiffs purport to represent a nationwide class of all individuals who directly or indirectly purchased prescription opioid medication from January 2008 to the present in 31 different states, allege causes of action for violations of those states’ antitrust laws and consumer protection statutes (and unjust enrichment), and seek, in addition to class certification, unspecified monetary damages (including actual, statutory, and punitive or treble damages) and equitable relief, including declaratory judgment and restitution. On February 13, 2020, this case was transferred to the MDL. All activity in the case is stayed by order of the MDL court.
There are currently 26 cases brought by various West Virginia and Kentucky hospitals that have been consolidated in the state-court West Virginia Opioid Litigation Multi-Litigation Panel (the “MLP”). On November 20, 2019, the manufacturer defendants collectively filed a motion to dismiss, in which Amneal joined, and the Company filed its own individual motion to dismiss. The MLP has denied the manufacturer defendants’ motion to dismiss, but has not yet ruled on the Company’s separate motion. There also are 5 additional cases brought by West Virginia municipalities against the Company, Amneal, Amneal Pharmaceuticals of New York, LLC, and Impax which have been transferred to the MLP. The Amneal entities filed motions to dismiss in those cases on June 12, 2020. The MLP also ordered an early mediation on February 26 and 27, 2020, during which plaintiffs did not make a settlement demand. The MLP has ordered a public nuisance bench trial to occur beginning on March 22, 2021. Defendants have filed a motion for reconsideration of the order denying a jury trial.
Including the above-referenced cases, in connection with the further extended MDL pleading amendment deadline of March 16, 2019, the Company and certain of its affiliates recently have been named in approximately 600 additional complaints filed929 cases now pending in the MDL court andor in various state and territorial courts, including cases brought by:
•Political subdivision / municipal entity plaintiffs from the states of Alabama, Arkansas, Arizona, California, Colorado, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, 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, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wisconsin;Wyoming;
•Third-party payor plaintiffs;
•Individual plaintiffs;
•Indian tribe plaintiffs; and
•Hospital / healthcare provider plaintiffs.
All activity in these cases is stayed by order of the MDL court. Requests for waivers for service of process have been transmitted by plaintiffs’ counsel to defense counsel in relation to the Company and certain of its affiliates in certainmost of these cases. NeitherIn each case where service on the Company nor any ofor its affiliates has been served in these cases.perfected, and the case is not stayed, responsive pleadings or pre-answer motions have been filed.
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.
Securities Class Action
Actions
On April 17, 2017, Lead Plaintifflead 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-5.10b-5 (Fleming v. Impax Laboratories Inc., et al., No. 4:16-cv-6557-HSG). 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’plaintiff’s claims without prejudice and with leave to amend theirthe complaint. Plaintiff filed a second amended complaint October 26, 2018. Impax filed a motion to dismiss the second amended complaint on December 6, 2018; plaintiffs’ opposition thereto was filed on January 17, 2019; and 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, plaintiff 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 had been stayed pending the securities class action referenced above. On May 14, 2019, plaintiff stipulated to the voluntarily dismissal of his claims, and on May 17,August 12, 2019, the Court entered an Orderorder granting Impax’s motion, dismissing without prejudice the entire action.
Teva v. Impax Laboratories, LLC.
plaintiff’s second amended complaint with prejudice. On February 15, 2017, plaintiffs Teva Pharmaceuticals USA, Inc. and Teva Pharmaceuticals Curacao N.V. ("Teva")September 5, 2019, plaintiff filed a Praecipe to Issue Writnotice of Summons and Writ of Summons inappeal from both dismissal orders with the Philadelphia CountyUnited States 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 (and therefore that Impax is liable to TevaAppeals for the amounts it paid to settle those litigations). ImpaxNinth Circuit. Plaintiff’s opening brief was filed a Motion to Disqualify Teva’s counsel related to the matter, and on August 23, 2017, the trial court denied Impax's motion. Following the trial 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 application for reargument with the Superior Court, which was deniedNinth Circuit 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 motion for judgment on the pleadings. Impax filed its answer and14, 2020, Impax’s answering 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 noticed15, 2020, and plaintiff filed 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
reply brief on August 4, 2020.
On August 3, 2017, plaintiff Emielou WilliamsDecember 18, 2019, Cambridge Retirement System filed a class action complaint in the Superior Court for the State of California in theNew Jersey, Somerset County, of Alameda on behalf of herselfitself and others similarly situated against the Company and fourteen current or former officers alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (Cambridge Retirement System v. Amneal Pharmaceuticals, Inc., et al., No. SOM-L-1701-19). Plaintiff principally alleges that the amended registration statement and prospectus issued on May 7, 2018 in connection with the Amneal/Impax alleging violation of California Businessbusiness combination was materially false and/or misleading, insofar as it purportedly failed to disclose that Amneal was an active participant in an alleged antitrust conspiracy with several other pharmaceutical manufacturers to fix generic drug prices, and Professions Code section 17200 by violating various California wage and hour laws, and seeking,that this secret collusion improperly bolstered Amneal’s financial results reflected in the registration statement. Plaintiff seeks, among other things, declaratory judgment, restitutioncertification of allegedly unpaid wages,a class 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, it struck all of plaintiff’s class allegations.unspecified compensatory and/or recessionary damages. On March 13, 2018, plaintiff filed her First Amended Complaint once again including31, 2020, the same class allegations. The Company filed a Demurrermotion to dismiss the complaint. Oral argument on the motion to dismiss was held telephonically on July 14, 2020 and, Motion to Strike Class Allegations on April 12, 2018. On September 20, 2018,July 15, 2020, the Court again struck plaintiff’s class allegations; plaintiffcourt entered an order denying the motion.
The Company believes it has appealed this most recent ordersubstantial meritorious defenses to the California State Court of Appeal. Plaintiff filed her opening appellate brief on February 22, 2019; Impax’s brief in response
was filed on April 18, 2019; plaintiff filed her reply brief on May 7, 2019;claims asserted with respect to the litigation. However, any adverse outcome could negatively affect the Company and Impax filedcould have a surreply on May 22, 2019. The appeal has now been fully submittedmaterial adverse effect on the briefs.
Company's results of operations, cash flows and/or overall financial condition.
United States Department of Justice / Drug Enforcement Administration Subpoenas
On July 7, 2017, Amneal Pharmaceuticals of New York, LLC received an administrative subpoena issued by the Long Island, NY District Office of the Drug Enforcement Administration (the “DEA”) requesting information related to compliance with certain recordkeeping and reporting requirements pursuant to regulations promulgated by the DEA. The Company is cooperating with this request for information and has provided relevant information responsive to the request. The Company and the U.S. Attorney for the Eastern District of New York (“E.D.N.Y.”) have entered into a tolling agreement (and several amendments thereto) with respect to the investigation. The material provisions of the tolling agreement (as amended) provide that the investigation is ongoing, that the U.S. Attorney will not file a claim against the Company on or before December 19, 2019,November 11, 2020, and requests that the Company agree that the applicable statute(s) of limitations be tolled during the period from January 19, 2018 through December 20, 2019.November 12, 2020. The Company cannot predict at this time whether the U.S. Attorney will file a lawsuit or other claims against the Company with respect to the investigation.
On March 14, 2019, Amneal received a subpoena (the “Subpoena”) from an Assistant U.S. Attorney (“AUSA”) for the Southern District of Florida. The Subpoena requests information and documents generally related to the marketing, sale, and
distribution of oxymorphone. The Company intendshas produced documents and information to cooperate with the AUSA regardingin response to 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 cooperateis cooperating with the AUSA regarding the Subpoena. The Company and the U.S. Attorney for the E.D.N.Y. have entered into a tolling agreement (and several amendments thereto) with respect to the investigation. The material provisions of the tolling agreement (as amended) 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 arguments to the E.D.N.Y. concerning the investigation is extended to November 12, 2019,2020, and that the Company agrees that the applicable statute(s) of limitations are tolled during the period from April 12, 2019 through November 12, 2019.2020. The Company cannot predict at this time whether the U.S. Attorney will file a lawsuit or other claims against the Company with respect to the investigation.
Ranitidine Litigation
On January 27, 2020, the Company and Amneal were named in a putative class action complaint filed in the United States District Court for the Northern District of Illinois by several named plaintiffs on behalf of consumers who purchased Zantac® (ranitidine) and have not been diagnosed with, but “live in constant fear of developing,” cancer, alleging that the defendants, comprising various entities alleged to have manufactured or sold brand-name Zantac® or generic ranitidine, failed to disclose and/or concealed the product’s “dangerous propensities” in respect of the alleged presence in the product of N-Nitrosodimethylamine (or "NDMA") (White, et al., v. GlaxoSmithKline plc, et al., No. 1:19-cv-7773). The complaint purports to state claims for violations of state consumer protection acts, breaches of implied warranties, negligence/gross negligence, and fraudulent concealment (and seeks the certification of corresponding nationwide classes and subclasses). In addition to class certification, plaintiffs seek, among other things, unspecified monetary damages and equitable relief, including the implementation and funding of a medical monitoring program. The complaint is one of hundreds of similar putative class actions and personal injury/product liability lawsuits filed in federal courts nationwide. In November 2019, the JPML established In re Zantac/Ranitidine NDMA Litigation (MDL No. 2924) for coordinated or consolidated pretrial proceedings and, on February 6, 2020, ordered the MDL centralized in the Southern District of Florida. On February 24, 2020 this lawsuit was transferred to and consolidated with MDL No. 2924. On March 2, 2020, plaintiffs voluntarily dismissed their claims without prejudice against the generic ranitidine manufacturers named as defendants (including the Company and Amneal).
On March 6, 2020, plaintiff Kathy McMillian filed a personal injury / products liability complaint in the United States District Court for the Southern District of Alabama against brand and generic ranitidine product manufacturers (including Amneal), as well as Walmart, Inc., alleging that she developed kidney cancer as a result of her use of Zantac®, Equate®, and/or generic ranitidine, and that defendants knew about but failed to warn regarding an alleged “NDMA defect” in those products (McMillian v. Sanofi-Aventis U.S. LLC, et al., No. 1:20-cv-141-N). Plaintiff seeks unspecified amounts of both compensatory and punitive damages, as well as attorneys’ fees and other costs. On March 31, 2020, the case was transferred to and consolidated with MDL No. 2924.
On March 13, 2020, plaintiff Walter Jones, on behalf of decedent Sue Jones, filed an amended complaint naming the Company, Amneal, and Amneal Pharmaceuticals of New York, LLC, in his personal injury / products liability lawsuit against brand and generic ranitidine product manufacturers pending in the United States District Court for the Western District of Tennessee (Jones v. Boehringer Ingelheim Pharmaceuticals, Inc., et al., No. 1:20-cv-2157-JDB-JAY). Plaintiff alleges that his decedent spouse developed liver cancer and died as a result of six years of use with Zantac®, and that defendants knew about but failed to warn regarding an alleged “NDMA defect” in their ranitidine products. Plaintiff seeks unspecified amounts of both compensatory and punitive damages, as well as attorneys’ fees and other costs. On March 31, 2020, the case was transferred to and consolidated with MDL No. 2924.
By order of the MDL court, on June 22, 2020, consolidated groups of personal injury plaintiffs, economic loss/medical monitoring class action plaintiffs, and third-party payor plaintiffs (comprising NECA-IBEW Welfare Trust Fund, Plumbers & Pipefitters Local Union 630, and Indiana Laborers Welfare Fund) each filed master complaints (superseding and replacing all previously filed individual complaints), in which the Company, Amneal, and Amneal Pharmaceuticals of New York, LLC are named as defendants, along with all brand and generic manufacturers, distributors, retailers, and repackagers of ranitidine-containing products. Responsive pleadings to these master complaints are due to be filed August 23, 2020.
On June 18, 2020, Amneal was named in a lawsuit filed in New Mexico state court on behalf of its Attorney General (State of New Mexico, ex rel. Hector H. Balderas v. Glaxosmithkline PLC, et al., No. D-101-CV-2020-01289), alleging claims of public nuisance, negligence, and violations of state consumer protection laws against brand/generic manufacturers and store-brand
distributors of Zantac®/ranitidine. Plaintiff seeks unspecified amounts of both compensatory and punitive damages, as well as civil penalties and injunctive relief (including restitution, disgorgement, and the funding of a medical monitoring program).
14.The Company believes it has substantial meritorious defenses to the claims asserted with respect to these lawsuits. 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.
Metformin Litigation
The Company, Amneal, and AvKARE, Inc. have been named as defendants, along with numerous other manufacturers, retail pharmacies, and wholesalers, in several putative class action lawsuits pending in the United States District Court for the District of New Jersey (“D.N.J.”), filed on behalf of consumers who purchased and third-party payors who paid or made reimbursements for prescription generic metformin products manufactured by or for defendants, alleging that defendants made and sold to putative class members metformin products that were “adulterated” or “contaminat[ed]” with NDMA and thus “worthless,” and therefore that plaintiffs suffered economic losses in connection with their purchases or reimbursements.
On June 3, 2020, the D.N.J. consolidated the lawsuits, as In Re Metformin Marketing and Sales Practices Litigation (No. 2:20-cv-02324-MCA-MAH). On July 6, 2020, plaintiffs filed a consolidated economic loss class action complaint, in which they seek, in addition to class certification, among other things, unspecified compensatory and punitive damages, statutory penalties, and equitable relief. Responsive pleadings are not yet due.
The Company believes it has substantial meritorious defenses to the claims asserted with respect to this matter. 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.
18. Segment Information
TheAs a result of the Acquisitions, the Company has twoadded a third reportable segment, AvKARE, to its existing 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 therapeutic categories. The Company'sGenerics’ retail and institutional portfolio contains approximately 200250 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 products for healthcare providers.
Specialty 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.
AvKARE provides pharmaceuticals, medical and surgical products and services primarily to governmental agencies, primarily focused on serving the Department of Defense and the Department of Veterans Affairs. AvKARE is also a wholesale distributor of bottle and unit dose pharmaceuticals under the registered names of AvKARE and AvPAK, as well as medical and surgical products. AvKARE is also a packager and wholesale distributor of pharmaceuticals and vitamins to its retail and institutional customers who are located throughout the United States focused primarily on offering 340b-qualified entities products to provide consistency in care and pricing.
The Company’s chief operating decision maker evaluates the financial performance of the Company’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 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 selling expenses, research and development expenses, and other operating expenses to the extent specifically identified by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | Generics (1)(2) | | Specialty (2) | | AvKARE (1) | | Corporate and Other | | Total Company |
| Net revenue | | $ | 306,559 | | | $ | 94,256 | | | $ | 63,847 | | | $ | — | | | $ | 464,662 | |
| Cost of goods sold | | 218,909 | | | 50,229 | | | 50,528 | | | — | | | 319,666 | |
| Cost of goods sold impairment charges | | 759 | | | — | | | — | | | — | | | 759 | |
| Gross profit | | 86,891 | | | 44,027 | | | 13,319 | | | — | | | 144,237 | |
| Selling, general and administrative | | 12,802 | | | 16,870 | | | 15,647 | | | 35,625 | | | 80,944 | |
| Research and development | | 40,316 | | | 5,256 | | | — | | | — | | | 45,572 | |
| | | | | | | | | | |
| Intellectual property legal development expenses | | 3,550 | | | — | | | — | | | — | | | 3,550 | |
| Charges (gains) related to legal matters, net | | 3,050 | | | (1,750) | | | — | | | — | | | 1,300 | |
| Other operating expenses | | 657 | | | 82 | | | — | | | 1,381 | | | 2,120 | |
| Operating income (loss) | | $ | 26,516 | | | $ | 23,569 | | | $ | (2,328) | | | $ | (37,006) | | | $ | 10,751 | |
| | | Three Months Ended June 30, 2019 | | Generics | | Specialty | | Corporate
and Other | | Total
Company | |
| Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 | | Generics (1)(2) | | Specialty (2) | | AvKARE (1) | | Corporate
and Other | | Total
Company |
| Net revenue | | $ | 335,064 |
| | $ | 69,578 |
| | $ | — |
| | $ | 404,642 |
| Net revenue | | $ | 659,145 | | | $ | 182,233 | | | $ | 121,817 | | | $ | — | | | $ | 963,195 | |
| Cost of goods sold | | 263,423 |
| | 32,958 |
| | — |
| | 296,381 |
| Cost of goods sold | | 437,774 | | | 98,047 | | | 97,423 | | | — | | | 633,244 | |
| Cost of goods sold impairment charges | | 3,012 |
| | — |
| | — |
| | 3,012 |
| Cost of goods sold impairment charges | | 2,215 | | | — | | | — | | | — | | | 2,215 | |
| Gross profit | | 68,629 |
| | 36,620 |
| | — |
| | 105,249 |
| Gross profit | | 219,156 | | | 84,186 | | | 24,394 | | | — | | | 327,736 | |
| Selling, general and administrative | | 14,379 |
| | 16,150 |
| | 36,752 |
| | 67,281 |
| Selling, general and administrative | | 29,425 | | | 37,812 | | | 26,435 | | | 65,248 | | | 158,920 | |
| Research and development | | 45,448 |
| | 2,568 |
| | — |
| | 48,016 |
| Research and development | | 69,350 | | | 12,601 | | | — | | | — | | | 81,951 | |
| In-process research and development impairment charges | | In-process research and development impairment charges | | 960 | | | — | | | — | | | — | | | 960 | |
| Intellectual property legal development expenses | | 2,511 |
| | — |
| | — |
| | 2,511 |
| Intellectual property legal development expenses | | 4,815 | | | 5 | | | — | | | — | | | 4,820 | |
| Acquisition, transaction-related and integration expenses | | 987 |
| | 1,366 |
| | 1,166 |
| | 3,519 |
| |
| Restructuring and other charges | | 418 |
| | — |
| | 2,417 |
| | 2,835 |
| |
| Charges related to legal matters, net | | Charges related to legal matters, net | | 5,550 | | | 250 | | | — | | | — | | | 5,800 | |
| Other operating expenses | | Other operating expenses | | 703 | | | 82 | | | — | | | 5,958 | | | 6,743 | |
| Operating income (loss) | | $ | 4,886 |
| | $ | 16,536 |
| | $ | (40,335 | ) | | $ | (18,913 | ) | Operating income (loss) | | $ | 108,353 | | | $ | 33,436 | | | $ | (2,041) | | | $ | (71,206) | | | $ | 68,542 | |
(1)Operating results for the sale of Amneal products by AvKARE are included in Generics.
(2)During the three months ended September 30, 2019, operating results for Oxymorphone were reclassified from Generics to Specialty, where it is sold as a non-promoted product. Prior period results have not been restated to reflect the reclassification.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | 14,379 | | | 16,150 | | | 36,752 | | | 67,281 | |
| Research and development | | 45,448 | | | 2,568 | | | — | | | 48,016 | |
| | | | | | | | |
| 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, 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) | |
|
| | | | | | | | | | | | | | | | |
| 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 | ) |
15.19. 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 and/ or expense in the respective reporting periods are described below.
Financing Lease/Financing ObligationLease - Related Party
The Company has a financing lease for two2 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 11.12. Leases. in the Company’s 2019 Annual Report on Form 10-K.
Lease costs and interest expense related to this lease were approximately $2 million and $3 million for the three and six months ended June 30, 2020, respectively. Lease costs and interest expense related to this lease were each approximately $2 million and $4 million for the three and six months ended June 30, 2019, respectively.
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 two2 separate triple-net lease agreements that expire in 2027 and 2031, respectively, at an annual rental cost of approximately $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, 20192020 and 20182019 was $0.5 million. Rent expense paid to the related party for both of the six months ended June 30, 20192020 and 20182019 was $1 million.
Asana Biosciences, LLC
Asana Biosciences, LLC (“Asana”) is an early stage drug discovery and research and development 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 this arrangement for the three and six months ended June 30, 2019 was $1 million and $1.4$1 million, respectively (none(NaN in 2018)2020). At June 30,December 31, 2019 receivables of approximately $1 million were due from the related party for research and development related services.
Industrial Real Estate Holdings NY, LLC
services (NaN at June 30, 2020).
Industrial Real Estate Holdings NY, LLC ("IRE")and Sutaria Family Realty, LLC
Industrial Real Estate Holdings NY, LLC is an independent real estate management entity, which among other activities, iswas the landlordsub-landlord of Amneal’s leased manufacturing facility located at 75 Adams Avenue, Hauppauge, New York. TheIn May 2020, the lease expires inwas
assigned to the Company with the consent of the landlord, Sutaria Family Realty, LLC., which is also a related party. Concurrently with the assignment of the lease, the Company exercised a renewal option for $0.1 million to extend the lease by 5 years until March 2021.31, 2026. Monthly rent payments are $0.1 million and increase by 3% annually. Rent expense paid to the related partyparties for both the three months ended June 30, 20192020 and 20182019 was $0.3 million and $0.2 million, respectively.million. Rent expense paid forto the related partyparties for both the six months ended June 30, 20192020 and 20182019 was $0.6 million and $0.5 million, respectively.
million.
Kashiv BioSciences, LLC
Kashiv BioSciences, LLC ("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, AmnealThe parties entered into a sublease agreement with Kashivlease for a portionparking spaces in Piscataway, NJ. The total amount of one of its research and development facilities. The sublease automatically renews annually if not terminated and has an annual base rent of $2 million. On January 15, 2018, Amneal and Kashiv entered into an Assignment and Assumption of Lease Agreement. The lease was assignedexpense paid to Kashiv and Amneal was relieved of all obligations. Rental income from the related party subleasethis agreement for both the three and six months ended June 30, 20192020 was less than $0.1 million (none(NaN in 2018)2019). Rental income from the related party sublease for the six months ending June 30, 2019 and 2018 was less than $0.1 million and $0.4 million, 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 six months ended June 30, 2020 were $0.2 million (NaN for the three months ended June 30, 2020). The total reimbursable expenses associated with these arrangements for the three and six month periodmonths ended June 30, 2019 waswere $2 million and $3 million, respectively (none in 2018).respectively. 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 and six months ended June 30, 2019 and 20182020 was $0.7$2 million and $2$5 million, respectively. The total profit share paid to Kashiv for the three and six months ended June 30, 2019 was $0.7 million and 2018 was $1 million, and $2 million, respectively. At June 30, 2019 and December 31, 2018 payables of approximately $3 million and $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 were 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 amortized on a straight-line basis over the remaining life of the Estradiol intangible asset. The first earn out was paid in July 2018 and the second earn out was paid in 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 $8 million, an amount equal to the legal costs incurred by Amneal related to the defense of the ANDA. 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 IPintellectual property 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. AtFor the three and six months ended June 30, 2019,2020, the Company recorded a $2 million payable to theresearch and development expense, which was accrued in related party payable - short term as of June 30, 2020.
In November 2019, Amneal and Kashiv entered into a licensing agreement for the costdevelopment and commercialization of Kashiv’s orphan drug K127 (Pyridostigmine) for the treatment of Myasthenia Gravis. Under the terms of the agreement, Kashiv will be responsible for all development and clinical work required to secure Food and Drug Administration approval and Amneal will be responsible for filing the NDA and commercializing the product. The Company made an upfront payment of approximately $2 million to Kashiv in December 2019, which was recognizedrecorded in research and development, and Kashiv is eligible to receive development and regulatory milestones totaling approximately $17 million. Kashiv is also eligible to receive tiered royalties from the low double-digits to mid-teens on net sales of K127. For the six months ended June 30, 2020, the Company recorded $2 million (NaN in the three months ended June 30, 2020 or three and six months ended June 30, 2019), as R&Dresearch and development expense to compensate Kashiv for costs incurred to develop the product.
Adello Biologics, LLC
Adello is an independent clinical stage company engaged inOn February 20, 2020, the development of biosimilar pharmaceutical products. AmnealCompany and Adello are parties toKashiv entered into a master services agreement pursuant to which, from time to time, Amnealcovering certain services that Kashiv provides human resourcesthe Company for commercial product support for EluRyng 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 income received from Adello from these agreements was less than $0.1 million for bothother products, including Ranitidine and Nitrofurantoin. For the three and six months ended June 30, 2019. The total amount2020, the Company recorded $2 million and $3 million, respectively, (NaN in 2019), as cost of net expense paidgoods sold to Adello from these agreementscompensate Kashiv for both the three months and six ended andservices performed.
At June 30, 2018 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. Pursuant2020 and December 31, 2019 payables of approximately $4 million and $6 million, respectively, were due 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 $11 millionrelated party for the up-front payment plus interest. This amountaforementioned transactions. Additionally, at both June 30, 2020 and December 31, 2019 a receivable of $0.1 million was paid in January 2018.
due from the related party.
On October 1, 2017, Amneal and AdelloKashiv, entered into a license and commercialization agreement pursuantagreement. Kashiv granted Amneal an exclusive license, under its New Drug Application, to which the parties have agreed to cooperate with respect to certain development activities in connection withdistribute and sell two biologic pharmaceutical products. In addition, under the agreement, Adello has appointed Amneal as its exclusive marketing partner for suchbio-similar products in the United States. U.S. Kashiv 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 recorded withinexpensed in research and development expenses.development. The agreement also provides for potential future milestone payments to Adello.Kashiv 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 October 2017,addition, the agreement provides for Amneal purchasedto pay a building from Adelloprofit share equal to 50% of net profits, after considering manufacturing and marketing costs. The research and development expenses under this agreement for the six months ended June 30, 2020 and 2019 were immaterial.
In May 2020, Amneal and Kashiv entered into a product development agreement for the development and commercialization of Posaconazole. Under the agreement, the intellectual property 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.
In connection with the agreement, Amneal paid an upfront amount of $0.3 million in IrelandMay 2020 for execution of the agreement which was expensed in research and development. The agreement also provides for potential future milestone payments to further support its inhalation dosage form. Amneal issued a promissory noteKashiv of (i) up to $0.8 million relating to development milestones, (ii) up to $0.3 million relating to regulatory approval, and (iii) up to $1 million for 13 million euros ($15 million based on exchange rate asthe achievement of December 31, 2017)cumulative net sales. The milestones are subject to certain performance conditions which accrues interest at a rate of 2% per annum, due onmay or before July 1, 2019. The promissory note was paid in full in the second quarter of 2018. Refer to Note 5. Alliancemay not be achieved, including FDA filing, FDA approval and Collaboration for further information on collaboration agreements with Adello.
commercial sales volume objectives.
PharmaSophia, LLC
PharmaSophia, LLC ("PharmaSophia") is a joint venture formed by Nava Pharma, LLC ("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 the three months ended June 30, 2020 and 2019 and 2018 was $0.3$0.2 million and $0.1$0.3 million, respectively. The total amount of income earned from these agreements for the six months ended June 30, 2020 and 2019 and 2018 was $0.6$0.4 million and $0.2$0.6 million, respectively. At both June 30, 20192020 and December 31, 20182019 receivables of $0.7 million and $0.1 million, respectively, were due from the related party.
Gemini Laboratories, LLC
Prior Additionally, as of December 31, 2019 a payable of less than $0.1 million was due to the Company's acquisition of Geminirelated party, which was settled in May 2018, Amneal and Gemini were parties to various agreements. Total gross profit earned from the sale of inventory to Gemini for the three and six months ended June 30, 2018 was nil and $0.1 million. The total profit share paid by Gemini for the three and six months ended June 30, 2018 was $0.8 million and $5 million, respectively.February 2020.
Fosun International Limited
Fosun International Limited (“Fosun”) is a Chinese international conglomerate and investment company that is a significant 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 in China 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, 2020 and 2019, the Company has not recognizeddid 0t recognize any revenue from this agreement.
Apace KY, LLC d/b/a Apace Packaging LLC
Apace KY, LLC d/b/a Apace Packaging LLC (“Apace”) provides packaging solutions pursuant to an exclusive packaging agreement. Apace markets its services which include bottling and blistering for the pharmaceutical industry. The total amount of expenses from this arrangement for the three and six months ended June 30, 2020 was $4 million and $6 million, respectively (NaN in 2019). At June 30, 2020, payables of approximately $1 million were due to the related party for packaging services.
Tracy Properties LLC
R&S leases operating facilities, office and warehouse space from Tracy Properties LLC. The total amount of expenses from this arrangement for the three and six months ended June 30, 2020 was $0.1 million and $0.2 million, respectively (NaN in 2019).
AzaTech Pharma LLC
R&S purchases inventory from AzaTech Pharma LLC for resale. The total amount of expenses from this arrangement for the three and six months ended June 30, 2020 was $1 million and $2 million, respectively (NaN in 2019). At June 30, 2020, payables of approximately $0.7 million were due to the related party for inventory purchases.
AvPROP, LLC
AvKARE LLC leases its operating facilities from AvPROP, LLC. Rent expense from this arrangement for the three and six months ended June 30, 2020 was less than $0.1 million and $0.1 million, respectively.
Tarsadia Investments, LLC
Tarsadia Investments, LLC (“Tarsadia”) is a private investment firm that provides financial services and is a significant shareholder of the Company. Tarsadia offers capital and strategic support for companies with substantial growth potential primarily in the healthcare, financial services, real estate, and clean technology sectors. The Company entered into an agreement in which Tarsadia will provide financial consulting services. The services are not expected to have a material impact to the Company’s financial statements.
Avtar Investments, LLC
Avtar Investments, LLC ("Avtar") is a private investment firm. During April 2020, the Company entered into an agreement in which Avtar will provide consulting services. The total amount of consulting expense incurred for the three and six months ended June 30, 2020 was $0.8 million. As of June 30, 2020, $0.8 million is due to Avtar.
Zep Inc.
Zep Inc. ("Zep") is a producer, and distributor of maintenance and cleaning solutions for retail, food & beverage, industrial & institutional, and vehicle care customers. During May 2020, AvKARE entered into an agreement to supply cleaning products to Zep. The amount of revenue recorded for the three and six months ended June 30, 2020 was $0.4 million. As of June 30, 2020, $0.4 million was recorded in related party receivables.
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 19.21. Stockholders' Equity/ Members' Deficit containedEquity and Redeemable Non-Controlling Interests.
Additionally, under the terms of the limited liability company agreement between the Company and the holders of the Rondo Class B Units, Rondo is obligated to make tax distributions to those holders, subject to certain limitations as defined in the Company's 2018 Annual Report on Form 10-K.
Rondo Credit Facility. For further details, refer to Note 21. Stockholders' Equity and Redeemable Non-Controlling Interests.
Notes Payable – Related Party
During December 2018,The sellers of AvKARE, LLC and R&S hold the Company acquiredremaining 34.9% interest in Rondo (“Rondo Class B Units”). Certain holders of the non-controlling interests in oneRondo Class B Units are also holders 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.Sellers Notes and the Short-Term Sellers Note. For additional information, refer to Note 13.Debt.
16.20. Goodwill and Intangible Assets
The changes in goodwill for the six months ended June 30, 20192020 and for the year ended December 31, 20182019 were as follows (in thousands):
| | | | | | | | | | | |
| June 30,
2020 | | December 31,
2019 |
| Balance, beginning of period | $ | 419,504 | | | $ | 426,226 | |
| Impax acquisition adjustment | — | | | (1,255) | |
| Goodwill acquired during the period | 108,790 | | | — | |
| Goodwill divested during the period | — | | | (5,175) | |
| Currency translation | (819) | | | (292) | |
| Balance, end of period | $ | 527,475 | | | $ | 419,504 | |
|
| | | | | | | |
| 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 |
|
As of June 30, 2020, $361 million, $93 million, and $73 million of goodwill was allocated to the Specialty, Generics, and AvKARE segments, respectively. As of December 31, 2019, $361 million and $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 monthsyear ended June 30,December 31, 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, 2018,2019, the adjustment to goodwill acquired was associated with the Impax and Gemini acquisitions.Combination. Refer to Note 3. Acquisitions and Divestitures for additional information about the acquisition of ImpaxAcquisitions and the divestituredivestitures of the Company's operations in the United Kingdom and Germany.
Intangible assets at June 30, 20192020 and December 31, 20182019 are comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | | | December 31, 2019 | | | | |
| Weighted-Average
Amortization Period
(in years) | | Cost | | Accumulated
Amortization | | Net | | Cost | | Accumulated
Amortization | | Net |
| Amortizing intangible assets: | | | | | | | | | | | | | |
| Product rights | 9.5 | | $ | 1,189,785 | | | $ | (265,284) | | | $ | 924,501 | | | $ | 1,197,535 | | | $ | (198,857) | | | $ | 998,678 | |
| Other intangible assets | 6.0 | | 133,800 | | | (15,590) | | | 118,210 | | | 3,000 | | | (1,000) | | | 2,000 | |
| Subtotal | | | $ | 1,323,585 | | | $ | (280,874) | | | $ | 1,042,711 | | | $ | 1,200,535 | | | $ | (199,857) | | | $ | 1,000,678 | |
| In-process research and development | | | 381,115 | | | — | | | 381,115 | | | 382,075 | | | — | | | 382,075 | |
| Total intangible assets | | | $ | 1,704,700 | | | $ | (280,874) | | | $ | 1,423,826 | | | $ | 1,582,610 | | | $ | (199,857) | | | $ | 1,382,753 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 evaluated assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the asset. For the three months ended June 30, 2019,2020, the Company recognized a total of $1 million of intangible asset impairment charges, which was recognized in cost of goods sold impairment charges. For the six months ended June 30, 2020, the Company recognized a total of $3 million of intangible asset impairment charges, which was recognized in cost of goods sold. For the six months ended June 30, 2019, the Company recognized a total of $79 million of intangible asset impairment charges, of which $56$2 million was recognized in cost of goods sold impairment charges and $23$1 million was recognized in in-process research and development expense. impairment charges.
The impairment charges for the three months ended June 30, 2020 are primarily related to four3 marketed products, two2 of which experienced significant price erosion during 2020. The contract with the remaining product was terminated with the customer.
The impairment charges for the six months ended June 30, 2020 are primarily related to 5 currently marketed products and two of which are 2 in-process research and development (“IPR&D&D”) products allthat were acquired as part of the Combination. For the currently marketed products, the impairment charges were the result of4 products experienced significant price erosion during the first quarter of 2019,2020, without an offsetting increase in customer demand, resulting in significantly lower than expected future cash flows. Forflows and negative margins and one product had its contract terminated. The IPR&D product, the impairment charge was the resultcharges are associated with 2 products, 1 of increased competition atwhich experienced a delay in its estimated launch resulting in significantly lower than expected future cash flows. Fordate and the other IPR&D product,was canceled due to the impairment charge waswithdrawal of our development partner.
During the resultsix months ended June 30, 2020, the Company recognized $131 million of intangible assets associated with the Acquisitions, of which all are classified in other intangible assets in the table above. These intangible assets consist of government licenses, government contracts, national contracts, customer relationships and a strategic decisiontrade name and are amortized to no longer pursue approval of the product.selling, general, and administrative over their estimated useful lives. Refer to Note 3.Acquisitions and Divestitures for additional information.
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 supply agreement with JSP. Refer to Note 5. Alliance and Collaboration for additional information.
For the six months ended June 30, 2019, included in 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Amortization | $ | 43,976 | | | $ | 34,796 | | | $ | 86,552 | | | $ | 65,759 | |
The following table presents future amortization expense for the next five years and thereafter, excluding $429$381 million of IPR&D intangible assets (in thousands):
| | | | | |
| Future
Amortization |
| Remainder of 2020 | $ | 88,633 | |
| 2021 | 172,302 | |
| 2022 | 157,964 | |
| 2023 | 146,979 | |
| 2024 | 140,021 | |
| Thereafter | 336,812 | |
| Total | $ | 1,042,711 | |
21. Stockholders’ Equity and Redeemable Non-Controlling Interests
|
| | | |
| | 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 forthUnder the componentsterms of the Company’s acquisition, transaction-related and integration expenses forLimited Liability Company Agreement, Amneal is obligated to make tax distributions to its members. For the three and six months ended June 30, 2020, a tax distribution of $1 million was recorded as a reduction of non-controlling interests. For the three and six months ended June 30, 2019, 0 tax distribution was recorded due to tax losses incurred. As of June 30, 2020, a $1 million liability was included in related-party payables for the tax distribution.
During December 2018, the Company acquired the non-controlling interests in 1 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 in 2019.
Redeemable Non-Controlling Interests
As discussed in Note 3. Acquisitions and 2018 (in thousands):Divestitures, the Company acquired a 65.1% interest in Rondo on January 31, 2020. The sellers of AvKARE, LLC and R&S hold the remaining 34.9% interest as Rondo Class B Units. Beginning on January 1, 2026, the holders of the Rondo Class B Units have the right (“Put Right”) to require the Company to acquire the Rondo Class B Units for a purchase price that is based on a multiple of Rondo’s earnings before income taxes, depreciation, and amortization (EBITDA) if certain financial targets and other conditions are met. Additionally, beginning on January 31, 2020, the Company has the right to acquire the Rondo Class B Units based on the same value and conditions as the Put Right. The Rondo Class B Units are also redeemable by the holders upon a change in control.
Since the redemption of the Rondo Class B Units is outside of the Company's control, the units have been presented outside of stockholders' equity as redeemable non-controlling interests. Upon closing of the Acquisitions on January 31, 2020, the redeemable non-controlling interests were recorded as a component of the fair value of consideration transferred at an estimated preliminary fair value of $11 million. The fair value of the redeemable non-controlling interests was estimated using the Monte-Carlo simulation approach under the option pricing framework, which considers the redemption rights of both the Company and the holders of the Rondo Class B Units.
|
| | | | | | | | | | | | | | | |
| | 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 |
|
(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. These costs forThe Company will attribute 34.9% of the net income of Rondo to the redeemable non-controlling interests. The Company will also accrete the redeemable non-controlling interests to redemption value upon an event that makes redemption probable. For the three and six months ended June 30, 2019 consists2020, a tax distribution of integration costs.
(2)Profit participation units expense relates to the accelerated vesting$0.4 million was recorded as a reduction of certainredeemable non-controlling interests. As of Amneal's profit participation units that occurred prior to the ClosingJune 30, 2020, a liability of the Combination for current and former employees of Amneal for service prior to the Combination (see additional information$0.4 million was included 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 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 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 millionrelated-party payables 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.
tax distribution.
Changes in Accumulated Other Comprehensive Loss by Component (in thousands):
| | | | | | | | | | | | | | | | | |
| Foreign
currency
translation
adjustment | | Unrealized
gain (loss) on cash
flow hedge, net
of tax | | Accumulated
other
comprehensive
loss |
| Balance December 31, 2018 | $ | (7,755) | | | $ | — | | | $ | (7,755) | |
| Other comprehensive (loss) income before reclassification | (729) | | | 7,764 | | | 7,035 | |
| Amounts reclassified from accumulated other comprehensive loss | 1,461 | | | — | | | 1,461 | |
| Reallocation of ownership interests | (809) | | | — | | | (809) | |
| Balance December 31, 2019 | (7,832) | | | 7,764 | | | (68) | |
| Other comprehensive loss before reclassification | (3,985) | | | (35,622) | | | (39,607) | |
| Reallocation of ownership interests | (14) | | | (7) | | | (21) | |
| Balance June 30, 2020 | $ | (11,831) | | | $ | (27,865) | | | $ | (39,696) | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Amneal Pharmaceuticals, Inc. (the "Company," "we," "us," or "our") is a 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 branded products. We were formed on 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 analysis for the three and six months ended June 30, 20192020 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 for the year ended December 31, 20182019 included in our 20182019 Annual Report on Form 10-K.
On January 31, 2020, we acquired a 65.1% controlling interest in both AvKARE Inc., a Tennessee corporation now a limited liability company (“AvKARE, LLC”), and Dixon-Shane, LLC d/b/a R&S Northeast LLC, a Kentucky limited liability company (“R&S”). As a result of the AvKARE, LLC and R&S acquisitions (the “Acquisitions”), we now have three reportable segments, Generics, Specialty, and AvKARE.
Our Specialty segment is engaged in the development, promotion, sale and distribution of 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 migraine headaches, which is sold under a license agreement with AstraZeneca UKU.K. 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 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’sOur Generics segment includes over 200approximately 250 product families covering an extensive range of dosage forms and delivery systems, including both immediate and extended release oral solids, 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 resulting from complex drug formulations or manufacturing, or legal or regulatory challenges. Generic 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.
AvKARE provides pharmaceuticals, medical and surgical products and services primarily to governmental agencies, primarily focused on serving the Department of Defense and the Department of Veterans Affairs. AvKARE is a wholesale distributor of bottle and unit dose pharmaceuticals under the registered names of AvKARE and AvPAK, as well as medical and surgical products. AvKARE is also a packager and wholesale distributor of pharmaceuticals and vitamins to its retail and institutional customers who are located throughout the United States of America focused primarily on offering 340b-qualified entities products to provide consistency in care and pricing.
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 20182019 Annual Report on Form 10-K.10-K,as supplemented by Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.
AsCOVID-19 Pandemic
On March 11, 2020, the World Health Organization designated the outbreak of a novel strain of coronavirus (“COVID-19”) as a global pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of
COVID-19, including imposing restrictions on movement and travel such as quarantines and shelter-in-place requirements, and restricting or prohibiting outright some or all commercial and business activity, including the manufacture and distribution of certain goods and the provision of non-essential services. These measures, though currently temporary in nature, may become more severe and continue indefinitely depending on the evolution of the endoutbreak.
The Company did not observe significant impacts on its business or results 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 challenges and others to persist at leastoperations for the remainderthree months ended March 31, 2020 due to the global emergence of 2019.
To address these challenges, we have,COVID-19. However, during April and May 2020, as the infection rate of COVID-19 spread throughout New York and New Jersey, the governors of those states issued executive orders requiring residents, among other things, conductedto remain at home with limited exceptions such as working at an in depth, company wide reviewessential business. Although as a pharmaceutical manufacturer Amneal is an essential business, we did experience supply chain constraints, including manufacturing and packaging delays at several of our organizational structures, operational budgets, currentkey domestic manufacturing and future capital projectspackaging facilities in New York and existing capabilityNew Jersey during the three months ended June 30, 2020. In June and infrastructure alignments, resultingJuly 2020, as the restrictions from the governors of New York and New Jersey were eased, our manufacturing and distribution facilities were able to resume normal productivity. However, we may again experience supply chain constraints at our New York, New Jersey, India or other facilities in the comprehensive restructuring planevent of subsequent waves of COVID-19 infections. These potential supply chain disruptions may significantly impact our third and fourth quarter 2020 results of operations and cash flows. To mitigate any potential overall market liquidity constraints, we announcedborrowed $300 million under our revolving credit facility in July 2019.March 2020 as a precautionary measure. As the financial markets stabilized following a period of high volatility due the COVID-19 pandemic, we repaid all of the $300 million of borrowings under our revolving credit facility before June 30, 2020. (Refer to Note 13.Debt, for further details). As noted in our 2019 Annual Report on Form 10-K, several of our key domestic manufacturing, packaging, and facilities are located in New York and New Jersey, two states with a high number of confirmed cases of COVID-19. To offset the decreased second quarter output, we will increase production during the third and fourth quarters.
To the extent that the COVID-19 pandemic continues or worsens, national, state, and local governments may impose additional restrictions or extend the restrictions already in place. The restructuring plan is designedworsening of the pandemic and the related safety and business operating restrictions could result in a number of adverse impacts to reduce costs, optimize our organizational and manufacturing infrastructure, which we expectbusiness, including, but not limited to, reduce costs by approximately $50 million per year once the plan has been executed. For additional information, refer to Note 18, Subsequent Events,disruption to the unauditedeconomy and our customers, additional work restrictions, and supply chains being interrupted or slowed. Also, governments may impose other laws, regulations, or taxes that could adversely impact our business, financial statementscondition, or results of operations. Further, depending on the extent to which our customers are affected, they could delay or reduce purchases of products we provide. The potential effects of the COVID-19 pandemic also could impact us in a number of other ways including, but not limited to, reductions to our profitability, fluctuations in foreign currency markets, the availability of future borrowings, the cost of borrowings, credit risks of our customers and counterparties, and potential impairment of the carrying amount of goodwill or other definite-lived assets.
We will continue to actively monitor the situation and may take further precautionary and preemptive actions as may be required by national, state, or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers, and shareholders. Until the ultimate extent and duration of the pandemic is known, we cannot predict the ultimate effects the pandemic may have on our business, in particular with respect to demand for our products, our strategy, and our prospects, the effects on our customers, or the impact on our financial results. Refer to Part I, II, Item 11A "Risk Factors" of this report.
Our current year results continue to be impacted by our Combination with Impax as a result of our continued actions to adjust our operations and cost structure. The historical financial resultsQuarterly Report on Form 10-Q for further discussion of the Company for the periods prior the May 4, 2018 closingpotential impact of the Combination are the historical financial results of Amneal, and thus the current period results, and balances, may not be comparable to prior years as the current year includes the results of Impax from May 4, 2018.COVID-19 pandemic on our business.
Results of Operations
Consolidated Results
The following table sets forth our summarized, consolidated results of operations for the three and six months ended June 30, 20192020 and 20182019 (in thousands):
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended
June 30, | | | Six Months Ended
June 30, | |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
| Net revenue | $ | 404,642 |
| | $ | 413,787 |
| | $ | 850,762 |
| | $ | 688,976 |
| Net revenue | $ | 464,662 | | | $ | 404,642 | | | $ | 963,195 | | | $ | 850,762 | |
| Cost of goods sold | 296,381 |
| | 235,492 |
| | 606,124 |
| | 366,086 |
| Cost of goods sold | 319,666 | | | 296,381 | | | 633,244 | | | 606,124 | |
| Cost of goods sold impairment charges | 3,012 |
| | — |
| | 56,309 |
| | — |
| Cost of goods sold impairment charges | 759 | | | 3,012 | | | 2,215 | | | 56,309 | |
| Gross profit | 105,249 |
| | 178,295 |
| | 188,329 |
| | 322,890 |
| Gross profit | 144,237 | | | 105,249 | | | 327,736 | | | 188,329 | |
| Selling, general and administrative | 67,281 |
| | 56,003 |
| | 151,717 |
| | 81,124 |
| Selling, general and administrative | 80,944 | | | 67,281 | | | 158,920 | | | 151,717 | |
| Research and development | 48,016 |
| | 50,335 |
| | 101,874 |
| | 94,544 |
| Research and development | 45,572 | | | 48,016 | | | 81,951 | | | 101,874 | |
| In-process research and development impairment charges | — |
| | — |
| | 22,787 |
| | — |
| In-process research and development impairment charges | — | | | — | | | 960 | | | 22,787 | |
| Intellectual property legal development expenses | 2,511 |
| | 4,047 |
| | 6,677 |
| | 8,623 |
| Intellectual property legal development expenses | 3,550 | | | 2,511 | | | 4,820 | | | 6,677 | |
Acquisition, transaction-related and integration expenses
| 3,519 |
| | 207,507 |
| | 9,551 |
| | 214,642 |
| Acquisition, transaction-related and integration expenses | 1,787 | | | 3,519 | | | 4,362 | | | 9,551 | |
| Legal settlement gains | — |
| | (3,000 | ) | | — |
| | (3,000 | ) | |
| Charges related to legal matters, net | | Charges related to legal matters, net | 1,300 | | | — | | | 5,800 | | | — | |
| Restructuring and other charges | 2,835 |
| | 44,465 |
| | 8,996 |
| | 44,465 |
| Restructuring and other charges | 333 | | | 2,835 | | | 2,381 | | | 8,996 | |
| Operating loss | (18,913 | ) | | (181,062 | ) | | (113,273 | ) | | (117,508 | ) | |
| Operating income (loss) | | Operating income (loss) | 10,751 | | | (18,913) | | | 68,542 | | | (113,273) | |
| Total other expense, net | (37,314 | ) | | (81,444 | ) | | (76,134 | ) | | (92,982 | ) | Total other expense, net | (32,509) | | | (37,314) | | | (76,956) | | | (76,134) | |
| Loss before income taxes | (56,227 | ) | | (262,506 | ) | | (189,407 | ) | | (210,490 | ) | Loss before income taxes | (21,758) | | | (56,227) | | | (8,414) | | | (189,407) | |
| Benefit from income taxes | (5,701 | ) | | (12,416 | ) | | (14,129 | ) | | (12,052 | ) | |
| Net loss | $ | (50,526 | ) | | $ | (250,090 | ) | | $ | (175,278 | ) | | $ | (198,438 | ) | |
| Provision for (benefit from) income taxes | | Provision for (benefit from) income taxes | 2,186 | | | (5,701) | | | (105,987) | | | (14,129) | |
| Net (loss) income | | Net (loss) income | $ | (23,944) | | | $ | (50,526) | | | $ | 97,573 | | | $ | (175,278) | |
Net Revenue
Net revenue for the three months ended June 30, 2019 decreased2020 increased by 2%15%, or $9$60 million, to $405$465 million as compared to $414$405 million for the three months ended June 30, 2018.2019. The decreaseincrease over the prior year is primarily attributable to price and volume erosion of $114$67 million mainlyfrom the Acquisitions, $39 million from new product launches after June 30, 2019 in our Generics segment $11and $12 million in divestitures of our international businesses and the loss of exclusivity on Albenzaprimarily from volume increases in our Specialty segment, which were partially offset by $58 million from the timing of the Combination and the acquisition of Gemini Laboratories, LLC ("Gemini"), a $46 million contribution from Levothyroxine sodium tablets ("Levothyroxine") which launched in Q4 2018, and $12 million from new product launcheserosion in our Generics segment.
segment and a $2 million decline from the divestiture of our international business in Germany.
Net revenue for the six months ended June 30, 20192020 increased by 23%13%, or $162$112 million, to $851$963 million as compared to $689$851 million for the six months ended June 30, 2018.2019. The increase over the prior year period is primarily attributable to a $211$132 million timing impact from the Combination and the acquisition of Gemini, a $95 million contribution from Levothyroxine, and $17Acquisitions, $101 million from new product launches after June 30, 2019 in our Generics segment and $20 million primarily from volume increases in our Specialty segment, which were partially offset by price and volume erosion of $147 million mainly in our Generics segment the loss of exclusivity on Albenza in our Specialty segment and $15a $16 million decline from the divestitures of our international businesses primarily in the UKU.K. and Germany.
Cost of Goods Sold and Gross Profit
Cost of goods sold, including impairment charges, increased 27%7%, or $64$21 million, to $320 million for the three months ended June 30, 2020 as compared to $299 million for the three months ended June 30, 2019 as compared to $235 million for the three months ended June 30, 2018.2019. The increase in cost of goods sold was primarily attributable to a $49 million increase associated with the timing of the Combination and Gemini acquisition and $20Acquisitions, which were partially offset by a $15 million decline in inventory related charges, lower costs associated with sales erosion in our Generics segment. Cost of goods sold also increased over the prior year period due to incremental expenses related to the Combination, including amortization of intangible assets of $18segment, a $4 million decline in site closure costsexpenses, and a $2 million decline associated with the divestiture of $7 million and royalties of $3 million.
our international business in Germany.
Accordingly, gross profit for the three months ended June 30, 20192020 was $105$144 million (26%(31% of total revenues)net revenue) as compared to gross profit of $178$105 million (43%(26% of total revenues)net revenue) for the three months ended June 30, 2018.2019. Our gross profit as a percentage of sales declinednet revenue increased compared to the prior year period primarily as a result of the price and volume erosiondecline in the Generics segment and our inventory related charges.
Cost of goods sold, including impairment charges, increased 81%decreased 4%, or $296$27 million, to $635 million for the six months ended June 30, 2020 as compared to $662 million for the six months ended June 30, 2019 as compared to $366 million for the six months ended June 30, 2018.2019. The increasedecrease in cost of goods sold was primarily attributable to higher product sales due to the Combination and Gemini acquisition, $56a $54 million decrease in intangible impairmentasset impairments mainly in our Generics segment, a $36 million ofdecrease in expenses related to the Levothyroxine transition agreement with Lannett Company ("Lannett"), $33a $16 million ofdecline in inventory related charges, a $12 million decline in site closure expenses, lower costs associated with sales erosion in our Generics segment, and incremental expenses related toa $12 million decline associated with the Combinationdivestitures of our international businesses primarily in the U.K. and Germany, which were partially offset by a $104 million increase associated with the acquisition of Gemini, including amortization of intangible assets of $48 million and royalties of $19 million.Acquisitions.
Accordingly, gross profit for the six months ended June 30, 20192020 was $188$328 million (22%(34% of total revenues)net revenue) as compared to gross profit of $323$188 million (47%(22% of total revenues)net revenue) for the six months ended June 30, 2018.2019. Our gross profit as a percentage of sales declinednet revenue increased compared to the prior year period primarily as a result of the $54 million decline in intangible impairment charges, increased inventory related charges, and price erosion in our Generics segment as well as other factors described above.
Selling, General, and Administrative
Selling, General, and Administrative
Selling, general, and administrative (" (“SG&A"&A”) expenses for the three months ended June 30, 20192020 were $67$81 million, as compared to $56$67 million for the three months ended June 30, 2018.2019. The $11$14 million increase from the prior periodyear was primarily due to the timing of the Combination and Gemini acquisition, including selling expensesa $16 million increase associated with 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.
Acquisitions.
SG&A expenses for the six months ended June 30, 20192020 were $152$159 million, as compared to $81$152 million for the six months ended June 30, 2018.2019. The $71$7 million increase from the prior year was primarily due to the timing of the Combination and Gemini acquisition, including selling expensesa $26 million increase associated with our Specialty segment, stock-based compensation and higher Corporate functions spend including public company costs that did not exist prior to the Combination. These increasesAcquisitions, which were partially offset by post-merger operating synergies.
cost savings associated with our restructuring and integration programs.
Research and Development
Research and development (“R&D”) expenses remained relatively consistent for the three months ended June 30, 2019 and 2018 at2020 were $46 million, as compared to $48 million and $50 million, respectively.
Research and development expenses for the sixthree months ended June 30, 2019 were $1022019. The $2 million as compared to $95 million for the six months ended June 30, 2018. The $7 million increasedecrease compared to the prior year is primarily attributable to cost savings in our Generics segment associated with the Company’s restructuring programs and the timing of expenses in 2020 due to generic product mix and delayed spending as a result of COVID-19.
R&D expenses for the Combination and increased milestone paymentssix months ended June 30, 2020 were $82 million, as compared to $102 million for the six months ended June 30, 2019. The $20 million decrease compared to the prior year is primarily attributable to cost savings in our Generics segment.
segment associated with the Company’s restructuring programs and the timing of expenses in 2020 due to delayed spending as a result of COVID-19.
In-Process Research and Development Impairment Charges
There were noWe recognized in-process research and development ("IPR&D") impairment charges for the threesix months ended June 30, 2019 and 2018.
We recognized IPR&D impairment charges2020 of $1 million as compared to $23 million for the six months ended June 30, 2019. The2019 (none in the three months ended June 30, 2020 and 2019).
For the six months ended June 30, 2020, the charges are primarily associated with two products. One of the products experienced a delay in its estimated launch date and the other product was canceled due to the withdrawal of our development partner.
For 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 Expense
Intellectual property legal development expenses for the three months ended June 30, 2019 was $32020 were $4 million as compared to $4$3 million for the three months ended June 30, 2018.2019. Intellectual property legal development expenses for the six months ended June 30, 2019 was $72020 were $5 million as compared to $9$7 million for the six months ended June 30, 2018.2019. 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, Transaction-Related and Integration Expenses
We recognized approximately $4$2 million of acquisition, transaction-related and integration expenses for the three months ended June 30, 20192020 as compared to $208$4 million for the three months ended June 30, 2018.2019. We recognized approximately $10$4 million of acquisition, transaction-related and integration expenses for the six months ended June 30, 20192020 as compared to $215$10 million for the three months ended June 30, 2019.
For the three and six months ended June 30, 2020 acquisition, transaction-related and integration expenses were primarily related to systems integrations associated with the Combination and integration activities associated with the Acquisitions. The decreases from the prior year are primarily related to the substantial completion of integration activities related to the Combination.
Charges Related to Legal Matters, Net
For the three months ended June 30, 2020, we recorded net charges of $1 million for commercial legal proceedings and claims, of which a $3 million charge recorded in our Generics segment was partially offset by a $2 million gain in our Specialty segment.
For the six months ended June 30, 2018.2020, we recorded net charges of $6 million for commercial legal proceedings and claims, which was primarily recorded in our Generics segment.
Restructuring and Other Charges
ExpensesOn July 10, 2019, we announced a plan to restructure our operations that is intended to reduce costs and optimize our organizational and manufacturing infrastructure. Pursuant to the restructuring plan as revised, we expect to reduce our headcount by approximately 300 to 350 by December 31, 2020, primarily by ceasing manufacturing at our Hauppauge, NY facility.
Restructuring and other charges were $0.3 million and $2 million for the three and six months ended June 30, 2020, respectively. These charges primarily consisted of charges associated with cash severance and other benefits provided pursuant to our severance programs for former executives.
Restructuring and other charges 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 $3 million and $9 million, respectively. These charges primarily consisted of restructuringcash and other severance charges for the three 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, CaliforniaCA facility and other facilities and approximately $2as well as cash severance charges associated with the cost of benefits for former senior executives.
Other Expense, Net
Other expense, net was $33 million of other employee severance charges. The restructuring and other charges for the three months ended June 30, 2018 were $442020, as compared to $37 million whichfor the three months ended June 30, 2019. The decrease of $4 million was primarily associated withattributable to a reduction$7 million decline in workforce resultinginterest expense as reductions in interest rates offset increased borrowings and a $2 million favorable impact from the Combination.divestitures, partially offset by a $5 million unfavorable foreign currency impact.
We recorded $9Other expense, net was $77 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, 2019,2020, 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. The increase of $1 million was primarily attributable to a $7 million unfavorable impact from divestitures and a $5 million unfavorable foreign currency impact, partially offset by a $11 million decline in interest expense as reductions in interest rates offset increased borrowings.
Provision For (Benefit From) Income Taxes
For the three months ended June 30, 2020 and 2019, as compared to $93the Company's provision for (benefit from) income taxes and effective tax rates were $2 million forand (10.0%) and $(6) million and 10.1%, respectively. The year over year change is primarily associated with an increase in foreign based earnings.
For the six months ended June 30, 2018.2020 and 2019, the Company's benefit from income taxes and effective tax rates were ($106) million and 1259.7% and ($14) million and 7.5%, respectively. The decrease of $17 million wasyear over year change is primarily attributable to a $20associated with the $110 million benefit from the changecarryback of U.S. Federal deferred tax assets under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). In July 2020, we received $106 million 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 losscash 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 alsorefunds associated with the year-over-year declineCARES Act, with the remaining $4 million in pre-tax loss.
cash refunds expected to be received before December 31, 2020. The changeCARES Act is an emergency economic stimulus package in response to the COVID-19 pandemic which, among other things, includes provisions relating to income and non-income-based 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 tolaws. These deferred tax assets had a $204 million and $205 million, respectively, decline in acquisition, transaction-related and integration expenses100% valuation allowance as well as $41 million and $35 million, respectively, decline in restructuring and other charges associated with severance benefits.
of December 31, 2019.
Net Loss
(Loss) Income
We recognized a net loss for the three months ended June 30, 20192020 of $51$24 million as compared to net loss of $250($51) million for the three months ended June 30, 2018.2019. The year over year decrease in our net loss of $199$27 million is primarily attributable to favorable gross profit of $39 million and a $204 million decline in acquisition, transaction related and integration expenses associated with the Combination and Gemini acquisition, a $41interest expense of $7 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 andan increase in selling, general and administrative expenses primarily related toassociated with the CombinationAcquisition of $16 million, a decrease in foreign exchange gains of $5 million and acquisitionan increase in the provision for income taxes of Gemini.$8 million.
We recognized a net lossincome for the six months ended June 30, 20192020 of $175$98 million as compared to net loss of $198($175) million for the six months ended June 30, 2018.2019. The year over year decreaseincrease of $23$273 million is primarily attributable to favorable gross profit of $139 million (including a $205$54 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 incrementala $36 million decrease in expenses related to the CombinationLevothyroxine transition agreement with Lannett), a $92 million favorable impact from income taxes related to the CARES Act, a $22 million decline in IPR&D impairment charges and acquisition of Gemini.
$11 million from lower interest expense. Generics
The following table sets forth results of operations for our Generics segment for the three and six months ended June 30, 20192020 and 20182019 (in thousands):
| |
| Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended
June 30, | | | Six Months Ended
June 30, | |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
| Net revenue | $ | 335,064 |
| | $ | 361,770 |
| | $ | 717,541 |
| | $ | 636,959 |
| Net revenue | $ | 306,559 | | | $ | 335,064 | | | $ | 659,145 | | | $ | 717,541 | |
| Cost of goods sold | 263,423 |
| | 211,534 |
| | 542,301 |
| | 342,128 |
| Cost of goods sold | 218,909 | | | 263,423 | | | 437,774 | | | 542,301 | |
| Cost of goods sold impairment charges | 3,012 |
| | — |
| | 56,309 |
| | — |
| Cost of goods sold impairment charges | 759 | | | 3,012 | | | 2,215 | | | 56,309 | |
| Gross profit | 68,629 |
| | 150,236 |
| | 118,931 |
| | 294,831 |
| Gross profit | 86,891 | | | 68,629 | | | 219,156 | | | 118,931 | |
| Selling, general and administrative | 14,379 |
| | 19,621 |
| | 38,527 |
| | 30,824 |
| Selling, general and administrative | 12,802 | | | 14,379 | | | 29,425 | | | 38,527 | |
| Research and development | 45,448 |
| | 47,206 |
| | 95,599 |
| | 91,415 |
| Research and development | 40,316 | | | 45,448 | | | 69,350 | | | 95,599 | |
In-process research and development impairment charges
| — |
| | — |
| | 22,787 |
| | — |
| In-process research and development impairment charges | — | | | — | | | 960 | | | 22,787 | |
| Intellectual property legal development expenses | 2,511 |
| | 4,004 |
| | 5,632 |
| | 8,580 |
| Intellectual property legal development expenses | 3,550 | | | 2,511 | | | 4,815 | | | 5,632 | |
| Legal settlement gains | — |
| | (3,000 | ) | | — |
| | (3,000 | ) | |
| Charges related to legal matters | | Charges related to legal matters | 3,050 | | | — | | | 5,550 | | | — | |
| Other operating expenses | 1,405 |
| | 139,419 |
| | 6,083 |
| | 139,419 |
| Other operating expenses | 657 | | | 1,405 | | | 703 | | | 6,083 | |
| Operating income (loss) | $ | 4,886 |
| | $ | (57,014 | ) | | $ | (49,697 | ) | | $ | 27,593 |
| Operating income (loss) | $ | 26,516 | | | $ | 4,886 | | | $ | 108,353 | | | $ | (49,697) | |
Net Revenue
Generics net revenue was $335$307 million for the three months ended June 30, 2019,2020, a decrease of $27$29 million or 7%9% when compared with the same period in 2018. Volume and pricing2019. The year over year decrease was primarily driven by erosion of $105 million in our existing business as well asprimarily from Levothyroxine and Diclofenac Gel generic competition, a $11$13 million decline from the reclassification of Oxymorphone to our Specialty segment, and a $2 million decline from the divestiture of our international business in international revenues from divestitures wereGermany, 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$39 million from new product launches. Favorable volume growth increased sales in Levothyroxine, Abiraterone Acetate, Chlorpromazine HCI, Guanfacinelaunches after June 30, 2019, which included EluRyng and Hydroxyprogesterone Caproate Injection, which were partially offset by price and volume declines in sales of Yuvafem, Diclofenac Gel and Aspirin Dipyridamole ER Capsules.
Sucralfate Oral Suspension.
Generics net revenue was $718$659 million for the six months ended June 30, 2019, an increase2020, a decrease of $81$58 million or 13%8% when compared with the same period in 2018.2019. The year over year increasedecrease was primarily driven by erosion in our existing business primarily from Levothyroxine and Diclofenac Gel generic competition, a $113$26 million impactdecline from the timingreclassification of Oxymorphone to our Specialty segment, and a $16 million decline from the Combination, $95 milliondivestitures of our international businesses primarily in sales of Levothyroxine,the U.K. and $17Germany, partially offset by $101 million from new product launches partially offset by priceafter June 30, 2019, which included EluRyng 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.
Sucralfate Oral Suspension.
Cost of Goods Sold and Gross Profit
Generics cost of goods sold, including impairment charges, for the three months ended June 30, 20192020 was $266$220 million, an increasea decrease of 26%18% or $55$47 million compared to the three months ended June 30, 2018.2019. The year over year increase isdecrease was primarily associated with sales of Impax products added to portfolioa $15 million decline in inventory related charges, a $9 million decline in royalty expense primarily associated with the Combination and $20reclassification of Oxymorphone, a $4 million decline in amortization expense, a decrease of $4 million in inventory charges. Cost of goods sold also increased over the prior year period due to $3site closure expenses, a $2 million ofdecline in intangible asset impairment charges, as well as incremental expenses related toand a $2 million decline associated with the Combination, including amortizationdivestiture of intangible assets of $9 million and site closure costs of $7 million.
our international business in Germany.
Generics gross profit for the three months ended June 30, 20192020 was $69$87 million (20%(28% of total revenues)Generics net revenue) as compared to gross profit of $150$69 million (42%(20% of total revenues)Generics net revenue) for the three months ended June 30, 2018.2019. Our Generics gross profit as a percentage of sales declinedincreased compared to the prior year period primarily as a result of a price erosion and inventory related charges in addition to the other factors noteddescribed above.
Generics cost of goods sold, including impairment charges, for the six months ended June 30, 20192020 was $599$440 million, an increasea decrease of 75%26% or $256$159 million compared to the six months ended June 30, 2018.2019. The year over year increase isdecrease was primarily
associated with sales of Impax products added to portfolio with the Combination, $56a $54 million decline in intangible asset 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 unfavorablyfavorably impacted by a $36 million decline of expenses related to the Levothyroxine transition agreement with Lannett, and incremental expensesa $16 million decline in inventory related to the Combination, including amortization of intangible assets of $18charges, a $12 million decline in site closure costsexpenses, a $12 million decline associated with the divestitures of $16our international businesses primarily in the U.K and Germany and a $4 million and royalties of $12 million.
decline in amortization expense.
Generics gross profit for the six months ended June 30, 20192020 was $119$219 million (17%(33% of totalGenerics net revenue) as compared to gross profit of $295$119 million (46%(17% of totalGenerics net revenue) for the six months ended June 30, 2018.2019. Our Generics gross profit as a percentage of sales declinedincreased compared to the prior year period primarily as a result of the $56$54 million decline in impairment charge, price erosioncharges and the other factors described above.
Selling, General, and Administrative
Generics SG&A expensesexpense for the three months ended June 30, 2019 were $142020 was $13 million, as compared to $20$14 million for the three months ended June 30, 2018.2019. The $6$1 million year over year decrease from the prior period was primarily associated with cost savings initiatives associated with our restructuring and integration programs and the timing of expenses in 2020 due to post Combination operating synergies and the divesting our UK and Germany businesses.
delayed spending as a result of COVID-19.
Generics SG&A expense for the six months ended June 30, 2019 were $392020 was $29 million, as compared to $31$39 million for the six months ended June 30, 2018.2019. The $8$10 million increase from the prior year periodover year decrease was primarily due toassociated with cost savings initiatives associated with our restructuring and integration programs and the timing of the Combination partially offset by post Combination operating synergiesexpenses in 2020 due to delayed spending as a result of COVID-19 and the divesting of our UK and Germany businesses.
a reduction in international expenditures.
Research and Development
Generics research and developmentR&D expenses remained relatively consistent for the three months ended June 30, 20192020 was $40 million, a decrease of 11% or $5 million compared to the three months ended June 30, 2019. The year over year decrease is primarily associated with cost savings associated with our restructuring program, delays from COVID-19 and 2018 were $45 million and $47 million, respectively.
transitioning some third party costs in-house.
Generics research and developmentR&D expenses for the six months ended June 30, 2019 were $962020 was $69 million, asa decrease of 27% or $26 million compared to $91the six months ended June 30, 2019. The year over year decrease is primarily associated with cost savings associated with our restructuring programs, delays from COVID-19 and transitioning some third party costs in-house.
In-Process Research and Development Impairment Charges
We recognized IPR&D impairment charges of $1 million for the six months ended June 30, 2018. The $52020 as compared to $23 million increase is primarily attributable tofor the timing of the Combination.
In-Process Research and Development Impairment Charges
There were no IPR&D impairment chargessix months ended June 30, 2019 (none for the three months ended June 30, 2019.2020 and 2019).
For the six months ended June 30, 2020, the charges are primarily associated with two products. One of the products experienced a delay in its estimated launch date and the other product was canceled due to the withdrawal of our development partner.
For the six months ended June 30, 2019, we recognized IPR&D impairmentthe charges of $23 millionare primarily associated with two IPR&D products inthat were acquired as part of 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. Combination.
Charges Related to Legal Matters
For the other IPR&D product, the impairment charge was the resultthree and six months ended June 30, 2020, we recorded charges of a strategic decision to no longer pursue approval of the product.
There were no IPR&D chargesapproximately $3 million and $6 million, respectively, for commercial legal claims (none for the three and six months ended June 30, 2018.2019).
Intellectual Property Legal Development Expenses
Generics intellectual property legal development expenses for the three months ended June 30, 20192020 were $3$4 million as compared to $4$3 million for the prior year period. Generics intellectual property legal development expenses for the six months ended June 30, 20192020 were $6$5 million as compared to $9$6 million for the prior year period. For both the three and six month periods, these
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 GainsOther Operating Expenses
There were no legal settlement gains forFor the three months ended June 30, 2020 and 2019, other operating expenses were not material.
For the six months ended June 30, 2019.
Legal settlement gains of $3 million for the three and six months ended June 30, 20182020, other operating expenses were primarily related to settlements with several innovators of branded pharmaceutical products.
Other Expenses
not material. For the three and six months ended June 30, 2019, we recorded $6 million of other operating expenses. These 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
The following table sets forth results of operations for our Specialty segment for the three and six months ended June 30, 20192020 and 20182019 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| Net revenue | $ | 69,578 |
| | $ | 52,017 |
| | $ | 133,221 |
| | $ | 52,017 |
|
| Cost of goods sold | 32,958 |
| | 23,958 |
| | 63,823 |
| | 23,958 |
|
| Gross profit | 36,620 |
| | 28,059 |
| | 69,398 |
| | 28,059 |
|
| Selling, general and administrative | 16,150 |
| | 13,549 |
| | 37,477 |
| | 13,549 |
|
| Research and development | 2,568 |
| | 3,129 |
| | 6,275 |
| | 3,129 |
|
| Intellectual property legal development expenses | — |
| | 43 |
| | 1,045 |
| | 43 |
|
| Other operating expenses | 1,366 |
| | 2,421 |
| | 3,428 |
| | 2,421 |
|
| Operating income | $ | 16,536 |
| | $ | 8,917 |
| | $ | 21,173 |
| | $ | 8,917 |
|
Our Specialty segment is comprised of the Impax Specialty business acquired on May 4, 2018 and the Gemini business acquired on May 7, 2018. Prior to these two transactions, we did not have a Specialty segment. Refer to 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Net revenue | $ | 94,256 | | | $ | 69,578 | | | $ | 182,233 | | | $ | 133,221 | |
| Cost of goods sold | 50,229 | | | 32,958 | | | 98,047 | | | 63,823 | |
| Gross profit | 44,027 | | | 36,620 | | | 84,186 | | | 69,398 | |
| Selling, general and administrative | 16,870 | | | 16,150 | | | 37,812 | | | 37,477 | |
| Research and development | 5,256 | | | 2,568 | | | 12,601 | | | 6,275 | |
| Intellectual property legal development expenses | — | | | — | | | 5 | | | 1,045 | |
| (Gains) charges related to legal matters, net | (1,750) | | | — | | | 250 | | | — | |
| Other operating expenses | 82 | | | 1,366 | | | 82 | | | 3,428 | |
| Operating income | $ | 23,569 | | | $ | 16,536 | | | $ | 33,436 | | | $ | 21,173 | |
Net Revenue
Specialty net revenue for the three months ended June 30, 20192020 was $70$94 million, an increase of 34%35% or $18$25 million compared to the three months ended June 30, 2018.2019. The increase from the prior year period was primarily due to a $26$13 million timing impact from the Combination and Gemini acquisition, which was partially offset byreclassification of Oxymorphone from our Generics segment as well as a $8$12 million declineincrease in our existing business primarily associated with the loss of exclusivity on Albenza.
volume increases in Oxymorphone and Rytary.
Specialty net revenue for the six months ended June 30, 20192020 was $133$182 million, an increase of 156%37% or $81$49 million compared to the six months ended June 30, 2018.2019. The increase from the prior year period was primarily due to a $99$26 million timing impact from the Combination and Gemini acquisition, which was partially offset byreclassification of Oxymorphone from our Generics segment as well as a $18$20 million declineincrease in our existing business primarily associated with the loss of exclusivity on Albenza.
volume increases in Oxymorphone, Rytary and Unithroid.
Cost of Goods Sold and Gross Profit
Specialty cost of goods sold for the three months ended June 30, 20192020 was $33$50 million, an increase of 38%$17 million or $9 million52% compared to the three months ended June 30, 2018.2019. The increase from the prior year period was primarily due to increased volume$11 million of incremental expenses associated with the timingreclassification of the CombinationOxymorphone and Gemini acquisition, partially offset by the loss$5 million of exclusivity on Albenza.
incremental amortization expense, as well as a volume increase in our existing business.
Accordingly, Specialty gross profit for the three months ended June 30, 20192020 was $37$44 million (53%(47% of total revenues)Specialty net revenue) as compared to gross profit of $28$37 million (54%(53% of total revenues)Specialty net revenue) for the three months ended June 30, 2018.
2019.
Specialty cost of goods sold for the six months ended June 30, 20192020 was $64$98 million, an increase of 166%$34 million or $40 million54% compared to the six months ended June 30, 2018.2019. The increase from the prior year period was primarily due to increased volume$20 million of incremental expenses associated with the timingreclassification of the CombinationOxymorphone and Gemini acquisition, partially offset by the loss$10 million of exclusivity on Albenza.
incremental amortization expense, as well as a volume increase in our existing business.
Accordingly, Specialty gross profit for the six months ended June 30, 20192020 was $69$84 million (52%(46% of totalSpecialty net revenue) as compared to gross profit of $28$69 million (54%(52% of totalSpecialty net revenue) for the six months ended June 30, 2018.2019.
Selling, General, and Administrative
Specialty SG&A expense of $17 million and $38 million for the three and six months ended June 30, 2020, respectively, was flat with the prior year periods.
Research and Development
Specialty SG&AR&D expenses for the three months ended June 30, 20192020 were $16$5 million, as compared to $14$3 million for the three months ended June 30, 2018.2019. The $2 million increase from the prior period was primarily due to the timing of the Combination and Gemini 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, 2019 at $3 million when compared to the prior year period.
Specialty research and development expenses for the six months ended June 30, 2019 were $6 million, as compared to $3 million for the six months ended June 30, 2018. The $3 million increase from the prior year period was primarily due to clinicalan increase in development costs associated withfor IPX203.
Specialty R&D expenses for the six months ended June 30, 2020 were $13 million, as compared to $6 million for the six months ended June 30, 2019. The $7 million increase from the prior year period was primarily due to an increase in development for IPX203 and a $2 million milestone achievement of one of our bio studies.development partners.
Other Expenses
(Gains) Charges Related to Legal Matters, Net
For the three months ended June 30, 2019,2020, we recognizedrecorded a gain of $2 million for the favorable resolution of a commercial legal proceeding.
Other Operating Expenses
For the three and six months ended June 30, 2019, other operating expenses of $1 million in the Specialty segment compared to $2 million for the three months ended June 30, 2018. For the six months ended June 30, 2019, we recognized other operating expenses ofand $3 million, in the Specialty segment compared to $2 million for the six months ended June 30, 2018. For the three and six month periods, these expensesrespectively, were primarily attributable to acquisition, site closure and integration expenses associated with the Combination.
AvKARE
The following table sets forth results of operations for our AvKARE segment for the three and six months ended June 30, 2020 (in thousands):
52 | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | | | Six Months Ended
June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Net revenue | $ | 63,847 | | | $ | — | | | $ | 121,817 | | | $ | — | |
| Cost of goods sold | 50,528 | | | — | | | 97,423 | | | — | |
| Gross profit | 13,319 | | | — | | | 24,394 | | | — | |
| Selling, general and administrative | 15,647 | | | — | | | 26,435 | | | — | |
| Operating loss | $ | (2,328) | | | $ | — | | | $ | (2,041) | | | $ | — | |
Our AvKARE segment consists of the businesses we acquired in the Acquisitions on January 31, 2020. Prior to the Acquisitions, we did not have an AvKARE segment. Refer to Note 3. Acquisitions and Divestitures.
Liquidity and Capital Resources
Our primary source of liquidity is cash generated from operations, available cash and borrowings under debt financing arrangements, including $489$414 million of available additional capacity on our asset backed revolving credit facility ("ABL").Revolving Credit Facility as of July 16, 2020, as defined below. 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, the impact of the COVID-19 pandemic, 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 research 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. As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. A continued worldwide disruption could materially affect our future access to sources of liquidity, particularly our cash flows from operations, and financial condition. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.
On March 27, 2020, President Trump signed into law the CARES Act. The CARES Act is an emergency economic stimulus package in response to the COVID-19 pandemic which, among other things, includes provisions relating to income and non-income-based tax laws. In July 2020, we received $106 million in cash from U.S. federal tax refunds associated with the CARES Act (refer to Note 8.Income Taxes) with an additional $4 million in cash refunds expected to be received before December 31, 2020. Other non-income-based tax provisions include deferral of the employer share of Social Security payroll taxes due from the CARES Act date of enactment through December 31, 2020, and a potential 50% credit on qualified wages against employment taxes each quarter with any excess credits eligible for refunds.
Over the next 12 months, we will 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,loans, Revolving Credit Facility, severance and capital expenditures. We made a $50 million payment to JSP on April 22, 2019 pursuant to the terms of a license and supply agreement, as described in Note 5. Alliance and Collaboration. Given the magnitude of projected expenditures, we may require additional funds from our ABL to meet these increased cash needs in the next year.
We 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 redemptionssales or exchanges of Amneal common units by Holdings. The timing and amount of any payments under the TRA will also vary, depending upon a number of factors including the timing and number of Amneal common units sold or exchanged for our Class A Common Stock, the price of our Class A Common Stock on the date of sale or exchange, the timing and amount of our taxable income, and the tax rate in effect at the time of realization of our taxable income. 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 timingFurther sales or exchanges occurring subsequent to June 30, 2020 could result in future Amneal tax deductions and obligations to pay 85% of any payments undersuch benefits to the tax receivable agreement will vary depending upon a numberholders of factors, but we expect that the paymentsAmneal common units. These obligations could be substantial,incremental to and substantially larger than the approximate $202 million contingent liability as of June 30, 2020 (refer to Note 8.Income Taxes). Payments could also 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, seeItem 1A. Risk FactorsandNote 8. Income Taxesin our 20182019 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, in2020, no cash tax distributions were made to Holdings. The amount dueIn July 2020, we made cash tax distributions of $1 million to Holdings as of June 30, 2019 is immaterial.
pursuant to the limited liability operating agreement.
At June 30, 2019,2020, 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
(in thousands)
|
| | | | | | | |
| | 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 | ) |
| | | | | | | | | | | |
| Six Months Ended
June 30, | | |
| 2020 | | 2019 |
| Cash provided by (used in): | | | |
| Operating activities | $ | 228,267 | | | $ | (87,316) | |
| Investing activities | (270,969) | | | (44,795) | |
| Financing activities | 157,897 | | | (30,939) | |
| Effect of exchange rate changes on cash | 255 | | | 1,293 | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 115,450 | | | $ | (161,757) | |
Cash Flows from Operating Activities
Net cash used inprovided by operating activities was $87$228 million for the six months ended June 30, 20192020 compared to net cash used in operating activities of $72$(87) million for the six months ended June 30, 2018.2019. The change was primarily attributed to unfavorable
improved operating performance, favorable timing ofimpacts from the collections of trade accounts receivable, increased interest due to additional debtreceivables and payments of the combined company, an unfavorable impact from accounts payable and accrued expenses, asand a result of the timing of cash disbursements and an increasedecrease in payments primarily associated with severance chargesof employee separation benefits and interest, which were partially offset by decreased transaction and integration costs.
an unfavorable impact from income taxes.
Cash Flows from Investing Activities
The decreaseincrease in cash used in investing activities of $316$226 million for the six months ended June 30, 20192020 compared to the six months ended June 30, 2018,2019, was primarily related to cash paid for the Acquisitions, partially offset by a decrease in cash paid for acquisitions and an increase in the proceeds received on thefrom sale of international businesses.
businesses and decreases in purchases of property, plant and equipment and acquisitions of intangible assets.
Cash Flows from Financing Activities
The decrease inNet cash (used in) provided by financing activities of $455was $158 million for the six months ended June 30, 20192020 compared to net cash used in financing activities of ($31) million for the six months ended June 30, 20182019. The change was primarily attributable to a decrease inthe net proceeds from our Term Loana $180 million term loan associated with the Acquisitions and an increasea decrease in tax distributions to non-controlling interests partially offset by a decrease in distributions to members.interests.
UK Divestiture
On March 30, 2019, Amneal 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 Operationscontained in the Company’s 20182019 Annual Report on Form 10-K. WeOther than the contractual obligations noted below, there have been no material changes to the disclosure presented in our 2019 Annual Report on Form 10-K.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period (in thousands) | | | | | | | | |
| Contractual Obligations | | Total | | Less Than
1 Year | | 1-3 Years | | 3-5 Years | | More Than
5 Years |
Rondo Term Loan (1) | | $ | 177,750 | | | $ | 4,500 | | | $ | 18,000 | | | $ | 18,000 | | | $ | 137,250 | |
Interest payments on Rondo Term Loan (2) | | 34,383 | | | 4,214 | | | 15,651 | | | 13,966 | | | 552 | |
(1)Rondo Term loan relates to the Acquisitions.
(2)Interest on the Rondo Term Loan was calculated based on the applicable rate at June 30, 2020.
The foregoing table does not include herein certain updatesthe $45 million of aggregate principal and the related interest due on the long-term promissory notes (“Sellers Notes”) and the short-term promissory note (“Short-Term Sellers Note”) issued in connection with the Acquisition because of the uncertainty as to when those obligations. The $50 million Levothyroxine license and supply contract liability outstanding at March 31, 2019 was paid in April 2019.
amounts will be repaid. Refer to the section Acquisition Financing – Notes Payable-Related Party below for additional information.
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 threesix months ended June 30, 2019, and the year ended December 31, 2018, $37 million and $10 million, respectively,(none in 2020) 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.
Additionally, during the year ended December 31, 2019, the Company recorded $1 million in cost of sales related to reimbursement due to Lannett for certain of its unsold inventory at the end of the Transition Period, which was fully settled in March 2020.
Outstanding Debt Obligations
Term Loan and RevolvingSenior Secured Credit Agreements
Facilities
On May 4, 2018 we entered into a senior credit agreement that provided the a term loan (“Term LoanLoan”) with a principal amount of $2.7 billion and the ABLan asset backed revolving credit facility (“Revolving Credit Facility”) under which loans and letters of credit up to a principal amount of $500 million, on which $414 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% 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, 2019.2020. The ABLRevolving Credit Facility bears an annual interest rate of one-month LIBOR plus 1.5%1.25% at June 30, 20192020 and matures on May 4, 2023. As of June 30, 2019, theThe annual interest rate for the ABLRevolving Credit Facility 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, 2019, we had no outstanding borrowings under the ABL.
The proceeds of any loans made under the Senior Secured Credit FacilityFacilities 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 ABLRevolving Credit Facility at a rate based on average historical excess availability, between 0.25% and 0.375% per annum. At June 30, 2019,2020, the ABLRevolving Credit Facility commitment fee rate is 0.375% per annum.
During March 2020, as a precautionary measure to mitigate the uncertainty surrounding overall market liquidity due to COVID-19, we borrowed $300 million on the Revolving Credit Facility. At June 30, 2020, all $300 million was repaid.
The Senior Secured Credit Facilities contain a number of covenants that, among other things, create liens on Amneal's 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 ABLRevolving Credit 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, 2019,2020, Amneal was in compliance with all covenants under the Senior Secured Credit Facilities.
Acquisition Financing – Revolving Credit and Term Loan Agreement
On January 31, 2020, in connection with the Acquisitions, Rondo Intermediate Holdings, LLC (“Rondo Holdings”), a wholly-owned subsidiary of Rondo, entered into a revolving credit and term loan agreement (“Rondo Credit Facility”) that provided a term loan ("Rondo Term Loan") with a principal amount of $180 million and a revolving credit facility (“Rondo Revolving Credit Facility”) which loans up to a principal amount of $30 million. The Rondo Term Loan is repayable in equal quarterly installments at a rate of 5.0% of the original principal amount annually, with the balance payable at maturity on January 31, 2025. The Rondo Credit Facility bears a variable annual interest rate, which is one-month LIBOR plus 3.0% at June 30, 2020 and matures on January 31, 2025. The annual interest rate for borrowing under the Rondo Credit Facility may be reduced or increased by 0.25% based on step-downs and step-ups determined by the total net leverage ratio, as defined in that agreement. At June 30, 2020, the Company had no outstanding borrowings under the Rondo Revolving Credit Facility.
A commitment fee based on the average daily unused amount of the Rondo Credit Facility is assessed at a rate based on total net leverage ratio, between 0.25% and 0.50% per annum. At June 30, 2020, the Rondo Credit Facility commitment fee rate is 0.4% per annum.
The Rondo Credit Facility contains a number of covenants that, among other things, create liens on the equity securities and assets of Rondo Holdings, Rondo, AvKARE, LLC and R&S. The Rondo Credit Facility contains certain negative, affirmative and financial covenants that, among other things, restrict the ability to incur additional debt, grant liens, transact in mergers and acquisitions, make certain investments and payments or engage in certain transactions with affiliates. The Rondo Credit Facility also contains customary events of default. Upon the occurrence of certain events of default, the obligations under the Rondo Credit Facility may be accelerated and/ or the interest rate may be increased. At June 30, 2020, Rondo was in compliance with all covenants. The Company is not party to the Rondo Credit Facility and is not a guarantor of any debt incurred thereunder.
Acquisition Financing – Notes Payable-Related Party
The Sellers Notes with a stated principal amount of $44 million and the Short-Term Sellers Note with a stated principal amount of $1 million were issued by Rondo or its subsidiary, Rondo Top Holdings, LLC, on January 31, 2020, the closing date of the Acquisitions. The Sellers Notes are unsecured and accrue interest at a rate of 5% per annum, not compounded, until June 30, 2025. The Sellers Notes are subject to prepayment at the option of Rondo, as the obligor, without premium or penalty. Mandatory payment of the outstanding principal and interest is due on June 30, 2025 if certain financial targets are achieved, the borrowers’ cash flows are sufficient (as defined in the Sellers Notes) and repayment is not prohibited by senior debt. If repayment of all outstanding principal and accrued interest on the Sellers Notes is not made on June 30, 2025, the requirements for repayment are revisited on June 30 of each subsequent year until all principal and accrued interest on the Sellers Notes are satisfied no later than January 31, 2030 or earlier, upon a change in control. The Short-Term Sellers Note is also unsecured and accrues interest at a rate of 1.6% and is due on January 31, 2020.
The Sellers Notes were recorded at a fair value of $35 million, which was estimated using the Monte-Carlo simulation approach under the option pricing framework. The Short-Term Sellers Note of $1 million was recorded at the stated principal amount of $1 million, which approximates fair value. The $9 million discount on the Sellers Notes will be amortized to interest expense using the effective interest method from January 31, 2020 to June 30, 2025 as the carrying value of the Sellers Notes will accrete to the stated principal amount of $44 million.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2019.2020.
Critical Accounting Policies
For 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 20182019 Annual Report on Form 10-K. Other than as set forth below, thereThere have been no material changes to the disclosure presented in our 20182019 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 not limited to, general economic conditions, our outlook, market performance of 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 Note 2. Summary of Significant Accounting Policies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussionThere has not been any material change in our assessment of the Company’s quantitative and qualitative disclosures about market risks, see risk as set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk, in our 20182019 Annual Report on 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 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 ChiefCo-Chief Executive OfficerOfficers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our ChiefCo-Chief Executive OfficerOfficers 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 ChiefCo-Chief Executive OfficerOfficers and Chief Financial Officer concluded that due to the material weakness, described below, our disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act, were not effective as of June 30, 2019 at2020.
The material weakness in internal control over financial reporting (as defined in Rule 13a-15(f) of the reasonable assurance level.Exchange Act) resulted from ineffective controls over cash disbursements. Specifically, we did not have adequate controls to prevent improper changes to banking information in our vendor master file, which allowed cash disbursements to be redirected from a vendor bank account to an unrelated bank account. In light of the material weakness, we performed additional analysis, including validating changes to vendor bank account information made during 2020, to ensure that the Company’s financial statements covered by this Quarterly Report on Form 10-Q are prepared in accordance with generally accepted accounting principles in the United States of America.
This control deficiency did not result in any financial loss or any material impact to the financial statements for the periods covered by this Quarterly Report on Form 10-Q or for any prior periods.
To remediate the material weakness described above, we have enhanced the design and execution of our existing controls and procedures to prevent improper changes to the banking information in our vendor master file. We expect that remediation will be completed prior to December 31, 2020 following sufficient operational time for the applicable remedial controls and subsequent testing.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2019,2020, except as noted above, 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– OTHER INFORMATION
ITEMItem 1. Legal Proceedings
Information pertaining to legal proceedings can be found in Note 13.17. Commitments and Contingencies and is incorporated by reference herein.
Item 1A. Risk Factors
Other than as set forth below, there have been no material changes to the disclosuredisclosures presented in our 20182019 Annual Report on Form 10-K under Item 1A. Risk Factors.The direct and indirect impact of the COVID-19 pandemic could also affect or amplify one or more of the risk factors included in our 2019 Annual Report on 10-K. However, given the unpredictable, unprecedented and fluid nature of the pandemic, the potential impacts it could have on us, whether direct or indirect, remain uncertain. Additionally, other risks that we do not presently perceive or that we currently believe are not material may also adversely affect us.
If we fail to maintain an effective system of internal control over financial reporting, or to remediate any existing material weakness, 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 controlled by the Amneal Group. The interestsrequired to comply with Section 404 of the Amneal Group may differ fromSarbanes-Oxley Act. Section 404 of the interestsSarbanes-Oxley Act requires public companies to conduct an annual review and evaluation of their internal controls and attestations of the effectiveness of internal controls by independent auditors. Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. Our failure to maintain the effectiveness of our other stockholders.
Asinternal controls in accordance with the requirements of June 30, 2019, the groupSarbanes-Oxley Act or to remediate any identified material weaknesses, or the inability of shareholders who owned Amneal priorour independent registered public accounting firm to express an opinion as to the Combination (the "Amneal Group") controlled approximately 57% of the voting power of alleffectiveness of our outstanding shares of common stock.
Through its control of a majority of our voting power and the provisions set forth in our charter, bylaws and the Second 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 our board of directors. The Amneal Group hasinternal 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 the Amneal Group's agreement to vote in favor of directors not designated by the Amneal Group and such other matters that are set forth in the Stockholders Agreement. The Amneal Group may have different interests than our other stockholders and may make decisions adverse such interests.
Among 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 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.
The Amneal Group could transfer control of us to a third party by transferring its shares. In addition, the Company believes members of the Amneal Group have pledged Amneal Common Units and the corresponding shares of Class B Common Stock to secure borrowings, and other members of the Amneal Group could enter 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 pledged. Because of the 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 voluntary or forced sale of some or all these units or shares pursuant to a margin call or otherwise could cause our stock price to decline and negatively impact our business. Similarly, a voluntary or forced sale could cause the Company to lose its “controlled company” status under the New York Stock Exchange listing requirements, which would require us to comply over a transition period with certain
corporate governance requirements from which we are currently exempt, including having a fully independent compensation committee. If all of the Amneal Common Units and corresponding shares of Class B stock were pledged to secure borrowings, a complete foreclosure could result in a change of control.
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,financial reporting, could have a material adverse effect on our business, condition (financialbusiness. We could lose investor confidence in the accuracy 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 contributionscompleteness 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 review 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 continually introduce new products. If these trends continue or worsen, or if we experience further difficulty in this market or the Specialty market, this may continue to adversely affect our revenues and profits in our Generics and Specialty segments. Furthermore, during the first two quarters of 2019, the Company's market capitalization decreased significantly. Additional decline in our market capitalization, even if due to macroeconomic or industry-wide factors, could put pressure on the carrying value of our goodwill in both our Generics and Specialty segments and cause the Company to conduct an interim impairment test. A determination that all or a portion of our goodwill is impaired, although a non-cash charge against earnings, could have a material adverse affect on our results of operations and financial condition.
If we determine in the future that we will not be able to fully utilize all or part of our deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made,reports, which could have an adverse effect on the price of our resultscommon 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.
In connection with the preparation of operationsour condensed consolidated financial statements for the three and earningssix months ended June 30, 2020, our management identified a material weakness in internal controls over financial reporting regarding cash disbursements, as discussed in greater detail in Part I, Item 4 "Controls and Procedures." 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 the existing material weakness or any future periods.
We record valuation allowances againstinternal control material weaknesses may result in current and potential stockholders and alliance and collaboration agreements’ partners losing confidence in our deferred tax assets when it is more likely than not that allfinancial reporting, which could harm our business, the market price of our common stock, and our ability to retain our current, or a portion of a deferred tax asset willobtain new, alliance and collaboration agreements’ partners. Further, we may not be realized. We routinely evaluatesuccessful in making the realizabilityimprovements necessary to remediate the existing or any future material weakness, or in doing so in a timely and cost-effective manner.
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. The inability to timely file periodic reports under the Exchange Act could result in the SEC revoking the registration of our deferred tax assetscommon 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 assessinglimiting the likelihood thatpublicly available information regarding us and greatly reducing the ability of our deferred tax assets will be recovered based on all available positivestockholders to sell or trade our common stock.
The spread of the novel coronavirus (“COVID-19”) pandemic and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategiesother adverse public health developments could adversely affect our business and results of operations. Estimating future taxable income
On March 11, 2020, the World Health Organization designated the outbreak of a novel strain of coronavirus (“COVID-19”) as a global pandemic. Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including imposing restrictions on movement and travel such as quarantines and shelter-in-place requirements, and restricting or prohibiting outright some or all commercial and business activity, including the manufacture and distribution of certain goods and the provision of non-essential services. These measures, though currently temporary in nature, may become more severe and continue indefinitely depending on the evolution of the COVID-19 pandemic. To date, no fully effective vaccines or treatments have been developed and effective vaccines or treatments may not be discovered soon enough to protect against a worsening of the outbreak or to prevent COVID-19 from becoming endemic.
Our business and results of operations could be materially adversely affected by the COVID-19 pandemic. In particular, the COVID-19 pandemic could materially adversely impact the Company's operations, including, among other things, its manufacturing operations, supply chain, sales and marketing and clinical trial operations. Any of these factors could adversely affect the Company's business, operating results or financial condition. The United States, India and China, three countries particularly hard hit by the pandemic, represent vital aspects of our direct and indirect supply chain and the United States is inherently uncertainthe largest end market for our products, representing the geographic source of almost our entire 2019 net revenue. We have taken precautionary measures intended to help minimize the risk of the virus to our employees, including requiring non-production employees to work remotely, suspending all non-essential travel worldwide, and requires judgment. In projecting future taxable income,restricting or prohibiting attendance at industry events and in-person work-related meetings. While these measures are temporary, they may continue until the pandemic is contained. The spread of COVID-19 could also negatively affect the operations of the third parties with whom we considerdo business, including our historical
raw material providers, aspects of our supply chain and our development, collaboration and commercial partners, for the same or different reasons that it is impacting our business directly. We expect the foregoing and other unanticipated challenges will cause delays or disruptions in the manufacture, supply and availability of our products, particularly those in New York and New Jersey and more generally will make it more difficult to operate our business. Any of these factors could adversely affect the Company's business, operating results or financial condition.
resultsThe spread of COVID-19 could also adversely affect our clinical trial operations and incorporate certain assumptions, including projected new product launches, revenue growth,other research 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 offset taxable income in future periods and 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 incomedevelopment activities in the future that will allow us to realize these DTAs. However, Generic pharmaceuticals have faced regularUnited States and increasing price erosion each year, placing even greater importance onelsewhere, including our ability to continually introduce new products. If these trends continuerecruit and retain volunteers, principal investigators and site staff who, as patients and healthcare providers, may have heightened exposure risks and sensitivities to COVID-19. Further, some patients may be unable to comply with clinical trial protocols if quarantines or worsen,travel restrictions impede patient movement or ifinterrupt healthcare services or may become infected with COVID-19 themselves, any of which would delay our ability to conduct clinical trials or release clinical trial results. COVID-19 may also affect employees of third-party contract research organizations that we experience further difficultyrely upon to carry out our clinical trials, which could result in this market, thisinefficiencies due to reductions in staff and disruptions to work environments. The outbreak could impact the day-to-day operations of the FDA and other health authorities in their ability to respond to non-emergency matters, which could delay reviews and approvals of product candidates.
The COVID-19 pandemic has adversely affected many industries as well as the economies and financial markets of many countries, including the United States, India and China, resulting in a significant deceleration of economic activity. This slowdown has reduced production, decreased the level of trade, and led to widespread corporate downsizing, causing a sharp increase in unemployment. We have also seen significant disruption of and extreme volatility in the global capital markets, which could increase the cost of, or entirely restrict access to, capital. This volatility and uncertainty have adversely affected our stock price and may continue to adversely affectdo so. The impact of this pandemic on the U.S., Indian, Chinese and world economies is uncertain and, unless the pandemic is contained, these adverse impacts could worsen, impacting all segments of the global economy, and result in a significant recession or worse.
Considerable uncertainty still surrounds the COVID-19 virus and its potential effects, and the extent of and effectiveness of any responses taken on a local, national and global level. Infections may become more widespread and that could accelerate or magnify one or more of the risks described above. While we expect the COVID-19 pandemic and related events will have a negative effect on our revenuesbusiness, the full extent and profits. If we are unablescope of the impact on national, regional and global markets and economies, and therefore our business and industry, is highly uncertain and cannot be predicted. Accordingly, our ability to generate sufficient taxable income fromconduct our future operations, a substantial valuation allowance to reduce our DTAs may be required, which could materially increase our income tax expensebusiness in the periodmanner and on the valuation allowance is recognizedtimelines presently planned could be materially and negatively affected, any of which could have a material adverse effectimpact on our business and our results of operationsoperation and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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| Exhibit No. | | Description of Document |
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Exhibit No. | | Description of Document |
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| | Form of Tripartite Letter Agreement Credit Suisse* |
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| | Form of Tripartite Acknowledgment and Agreement Morgan Stanley* |
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| | Separation Agreement between Robert Stewart, Amneal Pharmaceuticals, Inc. and Amneal Pharmaceuticals LLC, dated as of August 2, 2019 *†
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| | Amendment No. 1, dated as of August 2, 2019, to Second Amended and Restated Stockholders Agreement, by and among Amneal Pharmaceuticals Holding 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 Amneal Pharmaceuticals, Inc. †
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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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101 | | |
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| 101 | | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 20192020 formatted in inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for each of the three and six months ended June 30, 20192020 and 2018,2019, (ii) Consolidated Statements of Comprehensive Loss(Loss) Income for each of the three and six months ended June 30, 20192020 and 2018,2019, (iii) Consolidated Balance Sheets as of June 30, 20192020 and December 31, 2018,2019, (iv) Consolidated Statements of Cash Flows for each of the six months ended June 30, 20192020 and 2018,2019, (v) Consolidated Statements of Stockholders' Equity/ Members' DeficitEquity for each of the three and six months ended June 30, 20192020 and 20182019 and (vi) Notes to Consolidated Financial Statements. * |
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| 104 | | Cover Page Interactive Data File – The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 is formatted in Inline XBRL (included as Exhibit 101). |
* 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.
† Denotes management compensatory plan or arrangement.
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| ** | 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. |
| † | 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 6, 2020 | Amneal Pharmaceuticals, Inc. | |
| | (Registrant) |
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Date: August 5, 2019 | Amneal Pharmaceuticals, Inc. |
| By: | | (Registrant) |
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| By: | /s/ Chirag Patel |
| | Chirag Patel |
| | President and Co-Chief Executive Officer |
| | (Co-Principal Executive Officer) |
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| By: | /s/ Chintu Patel |
| | Chintu Patel |
| | Co-Chief Executive Officer |
| | (Co-Principal Executive Officer) |
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| By: | /s/ Todd P. BranningAnastasios Konidaris |
| | Todd P. BranningAnastasios Konidaris |
| | SeniorExecutive Vice President, and Chief Financial Officer
(Principal Financial and Accounting Officer)
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