Amneal Pharmaceuticals, Inc. Q1 FY2022 Earnings Call

Hello and welcome to Amneal's First Quarter 2022 Conference Call. My name is Alex and I will be coordinating the call today. I would now like to turn the call over to Amneal's Head of Investor Relations, Tony DiMeo. Over to you Tony.

Good morning and thank you for joining Amneal's first quarter 2022 earnings call. Today, we issued a press release reporting our financial results. The press release and a presentation are available on our website at amneal.com. And a replay of this call will be posted after the call. Certain statements made on this call regarding matters that are not historical facts, including but not limited to management's outlook or predictions are forward-looking statements that are based solely on information that is now available to us. Please review the section entitled cautionary statements on forward-looking statements in the earnings presentation and our SEC filings for a discussion of factors that may impact our future performance. We also discuss certain non-GAAP measures. Important information on our use of these measures and reconciliation to U.S. GAAP may be found in our earnings presentation. Beginning in the first quarter of 2022, the company will no longer exclude R&A milestone expense from non-GAAP financial measures. In our press release, we provide revised prior period results reflecting this change. On the call this morning are Chirag and Chintu Patel, Co-CEOs; Tasos Konidaris, CFO; Andy Boyer, Generics; Joe Todisco, Specialty; and Jason Daly, our Chief Legal Officer and Corporate Secretary. I will now turn the call over to Chirag.

Thank you, Tony. Good morning, everyone. The first quarter was a strong start to the year, with revenue reaching $498 million and adjusted EBITDA hitting $100 million as anticipated. We are on course to meet our guidance commitments for full-year 2022, targeting continued growth in both revenue and profit. Building on our consistent performance and strategic execution over recent years, we are expanding into high-growth areas such as Specialty, Injectables, and now Biosimilars. Our strategy as a global essential medicines company emphasizes affordability, access, and addressing unmet patient needs. Looking ahead, we anticipate an acceleration in our growth profile, diversification in our business mix, and an expanded impact on global healthcare. Now, let me share some updates from our various business segments. Starting with Generics, we are seeing continuous growth as our productive R&D efforts yield a more diverse portfolio with new complex medicines. Consequently, Amneal has a low level of product concentration, with our largest Generics product accounting for only 5% of total revenues, and our top five Generics products representing just 17%. With a focus on complex and higher barrier products, over half of our Generics revenue now comes from non-oral solids, compared to 35% a few years ago. The shift towards complex medicines continues, with 86% of our pipeline consisting of non-oral solids. As a result, we expect sustained growth in this segment and are reinvesting returns into high-growth areas. Regarding our injectable business, as previously mentioned, this is a significant growth area for Amneal. We are happy to report that Injectables will see approximately 30% growth this year, reaching more than $160 million in revenue, as we aim for over $300 million by 2025. We plan to expand our business through enhanced capabilities, increased capacity, and new products in our portfolio, which we believe will drive substantial and sustainable growth in Injectables for years to come. In Biosimilars, we are thrilled to be entering the U.S. biosimilar market with the upcoming launch of our first three oncology products. We are proud of the approvals for RELEUKO, a filgrastim biosimilar, and Alymsys, a bevacizumab biosimilar, which mark significant achievements for team Amneal and our partners. Furthermore, we expect to receive approval for a third biosimilar similar to filgrastim in the next few weeks. As we have shared before, we have positioned Amneal to play a crucial and long-term role in the rapidly growing $28 billion U.S. biosimilar market. We estimate the market size for these three products, based on net revenue, to be approximately $4 billion, with about half coming from Biosimilars. Together, we anticipate peak sales for these three U.S. biosimilars to reach $200 million. This is our first time providing a revenue estimate for Biosimilars. We are also exploring additional opportunities to be early to market while we build our portfolio through in-licensing and vertical integration to become a significant player in biosimilars. In healthcare distribution, we experienced continued positive growth in Q1 and expect this growth to be sustainable, driven by strong commercial and operational execution as we expand across various distribution channels. Internationally, we are utilizing our portfolio of complex generics, Injectables, Specialty, and Biosimilars to meet local market needs. We believe this strategy will generate considerable revenues over time and be highly profitable as we leverage partners and our existing infrastructure. In China, we are progressing well with our Fosun partnership and expect to commercialize later this year or early next year. In India's 25 million branded generics market, we have launched our label and are working to increase our presence. In other parts of the world, we are pursuing distribution agreements and will update you on our progress. In Specialty, we continue to focus on enhancing the commercial execution of our key branded products and advancing the pipeline. We expect ongoing growth for Rytary for Parkinson's and Unithroid in hypothyroidism throughout the year. As our pipeline yields new branded products, including those launching this year and IPX-203 next year, we anticipate significant expansion in the Specialty business over the coming years. Before handing it over to Chintu, I want to acknowledge Joe Todisco, who is leaving Amneal to become the CEO of a biopharmaceutical company in New Jersey. I want to express my gratitude to Joe for his incredible contributions to Amneal over the past 11 years and his strong leadership. He has built a great team and has made significant contributions to our company. We wish him all the best. Now, I will turn it over to Chintu.

Thank you, Chirag. Good morning, everyone. I want to express my heartfelt gratitude to the more than 7,000 members of the Amneal family who work tirelessly every day to make health achievable. Our unwavering commitment to excellence in operations, supply chain, quality, and innovation sets Amneal apart. Through our excellence programs, we consistently reduce costs and enhance efficiency. In R&D, we're allocating more funds to high-growth areas, particularly Biosimilars, Specialty, Injectables, and complex generics. Let me now discuss various aspects of our business. In Generics, we're optimistic about our pipeline and ongoing innovation in complex categories. So far in 2022, we've launched eight new products, with an expectation of 20 to 30 new launches this year and in the years ahead. Recently, we received approval for bexarotene gel, and Amneal leads the industry in CGT approvals. Overall, we have 111 ANDAs pending across all dosage forms in generics and plan to file about 30 more this year. Out of our pipeline of 101 products, 86% are non-oral solids, and most are anticipated to be first-to-market. We are progressing towards a more complex and differentiated portfolio of over 250 molecules that support sustainable growth. A key product launch in 2022 is ritonavir, which is used together with Paxlovid. We are thrilled to be one of the primary U.S. suppliers of this important COVID-19 treatment. Ritonavir is an approved ANDA that our team is diligently working to supply due to significant demand. Additionally, we have enhanced the supply chain for the Adrenaclick epinephrine auto-injector and expect increased revenue in 2022. Looking ahead into 2022 and 2023, we anticipate significant launches that will begin to roll out late this year, contributing to growth in 2023 and beyond. For competitive reasons, we don't disclose many upcoming launches, but I can mention a few key ones among others, including in ophthalmics and magnesium sulfate. In retail generics, our strong pipeline and leading commercial presence should drive consistent financial performance. In ophthalmics and otics, we currently have eight ANDAs pending and 11 products in the pipeline. In inhalation nasal, there are four ANDAs pending and seven additional products under development. We foresee substantial growth in Injectables as we expand our portfolio and enhance our capacity and capabilities. In January, we acquired the Saol Baclofen franchise, which added live result to our institutional offerings and increased our commercial capabilities. Last November, we acquired Puniska Healthcare, adding advanced manufacturing capabilities and doubling our capacity to 16 production lines overall. The integration is progressing well, and we are prepared for commercial production in 2023. This acquisition, along with the expansion of other sites, has improved Amneal's ability to conduct more R&D and supply commercial products from various locations. We expect to launch five to 10 new Injectables in 2022, with four already this year. We have 28 ANDAs pending and another 61 products in our pipeline, covering a range of complex areas, including drug-device combinations, peptides, long-acting injectables, liposomes, LVP bags, and 505(b)(2) products. Overall, we are on track for over 14 injectable launches from 2022 through 2025. As previously mentioned, we believe that our robust quality track record, increased supply capacity, and ongoing innovation well-position us to scale our Injectables business and become a sustainable long-term global supplier. We are enthusiastic about the expanding biosimilars market and believe Amneal is poised for growth both now and in the future. The recent approvals of our first two biosimilars, along with another anticipated approval this month, mark a pivotal moment for Amneal. We are planning to launch Releuko and Alymsys in Q3 and expect to be among a few companies to offer three U.S. biosimilars in the oncology sector. We were pleased to receive first cycle approval for Alymsys, which is a significant achievement for our team and showcases our core skills in this area. Together with our partners, we possess substantial scientific, regulatory, manufacturing, and commercial expertise necessary in Biosimilars. We see that successful outcomes rely on having the right development pathway, manufacturing capabilities, and a vertically integrated approach over time from development to commercialization. We are actively enhancing our essential capabilities and expanding our portfolio to drive organic and inorganic growth by targeting new biosimilar launches in the coming years. We are very optimistic about our future in biopharmaceuticals, especially in Biosimilars, as opportunities are currently materializing for us. On the international front, we are advancing our strategies in China, India, and globally. We view global expansion as another avenue for long-term sustainable growth. In China, we currently have five products filed, with expectations for 10 to 15 by the end of 2022 and 20 to 30 in total over time. In March, we were excited to be one of the companies awarded a sub-license to manufacture and commercialize Paxlovid in 95 low- and middle-income countries, and we are exploring distribution strategies to enhance access to this COVID-19 treatment. In Specialty, we are broadening our branded portfolio and see several catalysts for growth. Our current Specialty pipeline has a potential U.S. peak sales range of $500 million to $1 billion. We plan to launch LYVISPAH specifically in June and aim to introduce our DHE Autoinjector for migraines and cluster headaches later this year, pending approval. For IPX-203, we've concluded our pre-NDA meeting with the FDA. At the American Academy of Neurology Meeting in April, we presented two abstracts highlighting top-line clinical efficacy results and post hoc analyses indicating increased effectiveness. We expect to submit our NDA in Q3 and, pending FDA approval, are on track for a mid-2023 launch, projecting U.S. peak sales between $300 million to $500 million for IPX-203. We plan to file our NDA for K-127 for Myasthenia Gravis by the end of 2022 while exploring other indications. Our other pipeline programs, K-114 and K-128, are also progressing well. We look forward to sharing more on our expanding Specialty pipeline. We are introducing new 505(b)(2) programs aimed at repurposing existing molecules using our drug delivery technology platforms, GRANDE and KRONOTEC. Developing these technologies differentiates us in the Specialty area. Overall, we are very excited about our Specialty growth prospects and plan for at least one new launch each year moving forward. To conclude, our strategy for accelerated growth is founded on a strong base of innovation, exceptional quality, and operational excellence. We remain highly focused on our execution throughout this year. I will now pass it over to Tasos.

Thank you, Chintu. Our financial performance in the first quarter met our expectations, and due to the excellent efforts of our team, we are happy to reaffirm our full-year 2022 guidance for ongoing growth in both revenue and profits. In the first quarter, we reported total net revenue of $498 million, adjusted EBITDA over $100 million, and adjusted diluted EPS of $0.12. Our results include $5 million in R&D milestone expenses, which we are no longer excluding from our non-GAAP results. The annual run rate for these expenses ranges from $50 million to $20 million and represents external partnerships to enhance our R&D pipeline. As a policy change, there is no economic impact to our business. Q1 net revenues from generics were $318 million, an increase of $5 million or 2%. Products launched in 2021 and 2022 contributed $14 million to this growth, offsetting the usual declines from the remaining portfolio. As we have previously stated, our focus on innovation and effective commercial execution is a key factor that supports our sustainable revenue growth. Therefore, products launched before 2019 now make up about 65% of generics net revenue and are decreasing rapidly. This reduced reliance on older products that face more competition is promising for our ongoing growth and profitability. In Specialty, Q1 net revenue was $85 million, a decline of $11 million or 11%, representing the lowest quarterly revenue for the year. This performance reflects Zomig's loss of exclusivity as well as higher than normal reimbursement costs associated with Lannett. We are encouraged by the total prescription growth of Rytary and Unithroid, which increased by 6% and 13% respectively, as well as the upcoming launches of LYVISPAH and DHT Autoinjector. Our AvKARE revenue of $95 million grew by $10 million or 12%, highlighting our success in acquiring customers in the non-federal distribution channel. Q1 adjusted gross margin was 43.5%, consistent with the previous quarter. This includes a generics gross margin of 42%, which improved by 300 basis points from the prior quarter, and an AvKARE gross margin of 15%, which declined by 500 basis points due to changes in business mix. Additionally, there were $15 million in costs linked to the timing of our manufacturing production schedule. This issue is timing-related and is expected to improve in future quarters, leading to significant additional gross margin and profitability. Our Q1 adjusted EBITDA of $100 million was a few million more than the expectations shared during our February call. It also includes the $5 million related to our policy change and $15 million for manufacturing overhead allocation. From an operational cash perspective, we generated $120 million, which we will continue to invest in promoting sustainable long-term growth. In the first quarter, we invested $131 million to fully fund the previously announced acquisitions of Saol, Kashiv, and Puniska Healthcare. Looking forward and consistent with our February earnings call, we anticipate a significant acceleration in both revenue and profit growth throughout this year. This growth will be driven by four factors: new product launches such as RELEUKO, LYVISPAH, Lioresal, and other new biosimilars; strong demand for key growth brands; favorable fixed manufacturing overhead absorption; and stability in our operating expenses. Having these factors well understood and within our control gives us confidence in achieving our 2022 financial guidance. Let me now hand the call back to Chirag.

Thank you, Tasos. In summary, we are on track for another great year in 2022. We see momentum across our business, including our first U.S. biosimilar approval. We see these growth drivers building and accelerating our company performance this year, next year, and beyond. I'll now open the call to questions.

Thank you. Our first question for today comes from Gary Nachman of BMO Capital Markets. Gary, your line is now open. Oh sorry, Gary, you might be muted. Sorry, Gary, I'm still not receiving any audio. Could you please check your connection?

Operator, next question.

Our next question comes from Mikaela Franceschina from Barclays. Mikaela, your line is now open.

Hi, I'm Mikaela Franceschina from Barclays on for Balaji Prasad. Just wondering by when can you realize your U.S. peak sales guided of $200 million plus for your three biosimilars? And when thinking about your Biosimilars, how do you plan to get vertically integrated and over what timeframe?

Mikaela, thank you and good morning. So the peak sales, as you know, we are working on getting reimbursement in place, which should be in place by January 1, 2023. Our commercial infrastructure is in place. So we expect contributions this year, adding up to more contributions in 2023, and peak sales I would say somewhere between 2023 and 2024 we should be able to achieve that. And you had a second question on vertical integration. So as we are committed to biosimilars for the long-term, as we have previously stated, our strategy is dual: one is to license from key trusted partners and build our own capabilities. So we are exploring different options and should be able to be vertically integrated by the end of this year or the beginning of next year.

Thank you.

Thank you. Our next question comes from David Amsellem from Piper Sandler. David, your line is now open.

Hey, thanks. I joined late, so I apologize if I missed this. But on the margins, I know you talked about AvKARE being a bigger part of the mix. I just had a bigger picture question about the role of AvKARE in the organization, and to the extent that you have periods where it's a bigger part of the mix, and there's some margin compression. Do you see that as problematic? I'm just trying to get a better sense of where AvKARE fits and what is the margin profile given where you're taking the business that is acceptable? So that's number one. Number two is on Biosimilars. I think you laid out some assumptions about peak sales. So I wanted to get your thoughts on just your view on share – volume share and ultimately how you're seeing overall penetration in the Filgrastim and PEG-Filgrastim and bevacizumab markets playing out for Biosimilars, and what your underlying assumptions are regarding pricing erosion, share, and your penetration in those markets. That would be really helpful. Thank you.

David, good morning. So I'll start with the big picture on AvKARE. AvKARE is an excellent cash flow business for us and also allows us to put more products in the federal healthcare market, which is the VA and DoD as you know we are one of the top two there. So margin could fluctuate in that business. They have three segments within AvKARE. One is the federal government, which is steady and has good margins, and then they have a unit dose business which is growing, and the third business is pure distribution business for the City of Philadelphia, and they have added a few more cities. So it's a great business. It will fluctuate between 15% to 20% of gross margin and we keep adding to the top line. So we should be focused on the top line as well. Anything else on AvKARE, Tasos?

No, you are spot on. It's a sustainable business. It is growing both top line and bottom line. David is correct. The overall margin of that business is less than the rest of our business, but we're really focused on total absolute dollar returns there.

Yes.

And whether or not one quarter AvKARE in this situation 15% gross margin versus 18%, that's where it's going to fluctuate and doesn't really move the needle that much from a total company perspective. So the key driver there is Specialty, which continues to be almost 80% of our generics, which as you know over the last three years, we've grown it from mid-30s to substantially more than 40%, so that will be then.

Yes, thank you, Tasos, for the question on Biosimilars. The great news is that our commercial team is established, led by Harsher Singh and enhanced by a few additions from ADC and Pfizer. We've also added 21 people to our institutional sales and contracting salesforce. As always, we are confident in our ability to successfully commercialize these products. We have a solid understanding of the market. We are working on securing the reimbursement code for our quasi-branded products. For Bevacizumab, we are competing against Amgen, Pfizer, and the original innovator, and we aim to capture around 15% to 20% market share. Our strategy includes focusing on oncologic clinics and integrated regional systems, with several paths to success. We will benefit from the 340B pass-through status, which is advantageous. The GCSF, specifically Filgrastim, also has pass-through status, though the competition is stiffer with three active players. We hope to leverage our unique 340B position to achieve similar market share goals. For PEG-Filgrastim, competition is even higher due to five active players, so we will explore various channels for penetration. Having strong partnerships for PEG-Filgrastim will be beneficial as we prepare for its launch. Overall, we are eager about the prospects for all three products, and the future of biosimilars looks very promising.

Okay. That's helpful. And just if I may follow-up, just to be clear on the shared economics, could you remind me of the margin profile of the biosimilars? I mean, that's not going to be net margins that are going to be higher than corporate operating margins, right? Is that a fair way to think about it?

Yes, the market size could lead to higher expectations, while PEG-Filgrastim is expected to align with corporate margins.

Got it. Okay. Thank you.

Thank you. Our final question for today comes from Gary Nachman from BMO Capital Markets. Gary, your line is now open.

Okay, great. Sorry, I missed you guys before just jumping around a couple of calls. I don't know if you touched on this. I obviously jumped on late. But did you talk about how you expect gross margins to trend for the remainder of this year and sort of what additional initiatives you are taking to improve the gross margin further beyond this year? Just what sort of levers you think you have at this point? How much more there is to do on that front? And then with respect to the Specialty – yes, just one more, with respect to the Specialty business just how comfortable you are with the commercial infrastructure? How much more do you want to leverage that in terms of bringing new products in? Is that going to become a much bigger part of your business do you think over the next few years, or will it be relatively modest when you think of the overall company? Thanks.

Hey, Gary, I'll take the first one. Good morning. As you know, our Q1 gross margin was 43%. We are looking to increase that for the rest of the year. My gut feeling is we’ll finish the full year probably around 45%, which is in line with where we were last year. That's number one. Now, if you think about the growth drivers and how do we go from Q1 of 43% to let's say the rest of the year of about 45%, there are a couple of things. Number one is our internal manufacturing production plan. So, better fixed overhead absorption, and we're in control of that. It just reflects the demand and manufacturing operations. So high confidence on getting that benefit. Second is new product launches. As we shared with you a few months ago, this year we expect new product launches to be more on the back end of the year than the front end. And as you know, by nature of the complexity of those products, they have substantially greater gross margin than the rest of the portfolio. The third factor is when you look at our Specialty business. As I said in Q1, that is the low point in terms of revenue. Unit growth is expected to accelerate growth and those products have higher gross margins. So those are the three levers.

Yes.

Thank you, Tasos. On Specialty, we have built a strong platform since acquiring Impacts in 2018, which provides us with excellent commercial capabilities for Parkinson's and movement disorders, as well as endocrinology. We're thrilled to have a skilled team and established market access relationships. We anticipate continued penetration growth of 6% to 8% annually, with unit growth projected at 10% to 12%. Our organic pipeline is robust; we have a product launching on June 1, as well as a DHE autoinjector expected to be launched this year based on positive outcomes from our partner's site with the FDA. The IPX-203 is expected next year and has significant sales potential due to its product profile and results. K-127, our core product for Myasthenia Gravis, is set for filing this year with a launch anticipated in 2024, alongside government programs supporting it. Additionally, we are advancing two more pipeline programs, K-114 and K-128, and plan to provide updates on our expanding Specialty pipeline. We are also introducing new 505(b)(2) programs that aim to repurpose existing molecules using our drug delivery technologies GRANDE and KRONOTEC, which set us apart in Specialty. Currently, our Specialty business is valued at about $400 million. These organic pipelines are expected to contribute significantly to our revenue, and we are open to strategic tuck-in deals in these two specialty areas. We continuously assess available opportunities, particularly as the biotech landscape evolves, which positions companies like ours favorably due to steady cash flow from our Generics, Injectables, and Specialty segments that support our growth. We are enthusiastic about our prospects. We aspire to reach $1 billion in Specialty sales, and while it may take a few more years, we have strong growth drivers in place. You're spot on—the Specialty business is becoming increasingly significant and is contributing more than our Generics sector.

That's very helpful. Thank you.

Thank you. We have no further questions for today, so I'll hand back to Chirag Patel for any closing remarks.

Well, thank you everyone. I know it was a busy morning, so many people could not join. But to everybody who did join, thank you very much. And have a great day.

Thank you for joining today's call. You may now disconnect.