Amneal Pharmaceuticals, Inc. Q4 FY2022 Earnings Call

Hello, everyone. And welcome to the Amneal Fourth Quarter 2022 Earnings Conference Call. My name is Bruno, and I'll be operating your call today. I will now turn the call over to Amneal’s Head of Investor Relations, Tony DiMeo. Please go ahead.

Good morning, and thank you for joining Amneal’s fourth quarter 2022 earnings call. Today, we issued a press release reporting our Q4 results. The press release and presentation are available at amneal.com. 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 based solely on information that is now available to us. Please see 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 non-GAAP measures. Information on our use of these measures and reconciliation to U.S. GAAP are in the earnings presentation. On the call today are Chirag and Chintu Patel, Co-CEOs; Tasos Konidaris, CFO; Andy Boyer, Generics; Harsher Singh, Biosciences; and Jason Daly, Chief Legal Officer. I'll now turn the call over to Chirag.

Thank you, Tony, and good morning, everyone. We delivered strong fourth quarter results with $610 million of revenue and adjusted EBITDA of $154 million. We saw growth across all three business segments in Q4 and closed out 2022 well. Looking forward, our 2023 outlook reflects continued, resilient top and bottom-line performance. Overall, we believe Amneal is uniquely positioned for sustainable long-term growth. The Generics business is robust and growing each year. We are shifting towards more complex, high-growth, and high-impact products. With each new launch in injectables, complex generics, and biosimilars, our portfolio of affordable medicines is increasingly diversified. In Specialty, we are focused on expanding our branded business through the upcoming IPX203 launch and advancing our pipeline. Together with the consistently growing healthcare business, we see multiple vectors of growth and value creation that are at the heart of our strategy focused on unmet patient needs, affordability, and providing access to essential medicines globally. Let me now talk about how we are advancing our key strategic priorities. First, in Generics, we are constantly innovating, moving up the value chain of product complexity, and expanding our impact on patients. Our strategic focus has been and continues to be developing complex innovations, such as new injectables and other products that create tremendous value for patients, marking the next frontier of our affordable medicines journey in biologics and international markets. Since 2019, the team has done an extraordinary job developing our R&D engine, driving strong operational execution, and ensuring the commercial success of our business. As a result, our increasingly diversified portfolio is generating durable top-line growth. Over the last three years, we have consistently grown faster than the overall U.S. Generics market. Today, Amneal is the fourth-largest U.S. Generics company in terms of annual prescriptions and is responsible for saving American patients over $10 billion every year. We expect our topline growth algorithm in Generics to endure long term. In injectables, we are focused on expanding our product portfolio, adding capacity, and building key capabilities. In 2022, the business was very successful, generating $181 million in revenue; today, we have about 30 institutional products with over 30 new launches expected by 2025. From an operational standpoint, we are more than doubling our capacity with our two new U.S. sites. As we launch new products and bring new capacity online during 2023, we expect the next inflection of revenues to come in 2024. We are on track to achieve our goal of over $300 million in injectable revenue by 2025. Next, Biosimilars represent the next wave of affordable medicines and are highly aligned with our mission of providing access to high-quality, affordable medicines. We are excited about the growth prospects for Biosimilars, as the U.S. market alone is expected to approach $40 billion in net sales by 2027. With a long-term horizon, we see a very strong ROI, as the development costs for new biologics continue to decrease, and we expect this market to be less competitive than others. In Q4, we launched ALYMSYS, our biosimilar of Avastin; RELEUKO, our biosimilar of Neupogen. We expect to launch our third product FYLNETRA, our biosimilar of Neulasta, in the next few months in conjunction with our reimbursement coverage. Similar to the first-year adoption curve of other biosimilars, we expect 2023 to be a busy year as the commercial team works across payers, providers, and channels to drive uptake. For these three biosimilars, we see peak sales of over $200 million. We look to expand our portfolio and be strategically vertically integrated over time. Our goal is to be a top five player in the U.S. Biosimilars market and a global player over time, just like in U.S. Generics. To expand access to essential medicines globally, we leverage our diverse U.S. FDA-approved product portfolio of complex generics, injectables, specialty products, and biosimilars. We believe our international expansion strategy will add considerable revenues and profits over time. In the fast-moving $25 billion Indian pharmaceutical market, we are expanding our presence with a new brand and leveraging our local commercial team as we focus on the hospital market in India. In Europe, we signed a long-term distribution agreement with Orion at year-end. We will register complex generic products starting this year and look to begin commercialization in Europe late next year. Additionally, we are pleased to share that we recently signed another long-term distribution partnership agreement in Canada. We are partnering with Sterimax to bring our injectable portfolio to Canada. We will continue to pursue additional partnership opportunities around the world. Second, in Specialty, we expect to become a much bigger and more sustainable player over time. Our strategy focuses on 505(b)(2) opportunities that leverage our reformulation technologies to improve existing medicines and provide new innovative therapies for patients. Today, our key branded products, Rytary for Parkinson's and Unithroid for hypothyroidism, continue to grow in the low double digits combined. Next up is IPX203. We are excited about the potential of IPX203 to be a best-in-class therapy for Parkinson's patients. Beyond IPX203, we are advancing our pipeline of neurology and endocrinology programs. We look to exceed over $500 million in specialty revenue by 2027. Third, in AvKARE, we look to expand across multiple channels, including distribution, the Federal Government, and unit dose. To date, since its acquisition in 2022, the revenue of the business has grown in double digits. We expect momentum in this durable $400 million-plus revenue business to continue going forward. In summary, we are very excited about Amneal's future, particularly with key catalysts happening now across our business such as Biosimilars and the planned launch of IPX203 in specialty. As we execute our strategy and launch products in high-growth areas, our billion-dollar business continues to grow. We believe these growth drivers will accumulate and generate higher levels of financial performance over time. I will now hand it over to Chintu.

Good morning, everyone. Thank you, Chirag. First, thank you to the Amneal family, who worked so hard to make healthy possible for so many. Let me start out with operations; we are focused on operational excellence and optimizing our global footprint. In 2022, the team drove record production of key products such as Adrenaclick, achieved operational efficiencies, and expanded infrastructure in key areas such as injectables. In R&D, our global innovation team continues to drive a highly productive R&D engine as we shift our efforts towards a wide array of complex pipeline products. In Inhalation, we recently entered a partnership to in-license the soft drug technology platform for the development of inhalation pipeline products such as Respimat inhalers. As always, Amneal is built upon our strong quality track record and commitment to the highest standards of quality. Since our founding in 2002, the FDA has conducted over 80 successful inspections of our sites. We continuously look for ways to push the quality bar higher through investments and best practices. Let me now walk through the different aspects of our innovation agenda. In Generics, our focus is on complex innovations for about 90% of our pipeline, with over half expected to be first-to-market, first-to-file, or 505(b)(2). In 2022, we launched 26 new generic products. In 2023, we expect over 30 new launches, with five already launched in the first two months. Today, we also announced our FDA submission of generic Narcan, manufactured at our Branchburg, New Jersey facility. We see a meaningful opportunity to improve access to this critical opioid overdose treatment. Please refer to our key catalyst slide in the earnings presentation for a list of notable launches. In Injectables, we are scaling up as we expand our infrastructure and add to our portfolio. Our newest injectable site is on track for inspection next month, with FDA approval expected later this year. Once approved, we will have all the key capabilities of a leading injectables company with the ability to produce across dosage forms, including vials, prefilled syringes, cartridges, and LVP bags. With our expanded capabilities, we have shifted our innovation focus towards injectables. In the last few months, we received approval for our first two LVP bags, Esmolol and Magnesium sulfate. There are currently 33 injectables ANDAs pending and another 59 products in the pipeline. We have made good progress advancing our programs in several complex areas including drug-device combinations, peptides, long-acting injectables, liposomes, LVP bags, and 505(b)(2) products. Similar to 2022, we expect to file 10 to 15 more ANDAs in 2023. We are well on our way to scaling our injectables business to be a major player. In Biosimilars, we are very excited about Amneal's potential in this space. To start, we are pleased to launch our first two biosimilars in Q4, with one more launching soon. Beyond this, there is tremendous opportunity to expand our portfolio with additional molecules as a large number of branded biologics come off patent in the coming years. Currently, biosimilars are in development for 27 molecules, representing approximately $96 billion of the total $260 billion U.S. biologics market. We are looking at innovative and cost-effective development and manufacturing pathways with partners, as our goal is to be first or second to market in future biosimilars. Over time, we look to be vertically integrated to scale this business effectively. We expect biosimilars to be a key growth area for Amneal long-term. Looking globally, we see 2023 as a foundational year for executing our international expansion strategy. Our focus and efforts extend beyond the key initiatives in India, Europe, and China, which Chirag highlighted. Additionally, we have comprehensively analyzed our entire product portfolio in the context of all emerging markets. As a result, we have systematically identified over 50 product opportunities across different emerging market countries. In 2023, we began registering products locally. We have a dedicated team at Amneal focused on driving international expansion. In Specialty, we are expanding our branded portfolio as we advance our pipeline. Our PDUFA date for IPX203 is coming up on June 30. We continue to see this as a $300 million to $500 million peak sales opportunity as we look to impact a broader portion of U.S. Parkinson's patients. We are also looking at international licensing opportunities. Beyond IPX203, we have continued to advance our branded pipeline and are pleased to share the addition of K-130 to our specialty pipeline. K-130 is a new R&D program for symptomatic neurogenic orthostatic hypotension. There is a potential broad use case across several patient populations, including Parkinson's and other chronic diseases. This 505(b)(2) program utilizes our proprietary drug delivery technology platform, GRANDE, which is an advanced gastric retention system. We are working on additional R&D programs in the preclinical phase. In summary, we are executing our innovation strategy and advancing our pipeline, particularly in high-growth areas. I will now hand it over to Tasos.

Thank you, Chintu. I will start with our fourth quarter results, then move on to our full-year 2022, followed by 2023 guidance. We're very pleased with our fourth quarter results with total net revenue of $610 million, growing 14%, adjusted EBITDA of $154 million, growing 26%, and adjusted diluted EPS of $0.23, up 35%. Q4 Generics' net revenue was $399 million, an increase of $53 million or 15% compared to the prior year period. Our results reflect favorable prior-year comparisons, solid growth of Zafemy, and the breadth of our new product launches. As a point of reference, new products launched in 2021 and 2022 accounted for $35 million or 70% of our growth this quarter. Q4 specialty net revenue of $103 million increased by $2 million or 2% compared to the prior year period, driven by Unithroid, up 34%, and Rytary, up 13%, partially offset by the final quarter impact from the loss of exclusivity for Zomig nasal spray. Our AvKARE business continues to perform exceedingly well with Q4 net revenue of $108 million, up $18 million or 21%, compared to the prior year period, due to continued growth of our distribution channel and new products to better meet the demands of our customers. As we outlined on our Q3 earnings call, the drivers of sequential revenue acceleration from Q3 to Q4 played out as expected. Our expansive and diversified portfolio continues to perform well and increases our financial resiliency and predictability. Q4 2022 adjusted gross margin of 43.4% was slightly up compared to the prior year period. Q4 adjusted EBITDA of $154 million was $32 million or 26% greater than the prior year period. We believe strong Q4 results are indicative of our P&L profile over time with faster-growing top line, solid gross margin, and operating expense leverage, generating robust profitability. Now looking at full-year 2022 results, we met our financial guidance metrics. Total net revenue of $2.2 billion grew $118 million or 6%. Full-year 2022 generics top line grew 5%, driven by new product launches, growth of our injectable portfolio, and our Adrenaclick epinephrine auto-injector. Specialty net revenue declined by $4 million or 1%, as strong growth in Unithroid, up 33%, and Rytary up 8% offset the Zomig loss of exclusivity, which is an impact we could now annualize. Full-year 2022 adjusted EBITDA was $514 million, up $2 million year-over-year, reflecting top-line growth partially being offset by inflationary pressures and growth in our sales and marketing functions to support numerous product launches. Full-year 2022 adjusted diluted EPS of $0.68 declined 13%, in part due to higher interest expense. From an operating cash flow perspective, we generated $210 million, of which $145 million was used to settle certain legacy legal matters. As we discussed in the past, we're focused on resolving various legacy legal issues expeditiously. Earlier in 2022, we resolved the Opana legal matter, and in the fourth quarter of 2022, we recorded an $18 million charge related to the majority of opioid cases. We believe this amount is consistent with our position as a generic manufacturer with limited market share. From a balance sheet perspective, we finished 2022 with net debt of $2.6 billion and net debt to adjusted EBITDA of 5.1 times, compared to 7 times three years ago. In 2023, we expect to refinance our $2.6 billion Term Loan B and continue to delever over time through EBITDA growth and debt pay-down. Let me now turn to our 2023 guidance where we expect another year of stable results as we build for sustainable long-term growth. From a top-line perspective, we expect 2023 total company net revenue of $2,250 million to $2,350 million, reflecting continued mid-single-digit growth driven by all segments. In generics, we expect low single-digit growth, reflective of the following four dynamics. First, we believe our three biosimilars should add $40 million to $60 million this year, driven by ALYMSYS. 2023 represents our first year of commercialization in this new product market, and we believe our products and commercial teams can add substantial value to our customers. Second, we expect the strength of our generics R&D pipeline to add over $100 million in net sales, with many of these new products having already been approved. Third, we expect resolution of the capital supply chain issues that impact our controlled substance products, as well as a few future injectable pipeline products. Fourth, we expect the competitive nature of our generics segment to persist from a price and volume perspective. In specialty, we expect mid-single-digit growth driven by Rytary and Unithroid. We're very excited about the potential FDA approval of IPX-203, but we have not included that in our net sales guidance. At AvKARE, we expect continued double-digit growth driven by the ongoing expansion of the distribution segment and new product innovations in the government and hospital segments. Moving down the P&L, we expect 2023 adjusted EBITDA of $500 million to $530 million. Our outlook includes approximately $15 million of inflation and $30 million of incremental investments in sales and marketing to scale up in higher growth areas, such as specialty, biosimilars, and injectables. From an adjusted EPS perspective, we expect $0.40 to $0.50, which reflects higher interest expense related to our likely Term Loan B refinance. On the cash side, we expect 2023 operating cash flow, excluding any legal settlements, between $200 million and $230 million, which is in line with the $210 million we delivered in 2022, despite increased interest costs. Furthermore, we expect $50 million to $60 million in capital spending. Finally, from a phasing perspective, we expect 2023 to develop in a similar manner to 2022. That said, let me hand it back to Chirag.

Thank you, Tasos. In summary, 2022 was a year of strong performance across our diversified portfolio. Amneal is a fundamentally different company than it was in 2019 when Chintu and I came back. The business is expanding into high-growth areas such as biosimilars, specialty, injectables, and complex generics. The top line is growing each year as we devote our strategic focus, investment, and energy to the high-impact areas of the global pharmaceutical industry. Looking out one year from now, we envision an even stronger Amneal with a flourishing biosimilar business, specialty accelerating with IPX-203, a generics business that has an entirely new basket of complex innovations, injectables inflecting higher and healthcare continuing to grow in double digits, all building on our consistently durable financial profile. Over the long term, we believe Amneal is uniquely well-positioned to drive sustainable growth and create value for all stakeholders and society. We will now open the call to questions.

Our first question is from Elliot Wilbur from Raymond James. Elliot, your line is now open. Please go ahead.

Good morning. Thank you. Quick question on the pipeline, specifically regarding the specialty segment. I'm referring to slide five in the deck. Previously, the company had talked about peak sales potential for pipeline assets in the specialty segment being $500 million to $1 billion. Now the language is $500 million by 2027. Is there any change to the outlook, or is this just a desire on your part to be a bit more granular in terms of timing? A follow-up, big-picture question: Chirag, I think you sort of addressed this in your closing commentary, but investors have expressed frustration with the fact that EBITDA has been roughly flat the last couple of years despite scaling up investments, which has diluted cash conversion metrics and impacted the company's ability to reduce its debt load. So when do you expect to start to see the EBITDA leverage relative to top-line growth materialize?

Thank you, Elliot, for your compliments on Amneal. It is a strong culture with over 7,000 people dedicated to our pipeline and investments we have made over the years. On your big-picture question, we hope to reach the $1 billion mark as soon as we can on specialty. So, as I mentioned, in the short term, we have multiple vectors of growth. In terms of generics, you are correct; it’s not getting worse and may be slightly improving. Some responsible buyers have indicated that there would be no opportunity for price reductions moving forward, which is comforting. These are low-priced drugs, and further reductions could risk shortages. Companies like us and Teva have already faced issues on certain molecules. We believe the generics segment has stabilised, and we are seeing positive behavior from certain major buyers. We expect our generics business to thrive through innovations in non-commodity products. Regarding specialty, we expect IPX203 to impact a large patient population significantly, enhancing our growth potential. Overall, Amneal is excited about its future prospects and responsive developments across our business, including international expansions.

Okay. Great. Just a couple of follow-ups. For IPX-203, how have conversations with the FDA been going, and what are you doing to prepare for that launch? You're obviously excited about it. I think you said you're not factoring anything into the revenue guidance for this year, but is it in the spending guidance? And then ultimately, how much will it cannibalize Rytary, or will it be additive for new patients when you talk about the $300 million to $500 million peak over time?

Thank you, Gary. Chintu, would you like to provide an update on IPX-203?

Sure. Good morning, Gary. IPX-203 is moving well through the regulatory process. We are engaged with the FDA and are optimistic about receiving approval by the goal date of June 30. So far, there have been no showstoppers.

Regarding cannibalization, we do not anticipate it to be significant. We see IPX-203 as a broader market opportunity. There are approximately 3 million prescriptions available, with 95% of patients currently using IR. We believe some current Rytary patients may switch over to IPX-203, but overall, our aim is to capture a broader market share.

Good morning, Gary. In terms of margins, Q4 was in line with our expectations. Generic margins were 41.6%, up 250 basis points from the previous year. Specialty margins increased by about 200 basis points. The total company margin at 43.4% was flat compared to Q4 of last year. This mix could be contributing to the perception of margin weakness. Looking ahead to 2023, we expect gross margins for generics to remain between 41% and 43%, depending on new product introductions and competition. Specialty margins are expected to remain around 82%. Overall, not much change in gross margins is anticipated.

Your question about international expansion is insightful. We see our international opportunities contributing significantly to our revenue within the next few years. We are currently focusing on introducing our existing FDA-approved products to those emerging markets.

Ladies and gentlemen, we currently have no further questions. I would now like to hand over to Chirag Patel for final remarks.

Thank you, everyone. Have a great day.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.