Amneal Pharmaceuticals, Inc. Q1 FY2023 Earnings Call

Hello, everyone and welcome to the Amneal Pharmaceuticals First Quarter 2023 Earnings Conference Call. My name is Emily, and I'll be your moderator for today's call. 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 first quarter 2023 earnings call. Today, we issued a press release reporting our full Q1 results. We announced certain unaudited preliminary results for the first quarter on April 17, 2023. 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 that are 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 reconciliations to US GAAP are in the earnings presentation. On the call today are Chirag and Chintu Patel, Co-Founders and Co-CEOs; Tasos Konidaris, CFO; our commercial leaders Andy Boyer for Generics; Joe Renda for Specialty; Harsher Singh for Biosciences; and Jason Daly, Chief Legal Officer. I will now turn the call over to Chirag.

Thank you, Tony. Good morning, everyone. We delivered very strong first quarter results with $558 million of revenue growing 12% and adjusted EBITDA of $116 million growing 16%. We saw robust top-line growth in Q1 across all three business segments: Generics, Specialty, and AvKARE reduced our net leverage to 4.9 times and affirmed our full year 2023 guidance. Taking a step back for those who are newer to the Amneal story, we are a global pharmaceutical company with an expanding portfolio of approximately 270 products. Our strategy focuses on launching new products in high-growth and high-impact areas of medicine such as complex generics, injectables, biosimilars, and specialty. Since 2019, we have significantly diversified our business fueled by the productivity of our R&D pipeline and strategic investments to build our global platform. As a result of Amneal's diversification, we have seen continuous strong financial performance since 2019 as we have delivered substantial revenue and EBITDA growth. In 2022, approximately $500 million of our top-line performance came from products launched since 2019. We see our momentum accelerating in 2023 and beyond underscored by our strong Q1 results and 2023 outlook. In short, we are very well-positioned for sustainable long-term growth, accelerating profitability, and continued deleveraging. I'll now briefly walk through how we are executing on our key strategic priorities across our businesses. First in the Generics segment, our diverse portfolio of approximately 230 retail generic products is continually expanding, moving up the value chain of complexity and generating durable top-line growth since 2019. Our strategy to diversify with more complex products has been deliberate over the years. To give you context, we expect about 55% of 2023 Generics revenue will be from complex products, up from 35% in 2019. We feel great about the breadth and depth of our R&D pipeline, which we expect to continue delivering 20 to 30 new product launches every year and continue to differentiate our business as we move forward. We have been on a remarkable journey these last four years and the team has been hard at work focusing on the highest-value products in complex generics, with many nearing the finish line. Altogether, we expect continued strong execution and growth of our business. In Injectables, similar to where we are today in U.S. generics, our goal is to be a top five U.S. injectable business and also a global player. Today, we have about 30 institutional products, with over 30 new launches expected by 2025. We are executing very well on our injectables growth strategy by expanding our portfolio, building key capabilities, and adding capacity. Our commercial strategy centers on our ability to be a differentiated supplier of a growing portfolio of injectables for hospitals, with a resilient supply chain in a market impacted by shortages. To that end, today we are pleased to share a major milestone with the successful U.S. FDA inspection this week of our fourth and largest injectable site. As we ramp up commercial production later this year, in line with our plan, we expect the next revenue inflection point in 2024. We remain on track for over $300 million injectables revenue by 2025. Next, in Biosimilars, we're very pleased with the initial market penetration of our first two biosimilars: ALYMSYS and RELEUKO. Since their launch in Q4, our commercial team is executing very well by adding new customer outlets for both products and driving substantial pull-through as usage rates of our biosimilars have doubled month-over-month since launch. In particular, we are seeing strong market adoption of our ALYMSYS product which is our bevacizumab biosimilar, referencing Avastin. This month, we plan to launch our third biosimilar, FYLNETRA. And we'll have three U.S. oncology biosimilars in the market. Based on our strong commercial execution and trajectory, we are well on our way of achieving this year's target of $40 million to $60 million, more next year and over $200 million in peak sales. Beyond these three initial biosimilars, we are working to expand our portfolio with additional molecules where we can be early to market and vertically integrated from development to commercialization over time. Our goal is to be a top five biosimilar player in the United States over time. Internationally, we are leveraging our diverse portfolio of U.S. FDA-approved products to expand into new geographies. In India, we are expanding Amneal's brand presence and leveraging our local teams and infrastructure as we focus on the hospital market. Around the rest of the world, we are working with distribution partners. We expect meaningful incremental revenue and profits over time. Next, in the Specialty segment, we continue to grow our branded products in RYTARY in Parkinson's and Unithroid in hypothyroidism, delivering strong growth again in Q1. In parallel, we are advancing our pipeline of new CNS and endocrinology products. On IPX203, we are one step closer to delivering a new impactful therapy for Parkinson's patients, as we head towards the June 30th PDUFA date. As we expand our portfolio, we expect over $500 million in Specialty revenue by 2027. In the third segment, AvKARE, we see continued momentum across the multiple channels: distribution, federal government, and unit dose. We expect this business will continue to deliver durable double-digit growth going forward. Overall, we are proud of the strong momentum across Amneal. Each quarter, our portfolio is incrementally larger and more diverse as we launch new increasingly complex products. We are leveraging our key capabilities and global footprint to operate at scale across our business. As we execute, we look to build upon our sustainable growth profile and drive higher adjusted EBITDA levels. I want to touch briefly on our capital allocation strategy which Tasos will discuss further. To be clear, reducing debt and strengthening our balance sheet has always been our key priority. As a result, our net leverage has reduced from 7.4 times in 2019 to 4.9 times this quarter. And our goal is to be below four times net leverage by the end of 2025.

Good morning, everyone. Thank you, Chirag. Let me begin by thanking the Amneal family, who work hard every day to make health possible for so many. We are very excited about our strong start to the year and the great progress we are seeing across our organization. I will touch on how our strong foundation in operational excellence and highly productive R&D engine continues to propel our company strategy forward. Starting in operations, we are focused on operational excellence and efficiency, superior quality, and expanding our global capabilities, particularly in injectables. Let me provide more color on each. First, we remain focused on operational excellence and driving efficiencies. The team has done an excellent job as we move manufacturing for over 30 products to low-cost locations. And we are on track to achieve our in-year operational efficiency goals. We are taking various other measures to lower costs and expand our margins. In addition, our prudent capital spend focuses on driving operational efficiency, automation, and supporting long-term growth. Second, from a quality perspective, Amneal has maintained a superb track record and commitment to the highest standards of quality over the years. Since 2005, the U.S. FDA has conducted over 90 successful inspections with no OAIs or warning letters. We are very excited to share the successful U.S. FDA inspection this week of our largest injectable site. We look to commercialize products from this site starting in the third quarter. This is an important cornerstone of our injectables growth strategy, increasing our capacity and capabilities across all areas. We now have 19 production lines across various dosage forms, including vials, prefilled syringes, cartridges, LVP bags, and immersion. Over the last two years, we have invested over $150 million in capital and tremendous energy to bring two new injectable sites online. As a result, we are now at scale in injectables with four manufacturing locations, doubling the capacity we had a few years ago and a deep R&D pipeline that provides a clear runway for long-term injectables growth. With our expanded infrastructure, we are well positioned to be a top five U.S. injectable business and a global player. Let me move to generics R&D, where we are continually adding new products to our pipeline. In the first four months of 2023, we have launched 10 new generics, and we are on track to deliver over 30 new products this year. Overall, we have 99 ANDAs pending with the U.S. FDA, with 63% representing non-oral solid products. This includes 32 injectables, 10 ophthalmics, 10 topical, six oral liquids, and four inhalation products. Behind that, we have 81 pipeline products with 89% representing non-oral solid products in complex categories, which tend to drive higher profitability and have longer product life cycles. Over one-third of our pending ANDAs and two-thirds of our pipeline are expected to be first-to-market, first-to-file, or 505(b)(2) products. In injectables, we see our cadence of innovation continuing as we remain on track to file 10 to 15 more ANDAs in 2023, including many complex injectables. We look to file our first 505(b)(2) ready-to-use bags this year as well. In inhalation, we recently completed clinical trials for generic ProAir and look to submit our ANDA shortly. In addition, we shared last quarter our new partnership to in-license the Soft Mist technology platform for the development of Respimat inhalation programs. Also, we are pleased with the progress of our MDI programs and expect to submit additional ANDAs in the coming years. Next, let me highlight a few notable upcoming new product launches. First, as discussed last quarter, we are very excited about our ANDA for naloxone nasal spray, our generic version of Narcan, which is currently under priority review with the U.S. FDA. We believe this product, now over-the-counter, will improve access to a critical life-saving opioid overdose treatment for millions of people across America. In addition, we are on track for the July launch of an authorized generic version of Xyrem, which is a key therapy for narcolepsy. A list of our notable launches is included on the key growth catalyst slide in the presentation. We have added a number of new programs to the list this quarter. Turning to specialty R&D, we are expanding our portfolio through our pipeline. We have our PDUFA date for IPX203 coming up on June 30. We see IPX203 as an important innovation that advances the standard of care, with a broad market appeal for Parkinson's patients. Accordingly, we continue to see IPX203 as a $300 million to $500 million peak sales opportunity. In addition, we are making good progress on international licensing opportunities for IPX203, which is pending approval so that this new therapy can reach the global patient population. Next, in biosimilars, we are very excited about the value Amneal can bring to this space. Our first oncology biosimilars are seeing strong uptake in the market, and we see tremendous opportunity to expand our portfolio through partnership for future molecules. We see biosimilars as a key long-term growth driver. Looking globally, we see 2023 as a foundational year for our international expansion strategy. Our R&D team is well positioned to leverage our rich portfolio and file key products in markets around the world, including Europe, China, and other emerging markets. We have begun registering selected products this year, as we pursue over 50 product opportunities in different emerging market countries. We have a dedicated team at Amneal focused on driving international expansion. In summary, we continue to drive operational excellence and execute well across our innovation strategy, which is fueling our ability to drive sustainable growth. I will now hand it over to Tasos.

Thank you, Chintu. I'll first discuss first quarter results, then capital allocation, followed by a brief review of our full year 2023 guidance affirmation. We're very pleased with our first quarter results, with total net revenue of $558 million growing 12%; adjusted EBITDA of $116 million growing 16%; and adjusted diluted EPS of $0.12 in line with the prior year. First quarter Generics net revenue was $344 million, an increase of $26 million or 8% versus the prior year. Strong performance was driven by new product launches in 2022 and 2023, which added $31 million of revenue and stable performance in the rest of our broad portfolio. In addition to the strong performance, we're very pleased by the continued evolution in the refreshing of our Generics portfolio. As an example, products launched and added since 2019, now account for 42% of our Generic revenue, which bodes well for continued growth and profitability. Q1 Specialty net revenue of $92 million increased $7 million or 8% versus the prior year, driven by Unithroid, up 39%; and Rytary, up 14%, which reflects strong commercial execution as well as substantial patient needs. Our AvKARE business continues to perform exceedingly well, with Q1 net revenue of $122 million, up $27 million or 29% compared to the prior year due to continued expansion of our distribution channel. We're very proud of the work our AvKARE team is doing in increasing market share and providing our customers with new products and innovative solutions. Q1 2023 adjusted gross margin of 39.4% compares to 43.5% in the prior year was in line with our expectations reflecting the discontinuation of a handful of legacy products, timing of fixed overhead absorption, and our mix of business. Our first quarter adjusted gross margin represents the low point of the year as future quarters will benefit from new product launches, operating efficiencies, and manufacturing plant utilization increases. First quarter adjusted EBITDA of $116 million increased $16 million or 16% versus the prior year. The strong performance reflects our revenue growth and higher investment in sales and marketing to support our biosimilar and specialty brands, offset by tight expense management across the remaining operations. First quarter adjusted diluted EPS of $0.12 was in line with the prior year, as higher interest expense offset our adjusted EBITDA growth. From a cash flow perspective, we generated operating cash flow of $140 million which includes our interest expense and an $85 million payment related to the Opana ER settlement that we announced last year. The strong performance was driven by robust cash collections related to our high accounts receivable balance at year-end 2022 as well as the continued strength of our top line growth. Let me now turn to our capital allocation. Over the last few years, we have successfully increased profitability and acquired key capabilities, well-run businesses, reduced legacy legal exposures, and lowered leverage. As a result, we have grown annual adjusted EBITDA to over $500 million compared to $339 million in 2019. We invested about $500 million in M&A such as AvKARE; new state-of-the-art injectable facilities; rebuilt our specialty R&D pipeline; and settled substantial legacy legal matters. In addition, we reduced net leverage from 7.4x in 2019 to 4.9x in the most recent quarter. With many of these investments now behind us, our intent is to prioritize debt reduction. We believe our strong cash generation and bottom-line growth as many of these investments come to market and active debt paydown will further reduce net leverage to below 4x by the end of 2025. For full year 2023, we're reaffirming our guidance expectations. As a reminder, we expect total net revenue of $2.250 billion to $2.350 billion in 2023, which reflects continued mid-single-digit growth driven by growth across all our three business segments. Also, we continue to expect 2023 adjusted EBITDA between $500 million and $530 million which includes incremental investments particularly in sales and marketing to support new launches and scale up in higher-growth areas of the business. We expect adjusted EPS between $0.40 and $0.50, which reflects higher interest expense, including the potential refinancing of our term loan B. On the cash side, we continue to expect 2023 operating cash flow between $200 million to $230 million, which includes interest expense and excludes the already announced legal settlement costs of about $90 million mostly related to Opana ER and capital spend between $50 million and $60 million.

Thank you, Tasos. In summary, we are pleased with our excellent start of the year. We expect our strong momentum will accelerate over 2023. Amneal remains well-positioned for sustainable long-term growth with a diversified and expanding portfolio and key near-term catalysts happening now including biosimilars, complex generics, injectables, and IPX203. As we continue to execute our strategy well, further diversify our business, and deliver profitable growth, we expect to drive higher levels of adjusted EBITDA and remarkably deleverage the company. Let me now open the call to questions.

Thank you. Our first question today comes from Balaji Prasad with Barclays. Please go ahead.

All the details on the slides, also congratulations on the injectable facilities, so I think that's probably where I'll start with. Chirag, can you help me understand the broader or the current commercial opportunity in the injectables market? Is it addressing shortages, or is there scope for a player with stronger pricing power or any kind of advantage there? And also just remind me about the current injectable size? And what are the key contributors to take you to the $300 million portfolio? And the second question is on the biosimilar side. Can you give an update on how the environment for partnerships in biosimilars is as you look to bring in more biosimilars into the U.S.? And lastly on the same front, are the combined biosimilar revenues greater than $15 million in Q1? Thanks.

Thank you, Balaji. Let me start with the injectable strategy. As we have stated, our strategy is to expand capacity and have redundancy in our supply chain, and that's exactly what we've been doing. Our focus has been to introduce differentiated products such as Triamcinolone. We were first in the market and still have a major market share, cyclophosphamide, now LVP bags, and peptide-based products coming soon. So it's more driven towards complex products, which have less competition with supply chain security for our customers, for our hospitals, and a very deep relationship we are building. We're also going to supply certain commodity products that are in shortages, and that's how we have built our injectable business strategically. So today we do about $180 million, and we expect to be well over $300 million by the end of 2025. This will obviously also include international revenues as these products have good international markets as well. On biosimilars, we are very excited with two launches and are about to launch the third one. The team has done a great job, as we always excel on the commercial side, building relationships using the old relationships that we had with wholesalers, building new ones with community oncologists and hospitals. We do have a sales force, market access. We take from our specialty sales that help on marketing and market access as well. We are well on our way to reach this year's target of about $50 million to $60 million. This accelerates because we are expecting significant uptick in Q3 and Q4, and next year we are projected for significant uptake for these three products. We are working on the pipeline which we haven't announced yet, as we have a stated goal to become a top five player in the United States in the long run. Our strategy is not just for one year, two years, or three years; it's to stay in the game for the next 10 years. We believe biosimilars represent a highly valuable franchise for the United States and for the global market.

Just to add one point to Chirag on the injectables. Good morning, Balaji. This is Chintu. We have 32 pending ANDAs at the FDA and continue to file about 10 to 15 every year. We currently operate 19 production lines. To increase our revenue from around $170 million to $180 million involves these 32 pending applications along with our continued filings. Many of our products are in differentiated dosage forms, including complex drug-device combinations, cartridges, LVP bags, and peptides. We also have some long-acting depot injections, positioning us well in the market. We have achieved redundancy and resilience in our manufacturing capabilities, which has been a significant challenge in injectables. We are excited that all our lines are now operational, and we will soon begin commercializing from our newly FDA-inspected site. This enhances our leverage in various areas, which are also very promising for our international growth.

Thanks, Chintu. That’s helpful.

Our next question comes from Chris Schott with JPMorgan. Please go ahead. Chris, your line is open.

Great. Thanks very much. Just two questions on guidance for me. Maybe first on the generic gross margin trends. Can you just elaborate a little bit more on what happened to gross margins this quarter and how we should think about generic gross margins for the balance of the year? I know you mentioned there were some one-time issues, but I don't think you've had gross margins to slow for a few years and I'm trying to wrap my head around what exactly is happening there and probably more importantly just how to think about the next few quarters. And the second was on revenue growth. It seems like you have obviously had a very good start to the year with this quarter, but I think the go-forward guidance implies more modest revenue growth for the remainder of the year. Again, just a similar question there, just to help me with the cadence of revenue growth as we think about the next few quarters and kind of drivers there? Thank you.

Hey, Chris, this is Tasos. Good morning. Yes, as you know, gross margin can vary from quarter to quarter. For us, it was due to some product discontinuations and the related upsell license products we had to write off, along with the timing of our production line. You are correct that it was slightly lower than in previous quarters. However, I fully expect Q2 to exceed 40%. Looking at the full year from a gross margin standpoint, I anticipate we will be around 42%, consistent with the previous year. That covers the gross margin. Chirag, would you like to discuss the revenue growth perspective?

Sure. So Chris, we've been speaking for the last few years and you've been following Amneal; this year is a rocket about to be fired now, right? Because it's well-positioned to drive sustainable top-line growth and meaningful adjusted EBITDA acceleration in 2023, 2024, and beyond. Let me tell you how it is happening and how diverse and strong our portfolio is, so we are not relying on two specialty products to make our life or our company, right? We have a Generics portfolio of 270 products driving durable profitable growth, number three in the United States in value, number four in volume. We are the only company that grew while everybody else declined. We will continue to grow in the coming years. Our highly productive innovative R&D pipeline is launching 20 to 30 new products every year. Look at the diversity we have, as well as the continued shift to complex products with capabilities across dosage forms. It is essential business and we are providing essential services. Over $500 million in revenue came from recent product launches; we are expanding in high-growth areas like injectables and biosimilars; our goal is to be a top five player. You know we did it before and we're going to do it again. Our Specialty portfolio is also growing. I know you may not be excited about IPX203, but we are. We're determined to deliver the product to as many general neuroscientists as we can, and even beyond that. Our AvKARE distribution business is also growing double digits. After the top three, we have very few competitors. This gives us an excellent chance to distribute our products directly in unit doses in government channels and niche distribution channels. This is now a sizable business worth over $450 million. Furthermore, we are meaningfully entering international markets as well to further diversify. With our global network of manufacturing sites operating at the highest quality, we are the U.S. champions. We have three OSD sites, four injectable sites, one nasal spray liquid site, a transdermal site, and two API sites providing the needed API, along with an inhalation respiratory site in Ireland. We are extremely well positioned for growth, not just this year, but from 2024 all the way to 2030. Thank you.

Our next question comes from David Amsellem with Piper Sandler. David, please go ahead.

On the Generics business, can you talk about product concentration? I'm specifically interested in contributions from Zafemy this year and how you're thinking about the potential for competition that product could face down the road? I know it's a complex product, but can you talk about that? And in general, are there any other products we should be thinking about that have an outsized impact on Generics? That's number one. And then number two, helpful commentary on the deleveraging, but I guess my question is on business development and M&A. What's your appetite or capacity for deals? How large can you go? And how big of a priority are bolt-on transactions? Thanks.

Hi David, this is Tasos. I can take the first one, and Chirag can take the more strategic question. Whether or not Zafemy or any other product in our portfolio faces more or less competition does not make a big difference one way or the other. We have done quite well with the diversification of our business. For example, if you go back a few years, levothyroxine was a $180 million product for us. We don't have any such products anymore in the Generics segment. The biggest product may be a $50 million or $60 million product now. This is part of why we keep focused on how the business has been diversified over the years. No single product keeps us up at night. The other factor is, as Chirag said earlier, we launched 10 new products recently. There are another 20 new products that are going to be launched. Whether we launch 30 or 25 products this year will not materially affect our performance.

Tasos, you covered that very well. And David, we do not have the big risk we faced in 2018 with the large concentration of products in our generics. It's highly diversified across our business segments. Within Generics, we have multiple products that generate numbers between 10, 20, 30, to 50 million each. We'll continue to drive new products, and the drag, like Zafemy, leads the way. Regarding M&A, we invested nearly $600 million over the last four years, and that investment is paying off significantly. We continue to invest about $240 to $250 million annually, combining internal R&D, external R&D, and capital expenditures, putting in place the necessary infrastructure such as a new peptide site or biosimilar investments. We are well-stocked for the next couple of years. Right now, we are focused on deleveraging, lowering our debt load, and increasing EBITDA. From 2026 onward, we expect to be in a much better position to consider more aggressive strategic opportunities, but presently we are pleased with the solid performance of all segments. There's not a weak link among them.

Okay. Thank you.

Our next question comes from Greg Fraser with Truist Securities. Greg, please go ahead.

Thanks and good morning, folks. On IPX203, you mentioned in the slides the data generation plan that supports potential for early use. Can you expand on that? Are you planning additional clinical work? And then, can you just give us an update on your efforts to refinance the term loan B? When do you expect to finalize a refinancing? And what are your expectations for terms for the new debt? Thank you.

Hi. Good morning. So on IPX203, we are very excited about the novelty of this formulation compared to current offerings and how it can benefit patients. This formulation combines immediate release with extended release. Carbidopa/levodopa, particularly levodopa, presents absorption challenges throughout the GI tract and has a short half-life. Our clinical data indicates a 1.5-hour improvement per dose compared to immediate release CD/LD. That's what goes into the label, but the specifics remain under final negotiation. This formulation has the potential to assist many new patients starting on immediate release carbidopa/levodopa therapy, helping to mitigate fluctuations and stabilize patients, providing a long, durable good time. Currently, our Rytary product serves only over 4% of the patient population, while 96% still rely on outdated immediate release therapy, which has caused significant distress during off-time.

Greg, regarding the refinancing, as you know, our term loan B doesn't come due for another two years until May 2025. So there's plenty of runway. Having said that, I’ve experienced market conditions during 2007, 2008, and 2009, so you never know what happens in capital markets. Therefore, as a company, we want to be proactive; this is why we want to refinance our term loan B sometime this year. We are in active conversations with the market. Many investors in our current term loan B have expressed interest in participating in the refinancing efforts. We'll continue to work to be constructive with the market, but we will be discerning in our decisions regarding terms. Our target is to complete this process before the end of the year. If it takes longer, that’s acceptable.

Thank you.

Thank you very much. So just closing out, in summary, Amneal is diversified, differentiated, and growing across all businesses. We're demonstrating this consistently, and there will be more to showcase. Our focus remains on execution, driving elevated EBITDA, and deleveraging. The future looks very bright, and all 7,000 employees are extremely excited to make Amneal the American champion and lead in providing affordable medicine for the United States. Thank you very much.

Thank you.

Thank you everyone for joining us today. This concludes our call, and you may now disconnect your lines.