Amneal Pharmaceuticals, Inc. (AMRX) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Amneal Pharmaceuticals, Inc. (the “Company”, “we,” “us,” or “our”) is a global pharmaceutical company that develops, manufactures, markets, and distributes a diverse portfolio of essential medicines, including retail generics, injectables, biosimilars and specialty branded pharmaceuticals. We operate principally in the United States (“U.S.”), India, and Ireland, and sell to wholesalers, distributors, hospitals, governmental agencies, chain pharmacies and individual pharmacies, either directly or indirectly.
Prior to the Reorganization (as defined herein), the Company was a holding company, whose principal assets were common units (the “Amneal Common Units”) of Amneal Pharmaceuticals, LLC (“Amneal”). As of September 30, 2023, we held 50.4% of the Amneal Common Units and the group, together with their affiliates and certain assignees, who owned Amneal when it was a private company (the “Members” or the “Amneal Group”) held the remaining 49.6%. On November 7, 2023, we implemented a plan pursuant to which the Company and Amneal reorganized and simplified our corporate structure by eliminating our umbrella partnership-C-corporation structure and converting to a more traditional structure whereby all stockholders hold their voting and economic interests directly through the public company (the “Reorganization”). Effective with the Reorganization, the Company holds 100% of the Amneal Common Units and consolidates the financial statements of Amneal and its subsidiaries. Refer to Note 1. Nature of Operations in our consolidated financial statements for additional information about the Reorganization.
Although we had a minority economic interest in Amneal prior to March 31, 2023, we were Amneal’s sole managing member, having the sole voting power to make all of Amneal’s business decisions and control its management. Therefore, we consolidated the financial statements of Amneal and its subsidiaries prior to the Reorganization. We recorded non-controlling interests for the portion of Amneal’s economic interests that we did not hold prior to the Reorganization.
The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under Item 1A. Risk Factors and under the heading Forward-Looking Statements in this Annual Report on Form 10-K. The following discussion and analysis, as well as other sections in this report, should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included elsewhere herein.
For a discussion of our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, see “Results of Operations” and “Liquidity and Capital Resources” under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K.
Overview
Segments
We have three reportable segments: Generics, Specialty, and AvKARE.
Generics
Our Generics segment includes over 260 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, films, transdermal patches and topicals. We focus on developing products with substantial barriers-to-entry resulting due to 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 our financial results. The entrance into the market of additional competition generally has a negative impact on the volume and/or pricing of the affected products. Additionally, pricing is determined by market place dynamics and is often affected by factors outside of our control.
Specialty
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 Parkinson’s disease, and endocrine disorders. 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 also includes
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UNITHROID® (levothyroxine sodium), for the treatment of hypothyroidism, which is sold under a license and distribution agreement with Jerome Stevens Pharmaceuticals, Inc., and ONGENTYS® (opicapone), an add-on treatment to carbidopa/levodopa in patients with Parkinson’s disease experiencing “Off” episodes, which we commenced selling in early 2024 under a license agreement with BIAL.
On June 30, 2023, we received a complete response letter (“CRL”) from the FDA regarding our new drug application (“NDA”) for IPX203 for the treatment of Parkinson’s disease. The CRL indicated that although an adequate scientific bridge was established for the safety of one ingredient, levodopa, based on pharmacokinetic studies, it was not adequately established for the other ingredient, carbidopa, and the FDA requested additional information. The CRL did not identify any issues with respect to the efficacy or manufacturing of IPX203. During October 2023, we met with the FDA to align on the path to approval for IPX203. During the meeting, the FDA asked us to complete a QT study, a routine cardiac safety study that is required for new drugs. We completed the QT study and resubmitted our NDA for IPX203 on February 7, 2024.
Our Specialty products are marketed through skilled specialty sales and marketing teams, who call on neurologists, movement disorder specialists, endocrinologists and primary care physicians in key markets throughout the U.S. Our Specialty segment also has a number of product candidates that are in varying stages of development.
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., 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.
AvKARE
Our AvKARE segment provides pharmaceuticals, medical and surgical products and services primarily to governmental agencies. AvKARE is a re-packager of bottle and unit dose pharmaceuticals under the registered names of AvKARE and AvPAK, which service the Department of Defense and Department of Veteran Affairs. AvKARE is also a wholesale distributor of pharmaceuticals, over the counter drugs and medical supplies to its retail and institutional customers that are located throughout the U.S. focused primarily on offering 340b-qualified entities products to provide consistency in care and pricing.
The Pharmaceutical Industry
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 Item 1. Business and Item 1A. Risk Factors in this Form 10-K.
Inflation
While it is difficult to accurately measure the impact of inflation, we estimate our business experienced an increase in costs due to inflation of approximately $15.0 million for the year ended December 31, 2023. We expect an inflationary impact of approximately $15.0 million to $20.0 million for the year ending December 31, 2024. Notwithstanding our estimates, rising inflationary pressures due to higher input costs, including higher material, transportation, labor and other costs, could exceed our expectations and may adversely impact our operating results in future periods.
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Results of Operations
Consolidated Results
The following table sets forth our summarized, consolidated results of operations (dollars in thousands):
| Years Ended December 31, | Increase (Decrease) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | ||||||||||
| Net revenue | $ | 2,393,607 | $ | 2,212,304 | $ | 181,303 | 8.2% | ||||||
| Cost of goods sold | 1,573,042 | 1,427,596 | 145,446 | 10.2% | |||||||||
| Gross profit | 820,565 | 784,708 | 35,857 | 4.6% | |||||||||
| Selling, general and administrative | 429,675 | 399,700 | 29,975 | 7.5% | |||||||||
| Research and development | 163,950 | 195,688 | (31,738) | (16.2)% | |||||||||
| In-process research and development impairment charges | 30,800 | 12,970 | 17,830 | 137.5% | |||||||||
| Intellectual property legal development expenses | 3,828 | 4,358 | (530) | (12.2)% | |||||||||
| Acquisition, transaction-related and integration expenses | — | 709 | (709) | (100.0)% | |||||||||
| Restructuring and other charges | 1,749 | 1,421 | 328 | 23.1% | |||||||||
| Change in fair value of contingent consideration | (14,497) | 731 | (15,228) | nm | |||||||||
| Insurance recoveries for property losses and associated expenses | — | (1,911) | 1,911 | (100.0)% | |||||||||
| Charges related to legal matters, net | 1,824 | 269,930 | (268,106) | (99.3)% | |||||||||
| Other operating income | (1,138) | (3,960) | 2,822 | (71.3)% | |||||||||
| Operating income (loss) | 204,374 | (94,928) | 299,302 | nm | |||||||||
| Total other expense, net | (244,644) | (153,199) | (91,445) | 59.7% | |||||||||
| Loss before income taxes | (40,270) | (248,127) | 207,857 | (83.8)% | |||||||||
| Provision for income taxes | 8,452 | 6,662 | 1,790 | 26.9% | |||||||||
| Net loss | $ | (48,722) | $ | (254,789) | $ | 206,067 | (80.9)% |
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Net Revenue
Net revenue for the year ended December 31, 2023 increased 8.2% from the prior year primarily due to:
•Growth in our Generics segment of $39.3 million primarily due to new generics products launched in 2023 and 2022, which included biosimilars that contributed $62.6 million and new generic products that contributed $47.4 million, partially offset by price erosion. Net revenue for the year ended December 31, 2023 included a non-recurring customer order of $21.0 million.
•Growth in our AvKARE segment of $125.6 million primarily driven by growth in our distribution and government channels resulting from new product introductions.
•Growth in our Specialty segment of $16.3 million primarily driven by growth in our endocrinology portfolio of $21.0 million, or 23.8% and a $2.2 million, or 1.2% increase in our neurology portfolio, which was negatively impacted by Medicare rebates associated with the Inflation Reduction Act of approximately $6.4 million. Excluding these rebates, net revenue from our neurology portfolio increased 4.7%.
Cost of Goods Sold and Gross Profit
Cost of goods sold increased 10.2% for the year ended December 31, 2023 as compared to the prior year. The increase in cost of goods sold was primarily due to increased AvKARE and Generics volume, a $25.0 million increase in marketed product intangible asset impairment charges primarily related to a reduction in promotional focus on LYVISPAH™ in our Specialty segment, and an increase in the inventory provision, partially offset by efficiencies in our supply costs. Cost of goods sold for the year ended December 31, 2023 included $11.0 million associated with the non-recurring customer order in our Generics segment discussed above.
Gross profit as a percentage of net revenue decreased to 34.3% for the year ended December 31, 2023 from 35.5% in the prior year, primarily as a result of the factors noted above.
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Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2023 increased 7.5% as compared to the prior year primarily due to increases in employee compensation, higher costs associated with our biosimilar launches, higher freight charges driven by increased sales volume, and higher professional fees associated with the Reorganization, partially offset by a decrease of $5.0 million associated with a biosimilar regulatory approval in the prior year.
Research and Development
R&D expenses for the year ended December 31, 2023 decreased 16.2% from the prior year primarily due to lower project spend of $17.3 million, a decrease in in-licensing and upfront milestone payments of $2.5 million and operating efficiencies in our infrastructure.
In-Process Research and Development Impairment Charges
In process research and development (“IPR&D”) impairment charges of $30.8 million for the year ended December 31, 2023 were related to one Generics asset and one Specialty asset, both of which experienced adverse clinical trials results in the fourth quarter of 2023 and resulted in significantly lower than expected future cash flows. IPR&D impairment charges of $13.0 million in the prior year were related to one Generics asset which experienced a delay in its expected launch date and one Generics asset which experienced significant expected price erosion, both of which resulted in significantly lower than expected future cash flows.
Change in Fair Value of Contingent Consideration
Refer to Note 19. Fair Value Measurements for information about the estimation of our contingent consideration liabilities. The $15.2 million decrease in the change in fair value of contingent consideration for the year ended December 31, 2023 as compared to the prior year was primarily related to a reduction in promotional focus on LYVISPAHTM.
Charges Related to Legal Matters, Net
For the year ended December 31, 2023, charges related to legal matters, net was $1.8 million, comprised of $3.9 million in charges associated with Generics civil prescription opioid litigation, a $3.0 million charge for the settlement of a Generics customer claim, a $3.0 million charge for the settlement of Generics commercial antitrust litigation, and a $1.9 million charge for the settlement of a corporate stockholder derivative lawsuit, partially offset by a $10.0 million credit from the settlement of Generics patent infringement matters. For the year ended December 31, 2022, we recorded charges of $269.9 million primarily for the corporate Opana® ER antitrust litigation of $262.8 million and Generics segment civil prescription opioid litigation of $18.0 million, partially offset by corporate insurance recoveries associated with securities class actions of $15.5 million. For further details, refer to Note 21. Commitments and Contingencies.
Other Operating Income
Other operating income for the year ended December 31, 2023 and 2022 was comprised of income earned from the India Production Linked Incentive Scheme for the Pharmaceutical Sector in our Generics segment. Refer to Note 6. Government Grants for additional information.
Total Other Expense, Net
Total other expense, net increased 59.7% for the year ended December 31, 2023. The increase was primarily driven by a $52.3 million increase in net interest expense as a result of higher rates on our variable rate debt and a $40.8 million loss on refinancing the Term Loan Due 2025 and amending the New Revolving Credit Facility.
Provision For Income Taxes
The provision for income taxes was $8.5 million and $6.7 million for the years ended December 31, 2023 and 2022, respectively. The effective tax rates for the years ended December 31, 2023 and 2022 were (21.0)% and (2.7%), respectively. The year-over-year change in the provision for income taxes was primarily related to the timing and mix of income, and to the release of liabilities for uncertain tax positions in 2022.
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Generics
The following table sets forth the results of operations for our Generics segment (dollars in thousands):
| Years Ended December 31, | Increase (Decrease) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | ||||||||||
| Net revenue | $ | 1,471,401 | $ | 1,432,073 | $ | 39,328 | 2.7% | ||||||
| Cost of goods sold | 913,869 | 896,031 | 17,838 | 2.0% | |||||||||
| Gross profit | 557,532 | 536,042 | 21,490 | 4.0% | |||||||||
| Selling, general and administrative | 119,912 | 109,781 | 10,131 | 9.2% | |||||||||
| Research and development | 132,233 | 167,509 | (35,276) | (21.1)% | |||||||||
| In-process research and development impairment charges | 26,500 | 12,970 | 13,530 | 104.3% | |||||||||
| Intellectual property legal development expenses | 3,708 | 4,251 | (543) | (12.8)% | |||||||||
| Acquisition, transaction-related and integration expenses | — | 25 | (25) | (100.0)% | |||||||||
| Restructuring and other charges | 211 | 821 | (610) | (74.3)% | |||||||||
| Insurance recoveries for property losses and associated expenses | — | (1,911) | 1,911 | (100.0)% | |||||||||
| (Credit) charges related to legal matters, net | (64) | 22,400 | (22,464) | (100.3)% | |||||||||
| Other operating income | (1,138) | (3,960) | 2,822 | (71.3)% | |||||||||
| Operating income | $ | 276,170 | $ | 224,156 | $ | 52,014 | 23.2% |
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Net Revenue
Generics net revenue for the year ended December 31, 2023 increased 2.7% as compared to the prior year, primarily due to new generic products launched in 2023 and 2022, which included biosimilars that contributed $62.6 million and new generic products that contributed $47.4 million, partially offset by price erosion. Net revenue for the year ended December 31, 2023 included a non-recurring customer order of $21.0 million.
Cost of Goods Sold and Gross Profit
Generics cost of goods sold for the year ended December 31, 2023 increased 2.0% compared to the prior year primarily due to costs associated with increased sales volume and an increased inventory provision, partially offset by efficiencies in our supply costs. Cost of goods sold for the year ended December 31, 2023 included $11.0 million associated with the non-recurring customer order discussed above.
Generics gross profit as a percentage of net revenue increased to 37.9% for the year ended December 31, 2023 from 37.4% in the prior year as a result of the factors described above.
Selling, General, and Administrative
Generics SG&A for the year ended December 31, 2023 increased by 9.2% compared to the prior year primarily due to an increase in employee compensation, higher costs associated with our biosimilar launches, and higher freight charges driven by increased sales volume, partially offset by a decrease of $5.0 million associated with a biosimilar regulatory approval in the prior year.
Research and Development
Generics R&D expense for the year ended December 31, 2023 decreased 21.1% compared to the prior year primarily due to lower project spend of $25.0 million and operating efficiencies in our infrastructure, including reduced employee compensation costs, partially offset by an increase in in-licensing and upfront milestone payments of $2.0 million.
In-Process Research and Development Impairment Charges
Generics IPR&D impairment charges of $26.5 million for the year ended December 31, 2023 were related to one asset that experienced adverse clinical trials results in the fourth quarter of 2023 and resulted in significantly lower than expected future
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cash flows. Generics IPR&D impairment charges of $13.0 million in the prior year were related to one asset that experienced a delay in its expected launch date and one asset that experienced significant expected price erosion, both of which resulted in significantly lower than expected future cash flows.
(Credit) Charges Related to Legal Matters, Net
For the year ended December 31, 2023, Generics credit related to legal matters, net was $(0.1) million, comprised of a $(10.0) million credit from the settlement of patent infringement matters, net of $3.9 million in charges associated with civil prescription opioid litigation, a $3.0 million charge for the settlement of a customer claim, and a $3.0 million charge for the settlement of commercial antitrust litigation. For the year ended December 31, 2022, Generics charges related to legal matters, net were $22.4 million, primarily comprised of $18.0 million of charges for civil prescription opioid litigation. Refer to Note 21. Commitments and Contingencies for additional information.
Other Operating Income
Generics other operating income for the years ended December 31, 2023 and 2022 was comprised of income earned from the India Production Linked Incentive Scheme for the Pharmaceutical Sector. Refer to Note 6. Government Grants for additional information.
Specialty
The following table sets forth the results of operations for our Specialty segment (dollars in thousands):
| Years Ended December 31, | Increase (Decrease) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | ||||||||||
| Net revenue | $ | 390,457 | $ | 374,121 | $ | 16,336 | 4.4% | ||||||
| Cost of goods sold | 214,277 | 182,432 | 31,845 | 17.5% | |||||||||
| Gross profit | 176,180 | 191,689 | (15,509) | (8.1)% | |||||||||
| Selling, general and administrative | 88,137 | 90,031 | (1,894) | (2.1)% | |||||||||
| Research and development | 31,717 | 28,179 | 3,538 | 12.6% | |||||||||
| In-process research and development impairment charges | 4,300 | — | 4,300 | nm | |||||||||
| Intellectual property legal development expenses | 120 | 107 | 13 | 12.1% | |||||||||
| Acquisition, transaction-related and integration expenses | — | 49 | (49) | (100.0)% | |||||||||
| Restructuring and other charges | 1,105 | — | 1,105 | nm | |||||||||
| Change in fair value of contingent consideration | (14,497) | 731 | (15,228) | nm | |||||||||
| Operating income | $ | 65,298 | $ | 72,592 | $ | (7,294) | (10.0)% |
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Net Revenue
Specialty net revenue for the year ended December 31, 2023 increased 4.4% as compared to the prior year, driven by the growth in our endocrinology portfolio of $21.0 million, or 23.8%, and a $2.2 million, or 1.2%, increase in our neurology portfolio, which was negatively impacted by Medicare rebates associated with the Inflation Reduction Act of approximately $6.4 million. Excluding these rebates, net revenue from our neurology portfolio increased 4.7%.
Cost of Goods Sold and Gross Profit
Specialty cost of goods sold for the year ended December 31, 2023 increased 17.5% as compared to the prior year primarily due to an increase in volumes and a $25.0 million increase in marketed product intangible asset impairment charges primarily related to a reduction in promotional focus on LYVISPAH™. Specialty gross profit as a percentage of net revenue decreased to 45.1% for the year ended December 31, 2023 as compared to 51.2% in the prior year as a result of the factors described above.
Selling, General, and Administrative
Specialty SG&A expense for the year ended December 31, 2023 decreased 2.1% as compared to the prior year primarily due to a decrease in third-party marketing spend for our promoted products.
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Research and Development
Specialty R&D expense for the year ended December 31, 2023 increased 12.6% as compared to the prior year primarily due to an increase in project related spend of $7.7 million and increased employee compensation, partially offset by a decrease in in-licensing and upfront milestone payments of $4.5 million.
Change in Fair Value of Contingent Consideration
Refer to Note 19. Fair Value Measurements for information about the estimation of our contingent consideration liabilities. The $15.2 million decrease in the change in fair value of contingent consideration for the year ended December 31, 2023 as compared to the prior year was primarily related to a reduction in promotional focus on LYVISPAHTM.
AvKARE
The following table sets forth the results of operations for our AvKARE segment (dollars in thousands):
| Years Ended December, 31 | Increase | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | ||||||||||
| Net revenue | $ | 531,749 | $ | 406,110 | $ | 125,639 | 30.9% | ||||||
| Cost of goods sold | 444,896 | 349,133 | 95,763 | 27.4% | |||||||||
| Gross profit | 86,853 | 56,977 | 29,876 | 52.4% | |||||||||
| Selling, general and administrative | 55,341 | 53,659 | 1,682 | 3.1% | |||||||||
| Operating income | $ | 31,512 | $ | 3,318 | $ | 28,194 | 849.7% |
Net Revenue
AvKARE net revenue for the year ended December 31, 2023 increased 30.9% as compared to the prior year primarily driven by growth in our distribution and government channels resulting from new product introductions.
Cost of Goods Sold and Gross Profit
AvKARE cost of goods sold for the year ended December 31, 2023 increased 27.4% as compared to the prior year, and gross profit as a percentage of net revenue increased to 16.3% for the year ended December 31, 2023 from 14.0% in the prior year primarily due to the increase in sales through our higher margin government channel, including higher margin new product introductions.
Selling, General, and Administrative
AvKARE SG&A expense for the year ended December 31, 2023 increased 3.1% as compared to the prior year primarily due to higher employee compensation.
Liquidity and Capital Resources
Our primary source of liquidity is cash generated from operations, available cash and borrowings under debt financing arrangements (as defined and described in Note 16. Debt), including $225.2 million of available capacity on our Amended New Revolving Credit Facility and $28.0 million of available capacity under the Amended Rondo Revolving Credit Facility as of December 31, 2023. 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, our ability to negotiate and maintain satisfactory terms under our borrowing and debt facilities in the future, and demand for our products, which are factors that may be out of our control. Our primary uses of capital resources are to fund operating activities, including R&D expenses associated with new product filings, and pharmaceutical product manufacturing expenses, license payments, spending on production facility expansions, capital equipment, acquisitions, and legal settlements.
We estimate that we will invest approximately $60.0 million to $70.0 million during 2024 for capital expenditures to support and grow our existing operations, primarily related to investments in manufacturing equipment, IT and facilities.
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Debt Instruments
Over the next 12 months, we expect to make substantial payments for monthly interest and quarterly principal amounts due for our Term Loan Due 2028, monthly interest under our Term Loan Due 2025, and contractual payments for leased premises. Annually, we are also required to calculate the amount of excess cash flow payments, as defined in our term loan agreements. Based on the results of the excess cash flows calculation for the years ended December 31, 2023, 2022 and 2021, no excess cash flows principal payments were required. Based on the results of the excess cash flows calculation for the year ended December 31, 2020, the Company made a $14.4 million additional principal payment towards our Term Loan Due 2025 in March 2021.
In the year ended December 31, 2023, we paid the remaining outstanding principal under our Rondo Term Loan from cash on hand, of which we made prepayments totaling $63.0 million in excess of planned principal payments (refer to Note 16. Debt for additional information).
Legal Settlements
In January 2024, we paid $52.4 million to the plaintiffs of the Opana ER® antitrust litigation under the terms of the related settlement agreements with cash on hand (refer to Note 21. Commitments and Contingencies for additional information).
Tax Receivable Agreement
In 2018, we entered into a tax receivable agreement (“TRA”) for which we were generally required to pay the other holders of Amneal Common Units 85% of the applicable tax savings, if any, in U.S. federal and state income tax that we were deemed to realize as a result of certain tax attributes of their Amneal Common Units sold to us (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Amneal Common Units for shares of Class A common stock and (ii) tax benefits attributable to payments made under the TRA. As part of the Reorganization, the TRA was amended to reduce our future obligation to pay 85% of the realized tax benefits subject to the TRA to 75% of such realized benefits. As of December 31, 2023, the contingent TRA liability, including the impact of the amendment, was $185.2 million.
The timing and amount of any payments under the TRA may vary, depending upon a number of factors including the timing and amount of our taxable income, and the corporate tax rate in effect at the time of realization of our taxable income (the TRA liability is determined based on a percentage of the corporate tax savings from the use of the TRA’s attributes). Because the Amneal Group has exchanged all of its Amneal Common Units pursuant to the Reorganization, the primary remaining factor that could increase the contingent TRA liability is an increase in the effective tax rate. In addition, any future payments under the TRA may create additional basis adjustments, which may result in an additional layer of depreciation and amortization allocable to the Company, resulting in additional TRA payments. The timing and amount of payments may also be accelerated under certain conditions, such as a change of control or other early termination event, which could give rise to our obligation to make TRA payments in advance of tax benefits being realized.
For further information, refer to Item 1A. Risk Factors and Note 7. Income Taxes.
Tax-related Distributions to Amneal Members
Prior to the Reorganization, Amneal was obligated to make tax distributions to the Members. For the years ended December 31, 2023, 2022, and 2021, the Company recorded net tax distributions of $56.7 million, $10.6 million, and $53.5 million, respectively, as a reduction of non-controlling interests. Subsequent to the Reorganization, we are no longer obligated to make tax distributions to the Members. There was no liability for tax distributions payable to the Members as of December 31, 2023 and 2022.
Cash Balances
At December 31, 2023, our cash and cash equivalents consist of cash on deposit and highly liquid investments. A portion of our cash flows are derived outside the U.S. 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 U.S. may exceed amounts that are insured by the Federal Deposit Insurance Corporation. We make our investments in accordance with our investment policy. The primary objectives of our investment policy are liquidity and safety of principal.
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Cash Flows
For a discussion comparing of our cash flows for the fiscal years 2022 to 2021, see Cash Flows under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K.
The following table sets forth our summarized, consolidated cash flows for the years ended December 31, 2023 and 2022 (in thousands):
| Years Ended December 31, | Increase (Decrease) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ | % | |||||||||||
| Cash provided by (used in): | ||||||||||||||
| Operating activities | $ | 345,577 | $ | 65,100 | $ | 280,477 | 430.8 | % | ||||||
| Investing activities | (69,189) | (174,309) | 105,120 | (60.3) | % | |||||||||
| Financing activities | (212,573) | (106,620) | (105,953) | 99.4 | % | |||||||||
| Effect of exchange rate changes on cash | 65 | (5,683) | 5,748 | (101.1) | % | |||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 63,880 | $ | (221,512) | $ | 285,392 | (128.8) | % |
Cash Flows from Operating Activities
Net cash provided by operating activities was $345.6 million for the year ended December 31, 2023 as compared to $65.1 million for the prior year. The year-over-year increase was primarily driven by increased profitability adjusted for non-cash items and timing of collections of receivables, partially offset by other working capital uses of cash.
Cash Flows from Investing Activities
Net cash used in investing activities was $69.2 million for the year ended December 31, 2023 as compared to $174.3 million for the prior year. The year-over-year decrease in net cash used in investing activities was primarily due to $84.7 million of cash paid to acquire the baclofen franchise from entities affiliated with Saol International Limited during the prior year period and a year-over-year decrease in cash paid for intangible assets associated with marketed product licenses.
Cash Flows from Financing Activities
Net cash used in financing activities was $212.6 million for the year ended December 31, 2023 as compared to net cash used in financing activities of $106.6 million for prior year. The year-over-year increase was primarily due to: (i) an increase in debt related costs due to the Refinancing (refer to Note 16. Debt) and (ii) an increase in tax distributions, partially offset by (i) a net increase in long-term debt (refer to Note 16. Debt) and (ii) a payment made in the prior year for the acquisition of the baclofen franchise of certain entities affiliated with Saol International Limited (refer to Note 3).
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Commitments and Contractual Obligations
Our contractual obligations as of December 31, 2023 were as follows (in thousands):
| Payments Due by Period | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||
| Term Loan Due 2025 (1) | $ | 191,979 | $ | — | $ | 191,979 | $ | — | $ | — | |||||||||
| Interest payments on Term Loan Due 2025 (1) | 23,440 | 17,508 | 5,932 | — | — | ||||||||||||||
| Term Loan Due 2028 (1) | 2,351,647 | 58,791 | 117,582 | 2,175,274 | — | ||||||||||||||
| Interest payments on Term Loan Due 2028 (1) | 1,067,102 | 257,107 | 493,382 | 316,613 | — | ||||||||||||||
| Amended New Revolving Credit Facility (2) | 179,000 | 179,000 | — | — | — | ||||||||||||||
| Operating lease obligations (3) | 61,340 | 15,978 | 25,237 | 13,209 | 6,916 | ||||||||||||||
| Financing lease obligation (4) | 110,737 | 6,856 | 13,014 | 11,294 | 79,573 | ||||||||||||||
| Opana ER® antitrust litigation settlements and associated interest (5) | 52,415 | 52,415 | — | — | — | ||||||||||||||
| Non-cancelable marketing and royalty obligations (6) | 28,000 | 13,000 | 15,000 | — | — | ||||||||||||||
| Total | $ | 4,065,660 | $ | 600,655 | $ | 862,126 | $ | 2,516,390 | $ | 86,489 |
(1)A description of our Term Loan Due 2025 and Term Loan Due 2028, and related debt service and interest requirements is contained in Note 16. Debt. Interest on our Term Loan Due 2025 and Term Loan Due 2028 was calculated based on applicable rates at December 31, 2023, excluding the impact of our interest rate swap.
(2)A description of our Amended New Revolving Credit Facility is contained in Note 16. Debt. The table assumes the balance outstanding as of December 31, 2023 will be repaid by December 31, 2024. The actual balance outstanding may fluctuate significantly in future periods. The interest rate on borrowings under the Amended New Revolving Credit Facility resets every 30, 90 or 180 days based on the term that we select.
(3)Amounts represent future minimum rental payments under non-cancelable facility leases. A discussion of our operating lease obligations is contained in Note 18. Leases.
(4)Amounts primarily represent future minimum rental payments under a non-cancelable financing lease obligation for a production facility in New York. A discussion of our financing lease obligations is contained in Note 18. Leases.
(5)Refer to Note 21. Commitments and Contingencies for additional information.
(6)Represents minimum sales and marketing spending obligations and a minimum royalty obligation.
The foregoing table does not include milestone payments potentially payable by us under our collaboration agreements and potential payments under our contingent consideration arrangements. Such payments are dependent upon the occurrence of specific and contingent events, and not the passage of time. A discussion of our significant contingent milestones is contained in Note 5. Alliance and Collaboration and Note 24. Related Party Transactions and a discussion of our contingent consideration arrangements is contained in Note 3. Acquisitions and Note 19. Fair Value Measurements. Additionally, the foregoing table does not include $44.2 million of aggregate principal and related interest due on the Sellers Notes as of December 31, 2023 (as defined in Note 16. Debt). The Sellers Notes are not included because the timing of the associated payments is dependent on the occurrence of future events. Refer to the section Rondo Acquisitions Financing – Notes Payable-Related Party in Note 16. Debt for a discussion of the terms of this indebtedness and descriptions of terms.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of December 31, 2023.
Critical Accounting Policies
Our significant accounting policies are described in Note 2. Summary of Significant Accounting Policies.
Included within these policies are certain policies which contain critical accounting estimates and, therefore, have been deemed to be “critical accounting policies.” Critical accounting estimates are those which require management to make assumptions about matters that were uncertain at the time the estimate was made and for which the use of different estimates, which reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur from period to
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period could have a material impact on our financial condition or results of operations. We have identified the following to be our critical accounting policies: certain sales-related deductions, business combinations (including contingent consideration) impairment of goodwill and intangible assets, income taxes and contingencies.
Certain Sales-Related Deductions
Our gross product revenue is subject to a variety of deductions, which are estimated and recorded in the same period that the revenue is recognized. Certain deductions represent estimates of rebates related to gross sales for the reporting period and, as such, knowledge and judgment of market conditions and practice are required when estimating the impact of these revenue deductions on gross sales for a reporting period.
Historically, our changes of estimates reflecting actual results or updated expectations have not been material to our overall business. If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. The sensitivity of our estimates can vary by program, type of customer and geographic location. However, estimates associated with Medicaid rebates and sales returns are most at risk for material adjustment because of the extensive time delay between the recording of the accrual and its ultimate settlement, an interval that can generally range up to one year. Because of this time lag, in any given quarter, our adjustments to actual can incorporate revisions of several prior quarters.
Business Combinations
We account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition. The fair value of the consideration paid is assigned to the underlying net assets of the acquired business based on their respective fair values as determined using a market participant concept. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill.
Intangible assets are amortized over the estimated useful life of the asset. Significant judgments are used in determining the estimated fair values assigned to the assets acquired and liabilities assumed and in determining estimates of useful lives of long-lived assets. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future net cash flows, estimates of appropriate discount rates used to present value expected future net cash flow streams, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream, as well as other factors. These judgments can materially impact the estimates used to allocate acquisition date fair values to assets acquired and liabilities assumed and the future useful lives. For these and other reasons, actual results may vary significantly from estimated results.
Impairment of Goodwill and Intangible Assets
Goodwill
Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value based test. We test goodwill for possible impairment annually during the fourth quarter, or whenever events or circumstances indicate that the carrying amount may not be recoverable.
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 that we consider 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 our reporting unit using a combination of the income and market approaches. 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. Our reportable segments are the same as the respective operating segments and reporting units. As of December 31, 2023, $366.3 million, $162.8 million, and $69.5 million of goodwill was allocated to our Specialty,
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Generics, and AvKARE segments, respectively. During the fourth quarter of 2023, we tested our Specialty and Generics reporting units for impairment using a quantitative assessment and utilized a qualitative assessment for our AvKARE reporting unit. The determination of fair value in the quantitative assessment required us to make significant estimates and assumptions. These estimates and assumptions primarily included, but were not limited to: the selection of appropriate peer group companies, the discount rate, terminal growth rates, forecasts of revenue, operating income, depreciation and amortization, restructuring charges and capital expenditures. For more information about goodwill, including our interim impairment test, see Note 13. Goodwill and Other Intangible Assets. There was no impairment of goodwill in any reporting unit for the year ended December 31, 2023.
Significant judgment is used in determining the assumptions utilized in our quantitative assessment. Accordingly, any changes in assumptions described above could have a material impact on our consolidated results of operations. Additionally, 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.
Intangible Assets
We review our long-lived assets, including intangible assets with finite lives, for recoverability whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the asset. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value which is generally an expected present value cash flow technique. Our policy in determining whether an impairment indicator exists comprises measurable operating performance criteria as well as other qualitative measures. Events giving rise to impairment are an inherent risk in the pharmaceutical industry and cannot be predicted. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a product in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. If our assumptions are not correct, there could be an impairment loss in subsequent periods or, in the case of a change in the estimated useful life of the asset, a change in amortization expense.
Intangible assets with indefinite lives, including IPR&D, are tested for impairment if impairment indicators arise and, at a minimum, annually. However, an entity is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. The indefinite-lived intangible asset impairment test consists of a one-step analysis that compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We consider many factors in evaluating whether the value of its intangible assets with indefinite lives may not be recoverable, including, but not limited to the discount rate, terminal growth rates, general economic conditions, our outlook and market performance of our industry and recent and forecasted financial performance.
For the year ended December 31, 2023, we recognized $66.9 million of intangible asset impairment charges, of which $36.1 million was recognized in cost of goods sold and $30.8 million was recognized in in-process research and development impairment charges. Cost of sales impairment charges for the year ended December 31, 2023 of $36.1 million primarily related to a reduction in promotional focus on LYVISPAH™ in our Specialty segment, resulting in significantly lower than expected future cash flows. IPR&D impairment charges for the year ended December 31, 2023 of $30.8 million were related to one Generics asset and one Specialty asset, both of which experienced adverse clinical trials results in the fourth quarter of 2023 and resulted in significantly lower than expected future cash flows.
For the year ended December 31, 2022, we recognized a total of $24.1 million of intangible asset impairment charges, of which $11.1 million was recognized in cost of goods sold and $13.0 million was recognized in in-process research and development impairment charges. Cost of sales impairment charges for the year ended December 31, 2022 of $11.1 million related to currently marketed products of which (i) one product experienced significant price erosion during 2022, resulting in significantly lower than expected future cash flows and negative margins, (ii) the supply agreement of one product was terminated during 2022 and therefore the asset was not recoverable and (iii) one product was no longer expected to be sold to a key customer, therefore, the asset was not recoverable. IPR&D impairment charges for the year ended December 31, 2022 of $13.0 million related to (i) one asset that experienced a delay in its expected launch date and (ii) one asset that experienced significant expected price erosion, both of which resulted in significantly lower than expected future cash flows.
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Income Taxes
We record valuation allowances against our DTAs when it is more likely than not that all or a portion of a DTA will not be realized. We routinely evaluate the realizability of our DTAs by assessing the likelihood that our DTAs will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including projected new product launches, revenue growth, and operating margins, among others.
A valuation allowance, if needed, reduces DTAs to the amount expected to be realized. When determining the amount of net DTAs that are more likely than not to be realized, we assess all available positive and negative evidence. This evidence includes, but is not limited to, prior earnings history, projected future earnings, carryback and carry-forward periods and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of a DTA. The weight given to the positive and negative evidence is commensurate with the extent the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income to outweigh objective negative evidence of recent financial reporting losses.
As of December 31, 2023, based upon all available objective and verifiable evidence both positive and negative, including historical levels of pre-tax loss and income both on a consolidated basis and tax reporting entity basis, legislative developments, expectations and risks associated with estimates of future pre-tax income, and prudent and feasible tax planning strategies, we determined that it is more likely than not that we will not realize the benefits of our gross DTAs. Accordingly, as of December 31, 2023, this valuation allowance was $566.5 million and reduced the carrying value of these gross DTAs, net of the impact of the reversal of taxable temporary differences, to zero.
As described in Item 1A. Risk Factors and Note 7. Income Taxes in our consolidated financial statements, we are a party to a TRA under which we are generally required to pay to the Amneal Group 75% of the applicable tax savings, if any, in U.S. federal and state income tax that we are deemed to realize and that are created as a result of tax benefits attributable to payments made under the TRA.
The timing and amount of any payments under the TRA may vary, depending upon a number of factors including the timing and amount of our taxable income, and the tax rate in effect at the time of realization of the our taxable income (the TRA liability is determined based on a percentage of the corporate tax savings from the use of the TRA’s attributes). Because the Amneal Group has sold or exchanged all of their Amneal Common Units, effective with the Reorganization, there is no longer the associated risk of increased future obligations under the TRA (i.e., there cannot be further sales or exchanges giving rise to increased TRA liability occurring subsequent to December 31, 2023).
The projection of future taxable income involves significant judgment. Actual taxable income may differ materially from our estimates, which could significantly impact the timing and payment of the TRA. As noted above, we have determined it is more-likely-than-not we will be unable to utilize all of our DTAs subject to the TRA; and, as of December 31, 2023 and 2022, we had not recognized the entire contingent liability under the TRA related to the tax savings we may realize from Amneal common units sold or exchanged. If utilization of these DTAs becomes more-likely-than-not in the future, at such time, these TRA liabilities (which amount to approximately $185.2 million as of December 31, 2023, as a result of basis adjustments under Internal Revenue Code Section 754) will be recorded through charges to our statements of operations. However, if the tax attributes are not utilized in future years, it is reasonably possible no amounts would be paid under the TRA in excess of the $3.7 million accrued as of December 31, 2023. Should we determine that a DTA with a valuation allowance is realizable in a subsequent period, the related valuation allowance will be reversed and if a resulting TRA payment is determined to be probable, a corresponding TRA liability will be recorded.
Contingencies
We are involved in various litigation, government investigations and other legal proceedings that arise from time to time in the ordinary course of business. Our legal proceedings are complex, constantly evolving and subject to uncertainty. As such, we cannot predict the outcome or impact of our legal proceedings.
While we believe we have valid claims and/or defenses for the matters described in Note 21. Commitments and Contingencies, the nature of litigation is unpredictable and the outcome of the proceedings could include damages, fines, penalties and injunctive or administrative remedies. For any proceedings where losses are probable and reasonably capable of estimation, we accrue for a potential loss. When we have a probable loss for which a reasonable estimate of the liability is a range of losses and no amount within that range is a better estimate than any other amount, we record the loss at the low end of the range. While
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these accruals have been deemed reasonable by our management, the assessment process relies heavily on estimates and assumptions that may ultimately prove inaccurate or incomplete. Additionally, unforeseen circumstances or events may lead us to subsequently change our estimates and assumptions. The process of analyzing, assessing and establishing reserve estimates relative to legal proceedings involves a high degree of judgment.
The ultimate resolution of any or all claims, legal proceedings or investigations are inherently uncertain and difficult to predict, could differ materially from our estimates and could have a material adverse effect on our results of operations and/or cash flows in any given accounting period, or on our overall financial condition.
For further details, see Note 21. Commitments and Contingencies.
Recently Issued Accounting Standards
Recently issued accounting standards are discussed in Note 2. Summary of Significant Accounting Policies.