# ANI PHARMACEUTICALS INC (ANIP) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ANI PHARMACEUTICALS INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1023024/000102302422000004/anip-20211231x10k.htm
Accession: 0001023024-22-000004
Filing date: 2022-03-15
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/ANIP/
All MD&A years: /company/ANIP/mda/
Next year: /company/ANIP/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Please read the following discussion in conjunction with Item 1A. (“Risk Factors”) and our audited consolidated financial statements included elsewhere in this Annual Report on Form 10K. Some of the statements in the following discussion are forward-looking statements. See the discussion about forward-looking statements on page 1 of this Annual Report on Form 10-K.

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 11, 2021.

Executive Overview

ANI Pharmaceuticals, Inc. and its consolidated subsidiaries (together, “ANI,” the “Company,” “we,” “us,” or “our”) is a diversified bio-pharmaceutical company serving patients in need by developing, manufacturing, and marketing high quality branded and generic prescription pharmaceuticals, including for diseases with high unmet medical need. Our team is focused on delivering sustainable growth by building a successful Purified Cortrophin Gel franchise, strengthening our generics business with enhanced development capability, innovation in established brands and leveraging our North American manufacturing capabilities. Our four pharmaceutical manufacturing facilities, of which two are located in Baudette, Minnesota, one is located in East Windsor, New Jersey, and one is located in Oakville, Ontario, are together capable of producing oral solid dose products, as well as semi-solids, liquids and topicals, controlled substances, and potent products that must be manufactured in a fully-contained environment.

Strategy

Our objective is to build a sustainable and growing biopharmaceutical company serving patients in need and creating long-term value for our investors. Our growth strategy is driven by the following key pillars:

Building a successful Purified Cortrophin Gel franchise

We acquired the NDAs for Cortrophin gel and Cortrophin-Zinc in January 2016 and executed long-term supply agreements with a supplier of our primary raw material for corticotrophin active pharmaceutical ingredient (“API”), a supplier of corticotrophin API with whom we have advanced the manufacture of commercial scale batches of API, and a Cortrophin gel fill/finish contract manufacturer. During the second quarter of 2021, we submitted a Supplemental New Drug Application (“sNDA”) to the FDA.

On October 29, 2021, the FDA approved the Company’s sNDA for Purified Cortrophin™ Gel (Repository Corticotropin Injection USP) for the treatment of certain chronic autoimmune disorders, including acute exacerbations of multiple sclerosis (“MS”) and rheumatoid arthritis (“RA”), in addition to excess urinary protein due to nephrotic syndrome. Cortrophin Gel is an adrenocorticotropic hormone (“ACTH”), also known as purified corticotropin.

​

During 2021, we invested in leadership, expertise and infrastructure in the areas of commercialization of rare disease therapies and developed a launch strategy and commercial plan for this product. In the fourth quarter of 2021 and first quarter of 2022, we hired a significant number of new employees and assembled and trained our rare disease field force. On January 24, 2022, we announced the commercial launch of Cortrophin Gel in the U.S. As a result of the build out of our rare disease team, our expenditures in support of these efforts will materially increase in 2022 as compared to 2021.

Strengthening our generics business with enhanced research and development capability and increased focus on niche opportunities

​

43

Table of Contents

We have grown our generics business through a combination of market share gains on existing products and new product launches. We have also successfully acquired numerous ANDAs through business and asset acquisitions, including, most recently, our acquisition of Novitium, including their portfolio of commercial and pipeline generic products, manufacturing and development facilities and expert workforce. We have begun to increase our focus on niche lower competition opportunities such as injectables, Paragraph IV, and Competitive Generic Therapy designation filings. Additionally, we will continue to seek opportunities to enhance our capabilities through strategic partnerships and acquisitions of assets and businesses.

​

Maximizing the value from our established brands through innovative “go-to-market” (“GTM”) strategies and continued programmatic acquisitions

​

We have acquired the New Drug Applications (“NDAs”) for and market Atacand, Atacand HCT, Arimidex, Casodex, Lithobid, Vancocin, Inderal LA, Inderal XL, InnoPran XL, Oxistat, Veregen, and Pandel. We are innovating in our GTM strategy through creative partnerships. In addition, we will continue to explore opportunities in acquiring new brands to grow our established brands portfolio.

​

Expansion of contract development and manufacturing organization (“CDMO”) business by leveraging our unique manufacturing capabilities

We built a CDMO business through our sites in Baudette and grew it through the acquisitions of Novitium and WellSpring Pharma Services Inc. (“ANI Canada”). Our North America based manufacturing and unique capabilities in high-potency, hormonal, steroid, and oncolytic products can be leveraged to expand our CDMO business.

The pillars of our strategy are enabled by an empowered, collaborative, and purposeful team with a high performance-orientation.

Product Development Considerations

We consider a variety of criteria in determining which products to develop, all of which influence the level of competition upon product launch. These criteria include:

[[GREPCENT_TABLE]]
[["","\u25cf","Formulation Complexity. Our development and manufacturing capabilities enable us to manufacture pharmaceuticals that are difficult to produce, including highly potent, extended release, combination, and low dosage products. This ability to manufacture a variety of complex products is a competitive strength that we intend to leverage in selecting products to develop or manufacture."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Patent Status. We seek to develop products whose branded bioequivalents do not have long-term patent protection or existing patent challenges."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Market Size. When determining whether to develop or acquire an individual product, we review the current and expected market size for that product at launch, as well as forecasted price erosion upon conversion from branded to generic pricing. We endeavor to manufacture products with sufficient market size to enable us to enter the market with a strong likelihood of being able to price our products both competitively and at a profit."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Profit Potential. We research the availability and cost of active pharmaceutical ingredients in determining which products to develop or acquire. In determining the potential profit of a product, we forecast our anticipated market share, pricing, including the expected price erosion caused by competition from other generic manufacturers, and the estimated cost to manufacture the products."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Manufacturing. We generally seek to develop and manufacture products at our own manufacturing plants in order to optimize the utilization of our facilities, ensure quality control in our products, and to more closely control the economic inputs and outputs of our products."]]
[[/GREPCENT_TABLE]]

44

Table of Contents

[[GREPCENT_TABLE]]
[["","\u25cf","Competition. When determining whether to develop or acquire a product, we research existing and expected competition. We seek to develop products for which we can obtain sufficient market share and may decline to develop a product if we anticipate significant competition. Our specialized manufacturing facilities provide a means of entering niche markets, such as hormone therapies, in which fewer generic companies are able to compete."]]
[[/GREPCENT_TABLE]]

Fiscal 2021 Developments

​

Business Acquisition and Financing Activity

​

On November 19, 2021, we completed our previously announced acquisition of Novitium pursuant to the Merger Agreement for cash consideration of $89.5 million in cash (subject to various adjustments pursuant to the merger agreement), 2,466,654 restricted shares of ANI common stock, and up to $46.5 million in contingent future earn-out payments. The contingent consideration is based on the achievement of certain milestones, including milestones on gross profit of Novitium portfolio products over a 24-month period, regulatory filings completed during this 24-month period, and a percentage of net profits on certain products that are launched in the future. The cash consideration was financed via proceeds from the Credit Facility (as defined below) and proceeds from the PIPE Investment (as defined below). This acquisition is being accounted for as a business combination.

​

We acquired Novitium due to its proven track record of being a research and development growth engine capable of fueling sustainable growth, to expand our research and development pipeline via niche opportunities, to enhance our contract development and manufacturing organization (“CDMO”) business and U.S. based manufacturing capacity, and to diversify our revenue base.

​

In connection with our acquisition of Novitium, we entered into employment agreements with the two executives and founders of Novitium, Muthusamy Shanmugam and Chad Gassert. Both will serve as executive officers of the Company and Mr. Shanmugam was also appointed to the board of directors. Mr. Shanmugam holds interests in Scitus Pharma Services (“Scitus”), which provides clinical research services to Novitium, SS Pharma LLC (“SS Pharma”), which acquires and supplies API to Novitium, Esjay Pharma LLC (“Esjay”), which provides research and development and facilities consulting services, and Nuray Chemical Private Limited (“Nuray”), which manufactures and supplies API to Novitium. Mr. Gassert holds an interest in Scitus. See Note 14, Related Parties, in the notes to the consolidated financial statements in Part II, Item 8. of this Annual Report on Form 10-K for additional discussion.

​

Also on November 19, 2021, we, as borrower, entered into a credit agreement (the “Credit Agreement”) with Truist Bank, as Administrative Agent, and the other parties thereto, which provides for credit facilities consisting of (i) a senior secured term loan facility in an aggregate principal amount of $300.0 million (the “Term Facility”) and (ii) a senior secured revolving credit facility in an aggregate commitment amount of $40.0 million, which may be used for revolving credit loans, swingline loans and letters of credit (the “Revolving Facility,” and together with the Term Facility, the “Credit Facility”). The Term Facility proceeds were used to finance the cash portion of the consideration under the merger agreement between ANI and Novitium, fully repay and terminate our existing Amended and Restated Credit Agreement (“Prior Credit Facility”), and pay fees, costs and expenses incurred in connection with the merger.

The Credit Facility is secured by substantially all of the personal property and certain material real property owned by us and our wholly-owned domestic subsidiaries, and obligations under the Credit Facility are guaranteed by certain of our wholly-owned domestic subsidiaries.

Concurrently with the execution of the Merger Agreement on March 8, 2021, we entered into an Equity Commitment and Investment Agreement with Ampersand 2020 Limited Partnership, an affiliate of Ampersand Capital Partners (the “PIPE Investor”), pursuant to which, on November 19, 2021, we issued and sold to the PIPE Investor, and the PIPE Investor purchased, 25,000 PIPE Shares, for a purchase price of $1,000 per share and an aggregate purchase price of $25.0 million, in a private placement (the “PIPE Investment”) issued in reliance on the exemption from registration provided by Section (4(a)(2) of the Securities Act of 1933, as amended and/or Regulation D promulgated thereunder. Our Chairman of the Board of Directors is an operating partner of Ampersand Capital Partners, an affiliate of Ampersand 2020 Limited Partnership.

45

Table of Contents

​

As part of the Federal Trade Commission (“FTC”) conditions on the closing of the acquisition of Novitium, we agreed to divest a currently marketed product and rights to another product under development to an unrelated third party. The disposition of these products is immaterial to our results of operations.

​

For more information about the Novitium acquisition transaction, please see our Form 8-K filed with the SEC on November 26, 2021.

​

Asset Acquisitions

On April 1, 2021, we acquired the NDAs for Oxistat®, Veregen®, and Pandel® and the ANDA for Apexicon® from Sandoz Inc. for total consideration of $20.7 million. The acquisition was funded through a $24.0 million borrowing under the revolving facility portion (the “Revolver”) of our Prior Credit Facility.

Product Launches

Refer to our website at www.anipharmaceuticals.com for information on the products, including indications/treatments.

Purified Cortrophin Gel Approval and Launch

​

On October 29, 2021, the FDA approved the Company’s sNDA for Purified Cortrophin™ Gel (Repository Corticotropin Injection USP) for the treatment of certain chronic autoimmune disorders, including acute exacerbations of multiple sclerosis (“MS”) and rheumatoid arthritis (“RA”), in addition to excess urinary protein due to nephrotic syndrome. Cortrophin Gel is an adrenocorticotropic hormone (“ACTH”), also known as purified corticotropin.

During 2021, we invested in leadership, expertise and infrastructure in the areas of commercialization of rare disease therapies and developed a launch strategy and commercial plan for this product. In the fourth quarter of 2021 and first quarter of 2022, we hired a significant number of new employees and assembled and trained our rare disease field force. As a result of the build out of our rare disease team, our expenditures in support of these efforts will materially increase in 2022 as compared to 2021.

Purified Cortrophin Gel became available to our customers in late 2021, and we recognized an immaterial amount of revenues during the year ended December 31, 2021. On January 24, 2022, we announced the full-scale U.S. commercial availability and launch of Purified Cortrophin Gel.

​

Equity Financing

​

In November 2021, through a public offering, we completed the issuance and sale of 1,500,000 shares of ANI common stock, resulting in net proceeds after issuance costs of $69.7 million. The proceeds will be used to fund our Purified Cortrophin Gel commercialization efforts, including sales and marketing and consulting expenses related thereto, and for general corporate purposes.

​

COVID-19 Impact

We continue to closely monitor the impact of the novel coronavirus (“COVID-19”) pandemic on our business and the geographic regions where we operate. Per IQVIA/IMS data, total market generic and brand prescriptions continued to be depressed during 2021. During this period, and most significantly in the first quarter of 2021, our revenues were negatively impacted by the pandemic, as subsequent waves and variants of the virus impacted patient and customer behavior. IQVIA/IMS data indicates that total market generic and brand prescriptions increased sequentially during each of the second, third, and fourth quarterly periods of 2021 and increased against the comparable 2020 quarterly periods, and prescription levels appear to be nearing or have returned to pre-pandemic levels by the end of 2021. We have not experienced a significant impact to our manufacturing operations; however, we continued to see disruptions to our supply chain from the COVID-19 pandemic during 2021, including significant lead times for purchases of materials. Our

46

Table of Contents

manufacturing facilities have remained open throughout the pandemic and have operated in accordance with local, state and national safety guidelines. The pandemic has not impacted our access to capital and has not significantly impacted our use of funds, including but not limited to capital expenditures, spend on research and development activities and business development opportunities.

​

We are unable to predict the impact that the COVID-19 pandemic will continue to have on our future financial condition, results of operations and cash flows due to numerous uncertainties, including the continued duration of the pandemic, the appearance of additional variants of the virus, the level of success of continued actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.

General

Impacts to our 2021 results of operations, including to net revenues, operating expenses, interest and other expense, net, and income taxes are described below. Our 2021 results of operations were impacted by the November 19, 2021 acquisition of Novitium and related activity subsequent to that date. The acquisition will provide additional revenues and we will incur increased costs, including but not limited to the amortization of intangible assets acquired, other operating costs, and increased interest costs on borrowings used to finance the transaction. During the period between the acquisition date and December 31, 2021, Novitium operations generated $7.7 million in net revenues.

​

The following table summarizes our results of operations for the periods indicated:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended"],["\u200b","\u200b","December 31,"],["(in thousands)","","2021","","2020"],["Net revenues","\u200b","$","216,136","\u200b","$","208,475"],["Operating expenses","\u200b","","\u200b","\u200b"],["Cost of sales (exclusive of depreciation and amortization)","\u200b","","100,610","\u200b","","87,157"],["Research and development","\u200b","","11,369","\u200b","","16,001"],["Selling, general, and administrative","\u200b","","84,294","\u200b","","64,986"],["Depreciation and amortization","\u200b","","47,252","\u200b","","44,638"],["Contingent consideration fair value adjustment","\u200b","\u200b","500","\u200b","\u200b","\u2014"],["Legal settlement expense","\u200b","\u200b","8,750","\u200b","\u200b","\u2014"],["Purified Cortrophin Gel pre-launch charges","\u200b","","780","\u200b","","11,263"],["Intangible asset impairment charge","\u200b","\u200b","2,374","\u200b","\u200b","446"],["Operating loss","\u200b","","(39,793)","\u200b","","(16,016)"],["Interest expense, net","\u200b","","(11,922)","\u200b","","(9,452)"],["Other expense, net","\u200b","","(4,343)","\u200b","","(494)"],["Loss before benefit for income taxes","\u200b","","(56,058)","\u200b","","(25,962)"],["Benefit for income taxes","\u200b","","13,455","\u200b","","3,414"],["Net loss","\u200b","$","(42,603)","\u200b","$","(22,548)"]]
[[/GREPCENT_TABLE]]

​

47

Table of Contents

The following table sets forth, for the periods indicated, items in our consolidated statements of operations as a percentage of net revenues.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended"],["\u200b","\u200b","December 31,"],["\u200b","","2021","","2020"],["Net revenues","","100.0","%","100.0","%"],["Operating expenses","","","","","\u200b"],["Cost of sales (exclusive of depreciation and amortization)","","46.5","%","41.8","%"],["Research and development","","5.3","%","7.7","%"],["Selling, general, and administrative","","39.0","%","31.2","%"],["Depreciation and amortization","","21.9","%","21.4","%"],["Contingent consideration fair value adjustment","\u200b","0.2","%","\u2014","%"],["Legal settlement expense","\u200b","4.0","%","\u2014","%"],["Purified Cortrophin Gel pre-launch charges","","0.4","%","5.4","%"],["Intangible asset impairment charge","","1.1","%","0.2","%"],["Operating loss","","(18.4)","%","(7.7)","%"],["Interest expense, net","","(5.5)","%","(4.5)","%"],["Other expense, net","","(2.0)","%","(0.2)","%"],["Loss before benefit for income taxes","","(25.9)","%","(12.4)","%"],["Benefit for income taxes","","6.2","%","1.6","%"],["Net loss","","(19.7)","%","(10.8)","%"]]
[[/GREPCENT_TABLE]]

​

Results of Operations for the Years Ended December 31, 2021 and 2020

Net Revenues

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b","\u200b","\u200b","\u200b","\u200b"],["(in thousands)","","2021","","2020","","Change","","% Change"],["Generic pharmaceutical products","\u200b","$","143,571","\u200b","$","147,257","\u200b","$","(3,686)","","(2.5)","%"],["Branded pharmaceutical products","\u200b","","47,561","\u200b","","47,960","\u200b","","(399)","","(0.8)","%"],["Contract manufacturing","\u200b","","10,042","\u200b","","9,221","\u200b","","821","","8.9","%"],["Royalty and other income","\u200b","","14,962","\u200b","","4,037","\u200b","","10,925","","270.6","%"],["Total net revenues","\u200b","$","216,136","\u200b","$","208,475","\u200b","$","7,661","","3.7","%"]]
[[/GREPCENT_TABLE]]

​

We derive substantially all of our revenues from sales of generic and branded pharmaceutical products, contract manufacturing, and contract services, which include product development services, laboratory services, and royalties on net sales of certain products. Many of our branded products face competition from generic products and we expect them to continue to face competition from generic products in the future. Our generic products face competition from other generic products and we expect them to continue to face competition in the future. The primary means of competition among generic manufacturers are pricing, contract terms, service levels, and reliability. Increased competition generally results in decreased average selling prices of generic and brand products over time. In addition, due to strategic partnerships between wholesalers and pharmacy chains, we have experienced, and expect to continue to experience, increases in net sales to the wholesalers, with corresponding decreases in net sales to the pharmacy chains.

Net revenues for the year ended December 31, 2021 were $216.1 million compared to $208.5 million for the same period in 2020, an increase of $7.7 million, or 3.7%, primarily as a result of the following factors:

[[GREPCENT_TABLE]]
[["","\u25cf","Net revenues for generic pharmaceutical products were $143.6 million during the year ended December 31, 2021, a decrease of 2.5% compared to $147.3 million for the same period in 2020. From a product perspective, the net decrease was driven by declines in sales of Vancomycin, Methazolamide, Erythromycin Ethylsuccinate (\u201cEES\u201d), Miglustat, Penicillamine, and Tolterodine, and tempered by increased revenues from sales of Flecainide, the second quarter 2021 launch of Nicardipine, and the third quarter 2021 launches of Nebivolol and Tranexamic Acid, and the sales of generic products acquired in the Novitium acquisition from November 19, 2021 through the year ended December 31, 2021. The decrease in net generic revenues was principally due to"]]
[[/GREPCENT_TABLE]]

48

Table of Contents

[[GREPCENT_TABLE]]
[["","","lower average selling prices among generic products, which was tempered by an increase in volumes of generic products other than those mentioned above."]]
[[/GREPCENT_TABLE]]

​

During the year ended December 31, 2020, the overall market for and sales of our generic products were negatively impacted by the COVID-19 pandemic, as mitigation measures and other related actions suppressed prescription levels during the year. During the year ended December 31, 2021, generic prescription levels continued to be suppressed when compared to pre-pandemic levels, most significantly during the three months ended March 31, 2021, and the revenues for many of our generic pharmaceutical products continued to be negatively impacted. Per IQVIA/IMS data, total generic market prescriptions increased sequentially during the second, third, and fourth quarterly periods in 2021 and appear to be nearing pre-pandemic levels.

​

[[GREPCENT_TABLE]]
[["","\u25cf","Net revenues for branded pharmaceutical products were $47.6 million during the year ended December 31, 2021, a decrease of 0.8% compared to $48.0 million for the same period in 2020. From a product perspective, the net decrease was driven by lower unit sales of Inderal XL and Arimidex and decreased units and revenues of Atacand. These decreases were tempered by the launch of the products acquired in the Sandoz, Inc. asset acquisition on April 1, 2021 and increased unit sales and revenues of Casodex. Net brand revenues in 2021 were negatively impacted by a shift in mix towards products with lower average selling prices, tempered by an increase in overall volumes."]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2020, the overall market for, and sales of our brand products were negatively impacted by the COVID-19 pandemic, as mitigation measures and other related actions suppressed prescription levels throughout the year. These actions resulted in suppressed brand prescriptions during the year ended December 31, 2020. As of the end of the 2021 fiscal year, brand prescription levels appeared to have returned to pre-pandemic levels.

[[GREPCENT_TABLE]]
[["","\u25cf","Contract manufacturing revenues were $10.0 million during the year ended December 31, 2021, an increase of 8.9% compared to $9.2 million for the same period in 2020, due to an increase in the volume of orders, including the impact of Novitium contract manufacturing orders during the period from November 19, 2021 and December 31, 2021."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Royalty and other were $15.0 million during the year ended December 31, 2021, an increase of $10.9 million from $4.0 million for the same period in 2020, primarily due to the recognition of the final royalty of $11.2 million under the Kite Pharma, Inc. license agreement (Yescarta\u00ae) pursuant to the Tripartite Agreement in the first quarter 2021."]]
[[/GREPCENT_TABLE]]

​

Cost of Sales (Excluding Depreciation and Amortization)

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b","\u200b","\u200b","\u200b","\u200b"],["(in thousands)","","2021","","2020","","Change","","% Change"],["Cost of sales (excl. depreciation and amortization)","\u200b","$","100,610","\u200b","$","87,157","\u200b","$","13,453","","15.4","%"]]
[[/GREPCENT_TABLE]]

​

Cost of sales consists of direct labor, including manufacturing and packaging, active and inactive pharmaceutical ingredients, freight costs, packaging components, and royalties related to profit-sharing arrangements. Cost of sales does not include depreciation and amortization expense, which is reported as a separate component of operating expenses on our consolidated statements of operations.

For the year ended December 31, 2021, cost of sales increased to $100.6 million from $87.2 million for the same period in 2020, an increase of $13.5 million or 15.4%. The increase is primarily due to increased volumes of generic products, including increases related to activity of Novitium subsequent to our acquisition, a $3.2 million increase in costs representing the excess of fair value over cost for inventory acquired in asset acquisitions and a business combination, $1.9 million in a non-recurring royalty settlement, and $1.5 million of increased freight charges during the year ended December 31, 2021. The increase was tempered by $3.5 million of lower costs related to a current period decrease in sales of products subject to profit sharing arrangements. During the year ended December 31, 2021, we

49

Table of Contents

incurred $7.5 million in cost of sales representing the excess of fair value over cost for inventory acquired in the Sandoz, Inc. asset acquisition and Novitium business combination and subsequently sold during the period, compared to $4.3 million during the year ended December 31, 2020, related to the Amerigen asset acquisition.

​

Cost of sales as a percentage of net revenues, exclusive of the impacts related to excess of fair value over the cost of inventory sold during the period, increased to 43.1% during the year ended December 31, 2021, from 39.7% during the same period in 2020, primarily as a result of increased volumes in a period of declining average selling prices across generic products and a shift in mix towards brand products with lower average selling prices, as well as a $1.9 million non-recurring royalty settlement and a $1.5 million increase in freight expenses. The negative impacts were significantly tempered by $11.2 million of royalty revenue in the first quarter 2021 with no associated cost of sales.

​

During the year ended December 31, 2021, no single vendor represented at least 10% of inventory purchases. In the year ended December 31, 2020, we purchased 10% of our inventory from one supplier.

Other Operating Expenses

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(in thousands)","","2021","","2020","","Change","","% Change"],["Research and development","\u200b","$","11,369","\u200b","$","16,001","\u200b","$","(4,632)","","(28.9)","%"],["Selling, general, and administrative","\u200b","","84,294","\u200b","","64,986","\u200b","","19,308","","29.7","%"],["Depreciation and amortization","\u200b","","47,252","\u200b","","44,638","\u200b","","2,614","","5.9","%"],["Contingent consideration fair value adjustment","\u200b","\u200b","500","\u200b","\u200b","\u2014","\u200b","\u200b","500","\u200b","NM","(1)\u200b"],["Legal settlement expense","\u200b","\u200b","8,750","\u200b","\u200b","\u2014","\u200b","\u200b","8,750","\u200b","NM","(1)\u200b"],["Purified Cortrophin Gel pre-launch charges","\u200b","","780","\u200b","","11,263","\u200b","","(10,483)","","(93.1)","%"],["Intangible asset impairment charge","\u200b","\u200b","2,374","\u200b","\u200b","446","\u200b","\u200b","1,928","\u200b","432.3","%"],["Total other operating expenses","\u200b","$","155,319","\u200b","$","137,334","\u200b","$","17,985","","13.1","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Not meaningful\u200b"]]
[[/GREPCENT_TABLE]]

​

Other operating expenses consist of research and development costs, selling, general, and administrative expenses, depreciation and amortization, contingent consideration fair value adjustment, legal settlement expense, Purified Cortrophin Gel pre-launch charges, and intangible asset impairment charges.

For the year ended December 31, 2021, other operating expenses increased to $155.3 million from $137.3 million for the same period in 2020, an increase of $18.0 million, or 13.1%, primarily as a result of the following factors:

[[GREPCENT_TABLE]]
[["","\u25cf","Research and development expenses decreased from $16.0 million to $11.4 million, a decrease of 28.9%, primarily due to the non-recurrence of the $3.8 million in-process research and development expense from the Amerigen Pharmaceuticals, Ltd. acquisition in the first quarter 2020. The decrease was tempered by increases related to the Novitium activities subsequent to our acquisition."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Selling, general, and administrative expenses increased from $65.0 million to $84.3 million, an increase of 29.7%, primarily due to the $9.4 million of transaction expenses related to the Novitium acquisition and $14.0 million in pre-launch sales and marketing expenses related to Cortrophin commercialization activities incurred in the year ended December 31, 2021. In 2020, there were no comparable costs. Increased costs were also incurred related to employee compensation, legal, insurance, and other professional fees, in part related to Novitium activities subsequent to the acquisition. These increases were offset by the non-recurrence of $6.5 million of termination benefit expenses related to the departure of our former President and CEO and non-recurrence of other recruitment and related legal charges associated with our CEO search in the second quarter of 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Depreciation and amortization expense was $47.3 million for the year ended December 31, 2021, compared to $44.6 million for the year ended December 31, 2020. The increase is primarily due to the amortization of intangible assets acquired in the Novitium acquisition."]]
[[/GREPCENT_TABLE]]

​

50

Table of Contents

[[GREPCENT_TABLE]]