Amneal Pharmaceuticals, Inc. (AMRX) Earnings Call Transcript & Summary

So good morning, everybody. I'm Christopher Schott from JPMorgan. And it's my pleasure to be introducing Amneal today. From the company, we have Chirag and Chintu Patel, Co-Founders and Co-CEOs. And with that, I'll turn it over to Chirag.

Thank you, Chris. And thank you, everyone, for joining us today. We are thrilled coming back to Amneal 18 months ago. And 18 months ago, we left and came back 5 months ago. So it's not a long time that we were away but very thrilled and excited to rebuild Amneal 2.0, just like how we built Amneal 1.0. So many exciting areas of growth that we have. Let me walk you through. So this is what we have done, we're calling it the reinvigoration of Amneal, and we had tremendous momentum in 2019 towards the end, entering into 2020. So on a business evolution front, as you saw, we launched 2 key products, first to market. We launched almost 15 products after we came back. Total 37 products for 2019. We enhanced our plant utilization, the product optimization. We went after the business from the base portfolio as well. We strengthened our forecast accuracies, took out all the operational inefficiencies, refocused the generics and specialty R&D, and we will talk more about these, and we put lot more focus on our pipeline asset, IPX203, which I'll share some data with you. On execution side, as I said, we got 38 products launched, probably one of the highest in the nation. Our ANDAs submitted, only 14. They were on the low side for the first time, but we'll pick that back up. But it's not number of ANDAs that we file, it's the -- which ANDAs we file. And growth on our specialty products is on track for Rytary and Unithroid. And how did we position Amneal for the future growth? So what we did is we signed -- we completed a transaction and bought a distribution company, more focused on government sales, VA and DOD. This gives us additional sales channel, and I'll speak more about it. Also we can sell more unit dose products as well. So we're very excited about AvKARE transaction. We did in-license one of the product for Myasthenia Gravis, which is, again, keep building our movement disorder franchise after Rytary, and we're excited about that opportunity. We're looking at new pipeline asset as well. And we boosted our board by adding Jeff George, who was ex-CEO of Sandoz and Alcon, good friend; Shlomo Yanai from -- he was the CEO of Teva. So I guess we didn't leave anybody out. We covered the globe. And we have John Kiely. He joins us from Pricewaterhousecoopers. So very excited. Our Chairman is excellent as well, has a great background, Mr. Paul Meister. He built Thermofisher back in the days, '91 to 2005, turned around Revlon, inVentiv. So great board, very strong board as we position Amneal to be a growth company and something to write a story about in the coming years. So here are the 3 things that we're focused on. So first is to grow fundamentally strong generics business, the base business as well as new launches. And you may be surprised that why would I say grow fundamentally strong generics business. So we are still at the right size. We could add on as we have many shots on goal. We got multiple dosage forms. So ophthalmics is a new categories we'll be launching. We have injectable products already 30 or so in the market. We will be adding more. We have transdermal, pretty much all transdermal products, which -- and a couple of new ones we'll be launching this year. We have topical products. We have liquid products. So we pretty much cover all dosage forms. This is why we can still grow in a highly competitive generics market. We are keenly aware of the competition, and the big buying powers. The 3 buying groups have enormous power to change dynamics. So we have to navigate through, and this is why we can navigate through better than others because of multiple shots on goal. The second area we're focused on is our existing specialty franchise. We have great assets currently, great products, and we are adding more. And we've been looking at specialty R&D for several years as part of Amneal being private company. So nothing new for us. We love science. We're in science business, and we'll do more. In the last transaction, we're extremely excited as well. It gives us additional sales channel to sell in government, utilize our U.S. manufacturing footprint and expand into various other areas such as unit dose marketing as well. So let's talk a little bit more about each of these areas. So in generics, as I mentioned earlier, we're focusing on improving our gross margins. Unfortunately, 2019 was a transition year. First de-growth year in Amneal's history since we started the company in 2002. There were many operational inefficiencies, which we have addressed, increased our business, reduced inventory obsolescence, reduce failure to supply, so strengthening supply chain, so that is an important factor. We have to be 40-plus percent margins in order to keep reinvesting. And Amneal being #1 in quality, we have to maintain our quality standards all the time, which we will do it at any cost. The -- as I said, we are -- keep looking at the base business and increasing base business. Injectables is our focus as well as ophthalmics, inhalation. We have a good start this year as well. We've been working at it for the last 4 years. It's difficult areas. So Amneal is benefiting from years of investment that we have done in our own infrastructure as well as pipeline. So here's our pipeline today. We have 97 products waiting for approval at FDA, and you can see that 58% were oral solid dosage. And now, look at our development pipeline. It's smaller number of programs, but 72% all other dosage forms. So this is -- this gives us ability to keep introducing new products, keep finding niches as we navigate through this difficult U.S. generics market. But we also know it's an essential industry, so there will be demand for generics products all the time. Moving on. And here is the -- it's -- if you would say what gives us confidence because what we have done. We have the team, look at the products in each areas on the left that we have approval already and launched, many first to market, many in different dosage forms, and this is some of the pipeline I'm sharing with you. There are more to it. So opportunity is magnified when you look at the whole pipeline, and we'll be keep adding. This is how we won as Amneal 1.0. This is how we're going to win as Amneal 2.0, in addition to our specialty and distribution business. Now our second area of growth is specialty franchise. Our current programs are doing well, and we do face the difficult payer and government regulations and doughnut hole issues, but our scripts are growing for all our products. IPX203, I'll share more data, and pyridostigmine, which is for Myasthenia Gravis, is excellent addition to our pipeline. We are looking at complementary assets. We're highly disciplined how we would acquire or do M&A transaction. We will be very creative because we do not like high leverage, so we can't wait to de-lever ourselves very soon. But we are looking into neurology and endocrinology if there are fits because there are companies with 1 or 2 products, cannot survive on their own. We can bring them with us since we have the infrastructure for movement disorder. We have about 170 people in specialty with sales and market access and marketing team. And this is where we put our biosimilars. So we have 3 biosimilars in the pipeline, which is Neupogen, Neulasta and Avastin. We've been investing in biosimilars for quite a bit. So again, the area we are familiar with, working with FDA proactively to reduce the requirements of clinical, and we believe it fits in specialty because of the market access, customer service that is required, patient support that is required, so we did not put it in generics, we put it in specialty. And good thing is we already have the infrastructures that we can leverage on. We would become one of the key biosimilar players in the market, and it gives us more strength to do these things. We've been there, done there. This is almost, generics products, highly valuable, reduces a huge amount cost for the health care system in 10 years. We always saw biosimilar as a 15 years play. We never got nervous about it, and we're going to build it. And it's who stays last. And since we have the generics business, distribution business, specialty business, it gives us more strength, and we can last longer, building the biosimilar franchise. It will continue to have more competition. It will be competitive pricing, but if you can develop your programs at the right pace, you can make a good amount of money. On neurology, I mentioned the K127 and IPX203. We're also looking at thyroid franchise pipeline as well. So here's some data on IPX203, first time I'm sharing with you. So the chart on your left shows the symptoms management, and green is IPX203. It's instead of IR fluctuating and symptoms coming back in 2 to 3 hours, IPX203 takes it all the way up to 7, 8 hours. Same thing on the chart on right, the number of fluctuations the patient suffers are almost half with IPX203, and also the good on time, which is the biggest measure for the Parkinson's patient is, they count on. This is how they live their life. It's good on time. They can do activities. They can go up and down, play with grandkids. And this product provides 6.5 hours almost, IPX203 versus currently 3 hours. So very excited about this. Of course, the movement disorder experts we talk to, everybody is excited, and it can be managed really well, Parkinson's disease, with our product. Moving on to the third area of our growth, which is the AvKARE transaction. We did receive the FTC clearance right away, and we expect the close in February 2020. So let me explain you what this business is. So the VA and DOD, at least somebody cares about made in United States products. So they buy products that are TAA-compliance. And Amneal being a large U.S. company, a large U.S. manufacturing footprint, we constantly like to make products in America. So we would increase our business. They have national contracts, which are 5 years they're awarded. We have 31 of them. We will win more. And there is a relationship with 100-plus manufacturer partners. So it is good for the partners as well to have additional sales channel than relying on -- which we have to rely on the big 3, but this is just additional government channel. Also, the unit dose business is very niche and lucrative, highly profitable business, which we are well positioned to increase the business, and financial benefits are awesome as well. Here's some of the stats. It's a $2.5 billion market, which does not include biosimilars. So biosimilars will be added in government contracts for VA and DOD. National contracts, we'll keep winning more. Relationship with 132 manufacturers, which is excellent. And Amneal also gets to utilize its own manufacturing network as well. It was $63 million LTM EBITDA and 5.4x enterprise value we paid. So it's excellent deal, accretive, delevers our overall balance sheet as well and excellent growth platform. So we're very excited. These are the 3 things we are heads down executing. That is what generic businesses, any businesses, but we have to work very hard, keep coming up with new products, maintain our status on quality, which has been superb. We have 76 inspections over the last 15 years. We have passed all of them. So really great record with FDA and reputation. And quality will matter. FDA is going to come with quality metrics. The more educated consumers will start asking where the product is made, who made it, and Amneal is well-positioned to capitalize on that. The specialty franchise. We're very excited, very focused in only 2 areas, movement disorder and endocrinology. And the distribution just gives us new channels, new ways to grow business and expand. There could be disruptions coming up. We are well positioned to capitalize if that happens ahead of the time. So all 3 areas is exciting time at Amneal. The enthusiasm is back. We have 6,000 or so employees. Everybody is fired up like old days, building the company. We're calling it Amneal 2.0. And we look forward to talking to you all the time and deliver good results and good news. So very excited about it. And thank you very much for joining. The one thing I did not mention but I would mention. Within the generics business, we're also looking at international expansion but very specific in one large market. We've been working on it for the last several months, and we will announce it when it's completed. But it adds -- we have such great assets in the United States. We will be able to leverage those, some of them, take those assets into international markets. So additional growth driver in generics. So thank you very much, really appreciate you coming.

Give it a thumbs up, we can start here. So we're going to start -- I'm going to start with some questions, and we'll open up to the audience from there. Maybe the first one, just on some of the December approvals, can you talk a little bit about maybe first the generic NuvaRing opportunity? How we should think about the company's capacity, how to think about the market dynamics? And as we just consider that for 2020, just any color would be appreciated.

Excellent. So we were extremely pleased and excited with both approvals, Carafate was first. Our teams have worked on it for several years and had to work with FDA to create a guidance and approval pathway. So we're very happy to bring generic options, option for patient, and the GI patients weren't getting complete access, so this will give more access to sucralfate for patients. So very excited. NuvaRing, we worked on it for several years, it's a complicated product with device and drug combination. So we always build the capacity based on knowing that there will be authorized generics and few other competitors coming. So we're ramping up our market share and about 25% to 30% market share. So even when Teva comes, whenever they come, we still have a -- we can maintain our market share.

To the extent we don't see additional competition, where do you think you could move share based on your capacity currently?

I think, look, many people have filed their products. I do expect competition, but we like to go up to 30% market share.

Okay.

But as far as the capacity is concerned, it's the -- as you get into a complex manufacturing, you always get efficiencies as you go along. So each every day, our efficiency and productivity will go up. And there are actions which we have taken, and we have filed certain amendments with FDA that would even ramp up more. So I don't think we'll be hindered by the capacity going forward on NuvaRing.

And your baseline assumption, though, is that you'll see additional competitors come in as we go through this?

Yes, we do.

Okay. Maybe some more comment on Carafate. I know [indiscernible] coming, but just how do you think about that competitive landscape over time?

That, we don't see competitors except authorized generics for this year. Yes. It's an excellent product.

Okay. Great. Second one is just on the distribution business. Can you just talk a little bit about the structure that was created there and why take that structure versus just an outright acquisition of the company?

It is a wholly owned subsidiary of Amneal, 65% ownership would be Amneal, 35% is the family that we know from Kentucky. Somewhere about 15 years, we bought first business from them in 2007. This is the second business. We want the family to be incentivized and run the business because it's not our core competency, it's their core competency. So if they're incentivized, they can run it. And it's completely independent. So they -- it's a distribution business, they have relationship with 100 manufacturers and more. They do unit dose business, government business, VA and DOD. They have government contracting offices. So we kept it independent, and we'll provide the support that they need in IT and other outside areas, but they're completely capable of running it. And we took a debt on that sub, so not impacting the patent. But overall, it delevers the company as well as it's accretive.

And how do we think about the margin structure of the business? And is that margin structure or something that there's opportunity to improve? Or is that a pretty stable structure over time?

It does improve actually because of the number of products and launching. And if -- obviously, if it's in-house manufactured by Amneal, it's more margins as well. But it's a good business, a good niche that they have found, 10 years or so they've been doing it. So excellent opportunity for growth?

And is there more opportunity to, I guess, increase Amneal's share of the business that, that company distributes? Is that part of the synergy with the deal?

No, we have our capacity, and we will supply our products, but we have great partners. The other manufacturers, they about 100 of them, so which is -- and we're getting great support from them as well. So we -- I think we'll do both.

In other words, on the leverage situation, you talked to the main session about wanting to take that leverage down. Just help us get our hands around how -- where is an ideal leverage level for the company? And how do you see bridging from where we are today to those levels?

Well, the leverage does bother us, and we are extremely disciplined. Cash flow is strong, so net leverage, we like to bring it in 5 ranges first as soon as we can. And we are comfortable running the company around 4, 4.5. That's what we have done as Amneal as a private company over 10 years, and that's where we feel comfortable.

Is there a time horizon that you can see getting to that level? Or is it it's too early to talk?

Too early to say. We may give more details on the earnings call.

Okay. I'll open it up to the audience.

You mentioned in the last opportunities slide deck. Where are you guys with that? Is that a 2020 opportunity?

No, NeupoGen could be 2020. Neulasta would be the following year.

And just building on that biosimilar question, help us understand how much infrastructure you could leverage from the existing specialty business to ramp those products? Or are these things that you could look to and you find a partner to even further maximize the opportunity?

No, no. We believe in [indiscernible]. That is going to be 1 -- 2 key things in biosimilars. One is regulatory mastery, which our team has been doing it for over 5 years. So convincing FDA to have a reduced Phase III or no Phase III. That saves tremendous time and cost. Your investment is lower. And on distribution, the commercial is very complex. Clinics, hospitals, you have other buy-and-build facilities. So you are to be very smart. You have to negotiate with payers. You have to negotiate with PBMs and also provide support because if they don't provide support to doctors, they're going to -- they're not incentivized, and patient support as well. And you can be creative as well with biosimilars. You can improve the delivery system. So we're looking at all that. So regulatory and commercial, that is where Amneal would like to lead. And it's a long game. So if anybody thinks it's just 1 or 2 years, and it's going to mature, mature well, it will not have erosions like obviously like generics because the cost is so high to getting it in. Too many players we're seeing, something market would have to adjust. And in my mind is how long the big brand companies will continue to play if margins are not that attractive.

And should we expect some SG&A ramp supporting those launches? Or do you think you could handle that within your existing specialty infrastructure?

It would have some ramp, but we would offset by the revenues that it will bring in with the launches.

Questions?

Could you just talk about the overall generics environment, how do you see it shaping up in 2020 relative to 2019?

Oh, it's definitely improving than '19 because whatever the value they're going to extract, the big buyers, they've done it. There is obviously -- there will be competitions coming in. So it's still extremely competitive business, but much better than last 3 years going into 2020. And what would be important is to keep launching these different dosage forms in both retail and institutional hospital side, injectables.

Other questions?

In terms of gross margins, like you mentioned, you need to get margins in the 40% range to be able to invest in the business. Just help us understand the dynamics around margins beyond just the new product launches that you can -- the levers you can pull to improve that margin structure?

Fantastic. So we looked at the manufacturing utilization, which was going down, so we increased our own utilization on transdermal, Indian manufacturing sites. We transfer the products from Long Island, U.S. to India. We lowered the inventory obsolescence cost because we're monitoring. We strengthened supply chain. So these are internally controlled by us, which we used to do. So we're back, and we would lead. And in FTS as well, we would -- we are lowering failure-to-supply penalties. So these plays a big role in utilization, along with increasing base business. We have 225-plus products. We'll keep looking at new opportunities within those products. And there are players in and out as the rationalization happens, and we have tremendous relationship with these 3 big buying groups. So we -- and they know that they can rely on Amneal. Amneal has supplied consistently high-quality products. So with all that leverage, we do need to operate in mid-40s, high-40s in generics. We used to operate in 50s because of the investment that is required. The quality expectations by FDA is always higher and going more and more they're putting, which is rightfully so. And we like it because we lead the quality metrics. Then also the R&D investment, we have to constantly come up with new products. So if we don't have certain margins, and there's selling cost, so...

And -- sorry, Chris, if I can just add to Chirag's comment there to provide a little frame of reference sort of magnitude. I mean those operational issues that we've talked about, we estimate that they have probably cost us somewhere 400 to maybe 450 basis points of margin that is incremental margin deterioration because they're always going to have some element of failure-to-supply, they're going to have some element of inventory obsolescence, that's in our base numbers. But what has been in excess of what we've historically seen has probably impacted us somewhere in that order of magnitude. As we work through and make progress in addressing those and getting on the other side of those issues, that's the sort of magnitude of margin improvement that we're hoping to achieve, and we think is achievable and within our grasp.

And the time lines on that, do you have a sense of when could we see that? Is that going to be kind of gradual occurring? Or is that kind of step function increases that gets all played out.

I think you'll see more of a gradual progression in that because some of the issues don't resolve themselves completely overnight. So we're working aggressively on it. We haven't time bound ourselves to say we need to have it by this date, but we're working on addressing all the underlying root causes of these issues and as quickly as we can capture the improvement is what we're going to strive to achieve.

Is that -- and maybe not to push too much of the time, is this we're talking about this is like months, is it quarters? Is it years? Just trying to get some sense of, like, is this a very long-term process or something you can act on recently quickly?

No, you're -- it's more months and quarters nearer term to be able to address those, not years.

And we started since we came back. So it progress as we -- thank you, Todd, has been made really well. And we are also bringing some products in-house from CMOs. Impax had many CMO products, and our cost is half of the CMO cost, so that really helps.

I think on your last earnings call, you mentioned some M&A [indiscernible] to enhance [indiscernible] acquisition and [indiscernible] but what is your kind of appetite for M&A here?

Yes. So the question is -- I've been told to repeat questions because it's webcast -- is we -- what's our appetite for M&A and transformational M&A. So we are heads down executing and growing the business. We got enough to do with growth. We are looking, as I said, some singles on building pipeline in biosimilars as well as specialty products. We would, if anything, complementary, we can add on to our neurology franchise, we will, and we'll do a creative transaction. We are very careful about the leverage, and we want to not jeopardize that at all. So highly disciplined. Transformative, we'll look at it. But right now, we just want to grow the business. We would definitely at right time will relook at everything. And now, I guess, being public, we are on a limelight as well. So we get people know us more. I think that's one advantage I can think of. So I hope that answers your question. Thank you.

I just have one more question. In terms of Impax and Amneal combination, are you at a point where you feel like they're as innovative as they could be or as complementary as they could be that you still feel good about?

Yes. Most of the question is -- Amneal and Impax' integration is completed. Most of the area has been completed. We're working on a couple of financial modules and gross to net to consolidate completely. And that will be done soon as well.

But there are some product-level integration as we bring in a lot more products from Impax side in-house, so those things are in process, and that will give us some positive margins in 2020.

On your last earnings call, you talked about being very confident in growing EBITDA in 2020, how much of that growth would come from top line versus the operating issues.

Thank you. The question is the growth in 2020, how much will come from existing products and operational efficiencies versus new launches. So if I may park that question until the earnings call because I don't want to give out the earnings call details right now, but both areas will provide growth in 2020.

Just in general business, your chance to kind of set guidance, et cetera, how -- what's your approach now as a public company CEO now towards how you -- just given the business that's got a lot of volatility and some uncertainties that you can have some big upsides and downsides, how do you think about kind of approaching us with guidance as we think about the updates?

Well, being entrepreneur, we are always going to be upbeat, but our guidance is going to be very conservative going forward. I guess, we learned from the last 6 guidances, and it's -- we're going to be conservative, extremely conservative. And we don't know -- and I -- yes, you, all of you are always interested in quarterly updates, which we'll provide it. But we build business. The only way we know to build business is over time. That's how we have. Our minds are wired to build a sustainable business. So nothing we can do just to make a quarter. So be patient with us, but we'll be providing. We're building a company for 2020, '21, '22, '23, so we're here to stay and build it. Thank you.

On that issue of sustainability. It's a question I look at is when I look at the restructuring that the company has done, I look at the level of investment. I guess the question I have, just from outsiders, are you investing enough in the franchise to be able to sustain this kind of the high level of R&D that you had historically? Just help me get comfortable that the company hasn't cut too far in an effort just to keep its EBITDA supported and to address some of the leverage concerns.

No, actually, we haven't cut in that far. R&D is, surprisingly, it's a lower number than we used to spend as a private company, but all those infrastructure and pipeline is helping, but we still were not letting go any projects. We have cut down our oral solids, commodity R&D, but we have R&D in complex generic products. We have 505(b)(2) R&D. So obviously, we don't have room for any NCE type of things, but we can do these singles, doubles. And biosimilars also, smartly, we're not investing in R&D. We're investing more on regulatory and commercial. So there are many players where we can take their products and pay as we -- they make progress, and we launch the product. So we're not -- and SG&A has actually increased because we have the specialty franchise so -- which is doing great. So.

Just to elaborate a little bit. R&D, I mean, as a company, we are very passionate. We are a science-driven organization. And Amneal, historically, even in genetic space, has brought many first-to-market products. So we have not taken our eyes off or cut any budgets that would ever jeopardize any of our lucrative. But as over the last 5, 7 years, we also have learned in specialty and the complex where our R&D efficiency has also improved a lot. FDA is changing, and we have downsized just the commodity side of it, which we don't need, we have plenty. So we'll continue to be aggressive. We're still spending 9% to 10% of R&D -- I mean our budget is 9% to 10%, and we'll continue to do so. And...

And we're very efficient in R&D. My brother is all over R&D. He bleeds R&D.

Other questions? Maybe just on the specialty side, on the 203 opportunity, is there -- the profile, obviously, seems to improve nicely on...

It's tremendous.

Yes. How much more room is there, do you think, to go in terms of dislodging some of the kind of the older-ish generic products in the space. So is this -- I guess how much of this is just replacing or retiring ahead of the patent expiration versus an opportunity to actually expand the TAM you can pursue?

Actually, it's later, it's expand the franchise for right reason. It really can change the management of the disease. So we would be -- we have learned a lot in marketing Rytary, so it's not actually a replacement strategy, it is to make it much better because this was asked in the market. Can you make it 7 to 8 hours so we don't need to, every 2, 3 hours, keep taking a lot of drugs? So we could expand. We would be strategizing. And if we can start off new patients just on IPX203, it would be great. It's a large unmet need, and nobody likes IR, but the cost prohibits them. So if we can figure out something there, the coverage, it will be very smart. We like to provide access. We're in affordable medicine business.

And IPX203 is absolutely a great product and it will bring a lot of value to patients. It's a very severe disease. And sooner they start on a long-acting product, I think patients will see a lot more benefits. And even 1 more hour or 2 more hours of on-time compared to the existing therapy brings a lot of value to patient. So I think we'll be expanding our franchisee with 2 or 3.

Over there.

Can you give us an update on [indiscernible]. Have all the supply issues been resolved and [indiscernible]

It has been stable. The issues are still a facility that Pfizer manages, the Hospira facility. So it has -- continue to have FDA issues. But we are managing our inventory very proactively. We've been working with them. So the last few months have been stable. So I hope -- and I think it's going to stay pretty stable going forward in 2020. And we're also working on bringing some of the work in-house, so which would be -- will give us more control.

So just coming back to the generics gross margin and [indiscernible], you said that maybe internally assuming 400, 450 bps of impact there. And so that kind of gets you to the 34%, 35% range from the Q3. And then the other kind of 500 bps, how do we think about that timing? Is this -- you talked about those new launches driving that other 400, 500, is that something, okay, so say the 400, 500 internal was like this long-term [indiscernible] is that other piece? Is that something we possibly see in 2020 with these new launches?

Well, as Todd said, months, so we have already launched new products and lucrative ones in December. So I hope to see the annual impact. And also the full 2019, we launched 38 products that are getting annualized as well. So that should be very helpful in increasing gross margins.

We have time for maybe 1 last question, if you'll come up. Yes. Maybe just update on Copaxone and time lines we're going to think about for that?

I'll let my brother...

So Copaxone is not in our forecast for 2020. We expect Copaxone to materialize in early 2021.

Other questions? Appreciate the time today, thank you.

Thank you.

Thank you.