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

Good afternoon. Welcome to the Amneal Pharmaceuticals virtual presentation at Raymond James Annual Institutional Investor Conference. Pleased to have the company joining us this afternoon. Representing the company, members of management, we have Chirag Patel, company's Co-CEO and Co-Founder; along with Chintu Patel, also company's Co-CEO and a Co-Founder; and Tasos Konidaris, the company's Chief Financial Officer. Amneal is a leading U.S.-based generics company, founded in 2002; now, the fourth largest player in the industry. Has consistently moved up the generics value chain over the past several years, increasingly focused on high barrier to entry, specialty generics, biosimilars and specialty brands. So thank you, gentlemen. Welcome. I appreciate you joining us this afternoon.

Thank you.

Chirag, maybe not -- considering that you're coming off of relatively -- recently coming off of fourth quarter results, not asking you to rehash year-end results. But maybe you could just give us some quick perspective on the year that just concluded and described to of your -- relative degree of optimism regarding 2021 versus 2020.

Thank you. Thank you, Elliot, and thank you, Raymond James, for inviting us. Just a quick history on Amneal. And we started Amneal in 2002, very humble beginning, and built it to more -- as a private company, more than $1 billion-plus in sales before we acquired Impax because of specialty platform and taking company into the more diversity route. We -- in 2018, we had a hard time, '19, especially and to -- we came back to rerun the company, and we're calling it Amneal 2.0. So very excited about 2.0. What made us successful at Amneal 1.0 stays the same, which is our culture, our execution capabilities, our R&D capabilities, multiple platform that we have within generics and now within specialty, which allows us to come up with new products. As you saw, we just launched another first-to-market generics product, and we've been launching several of these, providing more access and affordability to American patients, and we'll continue to do so. So that remarkable journey now in Amneal 2.0 is also a long-term view as well. We had a phenomenal year in 2020 despite COVID. And we expect the COVID impact to be lesser in '21. We expect to keep launching new complex generics product, not only this year, but every year, going forward. We have refreshed the pipeline. And as we said, we have 9 subsectors within Gx, which includes injectables and our ophthalmics and other dosage forms. So we'll continue to lead. Our dream is to become from fourth to third to second to first affordable medicine company in the United States. And we are also proud of our specialty platform, which is -- we have 2 marketed products. We have 4 in the pipeline and pending close of the Kashiv Specialty Pharmaceuticals acquisition, which will bolster our technology platform to the highest level with more programs coming in. So that's where we are. Very excited about '21 and beyond. Thank you.

Where would -- so 2020 was a challenging year, obviously, but where would you say that the company specifically outperformed versus your original expectations? And what are some of the areas that -- where you're still targeting improvement that you think will benefit the company in 2021?

Sure. So we did outperform our guidance. So we beat the higher level of our guidance last year. If you compare 2019 to '20, we grew 28% over adjusted EBITDA. And '21, we continue to grow as well, where our guidance is -- calls for another 20% increase. So what -- where we had to face, where the whole world had to face is the -- we have plants in New York, New Jersey. It's remarkable people we have in these. They did not miss the days, and we have taken all the precautions, but it was very hard to rotate the shifts. So our productivity had suffered into March, April, May, June, July, then it got better. And now we are in a much better shape, obviously, with the vaccines and lower cases in New York, New Jersey. Our India site did not face that much of a trouble. We were able to manage through all our Indian plants during the pandemic. So that productivity gain would be excellent from last year to this year. The elective surgeries are coming back online. So more demand on our acute medications will also help drive more volume compared to last year. And bringing lots of products, which Impax used to manufacture with CMOs back in-house, we have done. So that helps drive the margins as well.

Sure. And you mentioned volume growth as being a key expected driver of 2021 performance, at least relatively better than what you saw in 2020. But we still see sort of a persistent lag in terms of return to normal with respect to overall prescription volumes. I guess we would have thought sometime in the middle of last year that we would have been back to normal by the end of the year, certainly early 2021, but we're still running 5% to 6% below normal. Now I know that doesn't necessarily impact your business as much as getting new approvals, of course, but still important to the overall industry and important for your base portfolio. So do you think -- are you still -- do you still believe it's reasonable to anticipate a return to pre-COVID Rx volumes this year?

Well, sometime starting in summer, it will start. Right now, it's a little softening, but we are keeping the matrix. And again, I'm speaking only from the generic side of the world that we're seeing -- we saw the dip in June, July. Before, it was higher orders, people stocking in, and then reduced demand. And now we're seeing it up since August last year, and it's staying up. Still maybe missing a few points on acute side of our prescription products. But yes, at some point, it will start demand to be -- we expect to go up in summer months.

Okay.

But as you mentioned, for our growth, it doesn't really impact because of 30, 35 new product launches and key high-value launches keep increasing our overall revenue and profitability. And just the one point, Elliot, that in a certain segment where we are underutilized, our plants, like transdermal and injectable, we are seeing, because of the new approval, more plant utilization and volumes coming through that gives us the efficiency gains. So that also helps us improve our margins overall.

Sure. And Chirag and Chintu, a question for both of you. Maybe just some -- your viewpoint just with respect to sort of the overall macro picture in the U.S. generics industry. We've gone through roughly a 5-year period where you've seen a major retreat from some of the previously entrenched players. I'm not sure how many people are aware of this, quite honestly. I wasn't even aware of this until about 1 week ago when we ran the numbers. But Teva's no longer the largest player in the U.S. generic industry. It's now -- or Endo. And Endo used to be a major player, and practically doesn't have a presence anymore. And now, you've got Mylan who's likely to retreat significantly from the business as well. I mean the interesting thing from my perspective is that these companies, they scale back significantly in terms of their core generic business, but they all still profess that they want to be major players in specialty generics and higher-value generics. I'm not -- I guess the lessons of history would say that kind of once you start to retreat, that it doesn't mean that it will actually become better in some of the higher value-add areas of the industry. So just curious to get your perspective on those observations.

Absolutely. So I'm so glad you did the study. So and, I'm speaking more for industry first, and then I'll talk about Amneal. So what we have seen, as you pointed out, a lot of product rationalization, the buy side consolidation, which drove -- and more FDA approval drove the pricing from the manufacturers to the trade bottom of the barrel, which cannot go anywhere bottom. I mean if some companies can even take it lower from manufacturer perspective, I have a big concern that -- this is a highly regulated, high-quality business where you have to meet all the standards. So I don't -- first of all, I do not believe that it hits -- keeps going down. There's no room to go down already. The rationalization have happened. And you're absolutely right, the company that loses its edge being the leading players in generics cannot just take the subset and say, "I'm going to lead in this spot." You're right. It doesn't happen. Usually, the company becomes very nervous focusing on everything. If you want to serve that market and be in the play and figure out how to compete with these foreign players, especially from India, who have the very low-cost basis, but I'm not sure how they can keep going lower and lower in the market because it's just -- you can't do the math. It goes below $0.01 a pill, is that how do you sustain all the quality you need to do to have. So that -- we believe it's -- the pressure's coming down. There's plenty within the generics. You -- one would have to understand how do you define generics. Generics includes not only retail side, but also institutional side. So that injectable business, right? There are also other sterile products. So yes, there's excellent opportunity on all those next-generation products and high-value products. And then at some point, people will start defining biosimilars as part of the affordable medicine group, which is a generics group, and it will end up there. So with all that, we believe it is poised for growth for the next 5, 10 years. As you know, this is an essential industry for America and for the world.

Yes. It's always surprised me that after 30 years of consolidation, the industry never consolidated. Never even consolidate market share. TAM has gone from a 20% market share to just barely 8% in the last 5 years. So...

Yes. So Elliot, just at Amneal, just to go back to the previous questions, we are focused on a parallel activities. We are not taking our eyes off our base business and operational efficiency and cost -- COGS improvement. So we continue to focus that. At the same time, we have -- we voted more high-end in science and more complex products. So we are very much focused. Amneal is known for his execution. We have the best approval to launch ratio. So we are continuously looking at it over the portfolio. We are not kind of walking away from the core business of generics and the base business. We have many avenues. We are bringing all the CMO products in house. We're looking at the API costing. We have our own API plants. So I think that's where the problem, if you just focus on one subset, and not focus on the totality of generics. Plus the biosimilars will come. So we are focused on value and volume both. We have right-sized manufacturing. So I think we have 9 different drug delivery platforms within generic subset. So I think that's where Amneal is really differentiating its own ability to execute, do both parallel activity, focus on manufacturing and current base business and also bringing out more complex and get science to the new level.

Sure. Maybe another question just with respect to sort of the overall industry, despite the fact that you've seen tremendous cost pressures and rationalization of the distribution channel, which is causing a lot of these historical legacy players to really change their business models. The one thing that doesn't seem to ever occur is discouraging new entrants. Never seems to be a shortage of new companies coming into the space. I guess that's always been a dynamic in the industry. But do you see anything on the horizon that's going to change or discourage these small upstarts from continuing to try and enter the U.S. market?

So for the commodity products, it may continue because it's very low-cost of investment. So -- and that expectations would be very small. So they may come in with 5 products, 10 products. So they're not really making money. Eventually, there they get tired. We haven't seen anybody big time coming in. What we are seeing is what we saw first time today, which is a Perrigo news, is Perrigo generics and private equity being engaged again in this field, which would help consolidate it further. There are companies, which needs to be consolidated in the industry. Unfortunately, a company like us would have a hard time doing so. First of all, we have our own portfolio, a large portfolio of generics product. And FDC has been always -- even though with 5, 6 competitors, they want you to divest products. So it becomes -- as we went through with Impax, our value was eroded just by that rush and the time it took with FDC.

Sorry, Elliot, just one little note on the smaller companies. Yes, they would come, but because of the COVID situation, buyers are now paying a lot more attention on supplies and resiliency of supply chain, where companies like Amneal has a lot more strength in supply chain and consistent supply that has become even more important due to COVID. So a small entrant would come. But I think that from the buyer's perspective, they are giving a good amount of vintage on selecting who has more muscle power to withstand this kind of pandemic situation or other supply disruptions. So that also plays a major role.

Okay. So let's turn to the 2021 outlook, key driver of growth is expected to be the introduction of specialty generic products, some of which you have just recently received approval for. Can you just discuss the evolution of the generics pipeline in terms of moving into some of these higher-value products? Are there still areas of white space where you sort of -- you need to round out development capabilities? Or are you at a point where you basically have all sort of the core formulations represented, you're now looking just to sort of round out each of these formulation verticals?

Great. So I'll start and then hand it off to Chintu as well. So we've been investing in science and innovation within generics. You call it generic specialty; I call it generics complex products because we do have a specialty branded portfolio, which is separate. So generics complex products, we've been investing since 2013 -- '12, '13, we started. And what we did is when we invest, we invest in its entire value chain. So from all aspects of R&D, analytical chemistry, organic chemistry, formulation, API. And therefore -- and we execute really well. Amneal maintains its #1 rating in quality, and that's what we're most proud of, and we will continue to do so as we are acutely aware of all these prescription meds go to our family members, which is a wide America. My own mother takes 4 or 5 prescriptions, and she always ask for Amneal's prescription, obviously. So we -- and as you can see, our proven track record, right? We have -- in the device-drug combo, drug-device combo, transdermal patches, all the oral liquids, topicals, nasal sprays, injectables. Now we started coming in, that's a huge area of growth for us. We're competitive. We think we're a small player today, #10. So we would like to move up in a top 5 in injectable space. And then you have the -- within this, we got various R&D centers. And inhalation is another platform where we have a huge plant in Ireland that we had acquired from J&J 5 years ago. So that is also ready to be commercialized, the product this year. So the growth drivers within complex generics will come from all these areas. And we have 900 scientists, various team across U.S., India and Ireland. And we just -- what we do, we do it really well. And we -- most of them, it's in-house, so we do not need to share in a highly-competitive world here of generics, the margins. And also, we control our quality investing.

Sure. Thanks. So let's -- you mentioned injectables. That's a big part of the growth story going forward. Maybe we can explore that subject matter in a little bit more detail. That's a $12 billion market. It's growing. Unlike the rest of the generic industry, it's growing about 5% to 6% per year. The top 5 companies have about a 60% share. So unlike the rest of the generic industry, still very concentrated. Top 3 companies, 50%. And arguably, the company at the top isn't investing a lot of money into the area. So it seems like a good candidate to lose some share to some upstarts. So you mentioned eventually ambitions to move into kind of the top 5 in terms of an injectable supplier. But what sort of -- other than the fact that it's incremental revenue and you didn't have a presence in the space to begin with, I mean, what kind of led you to that category? Is it just the incremental revenue, the durability of the products? Or are there synergies with the solid dose business?

Great question. So first and foremost is our vision and purpose of existing is to become a leading affordable medicine or generics company in the United States, which we are at it since very beginning, 2002, and we have made our marks in the various dosage forms. So the one that last 5 years ago, we started investing is in injectables. And we're doing it. It does bring the synergy from the analytical side. It brings the synergy from formulations, GMP, the quality hallmarks we have. So we always take our time to do it right. So we have launched products already, a small part of our business, only $150 million, but it's growing. And as you pointed out, we have a huge growth. All we need to do is execute really well. It seems like on a sterile world in injectables, many people mess up. Somehow you hear there's all these players out there and they cannot supply.

That was going to be one of my comments, that historically, companies that want to be in the injectables space change their mind once they get into the injectables space.

Yes. So we're not focusing on the commodity injectables or -- from the beginning, we introduced triamcinolone, cyclophosphamide. Triamcinolone was the first generic. So it's -- a lot of science is going behind it. Chintu, you want to do...

So Elliot, it's -- in injectable that there are many barriers of entry. And number one, as you rightfully said, it's the consistent supply. But with Amneal standard quality track records of '18, that was something that was our expertise. So we always make sure that the products we take, we can consistently supply. Second, we never wanted to get into a mid-large volume gain in injectable because we do think there would be a capacity. So how do we differentiate ourselves? So we have more differentiator in our injectable pipelines. We have peptides. We have microspheres. We have liposomal. We have large parenteral volume bags. We are working on 505(b)(2)s. We have separate cytotoxic plant, and we are able to bring like products like cyclophosphamide. We are the second generics in that space when we came out, triamcinolone, suspension-based product, very complex formulation. So we are looking at more of a scientific challenge and innovations. Plus we have a sterile portfolio of others outside of injectables, as in ophthalmic. That's something we are very proud, and we have very, very unique and very tough to crack products in that area also. So I think that's our injectable play, and we are very confident. And as we have said in our earnings call also, that we'll be bringing 40 sterile products over the next 5 years through our pipeline and the launches, including pending, we have 18, 20 pending products at FDA in injectables space also.

Okay. And so any discussion around injectables eventually leads us to the -- arguably the most significant growth opportunity ahead of the U.S. generics industry, and that's the movement into biologics, biosimilars, of course, which the company has 3 current filings for Avastin, Neupogen and Neulasta, I believe. So this is an area of tremendous potential growth. But really, biosimilars are coming into their own. You could see that in the reported results, some of the large branded companies, which are participating in this market. So far, that success has somewhat eluded traditional generic players, but that can't last forever. So Chirag, maybe just sort of comment on the company's strategy in biosimilars. And then ultimately, what do you think happens that leads to this market evolving to more of a traditional generics market based simply on cost?

Great point. So let's start with the intent of the law that biosimilars are being approved 351(k). And FDA is intent to work with the companies, the manufacturers and R&D companies to have an easier path for biosimilars to be approved compared to a few years ago. Just like how FDA evolved in complex generics, they're evolving in biosimilars. The original investment -- and we know a lot about this as well. Amneal has not invested directly in this purposely from the beginning. Such a large investment like Sandoz would quote $150 million, $200 million of development per product, which is not feasible for a company our size to do. Novartis can afford it, Pfizer can afford it. Just like on generics, if you go back in 1980s and '90s, a lot of brand companies were there. But eventually, it did not -- it wasn't their cup of tea. The biosimilars is supposed to bring more competitors for those biologics innovative drugs and reduce the cost and provide more access, therefore. So when there are 4 to 6 players in each biosimilars, what -- how does market behave? Yes, the manufacturing is very complex. We put a lot of weight there. That's what we are doing lately, learning the manufacturing because you have to do the highest utmost qualities. Anyway, we do it for all, but biosimilars even requires more infrastructure systems, the science, regulatory and convincing FDA through various other ways to prove the biosimilarities. And then once 5, 6 competitors are out there, unfortunately, it becomes a payer-driven market. And just like what they did with complex generics, they would do that for biosimilars. Or just like how GPOs did for injectables. We hope that they take a longer-term view and award at least 5, 7 years contract, just like injectables, unlike retail, which I don't think it will work like retail, it would more work like high-end peptides and injectable products. And company that has excellent manufacturing, cost-efficient development and production will be the winner. And you have to have a long view, 10 years. This is a good business for company's size us, but may not be as good for a company like Pfizer and Merck or anybody -- the pure pharma play to be in this market, and then it becomes ours in coming years.

Sure. Maybe what do you think has to happen? Or what do you think changes the current model where you have to run these expensive endpoint-based trials and you can't develop these products for less than $75 million to $100 million a piece?

It's already happening. We had several meetings with FDA. Chintu, you want to cover this a little bit in more detail?

So Elliot, it's evolving science. There is more understanding that is happening. For FDA, it's also new. For the medical community, indeed, also biosimilars are new. There is a lot of advancement from the technology perspective, from the analytical tools to show the structural similarity of biosimilars. There are other markets and other ways of proving same clinical efficacy through other models like biomarkers. So I think we believe that going forward, full-blown, unnecessary clinical study requirements, would reduce substantially. It would be a fusion model, a lot more analytical and other technology advancement to show the structural similarity along with PK-based model. And some, depending on the molecule, some U.K., and depending on the immunogenicity of the product, somewhat, it would be required. But I think $75 million, $100 million kind of investment would -- can be sustainable for long term. So I think the regulations are coming down, guidances are coming out, where FDA is totally open for new ideas and innovations because that's how they can bring the affordable biosimilar, not $100 million, $150 million investment.

Sure. Okay. Before we move into some questions that have come in, I want to ask you maybe just real quickly on -- let's talk about 2 acquisitions that the company made recently or last year, specifically in AvKARE in early 2020, which gives you a captive distribution model. Just real quickly sort of walk through that business, the rationale for the deal. How does this help Amneal sell more Amneal products? And do you envision future distribution deals similar to this?

Sure. And I'm sure your second acquisition question would be on the Kashiv question, which we love to touch on specialty. So distribution is -- we are largest U.S.-raised -- U.S. domicile company still manufacturing even in this competitive world of generics in the United States. So we have a lot of government business, and we wanted to get one step closer to the government business, which by acquiring AvKARE, it provides us a large direct sells to VA and DoD and other government agencies. Also AvKARE has unit dose distribution capabilities, and we make lots of liquid products and nasal sprays that goes into unit dose, which we are expanding that side of business. We're just getting one step closer to customer. So we would expect to expand in normal distribution channels. That's sort of where our strategy is. We're not whole sellers or distributors, but it's specifically for the government channels and unit dose. And certain targeted distribution where we can solve certain problems for our customers when they don't have inventory. So that's the distribution side. On our other acquisition recently announced. We're very excited on our specialty growth potential. We already have 2 marketed products and really good growing business in specialty branded. Again, as we do with everything else, we had invested over the years. We acquired Kashiv Specialty platform along with -- which has been Amneal's partner since the last 10 years, have given multiple complex generics as well as the one pipeline asset, especially as it came from Kashiv. So now we have -- all our pipeline assets are focused on our movement disorder franchise and endocrinology. So now we -- currently, we have Rytary, a leading Parkinson's disease product, plus we have the IPX203, which is where top line readouts coming up in September. We just added Myasthenia Gravis a year ago, which is also in clinic, and we have sialorrhea product. So all these are in movement disorder. And then we have hypothyroidism product, the next-generation liothyronine, the T3, which has been unmet need for patients since the last 20 years. So that also utilizes Kashiv's platform. So we're very excited. 75 awesome scientists come right here in Bridgewater, New Jersey, and with the manufacturing and R&D capabilities, this manufacturing is very unique because it's using the hot-melt extrusion or other technologies to provide -- polymer technologies to provide this gastric retentive system, GRANDE, we call it. So the drug is absorbed site specifically for a longer time. So more bioavailability, lasts to 18, 24 months -- I mean, hours. And it solves a lot of usual problem that older drugs had.

Okay. Great. So let me get to some questions that were submitted here.

Sure.

So the first one is with respect to gross margin. So we still have Tasos on the line. So gross margin has continued to come in below external expectations, even excluding the contribution from the distribution business. It appears that was lighter than expected. Do you still -- are you still confident that you can achieve north of 40% gross margin in 2021? And what do you see as a longer-term normalized gross margin profile for the generics business?

Yes. Thank you. Just to level set, excluding generics, gross margins improved 200 basis points last year. So in a COVID world, we're going to feel very good about that performance. I think that's number one. And the growth came by the generic segments coming in at mid-38% up 280 basis points. So we think, actually, that's pretty good performance as well. Listen, our view is we still target generic gross margins in excess of 40%. Whether or not the whole thing can happen in 2021 or in 2022, we still need to see. But that is still, we think, it's very much in our sights. That's number one. Number two, we continue to expect generics gross margin growth in 2021. And thirdly, the way I think we are thinking about is you have the overall portfolio of generics, call it, at 38%, 40% already. New products that we launch, they typically have a generic gross margin of about 70%. So as the portfolio turns over, as we are launching these more complex generics over time, that's going to be the driver of generics gross margin over -- in excess of 40% as well as ongoing operating expense improvements. So that's how we think about this. And year-over-year, we continue to expect 2021 for gross margins for the company, not just for generics, for the company as a whole, to increase in excess of the 41.6% that we were at 2020.

Okay. Next question is, the company has indicated for some time that you'd be interested in business development activity, acquisitions, particularly adding specialty branded assets to your current business. The fact that you have not completed a transaction reflect the lack of available assets? Or is the company just a very price-sensitive buyer?

As we have stated, we're looking for singles and doubles, right? We're not -- we do not -- we are very mindful of our debt ratio, and we have lowered it to 5.3 as of last year from 7x. And we continue to -- we're comfortable running the company below 4. 3.5x, that's what we would like to do. So it has to be accretive deal where we have our own pipeline. We're not in a rush, but we have targets. We're working through it. And that expectations obviously do not meet our expectations. So we'll have to wait until we meet somewhere in the middle of both sides of expectations. But we're constantly looking to add assets in our movement disorder franchise as well as endocrinology.

Okay. I think you've covered this on the year-end call, but just a question around generic Copaxone. Do you feel optimistic this could occur in 2021? And have you included some probability adjusted contribution in your guidance from that particular product?

It's fourth quarter. We are very optimistic for the fourth quarter. And there's some -- since it's launching late, it's a very minor contribution for this year. Mostly, it will go in '22.

Okay. And let's see here. I think we have time for perhaps one more. Just can you briefly describe current competitive dynamics around generic NuvaRing with the Teva launch? Has there been a big impact on your market share? Or was Teva able to compete for business against other competitors?

Sure. So only -- we were the first generics, and it's a very difficult manufacturing, and it took time for the ramp-up. So we only had 20% market share. And we were able to offset any price pressure by increasing our market share to now 35%. So actually, we went higher on market share. So we did not see the volume decrease. We increased the volume. And that more than offset the price pressure.

Okay. All right. We've reached the end of our allotted time. Thank you so much. Sincerely appreciate your participation.

Thank you, Elliot.

Thank you, Elliot.

Good afternoon. Take care.