In a bid to make better use of Amneal’s US portfolio and pipeline, the company is looking for international licensing partners, especially in Eastern Europe and China, as its new management team looks to restore growth and revive profit margins.
AMNEAL IS LOOKING FOR INTERNATIONAL LICENSING PARTNERS, PARTICULARLY IN EASTERN EUROPE AND CHINA Source: Shutterstock
Making better commercial use of its US marketed portfolio and pipeline by licensing assets to international partners forms part of a major turnaround plan for Amneal Pharmaceuticals unveiled by co-CEOs Chirag and Chintu Patel three months after they resumed control following the departure in early August of former CEO Rob Stewart and executive chairman Paul Bisaro.
Other elements of the plan laid out by the Patel brothers, who founded Amneal in 2002 and grew it into a leading generics player before the firm’s merger with Impax last year, include: shifting development efforts towards more complex products; winning new business for its US base portfolio; and improving facility utilization and supply-chain management.
Explaining how Amneal intended to play outside of the US, Chirag said “certain of our assets are highly valuable in other markets”, with Eastern Europe and China in particular looking “very attractive.” Thus, he said, the company would seek strategic partnerships with “top-five players” in these regions to maximize the returns on its portfolio and pipeline investments.
Leverage FDA-Approved Assets
“We are not planning to go and buy a company,” he clarified. Rather, he said, Amneal’s international strategy would be based around leveraging through alliances the value of both key assets that had been approved by the US Food and Drug Administration for production in the group’s FDA-approved facilities in the US, Ireland or India.
While Amneal in 2014 started expanding globally by opening an international headquarters in Zug, Switzerland, and making a string of bolt-on acquisitions such as Creo Pharma in the UK and Pharmagenus in Spain, it soon reversed that strategy by in 2017 divesting its CoPharma and Pharmagenus operations as well as selling its Australian business to Arrow Pharma.
And last year, under the previous management team, Amneal further sharpened its focus on the US by divesting Creo Pharma to Zentiva at the end of March for $32m in cash. (Also see "Zentiva Strikes Deal To Buy UK’s Creo Pharmaceuticals As It Pursues ‘Champion’ Ambitions" - Generics Bulletin, 4 Apr, 2019.) A $3m deal to sell its Amneal Deutschland unit in Germany to Austria’s Ever Pharma followed in May. Both transactions include license and supply agreements for certain products. (Also see "If Amneal Goes Global Again, It Intends To Go Big" - Generics Bulletin, 14 May, 2019.)
In the US, Chirag said Amneal was increasingly exploring opportunities in untapped distribution channels such as government contracts and unit-dose supplies.
Exploring Small-Scale US Transactions
Beyond the international partnerships and expanded trade channels, he said Amneal was actively evaluating small-scale transactions in the US, particularly around hybrid 505(b)(2) opportunities and sterile-drug manufacturing that “offer compelling returns on our investment.”
“The actions we are taking to strengthen our business,” he remarked, “will lay the foundation for accelerating and evaluating inorganic growth in both generics and specialty, including potentially transformational M&A.”
Detailing how Amneal was transforming its product pipeline, Chintu Patel said “as the generics market has become more competitive, we have refocused our research and development efforts away from commodity products and more towards complex products: first-to-market opportunities, sterile injectables, biosimilars, ophthalmic, inhalation and 505(b)(2) specialty products, which Amneal is uniquely positioned to deliver.”
While just over half of Amneal's 95-strong submitted abbreviated new drug application pipeline in the US is for solid oral-dosage forms such as tablets and capsules, three-quarters of its 80-project pre-filing development pipeline is for more complex delivery forms such as injectables, ophthalmics, topicals, oral liquids and inhalation products.
Amneal Shifts Pipeline Towards Complex Dosage Forms
“Over the last 30 days, we have added 15 products to our development portfolio, and by the end of 2019, we expect to have filed 15 to 17 ANDAs with the FDA,” Chintu told investors. “And next year, we expect to file 25 to 30 products,” he said, adding that several drugs within the firm’s pipeline could qualify for six-month competitive generic therapy (GCT) exclusivity.
Breakdown by delivery format of Amneal's filed and pre-filing US piplines (Source - Amneal)
Lining Up First US Inhalation Filing
Pointing to the wide range of dosage forms that were already pending final FDA approval, he revealed that “we anticipate filing our first inhalation product in the coming months.”
“Through a combination of base business wins and new product launches, we anticipate double-digit volume growth in 2020 for transdermal, oral liquids and sterile products, which will also drive improvement in our margins,” he said. “We expect this focus to become even more evident over the next 18-to-24 months as we work to launch approximately 15 complex products.”
The gap between approval and launch had already been brought down, he highlighted, noting 10 successful launches since the Patel brothers resumed control in early August, including of aminocaproic acid oral solution as well as injectable forms of fulvestrant and including paliperidone.
To support its increasing push into sterile products, Amneal recently decided to expand capacity next year at its injectables site in Ahmedabad, India, by adding a new ophthalmic and vial line.
Shortly before they departed, the previous management team of Stewart and Bisaro had unveiled an efficiency drive that envisaged cutting 550 employees largely by closing a manufacturing plant in Hauppauge, New York and a packaging center in East Hannover, New Jersey. Investors reacted by slashing the firm’s share price, and Stewart and Bisaro were gone less than a month later. (Also see "Amneal’s Shares Slump On Slashed Earnings Outlook and Cost-Cutting Plan" - Generics Bulletin, 11 Jul, 2019.)
The Patels believe that a more fundamental overhaul of Amneal’s entire supply-chain network is needed.
Thorough Analysis Of Business Almost Completed
“Since 5 August,” Chirag told investors, “we have done a top-to-bottom analysis of our business and our operations; we have visited our plants and talked to employees at all levels; we have met with customers and commercial partners to find ways to work more closely together. While conversations are continuing, the majority of our review is complete.”
“To drive higher revenue and profitability,” he explained, “our initiatives include: maximizing the value of our base business portfolio of more than 225 marketed products, which adds incremental business; improving our gross margin by increasing plant utilization; streamlining our inventory and supply-chain management; improving our gross-to-net sales conversion; and rightsizing our operating expenses.”
Addressing how Amneal would seek to halt the decline in, and revitalize, its base business, Chirag said the firm had identified around a quarter of its currently marketed portfolio of 225 products in which it could win new business and add volume. “We have already won new awards for 20 base-business products that will be incremental in 2020. In addition, we have more than 30-year product opportunities in the works, demonstrating in a short time how we can maximize our existing asset base to support incremental volume and growth,” he revealed.
Margin Decline Unacceptable But Fixable
Turning to the group’s weakening gross margin, Chirag acknowledged that the Generics division’s adjusted gross margin had declined over the past 18 months from around 50% to about 30%. “There is no question that the industry has changed – there is more competition and more concentration in buying-group power today,” he recognized. “However, this level of compression is simply unacceptable and unsustainable. More importantly, we believe it is fixable.”
Outlining how Amneal would improve its Generics gross margin, Chirag stressed the importance of winning more base business to better utilize its manufacturing infrastructure while adding in high-value launches.
“We are working to streamline our inventory and supply-chain management,” he continued. “We are strengthening our forecasting; improving coordination across finance, operations, supply chain, R&D and with our customers; and leveraging our scalability and network of reliable suppliers.” These changes, he believed, would reduce inventory-obsolescence charges and back orders.
Centralized Database For Supply-Chain Management
“We are developing a centralized intelligence database,” he outlined, “focused on providing easy access to mission-critical product data, which will increase our supply-chain efficiency.” This move, which was well underway, would cut cost of goods meaningfully in areas such as failure-to-supply penalties, he insisted. Amneal is also bringing products currently made by contract manufacturers in-house to its Hayward, California plant.
Through these initiatives, he predicted that Amneal would be able to lift the Generics division’s gross margin to “at least 40%”. However, he admitted that returning to Amneal’s historic gross margin level of 45% to 55% was unrealistic.
Chief financial officer Todd Branning was blunt in his assessment: “We face a challenging generics marketplace, and we have compounded those challenges with internal inefficiencies that have continued to hamper our results.”
Around two-thirds of the margin compression had come from price erosion, largely in the Generics business, he explained. The other third or so was more due to internal factors such as manufacturing inefficiencies, failure-to-supply penalties and inventory obsolescence. Launching new generics to replace more commoditized products would help pricing dynamics, he added.
Group Turnover Declined By 21%
In the third quarter of this year, Amneal reported group gross margin tumbled by 27.6 percentage points to 14.4%, while its adjusted margin was 15 points lower at 40% on group turnover that slid by 21% to $378m.
Both the gross margin and turnover declines were largely attributable to the firm’s Generics division, which saw more than a 30-point drop in reported gross margin to 8.3% – and a 20-point fall from 50% to 30% in adjusted gross margin – on sales that declined by $100m, or by just over a quarter, to $291.0m.
Pricing And Volume Effects Deplete Amneal's Sales
Pricing and volume erosion, coupled with divesting operations in the UK and Germany, cut sales by Amneal in the third quarter of this year, particularly in its Generics segment. A $40m boost from a deal with Jerome Stevens for generic levothyroxine limited the damage.
Evolution of sales by Amneal and its Generics business segment between the third quarters of 2018 and 2019 (Source - Amneal)
Several factors contributed to the 25.6% Generics sales slide, including: volume and price erosion of $132m; a $17m hit from reclassifying oxymorphone as a Specialty product “due to its status as a single source generic product”; and $12m of lost revenues from divesting the international operations in the UK and Germany. Offsetting these negative issues that were compounded by supply constraints on epinephrine auto-injectors was a $39.8m boost from introducing levothyroxine sodium under a licensing deal with Jerome Stevens. (Also see "JSP chooses Amneal after ceasing Lannett" - Generics Bulletin, 31 Aug, 2018.)
“Favorable volume growth increased revenue in levothyroxine, abiraterone acetate, chlorpromazine hydrochloride, guanfacine and hydroxyprogesterone caproate injection, which was partially offset by price and volume declines in revenue from Yuvafem (estradiol), diclofenac sodium gel and aspirin/dipyridamole extended-release capsules,” Amneal commented.
The Generics gross margin was depleted by a $49.1m charge to cost of goods, “primarily related to impairment and inventory obsolescence charges.” Including in-process research and development impairment charges of $23.4m primarily related to four marketed and four pipeline Impax products, restructuring and associated charges running to $14.7m, and legal charges of $14.75m related to a Wellbutrin XL (bupropion) settlement deal with Teva, the Generics division posted an operating loss of $80.4m versus a $92.2m prior-year profit.
Amneal’s group operating loss was $112.3m versus a $74.6m prior-year profit. The loss of exclusivity last year for the anthelmintic brand Albenza (albendazole) hit the Specialty segment that has just licensed US rights to Kashiv BioSciences’ K127 pyridostigmine orphan-drug candidate as a treatment for myasthenia gravis.
“While we are disappointed with our third-quarter results we continue to be optimistic about Amneal and view 2019 as a transition year,” commented Chirag and Chintu Patel.
Identified Causes Of Underperformance
“Since re-joining as co-CEOs in early August, we have substantially completed a comprehensive review of the business and believe we have identified the root causes of Amneal’s recent underperformance. This review has reinforced our belief that Amneal is a fundamentally strong company with a diverse generics portfolio across multiple dosage forms, a growing and increasingly complex pipeline, and a specialty franchise with significant opportunities. We have already implemented initiatives to accelerate the reinvigoration of our company and are confident we will return to growth in 2020 and beyond.”
Challenged by Piper Jaffray analyst David Ansellem that they were “articulating the kind of vision that many other generic companies aspire to” in targeting complex dosage forms and non-retail trade channels, Chirag recalled that Amneal had been a relatively late entrant into US generics in 2007, but had rapidly outpaced market growth. “We are used to operating in a competitive field,” he pointed out.
Listing how Amneal could differentiate itself from its peers, Chirag said: “We have a very large portfolio, our focus is in the US market, we are the largest US-domiciled company with various dosage forms, a great quality track record, and a great customer supply track record. Our relationships are superb.”
He pointed to the firm’s pipeline of complex products in areas such as injectables and ophthalmics, including three biosimilars through partnerships with Kashiv BioSciences and mAbxience. “We may look for a deal in biosimilars – the other complex products are covered,” he commented in relation to potential inorganic growth initiatives. On biosimilars, he said “our strategy is to be third or fourth or fifth as we are setting up our commercial and regulatory expertise.”
Amneal would, he added, continue to aim to invest almost 10% of its turnover in researching and developing not only complex dosage forms and biosimilars, but also solid oral dose drugs. “We believe in retail generics as well as institutional and specialty,” he clarified.