424B3 1 d414240d424b3.htm FINAL PROSPECTUS Final Prospectus
Table of Contents

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-224702

 

PROSPECTUS

224,996,163 Shares

 

LOGO

Amneal Pharmaceuticals, Inc.

Class A Common Stock

 

 

This prospectus relates to the offer and sale from time to time by the selling stockholders identified in this prospectus of up to an aggregate of 224,996,163 shares of Class A common stock, par value $0.01 per share, of Amneal Pharmaceuticals, Inc. Out of the 224,996,163 shares of Class A common stock that our selling stockholders may offer and sell, (i) 41,406,689 restricted shares of Class A common stock previously have been issued to certain of our stockholders, (ii) 12,328,767 shares of Class A common stock will result from the automatic conversion upon transfer of restricted shares of Class B-1 common stock that have previously been issued to certain of our stockholders and (iii) the remaining 171,260,707 shares of Class A common stock will be issued by us from time to time to Amneal Holdings, LLC, which is also a holder of outstanding Amneal Common Units (as defined herein), upon the redemptions by Amneal Holdings, LLC of an equivalent number of Amneal Common Units (and the surrender and cancellation of an equivalent number of shares of Class B common stock) held by Amneal Holdings, LLC. The availability of shares of Class A common stock described in clause (iii) above for offer and sale in this offering is subject to the redemption of Amneal Common Units pursuant to the LLC Agreement (each as defined herein).

The shares of Class A common stock registered hereby may be offered and sold by our selling stockholders through one or more underwriters, broker-dealers or agents. If the shares of Class A common stock are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of Class A common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. See “Plan of Distribution.”

We are not selling any shares of Class A common stock under this prospectus, and we will not receive any of the proceeds from the offer and sale of shares of our Class A common stock by the selling stockholders.

This prospectus describes the general manner in which shares of Class A common stock may be offered and sold by any selling stockholder. When the selling stockholders sell shares of Class A common stock under this prospectus, we may, if necessary and required by law, provide a prospectus supplement that will contain specific information about the terms of that offering. Any prospectus supplement may also add to, update, modify or replace information contained in this prospectus. We urge you to read carefully this prospectus, and any accompanying prospectus supplement before you make your investment decision.

Our Class A common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “AMRX.” We have three classes of common stock: Class A common stock, Class B common stock and Class B-1 common stock. The rights (including voting rights) of Class A common stock and Class B common stock are identical, except that Class B common stock has no economic rights and the rights of Class A common stock and Class B-1 common stock are identical, except that Class B-1 common stock has no voting rights (other than to elect the Class B-1 Director (as defined herein)). All of our Class B common stock is held by Amneal Holdings, LLC on a one-to-one basis with the number of Amneal Common Units it owns. See “Glossary” and “Prospectus Summary.”

See “Risk Factors” on page 11 to read about factors you should consider before investing in our Class A common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

Amneal Holdings, LLC

The date of this prospectus is May 9, 2018.


Table of Contents

TABLE OF CONTENTS

Prospectus

 

GLOSSARY

     iii  

THE COMBINATION AND THE PIPE INVESTMENT

     v  

MARKET AND INDUSTRY DATA

     vii  

NON-GAAP FINANCIAL MEASURES

     viii  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     7  

SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED AND OTHER FINANCIAL DATA

     9  

RISK FACTORS

     11  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     48  

THE COMBINATION

     49  

USE OF PROCEEDS

     50  

PRICE RANGE OF CLASS A COMMON STOCK

     51  

DIVIDEND POLICY

     52  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF AMNEAL

     53  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF IMPAX

     54  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

     55  

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

     59  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AMNEAL

     73  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF IMPAX

     94  

BUSINESS

     124  

MANAGEMENT

     164  

EXECUTIVE COMPENSATION

     171  

CERTAIN RELATED PARTIES AND RELATED PARTY TRANSACTIONS

     204  

EXCHANGES OF AMNEAL COMMON UNITS FOR CLASS A COMMON STOCK

     220  

PRINCIPAL AND SELLING STOCKHOLDERS

     221  

DESCRIPTION OF CAPITAL STOCK

     225  

SHARES ELIGIBLE FOR FUTURE SALE

     232  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF CLASS A COMMON STOCK

     235  

PLAN OF DISTRIBUTION

     239  

LEGAL MATTERS

     242  

EXPERTS

     242  

WHERE YOU CAN FIND MORE INFORMATION

     242  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

You should rely only on the information contained in this prospectus, any prospectus supplement or in any free writing prospectus we may authorize to be delivered or made available to you. We have not and the selling stockholders have not authorized anyone to provide you with different information. The selling stockholders are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our Class A common stock.

For investors outside the United States: We have not and the selling stockholders have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for

 

i


Table of Contents

that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside the United States.

This prospectus is a part of a registration statement on Form S-1 that we filed with the Securities and Exchange Commission (the “SEC”) using a “shelf” registration or continuous offering process. Under this shelf process, the selling stockholders may from time to time sell the shares of Class A common stock covered by this prospectus. Additionally, under the shelf process, in certain circumstances, we may provide a prospectus supplement that will contain certain specific information about the terms of a particular offering by one or more of the selling stockholders. We may also provide a prospectus supplement to add information to, or update or change information contained in this prospectus. You should read this prospectus before deciding to invest in shares of our Class A common stock. You may obtain this information without charge by following the instructions under “Where You Can Find More Information” appearing elsewhere in this prospectus.

Until June 3, 2018, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

ii


Table of Contents

GLOSSARY

As used in this prospectus, unless the context otherwise requires:

 

    Amneal” refers to Amneal Pharmaceuticals LLC, a Delaware limited liability company.

 

    Amneal Board” refers to Amneal’s board of managers.

 

    Amneal Common Units” refers to the common units of Amneal.

 

    Amneal Holdings” refers to Amneal Holdings, LLC, a Delaware limited liability company and the ultimate parent of Amneal.

 

    BCA” refers to the Business Combination Agreement, dated as of October 17, 2017, among Impax, Amneal, Holdco and Merger Sub, as amended on November 21, 2017 and December 16, 2017.

 

    Closing” refers to the closing of the Combination.

 

    Closing Date” refers to May 4, 2018, the date on which the Closing occurred.

 

    Company” refers to New Amneal, unless the context requires otherwise.

 

    Combination” refers to the transactions contemplated by the BCA.

 

    dollars” or “$” refers to U.S. dollars.

 

    Existing Amneal Members” refers to Amneal Pharmaceuticals Holding Company, LLC, AP Class D Member, LLC, AP Class E Member, LLC and AH PPU Management, LLC, each a Delaware limited liability company.

 

    GAAP” refers to the generally accepted accounting principles in the United States.

 

    Holdco” refers to Atlas Holdings, Inc., a Delaware corporation and a wholly owned subsidiary of Impax, which was renamed Amneal Pharmaceuticals, Inc. upon the Closing.

 

    holder” refers to each holder of New Amneal Shares.

 

    Impax” refers to Impax Laboratories, Inc., a Delaware corporation.

 

    Impax Board” refers to Impax’s board of directors.

 

    Impax Merger” means the merger of Merger Sub with and into Impax, with Impax continuing as the surviving corporation, pursuant to the BCA.

 

    Impax Shares” refers to outstanding shares of common stock of Impax, par value $0.01 each.

 

    Impax Stockholders” refers to the holders of Impax Shares.

 

    Merger Sub” refers to K2 Merger Sub Corporation, a Delaware limited liability company and a direct wholly owned subsidiary of Holdco and prior to the Closing an indirect wholly owned subsidiary of Impax.

 

    New Amneal,” “our” “we” or “us” refers refers to Holdco after its re-registration as a public company and renaming as Amneal Pharmaceuticals, Inc. pursuant to the BCA upon the Closing.

 

    New Amneal Board” refers to New Amneal’s board of directors.

 

    New Amneal Charter” refers to the amended and restated certificate of incorporation of New Amneal.

 

    New Amneal Shares” refers collectively to shares of Class A common stock, shares of Class B common stock and shares of Class B-1 common stock.

 

iii


Table of Contents
    selling stockholders” refers to the existing stockholders who may offer or sell shares of Class A common stock pursuant to this prospectus, as identified in “Selling Stockholders,” comprised of (i) the PIPE Investors (including certain of the PIPE Investors currently holding restricted shares of Class B-1 common stock will be automatically be converted into shares of Class A common stock upon the transfer thereof) and (ii) Amneal Holdings, which prior to the consummation of any offering or sale will exchange its Amneal Common Units for shares of Class A common stock as described in the “Prospectus Summary—Offering.”

 

    Stockholders Agreement” refers to the Second Amended and Restated Stockholders Agreement, dated December 16, 2017, by and among Holdco and the Existing Amneal Members.

 

iv


Table of Contents

THE COMBINATION AND THE PIPE INVESTMENT

On May 4, 2018, pursuant to the BCA, among other things: (i) the Impax Merger was effected; (ii) each Impax Share outstanding immediately prior to the Impax Merger Effective Time (other than than shares owned or held by Impax in treasury, by Amneal or by any of their respective subsidiaries (“Cancelled Shares”)), was converted into the right to receive one share of Class A common stock; (iii) Impax converted to a Delaware limited liability company named Impax Laboratories, LLC; (iv) Holdco contributed all of the equity interests of Impax to Amneal in exchange for certain equity interests of Amneal; (v) New Amneal issued shares of Class B common stock to the Existing Amneal Members, which subsequently assigned and transferred such shares to Amneal Holdings; and (vi) New Amneal became the managing member of Amneal.

Immediately following the Closing: (i) (A) Amneal Holdings held 100% of the Class B common stock, which represented approximately 75% of the voting power of the outstanding New Amneal Shares, and (B) Impax Stockholders immediately prior to the Closing held 100% of the Class A common stock, which represented approximately 25% of the voting power of the New Amneal Shares; (ii) (A) Amneal Holdings held approximately 75% of the Amneal Common Units and (B) Impax Stockholders indirectly, through their ownership in New Amneal, held approximately 25% of the Amneal Common Units; and (iii) the Amneal Common Units were exchangeable on a one-to-one basis for Class A common stock or Class B-1 common stock. The rights (including voting rights) of Class A common stock and Class B common stock are identical, except that Class B common stock has no economic rights and the rights of Class A common stock and Class B-1 common stock are identical, except that Class B-1 common stock has no voting rights (other than to elect the Class B-1 Director (as defined herein).

Following the Closing and the closing of the investment by certain institutional investors including TPG Improv Holdings, L.P. (“TPG”) and funds affiliated with Fidelity Management & Research Company (the “PIPE Investment”), Amneal Holdings held approximately 60% of the voting power of the outstanding New Amneal Shares, and the PIPE Investors held approximately 16% of the voting power of the outstanding New Amneal Shares.

In connection with the Combination and the PIPE Investment, Amneal Holdings, LLC entered into a definitive purchase agreement (the “PIPE Purchase Agreement”) with select institutional investors, including TPG and funds affiliated with Fidelity (the “PIPE Investors”). Pursuant to the PIPE Purchase Agreement, upon the Closing of the Combination, Amneal Holdings, LLC exercised its right to cause Amneal to redeem certain of the Amneal Common Units (the “Redeemed Units”) held by such members pursuant to the LLC Agreement. In connection with such redemption, Amneal Holdings, LLC received shares of Class A common stock or shares of Class B-1 common stock in exchange for such Redeemed Units, in each case pursuant to the LLC Agreement (such redemption and issuance of Class A common stock and Class B-1 common stock to Amneal Holdings, the “Redemption”). Following the Redemption, Amneal Holdings sold such shares of Class A common stock and Class B-1 common stock to the PIPE Investors at a per share purchase price of $18.25 for gross proceeds of approximately $855,000,000. Following the PIPE Investment, the PIPE Investors own collectively approximately 16% of the New Amneal Shares on a fully diluted and as converted basis, with TPG owning all outstanding shares of Class B-1 common stock.

In connection with the Combination and in furtherance of the PIPE Investment, TPG, Amneal Holdings and Holdco entered into a side letter (the “PIPE Side Letter”) providing for certain rights and obligations of each in connection with the PIPE Investment. Pursuant to the PIPE Side Letter, TPG has customary registration rights with respect to the New Amneal Shares owned by it. The PIPE Side Letter also provides TPG the right to designate a board observer with respect to the New Amneal Board, as well as the right, subject to certain ownership thresholds discussed herein, to designate a director for appointment to the New Amneal Board.

On May 4, 2018, Amneal Holdings caused Amneal to redeem (the “Closing Date Redemption”) (in accordance with the terms of the LLC Agreement) 6,886,140 of the Amneal Common Units issued to the Existing Amneal Members (and subsequently assigned and transferred to Amneal Holdings) in connection with

 

v


Table of Contents

the Combination for a like number of shares of Class A common stock covered by this prospectus, and intends to distribute such shares to certain direct and indirect members of Amneal Holdings who were or are employees of Amneal and to whom were previously issued (prior to the Closing) profit participation units in Amneal.

After giving effect to the Combination, the PIPE investment and the Closing Date Redemption, as of May 4, 2018, the holders of our Class A (including Amneal Holdings, to the extent of the Class A shares received in the Closing Date Redemption) and Class B-1 common stock hold 100% of the economic interests in us and approximately 43% of the voting power in us, and Amneal Holdings, through its ownership of all of the outstanding Class B common stock, holds no economic interest in us and the remaining approximately 57% of the voting power in us. We are a holding company, and following the Combination and the PIPE Investment, our principal assets are the Amneal Common Units, representing an aggregate approximately 43% economic interest in Amneal. The remaining approximately 57% economic interest in Amneal is owned by Amneal Holdings through its ownership of Amneal Common Units. We are the sole managing member of Amneal and, although we have a minority economic interest in Amneal, we have the sole voting power in, and control the management of, Amneal. Accordingly, we expect to consolidate the financial results of Amneal and report a non-controlling interest in our consolidated financial statements.

 

vi


Table of Contents

MARKET AND INDUSTRY DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources (including industry publications, surveys and forecasts, as well as market analyses and reports), and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets which we believe to be reasonable. Although we believe the data from these third-party sources is reliable, we have not independently verified any third-party information. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

vii


Table of Contents

NON-GAAP FINANCIAL MEASURES

EBITDA, or earnings before interest, taxes, depreciation and amortization, and adjusted EBITDA are used and provided by Amneal as non-GAAP financial measures. Adjusted EBITDA is intended to provide additional information on Amneal’s performance, operations and profitability. Adjustments to Amneal’s GAAP figures as well as adjusted EBITDA exclude interest expense, loss on extinguishment and modification of debt, income tax provision, depreciation and amortization, optimization expense, pro-forma royalty expense, loss on specified international entities, loss on sale of certain international businesses, acquisition and transaction related costs, foreign exchange gain, severance and non-controlling interest, legal contract settlement, member units purchase. Certain other special items or substantive events may also be included in the non-GAAP adjustments periodically when their magnitude is significant within the periods incurred. Amneal maintains an established non-GAAP cost policy that guides the determination of what costs will be excluded in non-GAAP measures. Amneal believes that these non-GAAP financial measures, when considered together with the GAAP figures, can enhance an overall understanding of Amneal’s financial and operating performance. The non-GAAP financial measures are included with the intent of providing investors with a more complete understanding of Amneal’s historical financial results and trends and to facilitate comparisons between periods and with respect to projected information. In addition, these non-GAAP financial measures are among the indicators Amneal’s management uses for planning and forecasting purposes and measuring Amneal’s performance. These non-GAAP financial measures should be considered in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The non-GAAP financial measures used by Amneal may be calculated differently from, and therefore may not be comparable to, non-GAAP financial measures used by other companies.

 

viii


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included elsewhere in this prospectus. You should also consider, among other things, the matters described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case appearing elsewhere in this prospectus.

Business

We are a specialty pharmaceutical company specializing in developing, manufacturing, marketing and distributing high-value generic pharmaceutical products across a broad array of dosage forms and therapeutic areas, as well as the development, manufacture and sale of branded products. We were formed from the combination of Amneal and Impax pursuant to the Combination. Prior to the consummation of the Combination, Amneal and Impax operated separately as independent companies.

Amneal is a generic pharmaceutical company specializing in developing, manufacturing, marketing and distributing high-value generic pharmaceutical products across a broad array of dosage forms and therapeutic areas. Amneal currently markets over 125 product families in the United States and its marketed and pipeline generics portfolios cover an extensive range of dosage forms and delivery systems, including both immediate and extended release oral solids such as tablets, capsules and powders, liquids, sterile injectables, nasal sprays, inhalation and respiratory products, ophthalmics (which are sterile pharmaceutical preparations administered for ocular conditions), films, transdermal patches and topicals (which are creams or gels designed to administer pharmaceuticals locally through the skin). Amneal focuses on developing products with substantial barriers-to-entry as a result of complex drug formulations or manufacturing, legal and/or regulatory challenges. Focusing on these opportunities allows Amneal to offer first-to-file (“FTF”), first-to-market (“FTM”) and other “high-value” products, which Amneal defines as products with zero to three generic competitors at time of launch. These products generally have limited competition at launch, tend to be more profitable and often have longer life cycles than other generic pharmaceuticals. As of December 31, 2017, Amneal had 156 products approved but not yet launched or pending Food and Drug Administration (“FDA”) approval and another 123 products in various stages of clinical development. Over 58% of Amneal’s total generic pipeline consists of potential FTF, FTM and high-value products. Amneal has an integrated, team-based approach to product development that combines its formulation, regulatory, legal, manufacturing and commercial capabilities.

Amneal was founded in 2002 by Chintu and Chirag Patel and is a limited liability company organized under the laws of Delaware. Since Amneal’s founding, Amneal has invested heavily in R&D and infrastructure in order to fuel future growth. As a result of these investments, as well as a continued focus on quality and customer service, Amneal has developed what it believes to be one of the largest generic product pipelines in the United States, as well as comprehensive development and manufacturing expertise and capability across all major dosage forms. This allows Amneal a greater degree of profitability, control over quality and agility in the face of changing market dynamics. Amneal has also developed vertically integrated Active Pharmaceutical Ingredient (“API”) manufacturing capabilities, which it utilizes on a selective, product-by-product basis based on API scarcity or as alternate supply for strategically critical products. As of December 31, 2017, Amneal had launched 34 products in 2017, compared to 18 and 14 for the full years ended December 31, 2016 and 2015, respectively.

For the year ended December 31, 2017, Amneal had net revenue of $1,033.7 million, net income of $169.3 million and adjusted EBITDA of $336.1 million. Amneal’s investment in growth initiatives and ability to successfully launch new products has resulted in a compound annual revenue growth rate of 10%, and an adjusted EBITDA compound annual growth rate of 9% over the last three years. Net income had a compound



 

1


Table of Contents

annual decline of 2% over the last three years. Amneal plans to strengthen its competitive position as a leading generic pharmaceutical company by continuing to focus on developing and commercializing high-value products.

Impax is a specialty pharmaceutical company applying formulation and development expertise, as well as its drug delivery technology, to the development, manufacture and marketing of generic pharmaceutical products, in addition to the development, manufacture and marketing of branded products. Impax operates in two segments, referred to as “Impax Generics” and “Impax Specialty Pharma.” Impax Generics concentrates its efforts on generic products, which are the pharmaceutical and therapeutic equivalents of brand-name drug products and are usually marketed under their established nonproprietary drug names rather than by a brand name. Impax Specialty Pharma utilizes its specialty sales force to market proprietary branded pharmaceutical products for the treatment of central nervous system (“CNS”) disorders and other select specialty segments.

Recent Developments

The following table presents selected preliminary unaudited financial results as of, and for, the three months ended March 31, 2018 for Amneal, Impax and the combined Company (Amneal and Impax). Our consolidated financial statements as of, and for, the three months ended March 31, 2018, are not yet available. We have the preliminary results described below primarily because our financial closing procedures for the three months ended March 31, 2018, are not yet complete and, as a result, our final results upon completion of our closing procedures may vary from the preliminary results set forth below. These preliminary results should not be viewed as a substitute for interim financial statements prepared in accordance with U.S. GAAP. Our independent registered public accounting firm has not conducted a review of, and does not express an opinion or any other form of assurance with respect to, these preliminary results.

Amneal

 

     Three months ended  
(In thousands)    March 31,
2018
     March 31,
2017
 

Statements of Income Data:

     

Net revenue

   $ 275,189      $ 225,681  

Total operating expenses

     81,041        73,288  

Operating profit

     63,554        42,728  

Net income attributable to Amneal Pharmaceuticals LLC and Subsidiaries

     51,535        41,853  

Impax

 

     Three months ended  
(In thousands)    March 31,
2018
     March 31,
2017
 

Statements of Operations Data:

     

Total revenues, net

   $ 142,355      $ 184,403  

Total operating expenses

     155,156        76,695  

Loss from operations

     (124,876      (51,804

Net loss

     (130,932      (98,431


 

2


Table of Contents

Combined Company (Amneal and Impax)

 

     Three months ended  
(In thousands)    March 31,
2018
     March 31,
2017
 

Statements of Operations Data:

     

Net revenue

   $ 417,544      $ 410,084  

Total operating expenses

     236,197        149,983  

Operating loss

     (61,322      (9,076

Net loss

     (79,397      (56,578

Total combined Company net revenues in the first quarter 2018 were $417.5 million, an increase of 1.8%, compared to $410.1 million in the prior year period. The increase was driven by a 17.8% increase in Specialty Pharma revenues.

Generic division revenues, net, in the first quarter 2018 were $358.3 million, a slight decline compared to $359.8 million in the prior year period, due to revenue reductions from increased competition on budesonide, lidocaine, yuvafem-estradiol, mixed amphetamine salts and fenofibrate, partially offset by increased revenue from new product launches including oseltamivir, methylphenidate HCI ER and erythromycin. First quarter 2018 sales were negatively impacted by lower revenues of epinephrine auto-injector due to a recent supply shortage at the Company’s third-party manufacturer, and lower than expected sales of aspirin dipyridamole ER due to limited raw material availability.

Specialty Pharma division revenues, net, in the first quarter 2018 were $59.2 million, an increase of 17.8%, compared to $50.3 million in the prior year period, driven by higher revenue from Rytary®, Zomig® and the anthelmintic products franchise.

Gross margin in the first quarter 2018 was 41.9%, compared to 34.4% in the prior year period. The prior year gross margin was negatively impacted by an approximate $39 million intangible asset impairment charge, for which there were no comparable amounts in the current year. Adjusted gross margin was 48.0% for the first quarter 2018, a slight decrease compared to 50.3% for the first quarter 2017, partially due to the supply shortages on epinephrine auto-injector and aspirin dipyridamole ER, as well as product sales mix.

The unaudited combined company preliminary results presented above is for illustrative purposes only and is not intended to, and does not purport to, represent what Impax’s, Amneal’s or New Amneal’s actual results or financial condition would have been if the Combination, the related financing transactions and the PIPE Investment had occurred at the beginning of the applicable periods.

The information above is based on preliminary unaudited information for the three months ended March 31, 2018, is not a comprehensive statement of our financial results, and is subject to completion of our financial closing procedures. This information should be read in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for prior periods included elsewhere in this prospectus. Our actual results for the three months ended March 31, 2018 are not yet available, may differ materially from our preliminary results (including as a result of quarter-end closing and review procedures) and are not necessarily indicative of the results to be expected for the remainder of 2018 or any future period. Accordingly, you should not place undue reliance upon these preliminary results. There can be no assurance that these results will be realized, and the preliminary results are subject to risks and uncertainties, many of which are not within our control. Please see “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” These preliminary results have been prepared by and are the responsibility of management. Our independent registered public accounting firm has not conducted a review of,



 

3


Table of Contents

and does not express an opinion or any other form of assurance with respect to, these preliminary results. These preliminary results should not be viewed as a substitute for interim financial statements prepared in accordance with U.S. GAAP.

Risks Associated With Our Business

The businesses of Amneal, Impax and New Amneal are subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary.

Corporate History and Information

We were incorporated in Delaware in 2017. Our principal executive offices are located at 30831 Huntwood Ave Hayward, CA 94544, and our telephone number is (510) 240-6000. Our website address is http://www.amneal.com. The information contained in, or that can be accessed through, our website is not part of this prospectus.

We anticipate filing various U.S. federal trademark registrations and applications, and we own unregistered trademarks and servicemarks, including our corporate logo. All other trademarks or trade names referred to in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus may be referred to without the ® and symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. This prospectus also includes other trademarks of other persons.



 

4


Table of Contents

Organizational Structure

The diagram below depicts our current organizational structure after giving effect to completion of the Combination, the PIPE Investment, and Closing Date Redemption (as defined herein), which occurred on May 4, 2018.

 

LOGO



 

5


Table of Contents

The diagram below depicts our organizational structure after giving further effect to this offering.

 

LOGO



 

6


Table of Contents

THE OFFERING

 

Class A common stock outstanding immediately prior to the registration by us of Class A common stock for resale by the selling stockholders

   114,695,481
shares

Class B-1 common stock outstanding immediately prior to the registration by us of Class A common stock for resale by the selling stockholders

   12,328,767 shares

Class B common stock outstanding immediately prior to the registration by us of Class A common stock for resale by the selling stockholders

   171,260,707
shares

Class A common stock that may be sold by the selling stockholders to the public

   Up to 224,996,163
shares(1)

Class A common stock to be outstanding immediately after the sale of Class A common stock by the selling stockholders to the public

   298,284,955(2)

Class B-1 common stock to be outstanding immediately after the sale of Class A common stock by the selling stockholders to the public

   None(2)

Class B common stock to be outstanding immediately after the sale of Class A common stock by the selling stockholders to the public

   None(2)

The number of shares of common stock to be outstanding after this offering is based on 114,695,481 shares of Class A common stock, 12,328,767 shares of Class B-1 common stock and 171,260,707 shares of Class B common stock (and an equivalent amount of Amneal Common Units), in each case, after giving effect to the Combination, the PIPE Investment and the Closing Date Redemption, outstanding as of May 4, 2018. It excludes the following:

 

    23,000,000 shares of Class A common stock reserved for future issuance under the 2018 Plan.

 

(1) Out of the 224,996,163 shares of Class A common stock that our selling stockholders may offer and sell, (i) 41,406,689 restricted shares of Class A common stock previously have been issued to certain of our stockholders, (ii) 12,328,767 shares of Class A common stock will result from the automatic conversion upon transfer of restricted shares of Class B-1 common stock that have previously been issued to certain of our stockholders and (iii) the remaining 171,260,707 shares of Class A common stock will be issued by us from time to time to Amneal Holdings, which is also a holder of outstanding Amneal Common Units (as defined herein) upon the redemptions by Amneal Holdings of an equivalent number of Amneal Common Units (and the surrender and cancellation of an equivalent number of shares of Class B common stock) held by Amneal Holdings.
   Amneal Holdings, from time to time, may require Amneal to redeem or exchange all or a portion of their Amneal Common Units for newly-issued shares of Class A common stock on a one-for-one basis. New Amneal’s Board of Directors, which includes directors who hold Amneal Common Units or are affiliated with Amneal Holdings and may include such directors in the future, may, at its option, instead make a cash payment in accordance with the terms of the LLC Agreement. Shares of our Class B common stock will be cancelled on a one-for-one basis if we redeem or exchange Amneal Common Units of Amneal Holdings pursuant to the terms of the LLC Agreement. On May 4, 2018, Amneal Holdings caused Amneal to redeem (in accordance with the terms of the LLC Agreement) 6,886,140 of the Amneal Common Units issued to the Existing Amneal Members (and subsequently assigned and transferred to Amneal Holdings) in connection with the Combination for a like number of shares of Class A common stock covered by this prospectus, and intends to distribute such shares to certain direct and indirect members of Amneal Holdings who were or are employees of Amneal and to whom were previously issued (prior to the Closing) profit participation units in Amneal.
  

In order for Amneal Holdings to offer or sell pursuant to this prospectus, we will implement the exchange procedures set forth in the LLC Agreement pursuant to which Amneal Holdings will exchange, on a one-for-one basis, its Amneal Common Units for newly-issued shares of Class A common stock that will be sold (and their shares of Class B common stock will be surrendered and cancelled on a one-for-one basis



 

7


Table of Contents
  upon such issuance). When Amneal Holdings exchanges Amneal Common Units for shares of Class A common stock, because New Amneal acquires additional Amneal Common Units, the number of Amneal Common Units owned by New Amneal will correspondingly increase. See “Certain Related Parties and Related Party Transactions—Agreements Entered into in Connection with the Combination—LLC Agreement.”
(2) The number of shares of Class A common stock to be outstanding after this offering assumes redemptions by Amneal Holdings of an amount of outstanding Amneal Common Units equivalent to the number of shares of Class A common stock (and the surrender and cancellation by Amneal Holdings of an equivalent number of shares of Class B common stock) sold by Amneal Holdings.


 

8


Table of Contents

SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED AND OTHER FINANCIAL DATA

You should read the following summary financial data together with the financial statements of Amneal and the related notes appearing at the end of this prospectus, the financial statements of Impax and the related notes appearing at the end of this prospectus, and the “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus.

The selected historical consolidated financial data of Amneal for each of the years ended December 31, 2017, 2016, and 2015, and as of December 31, 2017 and 2016 have been derived from Amneal’s audited consolidated financial statements and related notes, which are included in the section entitled “Index to Amneal Pharmaceuticals LLC and Subsidiaries Consolidated Financial Statements” included in this prospectus. The selected historical consolidated financial data for the year ended December 31, 2014 and as of December 31, 2015 have been derived from Amneal’s audited consolidated financial statements, which have not been included in this prospectus. The selected historical consolidated financial data for the year ended December 31, 2013 and as of December 31, 2014 and 2013 have been derived from the audited consolidated financial statements and related notes of Amneal’s immediate parent, Amneal Pharmaceuticals Holding Company, LLC (“APHC”), as adjusted to exclude the immaterial activities of APHC. These financial statements have not been included in this prospectus. The information set forth below is only a summary and is not necessarily indicative of the results of future operations of Amneal or New Amneal, and you should read the following information together with Amneal’s audited consolidated financial statements, the related notes and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Amneal” included in this prospectus.

The selected historical consolidated financial data of Impax for each of the years ended December 31, 2017, 2016, and 2015, and as of December 31, 2017 and 2016 have been derived from Impax’s audited consolidated financial statements and related notes, which are included in this prospectus. The selected historical consolidated financial data for the years ended December 31, 2014 and 2013 and as of December 31, 2015, 2014, and 2013 have been derived from Impax’s audited consolidated financial statements, which have not been included in this prospectus. The information set forth below is a summary and not necessarily indicative of future results and should be read together with the other information contained in this prospectus, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Impax.”

The following Summary Unaudited Pro Forma Condensed Combined Statement of Operations Data of New Amneal for the year ended December 31, 2017, has been prepared to give effect to the Combination, the related financing and the PIPE Investment as if Closing had occurred on January 1, 2017. The following Summary Unaudited Pro Forma Condensed Combined Balance Sheet Data of New Amneal as of December 31, 2017, has been prepared to give effect to the Combination, the related financing and the PIPE Investment as if Closing had occurred on December 31, 2017.

The following Summary Unaudited Pro Forma Condensed Combined Statement of Operations Data is for illustrative and informational purposes only and is not necessarily indicative of the results that might have occurred had the Combination, the related financing and the PIPE Investment taken place on January 1, 2017 for statements of operations purposes and is not intended to be a projection of future results. Future results may vary significantly from the results reflected because of various factors, including those discussed in the section entitled “Risk Factors” beginning on page 9. The following Summary Unaudited Pro Forma Condensed Combined Financial Information should be read in conjunction with the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements” and related notes.



 

9


Table of Contents

Amneal

 

     Years Ended December 31,  
(In thousands)    2017      2016      2015      2014      2013  

Statements of Income Data:

              

Net revenue

   $ 1,033,654      $ 1,018,225      $ 866,280      $ 785,263      $ 531,126  

Total operating expenses

     281,075        312,610        265,525        229,847        132,287  

Operating profit

     245,103        284,881        236,158        218,575        100,815  

Net income attributable to Amneal Pharmaceuticals LLC and Subsidiaries

     167,648        207,378        169,451        176,928        91,776  

 

     As of December 31,  
(In thousands)    2017     2016     2015     2014     2013  

Balance Sheet Data:

          

Cash and cash equivalents

   $ 74,166     $ 27,367     $ 61,087     $ 117,522     $ 81,885  

Working capital

     475,050       501,041       365,454       325,989       207,501  

Total assets

     1,341,889       1,218,817       1,014,093       829,983       592,289  

Total liabilities

     1,717,471       1,394,762       1,200,966       927,670       616,375  

Total members’ (deficit) equity

     (375,582     (175,945     (186,873     (97,686     (24,086

Impax

 

(In thousands, except per share data)    Years Ended December 31,  
     2017     2016     2015      2014      2013  

Statements of Operations Data:

            

Total revenues, net

   $ 775,787     $ 824,429     $ 860,469      $ 596,049      $ 511,502  

Total operating expenses

     546,491       343,080       282,836        223,837        205,687  

(Loss) income from operations

     (402,692     (494,182     69,568        88,816        (6,387

Net (loss) income

     (469,287     (472,031     38,997        57,353        101,259  

Net (loss) income per share—Basic

   $ (6.53   $ (6.63   $ 0.56      $ 0.84      $ 1.51  

Net (loss) income per share—Diluted

   $ (6.53   $ (6.63   $ 0.54      $ 0.81      $ 1.47  
(In thousands)    As of December 31,  
     2017     2016     2015      2014      2013  

Balance Sheet Data:

            

Cash, cash equivalents and short-term investments

   $ 181,778     $ 180,133     $ 340,351      $ 414,856      $ 413,133  

Working capital

     341,317       309,817       495,312        516,927        505,852  

Total assets

     1,351,300       1,823,018       1,922,487        1,079,197        996,923  

Total liabilities

     1,164,099       1,199,044       860,078        191,320        186,720  

Total stockholders’ equity

     187,201       623,974       1,062,409        887,877        810,203  

Pro Forma New Amneal

 

(In thousands)    Year Ended
December 31, 2017
 
    

Statement of Operations Data:

  

Net revenue

   $ 1,809,441  

Total operating expenses

     806,792  

Operating loss

     (167,931

Net loss

     (342,128

Net loss per share—Basic

   $ (1.29

Net loss per share—Diluted

   $ (1.29

 

(In thousands)    As of
December 31, 2017
 
    

Balance Sheet Data:

  

Cash and cash equivalents

   $ 243,163  

Working capital

     899,727  

Total assets

     4,313,360  

Total liabilities

     3,492,877  

Total stockholders’ equity

     820,483  


 

10


Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all other information in this prospectus, including our financial statements and related notes, before investing in our common stock. Any of the risk factors we describe below could adversely affect our business, financial condition or results of operations. The market price of our Class A common stock could decline if one or more of these risks or uncertainties actually occur, causing you to lose all or part of the money you paid to buy our common stock. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business. Certain statements below are forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” in this prospectus.

Risk Factors Relating to the Combination

The integration of Impax and Amneal following Closing will present challenges that may result in a decline in the anticipated benefits of the Combination.

The Combination involves the integration of two businesses that previously operated as independent businesses. Impax and Amneal will be required to devote management attention and resources to integrating their business practices and operations following the Closing. Potential difficulties Impax, Amneal or New Amneal may encounter in the integration process include the following:

 

    the inability to successfully integrate the two businesses, including operations, technologies, products and services, in a manner that permits Impax, Amneal or New Amneal to achieve the cost savings and operating synergies anticipated to result from the Combination, which could result in the anticipated benefits of the Combination not being realized partly or wholly in the time frame currently anticipated or at all;

 

    the loss of sales and customers as a result of certain customers of either or both of the two businesses deciding not to continue to do business with Impax or Amneal, or deciding to decrease their amount of business in order to reduce their reliance on a single company;

 

    the necessity of coordinating geographically separated organizations, systems and facilities;

 

    potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the Combination;

 

    the integration of personnel with diverse business backgrounds and business cultures, while maintaining focus on providing consistent, high-quality products and services;

 

    the consolidation and rationalization of information technology platforms and administrative infrastructures as well as accounting systems and related financial reporting activities;

 

    the potential weakening of established relationships with regulators; and

 

    the challenge of preserving important relationships of both Impax and Amneal and resolving potential conflicts that may arise.

Furthermore, it is possible that the integration process could result in the loss of talented employees or skilled workers of Impax and Amneal. The loss of talented employees and skilled workers could adversely affect Impax’s, Amneal’s or New Amneal’s ability to successfully conduct their respective businesses because of such employees’ experience and knowledge of Impax’s and Amneal’s businesses. In addition, Impax, Amneal or New Amneal could be adversely affected by the diversion of management’s attention and any delays or difficulties encountered in connection with the integration of Impax and Amneal. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of Impax’s or Amneal’s



 

11


Table of Contents

businesses. If Impax, Amneal or New Amneal experience difficulties with the integration process, the anticipated benefits of the Combination may not be realized fully or at all, or may take longer to realize than expected. These integration matters could have an adverse effect on the business, results of operations, financial condition or prospects of Impax, Amneal or New Amneal during this transition period and for an undetermined period after completion of the Combination.

New Amneal is controlled by the Amneal Group Members. The interests of Amneal Group Members may differ from those of other holders of New Amneal Shares.

Immediately following Closing, the PIPE Investment and the Closing Date Redemption, Amneal Group Members (as defined in the Stockholders Agreement) beneficially own approximately 60% of the fully diluted New Amneal Shares.

Through its ownership of a majority of New Amneal’s voting power and the provisions set forth in the New Amneal Charter, the restated bylaws of New Amneal Bylaws and the Stockholders Agreement, the Amneal Group Members have the ability to designate a majority of the New Amneal Board. As a result of the Amneal Group Members’ ownership of a majority of the voting and economic interests in the combined businesses of Impax and Amneal under New Amneal, New Amneal is a “controlled company” as defined in the NYSE listing rules and, therefore, is not be subject to the NYSE requirements that would otherwise require New Amneal to have (i) a majority of independent directors, (ii) a nominating committee composed solely of independent directors, (iii) the compensation of its executive officers determined by a majority of the independent directors or a compensation committee composed solely of independent directors, and (iv) director nominees selected, or recommended for the board’s selection, either by a majority of the independent directors or a nominating committee composed solely of independent directors. Further, Amneal Holdings has the right to nominate half of the directors to serve on each of the Nominating Committee and Compensation Committee for so long as the Amneal Group Members beneficially own more than 50% of the outstanding New Amneal Shares. For further information regarding the New Amneal Board and its committees following Closing, see the section entitled “Management.

Amneal Holdings also has control over certain New Amneal actions through certain consent rights:

 

    For so long as Amneal Holdings and its permitted transferees beneficially owns more than 25% of the outstanding New Amneal Shares, New Amneal will not take the following actions without obtaining the prior consent of Amneal Holdings:

 

    amend, modify, or repeal any provision of the New Amneal Charter or the New Amneal Bylaws in a manner that adversely impacts Amneal Holdings and its permitted transferees;

 

    effect any change in the authorized number of directors, except pursuant to the Stockholders Agreement;

 

    create or reclassify any new or existing class or series of capital stock to grant rights, preferences, or privileges with respect to voting, liquidation, redemption, conversion or dividends that are senior to or on parity with those of the New Amneal Shares; or

 

    consummate any transaction as a result of which (i) more than 50% of the outstanding New Amneal Shares will be beneficially owned by any persons other than Amneal Holdings and its permitted transferees and (ii) Amneal Holdings or its permitted transferees receives an amount or form of consideration different that which is granted to from other holders of New Amneal Shares.

 

    For so long as Amneal Holdings and its permitted transferees satisfy certain ownership thresholds pursuant to the Stockholders Agreement, New Amneal must obtain consent from Amneal Holdings before consummating any transaction involving New Amneal or any of its subsidiaries that would reasonably be expected to result in the recognition of $40,000,000 or more in taxable income or gain by Amneal Holdings.

 

12


Table of Contents
    Pursuant to the Tax Receivable Agreement, New Amneal and its subsidiaries must seek consent from Amneal Holdings or agree to certain conditions before (i) making a disposition of certain assets if the cumulative “amount realized” (as such term is defined for U.S. federal income tax purposes) for all such dispositions in any 12-month period would be in excess of $40,000,000, (ii) acquiring any equity interests or assets of other business entities, or (iii) entering into additional agreements with other persons that are similar to the Tax Receivable Agreement. In addition, New Amneal will be required to pay an Early Termination Payment to the Members in the event of a Change of Control (as defined in the section entitled “Certain Related Parties and Related Party Transactions—Tax Receivable Agreement.”).

Amneal Holdings may have different interests than other holders of New Amneal Shares and may make decisions adverse to your interests.

Among other things, Amneal Holdings’ control of New Amneal could delay, defer, or prevent a sale of New Amneal that other New Amneal Stockholders support, or, conversely, could result in the consummation of such a transaction that other New Amneal Stockholders do not support. This concentrated control could discourage a potential investor from seeking to acquire Class A common stock and, as a result, might harm the market price of that Class A common stock.

Impax, Amneal and New Amneal have incurred and will incur transaction-related costs in connection with the Combination and the integration of the two businesses.

Impax, Amneal and New Amneal have incurred and will incur transaction-related costs in connection with the Combination and in connection with the integration of Impax’s and Amneal’s businesses. There are many systems that must be integrated, including information management, purchasing, accounting and finance, sales, billing, payroll and benefits, and regulatory compliance. Impax and Amneal are in the early stages of assessing the magnitude of these costs and are therefore unable to provide estimates of these costs. Moreover, many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. Such expenses could, particularly in the near term, reduce the cost synergies that Impax and Amneal expect to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost synergies related to the integration of the businesses following the completion of the Combination. Accordingly, any net synergies may not be achieved in the near term or at all. These integration expenses may result in Impax, Amneal or New Amneal taking significant charges against earnings following the completion of the Combination.

The unaudited pro forma condensed combined financial information of Impax and Amneal is not intended to reflect what actual results of operations and financial condition would have been had Impax and Amneal been a combined company for the periods presented, and therefore these results may not be indicative of Impax’s, Amneal’s or New Amneal’s future operating performance.

Because Amneal only recently combined with Impax upon completion of the Combination, there is no available historical financial information that combines the financial results of Impax and Amneal. The historical financial statements contained in this document consist of and are based on the separate financial statements of Impax and Amneal.

The unaudited pro forma condensed combined financial information presented in this document is for illustrative purposes only and is not intended to, and does not purport to, represent what Impax’s, Amneal’s or New Amneal’s actual results or financial condition would have been if the Combination, the related financing transactions and the PIPE Investment had occurred on the relevant dates. In addition, such unaudited pro forma condensed combined financial information is based in part on certain assumptions regarding the transactions that Impax, Amneal and New Amneal believe are reasonable. These assumptions, however, are merely preliminary and will be updated after Closing. The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting. Under the acquisition method of accounting, the purchase

 

13


Table of Contents

price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective acquisition date fair values with any excess purchase price allocated to goodwill. The pro forma purchase price allocation was based on an estimate of the acquisition date fair values of the tangible and intangible assets and liabilities of Impax. In arriving at the estimated fair values, Impax and Amneal have considered the preliminary appraisals of independent consultants, which were based on a preliminary and limited review of the assets and liabilities related to Impax to be held by New Amneal following the consummation of the Combination. New Amneal has a one-year period following Closing to complete the purchase price allocation after considering the fair value of Impax’s assets and liabilities at the level of detail necessary to finalize the required purchase price allocation. The final purchase price allocation may be different from that reflected in the pro forma purchase price allocation presented herein, and this difference may be material.

The unaudited pro forma condensed combined financial information does not reflect the costs of any integration activities or transaction-related costs or incremental capital spending that Impax’s or Amneal’s management believes are necessary to realize the anticipated synergies from the Combination. Accordingly, the pro forma financial information included in this document does not reflect what Impax’s, Amneal’s or New Amneal’s results of operations or operating condition would have been had Impax and Amneal been a combined entity during the period presented, or what Impax’s, Amneal’s or New Amneal’s results of operations and financial condition will be in the future.

Business issues previously faced by one company may be imputed to the operations of New Amneal.

To the extent that, prior to the Closing, either Amneal or Impax had or was perceived to have operational, regulatory, legal or other challenges, those challenges may raise concerns with respect to the other company following Closing, which may limit or impede Impax’s, Amneal’s or New Amneal’s future ability to conduct its business consistently with past practice.

If Amneal were to cease being a subsidiary of New Amneal or Impax were to cease being a subsidiary of Amneal in the future, such a separation could adversely affect our business and profitability due to Amneal’s strong brand and reputation.

Amneal has marketed and Impax and Amneal expect to market many of their respective products and services using the “Amneal” brand name and logo. Impax believes that the association with Amneal will provide many benefits, including:

 

    brand associated with trust, integrity and longevity;

 

    perception of high-quality products and related services;

 

    strong research and development (“R&D”) capabilities, intellectual property, and technology; and

 

    established relationships with regulators, suppliers, customers and employees.

While there is no present intention to separate Impax from Amneal or separate Amneal from New Amneal, if Impax were to cease being a subsidiary of Amneal or Amneal were to cease being a subsidiary of New Amneal, such a separation could adversely affect Impax’s, Amneal’s or New Amneal’s ability to attract and retain customers. Impax, Amneal or New Amneal may be required to provide more favorable pricing and other terms to our customers and take other action to maintain our relationship with existing, and attract new, customers, all of which could have a material adverse effect on our business, financial condition and results of operations.

Some of Impax’s or Amneal’s existing agreements contain change in control or early termination rights that may be implicated by the Combination.

Parties with which Impax or Amneal currently does business or may do business in the future, including customers and suppliers, may experience uncertainty associated with the Combination, including with respect to

 

14


Table of Contents

current or future business relationships with Impax, Amneal and New Amneal. As a result, the business relationships of Impax or Amneal may be subject to disruptions if customers, suppliers, or others attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than Impax, Amneal or New Amneal. For example, certain customers and collaborators may have contractual consent rights or termination rights that may be triggered by a change of control or assignment of the rights and obligations of contracts that will be transferred in the Combination. These disruptions could harm our relationships with existing customers and preclude us from attracting new customers, all of which could have a material adverse effect on our business, financial condition and results of operations, cash flows, and/or share price of Impax, Amneal or New Amneal.

Some of Impax’s or Amneal’s relationships with its customers may experience disruptions in connection with the Combination, which may limit New Amneal’s business.

Parties with which Impax or Amneal currently does business or may do business in the future, including customers and suppliers, may experience uncertainty associated with the Combination, including with respect to future business relationships with the other or with New Amneal. As a result, the business relationships of Impax, Amneal and New Amneal may be subject to disruptions if customers, suppliers, or others attempt to renegotiate changes in existing business relationships or consider entering into business relationships with parties other than Impax, Amneal or New Amneal, in respect of Impax, Amneal or New Amneal. For example, certain customers and collaborators of Impax or Amneal may exercise contractual termination rights as they arise or elect to not renew contracts with Impax or Amneal. These disruptions could harm relationships with existing customers, suppliers or others and preclude us from attracting new customers, all of which could have a material adverse effect on our business, financial condition and results of operations, cash flows, and/or the share price of Impax, Amneal or New Amneal.

Potential changes in laws and regulations affecting Impax’s and Amneal’s businesses could have a material adverse effect on their respective financial performance.

Many of Impax’s and Amneal’s businesses are subject to various federal, state, local and foreign laws and regulations. Their failure to comply with applicable laws and regulations could restrict their ability to provide certain services or result in imposition of civil fines and criminal penalties, substantial regulatory and compliance costs, litigation expense, adverse publicity and loss of revenues. Adverse legislation or regulations could be adopted in any country, state or municipality in which Impax and Amneal operate. If such legislation or regulation is adopted in any particular jurisdiction and Impax or Amneal is unable to continue to operate profitably under the new rules, then Impax or Amneal may decide to make certain strategic decisions, resulting in decreased revenues, earnings and assets. If Impax or Amneal is unable to adapt its products and services to conform to any new laws and regulations, or if such laws and regulations have a negative effect on their customers, Impax or Amneal may experience customer losses or increased operating costs or be required to dispose of all or a part of their businesses, which could have a material adverse effect on their businesses, financial condition and results of operations.

Amneal Holdings may be contemplating sale of its post-Closing interest in New Amneal, which could impact or differ from the remaining interest holders in New Amneal.

The sale of additional New Amneal Shares by Amneal Holdings to other potential investors may adversely affect prevailing market prices for New Amneal Shares. In addition, such investors may have registration rights, the future exercise of which may adversely affect the market price of New Amneal Shares.

The Combination could have an adverse effect on the Impax and Amneal brands.

The success of Impax and Amneal is largely dependent upon the ability of Impax and Amneal to maintain and enhance the value of their respective brands, their customers’ connection to and perception of the brands, and

 

15


Table of Contents

a positive relationship with customers and suppliers. The businesses and results of operations of Impax and Amneal, could be severely damaged if the Combination receive considerable negative publicity or if customers or suppliers otherwise come to have a diminished view of the brands as a result of the Combination or the common ownership of the existing businesses.

The Tax Receivable Agreement with Amneal Holdings requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, and we expect that the payments we will be required to make will be substantial.

We are a party to the Tax Receivable Agreement with Amneal Holdings. Under the Tax Receivable Agreement, we will be required to make cash payments to Amneal Holdings and its permitted transferees equal to 85% of certain tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of redemptions or exchanges of Amneal Common Units by Amneal Holdings and its permitted transferees as described under “Certain Relationships and Related Transactions, and Director Independence—LLC Agreement—Amneal Common Units Redemption Right.” We expect that the amount of the cash payments that we will be required to make under the Tax Receivable Agreement will be significant. Any payments made by us to Amneal Holdings or its permitted transferees under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us. Furthermore, our future obligation to make payments under the Tax Receivable Agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are the subject of the Tax Receivable Agreement. For more information, see “Related Party TransactionsTax Receivable Agreement.” Payments under the Tax Receivable Agreement are not conditioned on Amneal Holdings or its permitted transferees’ continued ownership of Amneal Common Units or our Class A Common Stock.

The actual amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of Amneal Common Units, the amount of gain recognized by such holders, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable.

In certain cases, payments under the Tax Receivable Agreement to Amneal Holdings or its permitted transferees may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.

The Tax Receivable Agreement provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control or if, at any time, we elect an early termination of the Tax Receivable Agreement, then our obligations under the Tax Receivable Agreement to make payments thereunder would be based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement.

As a result of the foregoing, we could be required to make payments under the Tax Receivable Agreement that (i) are greater than the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement and (ii) are based on the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be required to be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement.

 

16


Table of Contents

We will not be reimbursed for any payments made to the Amneal Holdings or its permitted transferees under the Tax Receivable Agreement in the event that any tax benefits are disallowed.

Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine, and the Internal Revenue Service (the “IRS”) or another tax authority may challenge all or part of the tax benefits we claim, as well as other related tax positions we take, and a court could sustain such challenge. If the outcome of any such challenge would reasonably be expected to materially adversely affect a recipient’s rights or obligations (including the amount or timing of payments) under the Tax Receivable Agreement, then we will not be permitted to settle or fail to contest such challenge without the consent of Amneal Holdings. We will not be reimbursed for any cash payments previously made to Amneal Holdings or its permitted transferees under the Tax Receivable Agreement in the event that any tax benefits initially claimed by us and for which payment has been made to Amneal Holdings or its permitted transferees are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to Amneal Holdings or its permitted transferees will be netted against any future cash payments that we might otherwise be required to make to Amneal Holdings or its permitted transferees under the terms of the Tax Receivable Agreement. However, we might not determine that we have effectively made an excess cash payment to Amneal Holdings or its permitted transferees for a number of years following the initial time of such payment. As a result, payments could be made under the Tax Receivable Agreement in excess of the tax savings that we realize in respect of the tax attributes with respect to Amneal Holdings or its permitted transferees.

Risk Factors Relating to Us and the Combined Business

Global economic conditions could harm us.

While global economic conditions have been fairly stable as a whole in recent years, continued concerns about the systemic impact of potential geopolitical issues and economic policy uncertainty, particularly in areas in which we operate, could potentially cause economic and market instability in the future and could adversely affect our business, including our financial performance.

Challenging economic conditions could result in tighter credit conditions. The cost and availability of credit may be adversely affected by illiquid credit markets and wider credit spreads, which could adversely affect the ability of our third-party distributors, partners, manufacturers and suppliers to buy inventory or raw materials and to perform their obligations under agreements with us, which could disrupt our operations and adversely affect our financial performance.

Global efforts to contain health care costs continue to exert pressure on product pricing and market access to pharmaceutical products. In many international markets, government-mandated pricing actions have reduced prices of patented drugs. Some countries may be subject to periods of financial instability, may have reduced resources to spend on healthcare or may be subject to economic sanctions, and our business in these countries may be disproportionately affected by these changes. In addition, the currencies of some countries may depreciate against the U.S. dollar substantially and if we are unable to offset the impact of such depreciation, our financial performance within such countries could be adversely affected.

We may be unable to integrate operations successfully and realize the anticipated synergies and other benefits of the Combination.

The Combination involves the combination of two companies that operated as independent public companies prior to the Combination. The integration of the businesses may be more time consuming and require more resources than initially estimated and we may fail to realize some or all of the anticipated benefits of the Combination if the integration process takes longer than expected or is more costly than expected. In addition, until the completion of the Combination, Impax and Amneal operated independently. It is possible that the integration process could result in the diversion of each company’s management’s attention, the disruption or interruption of, or the loss of momentum in, each company’s ongoing businesses or inconsistencies in standards,

 

17


Table of Contents

control, procedures and policies, any of which could adversely affect New Amneal’s ability to maintain relationships with customers, partners and employees or its ability to achieve the anticipated benefits of the Combination, or could reduce the earnings or otherwise adversely affect our business and financial results. Moreover, in addition to our failure to realize the anticipated benefits of any acquisition, including our revenues or return on investment assumptions, we may be exposed to unknown liabilities or impairment charges as a result of acquisitions we do complete.

If we are unable to successfully develop or commercialize new products, our operating results will suffer.

Developing and commercializing a new product is time consuming, costly and subject to numerous factors that may delay or prevent such development and commercialization. Our future results of operations will depend to a significant extent upon our ability to successfully commercialize new products in a timely manner. We face several challenges when developing and commercializing new products, including:

 

    our ability to develop products in a timely and cost-efficient manner and in compliance with regulatory requirements, including delays associated with the FDA listing and approval process and our ability to obtain required regulatory approvals in a timely manner, or at all, and maintain such approvals if obtained;

 

    the success of our clinical testing process to ensure that new products are safe and effective or bioequivalent to the reference listed drug;

 

    the risk that any of our products presently under development, if and when fully developed and tested, will not perform as expected;

 

    the risk that legal action may be brought against our generic drug products by our branded drug product competitors, including patent infringement claims among others;

 

    the availability, on commercially reasonable terms, of raw materials, including APIs and other key ingredients necessary to the development of our generic drug products; and

 

    Our ability to scale-up manufacturing methods to successfully manufacture commercial quantities of generic drug product in compliance with regulatory requirements.

As a result of these and other difficulties, our products currently in development may or may not receive necessary regulatory approvals on a timely basis or at all, which may result in unsuccessful development or commercialization of new products. If any of our products, when acquired or developed and approved, cannot be successfully or timely commercialized, our operating results could be adversely affected. We cannot guarantee that any investment we make in developing or marketing products will be recouped, even if we are successful in commercializing those products.

If we fail to obtain exclusive marketing rights for our products or fail to introduce our products on a timely basis, our revenues, gross margin and operating results may decline significantly.

The Hatch-Waxman amendments to the Federal Food, Drug, and Cosmetic Act (the “FDCA”) provide for a period of 180 days of generic marketing exclusivity for any applicant that is first to file an ANDA containing a certification of invalidity, non-infringement or unenforceability related to a patent listed with respect to the corresponding branded drug (commonly referred to as a “Paragraph IV certification”). “First filers” are often able to price the applicable generic drug to yield relatively high gross margins during this 180-day marketing exclusivity period.

With respect to our generic products, ANDAs containing Paragraph IV certifications generally become the subject of patent litigation that can be both lengthy and costly. There is no certainty that we will prevail in any such litigation, that we will be the first to file and thus granted the 180-day marketing exclusivity period, or, if we are granted the 180-day marketing exclusivity period, that we will not forfeit such period. Even where we are

 

18


Table of Contents

awarded marketing exclusivity, we may be required to share our exclusivity period with other first filers. In addition, branded drug product companies often authorize a generic version of the corresponding branded drug product to be sold during any period of marketing exclusivity that is awarded (described further below), which reduces gross margins during the marketing exclusivity period. Branded drug product companies may also reduce the price of their branded drug product to compete directly with generic drug products entering the market, which would similarly have the effect of reducing gross margins. Furthermore, timely commencement of the litigation by the patent owner imposes an automatic stay of ANDA approval by the FDA for 30 months, unless the case is decided in the ANDA applicant’s favor during that period. Finally, if the court decision is adverse to the ANDA applicant, the ANDA approval will be delayed until the challenged patent expires, and the applicant forfeits the 180-day marketing exclusivity.

Our future profitability depends, to a significant extent, upon our ability to introduce, on a timely basis, new generic drug products that are either the first-to-market (or among the first-to-market) or that otherwise can gain significant market share. The timeliness of our product introductions is dependent upon, among other things, the timing of regulatory approval of our products, which to a large extent is outside of our control, as well as the timing of the introduction of competing products. As additional distributors introduce comparable generic pharmaceutical products, price competition intensifies, market access narrows, and product sales prices and gross margins decline, often significantly and rapidly. Accordingly, our revenues and future profitability are dependent, in large part, upon our ability or the ability of our development partners to file ANDAs with the FDA in a timely and effective manner or, alternatively, to enter into contractual relationships with other parties that have obtained marketing exclusivity. No assurances can be given that we will be able to develop and introduce successful products in the future within the time constraints necessary to be successful. If we or our development partners are unable to continue to timely and effectively file ANDAs with the FDA or to partner with other parties that have obtained marketing exclusivity, our revenues, gross margin and operating results may decline significantly, and our prospects and business may be materially adversely affected.

With respect to our branded products, generic equivalents for branded phannaceutical products are typicallv sold at lower prices than the branded products. The regulatory approval process in the United States and European Union exempts generic products from costly and time-consuming clinical trials to demonstrate their safety and efficacy and rely instead on the safety and efficacy of prior products. After the introduction of a competing generic product, a significant percentage of the prescriptions previously written for the branded product are often written for the generic version. In addition, legislation enacted in most U.S. states allows or, in some instances mandates, that a pharmacist dispense an available generic equivalent when filling a prescription for a branded product, in the absence of specific instructions from the prescribing physician. Pursuant to the provisions of the Hatch-Waxman Act, manufacturers of branded products often bring lawsuits to enforce their patent rights against generic products released prior to the expiration of branded products’ patents, but it is possible for generic manufacturers to offer generic products while such litigation is pending. As a result, branded products typically experience a significant loss in revenues following the introduction of a competing generic product, even if subject to an existing patent. Our branded pharmaceutical products are or may become subject to competition from generic equivalents because there is no proprietary protection for some of the branded pharmaceutical products we sell, because our patent protection expires or because our patent protection is not sufficiently broad or enforceable.

We face intense competition in the pharmaceutical industry from both brand and generic drug product companies, which could significantly limit our growth and materially adversely affect our financial results.

The pharmaceutical industry is highly competitive. The principal competitive factors in the pharmaceutical market include:

 

    introduction of other generic drug manufacturers’ products in direct competition with our generic drug products;

 

    introduction of authorized generic drug products in direct competition with our products, particularly during exclusivity periods;

 

19


Table of Contents
    the ability of generic drug product competitors to quickly enter the market after the expiration of patents or exclusivity periods, diminishing the amount and duration of significant profits;

 

    consolidation among distribution outlets through mergers and acquisitions and the formation of buying groups;

 

    the willingness of generic drug customers, including wholesale and retail customers, to switch among products of different pharmaceutical manufacturers;

 

    pricing pressures by competitors and customers;

 

    a company’s reputation as a manufacturer and distributor of quality products;

 

    a company’s level of service (including maintaining sufficient inventory levels for timely deliveries);

 

    product appearance and labeling; and

 

    a company’s breadth of product offerings.

Many of our competitors have longer operating histories and greater financial, R&D, marketing and other resources than us. Consequently, some of our competitors may be able to develop products and/or processes competitive with, or superior to, our products. Furthermore, we may not be able to (i) differentiate our products from those of our competitors, (ii) successfully develop or introduce new products—on a timely basis or at all—that are less costly than those of our competitors, or (iii) offer customers payment and other commercial terms as favorable as those offered by our competitors. The markets in which we compete and intend to compete are undergoing, and are expected to continue to undergo, rapid and significant change. We expect competition to intensify as technological advances and consolidation continues. New developments by other manufacturers and distributors could render our products uncompetitive or obsolete.

We believe our principal competitors in the U.S. generic pharmaceutical market, where we primarily compete, are Teva Pharmaceutical Industries Limited (“Teva”), Sandoz (a division of Novartis AG) (“Sandoz”), Endo International plc (Par) (“Endo”), Mylan Inc. (“Mylan”) and Fresenius Medical Care AG & Co. KGAA /Akorn, Inc. These companies, among others, collectively compete with the majority of our products. We also faces price competition generally as other generic manufacturers enter the market. Any such price competition may be especially pronounced where our competitors source their products from jurisdictions where production costs may be lower (sometimes significantly) than our production costs, especially lower-cost foreign jurisdictions. Any of these factors could result in reductions in our sales prices and gross margin. This price competition has led to an increase in demands for downward price adjustments by generic pharmaceutical distributors. Our principal strategy in addressing our competition is to offer customers a consistent supply of our generic drug products, as well as to pursue product opportunities with the potential for limited competition, such as high-barrier-to-entry first-to-file or first-to-market products. There can be no assurance, however, that this strategy will enable us to compete successfully in the generic drug product industry or that we will be able to develop and implement any new or additional viable strategies.

Competition in the generic drug industry has also increased due to the proliferation of authorized generic pharmaceutical products. Authorized generic drug products are generic drug products that are introduced by brand companies, either directly or through third parties, under the brand’s New Drug Application (“NDA”) approval for our own branded drug. Authorized generics do not face any regulatory barriers to introduction and are not prohibited from sale during the 180-day marketing exclusivity period granted to the FTF Abbreviated New Drug Application (“ANDA”) applicant. The sale of authorized generics adversely impacts the market share of a generic drug product that has been granted 180 days of marketing exclusivity. This is a significant source of competition for us, because an authorized generic drug product can materially decrease the profits that we could receive as an otherwise exclusive marketer of a generic drug product. Such actions have the effect of reducing the potential market share and profitability of our generic drug products and may inhibit us from developing and introducing generic pharmaceutical drug products corresponding to certain branded drugs.

 

20


Table of Contents

If we are unable to manage our growth, our business will suffer.

We have experienced rapid growth in the past several years, and anticipate continued rapid expansion in the future. This growth has required us to expand, upgrade, and improve our administrative, operational, and management systems, internal controls and resources. Although we cannot assure you that we will, in fact, grow as we expect, if we fail to manage growth effectively or to develop a successful marketing approach, our business and financial results will be materially harmed. We may also seek to expand our business through complementary or strategic acquisitions of other businesses, products or assets, or through joint ventures, strategic agreements or other arrangements. Any such acquisitions, joint ventures or other business combinations may involve significant integration challenges, operational complexities and time consumption and require substantial resources and effort. It may also disrupt our ongoing businesses, which may adversely affect our relationships with customers, employees, regulators and others with whom we have business or other dealings. Further, if we are unable to realize synergies or other benefits expected to result from any acquisitions, joint ventures or other business combinations, or to generate additional revenue to offset any unanticipated inability to realize these expected synergies or benefits, our growth and ability to compete may be impaired, which would require us to focus additional resources on the integration of operations rather than other profitable areas of our business, and may otherwise cause a material adverse effect on our business, results of operations and financial condition.

As our competitors introduce their own generic equivalents of our generic drug products, our revenues and gross margin from such products generally decline, often rapidly.

Revenues and gross margin derived from generic pharmaceutical products often follow a pattern based on regulatory and competitive factors that we believe are unique to the generic pharmaceutical industry. As the patent(s) for a brand name product or the statutory marketing exclusivity period (if any) expires, the first generic manufacturer to receive regulatory approval for a generic equivalent of the product is often able to capture a substantial share of the market. However, as other generic manufacturers receive regulatory approvals for their own generic versions, that market share, and the price of that product, will typically decline depending on several factors, including the number of competitors, the price of the branded product and the pricing strategy of the new competitors. We cannot provide assurance that we will be able to continue to develop such products or that the number of our competitors for any given product will not increase to such an extent that we may stop marketing a generic drug product for which we previously obtained approval, which may have a material adverse impact on our revenues and gross margin.

The illegal distribution and sale by third parties of counterfeit versions of our products or of stolen products could have a negative impact on our reputation and a material adverse effect on our business, results of operations and financial condition.

Third parties could illegally distribute and sell counterfeit versions of our products, which do not meet the rigorous manufacturing and testing standards that our products undergo. Counterfeit products are frequently unsafe or ineffective, and can be life-threatening. Counterfeit medicines may contain harmful substances, the wrong dose of the active pharmaceutical ingredient or no active pharmaceutical ingredients at all. However, to distributors and users, counterfeit products may be visually indistinguishable from the authentic version.

Reports of adverse reactions to counterfeit drugs or increased levels of counterfeiting could materially affect patient confidence in the authentic product. It is possible that adverse events caused by unsafe counterfeit products will mistakenly be attributed to the authentic product. In addition, thefts of inventory at warehouses, plants or while in-transit, which are not properly stored and which are sold through unauthorized channels could adversely impact patient safety, our reputation and our business.

Public loss of confidence in the integrity of pharmaceutical products as a result of counterfeiting or theft could have a material adverse effect on our business, results of operations and financial condition.

 

21


Table of Contents

Our business is highly dependent on market perceptions of us and the safety and quality of our products. Our business, products or product pricing could be subject to negative publicity, which could have a material adverse effect on our business, results of operations and financial condition.

Market perceptions of our business are very important to us, especially market perceptions of the safety and quality of our products. If any of our products or similar products that other companies distribute are subject to market withdrawal or recall or are proven to be, or are claimed to be, harmful to consumers, then this could have a material adverse effect on our business, results of operations and financial condition. Also, because our business is dependent on market perceptions, negative publicity associated with product quality, illness or other adverse effects resulting from, or perceived to be resulting from, our products could have a material adverse impact on our business, results of operations and financial condition.

The generic pharmaceutical industry has also in recent years been the subject of significant publicity regarding the pricing of pharmaceutical products more generally, including publicity and pressure resulting from prices charged by competitors and peer companies for new products as well as price increases by competitors and peer companies on older products that the public has deemed excessive. Any downward pricing pressure on the price of certain of our products arising from social or political pressure to lower the cost of pharmaceutical products could have a material adverse impact on our business, results of operations and financial condition.

Accompanying the press and media coverage of pharmaceutical pricing practices and public complaints about the same, there has been increasing U.S. federal and state legislative and enforcement interest with respect to drug pricing. For instance, the United States Department of Justice issued subpoenas to pharmaceutical companies, including Impax, seeking information about the sales, marketing and pricing of certain generic drugs. In addition to the effects of any investigations or claims brought against us, our business, results of operations and financial condition could also be adversely affected if any such inquiries, of us or of other pharmaceutical companies or the industry more generally, were to result in legislative or regulatory proposals that limit our ability to increase the prices of our products.

A substantial portion of our total revenues is expected to be derived from sales of a limited number of products.

We expect that we will derive a substantial portion of our revenue from sales of a limited number of products. In 2017, Impax’s significant products accounted for 15%, 12%, 9%, 7% and 7%, or an aggregate of 50%, of its product sales, net. In 2017, Amneal’s significant products accounted for 13%, 9%, 8%, 4%, and 3%, or an aggregate of 37% of its net revenue. The sale of our products may be significantly influenced by market conditions, as well as regulatory actions. We may experience decreases in the sale of our products in the future as a result of actions taken by our competitors, such as price reductions, or as a result of regulatory actions related to our products or to competing products, which could have a material impact on our results of operations. Actions which could be taken by our competitors, which may materially and adversely affect our business, results of operations and financial condition, may include, without limitation, pricing changes and entering or exiting the market for specific products.

Our growth is dependent on our ability to continue to successfully develop and commercialize new products in a timely manner.

Our financial results will depend upon our ability to introduce and commercialize additional generic and branded products in a timely manner. In the generic pharmaceutical products market, revenue from newly launched generic products is typically relatively high during the period immediately following launch and can be expected generally to decline over time. Revenue from generic drugs in general, including prices of generic products that have generic alternatives on the market, can generally be expected to decline over time. Revenue from branded pharmaceutical products can be expected to decline as the result of entry of new competitors, particularly of companies producing generic versions of the branded products. Our growth is therefore dependent upon our ability to successfully introduce and commercialize new generic and branded products.

 

22


Table of Contents

Our ability to develop or license, or otherwise acquire, and introduce new products on a timely basis in relation to our competitors’ product introductions involves inherent risks and uncertainties.

Product development is inherently risky, especially for new drugs for which safety and efficacy have not been established and the market is not yet proven. Likewise, product licensing involves inherent risks including uncertainties due to matters that may affect the achievement of milestones, as well as the possibility of contractual disagreements with regard to terms such as license scope or termination rights. The development and commercialization process, particularly with regard to new drugs, also requires substantial time, effort and financial resources. The process of obtaining FDA approval to manufacture and market new pharmaceutical products is rigorous, time consuming, costly and largely unpredictable. We, or a partner, may not be successful in obtaining FDA approval or in commercializing any of the products that we are developing or licensing.

Our approved products may not achieve expected levels of market acceptance.

Even if we are able to obtain regulatory approvals for our new products, the success of those products is dependent upon market acceptance. Levels of market acceptance for our new products could be affected by several factors, including:

 

    the availability of alternative products from our competitors;

 

    the prices of our products relative to those of our competitors;

 

    the timing of our market entry;

 

    the ability to market our products effectively at the retail level;

 

    the perception of patients and the healthcare community, including third-party payers, regarding the safety, efficacy and benefits of our drug products compared to those of competing products; and

 

    the acceptance of our products by government and private formularies.

Some of these factors will not be in our control, and our products may not achieve expected levels of market acceptance. Additionally, continuing and increasingly sophisticated studies of the proper utilization, safety and efficacy of pharmaceutical products are being conducted by the industry, government agencies and others which can call into question the utilization, safety and efficacy of products previously or currently marketed by Impax or Amneal. In some cases, studies have resulted, and may in the future result, in the discontinuance of product marketing or other risk management programs such as the need for a patient registry.

We may discontinue the manufacture and distribution of certain existing products, which may adversely impact our business, results of operations and financial condition.

We continually evaluate the performance of our products, and may determine that it is in our best interest to discontinue the manufacture and distribution of certain of our products. We cannot guarantee that we have correctly forecasted, or will correctly forecast in the future, the appropriate products to discontinue or that our decision to discontinue various products is prudent if market conditions change. In addition, we cannot assure you that the discontinuance of products will reduce our operating expenses or will not cause us to incur material charges associated with such a decision. Furthermore, the discontinuance of existing products entails various risks, including, in the event that we decide to sell the discontinued product, the risk that we will not be able to find a purchaser for such products or that the purchase price obtained will not be equal to at least the book value of the net assets for such products. Other risks include managing the expectations of, and maintaining good relations with, our customers who previously purchased products from our discontinued products, which could prevent us from selling other products to them in the future. Moreover, we may incur other significant liabilities and costs associated with our discontinuance of products, which could have a material adverse effect on our business, results of operations and financial condition.

 

23


Table of Contents

Manufacturing or quality control problems may damage our reputation for quality production, demand costly remedial activities and negatively impact our business, results of operations and financial condition.

As a pharmaceutical company, we are subject to substantial regulation by various governmental authorities. For instance, we must comply with requirements of the FDA and other healthcare regulators with respect to the manufacture, labeling, sale, distribution, marketing, advertising, promotion and development of pharmaceutical products. We must register our facilities, whether located in the United States or elsewhere, with the FDA as well as regulators outside the United States, and our products must be made in a manner consistent with current good manufacturing practices (“cGMP”), or similar standards in each territory in which we manufacture. The failure of one of our facilities, or a facility of one of our third party suppliers, to comply with applicable laws and regulations may lead to breach of representations made to our customers or to regulatory or government action against us related to products made in that facility.

In addition, the FDA and other agencies periodically inspect our manufacturing facilities. Following an inspection, an agency may issue a notice listing conditions that are believed to violate cGMP or other regulations, or a warning letter for violations of “regulatory significance” that may result in enforcement action if not promptly and adequately corrected. We remain committed to continuing to improve our quality control and manufacturing practices; however, we cannot be assured that the FDA will continue to be satisfied with our corrective actions and with our quality control and manufacturing systems and standards. Failure to comply strictly with these regulations and requirements may damage our reputation and lead to financial penalties, compliance expenditures, the recall or seizure of products, total or partial suspension of production and/or distribution, withdrawal or suspension of the applicable regulator’s review of our submissions, enforcement actions, injunctions and criminal prosecution. Further, other federal agencies, our customers and partners in our alliance, development, collaboration and other partnership agreements with respect to our products and services may take any such FDA observations or warning letters into account when considering the award of contracts or the continuation or extension of such partnership agreements. Because regulatory approval to manufacture a drug is site-specific, the delay and cost of remedial actions, or obtaining approval to manufacture at a different facility, could negatively impact our business. Any failure by us to comply with applicable laws and regulations and/or any actions by the FDA and other agencies as described above could have a material adverse effect on our business, financial position and results of operations.

The development, manufacture and sale of our products involves the risk of product liability and other claims by consumers and other third parties, and insurance against such potential claims is expensive and may be difficult to obtain.

The development, manufacture and sale of our drug products involves an inherent risk of product liability and other claims and the associated adverse publicity, and insurance against such potential claims is expensive and may be difficult to obtain. Litigation is inherently subject to uncertainties and we may be required to expend substantial amounts in the defense or resolution of this and similar matters. We regularly monitor the use of our products for trends or increases in reports of adverse events or product complaints, and regularly reports such matters to the FDA. In some cases, an increase in adverse event reports may be an indication that there has been a change in a product’s specifications or efficacy. Such changes could lead to a recall of the product in question or, in some cases, increases in product liability claims related to the product in question. If the coverage limits for product liability and other insurance policies are not adequate, or if certain of our products are excluded from coverage, a claim brought against us, whether covered by insurance or not, could have a material adverse effect on our business, results of operations, financial condition and cash flows. We also rely on self-insurance to cover product liability and other claims, and these claims may exceed the amounts we have reserved under our self-insurance program.

In the ordinary course of our business, we may also be subject to a variety of other types of claims, proceedings, investigations and litigation initiated by government agencies or third parties. These matters may include compliance matters, product regulation or safety, taxes, employee benefit plans, employment

 

24


Table of Contents

discrimination, health and safety, environmental, antitrust, customs, import/export, government contract compliance, financial controls or reporting, intellectual property, allegations of misrepresentation, false claims or false statements, commercial claims, claims regarding promotion of our products and services, or other similar matters. In addition, government investigations related to the use of our generic drug products may cause reputational harm to us. Negative publicity, whether accurate or inaccurate, about the efficacy, safety or side effects of our generic drug products or product categories, whether involving us or a competitor, could materially reduce market acceptance of our products, cause consumers to seek alternatives to our products, result in product withdrawals and cause our stock price to decline. Negative publicity could also result in an increased number of product liability claims, whether or not these claims have a basis in scientific fact. Any such claims, proceedings, investigations or litigation, regardless of the merits, might result in substantial costs, restrictions on product use or sales, or otherwise injure our business.

We manufacture and derive a portion of our revenue from the sale of pharmaceutical products in the opioid class of drugs. The U.S. Department of Health and Human Services has declared the wide spread addiction to and abuse of such products a public health emergency, and in recent months, the federal government has also announced plans to increase federal oversight on opioid sale and consumption. These plans, along with changing public and clinical perceptions of opioid products and the risks relating to their use may result in the imposition of even stricter regulation of such products and further restrictions on their sale and use, as well as a potential increase in opioid-related litigation involving us, all of which could result in material adverse effects on our business and results of operations. See “Business—Legal Proceedings” for more information.

We are subject to United States federal and state laws related to healthcare fraud and abuse and health information privacy and security, and the failure to comply with such laws may adversely affect our business.

In the United States, many of our products are eligible for reimbursement under federal and state health care programs such as Medicaid, Medicare, TriCare, and/or state pharmaceutical assistance programs, and as a result, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are, and will be, applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include, but are not limited to: (i) the U.S. Anti-Kickback Statute, which applies to our marketing and research practices, educational programs, pricing policies and relationships with healthcare providers or other entities, by prohibiting, among other things, soliciting, receiving, offering or paying remuneration, directly or indirectly, as a means of inducing, or in exchange for, either the referral of an individual or the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs; (ii) federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payers that are false or fraudulent; (iii) the U.S. Health Insurance Portability and Accountability Act of 1996, (“HIPAA”), which among other things created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters, and HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, and our implementing regulations, which impose certain requirements relating to the privacy, security and transmission of individually identifiable health information and place restrictions on the use of such information for marketing communications; (iv) the U.S. Physician Payments Sunshine Act, which among other things, requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under a federal healthcare program to report annually information related to “payments or other transfers of value” made to physicians and teaching hospitals, and ownership and investment interests held by certain healthcare professionals and their immediate family members, and similar state laws; (v) the government pricing rules applicable to the Medicaid, Medicare Part B, 340B Drug Pricing Program, the U.S. Department of Veterans Affairs program, the TRICARE program, and state price reporting laws; and (vi) state and foreign law equivalents of each of the above U.S. laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers, and state and foreign laws governing the privacy and security of health

 

25


Table of Contents

information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. Violations of the fraud and abuse laws may result in severe penalties against us and/or our responsible employees, including jail sentences, large fines, and the exclusion of our products from reimbursement under federal and state programs. Defense of litigation claims and government investigations can be costly, time-consuming, and distract management, and it is possible that we could incur judgments or enter into settlements that would require us to change the way we operate our business. We are committed to conducting the sales and marketing of our products in compliance with the healthcare fraud and abuse laws, but certain applicable laws may impose liability even in the absence of specific intent to defraud. Furthermore, should there be ambiguity, a governmental authority may take a position contrary to a position we have taken, or should an employee violate these laws without our knowledge, a governmental authority may impose civil and/or criminal sanctions.

Any adverse outcome in these types of actions, or the imposition of penalties or sanctions for failing to comply with fraud and abuse laws, could adversely affect us and may have a material adverse effect on our business, results of operations, financial condition and cash flows. Some of the statutes and regulations that govern our activities, such as federal and state anti-kickback and false claims laws, are broad in scope, and while exemptions and safe harbors protecting certain common activities exist, they are often narrowly drawn. While we manage our business activities to comply with these statutory provisions, due to their breadth, complexity and, in certain cases, uncertainty of application, it is possible that our activities could be subject to challenge by various government agencies. In particular, the FDA, the DOJ and other agencies have increased their enforcement activities with respect to the sales, marketing, research and similar activities of pharmaceutical companies in recent years, and many pharmaceutical companies have been subject to government investigations related to these practices. A determination that we are in violation of these and/or other government regulations and legal requirements may result in civil damages and penalties, criminal fines and prosecution, administrative remedies, the recall of products, the total or partial suspension of manufacturing and/or distribution activities, seizure of products, injunctions, whistleblower lawsuits, failure to obtain approval of pending product applications, withdrawal of existing product approvals, exclusion from participation in government healthcare programs and other sanctions.

Any of these types of investigations or enforcement actions could affect our ability to commercially distribute our products and could materially and adversely affect our business, financial condition, results of operations and cash flows.

Approvals for our new generic drug products may be delayed or become more difficult to obtain if the FDA institutes changes to its approval requirements.

The FDA may institute changes to its ANDA approval requirements, such as implementing new or additional fees similar to the fees imposed by the Generic Drug Fee User Amendments of 2012 (“GDUFA”) and its second iteration (GDUFA II), which may make it more difficult or expensive for us to obtain approval for our new generic products. The FDA may also implement other changes that may directly affect some of our ANDA filings pending approval from the FDA, such as changes to guidance from the FDA regarding bioequivalency requirements for particular drugs. Such changes may cause our development of such generic drugs to be significantly more difficult or result in delays in FDA approval or result in our decision to abandon or terminate certain projects. Any changes in FDA requirements may make it more difficult for us to file ANDAs or obtain approval of our ANDAs and generate revenues and thus have a material adverse effect on our business, results of operations and financial condition.

Federal regulation of arrangements between manufacturers of branded and generic products could adversely affect our business.

As part of the Medicare Prescription Drug and Modernization Act of 2003, companies are required to file with the FTC and the DOJ certain types of agreements entered into between branded and generic pharmaceutical

 

26


Table of Contents

companies related to the manufacture, marketing and sale of generic versions of branded drugs. This requirement could affect the manner in which brand drug manufacturers resolve intellectual property litigation and other disputes with generic pharmaceutical companies and could result generally in an increase or lengthening of litigation against pharmaceutical companies or additional investigations or proceedings by the FTC or other governmental authorities. The impact of this requirement, the pending legislation and the potential private-party lawsuits associated with arrangements between brand and generic drug manufacturers is uncertain and could adversely affect our business.

Healthcare reform and a reduction in the coverage and reimbursement levels by governmental authorities, HMOs, MCOs or other third-party payers may adversely affect our business.

As part of commercializing our products, we have obtained authorization to receive reimbursement at varying levels for the cost of certain products and related treatments from governmental authorities and private health insurers and other organizations, such as health maintenance organizations (“HMOs”) and managed care organizations (“MCOs”). The trend toward managed healthcare in the United States, the growth of organizations such as HMOs and MCOs, and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of pharmaceutical products, resulting in lower prices and a reduction in product demand. The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law on March 23, 2010 and March 30, 2010, respectively. These laws are referred to herein as “healthcare reform.” A number of provisions of the healthcare reform laws continue to have a negative impact on the price of our products sold to U.S. government entities. For example, the legislation includes measures that (i) significantly increase Medicaid rebates through both the expansion of the program; (ii) substantially expand the Public Health System (340B) program to allow other entities to purchase prescription drugs at substantial discounts; (iii) extend the Medicaid rebate rate to a significant portion of Managed Medicaid enrollees; (iv) apply a 50% discount to Medicare Part D beneficiary spending in the coverage gap for branded and authorized generic prescription drugs; and (v) levy a significant excise tax on the industry to fund healthcare reform. Such cost containment measures and healthcare reform affect our ability to sell our products and have a material adverse effect on our business, results of operations and financial condition. Additionally, the Medicare Part D Prescription Drug Benefit established a voluntary outpatient prescription drug benefit for Medicare beneficiaries (primarily the elderly over 65 and the disabled). These beneficiaries may enroll in private drug plans. There are multiple types of Part D plans and numerous plan sponsors, each with its own formulary and product access requirements. The plans have considerable discretion in establishing formularies and tiered co-pay structures and in placing prior authorization and other restrictions on the utilization of specific products. In addition, Part D plan sponsors are permitted and encouraged to negotiate rebates with manufacturers. The Medicare Part D program, which went into effect January 1, 2006, is administered by the Centers for Medicare & Medicaid Services (“CMS”) within the Department of Health and Human Services.

The CMS has issued extensive regulations and other sub-regulatory guidance documents implementing the Medicare Part D benefit, and the OIG has issued regulations and other guidance in connection with the Medicare Part D program. The federal government can be expected to continue to issue guidance and regulations regarding the obligations of Part D sponsors and their subcontractors. Participating drug plans may establish drug formularies that exclude coverage of specific drugs and payment levels for drugs negotiated with Part D drug plans may be lower than reimbursement levels available through private health plans or other payers. Moreover, beneficiary co-insurance requirements could influence which products are recommended by physicians and selected by patients. There is no guarantee that any drug that we market will be offered by drug plans participating under the Medicare Part D program or of the terms of any such coverage, or that covered drugs will be reimbursed at amounts that reflect current or historical levels. Additionally, any reimbursement granted may not be maintained, or limits on reimbursement available from third-party payers may reduce the demand for, or negatively affect the price of those products, which could significantly harm our business, results of operations, financial condition and cash flows. We may also be subject to lawsuits relating to reimbursement programs that could be costly to defend, divert management’s attention and adversely affect our operating results. Most state Medicaid programs have established preferred drug lists, and the process, criteria and timeframe for obtaining

 

27


Table of Contents

placement on the preferred drug list varies from state to state. Under the Medicaid drug rebate program, a manufacturer must pay a rebate for Medicaid utilization of a product. The rebate for single source products (including authorized generics) is based on the greater of (i) a specified percentage of the product’s average manufacturer price or (ii) the difference between the product’s average manufacturer price and the best price offered by the manufacturer. The rebate for multiple source products is a specified percentage of the product’s average manufacturer price. In addition, many states have established supplemental rebate programs as a condition for including a drug product on a preferred drug list. The profitability of our products may depend on the extent to which they appear on the preferred drug lists of a significant number of state Medicaid programs and the amount of the rebates that must be paid to such states. In addition, there is significant fiscal pressure on the Medicaid program, and amendments to lower the pharmaceutical costs of the program are possible. Such amendments could materially adversely affect our anticipated revenues and results of operations. Due to the uncertainties regarding the outcome of future healthcare reform initiatives and their enactment and implementation, we cannot predict which, if any, of the future reform proposals will be adopted or the effect such adoption may have on our business. Future rulemaking and reform, including repeal of existing law, with respect to the healthcare and pharmaceutical industries, could increase rebates, reduce prices or the rate of price increases for healthcare products and services, or require additional reporting and disclosure. We cannot predict the timing or impact of any future rulemaking, reform or repeal of healthcare laws.

The majority of our products are produced at a few locations and a business interruption at one or more of these locations could have a material adverse effect on our business, financial position and results of operations.

We produce the majority of the products that we manufacture at our manufacturing facilities in New York, New Jersey, California, and India, as well as at certain third party suppliers. A significant disruption at any of these facilities, even on a short-term basis, could impair our ability to produce and ship products to the market on a timely basis, which could have a material adverse effect on our business, financial position and results of operations.

Our profitability depends on our major customers. If these relationships do not continue as expected, our business, condition (financial and otherwise), prospects and results of operations could materially suffer.

We have approximately 220 customers, some of which are part of large purchasing groups. For the year ended December 31, 2017, Amneal’s four largest customers accounted for approximately 56% of net revenue, broken out as follows: AmerisourceBergen Corporation (21%), Cardinal Health, Inc. (13%), McKesson Drug Co. (13%), and CVS Caremark (9%). In 2017, the three major customers of Impax, Cardinal Health, McKesson Corporation, and Amerisource-Bergen, accounted for 33%, 30%, and 25%, respectively, or an aggregate of 88%, of Impax’s gross revenue. The loss of any one or more of these or any other major customer or the substantial reduction in orders from any one or more of our major customers could have a material impact on our future operating results and financial condition.

We may experience declines in the sales volume and prices of our products as a result of the continuing trend of consolidation of certain customer groups, which could have a material adverse effect on our business, financial position and results of operations.

Our ability to successfully commercialize any generic or branded pharmaceutical product depends in large part upon the acceptance of the product by third parties, including pharmacies, government formularies, other retailers, physicians and patients. Therefore, our success will depend in large part on market acceptance of our products. We make a significant amount of our sales to a relatively small number of drug wholesalers and retail drug chains. These customers represent an essential part of the distribution chain of our pharmaceutical products. Drug wholesalers and retail drug chains have undergone, and are continuing to undergo, significant consolidation. This consolidation may result in these groups gaining additional purchasing leverage and, consequently, increasing the product pricing pressures facing our business. Additionally, the emergence of large

 

28


Table of Contents

buying groups representing independent retail pharmacies and other drug distributors, and the prevalence and influence of managed care organizations and similar institutions, potentially enable such groups to demand larger price discounts on our products. For example, there has been a recent trend of large wholesalers and retailer customers forming partnerships, such as the alliance between Walgreens and AmerisourceBergen Corporation, the alliance between Rite Aid and McKesson Drug Company, and the alliance between CVS Caremark and Cardinal Health. The result of these developments may have a material adverse effect on our business, financial position and results of operations.

From time to time we may need to rely on licenses to proprietary technologies, which may be difficult or expensive to obtain.

We may need to obtain licenses to patents and other proprietary rights held by third parties to develop, manufacture and market products. If we are unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially market our products may be inhibited or prevented, which could have a material adverse effect on our business, results of operations and financial condition.

We depend to a large extent on third-party suppliers and distributors for the raw materials for our products, particularly the chemical compounds comprising the APIs that we use to manufacture our products, as well as for certain finished goods. A prolonged interruption in the supply of such products could have a material adverse effect on our business, financial position and results of operations.

The bulk of the raw materials essential to our manufacturing business are purchased from third parties. If we experience supply interruptions or delays, we may have to obtain substitute materials or products, which in turn would require us to obtain amended or additional regulatory approvals, subjecting us to additional expenditures of significant time and resources. In addition, changes in our raw material suppliers could result in significant delays in production, higher raw material costs and loss of sales and customers, because regulatory authorities must generally approve raw material sources for pharmaceutical products, which may be time consuming. Any significant supply interruption could have a material adverse effect on our business, condition (financial and otherwise), prospects and results of operations. To date, we have experienced no significant difficulties in obtaining raw materials. However, because the federal drug application process requires specification of raw material suppliers, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required. The amount of time required for the FDA to qualify a new supplier and confirm that our manufacturing processes meet the necessary standards could cause delays in the manufacturing and marketing of one or more of our products and could, depending on the particular product, have a material adverse effect on our results of operations and financial condition.

The time necessary to develop generic and branded drugs may adversely affect whether, and the extent to which, we receive a return on our capital.

We generally begin our development activities for a new generic drug product several years in advance of the patent expiration date of the brand-name drug equivalent. The development process, including drug formulation, testing, and FDA review and approval, often takes three or more years. This process requires that we expend considerable capital to pursue activities that do not yield an immediate or near-term return. Also, because of the significant time necessary to develop a product, the actual market for a product at the time it is available for sale may be significantly less than the originally projected market for the product. If this were to occur, our potential return on our investment in developing the product, if approved for marketing by the FDA, would be adversely affected and we may never receive a return on our investment in the product. It is also possible for the manufacturer of the brand-name product for which we are developing a generic drug to obtain approvals from the FDA to switch the brand-name drug from the prescription market to the OTC market. If this were to occur, we would be prohibited from marketing our product other than as an OTC drug, in which case revenues could be substantially less than we anticipated.

 

29


Table of Contents

Developing and commercializing branded pharmaceutical products is generally more costly than developing and commercializing generic products. In order to grow and achieve success in our branded product business, we must continually identify, develop, acquire and license new products that we can ultimately market. There are many difficulties and uncertainties inherent in pharmaceutical research and development, and there is a high rate of failure inherent in new drug discovery and development. Failure can occur at any point in the process, including late in the process after substantial investment. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals and payer reimbursement, limited scope of approved uses, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others. Products that do reach the market may ultimately be subject to recalls or other suspensions in sales. Delays and uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunity. Because there is a high rate of failure inherent in the research and development process of new products, there is a significant risk that funds invested in research and development will not generate financial returns. We cannot be certain when or whether any of our products currently under development will be approved or launched or whether, once launched, such products will be commercially successful. We may be required to spend several years and incur substantial expense in completing certain clinical trials. The length of time, number of trial sites and patients required for clinical trials vary substantially, and we may have difficulty finding a sufficient number of sites and subjects to participate in our trials. Delays in planned clinical trials can result in increased development costs, delays in regulatory approvals and delays in product candidates reaching the market. We rely on independent third-party clinical investigators to recruit subjects and conduct clinical trials in accordance with applicable study protocols and laws and regulations. If regulatory authorities detennine that we have not complied with regulations in the development of a product candidate, they may refuse to accept trial data from the site and/or not approve the product candidate, and we would not be able to market and sell that product. If we are not able to market and sell our products after significant expenditures to develop and test them, our business and results of operations could be materially and adversely affected.

The testing required for the regulatory approval of our products is conducted primarily by independent third parties. Any failure by any of these third parties to perform this testing properly and in a timely manner may have an adverse effect upon our ability to obtain regulatory approvals.

Our applications for regulatory approval of our products, including both internally-developed and in-licensed products, incorporate the results of testing and other information that is conducted or gathered primarily by independent third parties (including, for example, manufacturers of raw materials, testing laboratories, contract research organizations or independent research facilities). Our ability to obtain and maintain regulatory approval of the products being tested is dependent upon the quality of the work performed by these third parties, the quality of the third parties’ facilities, and the accuracy of the information provided by third parties. We have little or no control over any of these factors. If this testing is not performed properly, our ability to obtain or maintain regulatory approvals, and to launch or continue selling products, could be restricted or delayed.

We depends on third-party agreements for a portion of our product offerings and any failure to maintain these arrangements or enter into similar arrangements with new partners could result in a material adverse effect.

We have broadened our product offering by entering into a variety of third-party agreements covering any combination of joint development, supply, marketing and/or distribution of products. We cannot provide assurance that the development, supply, marketing and/or distribution efforts of our contractual partners will continue to be successful, that we will be able to renew such agreements or that we will be able to enter into new agreements for additional products. Any alteration to, or termination of, our current distribution and marketing agreements, failure to enter into new and similar agreements, or interruption of our product supply under the such agreements, could have a material adverse effect on our business, condition (financial and otherwise), prospects or results of operations.

 

30


Table of Contents

We may make acquisitions of, or investments in, complementary businesses or products, which may be on terms that may not turn out to be commercially advantageous, may require additional debt or equity financing, which could increase our leverage and dilute equity holders.

We regularly review the potential acquisition of technologies, products, product rights and complementary businesses and is currently evaluating, and intends to continue to evaluate, potential product and/or company acquisitions and other business development opportunities. We may choose to enter into such transactions at any time. Nonetheless, we cannot provide assurance that we will be able to identify suitable acquisition or investment candidates. To the extent that we do identify candidates that we believe to be suitable, we cannot provide assurance that we will be able to reach an agreement with the selling party or parties, that the terms we may agree to will be commercially advantageous to us, or that we will be able to successfully consummate such investments or acquisitions even after definitive documents have been signed. If we make any acquisitions or investments, we may finance such acquisitions or investments through our cash reserves, debt financing, which may increase our leverage, or by issuing additional equity interests, which could dilute the holdings of our then-existing owners. If we require financing, we cannot provide assurance that we will be able to obtain required financing when needed on acceptable terms or at all.

Our operations in, and anticipated expansion into additional, international markets subjects us to increased regulatory oversight both in those international markets and domestically and regulatory, economic, social and political uncertainties, which could cause a material adverse effect on our business, financial position and results of operations.

We are subject to certain risks associated with having assets and operations located in foreign jurisdictions, including our operations in India, Germany and the United Kingdom. We may also in the future expand our international business and operations into jurisdictions in which we have limited operating experience, including with respect to seeking regulatory approvals, marketing or selling products.

Our operations in these jurisdictions may be adversely affected by general economic conditions and economic and fiscal policy, including changes in exchange rates and controls, interest rates and taxation policies, increased government regulation, and, with respect to India, any reversal of India’s recent economic liberalization and deregulation policies, as well as social stability and political, economic or diplomatic developments in the future. Certain jurisdictions have, from time to time, experienced instances of civil unrest and hostilities, both internally and with neighboring countries. Rioting, military activity, terrorist attacks, or armed hostilities could cause our operations in such jurisdictions to be adversely affected or suspended. We generally do not have insurance for losses and interruptions caused by terrorist attacks, military conflicts and wars. In addition, anti-bribery and anti-corruption laws may conflict with some local customs and practices in foreign jurisdictions. Our international operations may subject us to heightened scrutiny under the U.S. Foreign Corrupt Practices Act (“FCPA”), the UK Bribery Act and similar anti-bribery laws, and could subject us to liability under such laws despite our best efforts to comply with such laws. As a result of our policy to comply with the FCPA, the UK Bribery Act and similar anti-bribery laws, we may be at a competitive disadvantage to competitors that are not subject to, or do not comply with, such laws.

We have increased exposure to tax liabilities, including foreign tax liabilities.

As a U.S. company with subsidiaries in, among other countries, India, Germany, Switzerland and England, we are subject to, or potentially subject to, income taxes as well as non-income based taxes in these jurisdictions as well as the United States. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. Changes in tax laws or tax rulings may have a significantly adverse impact on our effective tax rate. In addition, we have potential tax exposures resulting from the varying application of statutes, regulations and interpretations, which include exposures on intercompany terms of cross-border arrangements among foreign subsidiaries in relation to various aspects of our business, including research and development activities and manufacturing. Tax authorities in various jurisdictions may disagree with, and subsequently

 

31


Table of Contents

challenge, the amount of profits taxed in such jurisdictions; such challenges may result in increased tax liability, including accrued interest and penalties, which would cause our tax expense to increase and which may have a material adverse effect on our business, financial position and results of operations and our ability to satisfy our debt obligations.

Recent U.S. tax legislation may materially adversely affect our financial condition, results of operations and cash flows.

Recently enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of U.S. and multinational businesses, including by reducing the U.S. corporate income tax rate, limiting interest deductions, permitting immediate expensing of certain capital expenditures, modifying or repealing many business deductions and credits (including certain foreign tax credits), adopting elements of a territorial tax system, imposing a one-time transition tax (or “repatriation tax”) on all undistributed earnings and profits of certain U.S.-owned foreign corporations, broadening the categories of income earned by certain U.S.-owned foreign corporations that may be subject to current US taxation, revising the rules governing net operating losses, repealing the deduction of certain performance-based compensation paid to an expanded group of executive officers and introducing new anti-base erosion provisions, such as the base erosion and anti-abuse tax. Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and IRS, any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.

Our analysis and interpretation of this legislation is preliminary and ongoing and there may be material adverse effects resulting from the legislation that we have not yet identified. While some of the changes made by the tax legislation may adversely affect us, other changes may be beneficial. We continue to work with our tax advisors and auditors to determine the full impact that the recent tax legislation as a whole will have on us. We urge our investors to consult with their legal and tax advisors with respect to such legislation and its potential effect on an investment in our common stock.

Our competitors or other third parties may allege that we are infringing upon their intellectual property, forcing us to expend substantial resources in litigation, the outcome of which is uncertain. Any unfavorable outcome of such litigation, including losses related to “at-risk” product launches, could have a material adverse effect on our business, financial position and results of operations.

Companies that produce branded pharmaceutical products routinely bring litigation against ANDA or similar applicants that seek regulatory approval to manufacture and market generic forms of their branded products alleging patent infringement or other violations of intellectual property rights. Patent holders may also bring patent infringement suits against companies that are currently marketing and selling approved generic products. Litigation often involves significant expense and can delay or prevent introduction or sale of our generic products. If valid and enforceable patents are infringed by our products, we would need to delay selling the infringing generic product unless we could obtain a license from the patent holder, and, if we were already selling the infringing product, cease selling and potentially destroy existing product stock.

There may be situations in which we may make business and legal judgments to market and sell products that are subject to claims of alleged patent infringement prior to final resolution of those claims by the courts, based upon our belief that such patents are invalid, unenforceable, or are not infringed by our marketing and sale of such products. This is referred to in the pharmaceutical industry as an “at-risk” launch. The risk involved in an at-risk launch can be substantial because, if a patent holder ultimately prevails against us, the remedies available to such holder may include, among other things, damages measured by the profits lost by the patent holder, which can be significantly higher than the profits we makes from selling the generic version of the product. We

 

32


Table of Contents

could be liable for substantial damages from adverse court decisions in such matters. We may also be harmed by the loss of any value of such inventory that we are unable to market or sell.

We are involved in various legal proceedings, all of which are uncertain, force us to incur substantial expense to defend and/or expose us to substantial liability.

We are or may become a party to litigation in the ordinary course of our business, including, among others, matters alleging product liability, other intellectual property rights infringement, violations of securities laws, employment discrimination or breach of commercial contract. In general, litigation claims can be expensive and time consuming to bring or defend against and could result in settlements or damages that could have a material adverse effect on our business, results of operations and financial condition.

Our agreements to settle patent litigations, which are important to its business, are facing increased government scrutiny in the United States, which may result in increased government actions and private litigation suits.

We are involved in numerous patent litigations in which it challenges the validity or enforceability of innovator companies’ listed patents and/or their applicability to its generic pharmaceutical products, as well as patent infringement litigation in which generic companies challenge the validity or enforceability of our patents and/or their applicability to their generic pharmaceutical products, and therefore settling patent litigations has been and is likely to continue to be an important part of our business. Parties to such settlement agreements in the United States, including us, are required by law to file them with the Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice for review. The FTC has publicly stated that, in its view, some of the brand-generic settlement agreements violate the antitrust laws and has brought actions against some brand and generic companies that have entered into such agreements. In June 2013, the U.S. Supreme Court in its decision in FTC v. Actavis determined that “reverse payment” settlement agreements between brand and generic companies could violate antitrust laws. The Supreme Court held that such settlement agreements are neither immune from antitrust attack nor presumptively illegal but rather should be analyzed under the “Rule of Reason.” It is currently uncertain the effect the Supreme Court’s decision will have on our existing settlement agreements or its impact on its ability to enter into such settlement agreements in the future or the terms thereof. The Supreme Court’s decision may result in heightened scrutiny from the FTC of such settlement agreements and we may become subject to increased FTC investigations or enforcement actions arising from such settlement agreements. Further, private plaintiffs, including direct and indirect purchasers of our products, may also become more active in bringing private litigation claims against us and other brand and generic pharmaceutical companies alleging that such settlement agreements violate antitrust laws. Accordingly, we have in the past received and may receive formal or informal requests from the FTC for information about a particular settlement agreement, and there is a risk that the FTC, or others, such as customers, may commence an action against us alleging violations of the antitrust laws. Such settlement agreements may further expose us to claims by purchasers of the products for unlawfully inhibiting competition. We currently a defendant in private antitrust actions involving certain settlement agreements.

The defense of antitrust investigation and claims are generally expensive and time consuming, and we can give no assurance as to the timing or outcome of such investigation or claims or of any future private litigation or government action alleging that one of its settlement agreements violates antitrust laws.

 

33


Table of Contents

The use of legal, regulatory and legislative strategies by brand competitors, including authorized generics and citizen’s petitions, as well as the potential impact of proposed legislation, may increase our costs associated with the introduction or marketing of our generic products, delay or prevent such introduction and/or significantly reduce the profit potential of our products.

Brand drug companies often pursue strategies that may serve to prevent or delay competition from our generic alternatives to their branded products. These strategies include, but are not limited to:

 

    marketing an authorized generic version of a branded product at the same time that we introduce a generic equivalent of that product, directly or through agreement with a generic competitor;

 

    filing “citizen’s petitions” with the FDA to thwart generic competition by causing delays of our product approvals;

 

    using risk evaluation and mitigation strategies (“REMS”), related distribution restrictions or other means of limiting access to their branded products, to prevent us from obtaining product samples needed to conduct bioequivalence testing required for ANDA approval, thereby delaying or preventing us from obtaining FDA approval of a generic version of such branded products;

 

    seeking to secure patent protection of certain “Elements to Assure Safe Use” of a REMS program, which are required medical interventions or other actions healthcare professionals need to execute prior to prescribing or dispensing the drug to the patient, in an attempt to thwart our ability to avoid infringement of the patents in question or secure approval;

 

    seeking to establish regulatory and legal obstacles that would make it more difficult for us to demonstrate a generic product’s bioequivalence or “sameness” to the related branded product;

 

    initiating legislative and administrative efforts in various states to limit the substitution of generic versions of branded pharmaceutical products for the corresponding branded products;

 

    filing suits for patent infringement that automatically delay FDA approval of our generic products;

 

    introducing “next-generation” products prior to the expiration of market exclusivity for their branded product, which often materially reduces the demand for the generic product for which we may be seeking FDA approval;

 

    obtaining extensions of market exclusivity by conducting clinical trials of branded drugs in pediatric populations or by other methods as discussed below;

 

    persuading the FDA to withdraw the approval of branded drugs for which the associated patents are about to expire, thus allowing the brand company to develop and launch new patented products serving as substitutes for the withdrawn products;

 

    seeking to obtain new patents on drugs for which patent protection is about to expire;

 

    filing patent applications that are more complex and costly to challenge;

 

    seeking temporary restraining orders and injunctions against selling a generic equivalent of their branded product based on alleged misappropriation of trade secrets or breach of confidentiality obligations;

 

    seeking temporary restraining orders and injunctions against us after we have received final FDA approval for a product for which we are attempting to launch at-risk prior to resolution of related patent litigation;

 

    reducing the marketing of the branded product to healthcare providers, thereby reducing the branded drug’s commercial exposure and market size, which in turn adversely affects the market potential of the equivalent generic product; and

 

    converting branded prescription drugs that are facing potential generic competition to over-the-counter products, thereby significantly impeding the growth of the generic prescription market for such drugs.

 

34


Table of Contents

We expend a significant amount of resources on research and development, including milestones on in-licensed products, which may not lead to successful product introductions.

Much of our development effort is focused on technically difficult-to-formulate products and/or products that require advanced manufacturing technology. We expend significant resources on research and development primarily to enable us to manufacture and market FDA-approved pharmaceuticals in accordance with FDA regulations. We have entered into, and may in the future enter into, agreements that require us to make significant milestone payments upon achievement of various research and development events and regulatory approvals. As we continue to develop and in-license new products, we will likely incur increased research and licensing expenses. Because of the inherent risk associated with research and development efforts in the industry, particularly with respect to new drugs, our research and development expenditures may not result in the successful introduction of FDA-approved pharmaceutical products. Additionally, after we or our development partners submits an ANDA, the FDA may request that additional studies be conducted. As a result, we may be unable to reasonably determine the total research and development costs required to develop a particular product. Finally, we cannot be certain that any investment made in developing products will be recovered, even if we are successful in commercialization. To the extent that we expend significant resources on research and development efforts and are not ultimately able to successfully introduce new products as a result of those efforts, our business, financial position and results of operations may be materially adversely affected.

We have a substantial amount of indebtedness, which could adversely affect our financial health.

We have a substantial amount of indebtedness. As of December 31, 2017, on a pro forma basis giving effect to the Combination and the related financing, New Amneal would have had approximately $2.7 billion of total gross indebtedness and approximately $500.0 million of available borrowing capacity under our credit facilities. For additional details of our expected debt, see the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements.”

Our substantial level of indebtedness could have important consequences to you. For example, it could:

 

    increase our vulnerability to adverse economic and industry conditions;

 

    limit our ability to obtain additional financing for future working capital, capital expenditures, raw materials, strategic acquisitions and other general corporate requirements;

 

    expose us to interest rate fluctuations because the interest on certain debt under the credit facilities is imposed at variable rates;

 

    require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of cash flow for operations and other purposes;

 

    make it more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and acceleration of such indebtedness;

 

    limit our ability to refinance indebtedness or increase the associated costs;

 

    require us to sell assets to reduce debt or influence the decision about whether to do so;

 

    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate or prevent us from carrying out capital spending that is necessary or important to our growth strategy and efforts to improve operating margins or our business; and

 

    place us at a competitive disadvantage compared to any competitors that have less debt or comparable debt at more favorable interest rates and that, as a result, may be better positioned to withstand economic downturns.

 

35


Table of Contents

The risks and uncertainties inherent in conducting clinical trials could delay or prevent the development and commercialization of our own branded products, which could have a material adverse effect on our business, results of operations and financial condition.

With respect to our branded products which do not qualify for the FDA’s abbreviated application procedures, we must demonstrate through clinical trials that these products are safe and effective for use. We have only limited experience in conducting and supervising clinical trials. The process of completing clinical trials and preparing a NDA may take several years and requires substantial resources. Our studies and filings may not result in FDA approval to market our new drug products and, if the FDA grants approval, we cannot predict the timing of any approval. There are substantial filing fees for NDAs that are not refundable if FDA approval is not obtained.

There are a number of risks and uncertainties associated with clinical trials. The results of clinical trials may not be indicative of results that would be obtained from large scale testing. Clinical trials are often conducted with patients having advanced stages of disease and, as a result, during the course of treatment these patients can die or suffer adverse medical effects for reasons that may not be related to the pharmaceutical agents being tested, but which nevertheless affect the clinical trial results. In addition, side effects experienced by the patients may cause delay of approval or limit the profile of an approved product. Moreover, our clinical trials may not demonstrate sufficient safety and efficacy to obtain approval from the FDA or foreign regulatory authorities. The FDA or foreign regulatory authorities may not agree with our assessment of the clinical data or they may interpret it differently. Such regulatory authorities may require additional or expanded clinical trials. Even if the FDA or foreign regulatory authorities approve certain products developed by us, there is no assurance that such regulatory authorities will not subject marketing of such products to certain limits on indicated use.

Failure can occur at any time during the clinical trial process and, in addition, the results from early clinical trials may not be predictive of results obtained in later and larger clinical trials, and product candidates in later clinical trials may fail to show the desired safety or efficacy despite having progressed successfully through earlier clinical testing. A number of companies in the pharmaceutical industry, including us, have suffered significant setbacks in clinical trials, even in advanced clinical trials after showing positive results in earlier clinical trials. The completion of clinical trials for our product candidates may be delayed or halted for the reasons noted above in addition to many other reasons, including:

 

    delays in patient enrollment, and variability in the number and types of patients available for clinical trials;

 

    regulators or institutional review boards may not allow us to commence or continue a clinical trial;

 

    our inability, or the inability of our partners, to manufacture or obtain from third parties materials sufficient to complete our clinical trials;

 

    delays or failure in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective clinical trial sites;

 

    risks associated with trial design, which may result in a failure of the trial to show statistically significant results even if the product candidate is effective;

 

    difficulty in maintaining contact with patients after treatment commences, resulting in incomplete data;

 

    poor effectiveness of product candidates during clinical trials;

 

    safety issues, including adverse events associated with product candidates;

 

    the failure of patients to complete clinical trials due to adverse side effects, dissatisfaction with the product candidate, or other reasons;

 

    governmental or regulatory delays or changes in regulatory requirements, policy and guidelines; and

 

    varying interpretation of data by the FDA or foreign regulatory authorities.

 

36


Table of Contents

In addition, our product candidates could be subject to competition for clinical study sites and patients from other therapies under development which may delay the enrollment in or initiation of our clinical trials.

The FDA or foreign regulatory authorities may require us to conduct unanticipated additional clinical trials, which could result in additional expense and delays in bringing our product candidates to market. Any failure or delay in completing clinical trials for our product candidates would prevent or delay the commercialization of our product candidates. We cannot assure that our expenses related to clinical trials will lead to the development of brand-name drugs that will generate revenues in the near future. Delays or failure in the development and commercialization of our own branded products could have a material adverse effect on our business, results of operations and financial condition.

Our reporting and payment obligations under the Medicaid rebate program and other governmental purchasing and rebate programs are complex and may involve subjective decisions. Any determination that we have failed to comply with those obligations could subject us to penalties and sanctions, which could have a material adverse effect on our business.

The regulations applicable to us regarding reporting and payment obligations with respect to Medicaid reimbursement and rebates and other governmental programs are complex. As discussed elsewhere in this prospectus, we and other pharmaceutical companies are defendants in a number of suits filed by state attorneys general and have been notified of an investigation by the DOJ with respect to Medicaid reimbursement and rebates. Our calculations and methodologies are subject to review and challenge by the applicable governmental agencies, and it is possible that such reviews could adversely affect us and our business. In addition, because our processes for these calculations and the judgments involved in making these calculations involve, and will continue to involve, subjective decisions and complex methodologies, these calculations are subject to the risk of error and misjudgment. Any governmental agencies that have commenced (or that may commence) an investigation of us could impose, based on a claim of violation of anti-fraud and false claims laws or otherwise, civil and/or criminal sanctions, including fines, penalties and possible exclusion from federal health care programs (including Medicaid and Medicare). Some of the applicable laws may impose liability even in the absence of specific intent to defraud. Furthermore, should there be ambiguity with respect to how to properly calculate and report payments, and even in the absence of any such ambiguity, a governmental authority may take a position contrary to a position that we have taken and may impose civil and/or criminal sanctions on us. Any such penalties, sanctions, or exclusion from federal health care programs could have a material adverse effect on our business, financial position and results of operations. From time to time we conduct routine reviews of our government pricing calculations. These reviews may have an impact on government price reporting and rebate calculations used to comply with various government regulations regarding reporting and payment obligations.

Our operating results are affected by many factors and may fluctuate significantly on a quarterly basis.

Our operating results may vary substantially from quarter to quarter and may be greater or less than those achieved in the immediately preceding period or in the comparable period of the prior year. Factors that may cause quarterly results to vary include, but are not limited to, the following:

 

    the number of new product introductions by us;

 

    losses related to inventory write-offs;

 

    marketing exclusivity, if any, which may be obtained on certain new products;

 

    the level of competition in the marketplace for certain products;

 

    our ability to create demand in the marketplace for our products;

 

    availability of raw materials and finished products from suppliers;

 

    our ability to manufacture products at our manufacturing facilities;

 

37


Table of Contents
    the scope and outcome of governmental regulatory actions;

 

    our dependence on a small number of products for a significant portion of net revenue or income;

 

    legal actions against our generic products brought by brand competitors, and legal challenges to our intellectual property rights by generic competitors;

 

    price erosion and customer consolidation; and

 

    significant payments (such as milestones) payable by us under collaboration, licensing, and development agreements to our partners before the related product has received FDA approval.

The profitability of our product sales is also dependent upon the prices we are able to charge for our products, the costs to purchase products from third parties, and our ability to manufacture our products in a cost effective manner. If our revenues decline or do not grow as anticipated, we may not be able to reduce our operating expenses to offset such declines. Failure to achieve anticipated levels of revenues could, therefore, significantly harm our operating results for a particular fiscal period.

In certain circumstances, we issue price adjustments and other sales allowances to our customers. Although we may establish reserves based on our estimates of these amounts, if estimates are incorrect and the reserves are inadequate, it may result in adjustments to these reserves that may have a material adverse effect on our financial position and results of operations.

As described above, the first company to file an ANDA containing a Paragraph IV certification that successfully challenges the patent(s) on a branded product may be granted 180 days of generic market exclusivity by the FDA for such generic product. At the expiration of such exclusivity period, other generic distributors may enter the market, resulting in a significant price decline for the drug (in some instances, price declines have exceeded 90%). When we experience price declines following a period of generic marketing exclusivity, or at any time when a competitor enters the market or offers a lower price with respect to a product we are selling, we may, at our discretion, decide to lower the price of our product to retain market share and provide price adjustments to our customers for the difference between our new (lower) price and the price at which we previously sold the product which is still held in inventory by such customers. Because the entry of a competitive generic product following the expiration of any exclusivity period is unpredictable, we do not establish reserves for such potential adjustments, and therefore the full effect of such adjustments are not reflected in our operating results until such adjustments actually occur. There are also circumstances under which we may decide not to provide price adjustments to certain customers, and consequently, as a matter of business strategy, we may risk a greater level of sale returns of products in a customer’s existing inventory and lose future sales volume to competitors rather than reduce our pricing.

Based on estimates, we establish reserves for sales allowances including, but not limited to: sales discounts and returns, chargebacks, sales volume rebates, shelf stocks, re-procurement charges, cash discounts, and Medicaid rebate obligations at the time of sale. Although we believe our reserves are adequate as of the date of this prospectus, we cannot provide assurances that ourreserves will ultimately prove to be adequate. Increases in sales allowances may exceed our estimates for a variety of reasons, including unanticipated competition or an unexpected change in one or more of our contractual relationships. We will continue to evaluate the effects of competition and will record a price adjustment reserve if and when we deem it necessary. Any failure to establish adequate reserves with respect to sales allowances may result in a material adverse effect on our financial position and results of operations.

If we determine that our goodwill and other intangible assets have become impaired, we may record significant impairment charges, which would adversely affect our results of operations.

Goodwill and other intangible assets represent a significant portion of our assets. Goodwill is the excess of cost over the fair market value of net assets acquired in business combinations. In the future, goodwill and

 

38


Table of Contents

intangible assets may increase as a result of future acquisitions. We review our goodwill and indefinite lived intangible assets at least annually for impairment. We review our intangible assets with finite lives for recoverability whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. For example, during the year ended December 31, 2017, Impax recognized a total of $289.7 million of intangible asset impairment charges, and no impairment charge related to goodwill as a result of its annual testing in 2017. Impairment may result from, among other things, deterioration in the performance of acquired businesses, adverse market conditions and adverse changes in applicable laws or regulations, including changes that restrict the activities of an acquired business. Any impairment of goodwill or other intangible assets would result in a non-cash charge against earnings, which would adversely affect our results of operations.

Investigations and litigation concerning the calculation of average wholesale prices may adversely affect our business.

Many government and third-party payers, including Medicare, Medicaid, HMOs and others, reimburse doctors and others for the purchase of certain prescription drugs based on a drug’s average wholesale price (“AWP”). In the past several years, state and federal government agencies have conducted ongoing investigations of manufacturers’ reporting practices with respect to AWP, as a result of which certain agencies have suggested that reporting of inflated AWPs by manufacturers has led to excessive payments for prescription drugs. Numerous pharmaceutical companies have been named as defendants in actions brought by various State Attorneys General and have faced state law qui tam actions brought on behalf of various states, alleging generally that the defendants defrauded state Medicaid systems by purportedly reporting or causing the reporting of AWP and/or “Wholesale Acquisition Costs” that exceeded the actual selling price of the defendants’ prescription drugs. We, for example, are subject to a civil investigative demand issued by the Texas State Attorney General alleging certain overpayments to us by the Texas Medicaid system. These cases generally seek some combination of actual damages, and/or double damages, treble damages, compensatory damages, statutory damages, civil penalties, disgorgement of excessive profits, restitution, disbursements, counsel fees and costs, litigation expenses, investigative costs, injunctive relief, punitive damages, imposition of a constructive trust, accounting of profits or gains derived through the alleged conduct, expert fees, interest and other relief that the court may have deemed proper.

We can give no assurance that we will be able to settle current or future actions on terms that we deem reasonable, or that such settlements or adverse judgments, if entered, will not exceed the amount of any reserve. Accordingly, such actions could adversely affect us and may have a material adverse effect on our business, results of operations, financial condition and cash flows.

We are increasingly dependent on information technology, and our systems and infrastructure face certain risks, including cybersecurity and data leakage risks.

Significant disruptions to our information technology systems or breaches of information security could adversely affect our business. In the ordinary course of business, we collect, store and transmit large amounts of confidential information, and it is critical that we do so in a secure manner to maintain the confidentiality and integrity of such information. We have also outsourced significant elements of our information technology infrastructure; as a result we manage independent vendor relationships with third parties who are responsible for maintaining significant elements of our information technology systems and infrastructure and who may or could have access to our confidential information. The size and complexity of our information technology systems, and those of our third party vendors, make such systems potentially vulnerable to service interruptions and security breaches from inadvertent or intentional actions by our employees, partners or vendors. These systems are also vulnerable to attacks by malicious third parties, and may be susceptible to intentional or accidental physical damage to the infrastructure maintained by us or by third parties. Maintaining the secrecy of confidential, proprietary, and/or trade secret information is important to our competitive business position. While we have taken steps to protect such information and have invested in systems and infrastructures to do so, there can be no

 

39


Table of Contents

guarantee that our efforts will prevent service interruptions or security breaches in our systems or the unauthorized or inadvertent wrongful use or disclosure of confidential information that could adversely affect our business operations or result in the loss, dissemination, or misuse of critical or sensitive information. A breach of our security measures or the accidental loss, inadvertent disclosure, unapproved dissemination, misappropriation or misuse of trade secrets, proprietary information, or other confidential information, whether as a result of theft, hacking, fraud, trickery or other forms of deception, or for any other cause, could enable others to produce competing products, use our proprietary technology or information, and/or adversely affect our business position. Further, any such interruption, security breach, loss or disclosure of confidential information could result in financial, legal, business, and reputational harm to us and could have a material adverse effect on our business, financial position, results of operations and/or cash flow.

Our future success depends on our ability to attract and retain talented employees and consultants.

Our future success depends, to a substantial degree, upon the continued service of the members of our management team. The loss of the services of members of our management team, or their inability to perform services on our behalf, could have a material adverse effect on our business, condition (financial and otherwise), prospects and results of operations. Our success also depends, to a large extent, upon the contributions of our sales, marketing, scientific and quality assurance staff. We compete with brand and generic pharmaceutical manufacturers for qualified personnel, and our competitors may offer more favorable employment opportunities than we do. If we are not able to attract and retain the necessary personnel to accomplish our business objectives we could experience constraints that would adversely affect our ability to sell and market our products effectively, to meet the demands of our strategic partners in a timely fashion, and to support our research and development programs. In particular, our sales and marketing efforts depend on the ability to attract and retain skilled and experienced sales, marketing and quality assurance representatives. Although we believe that wehave been successful in attracting and retaining skilled personnel in all areas of our business, we cannot provide assurance that we can continue to attract, train and retain such personnel. Any failure in this regard could limit the rates at which Amneal generates sales and develops or acquires new products.

We depend on our ability to protect our intellectual property and proprietary rights.

Our success depends on our ability to protect and defend the intellectual property rights associated with our current and future products. If we fail to protect our intellectual property adequately, competitors may manufacture and market products similar to, or that may be confused with, our products, and our generic competitors may obtain regulatory approval to make and distribute generic versions of our branded products. Some patent applications in the United States are maintained in secrecy or are not published until the resulting patents issue. We also cannot be certain that patents will be issued with respect to any of our patent applications or that any existing or future patents issued to or licensed by us will provide competitive advantages for our products or will not be challenged, invalidated, circumvented or held unenforceable in proceedings commenced by our competitors or other third parties. Furthermore, our patent rights may not prevent or limit our present and future competitors from developing, making, importing, using or commercializing products that are functionally similar to our products. We rely particularly on trade secrets, trademarks, unpatented proprietary expertise and continuing innovation that we seeks to protect, in part, by registering and using marks; and by entering into confidentiality agreements with licensees, suppliers, employees, consultants and other parties—we use this approach to protecting our intellectual property in large part because few of our products are protected by patents. We cannot provide assurance that these agreements will not be breached or circumvented. We also cannot be certain that we will have recourse to adequate remedies in the event of a breach of such agreements. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. We cannot be sure that our trade secrets and proprietary technology will not be independently developed or otherwise become known by our competitors or, if patents are not issued with respect to our internally-developed products, that we will be able to maintain the confidentiality of information relating to these products. In addition, efforts to ensure our intellectual property rights may be costly, time-consuming and/or ultimately unsuccessful. We cannot be sure that we will have the resources to protect our own rights against infringement by third parties.

 

40


Table of Contents

There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with GAAP. Any future changes in estimates, judgments and assumptions used or necessary revisions to prior estimates, judgments or assumptions could lead to a restatement of our results.

The consolidated financial statements included in this prospectus are prepared in accordance with GAAP. This involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future and any necessary revisions to prior estimates, judgments or assumptions could lead to a restatement. Any such changes could result in corresponding changes to the amounts of assets (including goodwill and other intangible assets), liabilities, revenues, expenses and income.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud.

Our management or our independent registered public accounting firm may identify material weaknesses in our internal control over financial reporting in the future. The existence of internal control material weaknesses may result in current and potential stockholders and alliance and collaboration agreements’ partners losing confidence in our financial reporting, which could harm our business, the market price of our common stock, and our ability to retain our current, or obtain new, alliance and collaboration agreements’ partners.

In addition, the existence of material weaknesses in our internal control over financial reporting may affect our ability to timely file periodic reports under the Exchange Act. An internal control material weakness may develop in the future and affect our ability to timely file our periodic reports. The inability to timely file periodic reports under the Exchange Act could result in the SEC revoking the registration of our common stock, which would prohibit us from listing or having our stock quoted on any public market. This would have an adverse effect on our business and stock price by limiting the publicly available information regarding us and greatly reducing the ability of our stockholders to sell or trade our common stock.

Terrorist attacks and other acts of violence or war may adversely affect our business.

Terrorist attacks at or nearby our facilities may negatively affect our operations. While we do not believe that we are more susceptible to such attacks than other companies, such attacks could directly affect our physical facilities or those of our suppliers or customers and could make the transportation of our products more difficult and more expensive and ultimately affect our sales.

We carry insurance coverage on our facilities of types and in amounts that we believe are in line with coverage customarily obtained by owners of similar properties. We continue to monitor the state of the insurance market in general and the scope and cost of coverage for acts of terrorism in particular, but we cannot anticipate what coverage will be available on commercially reasonable terms in future policy years. Currently, we carry terrorism insurance as part of our property and casualty and business interruption coverage. If we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged facilities, as well as the anticipated future net sales from those facilities.

The expansion of social media platforms present new risks and challenges, which could cause a material adverse effect on our business, results of operations and financial condition.

The inappropriate use of certain media vehicles could cause brand damage or information leakage or could lead to legal implications from the improper collection and/or dissemination of personally identifiable information. In addition, negative posts or comments about us on any social networking website could seriously damage our reputation. Further, the disclosure of non-public company sensitive information through external

 

41


Table of Contents

media channels could lead to information loss as there might not be structured processes in place to secure and protect information. If our non- public sensitive information is disclosed or if our reputation is seriously damaged through social media, it could have a material adverse effect on our business, results of operations and financial condition.

We may need to raise additional funds in the future which may not be available on acceptable terms or at all.

We may consider issuing additional debt or equity securities in the future to fund potential acquisitions or investments, to refinance existing debt, or for general corporate purposes. If we issue equity, convertible preferred equity or convertible debt securities to raise additional funds, New Amneal Stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of New Amneal Stockholders. If we incur additional debt, we may increase our leverage relative to our earnings or to our equity capitalization, requiring us to pay additional interest expenses and potentially lowering New Amneal’s credit ratings. We may not be able to market such issuances on favorable terms, or at all, in which case, we may not be able to develop or enhance our products, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements.

The terms of our credit agreements will restrict our operations, particularly our ability to respond to changes or to take certain actions.

Our credit agreements will contain a number of restrictive covenants that impose operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on the ability to:

 

    incur additional indebtedness;

 

    pay dividends or make other distributions or repurchase or redeem capital stock;

 

    prepay, redeem or repurchase certain debt;

 

    make loans and investments;

 

    sell assets;

 

    incur liens;

 

    enter into transactions with affiliates;

 

    alter the businesses conducted by us;

 

    enter into agreements restricting subsidiaries’ ability to pay dividends; and

 

    consolidate, merge or sell all or substantially all of our assets.

A breach of the covenants under such credit agreements could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies which could have a material adverse effect on our business, operations and financial results. Furthermore, if we were unable to repay the amounts due and payable under our credit agreements, those lenders could proceed against the collateral granted to them to secure that indebtedness which could force us into bankruptcy or liquidation. In the event our lenders accelerated the repayment of the borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. Any acceleration of amounts due under the credit agreements would likely have a material adverse effect on us. As a result of these restrictions, we may be:

 

    limited in how we conduct business;

 

    unable to raise additional debt or equity financing to operate during general economic or business downturns; or

 

42


Table of Contents
    unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our strategy.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors which may be beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. Following the Combination, we estimate that we currently have approximately $2.7 billion of indebtedness, with an annual interest expense of approximately $138 million to $149 million and an annual debt amortization of approximately $27 million.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to affect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. Our credit agreements restrict our ability to dispose of assets and use the proceeds from those dispositions and also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or obtain proceeds in an amount sufficient to meet any debt service obligations when due.

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations, including our indebtedness.

If we cannot make scheduled payments on our debt, we will be in default and, as a result:

 

    our debt holders could declare all outstanding principal and interest to be due and payable;

 

    the lenders under our credit agreements could terminate their commitments to lend us money; and

 

    we could be forced into bankruptcy or liquidation.

Risks Related to Our Class A Common Stock and This Offering

New Amneal is a holding company with nominal net worth and depends on dividends and distributions from its subsidiaries to pay any dividends.

New Amneal is a holding company with nominal net worth and will not have any material assets or conduct any business operations other than its investments in its subsidiaries. New Amneal’s business operations are conducted primarily out of its direct operating subsidiary, Amneal, and its subsidiaries. As a result, notwithstanding any restrictions on payment of dividends under New Amneal’s existing indebtedness, New Amneal’s ability to pay dividends, if any, is dependent upon cash dividends and distributions or other transfers from its subsidiaries, including from Amneal.

 

43


Table of Contents

The Class A common stock price is expected to be volatile, and the market price of Class A common stock may decline.

The market price of Class A common stock could be subject to significant fluctuations. Market prices for securities of pharmaceutical, biotechnology, and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of Class A common stock to fluctuate include:

 

    the ability of New Amneal to obtain regulatory approvals for product candidates, and delays or failures to obtain such approvals;

 

    the failure of any of New Amneal’s product candidates, if approved for marketing and commercialization, to achieve commercial success;

 

    issues in manufacturing New Amneal’s approved products or product candidates;

 

    the entry into, or termination of, key agreements, including key licensing or collaboration agreements;

 

    the initiation of material developments in, or conclusion of, litigation to enforce or defend any of New Amneal’s intellectual property rights or defend against the intellectual property rights of others;

 

    announcements by commercial partners or competitors of new commercial products, clinical progress (or the lack thereof), significant contracts, commercial relationships, or capital commitments;

 

    adverse publicity relating to New Amneal’s markets, including with respect to other products and potential products in such markets;

 

    the introduction of technological innovations or new therapies competing with potential products of New Amneal;

 

    the loss of talented employees;

 

    changes in estimates or recommendations by securities analysts, if any, who cover the Class A common stock;

 

    general and industry-specific economic conditions potentially affecting New Amneal’s research and development expenditures;

 

    changes in the structure of health care payment systems;

 

    period-to-period fluctuations in New Amneal’s financial results;

 

    failure to meet or exceed financial and development projections New Amneal may provide to the public;

 

    failure to meet or exceed the financial and development projections of the investment community;

 

    the perception of the pharmaceutical industry by the public, legislators, regulators, and the investment community;

 

    adverse regulatory decisions;

 

    disputes or other developments relating to proprietary rights, including patents, litigation matters, and New Amneal’s ability to obtain patent protection for its technologies;

 

    sales of the Class A common stock by New Amneal or its stockholders in the future;

 

    trading volume of the Class A common stock; and

 

    period-to-period fluctuations in New Amneal’s financial results.

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies or the biotechnology sector. These broad market fluctuations may also adversely affect the trading price of the New Amneal’s Class A common stock.

 

44


Table of Contents

In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management’s attention and resources, which could significantly harm New Amneal’s profitability and reputation.

Future sales of shares by stockholders could cause the Class A common stock price to decline.

If New Amneal Stockholders sell, or indicate an intention to sell, substantial amounts of Class A common stock in the public market after the Lock-up Period and other legal restrictions on resale discussed in this prospectus lapse, the trading price of Class A common stock could decline. Upon completion of this offering, New Amneal is expected to have outstanding a total of approximately 298,284,955 shares of Class A common stock.

The Stockholders Agreement includes certain lock-up provisions limiting the ability of Amneal Holdings and its permitted transferees to transfer New Amneal Shares held by such members for a period of 180 days from the Closing of the Combination. Upon the expiration of the lock-up restrictions, 171,260,707 shares of Class A common stock subject to outstanding Amneal Common Units held by Amneal Holdings and its permitted transferees, as well as the 6,886,140 shares of Class A common stock relating to the Closing Date Redemption, each of which may be transferred under this prospectus, will become eligible for sale or transfer (subject to certain continuing restrictions). If these shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of the Class A common stock could decline.

If the ownership of the Class A common stock is highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the Class A common stock’s stock price to decline.

Executive officers and directors of New Amneal, and affiliates of executive officers and directors of New Amneal, beneficially own or control approximately 60% of the outstanding shares of New Amneal Shares. Accordingly, these executive officers, directors, and their affiliates, acting as a group, have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation, or sale of all or substantially all of New Amneal’s assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of New Amneal, even if such a change of control would benefit the other New Amneal Stockholders. The significant concentration of stock ownership may adversely affect the trading price of Class A common stock due to investors’ perception that conflicts of interest may exist or arise.

New Amneal is controlled by Amneal Holdings. The interests of the Amneal Holdings may differ from the interests of other stockholders of New Amneal.

Amneal Holdings possesses 60% of the voting power of all outstanding New Amneal Shares (after giving effect to the PIPE Investment and the Closing Date Redemption).

Through its ownership of a majority of New Amneal’s voting power and the provisions set forth in the New Amneal Charter, the New Amneal Bylaws and the Stockholders Agreement, Amneal Holdings and its permitted transferees have the ability to designate and elect a majority of the New Amneal Board. Amneal Holdings and its permitted transferees have control over all matters submitted to New Amneal Stockholders for approval, including changes in capital structure, transactions requiring stockholder approval under Delaware law and corporate governance, subject to the terms of the Stockholders Agreement relating to Amneal Holdings and its permitted transferees’ agreement to vote in favor of Non-Amneal Directors and such other matters that are described in more detail in the section entitled “Certain Related Parties and Related Party Transactions—Stockholders Agreement.” Amneal Holdings and its permitted transferees may have different interests than other New Amneal Stockholders and may make decisions adverse to your interests.

 

45


Table of Contents

Among other things, Amneal Holdings and its permitted transferees’ control could delay, defer, or prevent a sale of New Amneal that the company’s other stockholders support, or, conversely, this control could result in the consummation of such a transaction that other New Amneal Stockholders do not support. This concentrated control could discourage a potential investor from seeking to acquire Class A common stock and, as a result, might harm the market price of that Class A common stock.

The New Amneal Charter provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between New Amneal and its stockholders, which could limit New Amneal Stockholders’ ability to obtain a favorable judicial forum for disputes with New Amneal or its current or former directors, officers or employees.

The New Amneal Charter provides that unless New Amneal consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if such court does not have jurisdiction, the Superior Court of the State of Delaware or the federal district court for the District of Delaware) will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of New Amneal, any action asserting a claim of breach of fiduciary duty owed by any current or former director or officer of New Amneal to New Amneal or its stockholders, any action asserting a claim arising pursuant to any provision of the DGCL, the New Amneal Charter or the New Amneal Bylaws or any action asserting a claim governed by the internal affairs doctrine. The choice of forum provision may limit a New Amneal Stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with New Amneal or its current or former directors, officers or other employees, which may discourage such lawsuits against New Amneal and its current or former directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in the New Amneal Charter to be inapplicable or unenforceable in an action, New Amneal may incur additional costs associated with resolving such action in other jurisdictions, which could harm its business, results of operations, and financial condition.

An active trading market for the Class A common stock may not develop and New Amneal Stockholders may not be able to resell their shares of Class A common stock for a profit, if at all.

An active trading market for Class A common stock may never develop or be sustained. If an active market for Class A common stock does not develop or is not sustained, it may be difficult for its stockholders to sell their shares at an attractive price or at all.

Anti-takeover provisions under Delaware law could make an acquisition of New Amneal more difficult and may prevent attempts by New Amneal’s stockholders to replace or remove New Amneal’s management.

Because New Amneal is incorporated in Delaware, it is governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding voting stock of New Amneal from merging or combining with the New Amneal. Although Impax and Amneal believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with New Amneal’s board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by the New Amneal’s stockholders to replace or remove then current management by making it more difficult for stockholders to replace members of the board of directors, which is responsible for appointing the members of management.

We do not anticipate that New Amneal will pay any cash dividends in the foreseeable future.

The current expectation is New Amneal will retain its future earnings to fund the development and growth of New Amneal’s business. As a result, capital appreciation, if any, of the Class A common stock will be your sole source of gain, if any, for the foreseeable future.

 

46


Table of Contents

If New Amneal fails to maintain proper and effective internal controls, New Amneal’s ability to produce accurate and timely financial statements could be impaired, which could harm its operating results, its ability to operate its business and investors’ views of New Amneal.

New Amneal is required to comply with Section 404 of the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires public companies to conduct an annual review and evaluation of their internal controls and attestations of the effectiveness of internal controls by independent auditors. Ensuring that New Amneal has adequate internal financial and accounting controls and procedures in place so that it can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. New Amneal’s failure to maintain the effectiveness of its internal controls in accordance with the requirements of the Sarbanes-Oxley Act could have a material adverse effect on its business. New Amneal could lose investor confidence in the accuracy and completeness of its financial reports, which could have an adverse effect on the price of its common stock. In addition, if New Amneal’s efforts to comply with new or changed laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against New Amneal and its business may be harmed.

If securities or industry analysts do not publish, or cease publishing, research or reports about New Amneal, its business or its market, or if they change their recommendations regarding the Class A common stock adversely, the Class A common stock price and trading volume could decline.

If a trading market for Class A common stock develops, the trading market for Class A common stock will be influenced by whether industry or securities analysts publish research and reports about New Amneal, its business, its market or its competitors and, if any analysts do publish such reports, what they publish in those reports. New Amneal may not obtain analyst coverage in the future. Any analysts that do cover New Amneal may make adverse recommendations regarding the Class A common stock, adversely change their recommendations from time to time, and/or provide more favorable relative recommendations about New Amneal’s competitors. If any analyst who may cover New Amneal in the future were to cease coverage of New Amneal or fail to regularly publish reports on New Amneal, or if analysts fail to cover New Amneal or publish reports about New Amneal at all, New Amneal could lose, or never gain, visibility in the financial markets, which in turn could cause the stock price or trading volume of the Class A common stock to decline.

 

47


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this prospectus are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about: (i) the ability of Impax and Amneal to integrate their businesses successfully and to achieve anticipated synergies, (ii) the possibility that other anticipated benefits of the Combination will not be realized, including without limitation, anticipated revenues, expenses, earnings and other financial results, and growth and expansion of New Amneal’s operations, and the anticipated tax treatment, (iii) possible disruptions from the Combination that could harm Impax’s and/or Amneal’s business, including current plans and operations, (iv) the ability of Impax or Amneal to retain, attract and hire talented personnel, (v) potential adverse reactions or changes to relationships with clients, employees, suppliers or other parties resulting from the announcement or completion of the combination, (vi) potential business uncertainty, including changes to existing business relationships, during the pendency of the Combination that could affect Impax’s or Amneal’s financial performance, (vii) certain restrictions during the pendency of the Combination that may impact Impax’s or Amneal’s ability to pursue certain business opportunities or strategic combination, (viii) continued availability of capital and financing and rating agency actions, (ix) legislative, regulatory and economic developments (including the impact of changes in the tax code as a result of recent federal tax legislation and uncertainty as to how some of those changes may be applied), (x) unpredictability and severity of catastrophic events, including, but not limited to, acts of terrorism or outbreak of war or hostilities, as well as management’s response to any of the aforementioned factors, and (xi) such other factors as are set forth in this prospectus under the heading “Risk Factors.” Any forward-looking statements in this prospectus reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Important factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this prospectus. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This prospectus also contains estimates, projections and other information concerning our industry, our business, and the markets in which we operate. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

 

48


Table of Contents

THE COMBINATION

On May 4, 2018, pursuant to the BCA, among other things: (i) the Impax Merger was effected; (ii) each Impax Share outstanding immediately prior to the Impax Merger Effective Time, other than Cancelled Shares, was converted into the right to receive one share of Class A common stock; (iii) Impax converted to a Delaware limited liability company named Impax Laboratories, LLC; (iv) Holdco contributed all of the equity interests of Impax to Amneal in exchange for certain equity interests of Amneal; (v) New Amneal issued shares of Class B common stock to the Existing Amneal Members, which were subsequently assigned and transferred to Amneal Holdings; and (vi) New Amneal became the managing member of Amneal.

Immediately following the Closing: (i) (A) Amneal Holdings held 100% of the Class B common stock, which represented approximately 75% of the voting power of the outstanding New Amneal Shares, and (B) Impax Stockholders immediately prior to the Closing held 100% of the Class A common stock, which represented approximately 25% of the voting power of the New Amneal Shares; (ii) (A) Amneal Holdings held approximately 75% of the Amneal Common Units and (B) Impax Stockholders indirectly, through their ownership in New Amneal, held approximately 25% of the Amneal Common Units; and (iii) the Amneal Common Units were exchangeable on a one-to-one basis for Class A common stock or Class B-1 common stock. The rights (including voting rights) of Class A common stock and Class B common stock are identical, except that Class B common stock has no economic rights and the rights of Class A common stock and Class B-1 common stock are identical, except that Class B-1 common stock has no voting rights (other than to elect the Class B-1 Director).

On May 4, 2018, Amneal Holdings caused Amneal to redeem (the “Closing Date Redemption”) (in accordance with the terms of the LLC Agreement) 6,886,140 of the Amneal Common Units issued to the Existing Amneal Members (and subsequently assigned and transferred to Amneal Holdings) in connection with the Combination for a like number of shares of Class A common stock covered by this prospectus, and intends to distribute such shares to certain direct and indirect members of Amneal Holdings who were or are employees of Amneal and to whom were previously issued (prior to the Closing) profit participation units in Amneal.

After giving effect to the Combination, the PIPE investment and the Closing Date Redemption, as of May 4, 2018, the holders of our Class A (including Amneal Holdings, to the extent of the Class A shares received in the Closing Date Redemption) and Class B-1 common stock hold 100% of the economic interests in us and approximately 43% of the voting power in us, and Amneal Holdings, through its ownership of all of the outstanding Class B common stock, holds no economic interest in us and the remaining approximately 57% of the voting power in us. We are a holding company, and following the Combination and the PIPE Investment, our principal assets are the Amneal Common Units, representing an aggregate approximately 43% economic interest in Amneal. The remaining approximately 57% economic interest in Amneal is owned by Amneal Holdings through its ownership of Amneal Common Units. We are the sole managing member of Amneal and, although we have a minority economic interest in Amneal, we have the sole voting power in, and control the management of, Amneal. Accordingly, we expect to consolidate the financial results of Amneal and report a non-controlling interest in our consolidated financial statements.

 

49


Table of Contents

USE OF PROCEEDS

We will not receive any cash proceeds from the offer and sale from time to time by the selling stockholders of any of the shares of Class A common stock that have been registered pursuant to this prospectus. The selling stockholders will receive all of the net proceeds from any such offer and sale.

 

50


Table of Contents

PRICE RANGE OF CLASS A COMMON STOCK

Our Class A common stock began trading on NYSE under the symbol “AMRX” on May 7, 2018. Prior to that time, there was no public market for our Class A common stock. The following table sets forth the high and low sale prices per share of our Class A common stock and of Impax’s common stock, which is equivalent in value to our shares of Class A common stock that were issued upon the consummation of the Combination, as reported on NASDAQ, for the periods indicated.

 

     High      Low  

New Amneal

     

Year Ended December 31, 2018

     

From May 7, 2018 to May 8, 2018

   $ 17.00      $ 14.14  

Impax

     

Year Ended December 31, 2015

     

First quarter

   $ 47.30      $ 30.20  

Second quarter

   $ 51.31      $ 44.44  

Third quarter

   $ 50.32      $ 33.27  

Fourth quarter

   $ 44.76      $ 34.53  

Year Ended December 31, 2016

     

First quarter

   $ 42.65      $ 30.73  

Second quarter

   $ 36.40      $ 28.01  

Third quarter

   $ 31.62      $ 21.72  

Fourth quarter

   $ 24.23      $ 12.75  

Year Ended December 31, 2017

     

First quarter

   $ 14.80      $ 8.00  

Second quarter

   $ 17.65      $ 12.15  

Third quarter

   $ 23.80      $ 15.10  

Fourth quarter

   $ 21.80      $ 15.85  

Year Ended December 31, 2018

     

First quarter

     $21.75      $ 17.25  

Second quarter (through May 4, 2018)

   $ 20.80      $ 17.40  

On May 4, 2018, the date of completion of the Combination, the last reported sale price of Impax’s common stock on NASDAQ was $18.30 per share. As of the date of this prospectus, we had approximately 24,000 holders of record of our Class A common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include beneficial owners whose shares may be held in trust by other entities.

 

51


Table of Contents

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. In addition, pursuant to our credit facilities, we are restricted from paying cash dividends. Moreover, the terms of any future debt agreements may preclude us from paying dividends. Any future determination to pay dividends will be made at the discretion of our board of directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects and any other factors deemed relevant by our board of directors. Investors should not purchase our Class A common stock with the expectation of receiving cash dividend.

 

52


Table of Contents

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF AMNEAL

The selected historical consolidated financial data of Amneal for each of the years ended December 31, 2017, 2016, and 2015, and as of December 31, 2017 and 2016 have been derived from Amneal’s audited consolidated financial statements and related notes, which are included in the section entitled “Index to Amneal Pharmaceuticals LLC and Subsidiaries Consolidated Financial Statements” included in this prospectus. The selected historical consolidated financial data for the year ended December 31, 2014 and as of December 31, 2015 have been derived from Amneal’s audited consolidated financial statements, which have not been included in this prospectus. The selected historical consolidated financial data for the year ended December 31, 2013 and as of December 31, 2014 and 2013 have been derived from the audited consolidated financial statements and related notes of Amneal’s immediate parent, Amneal Pharmaceuticals Holding Company, LLC (“APHC”), as adjusted to exclude the immaterial activities of APHC. These financial statements have not been included in this prospectus. The information set forth below is only a summary and is not necessarily indicative of the results of future operations of Amneal or New Amneal, and you should read the following information together with Amneal’s audited consolidated financial statements, the related notes and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Amneal” included in this prospectus.

 

    Years Ended December 31,  
(In thousands)   2017     2016     2015     2014     2013  

Statements of Income Data:

         

Net revenue

  $ 1,033,654     $ 1,018,225     $ 866,280     $ 785,263     $ 531,126  

Research and development and intellectual property legal development expenses

    178,068       193,865       153,713       118,539       73,606  

Total operating expenses

    281,075       312,610       265,525       229,847       132,287  

Operating profit

    245,103       284,881       236,158       218,575       100,815  

Net income attributable to Amneal Pharmaceuticals LLC and Subsidiaries

    167,648       207,378       169,451       176,928       91,776  

 

    As of December 31,  
(In thousands)   2017     2016     2015     2014     2013  

Balance Sheet Data:

         

Cash and cash equivalents

  $ 74,166     $ 27,367     $ 61,087     $ 117,522     $ 81,885  

Working capital

    475,050       501,041       365,454       325,989       207,501  

Total assets

    1,341,889       1,218,817       1,014,093       829,983       592,289  

Long-term debt, net

    1,355,274       1,119,268       911,043       711,914       424,902  

Long-term portion of financing obligations

    39,987       40,298       40,578       17,310       16,237  

Total liabilities

    1,717,471       1,394,762       1,200,966       927,670       616,375  

Total members’ (deficit) equity

    (375,582     (175,945     (186,873     (97,686     (24,086

 

53


Table of Contents

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF IMPAX

The selected historical consolidated financial data of Impax for each of the years ended December 31, 2017, 2016, and 2015, and as of December 31, 2017 and 2016 have been derived from Impax’s audited consolidated financial statements and related notes, which are included in this prospectus. The selected historical consolidated financial data for the years ended December 31, 2014 and 2013 and as of December 31, 2015, 2014, and 2013 have been derived from Impax’s audited consolidated financial statements, which have not been included in this prospectus. The information set forth below is a summary and not necessarily indicative of future results and should be read together with the other information contained in this prospectus, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Impax.

 

     Years Ended December 31,  
(In thousands, except per share data)    2017     2016     2015      2014      2013  

Statements of Operations Data:

            

Total revenues, net

   $ 775,787     $ 824,429     $ 860,469      $ 596,049      $ 511,502  

Research and development

     80,847       80,466       70,622        78,642        68,854  

Total operating expenses

     546,491       343,080       282,836        223,837        205,687  

(Loss) income from operations

     (402,692     (494,182     69,568        88,816        (6,387

Net (loss) income

     (469,287     (472,031     38,997        57,353        101,259  

Net (loss) income per share—Basic

   $ (6.53   $ (6.63   $ 0.56      $ 0.84      $ 1.51  

Net (loss) income per share—Diluted

   $ (6.53   $ (6.63   $ 0.54      $ 0.81      $ 1.47  

 

     As of December 31,  
(In thousands)    2017     2016      2015      2014      2013  

Balance Sheet Data:

             

Cash, cash equivalents and short-term investments

   $ 181,778     $ 180,133      $ 340,351      $ 414,856      $ 413,133  

Working capital

     341,317       309,817        495,312        516,927        505,852  

Total assets

     1,351,300       1,823,018        1,922,487        1,079,197        996,923  

Long-term debt

     769,524       813,545        424,595        —          —    

Total liabilities

     1,164,099       1,199,044        860,078        191,320        186,720  

(Accumulated deficit) retained earnings

     (372,445     98,192        570,223        531,226        473,873  

Total stockholders’ equity

     187,201       623,974        1,062,409        887,877        810,203  

 

54


Table of Contents

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

This unaudited pro forma condensed combined financial information and explanatory notes of New Amneal present how the consolidated financial statements of New Amneal may have appeared had the Transactions (as defined below) and PIPE Investment occurred at earlier dates. The unaudited pro forma condensed combined statement of operations for year ended December 31, 2017 combines the historical consolidated statement of operations of Impax and the historical consolidated statement of income of Amneal, giving effect to the Transactions and PIPE Investment as if Closing had occurred on January 1, 2017. The unaudited pro forma condensed combined balance sheet combines the historical consolidated balance sheets of Impax and Amneal as of December 31, 2017, giving effect to the Transactions and PIPE Investment as if Closing had occurred on December 31, 2017. See “Note 1. Description of the Transactions” herein for additional information on the Transactions and the PIPE Investment.

The following unaudited pro forma condensed combined financial statements of New Amneal present the combination of the historical financial information of Impax and Amneal adjusted to give effect to the Transactions and PIPE Investment, including the impacts of the following:

 

    the effects caused by the PIPE Investment on (1) the Tax Receivable Agreement entered into with Amneal Holdings, which provides for the payment by New Amneal to Amneal Holdings and its permitted transferees of 85% of the amount of the cash savings, if any, in U.S. federal and state income tax that New Amneal is deemed to realize as a result of (i) certain tax attributes that are created as a result of the redemption of Amneal Common Units for shares of Class A common stock or, in the case of the PIPE Investment, Class B-1 common stock, (ii) certain other tax attributes acquired from the acquisitions of Amneal Common Units and (iii) tax benefits attributable to payments made under the Tax Receivable Agreement (including imputed interest). If and when New Amneal subsequently realizes a related tax benefit, it will distribute the amount of any such tax benefit to Amneal Holdings and its permitted transferees in respect of their contribution;

 

    adjustments to the provision for income taxes and deferred income taxes reflecting the ownership of Amneal by New Amneal; and

 

    the allocation of net income (loss) between non-controlling interests and New Amneal based on New Amneal’s 40% ownership of Amneal following the consummation of the Transactions and the PIPE Investment.

The unaudited pro forma condensed combined financial information is presented for informational purposes only and does not purport to represent what the results of operations or financial condition would have been had the Transactions and PIPE Investment actually occurred on the dates indicated, nor do they purport to project the results of operations or financial condition for any future period or as of any future date.

The accompanying unaudited pro forma condensed combined financial statements of New Amneal have been prepared in accordance with Article 11 of SEC Regulation S-X. The Combination is considered a business combination and therefore will be accounted for under the acquisition method of accounting in accordance with ASC 805. Although Impax is considered the legal acquirer of Amneal, for accounting purposes, Amneal is considered to be acquiring Impax in the Combination. Consequently, this transaction will be accounted for as a reverse acquisition.

Amneal was determined to be the accounting acquirer based upon the terms of the BCA and other factors including:

 

   

immediately after the Combination, Impax Stockholders immediately prior to the effective time of the Combination owned approximately 25.0% of the aggregate number of New Amneal Shares, and Amneal Holdings owned approximately 75.0% of the aggregate number of New Amneal Shares, in

 

55


Table of Contents
 

each case calculated on a fully diluted basis for New Amneal and on an as converted to Class A common stock basis; and

 

    directors appointed by Amneal will hold a majority of board seats of New Amneal.

Under the acquisition method of accounting for purposes of these unaudited pro forma condensed combined financial statements, management of Impax and Amneal have determined a preliminary estimated purchase price, calculated as described in “Note 3. Estimated Purchase Price and Preliminary Purchase Price Allocation” to these unaudited pro forma condensed combined financial statements. The Impax assets acquired and liabilities assumed in connection with the Combination are recorded at their estimated acquisition date fair values. A final determination of these estimated fair values will be based on the actual net assets of Impax that exist as of the date of Closing. Differences between these preliminary estimates and the final acquisition accounting may occur and these differences could be material.

The historical combined financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the Transactions and the PIPE Investment, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial statements should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. In addition, the unaudited pro forma condensed combined financial statements were based on and should be read in conjunction with:

 

    the audited consolidated financial statements of Amneal as of December 31, 2017 and December 31, 2016 and for each of the three years in the period ended December 31, 2017 and the related notes, which are included elsewhere in this prospectus;

 

    the audited consolidated financial statements of Impax as of December 31, 2017 and December 31, 2016 and for each of the three years in the period ended December 31, 2017 and the related notes, which are included elsewhere in this prospectus.

The unaudited pro forma condensed combined financial statements do not reflect the costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies or revenue synergies that may result from the Transactions.

 

56


Table of Contents

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF DECEMBER 31, 2017

(in thousands)

 

    Historical
Amneal
    Historical
Impax
    Combination
adjustments
    Financing &
other
adjustments
    Non-controlling
interest
adjustments
    PIPE Investment
adjustments
    Pro forma  
    (Note 4)     (Note 4)     (Note 5)     (Note 6)     (Note 7)     (Note 8)        

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 74,166     $ 181,778     $ (956,877 )(a)    $ 964,746 (a)    $ —       $ (20,650 )(e)    $ 243,163  

Restricted cash

    3,756       —         —         —         —         —         3,756  

Trade accounts receivable—net

    351,367       233,228       —         —         —         —         584,595  

Inventories

    284,038       158,471       16,029 (b)      —         —         —         458,538  

Prepaid expenses and other current assets

    42,396       82,287       (1,540 )(h)      —         —         —         123,143  

Assets held for sale

    —         32,266       —         —         —         —         32,266  

Related party receivables

    16,210       —         —         —         —         —         16,210  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    771,933       688,030       (942,388     964,746       —         (20,650     1,461,671  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment—net

    486,758       124,813       —         —         —         —         611,571  

Goodwill

    26,444       207,329       (93,117 )(d)      —         —         —         140,656  

Intangible assets—net

    44,599       262,467       1,398,733 (c)      —         —         —         1,705,799  

Deferred income taxes—net

    898       —         429 (f)      79,431 (e)      —         239,443 (a,d)      320,201  

Other assets

    11,257       61,136       (856 )(e)      1,925 (d)      —         —         73,462  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,341,889     $ 1,343,775     $ 362,801     $ 1,046,102     $ —       $ 218,793     $ 4,313,360  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ (Deficit) Equity

             

Current liabilities:

             

Accounts payable

  $ 70,013     $ 81,093     $ —       $ —       $ —       $ —       $ 151,106  

Current portion of debt and capital lease obligations—net

    89,267       17,848       (17,848 )(i)      (62,171 )(b)      —         —         27,096  

Accrued expenses and other current liabilities

    124,981       240,602       (651 )(g)      (982 )(c)      —         —         363,950  

Liabilities held for sale

    —         7,170       —         —         —         —         7,170  

Related party payables

    12,622       —         —         —         —         —         12,622  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    296,883       346,713       (18,499     (63,153     —         —         561,944  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt and capital lease obligations—net

    1,356,099       769,524       (769,524 )(i)      1,258,563 (b)      —         —         2,614,662  

Deferred income taxes

    2,491       3,226       (3,226 )(f)      —         —         —         2,491  

Other long-term liabilities

    46,955       37,111       —         —         —         214,671 (a)      298,737  

Related party payables—long-term

    15,043       —         —         —         —         —         15,043  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,717,471       1,156,574       (791,249     1,195,410       —         214,671       3,492,877  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shareholders’ (Deficit) Equity

             

Members’ equity

    2,716       —         —         (2,716 )(g)      —         —         —    

Preferred stock

    —         —         —         —         —         —         —    

Impax common stock

    —         742       (742 )(j)      —         —         —         —    

Class A common stock

    —         —         733 (j)      —         —         345 (b)      1,078  

Class B-1 common stock

    —         —         —         —         —         123 (b)      123  

Class B common stock

    —         —         —         2,250 (g)      —         (468 )(b)      1,782  

Treasury stock

    —         (2,157     2,157 (j)      —         —         —         —    

Additional paid in capital

    8,562       559,632       812,112 (j)      (140,127 )(g)      (557,630     260,088 (c,d,e)      942,637  

Accumulated other comprehensive (loss) income

    (14,232     1,429       (1,429 )(j)      —         —         —         (14,232

(Accumulated deficit) retained earnings

    (382,785     (372,445     341,219 (j)      (8,715 )(g)      —         —         (422,726
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total New Amneal shareholders’ (deficit) equity

    (385,739     187,201       1,154,050       (149,308     (557,630     260,088       508,662  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interests

    10,157       —         —         —         557,630       (255,966 )(c)      311,821  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ (deficit) equity

    (375,582     187,201       1,154,050       (149,308     —         4,122       820,483  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ (deficit) equity

  $ 1,341,889     $ 1,343,775     $ 362,801     $ 1,046,102     $ —       $ 218,793     $ 4,313,360  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

57


Table of Contents

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2017

(in thousands except share and per share amounts)

 

     Historical
Amneal
    Historical
Impax
    Combination
adjustments
    Financing &
other
adjustments
    Non-controlling
interest
adjustments
    PIPE Investment
adjustments
    Pro forma  
           (Note 4)     (Note 5)     (Note 6)     (Note 7)     (Note 8)        

Net revenue

   $ 1,033,654     $ 775,787     $ —       $ —       $ —       $ —       $ 1,809,441  

Cost of goods sold

     480,033       432,464       —         —         —         —         912,497  

Depreciation and amortization

     27,443       102,659       31,116 (c)      —         —         —         161,218  

Cost of goods sold impairment charges

     —         96,865       —         —         —         —         96,865  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     526,178       143,799       (31,116     —         —         —         638,861  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative

     113,826       212,664       (20,774 )(m)      —         —         —         305,716  

Research and development

     157,550       77,663       —         —         —         —         235,213  

In-process research and development impairment charges

     —         192,809       —         —         —         —         192,809  

Legal settlement gain

     (21,467     —         —         —         —         —         (21,467

Fixed asset impairment charge

     —         82,508       —         —         —         —         82,508  

Change in fair value of contingent consideration

     —         (31,048     —         —         —         —         (31,048

Development contract settlement

     (7,845     —         —         —         —         —         (7,845

Other operating expenses

     39,011       11,895       —         —         —         —         50,906  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

     245,103       (402,692     (10,342     —         —         —         (167,931
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expense:

              

Interest expense, net

     (73,640     (54,627     53,412 (l)      (77,809 )(h)      —         —         (152,664

Foreign exchange gain

     29,092       —         —         —         —         —         29,092  

Loss on sale of certain international businesses

     (29,232     —         —         —         —         —         (29,232

Gain on sale of intangible assets

     —         17,236       —         —         —         —         17,236  

Other expense, net

     —         (10,878     —         —         —         —         (10,878
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (73,780 )      (48,269 )      53,412       (77,809 )      —         —         (146,446 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax

     171,323       (450,961     43,070       (77,809     —         —         (314,377

Income tax provision

     1,998       18,326       (9,897 )(k)      6,523 (f)      —         10,801 (d)      27,751  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     169,325       (469,287     52,967       (84,332     —         (10,801     (342,128
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to non-controlling interests

     1,677       —         —         —         (237,512     48,886 (c)      (186,949
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income(loss) attributable to New Amneal

   $ 167,648     $ (469,287 )    $ 52,967     $ (84,332 )    $ 237,512     $ (59,687 )    $ (155,179 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share (Note 9):

              

Basic

     $ (6.53           $ (1.29
    

 

 

           

 

 

 

Diluted

     $ (6.53           $ (1.29
    

 

 

           

 

 

 

Weighted-average common shares outstanding (Note 9):

              

Basic

       71,856,950               120,366,394  
    

 

 

           

 

 

 

Diluted

       71,856,950               120,366,394  
    

 

 

           

 

 

 

 

58


Table of Contents

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

1. DESCRIPTION OF THE TRANSACTIONS

Pursuant to the terms of the BCA, Impax and Amneal combined the generics and specialty pharmaceutical business of Impax with the generic drug development and manufacturing business of Amneal in a transaction that represents an opportunity to create a new generics company, New Amneal through the Combination. The Combination includes: (i) the Impax Merger, upon the completion of which each outstanding Impax Share (other than Cancelled Shares), was converted into the right to receive one share of Class A common stock, (ii) the conversion of Impax to a Delaware limited liability company named Impax Laboratories, LLC, (iii) the contribution by Holdco of all of the equity interests of Impax to Amneal in exchange for certain equity interests of Amneal, (iv) the recapitalization of Amneal pursuant to which the Existing Amneal Members received a single class of limited liability company interests in Amneal, which was subsequently assigned and transferred to Amneal Holdings, and (v) the issuance by New Amneal of shares of Class B common stock to the Existing Amneal Members, which was subsequently assigned and transferred to Amneal Holdings. As a result of the Combination, Impax Stockholders immediately prior to Closing collectively held approximately 25.0%, and Amneal Holdings held approximately 75.0%, of the voting and economic interests in the combined businesses of Impax and Amneal under New Amneal.

In order to finance the Combination, Amneal consummated the following transactions (collectively, the “Financing”, and together with the Combination, the “Transactions”): (i) borrowing of $2,700.0 million in aggregate principal amount of new senior secured term loans (the “New Term Facility,”), (ii) entry into a new senior secured asset based revolving credit facility with borrowing capacity of up to $500.0 million (the “New ABL Facility”) under which no amounts were drawn and outstanding upon Closing, and (iii) use the proceeds of the initial borrowings under the New Term Facility, as well as cash on hand, to finance the repayment of both companies’ historical outstanding debt obligations.

Immediately upon the consummation of the Transactions, Amneal Holdings owned a majority interest in New Amneal with an effective voting interest of approximately 75.0% on a fully diluted and as converted basis through their ownership of Class B common stock. Amneal Holdings also held a corresponding number of Amneal Common Units, which entitles it to approximately 75.0% of the economic interests in the combined businesses of Impax and Amneal. New Amneal owned an interest in Amneal of approximately 25.0% and was its managing member. As a result, New Amneal consolidates the financial results of Amneal and will report a non-controlling interest related to the Amneal Common Units held by Amneal Holdings in the consolidated financial statements. Upon the consummation of the Transactions, the Amneal Common Units will become redeemable at the option of the holder for shares of Class A common stock or, in the case of the PIPE Investment, Class B-1 common stock on a one-for-one basis or, at New Amneal’s election, their per-share cash equivalent.

In connection with the Transactions, Amneal Holdings has entered into definitive Share Purchase Agreements with select institutional investors, including TPG and funds affiliated with Fidelity, which provides for the PIPE Investment through a private placement of certain shares of Class A common stock and Class B-1 common stock. Pursuant to the terms of the purchase agreements, upon the Closing of the Combination, Amneal Holdings exercised its right to cause Amneal to redeem approximately 15.0% of their ownership interests in Amneal in exchange for a corresponding number of unregistered shares of Class A common stock or Class B-1 common stock. The shares of Class A common stock and Class B-1 common stock received in the Redemption were sold immediately following the Closing by Amneal Holdings to the PIPE Investors through a private placement at a per share purchase price of $18.25 for gross proceeds of $855.0 million. Following the PIPE Investment, the PIPE Investors owned collectively approximately 15% of the New Amneal Shares on a fully diluted and as converted basis, with TPG owning all outstanding shares of Class B-1 common stock.

As a result of the PIPE Investment, the voting and economic interest of approximately 75.0% held by Amneal Holdings immediately upon Closing, was reduced by approximately 15.0%. As such, the overall

 

59


Table of Contents

interest percentage held by non-controlling interest holders upon the consummation of the Combination and PIPE Investment will be approximately 60.0%.

 

2. BASIS OF PRESENTATION

The unaudited pro forma condensed combined financial statements present the pro forma condensed combined financial position and results of operations of New Amneal based upon the historical financial statements of Amneal and Impax, after giving effect to the Transactions and the PIPE Investment and are intended to reflect the impact of such on New Amneal’s consolidated financial statements.

The Combination will be accounted for as a business combination, with Amneal treated as the “acquirer” and Impax treated as the “acquired” company for financial reporting purposes. Under the acquisition method of accounting, the total estimated purchase price of an acquisition is allocated to the net tangible and intangible assets based on their estimated fair values. Such valuations are based on available information and certain assumptions that management of Impax and Amneal believe are reasonable. The preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed is based on various preliminary estimates. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing these unaudited pro forma condensed combined financial statements. Differences between these preliminary estimates and the final acquisition accounting, which will be based on the actual net tangible and identifiable intangible assets that exist as of the closing of the Transactions, may occur and these differences could be material. The differences, if any, could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and New Amneal’s future results of operations and financial position.

The pro forma financial statements include certain reclassifications to align the historical financial statement presentation of Impax and Amneal. See “Note 4. Reclassifications” herein for additional information on the reclassifications.

The unaudited pro forma condensed combined statement of operations does not reflect the non-recurring expenses expected to be incurred in connection with the Transactions, including fees to attorneys, accountants and other professional advisors, the write-off of deferred financing costs, and other transaction-related costs that will not be capitalized. However, the impact of such expenses are reflected in the unaudited pro forma condensed combined balance sheet as an increase to accumulated deficit and a corresponding decrease to cash.

Further, the unaudited pro forma condensed combined financial statements do not reflect the restructuring or integration activities that have yet to be determined or other costs that may be incurred to achieve cost or growth synergies of New Amneal. As no assurance can be made that the costs will be incurred or the cost or growth synergies will be achieved, no adjustment has been made.

 

3. ESTIMATED PURCHASE PRICE AND PRELIMINARY PURCHASE PRICE ALLOCATION

The pro forma adjustments include a preliminary allocation of the estimated purchase price of Impax to the estimated fair values of assets acquired and liabilities assumed at the acquisition date. The final allocation of the purchase price could differ materially from the preliminary allocation primarily because market prices, interest rates and other valuation variables will fluctuate over time and be different at the time of completion of the Transactions compared to the amounts assumed for the pro forma adjustments.

Estimated Purchase Price

Because of the change of control that results from the Combination, it is considered to be a reverse acquisition and Amneal is deemed to be acquiring Impax for accounting purposes. The measurement of the consideration transferred by Amneal for its interest in Impax is based on the fair value of the equity interest that Amneal would have had to issue to give the Impax shareholders the same percentage equity interest in

 

60


Table of Contents

New Amneal, which is equal to approximately 25.0%. However, the fair value of the equity of Impax is used to calculate the preliminary consideration for the Combination because it has a quoted market price, the Combination involves only the exchange of equity and Amneal is a private company whose value is difficult to measure. The estimated purchase price, net of cash acquired, is calculated as follows:

 

(in thousands except share amount and share price)       

Fully diluted Impax share number(1)

     74,998,720  

Impax closing share price as of May 4, 2018

   $ 18.30  
  

 

 

 

Preliminary equity consideration

     1,372,477  
  

 

 

 

Extinguishment of Impax’s historical debt obligations including accrued and unpaid interest

     925,651  

Less: cash acquired

     (181,778
  

 

 

 

Estimated purchase price, net of cash acquired

   $ 2,116,350  
  

 

 

 

 

(1) Represents the number of outstanding Impax shares on a fully diluted basis per the BCA, calculated as the sum of 73.5 million shares of Impax common stock issued and outstanding (including Impax restricted shares, assuming that tax withholding with respect to vesting of the Impax restricted shares is effectuated by net cashless settlement) plus 1.6 million shares to be issued related to outstanding options (the vesting of which will be accelerated as a result of change-in-control provisions within the award agreements).

The preliminary value of the consideration does not purport to represent the actual value of the total consideration that will be received by the Impax Stockholders when the Combination is completed. In accordance with U.S. GAAP, the fair value of the equity securities comprising the consideration will be measured on the closing date of the transactions at the then-current market price per share of Impax Common Stock. This requirement will likely result in a difference from the price per share assumed in the calculation, and that difference may be material. For example, an increase or decrease of 10% in the price of Impax Common Stock upon Closing from the price of Impax Common Stock assumed in these unaudited condensed combined pro forma financial statements would change the value of the preliminary consideration by approximately $137.2 million, which would be reflected as a corresponding increase or decrease to goodwill.

 

61


Table of Contents

Preliminary purchase price allocation

The following is a summary of the preliminary purchase price allocation giving effect to the Combination as if it had been consummated on December 31, 2017:

 

(in thousands)       

Trade accounts receivable—net

   $ 233,228  

Inventories

     174,500  

Prepaid expenses and other current assets

     80,747  

Assets held for sale

     32,266  

Property, plant and equipment

     124,813  

Goodwill

     114,212  

Intangible assets

     1,661,200  

Deferred income taxes—net

     429  

Other assets

     60,280  
  

 

 

 

Total assets acquired

     2,481,675  
  

 

 

 

Accounts payable

     81,093  

Liabilities held for sale

     7,170  

Accrued expenses and other current liabilities

     239,951  

Other long-term liabilities

     37,111  
  

 

 

 

Total liabilities assumed

     365,325  
  

 

 

 

Net assets acquired

   $ 2,116,350  
  

 

 

 

 

4. RECLASSIFICATIONS

Certain reclassifications have been made to amounts in the historical consolidated financial information of Impax and Amneal to conform the financial statement presentation, including reclassifying the following:

Impax reclassifications in the unaudited pro forma condensed combined statement of operations

 

    Year ended December 31, 2017  
(in thousands)   Before
Reclassification
    Reclassification     After
Reclassification
 

Impax Generics revenues—net

  $ 549,077     $ (549,077 )(a)    $ —    

Impax Specialty Pharma revenues—net

    226,710       (226,710 )(a)      —    

Net revenues

    —         775,787 (a)      775,787  

Cost of revenues

    535,123       (535,123 )(b)      —    

Cost of revenues impairment charges

    96,865       (96,865 )(c)      —    

Cost of goods sold

    —         432,464 (b,d)      432,464  

Cost of goods sold impairment charges

    —         96,865 (c)      96,865  

Depreciation and amortization

    —         102,659 (d)      102,659  

Selling, general and administrative

    216,270       (3,606 )(e)      212,664  

Research and development

    80,847       (3,184 )(e)      77,663  

Other operating expenses

    5,105       6,790 (e)      11,895  

Other, net

    (10,878     10,878 (f)      —    

Other expense, net

    —         (10,878 )(f)      (10,878

Provision for income taxes

    18,326       (18,326 )(g)      —    

Income tax provision

    —         18,326 (g)      18,326  

 

(a) Represents the reclassification of Impax Generic revenues – net and Impax Specialty Pharma revenues – net on Impax’s statement of operations into net revenues to conform to Amneal’s statement of income presentation.

 

62


Table of Contents
(b) Represents the reclassification of cost of revenues on Impax’s statement of operations into cost of goods sold to conform to Amneal’s statement of income presentation.
(c) Represents the reclassification of cost of revenues impairment charges on Impax’s statement of operations into cost of goods sold impairment charges to conform to Amneal’s statement of income presentation.
(d) Represents the reclassification of $102.7 million for the year ended December 31, 2017 reported in cost of revenues on Impax’s statement of operations into depreciation and amortization to conform to Amneal’s statement of income presentation.
(e) Represents the reclassification of depreciation and amortization reported in selling, general and administrative and research and development on Impax’s statement of operations into other operating expenses to conform to Amneal’s statement of income presentation.
(f) Represents the reclassification of other, net on Impax’s statement of operations into other expenses, net to conform to Amneal’s statement of income presentation.
(g) Represents the reclassification of provision for income taxes on Impax’s statement of operations into income tax provision to conform to Amneal’s statement of income presentation.

Impax reclassifications in the unaudited pro forma condensed combined balance sheet as of December 31, 2017

 

(in thousands)    Before
Reclassification
     Reclassification     After
Reclassification
 

Accounts receivable, net

   $ 240,753      $ (240,753 )(h)    $ —    

Trade accounts receivable—net

     —          233,228 (h,k)      233,228  

Inventory, net

     158,471        (158,471 )(i)      —    

Inventories

     —          158,471 (i)      158,471  

Other non-current assets

     61,136        (61,136 )(j)      —    

Other assets

     —          61,136 (j)      61,136  

Accrued expenses and other current liabilities

     248,127        (7,525 )(k)      240,602  

Current portion of long-term debt, net

     17,848        (17,848 )(l)      —    

Current portion of long-term debt and capital lease obligations—net

     —          17,848 (l)      17,848  

Long-term debt, net

     769,524        (769,524 )(m)      —    

Long-term debt and capital lease obligations—net

     —          769,524 (m)      769,524  

Other non-current liabilities

     37,111        (37,111 )(n)      —    

Other long-term liabilities

     —          37,111 (n)      37,111  

 

(h) Represents the reclassification of accounts receivable, net on Impax’s balance sheet into trade accounts receivable—net to conform to Amneal’s balance sheet presentation.
(i) Represents the reclassification of inventory, net on Impax’s balance sheet into inventories to conform to Amneal’s balance sheet presentation.
(j) Represents the reclassification of other non-current assets on Impax’s balance sheet into other assets to conform to Amneal’s balance sheet presentation.
(k) Represents the reclassification of the $7.5 million shelf-stock adjustments reported in accrued and other current liabilities on Impax’s balance sheet into trade accounts receivable—net to conform to Amneal’s balance sheet presentation.
(l) Represents the reclassification of current portion of long-term debt, net on Impax’s balance sheet into current portion of long-term debt and capital lease obligations, net to conform to Amneal’s balance sheet presentation.
(m) Represents the reclassification of long-term debt, net on Impax’s balance sheet into long-term debt and capital lease obligations, net to conform to Amneal’s balance sheet presentation.
(n) Represents the reclassification of other non-current liabilities on Impax’s balance sheet into other long-term liabilities to conform to Amneal’s balance sheet presentation.

 

63


Table of Contents

Amneal reclassifications in the unaudited pro forma combined balance sheet as of December 31, 2017

 

(in thousands)    Before
Reclassification
     Reclassification     After
Reclassification
 

Other assets

   $ 12,155      $ (898 )(o)    $ 11,257  

Deferred income taxes—net

     —          898 (o)      898  

 

(o) Represents the reclassification of deferred income tax assets reported in other assets on Amneal’s balance sheet into deferred income taxes—net to conform to Impax’s balance sheet presentation.

 

5. COMBINATION RELATED PRO FORMA ADJUSTMENTS

The unaudited pro forma condensed combined financial statements reflect the following adjustments related to the Combination:

 

  (a) Adjustment to cash represents the following:

 

(in thousands)    As of
December 31, 2017
 

Repayment of Impax’s historical debt obligations including accrued and unpaid interest

   $ (925,651

Cash paid for transaction costs expected to be incurred through the consummation of the Transactions(1)

     (31,226
  

 

 

 

Total adjustment to cash

   $ (956,877
  

 

 

 

 

(1) These fees are recorded against accumulated deficit solely for the purposes of this presentation. As there is no continuing impact of these transaction costs on New Amneal’s results, the fees are not included in the unaudited pro forma condensed combined statement of operations.

 

  (b) Adjustment to state acquired inventory, which consists primarily of raw materials and finished goods, at its preliminary fair value. The preliminary fair value considers replacement cost for materials and net realizable value for work-in-process and finished goods. New Amneal will recognize the increased value of inventory in cost of goods sold as the inventory is sold, which for purposes of these unaudited pro forma condensed combined financial statements is assumed to occur within the first year after the Transactions. As there is no continuing impact of the inventory adjustment to New Amneal’s results, the cost of goods sold associated with the increased inventory value is not included in the unaudited pro forma condensed combined statement of operations.

 

  (c) Adjustment to state acquired identifiable intangible assets, consisting of tradenames, acquired in-process research and development product rights and marketed product rights at their preliminary fair values, and to increase amortization expense accordingly. The estimated fair values were determined using the “income approach,” a valuation technique that estimates the fair value of an asset based on market participant expectations of the cash flows that an asset would generate over its remaining useful life. The following table presents information about the intangible assets:

 

          Amortization expense  
(in thousands)   Fair value     Year ended
December 31, 2017
 

Total acquired indefinite lived intangible assets

  $ 375,900     $ —    

Total acquired finite lived intangible assets(1)

    1,285,300       99,491  
 

 

 

   

 

 

 

Total acquired intangible assets

    1,661,200       99,491  

Less: Impax’s historical intangible assets

    (262,467     (68,375
 

 

 

   

 

 

 

Pro forma adjustment

  $ 1,398,733     $ 31,116  
 

 

 

   

 

 

 

 

64


Table of Contents

 

(1) The adjustment to amortization expense was determined using the straight line method over a weighted-average estimated useful life of 12.92 years.

With other assumptions held constant, a 10% change to the fair value of acquired finite lived intangible assets would result in an increase or decrease to amortization expense of $9.9 million annually.

 

  (d) Adjustment to eliminate Impax’s historical goodwill of $207.3 million and to recognize goodwill related to the proposed Combination of $114.2 million. Goodwill is calculated as the difference between the estimated purchase price and the fair value of identifiable tangible and intangible assets acquired net of liabilities assumed. The adjustment is preliminary and subject to change based upon final determination of the fair value of assets acquired and liabilities assumed and finalization of the purchase price.

 

  (e) Adjustment to eliminate $0.9 million of historical deferred financing fee assets associated with Impax’s historical revolving credit facility.

 

  (f) New Amneal will be subject to U.S. federal and state income taxes and will file income tax returns for U.S. federal and certain state jurisdictions. All tax attributes and related tax adjustments are recorded based on New Amneal’s proportionate share of its ownership interest in assets held directly by Amneal (a tax-transparent entity). Represents the estimated deferred tax impacts related to (i) acquisition accounting adjustments primarily as a result of the step-up in fair value of intangible assets and inventory, and (ii) the historical deferred taxes recorded by Impax that are allocable to the Existing Amneal Owners. The incremental deferred tax impacts were calculated based on the tax effect of the estimated step-up in book basis of the net assets of Impax, excluding the amount attributable to goodwill, using an estimated statutory tax rate of 23.5% (based on recently enacted U.S. tax law). This rate does not reflect New Amneal’s effective tax rate, which includes other items and may be significantly different than the rates assumed for purposes of preparing these statements.

 

  (g) Adjustment to eliminate $0.7 million of accrued interest associated with Impax’s historical debt obligations.

 

  (h) Adjustment to eliminate Impax’s historical deferred rent of $1.5 million, resulting from the recognition of escalating rent payments on a straight-line basis over the lease term as required by GAAP. The deferred rent balance is eliminated through acquisition accounting because it does not meet the definition of an acquired asset or assumed liability.

 

  (i) Adjustment to extinguish Impax’s outstanding debt obligations of $787.4 million which includes $137.6 million of debt discount and unamortized deferred financing fees. The cash to be paid for the extinguishment of Impax’s outstanding debt obligations totaled $925.0 million plus $0.7 million of accrued and unpaid interest, for a total cash payment of $925.7 million as described in Note 3. The difference between the cash to be paid and the carrying amount represents the loss on debt extinguishment from the write off of the debt discount and unamortized fees noted above of $137.6 million. The write-off of the debt discount and fees is recorded against accumulated deficit solely for the purposes of this presentation. As there is no continuing impact of the write-off on New Amneal’s results, the debt discount and fees are not included in the unaudited pro forma condensed combined statement of operations.

 

65


Table of Contents
  (j) Adjustment to the components of permanent equity represent the following:

 

     As of December 31, 2017  
(in thousands)    Eliminate
Historical Impax
Equity(1)
    Record the
Combination
Consideration
     Other
Equity
Adjustments(2)
    Total
Pro Forma
Adjustment
 

Preferred stock

   $ —       $ —        $ —       $ —    

Impax common stock

     (742     —          —         (742

Class A Common Stock

     —         733        —         733  

Class B Common Stock

     —         —          —         —    

Treasury stock, at cost

     2,157       —          —         2,157  

Additional paid-in capital

     (559,632     1,371,744        —         812,112  

Accumulated other comprehensive income

     (1,429     —          —         (1,429

(Accumulated deficit) retained earnings

     372,445       —          (31,226     341,219  
  

 

 

   

 

 

    

 

 

   

 

 

 

Subtotal—stockholders’ (deficit) equity

   $ (187,201   $ 1,372,477      $ (31,266   $ 1,154,050  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Represents the elimination of historical Impax shareholders’ (deficit) equity.
(2) Includes the estimated transaction costs expected to be incurred through the consummation of the Combination. These costs are recorded against accumulated deficit solely for the purposes of this presentation. As there is no continuing impact of these transaction costs on New Amneal’s results, the fees are not included in the unaudited pro forma condensed combined statement of operations.

 

  (k) New Amneal will be subject to U.S. federal and state income taxes and will file income tax returns for U.S. federal and certain state jurisdictions. All tax attributes and related tax adjustments are recorded based on New Amneal’s proportionate share of its ownership interest in assets held directly by Amneal (a tax-transparent entity). Adjustment to record the income tax impacts of (i) the pro forma adjustments, and (ii) the 75% share of Impax unadjusted income tax expense which is allocable to the Existing Amneal Owners. The incremental tax impacts were calculated using an estimated statutory tax rate of 37.1%. This rate does not reflect New Amneal’s effective tax rate, which includes other items and may be significantly different than the rates assumed for purposes of preparing these statements.

 

  (l) Adjustment to eliminate the historical interest expense associated with Impax’s historical debt obligations for the unaudited pro forma condensed combined statement of operations.

 

  (m) Represents the elimination of one-time transaction costs directly attributable to the Combination of $20.8 million for the year ended December 31, 2017.

 

66


Table of Contents
6. FINANCING AND OTHER RELATED PRO FORMA ADJUSTMENTS

The unaudited pro forma condensed combined financial statements reflect the following adjustments related to the Financing, the proceeds of which were used in part to fund the Combination:

 

  (a) Adjustment to cash represents the following:

 

(in thousands)    As of
December 31, 2017
 

Repayment of Amneal’s historical debt obligations including accrued and unpaid interest

   $ (1,454,142

Amounts borrowed under the New Term Facility

     2,700,000  

Cash paid for fees related to the New Term Facility

     (59,163

Cash paid for fees related to the New ABL Facility

     (1,925

Cash distribution to Existing Amneal Members’

     (220,024
  

 

 

 

Total adjustment to cash

   $ 964,746  
  

 

 

 

 

  (b) Adjustment to debt represents the following:

 

(in thousands)    As of
December 31,
2017
 

Current portion of debt:

  

Extinguishment of Amneal’s historical current debt obligations

   $ (89,171

Record current portion of the New Term Facility(1)

     27,000  
  

 

 

 

Total adjustment to current portion of debt

   $ (62,171
  

 

 

 

Debt, net of current portion:

  

Extinguishment of Amneal’s historical long-term debt obligations

   $ (1,355,274

Record noncurrent portion of the New Term Facility(1)

     2,673,000  

Less: financing fees

     (59,163
  

 

 

 

Total adjustment to debt, net of current portion

   $ 1,258,563  
  

 

 

 

 

(1) Pursuant to the terms of the credit agreement, Amneal is required to repay amounts borrowed under the New Term Facility in quarterly installments of 0.25% of the total principal amount through the maturity date, at which time the remaining principal balance will be due.

 

  (c) Adjustment to eliminate $1.0 million of accrued interest associated with Amneal’s historical debt obligations.

 

  (d) Adjustment to record the new deferred financing fee asset of $1.9 million associated with New ABL Facility.

 

  (e) New Amneal will be subject to U.S. federal and state income taxes and will file income tax returns for U.S. federal and certain state jurisdictions. All tax attributes and related tax adjustments are recorded based on New Amneal’s proportionate share of its ownership interest in assets held directly by Amneal (a tax-transparent entity). Represents an adjustment of $79.4 million as of December 31, 2017 to the unaudited pro forma condensed combined balance sheet. The adjustment records the historical deferred income taxes associated with assets held directly by Amneal that are allocable to New Amneal based on its proportionate 25.0% ownership interests in the assets held directly by Amneal using an estimated statutory rate of 23.5% (based on recently enacted U.S. tax law). This rate does not reflect New Amneal’s effective tax rate, which includes other items and may be significantly different than the rates assumed for purposes of preparing these statements.

 

67


Table of Contents
  (f) New Amneal will be subject to U.S. federal and state income taxes and will file income tax returns for U.S. federal and certain state jurisdictions. All tax attributes and related tax adjustments are recorded based on New Amneal’s proportionate share of its ownership interest in assets held directly by Amneal (a tax-transparent entity). Represents an adjustment of $6.5 million for the year ended December 31, 2017. The adjustments record the historical taxes associated with assets held directly by Amneal that are allocable to New Amneal based on its proportionate 25.0% ownership interests in the assets held directly by Amneal using an estimated statutory rate of 37.1%. This rate does not reflect New Amneal’s effective tax rate, which includes other items and may be significantly different than the rates assumed for purposes of preparing these statements.

 

  (g) Adjustment to the components of New Amneal equity represent the following:

 

     As of December 31, 2017  
(in thousands)    Distribution
to Existing

Amneal
Members(1)
    Rollover Historical
Amneal

Equity(2)
    Other Equity
Adjustments(3)
    Total Pro Forma
Adjustment
 

Members’ equity

   $ (220,024   $ 217,308     $ —       $ (2,716

Preferred stock

     —         —         —         —    

Class A common stock

     —         —         —         —    

Class B common stock

     —         2,250       —         2,250  

Treasury stock, at cost

     —         —         —         —    

Additional paid-in capital

     —         (219,558     79,431       (140,127

Accumulated other comprehensive loss

     —         —         —         —    

(Accumulated deficit) retained earnings

     —         —         (8,715     (8,715
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal—stockholders’ (deficit) equity

   $ (220,024   $ —       $ 70,716     $ (149,308
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents the distribution of all historical cash and cash equivalents of Amneal and its subsidiaries to the Existing Amneal Members immediately prior to the Closing of the Transactions.
(2) Represents the reclassification of member’s deficit to Class B common stock and additional paid in capital to reflect the impact of the new capital structure of New Amneal
(3) Includes the following (i) $8.7 million write-off of unamortized deferred financing fees related to Amneal’s historical debt obligations. The write-off of these fees is recorded against accumulated deficit solely for the purposes of this presentation. As there is no continuing impact of the write-off on New Amneal’s results, the fees are not included in the unaudited pro forma condensed combined statement of operations, and (ii) the $79.4 million impact of recording the historical Amneal taxes that will be allocable to New Amneal based on its proportionate 25.0% ownership interest in assets held directly by Amneal.

 

  (h) Adjustment to interest expense consists of the following:

 

(in thousands)    Year ended
December 31,
2017
 

Eliminate historical Amneal interest expense

   $ (71,108

Interest expense related to new borrowings(1)

     139,898  

Amortization of deferred financing fees(2)

     9,019  
  

 

 

 

Pro forma adjustment to interest expense

   $ 77,809  
  

 

 

 

 

(1) Comprised of interest expense related to the New Term Facility. The weighted average cash interest rate, calculated including the effects of quarterly principal payments under the New Term Facility, is approximately 5.13%.

A 0.125% change in the estimated interest rates on the variable rate indebtedness of $2,700.0 million at the closing of the Transactions, comprised of the New Term Facility, would result in an increase or decrease in the pro forma annual interest expense of approximately $3.4 million annually.

 

68


Table of Contents
7. NON-CONTROLLING INTEREST ADJUSTMENTS

Immediately upon the consummation of the Transactions, Amneal Holdings owned a majority interest in New Amneal with an effective voting interest of approximately 75.0% on a fully diluted and as converted basis through their ownership of Class B common stock. Amneal Holdings also held a corresponding number of Amneal Common Units which entitled them to approximately 75.0% of the economic interests in the combined businesses of Impax and Amneal. New Amneal owned an interest in Amneal of approximately 25.0% and was its managing member. As a result, New Amneal will consolidate the financial results of Amneal and will report a non-controlling interest related to the Amneal Common Units held by Amneal Holdings in the consolidated financial statements. Upon Closing, the Amneal Common Units became redeemable at the option of the holder for shares of Class A common stock or, in the case of the PIPE Investment, Class B-1 common stock on a one-for-one basis or, at New Amneal’s election, their per-share cash equivalent.

The non-controlling interest adjustments to the unaudited pro forma condensed combined balance sheet reflect the cumulative impact to New Amneal’s consolidated shareholders’ deficit as a result of non-controlling interests holding approximately 75.0% of the ownership rights of Amneal, as well as the corresponding impact to net loss attributable to non-controlling interests on the unaudited pro forma condensed combined statement of operations. As a result of the PIPE Investment, the voting and economic interest of approximately 75.0% held by Amneal Holdings immediately upon Closing, was reduced by approximately 15.0%. As such, the overall interest percentage held by non-controlling interest holders upon the consummation of the Combination and PIPE Investment was approximately 60.0%. Refer to “Note 8. PIPE Investment Related Pro Forma Adjustments” for information regarding the impact of the PIPE Investment on non-controlling interests. All non-controlling interest adjustments have been calculated on a pre-tax basis due to the fact that all tax attributes reflected in the unaudited pro forma condensed combined financial statements represent New Amneal’s proportionate ownership share in assets held directly by Amneal. Accordingly, income taxes associated with assets held directly by Amneal are only reflected in the consolidated financial statements of New Amneal to the extent of its 25% ownership interest in Amneal.

 

8. PIPE INVESTMENT RELATED PRO FORMA ADJUSTMENTS

The unaudited pro forma condensed combined financial statements reflect the following adjustments related to the PIPE Investment:

 

  (a) New Amneal will be subject to U.S. federal and state income taxes and will file income tax returns for U.S. federal and certain state jurisdictions. These adjustments reflect the recognition of additional deferred taxes in connection the Transactions related to historical temporary differences in the book basis as compared to the tax basis of assets held directly by Amneal that are now allocable to New Amneal, as well as the impact of the Transactions on New Amneal’s tax attributes.

In addition, New Amneal is a party to the Tax Receivable Agreement pursuant to which, New Amneal is required to pay to Amneal Holdings and its permitted transferees 85% of the applicable cash savings, if any, in U.S. federal and state income tax that are realized in certain circumstances as a result of certain tax attributes of their Amneal Common Units sold to New Amneal and that are created as a result of (i) the redemptions of their Amneal Common Units, and (ii) tax benefits attributable to payments made under this Tax Receivable Agreement. See “Ancillary Agreements Related to the Combination—Tax Receivable Agreement.”

The net deferred tax asset adjustment of $252.6 million, resulting from the PIPE Investment, and the $214.7 million adjustment to recognize the liability related to the Tax Receivable Agreement are assuming: (1) only the Redemption associated with the PIPE Investment, (2) a share price equal to $18.25 per share, (3) an estimated 23.5% effective tax rate (based on recently enacted U.S. tax law), (4) no material changes in tax law, (5) the ability to utilize tax attributes, and (6) future Tax Receivable Agreement and exchange agreement payments.

 

69


Table of Contents

The net impact of the adjustments to net deferred taxes and the liability for the Tax Receivable Agreement have been recorded as an increase to additional paid in capital, as these adjustments arise from equity transactions of New Amneal. Additionally, because the amounts under the Tax Receivable Agreement are the sole obligation of New Amneal, no amount is allocated to non-controlling interests.

We anticipate that we will account for the income tax effects resulting from future taxable redemptions of Amneal Common Units by Amneal Holdings and its permitted transferees for shares of Class A common stock or, in the case of the PIPE Investment, Class B-1 common stock or cash by recognizing an increase in deferred tax assets, based on the enacted tax rates at the date of each exchange. Further, management will evaluate the likelihood that New Amneal will realize the benefit represented by the deferred tax asset, and, to the extent it is estimated that it is more likely than not that New Amneal will not realize the benefit, the carrying amount of the deferred tax asset will be reduced by a valuation allowance.

 

  (b) Adjustment to record an $0.5 million increase in par value of issued and outstanding Class A common stock and Class B-1 common stock, along with a corresponding decrease in par value of issued and outstanding Class B common stock, as a result of the cancellation of the number of shares of Class B common stock delivered to New Amneal by Existing Amneal Members as part of the Redemption.

 

  (c) Represents the impact of the PIPE Investment on non-controlling interest and net loss allocable to non-controlling interest. The percentage of non-controlling interest is expected to decrease from 75.0% to approximately 60.0% as a result of the Redemption. All non-controlling interest adjustments have been calculated on a pre-tax basis due to the fact that all tax attributes reflected in the unaudited pro forma condensed combined financial statements represent New Amneal’s proportionate ownership share of Amneal. Accordingly, income taxes associated with assets held directly by Amneal are only reflected in the financial statements of New Amneal to the extent of its 40% membership interest in Amneal.

 

  (d) Represents a $13.1 million deferred tax liability adjustment (which is being netted against deferred tax assets for presentation purposes) as of December 31, 2017 to the unaudited pro forma condensed combined balance sheet and corresponding adjustment to the unaudited pro forma condensed combined statement of operations of a $10.8 million increase for the year ended December 31, 2017. The adjustments record the additional 15% of historical taxes associated with assets held directly by Amneal that will be allocable to New Amneal due to the increase in their ownership interest of Amneal to approximately 40.0% as a result of the Redemption and PIPE Investment.

 

  (e) Adjustment to record cash paid for transaction costs expected to be incurred as a result of the PIPE Investment. These fees are recorded against accumulated deficit solely for the purposes of this presentation. As there is no continuing impact of these transaction costs on New Amneal’s results, the fees are not included in the unaudited pro forma condensed combined statement of operations.

 

9. NEW AMNEAL EARNINGS PER SHARE INFORMATION

The unaudited pro forma combined basic and diluted earnings per share (“EPS”) for the year ended December 31, 2017 are based on pro forma net loss reflecting the adjustments discussed above divided by the basic and diluted weighted-average number of common shares outstanding. New Amneal has three classes of issued and outstanding common stock; Class A common stock, Class B-1 common stock and Class B common stock. Holders of Class A common stock and holders of Class B-1 common stock have substantially identical economic rights, including rights with respect to any declared dividends or distributions of cash or property, and the right to receive proceeds on liquidation or dissolution of the New Amneal after payment of outstanding indebtedness. The two classes have different voting rights for matters submitted to a vote of stockholders, with each holders of Class A common stock entitled to one vote per share while holders of Class B-1 common stock are not entitled to any voting rights. Holders of Class B common stock are not entitled to receive any dividends or distributions, but are entitled to one vote per

 

70


Table of Contents

share. At any time at the option of the holder, the shares of Class B-1 common stock are convertible into, and the Amneal Common Units underlying shares of Class B common stock are redeemable (with the accompanying cancellation of such shares of Class B common stock) for, shares of Class A common stock on a share-for-share basis. New Amneal has the option to require the holders of Class B-1 common stock to convert their shares into Class A common stock upon the earlier of one year from the date of Closing or when the holders of Class B-1 common stock appoint a director to the board of directors. In addition, shares of Class B-1 common stock will be automatically converted into a like number of shares of Class A common stock upon transfer to any person or entity who is not a permitted transferee.

The two class method has been utilized for calculating unaudited pro forma basic EPS due to the fact that both the Class A common stock and Class B-1 common stock are considered participating securities under ASC 260 - Earnings Per Share. The shares of Class B common stock have no rights to dividends or distributions, whether in cash or stock, and therefore are not deemed to be participating securities and are excluded from the unaudited pro forma basic EPS calculation. As the economic rights of both the Class A common stock and the Class B-1 common stock are identical, the unaudited pro forma combined basic EPS for Class A common stock and Class B-1 common stock is the same and is calculated based on the number of shares of Class A common stock and Class B-1 common stock that will be issued and outstanding following the close of the Transactions and PIPE Investment. These shares represent the shares of Class A common stock exchanged for the outstanding Impax Shares, and shares of Class A common stock and Class B-1 common stock issued in connection with the PIPE Investment.

The unaudited pro forma diluted EPS calculation should give effect to all potentially dilutive shares following the close of the Transactions and PIPE Investment, including: (i) shares issuable pursuant to outstanding stock options, based on the application of the treasury stock method, (ii) outstanding Class B common stock which will be cancelled upon the redemptions of Amneal Common Units, on a share-for-share basis of such redeemed Amneal Common Units for such number of Class A common stock, based on the application of the as-if converted method, and (iii) outstanding Class B-1 common stock that is convertible into Class A common stock on a share-for-share basis, based on the application of the as-if converted method. The conversion of Class B-1 common stock to Class A common stock results in the exchange of all shares of Class B-1 common stock outstanding, and therefore the two class method is not required for unaudited pro forma combined diluted EPS. Similarly, the redemption of all outstanding Amneal Common Units held by Amneal Holdings and its permitted transferees for Class A common stock results in the cancellation of all shares of Class B common stock outstanding. Upon the completion of such redemptions, there will be no Amneal Common Units held by outside investors, resulting in the reduction of the non-controlling interest to 0%. As such, the pro forma net loss attributable to non-controlling interests should be added back to the numerator for purposes of calculating unaudited pro forma diluted EPS as if the redemptions and cancellation of the Class B common shares had occurred at the beginning of the period.

The shares issuable pursuant to outstanding stock options, the redemption of the Amneal Common Units held by Amneal Holdings and its permitted transferees for shares of Class A common stock and the add back of the net loss attributable to non-controlling interests have been excluded from the calculation of unaudited pro forma diluted EPS because the effect would have been anti-dilutive.

 

71


Table of Contents

The unaudited pro forma basic and diluted EPS are calculated as follows:

 

(in thousands except share and per share data)    Year ended
December 31, 2017
 

Pro Forma Basic EPS

  

Pro forma net loss attributable to New Amneal

   $ (155,179

Pro forma basic weighted-average common stock outstanding(1)

     120,366,394  
  

 

 

 

Pro forma basic EPS

   $ (1.29
  

 

 

 

Pro Forma Diluted EPS

  

Pro forma net loss attributable to New Amneal

   $ (155,179

Pro forma net loss attributable to non-controlling interests

     —    
  

 

 

 

Pro forma net loss

     (155,179

Pro forma basic weighted-average common shares outstanding(1)

     120,366,394  

Pro forma dilutive effect of the redemptions of Amneal Common Units

     —    

Pro forma dilutive effect of New Amneal stock options

     —    
  

 

 

 

Pro forma diluted weighted-average common shares outstanding

     120,366,394  
  

 

 

 

Pro forma diluted EPS

   $ (1.29
  

 

 

 

 

(1) Represents the number of shares of Class A common stock and Class B-1 common stock that will be issued and outstanding following the close of the Transactions and PIPE Investment.

 

72


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS OF AMNEAL

The following discussion and analysis summarizes the significant factors affecting the results of operations, financial condition and liquidity position of Amneal as of and for the years ended December 31, 2017, 2016, and 2015, should be read in conjunction with the consolidated financial statements and related notes of Amneal beginning on page F-1 of this prospectus. The following discussion and analysis of the financial condition and results of operations of Amneal covers periods prior to the consummation of the Combination described elsewhere in this prospectus and does not reflect its effect on future periods. The Combination will result in financial results that are materially different from those reflected in the consolidated financial statements of Amneal that are included elsewhere in this prospectus. For an understanding of pro forma financial information including the effect of the Combination, see the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements.” The following discussion and analysis contains forward-looking statements that reflect Amneal’s plans, estimates and beliefs. Actual results could differ materially from those discussed in the forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.” Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors” beginning on page 9.

Unless otherwise indicated, the components reported in millions may not equal the total amount reported due to rounding. Percentages presented are calculated from the numbers in millions.

Overview

Amneal is a generic pharmaceutical company specializing in developing, manufacturing, marketing and distributing high-value generic pharmaceutical products across a broad array of dosage forms and therapeutic areas. Amneal currently markets over 125 product families in the United States and its marketed and pipeline generics portfolios cover an extensive range of dosage forms and delivery systems, including both immediate and extended release oral solids such as tablets, capsules and powders, liquids, sterile injectables, nasal sprays, inhalation and respiratory products, ophthalmics (which are sterile pharmaceutical preparations administered for ocular conditions), films, transdermal patches and topicals (which are creams or gels designed to administer pharmaceuticals locally through the skin). Amneal focuses on developing products with substantial barriers-to-entry as a result of complex drug formulations or manufacturing, legal and/or regulatory challenges. Focusing on these opportunities allows Amneal to offer FTF, FTM and other “high-value” products, which Amneal defines as products with zero to three generic competitors at time of launch. These products generally have limited competition at launch, tend to be more profitable and often have longer life cycles than other generic pharmaceuticals. As of December 31, 2017, Amneal had 156 products approved but not yet launched or pending FDA approval and another 123 products in various stages of clinical development. Over 58% of Amneal’s total generic pipeline consists of potential FTF, FTM and high-value products.

Amneal has an integrated, team-based approach to product development that combines its formulation, regulatory, legal, manufacturing and commercial capabilities.

Amneal was founded in 2002 by Chintu and Chirag Patel and is a limited liability company organized under the laws of Delaware. Since Amneal’s founding, Amneal has invested heavily in R&D and infrastructure in order to fuel future growth. As a result of these investments, as well as a continued focus on quality and customer service, Amneal has developed what it believes to be one of the largest generic product pipelines in the United States, as well as comprehensive development and manufacturing expertise and capability across all major dosage forms. This allows Amneal a greater degree of profitability, control over quality and agility in the face of changing market dynamics. Amneal has also developed vertically integrated API manufacturing capabilities, which it utilizes on a selective, product-by-product basis based on API scarcity or as alternate supply for strategically critical products. As of December 31, 2017, Amneal had launched 34 products in 2017, compared to 18 and 14 for the full years ended December 31, 2016 and 2015, respectively.

 

73


Table of Contents

Amneal’s product development strategy emphasizes potential FTF, FTM and other high-value products. A generic pharmaceutical product is considered a FTF product if the ANDA filed with respect to such product is the first to be filed for such product which contains a paragraph IV patent challenge to the branded form of the product (a “Paragraph IV Challenge”) under the Hatch-Waxman Act. FTF status provides a statutory 180-day exclusivity period if the Paragraph IV Challenge either renders a favorable court decision or the expiration of 30 months after the patent owner brings an infringement action within 45 days from receiving notification by the applicant of the patent challenge, and the ANDA is approved by the FDA. This exclusivity period may be awarded to one ANDA sponsor or, under certain circumstances, may be required to be shared with other applicable ANDA sponsors with Paragraph IV certifications. A generic product is considered a FTM product if it is the first marketed generic version of a branded pharmaceutical for reasons other than statutory exclusivity. Amneal defines other “high-value” products as those with zero to three generic competitors (not including Amneal) at the time of launch. Within Amneal’s pipeline of filed and in-development products, over 58% are intended to be FTF, FTM or otherwise high-value products. As a result, and in light of the significant investment Amneal makes in R&D and infrastructure, Amneal is well positioned to support sustainable profitability and growth with anticipated future product launches.

The principal source of growth for Amneal’s business over the last five years has been the launch of internally developed products in the United States, and it expects this trend to continue in the near future. As of December 31, 2017, Amneal’s generic product pipeline contained 279 products, of which 156 are approved but not yet launched or pending with the FDA and 123 are in active stages of development. Amneal believes the strength and breadth of its product pipeline will enable it to differentiate itself in a challenging environment for the generic manufacturing industry and to continue its track record of revenue and EBITDA growth. Additionally, because the majority of Amneal’s product launches over the next two years are with respect to generic products for which an ANDA has already been filed with the FDA, Amneal believes that such product launches carry significantly less development risk.

Amneal has a network of ten manufacturing sites and seven co-located R&D centers within the United States, India and Ireland, with broad dosage capability across oral solids, solutions, suspensions, creams, gels, ointments, nasal sprays, hormonals, patches, oral thin films, dry powder inhalers, metered dose inhalers, cytotoxics, injectables, ophthalmics, otics, and tablets / capsules, as described below. Amneal also has a distribution center in Glasgow, Kentucky and a packaging center in East Hanover, New Jersey. In addition, Amneal selectively manufactures API for a subset of its products, which helps to reduce the overall cost of manufacturing for Amneal’s products and gives Amneal greater control over its supply chain. Since 2002, Amneal has had 60 successful FDA inspections of its various facilities (including its distribution facility in Glasgow, Kentucky) and Amneal has not received any warning letters with respect to any of Amneal’s facilities. Amneal believes the operational capabilities that it has developed will allow Amneal to continue to grow its business in the future.

In the United States and the Commonwealth of Puerto Rico, Amneal markets its products primarily through wholesalers and distributors, retail pharmacies, mail-order pharmacies and directly into hospitals and institutions. The majority of Amneal’s generic pharmaceutical products are marketed through wholesalers. Amneal’s sterile injectable products, while generally also marketed through wholesalers, are occasionally sold directly to large hospitals and institutions. Some of Amneal’s wholesalers purchase products and warehouse them for retail drug stores, independent pharmacies and managed care organizations, such as hospitals, nursing homes, health maintenance organizations, clinics, pharmacy benefit management companies and mail-order customers.

In Europe and other foreign jurisdictions, Amneal sells its products to wholesalers, distributors, independent pharmacies and, in certain countries, directly to hospitals. Through a broad network of sales representatives, Amneal adapts its strategy to different markets as dictated by such market’s respective regulatory and competitive landscapes.

 

74


Table of Contents

Results of Operations

Years Ended December 31, 2017 and 2016:

Net Revenue

Amneal’s net revenue for the years ended December 31, 2017 and December 31, 2016 was $1,034 million and $1,018 million, respectively, representing an increase of $16 million or 2%.

New product launches in the United States for 2017 were responsible for a significant portion of Amneal’s net revenue growth in 2017, with such product launches contributing $193 million in net revenues led by Aspirin-Dipyridamole ER (launched in January), Oseltamivir (launched in July), Tepadina Injection (launched in April), Mometasone Furoate Nasal Spray (launched in April) and Capecitabine (launched in March). These new product launches illustrate Amneal’s diverse product pipeline, including its first internally developed nasal product, a growing injectables portfolio, and complex oral products.

Amneal’s U.S. base business net revenue, which excludes 2017 new product launches, decreased by $165 million period over period. Lidocaine Ointment, Metaxalone, Fluocinolone and Acyclovir net revenues declined due to market competition on both price and volume, with net revenue attributable to Naproxen Sodium declining due primarily to volume reduction, and net revenue attributable to Ibuprofen and Oxy/APAP declining due primarily to supply constraints. Such net revenue declines were partially offset by higher net revenue of Yuvafem, a generic to Estradiol Vaginal Tablets (launched in October 2016), and Diclofenac Sodium Gel (launched in March 2016). Also contributing to the decrease were higher re-procurement charges of $26 million from 2016 to 2017 attributable to supply constraints caused by vendor delays and lower production in Amneal’s New York manufacturing facilities due to renovations. Before re-procurement charges and the erosion of three semi-exclusive products that experienced competition in 2017, Amneal’s U.S. base business decreased 9%, which consisted of price declines of 16%, partially offset by volume growth of 7%.

Amneal’s international net revenue decreased by $12 million period over period due primarily to the divestitures of (i) Amneal’s Australian business in August 2017 and (ii) Amneal’s Spain and Nordics businesses in September 2017, offset slightly by new product launches in Germany.

Gross Profit and Gross Margin

Gross profit and gross margin for the years ended December 31, 2017 and December 31, 2016 were $526 million and 51%, and $597 million and 59%, respectively. The decrease in gross margin for the year ended December 31, 2017 from the same period in 2016 of 8% was primarily a result of optimization expenses incurred amounting to $24 million or a gross margin decrease of approximately 3%. In 2017, Amneal began and completed a project to upgrade certain older manufacturing facilities in New York to optimize its manufacturing footprint. Such optimization expenses were incurred as internal resources and were deployed for these upgrades or were idle and production was lower than capacity. In addition, certain re-procurement charges were incurred as a result of lower production. The manufacturing facility upgrades were completed and these costs are not expected to continue in the future. Additionally, Amneal’s gross margins during the years ended December 31, 2017 were impacted by (i) higher depreciation / lease expense from equipment and capital expenditures and (ii) lower production of certain of Amneal’s products for which API was temporary unavailable and has since been resolved.

Gross margin of Amneal’s products decreased from 2016 to 2017 by approximately 3%. This decrease is primarily the result of (i) lower pricing due to increased competition on certain of Amneal’s products and (ii) price reductions attributable to the continued consolidation of Amneal’s customers. These declines in gross margin were partially offset by Amneal’s launch of certain high-value products.

 

75


Table of Contents

Selling, General and Administrative

Amneal’s selling, general and administrative (“SG&A”) expenses for the years ended December 31, 2017 and December 31, 2016 were $104 million and $115 million, respectively. SG&A expenses for 2016 included a legal contract settlement payment of $2.8 million payable pursuant to a former development partner. Excluding this settlement, SG&A expenses decreased by $8 million or 7%. This decrease in SG&A from 2016 to 2017 was primarily due to lower sales expenses, and salaries and benefits as a result of the divestitures of (i) Amneal’s Australian business in August 2017 and (ii) Amneal’s Spain and Nordics businesses in September 2017, and additional resources being converted to R&D activities in Ireland to support the development of the inhalation products. Also, professional fees declined legal settlements achieved. These declines in SG&A were partially offset by higher freight costs.

Research and Development

R&D expenses for the years ended December 31, 2017 and December 31, 2016 were $158 million and $168 million, respectively, representing a decrease of $10 million or 6%. This decrease was the result of lower material and supplies costs, lower external development costs due to the timing of certain projects, and lower exhibit batch product costs as more of Amneal’s projects in 2017 were performed in India, which has lower production costs compared to the United States. This decrease was partially offset by higher patient study (bio-equivalence) costs due to timing of such studies, and salaries and benefits to support escalating the development of inhalation products in Ireland.

Intellectual Property Legal Development Expenses

Amneal’s intellectual property legal development expenses for the years ended December 31, 2017 and December 31, 2016 were $21 million and $26 million, respectively, representing a decrease of $5 million or 19%. This decrease was the result primarily of reduced expenses related to trials on patent challenges during 2017. Intellectual property development expenses relate to legal challenges of innovator’s patents for invalidity or non-infringement, which are customary in the generic pharmaceutical industry, and are incurred predominantly during development of a pharmaceutical product and prior to regulatory approval of such product. Associated costs include, but are not limited to, formulation assessments, patent challenge opinions and strategy, and litigation expenses to defend the intellectual property supporting Amneal’s regulatory filings.

Depreciation

Amneal’s depreciation expense for the years ended December 31, 2017 and December 31, 2016 was $18.5 million and $14.5 million, respectively, representing an increase of $4.0 million or 28%. The increase was due primarily to a full year in 2017 of depreciation from Amneal’s new offices placed into service in August 2016 to support Amneal’s expanded operations for its New York manufacturing facilities. In addition, those expanded facilities became operational in third quarter of 2017.

Patent Litigation Settlements Gain

During the year ended December 31, 2016, Amneal received cash payments of $11.0 million in the aggregate in connection with the settlement of certain patent infringement matters with respect to Amneal’s ANDA product filings. Patent challenges against innovator patents are customary in the generic pharmaceutical industry. Amneal did not have patent litigation settlements where cash was received during the year ended December 31, 2017.

Development Contract Settlement

Pursuant to a product development agreement, Amneal and Kashiv, a related party, agreed to collaborate on the development and commercialization of Oxycodone HCI ER Oral Tablets. Under the agreement, this product

 

76


Table of Contents

is owned by Kashiv, with Amneal acting as the exclusive marketing partner and as Kashiv’s agent for filing the product ANDA and the leader of all services regarding intellectual property litigation. In addition, Amneal was also responsible for assuming control of and managing all aspects of the patent litigation arising from the filing of the ANDA, including selecting counsel and settling such proceeding (subject to Kashiv’s consent). In December 2017, Amneal and Kashiv terminated the product development agreement and pursuant to the termination and settlement of the agreement, Kashiv agreed to pay Amneal $7.8 million, an amount equal to the legal costs incurred by Amneal related to the defense of the ANDA.

Legal Settlement Gain

In July 2017, Amneal entered into a settlement agreement regarding one of its generic pharmaceutical products, Buprenorphine and Naloxone, pursuant to which Amneal received a settlement payment of $25 million, resulting in a net gain of $21.5 million after legal fees. Amneal filed a claim against the innovator of Suboxone, a combination of active pharmaceutical ingredients Buprenorphine and Naloxone, alleging anti-competitive conduct resulting in lost profits during the time period in which Amneal was restricted from entering the market to sell its generic version of Suboxone. There were no legal settlement gains for the year ended December 31, 2016.

Loss on Sale of Certain International Businesses

Australian Business Divestiture:

On August 31, 2017, Amneal consummated a transaction to sell 100% of the capital stock of its Australian subsidiary, Amneal Pharma Pty Ltd, to Arrow Pharmaceuticals Pty Ltd for cash consideration of $9.9 million. As a result of the sale, Amneal recognized a loss of $24.0 million, inclusive of divestiture costs. There were no divestitures for the years ended December 31, 2016.

Spain / Nordics Divestiture:

On September 30, 2017, Amneal consummated a transaction to sell 100% of the capital stock, and certain marketing authorizations and associated dossiers of its Amneal Nordic ApS and Amneal Pharma Spain S.L. subsidiaries to Aristo Pharma GmbH for cash consideration of $8.4 million. As a result of such sales, Amneal recognized a loss of $5.2 million. There were no divestitures for the years ended December 31, 2016.

Acquisition and Transaction-Related Expenses

In the ordinary course of its business, Amneal consummates certain business combinations, acquisitions or divestitures and, in connection therewith, incurs acquisition-related costs. Acquisition-related costs are expensed as incurred and amounted to $0.3 million for the year ended December 31, 2017.

In addition, as a result of the Combination, Amneal recognized transaction-related expenses. A total of $9.1 million in transaction-related expenses were incurred for the year December 31, 2017. There were no such expenses for the years ended December 31, 2016.

Interest Expense

Amneal’s interest expense for the years ended December 31, 2017 and December 31, 2016 was $71 million and $56 million, respectively, representing an increase of $15 million, or 27% from 2016 to 2017. The higher interest expense in 2017 was due primarily to increased borrowings which occurred in both April 2017 and May 2016 under Amneal’s term and revolving credit facilities, and higher amortization of debt issuance costs.

Foreign Exchange Gain/Loss

Amneal’s foreign currency transaction gains and losses are included in its determination of net income in Amneal’s consolidated statements of income as a component of Total other expense, net. Such foreign currency

 

77


Table of Contents

transaction gains and losses include fluctuations related to long term subsidiary loans, primarily to India, Switzerland, Australia and Ireland that are payable in the foreseeable future. Transaction gains were $29.1 million for the year ended December 31, 2017, compared to transaction losses of $14.1 million for the year ended December 31, 2016, representing a variation of $43.2 million from 2016 to 2017. The strengthening of certain foreign currencies, primarily in Switzerland, Ireland and India, against the U.S. Dollar, coupled with additional loans to these entities from Amneal, resulted in the significant transaction gains in foreign currency during the year ended December 31, 2017 compared to transaction losses during the same period in 2016.

Loss on Extinguishment and Modification of Debt

In April 2017, Amneal executed Amendment No. 6 to its credit facility, which provided for (i) incremental borrowing on Amneal’s term loan credit facility, and (ii) expansion of the borrowing capacity under Amneal’s revolving facility. As a result of the amendments, Amneal recorded a $2.5 million charge from the extinguishment and modification of debt due to incurring third-party debt issuance costs. There were no similar charges for the year ended December 31, 2016.

Income Tax Provision

The operations of Amneal are conducted through a limited liability company that is treated as a partnership for U.S. federal income tax purposes. All U.S. federal income tax benefits and/or liabilities of Amneal are passed through to its members. Amneal provides for a tax provision in the various foreign jurisdictions in which it operates.

Amneal’s income tax expense for the years ended December 31, 2017 and December 31, 2016 was $2.0 million and $5.4 million, respectively, representing a decrease of $3.4 million, or 63%. The decrease was due primarily to lower earnings in India from product sales to the United States and the effects of certain adjustments recorded in 2017.

Non-GAAP Financial Measures

EBITDA, or earnings before interest, taxes, depreciation and amortization, and adjusted EBITDA are used and provided by Amneal as non-GAAP financial measures. Adjusted EBITDA is intended to provide additional information on Amneal’s performance, operations and profitability. Adjustments to Amneal’s GAAP figures as well as adjusted EBITDA exclude interest expense, loss on extinguishment and modification of debt, income tax provision, depreciation and amortization, legal contract settlement, optimization expense, pro-forma royalty expense, loss of specified international entities, loss on sale of certain international businesses, acquisition and transaction-related costs, foreign exchange gain/loss, severance and non-controlling interest. Certain other special items or substantive events may also be included in the non-GAAP adjustments periodically when their magnitude is significant within the periods incurred. Amneal maintains an established non-GAAP cost policy that guides the determination of what costs will be excluded in non-GAAP measures. Amneal believes that these non-GAAP financial measures, when considered together with the GAAP figures, can enhance an overall understanding of Amneal’s financial and operating performance. The non-GAAP financial measures are included with the intent of providing investors with a more complete understanding of Amneal’s historical financial results and trends and to facilitate comparisons between periods and with respect to projected information. In addition, these non-GAAP financial measures are among the indicators Amneal’s management uses for planning and forecasting purposes and measuring Amneal’s performance. These non-GAAP financial measures should be considered in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The non-GAAP financial measures used by Amneal may be calculated differently from, and therefore may not be comparable to, non-GAAP financial measures used by other companies.

 

78


Table of Contents

Reconciliations of reported GAAP net income to EBITDA and adjusted EBITDA are as follows (in millions):

 

     Years Ended December 31,  
     2017      2016  

Net Income

   $ 169.3      $ 209.4  

Adjusted to add (deduct):

     

Interest expense

     71.1        56.0  

Loss on extinguishment and modification of debt

     2.5        —    

Income tax provision

     2.0        5.4  

Depreciation and amortization

     45.9        33.0  
  

 

 

    

 

 

 

EBITDA

     290.8        303.8  

Adjusted to add (deduct):

     

Legal contract settlement(1)

     —          2.8  

Optimization expense(2)

     24.3        —    

Pro-forma royalty expense(3)

     8.7        4.5  

Loss of specified international entities(4)

     4.1        15.7  

Loss on sale of certain international businesses(4)

     29.2        —    

Acquisition and transaction-related costs

     9.4        0.1  

Foreign exchange (gain) loss

     (29.1      14.1  

Severance

     0.2        1.9  

Non-controlling Interest

     (1.6      (2.0
  

 

 

    

 

 

 

Adjusted EBITDA

   $ 336.0      $ 340.9  
  

 

 

    

 

 

 

 

(1) In December 2016, Amneal entered into an agreement with a former development partner to settle a contract dispute. The total amount of the settlement was $2.8 million.
(2) Optimization expenses were incurred (expensed as period costs) while upgrading Amneal’s New York manufacturing facilities to meet the optimized standards of its new infrastructure. Such optimization expenses were incurred as internal resources deployed for these upgrades or were idle and production was lower than capacity. In addition, certain re-procurement charges were incurred as a result of lower production.
(3) Amneal has the commercial rights to distribute Estradiol Vaginal Tablets (“Estradiol”), sold under the tradename Yuvafem® and owns the full product rights for Aspirin/Dipyridamole ER (“ADip”). Both of the products are marketed by Amneal and respective royalties are paid to the development partner Kashiv Pharmaceuticals, LLC (“Kashiv”), a related party. On June 29, 2017, Amneal and Kashiv entered into a product acquisition and royalty stream purchase agreement under which Amneal acquired all rights including the regulatory information related to Estradiol and the ANDA. Amneal also reacquired the royalty rights associated with ADip. As a result of such purchases, Amneal added back the royalties for these products that related to historical periods.
(4) In the third quarter of 2017, Amneal sold certain international businesses (including certain of its businesses in Australia, Spain and the Nordics). Amneal added back the losses related to these entities for both periods presented, and added back the loss on sale of these international businesses.

Net Income

Amneal’s net income for the years ended December 31, 2017 and December 31, 2016 was $169 million and $209 million, respectively, representing a decrease of $40 million or 19%. Net income as a percentage of net revenue for the years ended December 31, 2017 and December 31, 2016 was 16% and 21%, respectively.

 

79


Table of Contents

Adjusted EBITDA

Amneal’s adjusted EBITDA for the years ended December 31, 2017 and December 31, 2016 was $336 million and $341 million, respectively, representing a decrease of $5 million or 1%. Adjusted EBITDA as a percentage of net revenue for the years ended December 31, 2017 and December 31, 2016 was 32% and 33%, respectively.

Years Ended December 31, 2016 and 2015

Net Revenue

Amneal’s net revenue for the years ended December 31, 2016 and December 31, 2015 was $1,018 million and $866 million, respectively, representing an increase of $152 million, or 18%.

New product launches in the United States in 2016 were responsible for a significant portion of Amneal’s net revenue growth, with such products contributing $153 million in 2016, led by Yuvafem (launched in October), Diclofenac Sodium Gel (launched in March), Aripiprazole Tablets (launched in July) and Fosphenytoin Sodium Injection (launched in August).

Amneal’s U.S. base business net revenue, which excludes 2016 new product launches, decreased by $23 million from 2015 to 2016. Lower net revenue was attributable to Buprenorphine and Naloxone, Metaxalone, Oxycodone/APAP, Flecainide, Fluocinolone, Hydrocodone/APAP and Atovaquone, as a result of competition entering the market at the end of 2015 and early 2016, and supply constraints of EEMT, and partially offset by higher net revenue attributable to Lidocaine Ointment (launched in November 2015) and Omega-3 Caps (launched in December 2015). Overall, the decline in net revenue for Amneal’s U.S. base business of 3% from 2015 to 2016 consisted of price declines of 11%, partially offset by volume growth of 8%.

Amneal’s international net revenue grew by $22 million from 2015 to 2016, mostly in Australia from Amneal’s acquisition of the Actavis Australian business in May 2015, and organic growth in the UK and Germany, primarily as a result of Amneal’s new product launches.

Gross Profit and Gross Margin

Amneal’s gross profit and gross margin for the years ended December 31, 2016 and December 31, 2015 were $597 million and 59%, and $502 million and 58%, respectively. The increase in Amneal’s gross margin from 2015 to 2016 of 1% was due primarily to Amneal’s launch of certain high-value products and lower facility ramp-up costs. In 2015, Amneal began production activities in its Piscataway, New Jersey facility and incurred ramp-up costs to ready the facility for production. These costs were reported as period costs in 2015 and no such costs were incurred in 2016. Gross margin improvement in 2016 was partially offset by U.S. base business price reductions and certain inventory write-off charges taken in Australia, primarily related to inventory purchased in the Actavis Australia acquisition for product that would not be sold before expiry.

Selling, General and Administrative

Amneal’s SG&A expenses for the years ended December 31, 2016 and December 31, 2015 were $115 million and $97 million, respectively. SG&A expenses for 2016 included a settlement payment of $2.8 million payable pursuant to a former development partner of Amneal. Excluding this settlement, SG&A expenses increased by $15 million, or 15%. The increase in Amneal’s SG&A expenses for 2016 was primarily due to an increase in personnel-related costs to support of the overall growth of Amneal’s business, both in the United States and internationally, costs related to product specific Risk Evaluation and Mitigation Strategies (“REMS”) programs, and professional fees. Amneal’s marketing costs were higher in 2016 compared to 2015 due to its promotional programs to expand the Yuvafem market, launched in October 2016, as well as costs incurred to support sales of injectables through institutional market channels.

 

80


Table of Contents

Research and Development

Amneal’s R&D expenses for the years ended December 31, 2016 and December 31, 2015 were $168 million and $137 million, respectively, representing an increase of $31 million or 23%. Overall, the increase was due primarily to Amneal’s continued efforts to invest in its product pipeline in a measured way for continued growth both in the United States and internationally. Amneal’s increased spend in 2016 primarily related to additional projects requiring expanded infrastructure such as personnel, lab supplies and production support as well as higher materials and sample spend compared to 2015. Higher materials spend in 2016 was driven by Amneal’s expansion into multiple dosage forms and increased sourcing of material and samples in support of development activity including exhibit batch production.

Intellectual Property Legal Development Expenses

Amneal’s intellectual property legal development expenses for the years ended December 31, 2016 and December 31, 2015 were $26 million and $17 million, respectively, representing an increase of $9 million or 53%. The increase from 2015 to 2016 related primarily to additional ANDA regulatory filings subject to patent challenges, many of which took place in the trial phase which is often the most costly phase of the patent challenge process. Intellectual property legal development expenses relate to legal challenges of innovator’s patents for invalidity or non-infringement, which are customary in the generic pharmaceutical industry, and are incurred predominately during development and prior to regulatory approval.

Depreciation

Amneal’s depreciation expense for the years ended December 31, 2016 and December 31, 2015 was $14.5 million and $10.4 million, respectively, representing an increase of $4.1 million or 39%. The increase from 2015 was due primarily to depreciation from various assets placed into service, including: (i) R&D facilities and equipment for injectable, inhalation and topical products, (ii) new revenue management software, and (iii) an additional distribution warehouse.

Member Units Purchase

In May 2015, Amneal purchased membership units from certain of its employees for an aggregate purchase price of $12.5 million in cash. The purchased membership units were originally issued through a profit participation plan established for a select group of employees in recognition of their past and continued service to Amneal. The purchased membership units were purchased at the discretion of Amneal’s management and no annual purchase program was adopted. Amneal did not purchase any membership units in 2016.

Patent Litigation Settlement Gain

During the years ended December 31, 2016 and December 31, 2015, Amneal received aggregate cash payments of $11.0 million and $8.7 million, respectively, with respect to the settlement of certain patent infringement matters with respect to its ANDA product filings.

Interest Expense

Amneal’s interest expense for the years ended December 31, 2016 and December 31, 2015 was $56 million and $46 million, respectively, representing an increase of $10 million or 22% from 2015 to 2016. The higher expense was due primarily to increased borrowings under Amneal’s term loan facility in 2016, partially offset by a lower interest rate on borrowings under Amneal’s term loan credit facility by 0.5% effective June 2015.

Foreign Exchange Loss

Amneal’s foreign currency transaction gains and losses are included in the determination of net income in Amneal’s consolidated statements of income as a component of Total other expense, net. Such foreign currency

 

81


Table of Contents

transaction gains and losses include fluctuations related to long term subsidiary loans, primarily to India, Switzerland, Australia and Ireland that are payable in the foreseeable future. Amneal’s transaction losses were $14.1 million and $12.2 million for the years ended December 31, 2016 and December 31, 2015, respectively, representing an increase in foreign currency losses of $1.9 million.

Loss on Extinguishment and Modification of Debt

In April 2015 and June 2015, Amneal executed Amendments No. 3 and 4 to its credit facility, which provided for (i) incremental borrowings on the term loan, reduction of quarterly principle payments and reduction of interest rate of Amneal’s term loan, and (ii) expansion of the borrowing capacity under Amneal’s revolving facility. As a result of the amendments, Amneal recorded a $2.6 million charge from the extinguishment and modification of debt due to the write-off of unamortized debt issuance costs.

Income Tax Provision

The operations of Amneal are conducted through a limited liability company that is treated as a partnership for United States federal income tax purposes. All United States federal income tax benefits and/or liabilities of Amneal are passed through to its members. Amneal provides for a tax provision in the various foreign jurisdictions in which it operates.

Amneal’s income tax expense for the years ended December 31, 2016 and December 31, 2015 was $5.4 million and $5.0 million, respectively, representing an increase of $0.4 million, or 8%. The increase was due primarily to higher earnings in India.

Non-GAAP Financial Measures

EBITDA, or earnings before interest, taxes, depreciation and amortization, and adjusted EBITDA are used and provided by Amneal as non-GAAP financial measures. Adjusted EBITDA is intended to provide additional information on Amneal’s performance, operations and profitability. Adjustments to Amneal’s GAAP figures as well as adjusted EBITDA exclude interest expense, loss on extinguishment and modification of debt, income tax provision, depreciation and amortization, legal contract settlement, member units purchase, pro-forma royalty expense, loss of specified international entities, acquisition-related costs, foreign exchange loss, severance and non-controlling interest. Certain other special items or substantive events may also be included in the non-GAAP adjustments periodically when their magnitude is significant within the periods incurred. Amneal maintains an established non-GAAP cost policy that guides the determination of what costs will be excluded in non-GAAP measures. Amneal believes that these non-GAAP financial measures, when considered together with the GAAP figures, can enhance an overall understanding of Amneal’s financial and operating performance. The non-GAAP financial measures are included with the intent of providing investors with a more complete understanding of Amneal’s historical financial results and trends and to facilitate comparisons between periods and with respect to projected information. In addition, these non-GAAP financial measures are among the indicators Amneal’s management uses for planning and forecasting purposes and measuring Amneal’s performance. These non-GAAP financial measures should be considered in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. The non-GAAP financial measures used by Amneal may be calculated differently from, and therefore may not be comparable to, non-GAAP financial measures used by other companies.

 

82


Table of Contents

Reconciliations of reported GAAP net income to EBITDA and adjusted EBITDA are as follows (in millions):

 

     Year Ended December 31,  
     2016      2015  

Net Income

   $ 209.4      $ 170.6  

Adjusted to add (deduct):

     

Interest expense

     56.0        45.8  

Loss on extinguishment and modification of debt

     —          2.6  

Income tax provision

     5.4        5.0  

Depreciation and amortization

     33.0        25.5  
  

 

 

    

 

 

 

EBITDA

     303.8        249.5  

Adjusted to add (deduct):

     

Legal contract settlement(1)

     2.8        —    

Member units purchase(2)

     —          12.5  

Pro-forma royalty expense(3)

     4.5        —    

Loss of specified international entities(4)

     15.7        —    

Acquisition-related costs

     0.1        0.4  

Foreign exchange loss

     14.1        12.1  

Severance

     1.9        1.2  

Non-controlling interest

     (2.0      (1.2
  

 

 

    

 

 

 

Adjusted EBITDA

   $ 340.9      $ 274.5  
  

 

 

    

 

 

 

 

 

(1) In December 2016, Amneal entered into an agreement with a former development partner to settle a contract dispute. The total amount of the settlement was $2.8 million.
(2) In 2015, Amneal purchased in cash certain membership units from certain member classes. As a result of the purchased membership units, Amneal recorded $12.5 million in expense.
(3) Amneal has the commercial rights to distribute Yuvafem and owns the full product rights for Aspirin/Dipyridamole ER. Both of the products are marketed by Amneal and respective royalties are paid to the development partner Kashiv, a related party of Amneal. On June 30, 2017, Amneal purchased the full product rights for Yuvafem, and the future royalties on Aspirin/Dipyridamole ER from Kashiv. As a result of these purchases, Amneal added back the royalties that related to historical periods.
(4) In the third quarter of 2017, Amneal sold certain of its international businesses (Australia, Spain and the Nordics). Amneal added back the losses related to these entities in 2016.

Net Income

Amneal’s net income for the years ended December 31, 2016 and December 31, 2015 was $209 million and $171 million, respectively, representing an increase of $38 million or 22%. Net income as a percentage of net revenue for the years ended December 31, 2016 and December 31, 2015 was 21% and 20%, respectively.

Adjusted EBITDA

Amneal’s adjusted EBITDA for the years ended December 31, 2016 and December 31, 2015 was $341 million and $275 million, respectively, representing an increase of $66 million or 24%. Adjusted EBITDA as a percentage of net revenue for the years ended December 31, 2016 and December 31, 2015 was 33% and 32%, respectively.

 

83


Table of Contents

Liquidity and Capital Resources

 

     December 31,
2017
     December 31,
2016
 
     (in millions)  

Cash and cash equivalents

   $ 74.2      $ 27.4  
  

 

 

    

 

 

 

As of December 31, 2017, Amneal had total cash and cash equivalents of $74.2 million, compared to $27.4 million as of December 31, 2016. The increase of $46.8 million during the period resulted primarily from favorable earnings, trade accounts receivable collections and accounts payable increases due to timing of payments, partially offset by equity distributions and capital expenditures.

As of December 31, 2017, all of Amneal’s cash and cash equivalents consist of cash on deposit and highly liquid investments. A portion of Amneal’s cash flows are derived outside the United States. As a result, Amneal is subject to market risk associated with changes in foreign exchange rates. Amneal maintains cash balances at both U.S. based and foreign country based commercial banks. At various times during the year, Amneal’s cash balances held in the United States may exceed amounts that are insured by the Federal Deposit Insurance Corporation (FDIC). Amneal makes its investments in accordance with its investment policy. The primary objectives of Amneal’s investment policy are liquidity and safety of principal.

Cash Flows from Operating, Investing and Financing Activities

 

     Years Ended December  
     2017      2016      2015  
     (in millions)  

Net cash provided by (used in):

        

Operating activities

   $ 234.2      $ 115.1      $ 104.9  

Investing activities

     (91.8      (130.9      (135.6

Financing activities

     (95.0      (19.5      (25.0

Effect of foreign exchange rate on cash

     (0.6      1.6        (0.7
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 46.8      $ (33.7    $ (56.4
  

 

 

    

 

 

    

 

 

 

Amneal’s net cash provided by operating activities was $234.2 million in 2017, as compared to $115.1 million in 2016, and $104.9 million in 2015. The increase of $119.1 million in net cash provided by operating activities was due primarily to strong collection of trade accounts receivable and an increase in accounts payable and accrued expenses as a result of the timing of cash disbursements for inventory and capital expenditures, which was partially offset by a reduction in net income adjusted for non-cash expenditures, higher prepaid expenses other current assets due primarily to goods and service tax prepayments in India, export incentives in India and a royalty stream that was prepaid on a license with a related-party, and higher related-party receivables from a development contract settlement. The increase of $10.2 million in 2016 was due primarily to higher net income adjusted for non-cash expenditures, lower inventories from the timing of product launches, and lower prepaid expenses due to lower royalty receivable. This was partially offset by an increase in trade accounts receivable reflecting increased sales and the timing of cash collections, and a decrease in accounts payable and accrued expenses as a result of the timing of cash disbursements.

Amneal’s net cash used in investing activities was $91.8 million in 2017, as compared to $130.9 million in 2016, and $135.6 million in 2015. The decrease of $39.1 million in 2017 was primarily due to a decrease in purchases of property, plant and equipment due to completing the expansion of certain facilities, the proceeds received on the sale of certain international businesses, partially offset by the acquisition of product rights. The decrease of $4.7 million in net cash used in 2016 was due primarily to a reduction in acquisitions as Amneal acquired the Actavis Australia business in 2015, partially offset by an increase in purchases of property, plant and equipment from the expansion of Amneal’s facilities worldwide.

 

84


Table of Contents

Amneal’s net cash used in financing activities was $95.0 million in 2017, as compared to $19.5 million in 2016, and $25.0 million in 2015. The increase of $75.5 million in 2017 was primarily related to equity distributions, partially offset by proceeds from increases in borrowings under Amneal’s term and revolving loan facilities. The decrease of $5.5 million in 2016 was primarily related to lower equity distributions, partially offset by repayments of amounts drawn on Amneal’s revolving loan facility.

Sources and Uses of Capital

Amneal’s primary sources of liquidity to date have been financing activities and cash provided by profitable operating activities. In order to complete development of Amneal’s current product pipeline, Amneal plans to continue financing its investments in R&D from cash liquidity generated by operating profits.

Amneal’s primary uses of capital resources to date have been to fund operating activities, including R&D expenses associated with new product filings, and pharmaceutical product manufacturing expenses, license payments, and spending on production facility expansions and capital equipment items.

In April 2017, Amneal executed an amendment to its existing credit facility increasing the amounts available under its term loan by $250.0 million, for a total availability under the term loan facility equal to $1,388.8 million. The interest rate for Amneal’s term loan facility is LIBOR plus 3.5% with a 1.00% LIBOR floor rate. The availability under Amneal’s revolving loan facility was also increased by $80.0 million, from $120.0 million to $200.0 million and the interest rate reduced by 0.5% to LIBOR plus 2.0% with a 1.00% LIBOR floor rate. As part of the transaction, $50.0 million was drawn on Amneal’s revolving facility. The maturity date for the Amneal’s term loan facility is November 1, 2019, but can be prepaid at any time at no additional cost. The revolving loan facility matures on November 1, 2018, but can be prepaid at any time at no additional cost. Amneal has the option to extend the maturity date of the revolving loan facility to November 1, 2019.

In May 2016, Amneal increased borrowings available under its term loan facility by $225.0 million for total availability under the term loan facility equal to $1,150.4 million, at an interest rate of LIBOR plus 3.5% with a 1.00% LIBOR floor rate. The borrowing limit on Amneal’s revolving loan facility was also increased by $30.0 million to $120.0 million. The interest rate on the revolving loan facility was reduced by 0.25% to LIBOR plus 2.5% and a 1.00% LIBOR floor rate.

Amneal has a letter of credit for $0.8 million issued to the landlord of a facility in Bridgewater, New Jersey, as required by the lease agreement of such facility, and the letter of credit is collateralized by a certificate of deposit for the same amount, which is recorded as restricted cash.

Amneal’s future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section entitled “Risk Factors” beginning on page 9. As of December 31, 2017 Amneal has available to it $125.0 million of undrawn commitments on its revolving loan facility. Amneal believes that it has an adequate balance in cash and cash equivalents to fund its operations for at least the next twelve months.

 

85


Table of Contents

Contractual Obligations

The following table summarizes Amneal’s significant contractual obligations, inclusive of interest expense, as of December 31, 2017, and the effect such obligations are expected to have on Amneal’s liquidity and cash flow in future periods (in millions):

 

     2018      2019      2020      2021      Thereafter      Total  

Bank term loan and revolver(a)

   $ 156.0      $ 1,424.2      $ —        $ —        $ —        $ 1,580.2  

Operating lease obligations(b)

     18.2        17.7        14.2        13.4        39.8        103.3  

Capital lease obligations(b)

     0.1        0.1        0.1        0.2        0.7        1.2  

Financing obligations(c)

     5.3        5.3        5.3        5.3        112.3        133.5  

Contingent consideration(d)

     0.4        —          —          —          —          0.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 180.0      $ 1,447.3      $ 19.6      $ 18.9      $ 152.8      $ 1,818.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Includes payoff of $75.0 million Revolver balance in 2018. These loans carry a LIBOR floating rate plus a contractual interest rate. Amneal assumed the LIBOR rate stays constant in the future periods for purposes of calculating future interest payments.
(b) Amounts represent future minimum rental payments under non-cancelable leases for certain facilities and machinery and equipment.
(c) Amounts represent future minimum rental payments under non-cancelable financing obligation for a production facility in NY.
(d) In 2015, Amneal acquired the Actavis Australian generics business. A portion of the consideration was contingent consideration based on 12% of aggregate future net sales. Amounts represent future contingent payments remaining and will terminate at end of first quarter 2018.

The foregoing table does not include milestone payments potentially payable by Amneal under its collaboration agreements and licenses. Such milestone payments are dependent upon the occurrence of specific and contingent events, and not the passage of time. Significant transactions including milestones are as follows:

Adello License and Commercialization Agreement

On October 1, 2017, Amneal and Adello entered into a license and commercialization agreement. Adello granted Amneal an exclusive license, under its NDA, to distribute and sell two bio-similar products in the United States. Adello is responsible for development, regulatory filings, obtaining FDA approval, and manufacturing, and Amneal is responsible for marketing, selling and pricing activities. The term of the agreement is 10-years from the applicable product’s launch date.

In connection with the agreement, Amneal paid an upfront amount of $1.5 million in October 2017 for execution of the agreement. The agreement also provides for potential future milestone payments to Adello of (i) up to $21 million relating to regulatory approval, (ii) up to $43 million for successful delivery of commercial launch inventory, (iii) between $20 million and $50 million relating to number of competitors at launch for one product, and (iv) between $15 million and $67.5 million for the achievement of cumulative net sales for both products. The milestones are subject to certain performance conditions, which may or may not be achieved, including FDA filing, FDA approval, launch activities and commercial sales volume objectives. In addition, the agreement provides for Amneal to pay a profit share equal to 50% of Net Profits, after considering manufacturing and marketing costs.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Amneal has exposure to interest rate risk due to the fact that the credit facilities are variable rate debt. The impact of changes in interest rates on the market value of the credit facilities is generally not significant,

 

86


Table of Contents

however, rate fluctuations do affect the amount of Amneal’s interest payments and, therefore, Amneal’s future earnings and cash flows, assuming other factors are held constant. At December 31, 2017, Amneal had variable rate debt of approximately $1,453.2 million.

Holding other variables constant, including levels of indebtedness, a 1% increase in interest rates on Amneal’s variable rate debt would have an adverse impact on pre-tax earnings and cash flows on an annual basis of approximately $14.5 million.

Foreign Currency Exchange Rate Risk

By the nature of Amneal’s global operations, Amneal is exposed to cash flow and earnings fluctuations resulting from foreign exchange rate variation. These exposures are transactional and translational in nature. Since Amneal manufactures and sells its products throughout the world, its foreign currency risk is diversified. Principal drivers of this diversified foreign exchange exposure include the European Euro, British pound, Indian Rupee, and the Swiss Franc. Amneal’s transactional exposure arises from the purchase and sale of goods and services in currencies other than the functional currency of Amneal’s operational units. Amneal also has exposure related to the translation of financial statements of its foreign divisions into U.S. dollars, the functional currency of Amneal. The financial statements of Amneal’s operations outside the U.S. are measured using the local currency as the functional currency. Adjustments to translate the assets and liabilities of these foreign operations in U.S. dollars are accumulated as a component of other comprehensive income/(loss) utilizing period-end exchange rates. Transaction gains and losses are included in the determination of net income in Amneal’s consolidated statements of income as a component of other expense. Such foreign currency transaction gains and losses include fluctuations related to long term intercompany loans that are payable in the foreseeable future.

Critical Accounting Policies and Estimates

Amneal’s discussion and analysis of its operating results and financial condition is based upon Amneal’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of the financial statements requires Amneal to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent amounts. While Amneal believes Amneal’s estimates, judgments and assumptions are reasonable, the inherent nature of estimates is such that actual results will likely differ from estimates made. Amneal’s senior management has reviewed these critical accounting policies and related disclosures with Amneal’s Audit Committee. Amneal’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements for the year ended December 31, 2017 set forth in the section entitled “Index to Amneal Pharmaceuticals LLC and Subsidiaries Consolidated Financial Statements.” Amneal believes the following critical accounting policies affect Amneal’s most significant judgments, assumptions, and estimates used in the preparation of Amneal’s consolidated financial statements and, therefore, are important in understanding Amneal’s financial condition and results of operations.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires Amneal’s management to make estimates and assumptions that affect the reported financial position of Amneal at the date of the financial statements and the reported results of operations during the reporting period. Such estimates and assumptions affect the reported amounts of Amneal’s assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The following are some, but not all, of such estimates: the determination of chargebacks, sales returns, rebates, bill backs, allowances for accounts receivable, accrued liabilities, valuation of inventory balances, the determination of useful lives for product rights and the assessment of expected cash flows used in evaluating goodwill and other long-lived assets for impairment. Actual results could differ from those estimates.

 

87


Table of Contents

Revenue Recognition

Revenue from sales of Amneal’s products is recognized when persuasive evidence of an arrangement exists, title and risk of loss has transferred to the customer, the price is fixed or determinable, and collection is reasonably assured. Amneal permits the return of product under certain circumstances. Product sales are recorded net of all sales-related deductions including, but not limited to: sales discounts and returns, chargebacks, sales volume rebates, shelf stocks, re-procurement charges, cash discounts, and Medicaid rebate obligations. Amneal establishes provisions for its sales- related deductions in the same period that it recognizes the related gross sales. These accruals reduce gross revenues and, with the exception of returns and Medicaid rebates, are treated as a reduction of trade receivables. Returns and Medicaid rebates are recorded as a liability. At the time a rebate or chargeback payment is made or a product return credit is issued, Amneal records a reduction to the contra accounts receivable or liability account.

Amneal estimates sales-related deductions based primarily on historical experience, estimated future trends, estimated customer inventory levels and contract sales terms with Amneal’s wholesale, retail, indirect, and institutional customers. The product returns accrual is primarily based on estimates of future product returns based generally on historical sales and return rates. Amneal estimates its chargeback accrual based on its estimates of the level of inventory of its products in the distribution channel that remain subject to chargebacks and historical chargeback rates. The estimate of the level of products in the distribution channel is based primarily on data provided by key customers. Amneal’s sales volume rebate accrual is based on actual net sales and the rebate rate for each customer. Amneal provides for cash discounts, which are deducted from revenues at the time of sale. Amneal estimates its Medicaid rebate accruals based on monthly sales, historical rates, and estimated lag time of the rebate invoices. Amneal’s accruals for returns, chargebacks, and rebates are adjusted as appropriate for specific known developments that may result in a change in its obligations. No material revisions were made to the methodology used in determining these reserves during the years ended December 31, 2017, 2016, and 2015.

A rollforward of the major categories of sales-related deductions for the years ended December 31, 2017, 2016, and 2015 is as follows (in thousands):

 

     Contract
Charge-backs
and Sales
Volume
Allowances
    Cash
Discount
Allowances
    Accrued
Returns
Allowance
    Accrued
Medicaid
Rebates
 

Balance at January 1, 2015

   $ 262.5     $ 14.4     $ 27.6     $ 4.2  

Provision related to sales recorded in the period

     1,900.7       62.4       14.9       31.6  

Credits issued during the period

     (1,832.4     (61.9     (10.4     (21.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

     330.8       14.9       32.1       14.4  

Provision related to sales recorded in the period

     2,182.6       70.7       31.8       17.2  

Credits issued during the period

     (2,146.6     (67.2     (17.7     (23.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

     366.8       18.4       46.2       8.1  

Provision related to sales recorded in the period

     2,489.7       79.8       24.6       26.0  

Credits issued during the period

     (2,402.8     (77.8     (25.6     (21.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

   $ 453.7     $ 20.4     $ 45.2     $ 12.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Inventories

Inventories consist of finished goods held for sale, raw materials, and work in process. Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. Adjustments for excess and obsolete inventories are established based upon historical experience and Amneal management’s assessment of current product demand. These assessments include inventory obsolescence based on its expiration date, damaged or rejected product, and slow-moving products.

 

88


Table of Contents

Goodwill

Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value based test. Amneal reviews goodwill for possible impairment annually during the fourth quarter, or whenever events or circumstances indicate that the carrying amount may not be recoverable.

The impairment model prescribes a two-step method for determining goodwill impairment. However, an entity is permitted to first assess qualitative factors to determine whether the two-step goodwill impairment test is necessary. The qualitative factors considered by Amneal may include, but are not limited to, general economic conditions, Amneal’s outlook, market performance of Amneal’s industry and recent and forecasted financial performance. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. In the first step, Amneal determines the fair value of its reporting unit using a discounted cash flow analysis. If the net book value of the reporting unit exceeds its fair value, Amneal then performs the second step of the impairment test, which requires allocation of the reporting unit’s fair value to all of its assets and liabilities using the acquisition method prescribed under authoritative guidance for business combinations with any residual fair value being allocated to goodwill. An impairment charge is recognized when the implied fair value of Amneal’s reporting unit’s goodwill is less than its carrying amount.

Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Such assumptions include projections of future cash flows and the current fair value of the asset.

Impairment of Long-Lived Assets (Including Intangible Assets with Finite Lives)

Amneal reviews its long-lived assets, including intangible assets with finite lives, for recoverability whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Amneal evaluates assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the asset. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value which is generally an expected present value cash flow technique. Management’s policy in determining whether an impairment indicator exists comprises measurable operating performance criteria as well as other qualitative measures.

Intangible assets, other than indefinite-lived intangible assets, are amortized using a straight line basis based on their estimated useful lives as the straight line basis of amortization approximates the pattern of economic benefit of the asset. The useful life is the period over which the assets are expected to contribute directly or indirectly to future cash flows. Intangible assets are not written-off in the period of acquisition unless they become impaired during that period.

Amneal regularly evaluates the remaining useful life of each intangible asset that is being amortized to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of the intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life.

Income Taxes

The operations of Amneal are conducted through a limited liability company that is treated as a partnership for U.S. federal income tax purposes. All U.S. federal income tax benefits and/or liabilities of Amneal are passed through to Amneal’s members. Amneal provides for a tax provision in the various foreign jurisdictions in which it operates.

 

89


Table of Contents

The provision for income taxes is determined using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based upon the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates that will be in effect at the time such differences are expected to reverse. When necessary, deferred tax assets are reduced by a valuation allowance to reflect the amount that is estimated to be recoverable.

The guidance related to accounting for income taxes requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the appropriate character during the period in which those temporary differences are deductible. Amneal applies a valuation allowance against deferred tax assets in the required jurisdictions.

Research and Development

R&D activities are expensed as incurred. Primarily, R&D costs consist of direct and allocated expenses incurred with the process of formulation, clinical research, and validation associated with new product development, and external regulatory filing fees. Upfront and milestone payments made to third parties in connection with R&D collaborations are expensed as incurred up to the point of regulatory approval or when there is no alternative future use. Payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the respective intangible asset. Amounts capitalized for such payments are included in intangible assets, net of accumulated amortization.

Intellectual Property Legal Development Expenses

Amneal expenses external intellectual property legal development expenses as incurred. These costs relate to legal challenges of innovator’s patents for invalidity or non-infringement, which are customary in the generic pharmaceutical industry, and are incurred predominately during development of a product and prior to regulatory approval. Associated costs include, but are not limited to, formulation assessments, patent challenge opinions and strategy, and litigation expenses to defend the intellectual property supporting Amneal’s regulatory filings.

Risks and Uncertainties

Amneal is subject to risks common to companies in the pharmaceutical industry including, but not limited to, uncertainties related to commercialization of products, regulatory approvals, dependence on key products, dependence on key customers and suppliers, and protection of intellectual property rights. For additional information regarding the risks attendant to Amneal’s business and the generic pharmaceutical industry, see the section entitled “Risk Factors.”

Recently Adopted Accounting Pronouncements

See the sections entitled “Amneal Pharmaceuticals LLC and Subsidiaries Notes to Consolidated Financial Statements—Recently Adopted Accounting Pronouncements.

Recently Issued Accounting Pronouncements

New Amneal will meet the definition of a public business entity and will adopt recently issued accounting pronouncements in accordance with the transition provisions and effective dates for public business entities. Below is a summary of the recently issued accounting pronouncements that will be relevant to New Amneal.

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill

 

90


Table of Contents

impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on today’s Step 1). The standard will be applied prospectively and is effective for New Amneal’s annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. New Amneal is evaluating the impact of this new guidance on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance will be effective for New Amneal for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. New Amneal is currently evaluating the impact that the standard will have on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), which provides clarification regarding the scope of the asset derecognition guidance and accounting for partial sales of nonfinancial assets. The update defines an in substance nonfinancial asset and clarifies that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. All businesses and nonprofit activities within the scope of Subtopic 610-20 are excluded from the amendments in this update. This guidance will be effective for New Amneal for annual and interim periods beginning after December 15, 2017 and is required to be applied at the same time as ASU 2014-09 (described above) is applied. The guidance can be applied using one of two methods: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. New Amneal is currently evaluating the impact that the standard will have on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), to clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The guidance requires entities to show the changes inthe total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance will be applied retrospectively and is effective for New Amneal for annual and interim periods beginning after December 15, 2017. New Amneal is evaluating the impact of this new guidance on its consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, that will require companies to account for the income tax effects of intercompany transfers of assets other than inventory (e.g., intangible assets) when the transfer occurs. The guidance is effective for New Amneal for annual and interim periods beginning after December 15, 2017. New Amneal is evaluating the impact of this new guidance on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), to clarify how entities should classify certain cash receipts and cash payments on the statement of cash flows. The new guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be applied retrospectively and is effective for New Amneal for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. New Amneal is evaluating the impact of this new guidance on its consolidated financial statements.

 

91


Table of Contents

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, guidance that changes the impairment model for most financial assets including trade receivables and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. Entities will apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The guidance is effective for New Amneal for annual and interim periods beginning after December 15, 2019. New Amneal is evaluating the impact of this new guidance on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The guidance is effective for New Amneal for annual and interim periods beginning after December 15, 2018, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. New Amneal is currently evaluating the impact that the standard will have on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. New Amneal is currently evaluating the impact that the standard will have on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which that company expects to be entitled to receive in exchange for those goods or services. This update sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed. The FASB has since issued eight additional ASUs, including ASU 2017-13 in September 2017 and ASU 2017-14 in December 2017. This ASU is effective for New Amneal for annual and interim periods beginning after December 15, 2017. The new guidance can be adopted using one of two methods: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. New Amneal will adopt the new revenue recognition standard in 2018 using the modified retrospective method. In addition, the new standard will result in additional revenue-related disclosures in the notes to the consolidated financial statements.

The Amneal business has made substantial progress in completing its impact assessment of the potential changes from adopting ASU 2014-09. The impact assessment consists of a review of a representative sample of contracts, surveying key stakeholders, and a cataloging of potential impacts on Amneal’s financial statements, accounting policies, financial control, and operations. The majority of Amneal’s revenue relates to the sale of finished generic pharmaceutical products to its customers, and though Amneal is still evaluating the impact of this standard, management does not anticipate that the adoption will have a significant impact on these transactions. Amneal is continuing to evaluate the impact on certain less significant non-standard arrangements. In addition, the new standard will require changes to processes and controls to support additional disclosures; and Amneal is in the process of identifying and designing such changes to processes and controls to ensure readiness.

 

92


Table of Contents

Off-Balance Sheet Arrangements

Amneal has not participated in any transactions with unconsolidated entities, such as special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

 

93


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF IMPAX

The following discussion and analysis, as well as other sections in this report, should be read in conjunction with the consolidated financial statements and related Notes to Consolidated Financial Statements included elsewhere herein. All references to years mean the relevant 12-month period ended December 31.

Overview

Impax is a specialty pharmaceutical company applying formulation and development expertise, as well as its drug delivery technology, to the development, manufacture and marketing of bioequivalent pharmaceutical products, commonly referred to as “generics,” in addition to the development, manufacture and marketing of branded products. Impax operates in two segments, referred to as “Impax Generics” and “Impax Specialty Pharma.” Impax Generics concentrates its efforts on generic products, which are the pharmaceutical and therapeutic equivalents of brand-name drug products and are usually marketed under their established nonproprietary drug names rather than by a brand name. Impax Specialty Pharma utilizes its specialty sales force to market proprietary branded pharmaceutical products for the treatment of CNS disorders and other select specialty segments. Impax sells its Impax Generics division products within the continental United States and the Commonwealth of Puerto Rico. Impax has no sales in foreign countries.

Impax plans to continue to expand Impax Generics through targeted ANDAs and a first-to-file and first-to-market strategy and to continue to evaluate and pursue external growth initiatives, including acquisitions and partnerships. Impax focuses its efforts on a broad range of therapeutic areas including products that have technically challenging drug-delivery mechanisms or unique product formulations. Impax employs its technologies and formulation expertise to develop generic products that reproduce brand-name products’ physiological characteristics but do not infringe any valid patents relating to such brand-name products. Impax generally focuses its generic product development on brand-name products as to which the patents covering the active pharmaceutical ingredient have expired or are near expiration, and Impax employs its proprietary formulation expertise to develop controlled-release technologies that do not infringe patents covering the brand-name products’ controlled-release technologies. Impax also develops, manufactures, sells and distributes specialty generic pharmaceuticals that Impax believes present one or more competitive advantages, such as difficulty in raw materials sourcing, complex formulation or development characteristics or special handling requirements. In addition to its focus on solid oral dosage products, Impax has expanded its generic pharmaceutical products portfolio to include alternative dosage form products, primarily through alliance and collaboration agreements with third parties. As of December 31, 2017, Impax marketed 225 generic pharmaceuticals, which represent dosage variations of 77 different pharmaceutical compounds through its Impax Generics division; another five of its generic pharmaceuticals representing dosage variations of two different pharmaceutical compounds are marketed by its alliance and collaboration agreement partners. As of December 31, 2017, in its Impax Generics Division, Impax had 17 applications pending at the FDA and 20 other products in various stages of development for which applications have not yet been filed.

The Impax Generics division develops, manufactures, sells, and distributes generic pharmaceutical products primarily through the following sales channels:

 

    the “Impax Generics sales channel” for sales of generic prescription products Impax sells directly to wholesalers, large retail drug chains, and others;

 

    the “Private Label Product sales channel” for generic pharmaceutical over-the-counter and prescription products Impax sells to unrelated third-party customers who in-turn sell the product to third parties under their own label;

 

    the “Rx Partner sales channel” for generic prescription products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements; and

 

94


Table of Contents
    the “OTC Partner sales channel” for sales of generic pharmaceutical over-the-counter products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements.

Revenues from generic products are reported under the caption “Impax Generics, net.”

Impax Specialty Pharma is engaged in the development, sale and distribution of proprietary branded pharmaceutical products that Impax believes represent improvements to already-approved pharmaceutical products addressing CNS disorders, including migraine, multiple sclerosis, Parkinson’s disease and post-herpetic neuralgia, and other select specialty segments. Impax believes that Impax has the research, development and formulation expertise to develop branded products that will deliver significant improvements over existing therapies.

Impax’s branded pharmaceutical product portfolio consists of commercial CNS and other select specialty products, as well as development stage projects. In February 2012, Impax licensed from AZ the exclusive U.S. commercial rights to Zomig® (zolmitriptan) tablet, orally disintegrating tablet and nasal spray formulations pursuant to the terms of the Distribution, License, Development and Supply Agreement between Impax and AstraZeneca UK, Limited, dated as of January 31, 2012 (the “AZ Agreement”), and began sales of the Zomig® products under its label during the year ended December 31, 2012 through its specialty sales force. In May 2013, Impax’s exclusivity period for branded Zomig® tablets and orally disintegrating tablets expired and Impax launched authorized generic versions of those products in the United States. In June 2015, the FDA approved the Zomig® nasal spray for use in pediatric patients 12 years of age or older for the acute treatment of migraine with or without aura. In addition to the Zomig® products and Impax’s internally developed pharmaceutical product, Rytary® for the treatment of Parkinson’s disease, post-encephalitic parkinsonism, and parkinsonism that may follow carbon monoxide intoxication and/or manganese intoxication, which was approved by the FDA on January 7, 2015, Impax is currently engaged in the sales and marketing of Emverm® (mebendazole) 100 mg chewable tablets, indicated for the treatment of pinworm, whipworm, common roundworm, common hookworm, and two other products, all acquired by Impax in its acquisition of Tower Holdings, Inc. (“Tower”) and its subsidiaries on March 9, 2015 (the “Tower Acquisition”). In November 2015, the European Commission granted marketing authorization for Numient® (referred to as Rytary® in the United States). The review of the Numient® application was conducted under the centralized licensing procedure as a therapeutic innovation, and the authorization is applicable in all 28 member states of the European Union, as well as Iceland, Liechtenstein and Norway.

Results of Operations

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

Overview

The following table sets forth Impax’s summarized, consolidated results of operations for the years ended December 31, 2017 and 2016 (in thousands):

 

     Year Ended December 31,     Increase / (Decrease)  
     2017     2016     Dollars     Percentage  

Total revenues

   $ 775,787     $ 824,429     $ (48,642     (6 )% 

Gross profit (loss)

     143,799       (151,102     294,901       *  

(Loss) income from operations

     (402,692     (494,182     91,490       (19 )% 

(Loss) income before income taxes

     (450,961     (576,325     125,364       (22 )% 

Provision for (benefit from) income taxes

     18,326       (104,294     122,620       *  
  

 

 

   

 

 

   

 

 

   

Net (loss) income

   $ (469,287   $ (472,031   $ 2,744       (1 )% 
  

 

 

   

 

 

   

 

 

   

 

* Percentage exceeds 100%

 

95


Table of Contents

Consolidated total revenues for the year ended December 31, 2017 decreased by 6%, or $48.6 million, to $775.8 million compared to $824.4 million for the year ended December 31, 2016. The decrease was primarily attributable to lower Impax Generics division product sales. Selling price for existing products decreased consolidated total revenues by 22%, while volumes for existing products increased consolidated total revenues by 14%, in each case compared to the prior year. The decrease in selling price was primarily the result of additional competition during the year ended December 31, 2017 in generic Adderall XR®, fenofibrate, diclofenac sodium gel, metaxalone and lower prices on epinephrine auto injector, partially offset by volume increases in epinephrine auto injector and Rytary®. New product launches increased consolidated total revenues by 2% compared to the prior year. Impax currently expects pricing pressures on generic products to continue in the industry at least in the near term. Impax is closely monitoring these developments as they related to Impax’s products, customers and end users.

Revenues from the Impax Generics division for the year ended December 31, 2017 were $549.1 million, a decrease of $57.2 million or 9%, over the prior year. The decrease compared to the prior year period was primarily due to increased competition on diclofenac sodium gel, metaxalone, generic Adderall XR® and fenofibrate. These decreases were partially offset by increased sales of its epinephrine auto-injector, budesonide and other products Impax acquired as part of Impax’s acquisition of a portfolio of products acquired from Teva Pharmaceuticals Industries Ltd. and affiliates of Allergan plc in August 2016 (the “Teva Transaction”) compared to the prior year period.

Revenues from Impax’s Specialty Pharma division for the year ended December 31, 2017 were $226.7 million, an increase of $8.6 million or 4% over the prior year. The increase from the prior year period was primarily due to higher sales of Rytary®, partially offset by lower sales of Impax’s anthelmintic products franchise and Zomig®.

Net loss for the year ended December 31, 2017 was $469.3 million, a decrease in Impax’s loss of $2.7 million compared to a net loss of $472.0 million for the year ended December 31, 2016. The net loss for the year ended December 31, 2017 was due to $289.7 million in intangible asset impairment charges and an approximate $74.1 million fixed assets impairment charge of Impax’s Taiwan manufacturing facility associated with its announced sale of the Taiwan operations. Additionally, during the year ended December 31, 2017, revenue from Impax’s generic products decreased due to increased competition and an approximate $48.4 million increase in cost of revenues caused by under-utilization of its plants associated with its restructuring initiatives. Impax’s fiscal year 2016 net loss was driven largely by its $541.6 million asset impairment charges and a $40.3 million reserve recorded as a result of the uncertainty of collection of the receivable due from Turing Pharmaceuticals AG (“Turing”) for reimbursement of Daraprim® chargebacks and Medicaid rebate liabilities pursuant to an Asset Purchase Agreement between Impax and Turing dated August 7, 2015 (the “Turing APA”).

Of the $289.7 million intangible asset impairment charges Impax incurred during the year ended December 31, 2017, Impax recognized $96.9 million in cost of revenues impairment charges and $192.8 million in in-process research and development impairment charges on its consolidated statement of operations. The impairment charge was attributable to eight currently marketed products and four in-process research and development (“IPR&D”) product rights, the majority of which were acquired as part of the Teva Transaction. For the currently marketed products, the impairment charge was the result of continued significant price and volume erosion during the year ended December 31, 2017, resulting in significantly lower expected future cash flows. The IPR&D impairment was the result of delays in the anticipated product launch and related competition in the market.

 

96


Table of Contents

Impax Generics

The following table sets forth results of operations for the Impax Generics division for the years ended December 31, 2017 and 2016 (in thousands):

 

     Year Ended December 31,     Increase / (Decrease)  
     2017     2016     Dollars     Percentage  

Revenues:

        

Impax Generics sales, net

   $ 549,077     $ 606,320     $ (57,243     (9 )%