Amneal Pharmaceuticals, Inc. (AMRX) Q4 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Amneal Pharmaceuticals Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. At this time, I would like to turn the conference over to Mark Donohue, Vice President of Investor Relations and Corporate Communications. Please go ahead sir.

Thank you. Good morning, everyone. Welcome to Amneal’s Fourth Quarter and Full Year 2018 Earnings Call. Earlier this morning, we issued a press release reporting our earnings for the fourth quarter and full year, press release as well as the slides that will be presented on this call are available on our website at www.amneal.com. We are conducting a live webcast of this call. A replay of which will also be available on our website after its conclusion. Please note that today’s call is copyrighted and material of Amneal and cannot be rebroadcasted without the company’s expressed written consent. I’d also like to remind you that during the course of this call, management will make projections or other forward-looking remarks regarding future events or the future financial performance of the company. It’s important to note that such statements about estimated or anticipated annual results, prospects or other non-historical facts are forward-looking statements and reflect our current perspective of existing trends and information as of today’s date. Amneal disclaims any intent or obligation to update these forward-looking statements except as expressly required by law. Actual results may differ materially from current expectations and projections depending on a number of factors affecting the Amneal business. These factors are detailed in our periodic public filings with the Securities and Exchange Commission, including but not limited to Amneal Pharmaceutical’s Inc’s Form 10-Q for the period ending September 30, 2018. Our discussion today includes certain non-GAAP measures as defined by the SEC. Management uses both GAAP financial measures and then disclose non-GAAP financial measures internally to evaluate and manage the Company’s operations, and to better understand its business. Further, management believes the inclusion of non-GAAP financial measures provide meaningful supplementary information to and facilitates analysis by investors in evaluating the Company’s financial performance, results of operations and trends. A reconciliation of GAAP to non-GAAP measures is available in this morning’s press release and in the appendix of today’s presentation. On the call this morning are Rob Stewart, our President and Chief Executive Officer; Todd Branning, our Chief Financial Officer. Following the prepared remarks, we will hold a Q&A session. Also on the call and available for Q&A is Paul Bisaro, our Executive Chairman; Andy Boyer, our Executive Vice President, Commercial Operations; and Joe Todisco, Senior Vice President of Specialty Commercial and David Buchen, Chief Labor Officer and Corporate Secretary. For our agenda today, Rob will begin with a review of our fourth quarter and full year 2018 highlights. Following that, Todd will review detailed financial results, after which Rob will conclude with our 2019 outlook and a review of our strategic priorities going forward. With that, I’ll turn the call over to Rob.

Thank you, Mark. Good morning everyone, and thank you for joining us today. I want to welcome Todd Branding for his first earnings call as our new CFO. We are excited he agreed to join Amneal and we look forward to his experience, guidance, and leadership in the years ahead. Todd, it’s great to work with you again. Please turn to slide six. 2018 was a year of significant progress for Amneal as we continued to integrate, grow and diversify our business. We are building Amneal from a foundation of strength, as demonstrated by our numerous achievements last year and sequential growth throughout the year. Notably, through our focus on operational excellence, we led the U.S. generics industry in both approvals and launches, including 62 ANDA approvals, 10 tentative approvals, and 42 new products launched. Our Specialty segment delivered strong script and revenue growth from Rytary, Unithroid. And our R&D group was very active submitting 31 ANDAs and we dosed our first patients in our Phase 3 study for IPX203. In May, we completed the reshaping of our company through the combination of Impax and Amneal. By the end of 2018, we completed the major tasks of integration. This included shutting down the Hayward manufacturing facility in December, approximately nine months ahead of what we had initially scheduled in our pre integration planning. As a result, we captured and accelerated rate of synergies and the amount of approximately $60 million, and we are on track to achieve more than $200 million in cost savings, at a faster pace than what we had originally planned. Throughout the year, we strategically deployed our capital with the acquisition of Gemini laboratories as well as through several partnerships. These included agreements with Jerome Stevens and Lannett for Levothyroxine, American Regent for Generic Makena and the biosimilar version of Avastin in partnership with mAbxience. Turning now to slide seven, from a financial perspective, on a full year basis, we benefited from several factors, including our strategic investments through business development, our ability to capture synergies at an accelerated rate, 42 new product launches and base business performance. As a result, although 2018 combined revenues were essentially flat, combined adjusted EBITDA grew by 16% to $584 million and combined adjusted diluted earnings per share came in at $0.98. Turning to slide eight, for the fourth quarter, we delivered solid financial and operational results, continuing a streak of three consecutive quarters of sequential growth. Fourth quarter combined net revenue grew 4% on a sequential basis, and 2% year-over-year. Adjusted EBITDA grew 15% on a sequential basis, and 34% compared to a year ago. And adjusted diluted earnings per share grew 22% on a sequential basis. Before Todd covers the details of our financial results, I’d like to review highlights from our segments. Turning to slide nine to take a look at our generic segment, we had a great year of pipeline execution and advanced our strategy to diversify our portfolio with a focus on higher value, higher return opportunities. As shown on the slide, Amneal lead the U.S. generics industry with 62 ANDA approvals. We also launched 42 new products representing 171 million in net revenue contribution with the rate of new product introductions accelerating as we move through the year. We are especially proud of the fact that we are not only getting generic products approved, but we are also launching them. This is demonstrated by our launch ratio, which is very high relative to our peer group. This means we are selecting the right products and excelling at executing both operationally and commercially. Of note 37% of our new product launches were from injectable, topical or liquid products, further diversifying our portfolio of more than two hundred generic product families. Turning now to Slide 10, as you have heard us say before, when it comes to our generics business, it’s not just about quantity, it’s about value, and Amneal is committed to building a diversified generic pipeline to drive sustainable growth. We made great progress with this effort in 2018 as 65% of the 31 ANDA submitted by Amneal were for non-oral solid dosage forms. Our current submitted pipeline includes 118 products pending at the FDA. Our momentum is carrying through the first two months of 2019 with nine ANDA approvals, two tentative approvals and we’ve already launched two products. We have the opportunity to launch upto 50 products this year. Turning to Slide 11, for the update of generic R&D development pipeline. As shown here, approximately two thirds of the products in our R&D pipeline are focused on non-oral solid dosage products. Again, this is a demonstration of our company’s emphasis on investing in complex products that have the potential to be more durable, and have higher and more sustainable value. On Slide 12, we recap the Specialty segment, which delivered sequential and year-over-year revenue growth in 2018. Within the important Rytary franchise, we grew net sales by 43% year-over-year as we continued off our focus on growth, and improving access for patients. We had several important managed care wins in 2018 and in December we had an all-time high in total scripts per week of 4237. Our team has done a fantastic job of executing on our new established the importance of the Rytary value proposition and better connect with both prescribers and patients. Turning now to ZOMIG nasal spray, another important specialty franchise. In 2018, net sales grew 11% year-over-year overcoming managed care headwinds. We are actively taking steps to improve patient access and affordability to maximize brand penetration. Turning now to Slide 13, to discuss Unithroid and Emverm, two specialty franchises that we believe have the potential for growth. Unithroid’s net sales in 2018 grew by 39% over the prior year with double digit growth in both total and new prescriptions. Looking forward, we believe there is continued growth potential for this product and we are committed to implementing strategies to deliver growth for the brand. This includes executing on our existing promotional strategy as well as sales force expansion in the second half of the year. Emverm sales declined 4% over 2017. We have already implemented an action plan for 2019 to increase patient awareness, access and affordability. This includes the launch of a new point of sale e-voucher to replace copay cards and increased direct-to-physician promotion. 2018 also marks the start of our Phase 3 study for IPX203, as highlighted on slide 14. We are enrolling patients and continue to expect top line data in the first half of 2020 with a filing date in 2021. This product has the opportunity to reduce off time and a BID dosing, which is a potential game changer for patients suffering from Parkinson’s disease. We’re excited about this opportunity. With that, I will turn the call over to Todd to walk through the financials.

Thanks Rob. Good morning everyone. Before I get to our results, I want to thank Rob, Paul, the leadership team, and our employees for their warm welcome since joining in January. I’m excited about what has been built here at Amneal and I look forward to helping us reach greater heights in the years ahead. My remarks will focus on our combined adjusted results as we believe they provide a better comparison of our performance and trends in the quarter. A full reconciliation of all GAAP to adjusted results can be found in the tables in our press release, and in the appendix of this presentation. Turning to Slide 16 and a review of the generic segment results for the fourth quarter. On a sequential basis, net revenue increased 5% compared to the third quarter. The increase was driven primarily by new product launches, which contributed approximately $78 million to fourth quarter revenue. Partially offsetting the increase were lower sales of Yuvafem and Aspirin Dipyridamole which were down approximately $34 million compared to the third quarter due to new competition, which entered the market in September of last year. Sales of our Epinephrine Auto-injector also declined in the fourth quarter by $12 million compared to the third quarter due primarily to seasonality and the inconsistent supply from our third party manufacturer. Compared to last year’s fourth quarter, net revenue increased 1%. New product launches more than offset a $54 million decline in sales of Aspirin Dipyridamole, Generic Tamiflu, Yuvafem and Diclofenac Gel due to new competition. Our adjusted gross margin declined in the fourth quarter by approximately 40 and 60 basis points on a sequential basis and 190 basis points year-over-year due primarily to unfavorable product sales mix, following additional competition on several high margin generics and inventory adjustments. Adjusted operating income in the fourth quarter increased to $150 million up 14% compared to the third quarter and up 23% compared to last year’s fourth quarter. The sequential and year-over-year increases were primarily due to an increase in revenue and lower R&D and SG&A expenses as we began to realize the benefit of cost synergies. Moving to Slide 17 in our specialty segment results. On a sequential basis, net revenue in the fourth quarter increased 2%, on a year-over-year basis net revenue increased 7%. The growth was driven by Rytary, primarily the result of continued strong volume growth, higher sales observing nasal spray and unit’s right. These increases were partially offset by a more than 90% decline in sales of Albenza as a result of generic competition. Adjusted gross margin for the fourth quarter was 81% up when compared with both the third quarter and 2017 fourth quarter, due to favorable product sales mix. Adjusted operating income for the Specialty segment in the fourth quarter increased to $51 million, up 16% from the third quarter and up 30% from the same period last year, due primarily to higher revenues and lower SG&A expenses as a result of cost synergies. Turning to Slide 18 and a review of a few balance sheet and cash flow items. We ended 2018 with $213 million in cash and cash equivalents, an increase of $48 million compared to the third quarter of 2018. The increase was the result of strong operating cash flow of $260 million in the fourth quarter. Additionally, we received $25 million from the sale of the few buildings and some equipment in Hayward, California. Major uses of cash during the fourth quarter included the full repayment of the $100 million borrowed under our revolving credit facility, which was used to fund working capital during the second and third quarters. We also paid $77 million to Gemini laboratories relating to the acquisition in May of 2018. In November 2018, we announced an agreement with Lannett to begin commercializing Levothyroxine in December, approximately four months before our agreement with Jerome Stephens, which is set to begin in late March of this year. As part of the transition agreement, we paid Lannett $43 million. During the fourth quarter, we also made a $35 million tax distribution payment and invested $20 million on capital projects. We currently expect to generate strong cash flow in 2019 to reinvest in the business, support our business development and to continue to pay down debt. I will now turn the call back to Rob for a review of our 2019 outlook and closing remarks.

Thanks Todd. For Amneal, although we achieved industry leading pipeline execution with a strong cadence of new approvals and launches, the financial benefits have been slower to materialize because of market factors currently impacting the generic industry. Concentrated buying power has created price deflation and challenging contract terms. In addition, brand rebating tactics have led to formulary exclusion of generics. Taken together, these factors are slowing both the value realized and the uptake of generic substitution. As a result, industry pipelines are not delivering their expected value as demonstrated by the fact that in 2018 roughly 30% of all ANDAs approved in the industry were actually launched. Please slide took a turn to Slide 20. As we look forward to 2019, we still see growth in the business, but not at the rate we originally expected. As a management team, we believe it is important to be realistic and nimble and how we respond to these mass market factors. As such, we have and will continue to take actions to better align the business with the current market realities. These include, delivering bottom line savings by continuing to rationalize lower value products from our portfolio, and pursue additional cost reductions. We are also playing to our strength as a reliable and consistent supplier by capitalizing on supply chain disruptions and shortages. In our generic segment, revenues are expected to increase in 2019, driven by the full year impact of 2018 product launches. In addition, we are currently targeting up to 50 new generic product launches, including Generic Nuvaring, which we currently project as a midyear opportunity assuming FDA approval. This will be partially offset by declines on key products Yuvafem, Aspirin/Dipyridamole, Oseltamivir, Diclofenac Gel due to competition and price erosion of base business. In the specialty segment, revenues are expected to decline due to the loss of the exclusivity on Albenza. We expect this will be partially offset by growth from both Rytary and Unithroid. Overall gross margin is expected to decline slightly due to the product mix as the impact of late 2018 competition on a few of our largest products flows into 2019, and the addition of the Levothyroxine product which is at a lower margin than our current Generics segment margin. R&D and SG&A expenses will be down as a result of reduced project spend, and the benefits of full year cost synergies, and interest expense is expected to increase as we incur a full year of interest in 2019, compared to only eight months in 2018. We expect to generate positive cash flow this year, which we anticipate utilizing for the optionality of either de-levering or investing in other transactions on the M&A side. Now please turn to Slide 21, which outlines the 2019 outlook metric on a full year adjusted basis. For 2019, we expect adjusted EBITDA in the range of $600 million to $650 million and adjusted diluted earnings per share in the range of $0.94 to $1.04. Based on the expected timing of 2019 approvals and launches, we expect our results to be back half weighted. Turning now to Slide 22 our near-term priorities are to build Amneal from our position of strength in order to continue to drive for double digit earnings growth and to achieve strong operational cash flows. We’re going to capitalize on our organic growth. We’ll continue to drive our operational excellence, making sure that we always strive to be a high quality reliable supplier with exceptional customer service and compliance. And we will continue to work on improving our earnings potential, capturing targeted synergies, so that we can reinvest back into the business to propel growth. On Slide 23, from a long term perspective, we are focused on strategically deploying our capital to support our long term aspiration of double digit earnings growth. We want to continue to add to our generics, our specialty, and our biosimilars businesses, while at the same time looking at other adjacencies to insulate the company from the traditional kind of quarter-to-quarter type of fluctuations that are inherent within generics. I’ve mentioned a few times that with the integration of Amneal and impacts behind us, we are in a position to use business development to accelerate our growth. In conclusion, we’re very optimistic about Amneal’s long term growth potential. I’m extremely proud of the hard work by our more than 6000 employees worldwide who over the past year have executed against our strategy and navigated through market headwinds. In 2018, our team did an incredible job of completing the impacts integration, while advancing our operational excellence priorities to launch high value products and driving future value through the effective deployment of our capital. We are truly building this organization from a position of strength, with an industry leading rate of new high value products, and expanded set of skill sets through the addition of impacts and our new strategic partnerships and strong operating cash flow. As a result, Amneal is solidly positioned to execute against our long term growth plan to diversify and grow the business, and we are exiting the year stronger than we began with a very bright growth prospect ahead. With that, I’ll turn the call back to Mark.

Thanks Rob. Before you open the call for questions, I’d ask you to please keep your questions to a minimum, so that we can get through everyone in today’s queue. With that Denise, you can take our first question.

Thank you [Operator Instructions] And your first question will come from Randall Stanicky of RBC Capital Markets. Please go ahead.

Great. Thanks guys. So the focus this morning is going to be on the guidance outlook, and particularly you know how conservative or not is that range. So can you help us with a bridge from 2018 to the guidance of 2019? What are the big swing factors, how much is erosion versus assumed new launch revenue and so on. And then the follow up question is, given the lower EBITDA outlook leverage metrics go higher, but you’re still pointing to business development 2019. So can you comment on how much flexibility you have to pursue deals and what type of deals you’re looking for? Thanks.

Yes, good morning Randall and thanks for the question. Regarding our guidance, we thought it was prudent to be to provide prudent guidance I would say, given the environmental factors that are impacting and influencing the business. You know we’re still committed to growth. We’re committed to driving value, but we also felt that it was it was prudent to relook at the value of the pipeline, that how quick the pipeline was actually going to be able to contribute and we think that we have a balanced guidance out there, that has both opportunities as well as risks in it. But we think, we’ve captured the downside risks while at the same time allowing for opportunity for upside and we didn’t dial in all of our opportunities for 2019. So we think, our guidance I would say is prudent. Regarding business development and the opportunity to do additional transactions, you know we still do have some firepower, yes. Our leverage ratio is not driving. It’s not lowering as quickly as we expected because the growth rate is a bit more moderated. But that said, we are still de-levering the company through our growth rate and we still do have great. We do have strong cash flow generation and we’ll be -- that’s going to provide us the optionality to do additional tuck in transactions. Obviously the ability to lever up is still there as well and depending on the contribution and the synergy capture that we can get from whatever transaction we do, would all way into you know how much firepower that we actually have. We’re still focused on diversifying the company away from the kind of traditional solid oral dosage type formulations. I still think that if there’s opportunities to add products or portfolios or companies that accelerate our injectable and institutional side of the business, that’s something that is a priority for us as well as looking at other adjacencies whether it be cash pay, whether it be specialty to further insulate the company from the typical fluctuations that you see in the generic market. So I hope that answers your questions.

Yeah, I mean are sizable and/or complex transactions still something that you guys have an interest in?

Yes, look I’ll never say never. You know it would have to be the -- always pass our test for both strategic and industrial logic. It would have to be something that we think that we can integrate and operate. It would -- we’d also have to make sure that we have creative structures that address the risk. And so, I would never take anything off the table. But and we’re going to look at everything.

Okay. Great, thanks.

The next question will be from David Risinger of Morgan Stanley. Please go ahead.

Thanks very much. So I wanted to ask a couple of questions please. First, with respect to cost efficiencies, I may have missed it, but could you update us on cost efficiencies achieved to date? And then what inning you think you’ll be in at the end of 2019? Second, with respect to revenue growth in 2020, previously the company had projected substantial growth in 2020? Could you just talk about at least at a high level how we should think about the revenue growth outlook for 2020? And then finally just a very quick question; net debt-to-EBITDA, assuming you don’t do any deals, what’s the reasonable target for the end of 2019? Thank you.

Okay. So, I’ll take the first couple and then I’ll pass the last one over to Todd. In terms of cost efficiencies we have been able to accelerate our synergy capture and you see that come through the P&L. This year, we delivered approximately $60 million in synergy capture. We’re in the mid-innings of being able to reckon – I should say realized that within the P&L. But in terms of we are in the late innings of all the strategic decisions that were required in order to actuate those synergies. So, we’ve announced the closure of Hayward right after the acquisition and we close the facility nearly nine months ahead of what we had plan. And all of the major structural changes that we need to make with the integration of Impax has all been done, decided and moved on. And so now it’s just a function of when it gets recognized within the P&L and that will continue through and strengthen all the way through 2019 into 2020. Regarding our 2020 guidance, we’re not providing 2020 guidance on this call, but what we are committed to is having that target of double-digit growth for the long-term. We’ve got a lot of pipeline opportunities not only in late 2019, but also going into 2020 that we think will help, sustain that growth for the future. And then as far as the debt-to-EBITDA I’ll pass that over to Todd.

David, thanks for the question. So, with respect to the leverage ratio and where we see at the end of 2019, so we did mentioned that at the end of 2018 on a net debt basis we were about 4.2 times assuming, and we will pay off our term loan as scheduled in the payments that we have to do in 2019. We will pay those as scheduled, depending on exactly where our EBITDA comes in for the year, I would expect that we will tick down a little bit probably closer to 4.1, maybe four times leverage ratio again depending on how to 2019 materializes.

Thank you.

Thank you, Dave.

The next question will be from Louise Chen of Cantor Fitzgerald. Please go ahead.

Hi. Thanks for taking my questions. So my first question is just how confident you are in the large pipeline that you have acquired from Amneal. And I know you mentioned Nuvaring. But what are some other sizeable launches coming up over the – say, the next 12 to 18 months? And then second question I had was on business development. You’d mentioned that just curious if you’re more interested in generic or specialty on that front? Thank you.

Yes. Thanks Louise. I’m really confident around the pipeline opportunities that we’ve assembled together between Amneal and Impax. We’ve got a very very strong pipeline, a lot of high-value durable products. For strategic and stealth reasons we’re not going to describe a lot of them because of the fact that we have -- because there still is an advantage in this especially given the market dynamics that are going on, you don’t want to necessarily telegraph launches and talk about what products you have in your pipeline because it allows even brand companies to even further insulate themselves to generic entry with additional brand rebating tactics and things along those lines. So, Nuvaring was the one major one that we disclosed that that we expect to get approval on that this year and launch that this year. And we think that will be a nice opportunity for Amneal. But we have several other, let’s call it Nuvaring like opportunities that will potentially come in late in 2019 as well as into 2020. As we get closer to those events we’ll talk about them, but we’re not going to really talk about what those big opportunities are simply because of the environmental conditions that exist within the industry. In terms of business development, my priority is not to increase scale on the generic side. I think we have all the technologies and capabilities that we need. But about the only caveat I would say to that or carve out of that statement would be something on the injectable side we’ve got 17 products, actually more than that now in market with a number of opportunities in the pipeline as well. If we can find portfolios of products that would help us accelerate our injectable and institutional business that’s something that would be potentially of interest to me. But just increasing scale in generics right now is not something that’s a priority for us because we have both the development and manufacturing in-house capability to deliver virtually every dosage form that’s out there. So our focus is really on more injectable institutional side, specialty type assets that we think could help fit the bag of our sales force both in terms endocrinology as well as CNS movement disorders and neurology.

Thanks Louise.

The next question will be from Chris Schott of JPMorgan. Please go ahead.

Great. Thanks very much. So, actually my first question is just elaborating a little bit more on the generic environment at this point. I think your comments in the past have been maybe alluded to you at some point industry pricing may be stabilizing. So the comments today still highlight a number of challenges the industry is amazing. So, I guess I was wondering what do you think it takes to get back to more normalized industry dynamics or is what we’re seeing today kind of the new norm? My second question was just trying to get a little bit more color on the gating of earnings and EBITDA in 2019, you mentioned this back half weighted, a sense of just how back half weighted should we thinking about here just to make sure we’re setting expectations properly to think about kind of first half results versus second half? Thanks so much.

Yes. So, in terms of the generic environment really, I have to answer the question kind of two different ways. In terms of the base business, I do think the industry has stabilized and I think you’re starting to see kind of a consequence of what’s happened with pricing getting so low and the terms and conditions in some of these buying groups getting so onerous that people are now just walking away from portfolios of product. So that because the pricing is got to a point where it’s just no longer worth making the manufacturing investment and having to deal with the complexity factors of all these different products. People are simplifying their businesses and getting out of portfolios just because of the fact that the pricing environment has gotten so low. So, I do think that that is creating basically let’s call it, a new environmental kind of condition for the base products where you’re seeing stability in pricing just because of the fact that people are just not going to continue to allow double-digit price declines. They will just walk away from the product because it’s gotten so low. So that to me means that the industry itself has stabilized on the base business. In terms of the new product launches that’s where I see maybe the biggest change and the biggest challenge because some of the policies and some of the -- I should say the tactics that exist are preventing generic substitution, preventing access and as a result we’re not getting necessarily the pricing environment because we have to discount price to such a degree to be able to offset let’s call it, some of the rebating that goes on. And I think as a result we have to -- we and everyone within the industry is basically relooking at their R&D portfolios, their investment levels and deciding whether or not it makes sense to continue to invest in certain product opportunities because of the fact that the pricing environment on new product launches isn’t necessarily yielding the same level of return that we saw in the past. Regarding the cadence of earnings, I’ll let Todd share some feedback on that.

So, Chris, in respect to how our phasing looks in 2019, I think in the – its fair to say in the early part of the year where we will see the competitive effects that we saw beginning in Q4 on products on the generic side they had additional competition come to the market. So, that will have some impact in the early part of 2019. Our launches as we’ve talked about, we have more lunches right now budgeted in the second half of the year versus the first half of the year. So, I think you’ll see a period where you see some improvement in our earnings performance throughout 2019 as we begin to get pass the drop in performance driven by the competition on some of our key generic products and replace those with new product launches. From specialty side its broadly stable throughout 2019.So, really been the swing factor of the timing of our new product launches coming to market on the generic side and as we’ve said that’s more in the back half of the year than the first half.

Thank you.

The next question will be from Dana Flanders of Goldman Sachs. Please go ahead.

Hi. Thanks for the questions. Can you maybe just elaborate a little bit on the gross margin outlook? I know you’re calling for it to decline in 2019. How should we think about the contribution of new launch gross margins, the contribution of some of those COGS synergies and just the ability to drive that gross margin higher over time? And then just my quick follow-up, can you give us any product level sales like you have in the past couple of quarters on Aggrenox, you’ve -- and some of your higher margin generic products? Thanks.

I’ll start with the last question and then we’ll talk about gross, I’ll turn it back to Todd on the gross margin discussion. On product sales, we don’t desolate breakdown or provide specific performance relative to products. I will say that all the products that you mentioned in terms of Yuvafem and Generic Aggrenox as well as the Generic Voltaren in terms of Diclofenac Gel also competition in the fourth quarter. These are still though good contributors and durable products. You could see that we have lost some market share as generic entries -- as other competition has come in and as you would expect the pricing environment on those products has decreased year-over-year. But those are still good products that are durable, that are going to continue to provide value for us through the course of 2019. And although we do expect all of these -- our products are going to see competition because of the fact that we’re there at market formation which is an important aspect of this business that we think that that allows for those assets to continue to be durable for the future. Regarding COGS and a gross margin, Todd, maybe you want to make a comment there.

Right. So, Dana, when we look at the gross margin, if you look at where we were in Q4, we did see some margin compression relative to where we were in Q3; that was the function of primarily the additional competition that we saw in key generic products. We did also have some inventory adjustments that contributed to the margin compression that we saw in Q4 relative to where we had been. As we look forward in the 2019 some of those factors will continue, we will also -- we expect that our largest single product in generics in 2019 will be the Levothyroxine and once we commence our deal with Jerome Stevens we will have additional royalties. So, I would say that it’s likely in 2019 that we’re going to have some compression relative to 2018. We will probably fluctuate a bit within the range that we provided in our outlook depending on the performance and pricing of new product launches.

Thank you.

Our next question will come from Gary Nachman of BMO Capital Markets. Please go ahead.

Hi. Good morning. Rob, regarding the changing dynamics of new product launches, do you need to invest more behind launches of more complex generic to get traction in those markets like one of your competitors recently said? And then has the FDA been timely with new generic approvals? Maybe you could talk quantitatively about expected impacts from your pipeline in 2019 in aggregate? Thanks.

Yes. So I would eco some of the feedback that you’ve heard from our peer group and some of the other industry leaders that as you move your portfolio into the more complex product lines and more complex generics there’s not this automatic substitution that we kind of enjoyed as an industry for the last decades. Now you actually have to go out and do some levels of promotion and detailing and provide MSL liaisons and things like that to help not only position your product but also to help supported and also patient support programs as well. I think that’s the new norm of this industry as we’ve kind of moved up the food chain from your traditional kind solid oral dosage form kind of products where it was automatic substitution. As you get into these genericizing some of these patient centric brands with patient centric programs that’s support the brand, I think we as an industry have to recognize that there’s going to be an investment level behind it to be able to get the substitution and also continue to provide the patient support that people rely on. And so I do share some of the sentiments that you’ve heard from some of the other industry leaders within the industry. Regarding FDA, I applaud what’s Scott Gottlieb has done. I think he has brought discipline within the FDA to be able to not only bring these complex generic products to the market and get increased productivity in terms ANDA approval, but also I find that the guidance that they provided for some of the complex products as well as the communication that exist between the agency and the industry has dramatically improved. That’s allowing us to make better decisions around timing of launches. It allows us to make better decisions in terms of when we with the timing of kind of scaling up and investing and launch qualities and all of that. I think that I applaud what the FDA has done and I see that that has been just continuing to improve under Scott’s leadership and I see that continuing in 2019 and beyond.

Okay. And then just the impact -- potential impact from the pipeline in 2019, if you could give some sort of quantification in aggregate that would be helpful?

Yes. We do not breakout at this point what the new product launch contribution expectation is. I would tell you that we were prudent and how we valued -- not only the value of the launches, but the timing of the launches within 2019 what we’ve kind of qualified for you is that we expect the contribution to be more back half loaded and you’ll see us, we’ve already had number of approvals this year would be as we mentioned we’re going to be launching Rivastigmine here within the quarter as well we’ve got some a series of other products that you see us continue to launch and we’ll press release the important ones as we go through the year so that you can see the cadence of those launches and the timing of when they would actually prompt that they would contribute, but it will more back half loaded this year than front half.

Okay. Thank you.

Thank you.

The next question will be from David Amsellem of Piper Jaffray. Please go ahead.

Thanks. So just a couple of quick ones. So, first on business development and I know you talked a lot about your approach, but can you talk about the extent to which your prioritizing the addition of brand, specialty assets. How important is that to you? And given that you have the neurology focused infrastructure, is that something that you’re really looking to leverage in terms of thinking about Board of Directors? So that’s number one. And then number two, as I know you’re still very much wedded to the idea of double-digit growth longer-term, but as you look at the portfolio, mean, is going to be challenging given that you still have certain products that are significant contributors or higher-margin products such as Opana ER and even Levothyroxine with the potential competition down the road. So, I guess the question is how aggressive is that long-term aspirational goal of double-digit growth given those dynamics? Thanks.

Yes. I think -- thanks for the question, David. In terms of business development priorities, of course, I’m looking do to look at other assets and what other things that we can do, the drop in the bag of our sales force on the specialty side, we’ve got great coverage across the U.S. We’re calling on virtually all of the movement disorder specialists, high concentration of neurologists, if we have the ability to add additional assets to the bag and increased utilization of that sales force and those relationships that we have with the specialists that is something that would be important for us. But with every business development transaction, it’s got to be at the right price, it’s got to be something that we think is got industrial and strategic logic that we can bring and offer value to our shareholders. We are not in the business of just going out and buying melting ice cubes. We want to go and add assets to the bag that we think that we could -- that we could go out and create value for us, so that we not only can sustain that double-digit growth in the near term, but the longer term as well. We believe with the assets that we have in our pipeline on an organic basis that we can continue to drive double-digit growth in the near term and we’re going to continue to invest in products like IPX203 so that we have additional assets to bring to the market on our specialty side and we’re continuing to invest on a generic side, we’ve got the over 100 projects in development right now that we think our value creation for us to keep the generic business growing at double-digit on an organic basis. Business development would be used as a means to be able to accelerate and diversify our growth. And so that’s the way I’m thinking about it. When I look at the pipeline even with the new realities of today I still think that this business has the means with in it as well as the ability to continue to capture the incremental synergies that that’s going to allow us to grow in 2019 and 2020 and then that pipeline will continue to deliver value for us beyond that.

And the next question will be from Elliot Wilbur of Raymond James. Please go ahead.

Good morning. First, I guess two questions for Todd. With respect to Yuvafem, could you provide the sequential revenue change 4Q to 3Q? If you did that in your prepared comments, I missed it. I heard Aggrenox and Epinephrine just curious on Yuvafem. And then with respect to any color you provide on operating cash flow expectations for 2019? I mean, I guess your cash conversion ratio if we look at CFO relative to just net income to be about 85% the last two years. I’m not sure if that’s expected to improve material or not, but just some sort of color on operating cash flow outlook would be helpful? Then I’ve got follow-up question for Rob as well.

Yes. Good morning Elliot. It’s Rob. I’ll take the Yuvafem question. We don’t break out specific differences between Q3 to Q4. What I’ll tell you in Q4, we did see incremental competition on Yuvafem. You see it reflected in the IMS data in terms of the market share dynamics that we still -- this is still an important product for us. We saw both Teva come back into the marketplace as well as the launch of Glenmark that obviously any time that you have competitive entry at these stabilizes it price and these stabilizes some volume and market share, but overall this is still a good product and it was a strong contributor in the fourth quarter. In terms of cash flows, Todd.

Yes. So Elliot, in respect of the operating cash flow as we see it in 2019, we –so as we said early, we do expect to have strong cash flow. This year we will have to deal with bit more cash for the interest expense that we’ll paying since we will have a full year’s worth of that in 2019. I would say early in the year we do have some additional payments that we will need to make for example, we have the upfront payment to Jerome Stevens for that agreement that we want to pay in the first part of the year. So we see a picture where we should generate strong operating cash flow throughout the year, but probably growing a little bit more as we progress into the year.

Okay. And follow-up questions for Rob. You mentioned sort of one of the key headwinds in terms of sort of realizing full value of new product launches, of course, is the evolution of these large buying groups, the consortium which seems kind of obvious on the surface. I know one of your board members has been rather vocal about exploring some sort of new or alternative forms of distribution going forward? But I guess the feedback from some smaller players has been that those – the evolution of consortia maybe getting a little bit less onerous than they expected meaning that does buying groups have been a little bit more generous in terms of allocating secondary sources of supply just because of some of the disruption out there. And if you think about what’s going on Washington, obviously the rebate systems under attack which would certainly seem to benefit the generic industry in terms of some of these more recent tactics that have emerge. So I’m just wondering if you think that initiative or sort of that discussion really is going to continue to kind of move forward at least sort of the same extend that maybe has been talked about the last 12 to 18 months?

Well, Elliot, I want to congratulate you on asking that question because its going to give me the opportunity to get my -- the board -- the bulk of board member avoid on this call, but…

I could remember his last name. That was the problem.

So, I’ll open it up on a comment to say that I do agree that the buying groups have -- I think have recognized the issues with access and what the concentrated market share and I think they are trying to change some of their buying behaviors and I’m seeing much more constructive dialogue with the buying groups than what we’ve had over the last several years simply because of the -- I think you’re right that you can point to the fact that there’s lots of supply chain disruptions because people are walking away from our portfolios or where people have allocated too much market share to A, individual company and then when they are not able to supply it creates all kinds of the supply chain disruption in the industry. I think the bigger challenge that we’re faced with now is really getting access on those specialty generics in terms of getting the access on in terms of market share as well as the pricing that we have the drop to be able to overcome the rebating issue. I do agree with you that some of the policy changes that this administration looking to put in place I think will help alleviate some of those issues, but I know, Paul has got some strong opinion on this, so I’m going to give him a chance to provide a voice.

Rob, thanks, and thank you, Elliot. Yes, look, I think we’ve been talking about ultimate distribution in many forms over the last 18 months and I think we’re starting to see it happen. We’re starting to see new pharmacy distribution models popping up. Sometimes it’s going directly to the doctors and giving doctors a way to point patients to various online pharmacies in the U.S. to be able to access drugs through a blink health or or somebody like that. And I think that will continue. The big disruption hasn’t occurred yet. Although it does appear that some of the companies are looking at that. Certainly, the Amazon transaction which we’ve talked about for a while would be a major disruptor. Also you see Walmart and Target and others using their online capabilities to bring patients to their pharmacies more directly. All of that stuff is moving outside of the buying group structure which is again not too surprising because as Rob indicated and we’ve been talking about for a while certainly the balance of power has shifted if you want to say to those buying groups and the manufactures are reactive and not controlling their own destiny and the minute that happens we are forced to find ways around it. And so -- inevitably this will occur. It just question of how quickly and how deeply that will go, but I still think that that something that we’re very active at watching and looking to see where it makes sense for us to step in and participate as opposed to just be on the sidelines. So more on that as we go through the year as these things develop, I would say.

Our next question will be from Tim Chiang of BTIG. Please go ahead.

Hi. Thanks. I think in your 2019 guidance you sort of highlighted recovery in Epinephrine supply. Could you talk little bit more about how much supply you think you can get this year? And can get back to more normalized levels?

Yes. Thanks Tim. This has been a challenge for us throughout all of 2018. It was a one of our bigger disappointment, because we had opportunities to continue to improve market share but also to is that we had jump through hoops to make absolutely certain that we were getting product directly to patients at the retail level because of and managing through a lot of that supply chain complexity and risk. I do think we will see a [Indiscernible] return back to our normal supply and inventory levels. We continue to work with our third-party manufacturer, I think all of you know who that is and we continue to work with them to try and improve this situation. They are committed to improving it, the relationship between the companies is strong, and we’re hopeful that we’re going to see that continue and improve throughout the course of the year. Our first quarter will be lower just because of the seasonality. You see that in both the fourth quarter and first quarter on this product. The seasonality is really the second and third quarter, but we’ll be working with our -- within our supply chain to try and increase our inventory levels to make absolutely sure that we’ve got a full supply for the season and are not plagued with the same situation that we -- that occurred throughout 2018.

Rob, I just had one follow up if I -- if I could ask is, it’s really just on your biosimilar pipeline. What’s the outlook for your pipeline, and when do you think you can get some material launches out in the U.S?

Yes, we do not have anything in 2019 for our biosimilar pipeline. This will be something that we’ll talk about more when we get closer to 2020. We are taking the partner approach with biosimilars. We’ve got three in our pipeline, both for gastrin as well as PEG. And then on top of that the relationship that we formed with mAbxience on Avastin. Our approach with biosimilars is if we can find assets that are in the right structures that are more tied to milestone payments around commercial success and more late stage kind of milestone type payments with more certainty. That’s kind of the approach that we’re taking. We want to be a fast follower in this space, because if you look at the returns on some of those early investments, they have not necessarily panned out and materialize. I do think that the biosimilar market will open up. I think it has to for the healthcare system to work. We will participate in that, but we’re going to be a fast follower and we’re going to take the approach on bringing biosimilar products that we think fit our institutional side of the business that where we can leverage our injectable portfolio and platform.

Okay, great. That’s helpful

Thank you, Tim.

And our last question this morning will be from Katherine Novak of Canaccord. Please go ahead.

Hey, this is actually Dewey Steadman from Canaccord. I guess for Paul and Bob -- Rob, just spot on going back to Watson and sort of the -- and the distribution system there. Is there any way you can build a similar system at Amneal RDF desire to? And then also with the direct consumer players that are out there like Crow and Hems & Hers does it make sense to make a partnership with one of those organizations or even potentially get creative and maybe acquire one of those organizations over time? Thanks.

Yes, great question Dewey. You know from our past life that I absolutely love the -- and the business and I do think that there’s a tremendous amount of value of having that type of distribution capability within a company. It’s hard to see, especially with the margins of that type of a business us to go out and try to organically build that. So if we were to ever -- I think the way that we would approach it is if we can find ways of partnering in that type of a model, but that would be something that might be of interest, but to go out and build that capability, given all the other kind of priorities that we have within the company, I don’t necessarily see that that would be a high priority. But I do think when you look at some of these alternative distribution models that Paul mentioned kind of popping up like Crow and stuff like that, I do think, Amneal is the type of company that we’re nimble enough and flexible enough that we could participate in those type of companies depending on how that model ultimately, I guess, formalizes overtime and solidifies. That could be something that we do think about. But right now our near-term priority is kind of more the other things that I outlined that are priorities for business development, but I love the distribution model and what I’d love to be able to do is get closer to it.

Excellent. Thank you.

Thank you.

Thank you. Thank you all for joining us today. That concludes our call. We’re available today and tomorrow for any questions you may have. Have a great day.

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today’s presentation. At this time, you may disconnect your lines.