Amneal Pharmaceuticals, Inc. (AMRX) Q2 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the Amneal Pharmaceuticals Second Quarter 2019 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 this event is being recorded. I would now like to turn the conference over to Mark Donohue, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Thanks, and good morning. Welcome to Amneal's Second Quarter 2019 Earnings Call. Earlier this morning, we issued press releases reporting a leadership transition and our quarterly results. The press releases as well as the slides that will be presented on this call are available on our website at amneal.com. We're 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 material of Amneal and cannot be rebroadcast without the company's express 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 Amneal 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 the 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, the Amneal Pharmaceuticals, Inc. Form 10-K for the period ended December 31, 2018. Our discussion today also includes certain non-GAAP measures as defined by the SEC. Management uses both GAAP financial measures and the disclosed 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 provides 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. I'm joined here this morning by Chirag and Chintu Patel, Amneal's co-chief CEOs; as well as Todd Branning, our Chief Financial Officer. Following their prepared remarks, we will hold the Q&A session. Also on the call and available for Q&A is Andy Boyer, our Executive Vice President of Commercial Operations; Joe Todisco, Senior Vice President of Specialty Commercial; Pradeep Bhadauria, Chief Scientific Officer; and David Buchen, Chief Legal Officer and Corporate Secretary. For our agenda today, Chirag and Chintu will begin with a discussion of our strategic direction, following that, Todd will review detailed financial results. We'll have a question-and-answer session following the prepared remarks. I'd now like to turn the call over to Chirag.

Thank you, Mark. Good morning, and thanks, everyone, for coming together so quickly. Before we get into the details of our second quarter financial results, Chintu and I will take a few minutes to discuss the leadership transition and board changes, our thoughts on the business and our vision for the future of the company. What we announced today is important and we wanted to speak with you directly. Our goal is to give you some insight into the decisions our Board has made and preview what's in store for Amneal in the coming months. Let's start by setting the stage. For those of you who do not know our story, we founded Amneal in 2002 with the simple goal of providing affordable medicines to patients. Over the following years, we transformed the company from a third party manufacturing business based out of a single plant in New Jersey to a vertically integrated multibillion dollar generic pharmaceutical company with global operations. We've built one of the largest and most diversified ANDA pipelines in the industry while maintaining an obsessive focus on best-in-class quality and operational expertise. These enabled us to grow Amneal in a substantial way through not only reinvestment in our pipeline and infrastructure, but also strategic M&A along the way. In fact, during our tenure, we were pleased to have been recognized as the fastest-growing generics company by revenue over - for over 10 years. Of course, we recognize that industry dynamics have changed substantially. The buying power of the GPOs is at an all time high and competition from fellow generics manufacturers has only increased. In times like these, Amneal cannot afford to sit still. As co-Chairmen, we supported strategic decisions at the Board level, including the recently announced restructuring plan. While we endorsed the program, which is designed to reduce Amneal's cost base and optimize our global manufacturing infrastructure, the Board believes there is more that needs to be done. To fracture the changes that are needed, the Board decided that Chintu and I should return as co-CEOs of the company. We would like to sincerely thank Paul and Rob for their service to Amneal. We remain very grateful for what they have contributed to the company, and look forward to working with Rob as an adviser through the transition. We would also like to thank Bob Bert [ph], Janet Vergis and DJ Rama for their service on the Board. Looking ahead, we are excited to partner with Paul Meister, who joins Amneal as Chairman of the Board. Paul has an outstanding track record of leading the transformational - transformation of companies in the healthcare space, both as an executive at the Board level and under his leadership, Fisher Scientific grew revenue at a double-digit rate over a decade. And he was instrumental in executing the company's seminal merger with Thermo Electron. He also served as the Chairman and CEO of inVentiv Health, which has provided him with key domain expertise within pharma and biotech. We look forward to Paul's contributions and are certain he will meaningfully enhance the company - enhance the success of our company. A lot has changed since we founded Amneal, and we realize it is a larger, more complex public company than we last led it. Between Paul Meister's deep public company experience, our track record of strategic and operational execution and the broader team's domain knowledge and work ethic, we know we have the bench strength to succeed. Indeed, of the things we have accomplished as leaders of the business, we are most proud of our culture and our employees. Put simply, we could not have done it without many significant contributions of Amneal's people. As co-CEOs, Chintu and I will be working closely together. Chintu will focus primarily on manufacturing, operations and R&D, while I will oversee our commercial and business development teams as well as all other corporate functions. In assuming the co-CEOs roles again, we have resigned from our other executive positions and will be responsible for setting the strategic direction and oversight of every part of the Amneal business. We are excited about this opportunity, and we'll approach it with the same passion, focus and discipline that enabled us to build Amneal in the first place. As founders, operators and significant shareholders, we believe we are uniquely situated to address the challenges we face and that our interests are deeply aligned through for those of our fellow shareholders. As we dig in and understand more, we will develop a detailed action plan around our key initiatives. But for now, let us walk through our near-term goals at a high level. We're going to revitalize the generics business in the United States. We have best-in-class internal manufacturing capabilities in the U.S., Ireland and India, as well as a commercial portfolio of over 300 approved products. We need to better leverage this existing infrastructure to maximize opportunities with key customers and think creatively about plant utilization. We will drive operational efficiencies to improve gross margins through cost rationalization and better supply chain management. Additionally, we'll continue a track record of bringing complex generics to market. As you have seen, our second quarter was challenging, particularly for our generics gross margin. We plan to work closely with Todd and the entire team to improve financial and resource planning, which should minimize unexpected cost and alleviate the margin pressure we experienced in the second quarter. Some of these areas have been identified in the researching plan, but we believe there are even greater opportunities to run the company more efficiently. At the same time, Amneal has always prioritized growth and today is no different. We will reinvigorate our organic growth initiatives and refocus our investments in product development within both generics and specialty. We will be taking a careful look at our R&D platform to concentrate resources on projects that present the greatest return, given the increased competition in the retail generics sector such as hospital-based sterile injectable franchise. We will also analyze new investments in specialty products in addition to IPX203 to drive future growth in specialty. Chintu will elaborate on these further in just a moment. Ultimately, these initiatives will lay the foundation for accelerating inorganic growth in both generics and specialty. As we look at the landscape today, we are confident we will be well positioned to capture opportunities across both segments through a number of potential avenues, including accretively licensing and business development deals; accelerating the migration of Amneal's generic portfolio to key focus areas such as more complex products, first-to-market opportunities, difficult to develop dosage forms, including transdermals, injectables and respiratory products as well as specialty and biosimilars; the emerging direct-to-consumer sales channel, which could help us improve efficiency in the supply chain; and of course, the evaluation of potential M&A opportunities, including transformational transactions. I would like to now turn the call over to my brother, Chintu.

Hi. Good morning, everyone. Thanks, Chirag. I'm humbled to have this opportunity and enthusiastic to make a difference. 17 years ago, when we founded Amneal, generics was not viewed as a high-growth industry. But even then, we saw the opportunity ahead of us and built a business from scratch to the fourth-largest generic drug company in the United States. We started our business primarily developing and selling oral solid retail-based generic products. However, we quickly realized this category would get increasingly competitive. The nature of generics means that we are constantly fighting the erosion of our base business as new entrants launch their own products. This trend became especially pronounced following the enactment of GDUFA, which allowed the FDA to prioritize new launches in hopes of clearing that growing ANDA backlog. As an organization, we had the foresight to strategically move up the value chain and turn our focus to more complex products, which naturally have higher barriers to entry and more defensible revenue streams. How did we do that? We developed in-house manufacturing capability for full suite of dosage forms, including oral solids, liquids, nasal sprays ophthalmics, transdermal patches, topical, sterile injectables and respiratory. We utilized our internal R&D and manufacturing platforms to construct the third-largest pipeline of filed or development ANDAs in the industry and by far the largest relative to our scale. We engaged in business development and consummated a number of accretive acquisitions. And we always maintained an unwavering commitment to quality and the collaborative relationship with our regulators. As a result, we have enjoyed one of the best quality track record in the industry with no major observations at our sites. As my brother mentioned, the industry is currently facing a number of challenges, however, I firmly believe there are growth opportunities in both segment of our business. As long as there are innovators making branded drugs, there will be opportunities for us in generics. We have the team, the facilities and the pipeline, which is over 170 products today and expected to grow over time. We intend to execute and maximize the productivity of our existing assets. Indeed, over the next 24 months, we expect to launch approximately 15 complex generic products. The only difference now is product selection and channel focus. Our aim has already shifted from retail generics to complex molecules such as sterile injectable, which are typically more durable revenue streams with largely institutional customers. We also recognize the meaningful opportunity within biosimilars, and we'll continue to find development partners to complement their R&D capabilities with our regulatory and commercial expertise. And within our specialty segment, we have a truly differentiated platform within neurology and endocrinology. These therapeutic areas have high unmet needs that affect sizable patient populations. We'll continue to augment this business with internally developed products or those we in-license to leverage our existing commercial infrastructure. Recognizing where the industry was heading over the past several years, we broadened our deep scientific and industry expertise by managing other companies in adjacent areas within life sciences. For instance, I recently served as CEO of Kashiv BioSciences, a clinical-stage pharma company that is developing a pipeline of biosimilars and of 505(b)(2) specialty products. The latter is particularly interesting product category for a couple of reasons. First, these products utilize novel drug delivery technology to improve upon existing molecules. As such, while they are branded products, they have shorter clinical time lines and less costly path to market. Additionally, they often serve large patient population with high unmet needs, particularly in neurology. What this means simply put is that we will look to commercialize branded therapies at a lower cost of development while leveraging our existing sales force, which is obviously a compelling return on our investment. This same logic applies for attractive assets both pipeline and commercial that we may in-license or acquire. There are clearly risk with any level of drug development, and we don't take those lightly. But as we build out our specialty business, we will do it in a disciplined and a very cost-effective manner. Our goals are now revitalizing our pipeline, ramping our bidding efforts and streamlining manufacturing. We have stellar resources at our disposal, an industry-leading R&D team, deep customer relationships and scalable commercial infrastructure. We look forward to strengthening our existing platform and adding new ones as appropriate. We are ready to roll up our sleeves and dig in. As most of you know, we embarked on a transformation in combination with Impax 2 years ago because we felt it was the best way to drive value at that time. Today, there is even more value in scale, and the resulting infrastructure better positions us to execute, and we don't want to miss out on opportunities to capture that. But to do so effectively, we need to address a number of key issues within the business. We are committed to doing that as quickly as possible. We understand that today's healthcare environment requires a new approach and new ideas. Based on our preliminary work, we have a strong sense about where we need to focus our energies. Over the coming months, we will be refining the plan and look forward to sharing our thoughts on our next quarterly call. We have never shied away from a challenge and look forward to the next chapter in Amneal's life. Finally, I would like to thank our global workforce for their hard work and dedication. Starting today, we will engage with teams internally as we travel to our locations around the world and share our collective vision for the company. With that, I would like to now turn the call over to Todd to take you through the quarter.

Thanks, Chintu. Good morning, everyone. Turning to Slide 11 and a review of Amneal's results for the second quarter. Total combined net revenue was $405 million for the second quarter 2019 comparing to $462 million last year. The decline was primarily attributable to price and volume erosion in the generics segment, the divestitures of our international businesses and the loss of exclusivity on Albenza in our specialty segment. We offset some of the decline with higher revenues from products launched in 2018, growth in Rytari, Unithroid and Zomig and 17 new product launches this year. Our gross margin in the second quarter was negatively impacted by product sales mix, generic price erosion and inventory obsolescence, which impacted our cost of goods sold. We are tightly managing expenses across the organization, and when combined with synergy capture from last year's combination with Impax, adjusted combined R&D and SG&A expenses declined $34 million in aggregate. We will continue to focus on capturing additional cost savings and further improving efficiencies across the company. Combined adjusted EBITDA was $92 million in this year's second quarter, down 34% from the prior year period as both lower revenue and margins were only partially offset by lower expenses. Diluted adjusted earnings per share on a combined basis declined $0.14 to $0.09 for the second quarter compared to the prior year period. Moving to Slide 12 and a review of our generics segment results. Compared to last year's second quarter, combined net revenue decreased 12% to $335 million. The decrease was primarily driven by price and volume erosion within our existing business as well as an $11 million decline in international revenues from divestitures. The decrease was partially offset by sales of new products launched in 2018 and throughout the first 6 months of 2019. On a sequential basis, compared to the first quarter of 2019, combined net revenues were lower by 12% as we felt the impact of pricing pressure on our base business and lower sales from international operations due to divestitures. The decrease was only partially offset by new product launches. Our combined adjusted gross margin declined in the second quarter to 34% compared to 48% in last year's second quarter and 42% in this year's first quarter. The compression of our margin was primarily due to the impact of competition, product sales mix, higher failure to supply penalties, higher manufacturing costs due to underutilized plant capacity and inventory obsolescence charges. We do expect costs from inventory obsolescence and underutilized plant capacity to decline in the second half of 2019, leading to an increase in our adjusted gross margin percentage for generics. Combined adjusted operating income in the second quarter compared to last year's second quarter decreased $44 million to $65 million. On a sequential basis, adjusted operating income was down $32 million compared to the first quarter of 2019. The decrease is due to lower revenues and lower gross profit partially offset by a reduction in R&D and SG&A expenses as we realized the benefit of cost synergies and other initiatives. Moving to Slide 13 and our specialty segment results. On a year-over-year basis, combined net revenue decreased 13% to $70 million as higher sales of Rytary, Unithroid and Zomig were more than offset by an 89% or $13 million decline in sales of Albenza as a result of the loss of exclusivity in the third quarter of 2018. On a sequential basis, combined net revenue in the second quarter increased 9% due to higher sales of Rytari and Zomig compared to this year's first quarter. Combined adjusted gross margin for the second quarter was 82%, up from 79% in the prior year period primarily due to favorable product sales mix. On a year-over-year basis, second quarter 2019 combined adjusted operating income improved by $1 million, despite a $10 million decline in revenue, driven by the improvement in gross margin and lower operating expenses. And on a sequential basis, combined adjusted operating income for the second quarter increased $10 million to $39 million. This was driven by higher revenue and lower expenses compared to this year's first quarter, which had a higher level of spend due to the timing of new marketing programs and our annual sales meeting. Moving to Slide 14. We ended the second quarter with $57 million in cash and cash equivalents, down $10 million compared to the first quarter of 2019. Our cash flow from operations improved in the second quarter to positive $21 million as accounts receivable collections normalized this quarter compared to the prior 2 quarters. Our efforts to be disciplined with R&D and SG&A spending also contributed to the improvement in cash flow from operations. During the quarter, we collected $38 million from the sale of our U.K. and German businesses. In April, we paid $50 million to Jerome Stevens, representing the upfront 10-year license payment for Levothyroxine. We also had cash out outflows of roughly $32 million for certain items, including restructuring and integration-related expenditures. We expect these nonrecurring expenditures will continue to decline as the year progresses. For the remainder of the year, we will continue to control our spending. When combined with our current expectations that revenues will improve as new product launches accelerate into the back half of the year, we expect to see a further improvement in our cash flow from operations during the second half of 2019. Turning to Slide 15. On July 10, we announced a restructuring plan designed to reduce our cost base, further rightsize our organization and optimize our global manufacturing infrastructure. At the same time, we revised our 2019 adjusted EBITDA guidance to reflect the continuing market pressure and additional competition on our key generic products. The uncertainty of supply of Epinephrine Auto-injector from our third-party supplier during the high seasonal third quarter as well as delays in key product approvals and launches, including generic NuvaRing. We reaffirmed our 2019 adjusted EBITDA guidance this morning. We updated additional financial guidance metrics to conform with our adjusted EBITDA range, and now expect adjusted diluted EPS to be in the range of $0.52 to $0.62. Most of the decline in the revised adjusted EBITDA range was the effect of competition, which has impacted prices and volumes across much of our generic portfolio. Our specialty business has performed in line with our expectations, and we expect continued growth of this business in the back half of the year. We continue to forecast full year adjusted gross margin in the range of 47% to 50%. Our year-to-date adjusted gross margin is 46%, and we expect this will increase in the second half of 2019 with the launch of more high-value products. In addition, we expect plant capacity utilization will improve as production ramps up to support new product launches and the higher levels of inventory obsolescence charges we reported during the first and second quarters of 2019 decline. We also expect our R&D and SG&A expenditures to remain in the range of the amounts spent during Q2. I will now turn the call back to Chirag for closing remarks.

Thank you, Todd. We appreciate all of you joining the call this morning. I would like to echo Chintu's earlier comments and thank our global workforce for their continued hard work and support. We look forward to working closely with all of you to achieve our goals. As we have discussed, we recognize the hard work that will be required, but we know this business very well and are excited and ready for that challenge. Thank you very much, and I will turn the call back over to Mark.

Thanks, Chirag. Before we open the call for questions, I’d ask if you could please keep your questions to one and one follow up, so that we can get to every analyst before the 0:30 AM time for this call. So with that, Angio, I am going to turn the call over to you and then open it up for questions.

[Operator Instructions] The first question comes from Greg Gilbert of SunTrust. Please go ahead.

Thanks. Good morning, gentlemen. I'll ask my one plus one right up front. The initiatives and strategies you're highlighting today do not sound different from what was previously being highlighted by the prior team. So what do you plan to do differently or is it just a function of switching out the people, executing on the strategy you already believed in? That's the first part. And the second part is about business development. When you look at a deal like what was recently announced between Mylan and Pfizer. It certainly put Mylan in a fundamentally different place as it relates to risk profile and balance sheet strength, et cetera, et cetera. Do you think a transaction that fundamentally changes Amneal along those lines is something worth considering in addition to your company-specific initiatives that you talked about? Thank you.

Thanks, Greg. This is Chirag. So let me start with the answer to your first question. So the biggest challenges we know that facing the business are here, and for us, it's not new. Pricing pressure has been going on since as early as 2013. Yet, we have consistently capitalized on opportunities. We have always succeeded by controlling what we can control. We have diversified our experience and capabilities and are focused on our near-term priorities. We will be rationalizing cost structure, specifically our generics business gross margins; improving the inventory management, supply chain, optimization of our manufacturing infrastructure. Basically, maximizing our current assets, preparing for new launches, hands-on approach, execution focus, look at what new pipelines we can bring as well. So these will be our first priorities, very operational focused. While we return to the growth plan, we will be looking at the deals which would be at the right time. We may be able to hit some singles and doubles first before we do the transformational deals.

So now taking on the second question about the Mylan and Pfizer merger. I think that merger is - we recognize that merger, and it was -- from the public knowledge, I think it makes sense. As far as Amneal is concerned, as Chirag mentioned, at an appropriate time, we will be evaluating all options including a transformational deal.

Thank you.

The next question comes from Randall Stanicky of RBC Capital Markets. Please go ahead.

Great. Thank you. I want to go back to the first question. Was this management change and Board shake-up, was it a result of a disagreement over strategic direction? And again, how should we think about Amneal being different going forward, if the case? And then second for Todd. You look at the second quarter adjusted EBITDA, it stepped down. You're now implying a step up in the back half. Can you help us in terms of understanding what drivers are built into that upward expectation in the back half of this year? Thanks.

Thanks, Randall. This was a Board decision. We are focused on Amneal's growth and maximizing shareholders' value. And we're very grateful to Paul and Rob, and look forward to working with Rob during transition as well. There was no disagreement. It was unanimous by the Board. And where do we look at Amneal going forward? As we explained just a few minutes ago, our focus would be on execution, operational efficiencies, capitalizing on our current assets, optimizing our utilization, how do we get rid of all these inventory obsolescence, failure to supply charges that hit Amneal and how do we get new products launch. So going forward, we're going to be sharp in execution as well as bringing new products to the market, more injectable products, biosimilar commercial launch readiness as well as specialty products additions. So we'd like to, as we have done over the years since founding the company, return the company back on to the growth plan on its normal operations as we keep looking at creative deals, strategic deals, as I mentioned, singles or doubles first and then do the transformational deals. Todd?

And Randall, this is Todd. Good morning, and thanks for your question on adjusted EBITDA. So as we look at the back half of the year, the things that stand out in terms of the forecast are we -- our specialty business has grown this year, and we expect that, that will continue to grow into the back half of the year, so there'll be additional earnings power being generated by that segment of our business. Also our new product launches will accelerate, and we've talked about this for several quarters now that it was a back half weighted year. Our new product launches in generics will accelerate into the back half of the year. We believe the combination of those two will more than offset any additional revenue erosion that we see on the base generics business. We have modeled some of that into the back half of the year, but we expect that the growth of specialty and the new product launches coming in generics will be drivers from a top line standpoint. And then I would add, we - so we expect that our plant capacity utilization, as I mentioned in my remarks, will improve in the second half of the year as we ramp-up production to support new product launches. And also, some of the inventory headwinds that we've seen, and we've talked about this in both first and second quarters now, we believe are behind us. And so some of the higher cost driven by inventory obsolescence charges will decline in the second half of 2019. And lastly, we expect to continue to spend R&D and SG&A at the levels that we saw in Q2. And so we believe that the combination of everything I've mentioned there is what will drive EBITDA growth over the back half of the year.

Okay, great. Thanks, guys.

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

Great. Thanks very much for the question. I guess my question was just kind of qualitatively, if we look beyond 2019, how do we think about growth for Amneal? I appreciate the need to reposition the company given the changes that have occurred in the market, but it does seem like some of these initiatives will take time. So when we think about 2020, is that a year of gradual EBITDA improvement? Or could we be thinking about something more meaningful in terms of recovery? And then kind of a follow-up to that on investment. It seems like you've already taken a lot of cost out of the model. So as you optimize and kind of further reduce expenses, how do you ensure you have enough resources going into the business to develop the products you're going to need to grow the business over time? Thank you.

So thank you, Chris. Hence this is a day 1, so I would not like to comment on 2020. Let us begin, and we will be back with you within 90 days in the next quarterly call. Before I turn it over to Todd for further clarification, let me answer your second question. The optimization and cost rationalization doesn't mean that we are just focusing on reducing cost. The efficiency also means what current products, the approved but not launched products, existing products we are under indexed. How do we increase market share and grow more business? This is the avenue we are more familiar with is to increase business and keep growing with proper cost structure, so we can compete with our global competitors.

Just a one comment on R&D, which you had asked. We are still continuing to spend about 9% to 10% of our revenue in R&D. With the resources, we'll be able to put dollars at the right projects, so we have a good return on our investment. We continue to believe and we'll be bolstering our R&D pipeline going forward, but the focus will be a lot more on the complex and specialty products, and we have -- continue to have 15 new complex launches over the next 24 months.

Chris, it's Todd. And I would just amplify the comments and remarks that Chirag and Chintu have made. We're not in a position today to provide guidance on 2020 or really discuss at even a high level, so we'll do that and some point in the future. And as we've talked about, we want to revitalize the generics business, which we touched on as well as continue to support growth in specialty. And so as we look at the investments that are required to do those things, we'll continue to assess those and analyze what's required and drive those improvements in our businesses. So I think you'll see us - while we'll try to be disciplined around our spending from an operating expense standpoint, we understand the need to support and grow these businesses, and that's what we're going to be committed to doing.

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

Thanks. So just wanted to get a little more insight from you on how you're thinking about contribution from these complex generic launches. And that's -- doesn't quite jibe with the -- your comments on the buying power of the GPOs or the consortia. In other words, the -- we've seen less and less impact from new launches or diluted value pipeline. So maybe at a high level, can you talk about why you're sanguine about contribution from new launches? Maybe not this year, but just longer term, particularly as you think about complex generics and the fact that a lot of your peers are also developing complex generics. So help us understand your optimism there. That would be helpful. Thank you.

Thank you, David. Yes, I guess, we were born optimistic. The -- you are absolutely right. The impact of new products' contributions is not same as it used to be, and we have seen this. And maybe if I refer to past a bit, it may be helpful. So we always used to get ahead by launching the products which could be -- could have limited competition. In this new time, we would have to focus -- which we do have in pipeline, certain are disclosed, certain are not disclosed, it is in one of the Slide number 8, we'll be focusing on the high-value products within different segments. So more on our hospital-based products, inhalations with limited competition. Transdermal, we already launched. And also specialty products, what else can we add to our current commercial infrastructure in CNS as well as endocrinology. So these were - yes?

Well, I just wanted to fit in my follow-up. You -- it seems like everything is on the table. Of all of the items on the laundry list, which segments, which type of product lines do you find the most attractive, whether it's CNS brands or whether it's hospital injectables? I mean help us understand how you're prioritizing the shopping list?

So we already have hospital injectable portfolios, portfolio whose certain products are in the market, and I don't know the exact number, but multiple products are pending for approval as well. So we'll continue to push more on our hospital-based products. And there also are certain opportunities within hospital-based products which are branded side, 505(b)(2)side. So we'll be looking at those as well. And then we'll be looking at our complex generics, which we already have it in pipeline in inhalation device-based products, device combos, ophthalmics, dermatology. So these would be the -- building upon our strengths, but very limited. And biosimilars, we'll be partnering. That's the -- we already have partnered 3 products, we'll be looking to partner more because it augments well with our hospital-based sales infrastructure. And then specialty will be -- have evaluated a few. We will continue to evaluate whether we bring in the products which is marketed and realize the synergy or adding the Phase II products, Phase III products. And these are again 505(b)(2), so these are not like NCE, which takes years and million dollars or more in development, but yet, it's a clear need out there for a larger patient population. So I know I gave you the laundry list, but we have the deep pipeline, deep expertise and R&D team to execute on these. And we're very selective. It's not going to be driven by filing 50 products, it is going to be driven by which product we file.

Okay. Thank you.

The next question comes from Elliot Wilbur of Raymond James. Please go ahead.

Thanks and good morning. Generics space certainly has cured a lot of the optimization over the last couple of years, so I appreciate that you two both remain optimistic with respect to the continued growth outlook for the business. First question is for Todd. I guess, with respect to operating cash flow, been quite a bit of concern around this metric over the past couple of quarters. You did see a modest recovery this period, but certainly less robust than some were hopeful for. If I think about adjusted net income based on the guidance parameters that you provided today, it implies second half adjusted net income of $110 million, $120 million approximately. How can we think about operating cash flow with respect to tracking that particular metric?

Elliot, good morning and thanks for your question. So we -- as you stated, we saw some improvement in our cash from operations in quarter two this year compared to quarter one. Throughout the quarter, we had seen what we had expected to see, which was a normalization of our -- both our cash collections in as well as some of our cash expenditures out. It wasn't, let's say, for the entire quarter because we were still dealing at the beginning of the quarter with some of the issues that we had talked about in quarter 1 in terms of the timing of cash collections with customers. But toward the end of the quarter, things were becoming very normalized, very stable for us. And so we expect that, that will continue into the back half of the year. And that the profile that we had talked about earlier this year that we saw an improvement in cash flows throughout the year, so we expect that to continue into Q3 and Q4, and I believe that's very much what you'll see.

Okay. And I want to ask a follow-up question around the expectations for new product launch cadence over the balance of the year. Previously, the company had indicated that it believed it could launch up to 50 new products. Now you're basically indicating you expect to launch 15 complex generics within the next 24 months or so. So assuming that the 50 new products, that number is no longer anticipated. But I'm trying to get a sense of how we can sort of reconcile those two. Has there been substantial rationalization across the portfolio such that we won't see anywhere close to that 50? Or is this is just more of a timing issue and a lot of those products have most likely shifted into 2020?

Yes. So Elliot, this is Todd. I'll continue on that question. In terms of this year, the up to 50 still stands. I think we were 17 through the end of June, and we've had another handful of launches so far in Q3. So we're still of the belief that we have the capability to launch up to 50 this year. There might be some towards the end of the year that could slip in to the early part of 2020. But we still see ourselves as very much on track with what we've communicated this year in terms of expectations, in terms of the number of launches this year. With a subset of that, I suppose, are what we are characterizing as these high-value more complex new product launches. And we expect that over the next 24 months, we'll be able to launch those products, and that's the 15 that we've referred to in our prepared remarks.

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

Hi. Thanks for taking my question. A follow-up here. So my first question is here for the cofounders of Amneal. We've gotten a lot of questions as to whether or not you have pledged your shares as collateral to loans as detailed in your Qs and Ks. And just wondering if there's any risk to a fore-selling here? And the second question I had was regarding your debt covenants. Where do you stand? And do you have the ability to draw on your revolver? Thank you.

I'll take the first question. There is no risk in collateral. Very minimum dollars have been drawn. So there's no issue there. Second, Todd?

Louis, it's Todd. Thanks for your question on debt covenants. So we're in good shape as it relates to those. Our term loan B is debt covenant light. There's only very standard affirmative to negative covenants in there, and we're in complete compliance with all of those under our asset-backed lending facility. There is one financial covenant, but it is linked to the amount borrowed under that. And we haven't borrowed any amounts under the revolver, don't have any outstanding borrowings right now under that facility. So we still have the ability to use that as needed without any restrictions at the moment.

The next question comes from Gary Nachman of BMO Capital Markets. Please go ahead.

Hi, good morning. As the business dynamics in U.S. generics have been changing so rapidly, what have been the one to two most surprising things to you over the last year in terms of magnitude leading to such a dramatic change in outlook from where you were a couple of years ago? And then just a follow-up on the last question. In terms of leverage and balance sheet capacity, is big M&A on hold until you get the leverage down? Or could you still be opportunistic with different transactions that you would be looking at, particularly on the bigger side? Thank you.

Thank you, Gary. Andy, would you like to speak about the generic markets today versus how it was before? Maybe that will answer his first question.

Yes. What I would say is price erosion obviously is the function of the mix of products that you have in your portfolio. And for a long time, Amneal has had high-barrier assets for a period of time that had not seen significant competition. When you look at what transpired at the end of 2018 and into '19, our largest products ended up having of 4 or 5, even 6 competitors on them, which was of sustainable value and profitability to the organization. We were concentrated there. So it's a combination of that. The pricing pressure in the marketplaces has been significant. I think the diversification of the big 3 in their volumes, trying to minimize the risk to our supply chain exposures that have occurred over a period of time, where they're no longer going with 1 or 2 manufacturers, they often have 4 or 5 different manufacturers and splitting their volumes in order to protect themselves over what's transpired over the last 2 years with tremendous supply disruptions. So I'd look at those 2 key areas as probably the most significant changes. I think the new product launches that we have coming have the ability to offset some of that, especially since our biggest products have seen significant competition, and it's just a matter of us executing.

And Gary, this is Todd. I'll take your second question on leverage. So look, we're perfectly mindful and aware of the elevated leverage that we have within the company, especially with our reduced earnings outlook for this year. So yes, our priorities are going to remain to revitalize the generics business, to continue to grow our specialty business, to look for opportunities to invest organically to support those 2 segments of our business. We will -- we certainly -- as a matter of practice, we routinely consider ways to move the business inorganically, and we'll continue to do that. But clearly, we're going to do that with a mindset and an understanding of what our financial position or realities are right now. And so I would say, our near-term priority is to do the things that we have talked about in terms of revitalizing generics, stabilizing our business, growing specialty, and that'll be our focus in the near term.

And I would finish, Gary, with saying that Amneal has more value than is reflected today. So we will be focusing on our current priorities, operational focus. While the M&A is not off the table, it will come at the right time.

Okay. Thank you.

The next question comes from Ami Fadia of SVB Leerink. Please go ahead.

Good morning, Thanks for taking my questions. Could you give us some color around the 15 complex launches that you expect over the next 24 months? Maybe give us a sense of how large they may be in terms of the branded products that they target. And maybe more specifically, if you can give us an update on a couple of products that you've talked about, Copaxone, Neulasta. Give us a better update on NuvaRing timing. And if there's an inhalation product, is that something that we can expect over the next 24 months? Thank you.

Yes. So the complex...

So let me -- hold on a second. Thank you, Ami. I'm going to have our CSO, Pradeep, who is present here, to go over this.

This is Pradeep. So when we are talking about our complex product pipeline, clearly, we have pretty diversified portfolio within our complex pipeline as well, ranging from complex injectables, transdermals, topical rings. And then we also have some complex biosimilar kind of product and then we also have some complex products which are in the ophthalmic and nasal category. And some of those products, like, you can pretty much see on the Slide number 8 as well. And we expect that some of these products are going to hit the market in next 12 to 24 months.

Thanks. Chintu, would you like to chime in, please?

And your particular question on NuvaRing, I think NuvaRing is moving positively through the regulatory process, and we are optimistically cautious about the fourth quarter launch for -- on NuvaRing as stated before.

Could you give us an update on the others?

So Ami, if you go on the Slide 8, we have, first time, I guess, disclosed few more products. For other competitive reasons, we usually guard some of the products. And so whatever we can disclose, we have put it on the Slide 8. So if we can refer to that, and we have categorized that within the current buckets. And we've also put down there what we have accomplished, which is over the last 10 to 12 years. So that will give you an idea which direction we're moving in, which categories.

Got it. Thank you.

Thanks, Ami.

The next question comes from Balaji Prasad of Barclays. Please go ahead.

Good morning, everyone. I would like to dig deeper into your focus on the hospital business as a growth driver. So can you give more specific details on this focus? And how is it different from your current hospitals business, the size of the opportunity? And also if there's incremental CapEx requirements for this and the time lines around this? Thank you.

Well, thank you Balaji. This is day 1, so of course, I'll give you the certain details that I know at this point or we know at this point. But we are already selling in the hospital segments a number of injectable products. We have a pipeline of about 15-plus products. We'll be increasing that pipeline substantially. We like that area. Also in our CapEx, there is allocation for more -- one more site as well as more lines of injectables, and we'll be looking at acquisitions, small plant acquisitions on injectables as well. So we are focused in growing that segment and augment that with the specialty products within hospital as well as biosimilars, which goes both ways for retail as well as hospitals.

Okay. Thank you and all the best.

Thank you, Balaji.

The next question comes from David Merris from Wells Fargo. And again, due to time constraints, this will be the last question. Please go ahead.

Good morning and thank you. Just on the generic industry trends and how you see them. You mentioned that things are intense and they're bad. But maybe you could just talk about what you've seen in the last 3 to 6 months. Is -- are things getting tougher? Or this is the same challenging environment, and you expect them to remain so for some time or are things improving? There's been a lot of -- I would imagine, with today's news that you expect them to remain tough. But just -- do you want to clarify what you've seen in the most recent past and what you expect over the next year? Thank you.

Thank you, David. So we're just starting out here, again, reboot for 14, 15 months. But it is important to look at this question on a case-by-case basis because Amneal is at a scale within the generic retail sector that we still have growth opportunities. We have seen the competition that -- overall, we had one of the best pipelines and products in the market. So the competitions already have showed up for those products. So now the focus is on new product launches, and I think we have -- I believe we have enough new products to launch that will -- in excess to whatever rolls off every year. Andy, would you like to add more color specifically for last 3 to 6 months?

Yes. David. What I would say -- I don't know if the market has changed that much. It's fairly -- it's been fairly consistent. Obviously, it's competitive out there. I think what's changed is our mix of products. The FDA is a double-edged sword for us. We've got this wonderful pipeline that needs to come to fruition. And we'd be having a very different conversation right now if we hadn't gotten competition in our top four products and we had launched our pipeline, which is going to come here at some point. So I don't know that the market is significantly changed. I just think the timing of our new product launches and the timing of the competition to our big 4 products has -- had put us in the situation we are today. But we're poised to execute and get back to growth.

Great. Thank you very much.

Thanks, David. So that concludes our call for today. We appreciate you all joining us on such short notice. Investor Relations will be available all week to answer any follow-up questions. We look forward to speaking to you soon. Thank you.

Thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.