Amneal Pharmaceuticals, Inc. (the "Company," "we," "us," or "our") is a pharmaceutical company specializing in developing, manufacturing, marketing and distributing high-value generic pharmaceutical products across a broad array of dosage forms and therapeutic areas, as well as branded products and biosimilar products. We operate principally inthe United States ,India , andIreland , and sell to wholesalers, distributors, hospitals, chain pharmacies and individual pharmacies, either directly or indirectly.
The Company is a holding company, the principal assets of which are common units (“Amneal Common Units”) of
The group of investors, together with their affiliates and certain assignees,who owned Amneal when it was a private company (the "Members") held 50.1% of Amneal Common Units and the Company held the remaining 49.9% as ofSeptember 30, 2022 . The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under Item 1A. Risk Factors in our 2021 Annual Report on Form 10-K and under the heading Cautionary Note Regarding Forward-Looking Statements included elsewhere in this Quarterly Report on Form 10-Q.
The following discussion and analysis for the three and nine months ended
Overview
We have three reportable segments: generic, specialty and
generic
Our Generics segment includes over 250 product families covering an extensive range of dosage forms and delivery systems, including both immediate and extended release oral solids, powders, liquids, sterile injectables, nasal sprays, inhalation and respiratory products, ophthalmics, films, transdermal patches and topicals. We focus on developing products with substantial barriers-to-entry resulting from complex drug formulations or manufacturing, or legal or regulatory challenges. Generic products, particularly in theU.S. , generally contribute most significantly to revenues and gross margins at the time of their launch, and even more so in periods of market exclusivity, or in periods of limited generic competition. As such, the timing of new product introductions can have a significant impact on the Company's financial results. The entrance into the market of additional competition generally has a negative impact on the volume and / or pricing of the affected products. Additionally, pricing is determined by market place dynamics and is often affected by factors outside of the Company's control.
Specialty
Our Specialty segment is engaged in the development, promotion, sale and
distribution of proprietary branded pharmaceutical products, with a focus on
products addressing central nervous system ("CNS") disorders, including migraine
and Parkinson's disease. Our portfolio of products includes Rytary®, an extended
release oral capsule formulation of carbidopa-levodopa for the treatment of
Parkinson's disease, post-encephalitic parkinsonism, and parkinsonism that may
follow carbon monoxide intoxication or manganese intoxication. In addition to
Rytary®, our promoted Specialty portfolio includes Unithroid® (levothyroxine
sodium), for the treatment of hypothyroidism, which is sold under a license and
distribution agreement with Jerome Stevens Pharmaceuticals, Inc. , and Emverm®
(mebendazole) 100 mg chewable tablets, for the treatment of pinworm, whipworm,
common roundworm, common hookworm and American hookworm in single or mixed
infections.
For Specialty products, the majority of the product's commercial value is
usually realized during the period in which the product has market exclusivity.
In the U.S. when market exclusivity expires and generic versions of a product
are approved and marketed, there can often be very substantial and rapid
declines in the branded product's sales. For example, the pediatric exclusivity
of the AstraZeneca patent licensed to Impax for Zomig® Nasal Spray expired in
May 2021 , and we lost market exclusivity in the fourth quarter of 2021.
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OurAvKARE segment provides pharmaceuticals, medical and surgical products, and services primarily to governmental agencies.AvKARE is a re-packager of bottle and unit dose pharmaceuticals under the registered names ofAvKARE and AvPAK, which service theDepartment of Defense andDepartment of Veterans Affairs as well as institutional customers.AvKARE is also a wholesale distributor of pharmaceuticals, over the counter products and medical supplies to institutional customers which are located throughoutthe United States of America focused primarily on offering 340b-qualified entities products to provide consistency in care and pricing. The Pharmaceutical Industry The pharmaceutical industry is highly competitive and highly regulated. As a result, we face a number of industry-specific factors and challenges, which can significantly impact our results. For a more detailed explanation of our business and its risks, refer to our 2021 Annual Report on Form 10-K, as supplemented by Part II, Item 1A "Risk Factors" of our subsequent Quarterly Reports on Form 10-Q.
COVID-19 pandemic
InMarch 2020 , theWorld Health Organization designated the outbreak of a novel strain of coronavirus ("COVID-19") as a global pandemic. Governments and businesses around the world took unprecedented actions to mitigate the spread of COVID-19, including imposing restrictions on movement and travel such as quarantines and shelter-in-place requirements, and restricting or prohibiting outright some or all commercial and business activity, including the manufacture and distribution of certain goods and the provision of non-essential services. To the extent that the pandemic (and variant strains) continues or worsens, national, state, local and international governments may impose additional restrictions or extend the restrictions already in place. The worsening of the pandemic and the related safety and business operating restrictions could result in a number of adverse impacts to our business, including, but not limited to, additional disruption to the economy and our customers, additional work restrictions, supply chains being interrupted or slowed, and rising supply prices. Also, governments may impose other laws, regulations, or taxes that could adversely impact our business, financial condition, or results of operations. Further, depending on the extent to which our customers are affected, they could delay or reduce purchases of products we provide. The potential effects of the pandemic also could impact us in a number of other ways including, but not limited to, reductions to our profitability, fluctuations in foreign currency markets, the availability of future borrowings, the cost of borrowings, credit risks of our customers and counterparties, and potential impairment of the carrying amount of goodwill or other definite-lived assets. Although not currently expected, any supply chain disruptions may significantly impact our 2022 results of operations and cash flows. Increasing infection rates and the introduction of new and more easily transmitted variants of COVID-19 could cause material disruptions to our global supply chains and cause labor shortages, as well as reduce the number of physician visits in general. We continue to actively monitor the situation and may take further precautionary and preemptive actions as may be required by national, state, or local authorities or that we determine are in the best interests of our employees, customers, partners, suppliers, and shareholders. Until the ultimate extent and duration of the pandemic is known, we cannot predict the ultimate effects the pandemic may have on our business, in particular with respect to demand for our products, our strategy, and our prospects, the effects on our customers, or the impact on our financial results.
Inflation
While it is difficult to accurately measure the impact of inflation, we currently expect an inflationary impact to income (loss) before income taxes of approximately$30 million for the year endingDecember 31, 2022 , excluding the impact of rising interest rates. However, rising inflationary pressures due to higher input costs, including higher material, transportation, labor and other costs, could exceed our expectations, which would further adversely impact our operating results in future periods. 48 --------------------------------------------------------------------------------
Results of Operations
Consolidated Results
The following table sets forth our summarized, consolidated results of operations for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands): Nine Months Ended Three Months Ended September 30, September 30, 2022 2021 2022 2021 Net revenue$ 545,557
cost of goods sold
350,653 329,394 1,027,439 953,514 Cost of goods sold impairment charges 674 688 5,786 688 Gross profit 194,230 198,511 569,320 602,571 Selling, general and administrative 100,071 91,397 297,542 268,280 Research and development 50,235 48,927 153,781 149,973 In-process research and development impairment charges - - - 710 Intellectual property legal development expenses 1,411 1,627 2,996 6,574 Acquisition, transaction-related and integration expenses 39 134 714 7,219 Charges related to legal matters, net 285 19,000 249,836 19,000
Charges (insurance recoveries) for property losses and associated expenses
- 8,186 (1,911) 8,186 Restructuring and other charges 581 425 1,312 788 Change in fair value of contingent consideration (1,425) 300 (1,495) 300 Other operating income (1,320) - (2,495) - Operating income (loss) 44,353 28,515 (130,960) 141,541 Total other expense, net (42,173) (30,558) (109,512) (93,856) Income (loss) before income taxes 2,180 (2,043) (240,472) 47,685 Provision for income taxes 4,570 4,049 8,459 7,056 Net (loss) income$ (2,390) $ (6,092) $ (248,931) $ 40,629 Net Revenue Net revenue for the three months endedSeptember 30, 2022 was$545.6 million , an increase of 3% as compared to$528.6 million for the three months endedSeptember 30, 2021 . The increase from the prior year period was attributable to the following: •Growth in our Generics segment of$3.1 million was primarily due to volume growth and an increase in new products launched in 2022 and 2021 of$4.3 million , partially offset by continued price erosion. •Specialty segment net revenue decreased$3.3 million as growth in our promoted products, including Rytary® and Unithroid® which increased 12% and 39%, respectively, was driven by favorable pricing and volume growth that continues to remain strong, offset by loss of exclusivity on Zomig® nasal spray and declines in our non-promoted products. •AvKARE segment net revenue grew$17.1 million as compared to the prior year period due to growth in our distribution channel. Net revenue for the nine months endedSeptember 30, 2022 was$1,602.5 million , an increase of 3% as compared to$1,556.8 million for the nine months endedSeptember 30, 2021 . The increase from the prior year period was attributable to the following: •Growth in our Generics segment of$12.8 million was primarily due to new products launched in 2022 and 2021 that contributed net revenue growth of$7.7 million , the favorable year-over-year impact of lower returns relating to Oseltamivir (generic Tamiflu®), and volume growth. These increases were partially offset by continued price erosion. •Specialty segment net revenue decreased$5.7 million as compared to the prior year period, driven by the loss of exclusivity of Zomig® nasal spray as well as a decline in our other non-promoted products. Net revenue from our promoted products, including Rytary® and Unithroid®, increased 7% and 33%, respectively as prescription growth remained strong for both products. 49 --------------------------------------------------------------------------------
•AvKARE segment net income grew
Cost of goods sold and gross profit
Cost of goods sold, including impairment charges, increased 6%, or$21.2 million , to$351.3 million for the three months endedSeptember 30, 2022 as compared to$330.1 million for the three months endedSeptember 30, 2021 . The increase in cost of goods sold, including impairment charges, was primarily due to increased Generics andAvKARE volume and increased freight charges, partially offset by the impact of the loss of exclusivity on Zomig® nasal spray. Gross profit for the three months endedSeptember 30, 2022 was$194.2 million (36% of total net revenue) as compared to gross profit of$198.5 million (38% of total net revenue) for the three months endedSeptember 30, 2021 . Our gross profit as a percentage of net revenue decreased compared to the prior year period primarily as a result of the factors discussed above. Cost of goods sold, including impairment charges, increased 8%, or$79.0 million , to$1,033.2 million for the nine months endedSeptember 30, 2022 as compared to$954.2 million for the nine months endedSeptember 30, 2021 . The increase in cost of goods sold was primarily due to increased Generics andAvKARE volume, increased freight costs, a reduction in operating efficiency benefits realized as compared to the prior year period, and a$5.1 million period over period increase in intangible asset impairment charges. Gross profit for the nine months endedSeptember 30, 2022 was$569.3 million (36% of total net revenue) as compared to gross profit of$602.6 million (39% of total net revenue) for the nine months endedSeptember 30, 2021 . Our gross profit as a percentage of net revenue decreased compared to the prior year period primarily as a result of the factors discussed above.
General and administrative salesman
Selling, general, and administrative ("SG&A") expenses for the three months
ended September 30, 2022 was $100.1 million , as compared to $91.4 million for
the three months ended September 30, 2021 . The $8.7 million increase from the
prior year period was primarily due to $6.9 million of costs associated with our
biosimilar launches, including the Saol Acquisition (as defined in Note 3.
Acquisitions to the financial statements included in this Form 10-Q), an
increase in employee compensation, and increased freight charges as fuel costs
increased.
SG&A expenses for the nine months ended September 30, 2022 were $297.5 million ,
as compared to $268.3 million for the prior year period. The $29.3 million
increase from the prior year period was primarily due to $16.4 million of costs
associated with our biosimilar launches, including the Saol Acquisition and a
$5.0 million expense associated with a biosimilar regulatory approval, an
increase in employee compensation, and increased freight charges as fuel costs
increased.
Research and Development
Research and development ("R&D") expenses for the three months ended
September 30, 2022 were $50.2 million , as compared to $48.9 million for the
three months ended September 30, 2021 . The $1.3 million increase compared to the
prior year period was primarily attributable to costs of $2.8 million associated
with acquired businesses in 2021, partially offset by operating efficiencies.
R&D expenses for the nine months ended September 30, 2022 were $153.8 million ,
as compared to $150.0 million for the nine months ended September 30, 2021 . The
$3.8 million increase compared to the prior year period was primarily
attributable to increased compensation and other costs, including $15.6 million
of costs associated with businesses acquired in 2021, partially offset by
decreases in in-licensing and upfront milestone payments of $12.4 million .
Intellectual Property Legal Development Expenses
Intellectual property legal development expenses include, but are not limited to, costs associated with formulation assessments, patent challenge opinions and strategy, and litigation expenses to defend our intellectual property. Intellectual property legal development expenses for the three months endedSeptember 30, 2022 and 2021 were$1.4 million and$1.6 million , respectively. Expenses may vary based on the number of individual cases and corresponding litigation outstanding in a particular period. Intellectual property legal development expenses for the nine months endedSeptember 30, 2022 and 2021 were$3.0 million and$6.6 million , respectively. The period-over-period decrease of$3.6 million was due to the timing of specific cases. Expenses may vary based on the number of individual cases and corresponding litigation outstanding in a particular period. 50 --------------------------------------------------------------------------------
Acquisition, transaction-related and integration expenses
Acquisition, transaction-related and integration expenses were immaterial for the three months endedSeptember 30, 2022 and 2021. Acquisition, transaction-related and integration expenses were$0.7 million for the nine months endedSeptember 30, 2022 as compared to$7.2 million for the nine months endedSeptember 30, 2021 . Acquisition, transaction-related and integration expenses for the nine months endedSeptember 30, 2022 were primarily related to the Saol Acquisition, which closed onFebruary 9, 2022 . For the nine months endedSeptember 30, 2021 , acquisition, transaction-related and integration expenses were primarily related to the KSP Acquisition, which closed onApril 2, 2021 , and integration expenses related to the businesses that comprise ourAvKARE segment. Refer to Note 3. Acquisitions for additional information.
Charges Related to Legal Matters, Net
For the three and nine months endedSeptember 30, 2022 , we recorded charges related to legal matters, net, of$0.3 million and$249.8 million , respectively. The net charges for the nine months endedSeptember 30, 2022 were primarily comprised of charges associated with Opana® ER antitrust litigation, net of insurance recoveries associated with securities class actions. For the three and nine months endedSeptember 30, 2021 , we recorded charges of$19.0 million for securities class actions. Refer to Note 13. Commitments and Contingencies for additional information.
(Insurance Recoveries) Property Losses and Associated Expenses
OnSeptember 1, 2021 , Tropical Storm Ida brought extreme rainfall and flash flooding toNew Jersey that caused damage to two of our facilities. The Company concluded that all inventory on-hand at the time of the flooding was damaged and unsellable and that a majority of the equipment was damaged beyond repair. In addition, the Company incurred significant costs to repair both facilities. Accordingly, the Company recorded$8.2 million of charges for property losses and associated expenses for both of the three and nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2022 , insurance recoveries of$1.9 million associated with property damage and inventory losses were received and recorded in charges (insurance recoveries) for property losses and associated expenses. Other Operating Income Other operating income for the three and nine month periods endedSeptember 30, 2022 of$1.3 million and$2.5 million , respectively, was comprised of income earned from the India Production Linked Incentive Scheme for the Pharmaceutical Sector. Refer to Note 19. Government Grants for additional information.
Total Other Expenses, Net
Total other expense, net was$42.2 million for the three months endedSeptember 30, 2022 as compared to$30.6 million for the three months endedSeptember 30, 2021 . Overall, the increase from the prior year period was driven by a$5.5 million unfavorable period-over-period impact of net foreign exchange gains and losses and higher interest expense, partially offset by an increase in the benefit related to a previously outstanding contingent liability. Total other expense, net was$109.5 million for the nine months endedSeptember 30, 2022 as compared to$93.9 million for the nine months endedSeptember 30, 2021 . Overall, the increase from the prior year period was driven by a$12.7 million unfavorable period-over-period impact of net foreign exchange gains and losses and higher interest expense, partially offset by an increase in the benefit related to a previously outstanding contingent liability.
Provision for income taxes
For the three months endedSeptember 30, 2022 and 2021, our provision for income taxes and effective tax rates were$4.6 million and 209.6% and$4.0 million and (198.2)%, respectively. The period-over-period change in the provision for income taxes was primarily related to a change in the mix of foreign income. For the nine months endedSeptember 30, 2022 and 2021, our provision for income taxes and effective tax rates were$8.5 million and (3.5)% and$7.1 million and 14.8%, respectively. The period-over-period change in the provision for income taxes was primarily related to a change in the mix of foreign income and a discrete benefit as a result of the completion of an Internal 51 --------------------------------------------------------------------------------
Tax Service examination and Joint Committee review of 2012-2018 federal income tax returns, which allowed the Company to recognize previously unrecognized tax benefits.
Net income (loss)
We recognized a net loss for the three months ended
We recognized a net loss for the nine months endedSeptember 30, 2022 of$248.9 million as compared to net income of$40.6 million for the nine months endedSeptember 30, 2021 . The period-over-period change was attributable to the factors discussed above, including the charge for the nine months endedSeptember 30, 2022 related to legal matters of$262.8 million associated with the Opana® ER antitrust litigation.
generic
The following table sets forth results of operations for our Generics segment for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net revenue$ 350,266 $ 347,127 $ 1,032,908 $ 1,020,072 Cost of goods sold 217,997 208,670 640,450 598,122 Cost of goods sold impairment charges 674 688 5,786 688 Gross profit 131,595 137,769 386,672 421,262 Selling, general and administrative 30,259 15,941 84,410 46,500 Research and development 41,987 34,999 129,382 114,547
Impairment charges for research and development in progress –
- - 710 Intellectual property legal development expenses 1,369 1,584 2,919 6,506 Acquisition, transaction-related and integration expenses 16 - 24 - Charges related to legal matters, net 285 - 2,442 -
Charges (insurance recoveries) for property losses and associated expenses
- 8,186 (1,911) 8,186 Restructuring and other charges 507 - 713 80 Other operating income (1,320) - (2,495) - Operating income (loss)$ 58,492 $ 77,059 $ 171,188$ 244,733 Net Revenue Generics net revenue was$350.3 million for the three months endedSeptember 30, 2022 , an increase of$3.1 million as compared to the prior year period, primarily due to volume growth and an increase in new products launched in 2022 and 2021 of$4.3 million , partially offset by continued price erosion. Generics net revenue was$1,032.9 million for the nine months endedSeptember 30, 2022 , an increase of$12.8 million as compared to the prior year period. The increase primarily related to new products launched in 2022 and 2021 that contributed revenue growth of$7.7 million , the favorable year-over-year impact of lower returns relating to Oseltamivir (generic Tamiflu®), and volume growth. These increases were partially offset by continued price erosion.
Cost of goods sold and gross profit
Generics cost of goods sold, including impairment charges, for the three months endedSeptember 30, 2022 was$218.7 million , an increase of$9.3 million compared the prior year period. The increase in cost of goods sold was primarily attributable to increased volume and inflationary pressure on freight. Generics gross profit for the three months endedSeptember 30, 2022 was$131.6 million (38% of net revenue) as compared to gross profit of$137.8 million (40% of net revenue) for the three months endedSeptember 30, 2021 as a result of the factors described above. 52 -------------------------------------------------------------------------------- Generics cost of goods sold, including impairment charges, for the nine months endedSeptember 30, 2022 was$646.2 million , an increase of$47.4 million as compared to the nine months endedSeptember 30, 2021 . The increase in cost of goods sold was primarily attributable to increased volume, increased freight costs, and a reduction in operating efficiencies period-over-period. Generics gross profit for the nine months endedSeptember 30, 2022 was$386.7 million (37% of net revenue) as compared to gross profit of$421.3 million (41% of net revenue) for the nine months endedSeptember 30, 2021 as a result of the factors described above.
General and administrative salesman
Generics SG&A expense for the three months endedSeptember 30, 2022 was$30.3 million , as compared to$15.9 million for the three months endedSeptember 30, 2021 . The increase over the prior year period was primarily due to$6.9 million of costs associated with our biosimilar launches, including the Saol Acquisition, an increase in employee compensation, and increased freight charges as fuel costs increased. Generics SG&A expense for the nine months endedSeptember 30, 2022 was$84.4 million , as compared to$46.5 million for the nine months endedSeptember 30, 2021 . The increase over the prior year period was primarily attributed to$16.4 million of costs associated with our biosimilar launches, including the Saol Acquisition and a$5.0 million expense associated with a biosimilar regulatory approval, an increase in employee compensation, increased freight charges due to rising fuel costs, and increased legal fees.
Investigation and development
Generics R&D expenses for the three months endedSeptember 30, 2022 was$42.0 million , an increase of$7.0 million compared to the three months endedSeptember 30, 2021 . The increase was primarily associated with increased project spending as our complex portfolio continued to advance, inflationary pressures and the costs associated with acquired businesses in 2021 of$3.0 million relating to complex generics, offset, in part, by a decrease in in-licensing and upfront milestone payments of$1.0 million . Generics R&D expenses for the nine months endedSeptember 30, 2022 was$129.4 million , an increase of$14.8 million as compared to the nine months endedSeptember 30, 2021 . The increase was primarily associated with increased project spending as our complex portfolio continued to advance, inflationary pressures and the costs associated with acquired businesses in 2021 of$12.5 million relating to complex generics, offset, in part, by a decrease in in-licensing and upfront milestone payments of$9.5 million .
Intellectual Property Legal Development Expenses
Intellectual property legal development expenses include, but are not limited to, costs associated with formulation assessments, patent challenge opinions and strategy, and litigation expenses to defend our intellectual property. Intellectual property legal development expenses for the three months endedSeptember 30, 2022 and 2021 were$1.4 million and$1.6 million , respectively. Expenses may vary based on the number of individual cases and corresponding litigation outstanding in a particular period. Intellectual property legal development expenses for the nine months endedSeptember 30, 2022 and 2021 were$2.9 million and$6.5 million , respectively. The period-over-period decrease of$3.6 million was due to the timing of specific cases. Expenses may vary based on the number of individual cases and corresponding litigation outstanding in a particular period.
Charges (insurance recoveries) for property losses and associated expenses
OnSeptember 1, 2021 , Tropical Storm Ida brought extreme rainfall and flash flooding toNew Jersey that caused damage to two of our facilities. The Company concluded that all inventory on-hand at the time of the flooding was damaged and unsellable and that a majority of the equipment was damaged beyond repair. In addition, the Company incurred significant costs to repair both facilities. Accordingly, the Company recorded$8.2 million of charges for property losses and associated expenses for both of the three and nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2022 , insurance recoveries of$1.9 million associated with property damage and inventory losses were received and recorded in charges (insurance recoveries) for property losses and associated expenses. 53
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Other operating income
Other operating income for the three and nine month periods endedSeptember 30, 2022 of$1.3 million and$2.5 million , respectively, was comprised of income earned from the India Production Linked Incentive Scheme for the Pharmaceutical Sector. Refer to Note 19. Government Grants for additional information.
Specialty
The following table sets forth results of operations for our Specialty segment for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net revenue$ 89,484 $ 92,745 $ 271,571 $ 277,311 Cost of goods sold 43,719 47,303 130,363 144,184 Gross profit 45,765 45,442 141,208 133,127 Selling, general and administrative 22,201 22,211 69,772 62,748 Research and development 8,248 13,928 24,399 35,426 Intellectual property legal development expenses 42 43 77 68 Acquisition, transaction-related and integration expenses 15 - 47 16 Change in fair value of contingent consideration (1,425) 300 (1,495) 300 Operating income$ 16,684 $ 8,960 $ 48,408 $ 34,569 Net Revenue Specialty net revenue for the three months endedSeptember 30, 2022 was$89.5 million , a decrease of$3.3 million as compared to the three months endedSeptember 30, 2021 , driven by the loss of exclusivity of Zomig® nasal spray and a decline in our other non-promoted products. Net revenue from our promoted products, including Rytary® and Unithroid®, increased 12% and 39%, respectively as prescription growth remained strong for both products. Specialty net revenue for the nine months endedSeptember 30, 2022 was$271.6 million , a decrease of$5.7 million as compared to the nine months endedSeptember 30, 2021 , driven by the loss of exclusivity of Zomig® nasal spray and a decline in our other non-promoted products. Net revenue from our promoted products, including Rytary® and Unithroid®, increased 7% and 33%, respectively as prescription growth remained strong for both products. Cost of Goods Sold and Gross Profit Specialty cost of goods sold for the three months endedSeptember 30, 2022 was$43.7 million as compared to$47.3 million for the three months endedSeptember 30, 2021 . Specialty gross profit for the three months endedSeptember 30, 2022 was$45.8 million (51% of net revenue) as compared to gross profit of$45.4 million (49% of net revenue) for the three months endedSeptember 30, 2021 . The increase in gross profit primarily related to the decrease in revenues, offset by product mix, including the loss of exclusivity on Zomig® nasal spray, which had lower margin. Specialty cost of goods sold for the nine months endedSeptember 30, 2022 was$130.4 million as compared to$144.2 million for the nine months endedSeptember 30, 2021 . Specialty gross profit for the nine months endedSeptember 30, 2022 was$141.2 million (52% of net revenue) as compared to gross profit of$133.1 million (48% of net revenue) for the nine months endedSeptember 30, 2021 . The increase in gross profit primarily related to the decrease in revenues, offset by product mix, including the loss of exclusivity on Zomig® Nasal Spray which had lower margin. 54 --------------------------------------------------------------------------------
General and administrative salesman
Selling, general and special administrative expenses were
Specialty SG&A expense was$69.8 million for the nine months endedSeptember 30, 2022 , an increase of$7.0 million compared to the nine months endedSeptember 30, 2021 . The increase was driven by an increase in in-person sales and marketing efforts following the onset of the COVID-19 pandemic.
Investigation and development
Specialty R&D expenses for the three months endedSeptember 30, 2022 were$8.2 million , as compared to$13.9 million for the three months endedSeptember 30, 2021 . The$5.7 million decrease from the prior year period was primarily attributable to a decrease in project spend as the IPX study wound down. Specialty R&D expenses for the nine months endedSeptember 30, 2022 were$24.4 million , as compared to$35.4 million for the nine months endedSeptember 30, 2021 . The$11.0 million decrease from the prior year period was primarily attributable to a decrease in project costs as our IPX203 study wound down and a decrease in in-licensing and upfront milestone payments of$2.9 million .
The following table shows the results of the operations of our
Three Months Ended
September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net revenue $ 105,807 $ 88,721 $ 298,066 $ 259,390
Cost of goods sold 88,937 73,421 256,626 211,208
Gross profit 16,870 15,300 41,440 48,182
Selling, general and administrative 13,216 14,683 39,361 41,986
Acquisition, transaction-related and integration
expenses - - - 1,422
Operating income $ 3,654 $ 617 $ 2,079 $ 4,774
Net Revenue
Cost of goods sold and gross profit
AvKARE cost of goods sold for the three months endedSeptember 30, 2022 was$88.9 million as compared to$73.4 million for the three months endedSeptember 30, 2021 .AvKARE gross profit for the three months endedSeptember 30, 2022 was$16.9 million (16% of net revenue) as compared to gross profit of$15.3 million (17% of net revenue) for the three months endedSeptember 30, 2021 . The decrease in gross profit as a percentage of revenue primarily related to the increase in sales through our lower margin distribution channel.AvKARE cost of goods sold for the nine months endedSeptember 30, 2022 was$256.6 million as compared to$211.2 million for the nine months endedSeptember 30, 2021 .AvKARE gross profit for the nine months endedSeptember 30, 2022 was$41.4 million (14% of net revenue) as compared to gross profit of$48.2 million (19% of net revenue) for the nine months endedSeptember 30, 2021 . The decrease in gross profit primarily related to the increase in sales through our lower margin distribution channel and a decrease in sales through our higher margin governmental label channel. 55 --------------------------------------------------------------------------------
General and administrative salesman
AvKARE selling, general and administrative expenses were
AvKARE selling, general and administrative expenses were
Liquidity and Capital Resources
OnJune 2, 2022 , the Company entered into a revolving credit agreement (the "New Credit Agreement"), which amended the existing senior secured asset based revolving credit facility (the "Revolving Credit Facility"). The New Credit Agreement (i) replaced the Revolving Credit Facility with a$350.0 million senior secured revolving credit facility (the "New Revolving Credit Facility") that matures onJune 2, 2027 , (ii) provides for up to$25.0 million of the New Revolving Credit Facility to be available for the purpose of issuing letters of credit; (iii) provides for up to$35.0 million of the New Revolving Credit Facility to be available for the purpose of issuing swingline loans; (iv) allows the the Company to request an incremental increase in the revolving facility commitments by up to$150.0 million ; and (v) terminated the revolving credit facility commitments of lenders under the Revolving Credit Facility. Interest is payable on the New Revolving Credit Facility at a rate equal to the alternate base rate ("ABR") or the secured overnight financing rate ("SOFR"), plus an applicable margin, in each case, subject to a ABR floor of 1.00% or a SOFR floor of 0.00%, as applicable. The applicable margin for the New Revolving Credit Facility is initially 0.25% per annum for ABR loans and 1.25% per annum for SOFR loans. The applicable margin on borrowings under the New Revolving Credit Facility thereafter will adjust ranging from 0.25% to 0.50% per annum for ABR loans and from 1.25% to 1.50% per annum for SOFR loans determined by the average historical excess availability. The proceeds of any loans made under the New Revolving Credit Facility can be used for capital expenditures, acquisitions, working capital needs and other general purposes, subject to covenants as described below. The Borrower pays a commitment fee based on the average daily unused amount of the New Revolving Credit Facility at a rate of 0.25% per annum. Our primary source of liquidity is cash generated from operations, available cash on hand and borrowings under debt financing arrangements, including$285.9 million of available capacity on our New Revolving Credit facility as ofSeptember 30, 2022 . Refer to Note 17. Debt in our 2021 Annual Report on Form 10-K for additional information. We believe these sources are sufficient to fund our planned operations, meet our interest and contractual obligations, including acquisitions, and provide sufficient liquidity over the next 12 months from the date of filing of this Form 10-Q. However, our ability to satisfy our working capital requirements and debt obligations will depend upon economic conditions, the impact of the COVID-19 pandemic, and demand for our products, which are factors that may be out of our control. Our primary uses of capital resources are to fund operating activities, including research and development expenses associated with new product filings, and pharmaceutical product manufacturing expenses, license payments, spending on production facility expansions and capital equipment, acquisitions, and settlements of litigation. As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. A continued worldwide disruption could materially affect our future access to sources of liquidity, particularly our cash flows from operations, and financial condition. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.
We estimate that we will invest approximately
during 2022 for capital expenditures to support and grow our existing operations, primarily related to investments in manufacturing equipment, information technology and facilities.
Over the next 12 months, we expect to make substantial payments, including$100.0 million in payments associated with the Preliminary Settlement Agreements for the Opana® ER antitrust litigation (refer to Note 13. Commitments and Contingencies), monthly interest and quarterly principal amounts due for our debt instruments, including our Term Loan and Rondo Term Loan, as well as contractual payments for leased premises. Refer to Note 17. Debt and Note 12. Leases in our 2021 Annual Report on Form 10-K for additional information on our indebtedness and leases, respectively. We are party to a tax receivable agreement ("TRA") that requires us to make cash payments to the Members other than the Company, in respect of certain tax benefits that we may realize or may be deemed to realize as a result of sales or exchanges of Amneal Common Units by the Members (refer to Note 1. Nature of Operations). The timing and amount of any payments under the TRA will also vary, depending upon a number of factors including the timing and number of Amneal Common Units sold 56 -------------------------------------------------------------------------------- or exchanged for our class A common stock, the price of our class A common stock on the date of sale or exchange, the timing and amount of our taxable income, and the tax rate in effect at the time of realization of our taxable income. The tax receivable agreement also requires that we make an accelerated payment to the Members equal to the present value of all future payments due under the agreement upon certain change of control and similar transactions. Further sales or exchanges occurring subsequent toSeptember 30, 2022 could result in future Amneal tax deductions and obligations to pay 85% of such benefits to the holders of Amneal Common Units. These obligations could be incremental to and substantially larger than the approximate$206.3 million contingent liability as ofSeptember 30, 2022 (refer to Note 7. Income Taxes). As a result of the foregoing, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity. For further details, refer to Item 1A. Risk Factors in our 2021 Annual Report on Form 10-K. In addition, pursuant to the limited liability operating agreement of Amneal, as amended, in connection with any tax period, we will be required to make distributions to Amneal's members, on a pro rata basis in proportion to the number of Amneal Common Units held by each member, of cash until each member (other than Amneal) has received an amount at least equal to its assumed tax liability and Amneal has received an amount sufficient to enable it to timely satisfy all of itsU.S. federal, state and local and non-U.S. tax liabilities, and meet its obligations pursuant to the TRA. During the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , we made tax distributions of$3.3 million and$2.2 million , respectively, to the Members. As ofSeptember 30, 2022 , our cash and cash equivalents consist of cash on deposit and highly liquid investments. A portion of our cash flows are derived outsidethe United States . As a result, we are subject to market risk associated with changes in foreign exchange rates. We maintain cash balances at bothU.S. based and foreign country based commercial banks. At various times during the year, our cash balances held inthe United States may exceed amounts that are insured by theFederal Deposit Insurance Corporation (FDIC). We make our investments in accordance with our investment policy. The primary objectives of our investment policy are liquidity and safety of principal. Cash Flows (in thousands) Nine Months Ended September 30, 2022 2021 Cash provided by (used in): Operating activities$ 88,392 $ 178,559 Investing activities (162,843) (107,213) Financing activities (84,453) (107,772) Effect of exchange rate changes on cash (1,944)
(76)
Net decrease in cash, cash equivalents and restricted cash
Cash flows from operating activities
Net cash provided by operating activities was$88.4 million for the nine months endedSeptember 30, 2022 as compared to$178.6 million for the nine months endedSeptember 30, 2021 . The decrease in operating cash flows from the prior year period was primarily driven by payments of$115.0 million into an escrow account associated with the Opana® ER antitrust litigation settlement agreements and Preliminary Settlement Agreements. Refer to Note 13. Commitments and Contingencies.
Cash flows from investing activities
Net cash used in investing activities for the nine months endedSeptember 30, 2022 was$162.8 million as compared to$107.2 million for the nine months endedSeptember 30, 2021 . The increase from the prior year period of$55.6 million was primarily due to an increase in cash paid for intangible assets associated with marketed product licenses and business acquisitions.
Cash flows from financing activities
Net cash used in financing activities was$84.5 million for the nine months endedSeptember 30, 2022 as compared to$107.8 million for the nine months endedSeptember 30, 2021 . The decrease from the prior year period of$23.3 million was primarily due to$85.0 million in borrowings under the New Revolving Credit Facility (refer to Note 20. Debt) and a$23.5 million decrease in tax distributions, partially offset by$44.5 million paid for deferred consideration associated with the KSP 57 --------------------------------------------------------------------------------
Acquisition and the Puniska Acquisition (see Note 3. Acquisitions) and an increase in principal payments made on loans from
Commitments and Contractual Obligations
The contractual obligations of the Company are set forth in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's 2021 Annual Report on Form 10-K. Other than the
contractual obligations noted below (shown in thousands), there have been no
material changes to the disclosure presented in our 2021 Annual Report on Form
10-K.
Payments Due by Period
Less than 1
Contractual Obligations Total Year 1-3 Years 3-5 Years More than 5 Years
Opana ER® antitrust litigation
Preliminary Settlement Agreements(1) $ 150,000 $ 100,000 $ 50,000 $ - $ -
Interest associated with the Opana
ER® antitrust litigation Preliminary
Settlement Agreements (1) 4,220 1,805 2,415 - -
Total $ 154,220 $ 101,805 $ 52,415 $ - $ -
(1) See Note 13. Commitments and Contingencies for additional information.
The foregoing table does not include milestone payments potentially payable by the Company under its collaboration agreements and licenses. Such milestone payments are dependent upon the occurrence of specific and contingent events, and not the passage of time. A discussion of our significant contingent milestones is contained in Note 5. Alliance and Collaboration and Note 24. Related Party Transactions in our 2021 Annual Report on Form 10-K and Note 6. Alliance and Collaboration and Note 15. Related Party Transactions in this Form 10-Q.
Off-Balance Arrangements
We had no off-balance sheet deals as of
Critical Accounting Policies and Estimates
For a discussion of the Company's critical accounting policies and estimates, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K. There have been no material changes to the disclosures presented in our 2021 Annual Report on Form 10-K.
Recently issued accounting standards
Recently issued accounting standards are discussed in Note 2. Summary of Significant Accounting Policies.
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