ANI PHARMACEUTICALS, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited interim condensed consolidated financial statements and the accompanying notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the audited consolidated financial statements and the accompanying notes thereto in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 (the "2020 Annual Report"), as well as the information contained under Management's Discussion and Analysis of Financial Condition and Results of Operations and "Risk Factors" contained in the 2020 Annual Report, and Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q , and other information provided from time to time in our other filings with theSEC . This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under "Risk Factors" in our 2020 Annual Report and this Quarterly Report on Form 10-Q.
EXECUTIVE OVERVIEW
ANI Pharmaceuticals, Inc. and its consolidated subsidiaries,ANIP Acquisition Company andANI Pharmaceuticals Canada Inc. (together, "ANI," the "Company," "we," "us," or "our") is an integrated specialty pharmaceutical company focused on delivering value to our customers by developing, manufacturing, and marketing high quality branded and generic prescription pharmaceuticals. We focus on niche and high barrier to entry opportunities, including controlled substances, oncology products (anti-cancer), hormones and steroids, and complex formulations. Our three pharmaceutical manufacturing facilities, of which two are located inBaudette, Minnesota and one is located inOakville, Ontario , are together capable of producing oral solid dose products, as well as semi-solids, liquids and topicals, controlled substances, and potent products that must be manufactured in a fully-contained environment.
Strategy
Our objective is to build a sustainable and growing biopharmaceutical company serving patients in need and creating long-term value for our investors. Our growth strategy is driven by the following key pillars:
Building a successful Cortrophin Gel franchise
We acquired the NDAs for Cortrophin gel and Cortrophin-Zinc inJanuary 2016 and executed long-term supply agreements with a supplier of our primary raw material for corticotrophin active pharmaceutical ingredient ("API"), a supplier of corticotrophin API with whom we have advanced the manufacture of commercial scale batches of API, and a Cortrophin gel fill/finish contract manufacturer. InApril 2020 , the FDA issued a Refusal to File ("RTF") letter for our supplemental New Drug Application ("sNDA") for Cortrophin Gel. Subsequently, we retained a prominent regulatory consulting firm, restructured the internal Cortrophin development team, and focused our efforts on a comprehensive review of the original sNDA to execute a plan that addressed all gaps for a planned re-submission to the FDA. During the second quarter of 2021, we re-submitted the sNDA to the FDA.
We have begun to invest in leadership and expertise in the areas of commercialization of rare disease therapies to develop a launch strategy and commercial plan for this product.
Strengthening our generics business with enhanced research and development capability and increased focus on niche opportunities
We have grown our generics business through a combination of market share gains on existing products and new product launches. We have also successfully acquired numerous ANDAs through asset acquisitions, including, most recently, theU.S. portfolio of 23 generic products, including 10 commercial products at the time of the acquisition, fromAmerigen Pharmaceuticals, Ltd. We also focus on niche lower competition opportunities such as injectables and Paragraph IV filings. Additionally, we will seek opportunities to enhance our research and development capabilities through strategic partnerships and acquisitions of
assets and businesses.
34
Table of Contents
Maximizing the value from our established brands through innovative "go-to-market" ("GTM") strategies and continued programmatic acquisitions
We have acquired the New Drug Applications ("NDAs") for and market Atacand, Atacand HCT, Arimidex, Casodex, Lithobid, Vancocin, Inderal LA, Inderal XL, InnoPran XL, OXISTAT, VEREGEN, and Pandel. We are innovating in our GTM strategy through creative partnerships. In addition, we will continue to explore opportunities in acquiring new brands to grow our established brands portfolio.
Expansion of contract development and manufacturing organization ("CDMO") business by leveraging our unique manufacturing capabilities
We built a CDMO business through our sites inBaudette and grew it through the acquisition ofWellSpring Pharma Services Inc. ("ANI Canada"). OurNorth America based manufacturing and unique capabilities in high-potency, hormonal, steroid, and oncolytic products can be leveraged to expand our CDMO business.
The pillars of our strategy will be enabled by an empowered, collaborative, and purposeful team with high performance-orientation.
Product Development Considerations
We consider a variety of criteria in determining which products to develop, all of which influence the level of competition upon product launch. These criteria include:
Formulation Complexity. Our development and manufacturing capabilities enable
us to manufacture pharmaceuticals that are difficult to produce, including
? highly potent, extended release, combination, and low dosage products. This
ability to manufacture a variety of complex products is a competitive strength
that we intend to leverage in selecting products to develop or manufacture.
? Patent Status. We seek to develop products whose branded bioequivalents do not
have long-term patent protection or existing patent challenges.
Market Size. When determining whether to develop or acquire an individual
product, we review the current and expected market size for that product at
? launch, as well as forecasted price erosion upon conversion from branded to
generic pricing. We endeavor to manufacture products with sufficient market
size to enable us to enter the market with a strong likelihood of being able to
price our products both competitively and at a profit. Profit Potential. We research the availability and cost of active
pharmaceutical ingredients in determining which products to develop or acquire.
? In determining the potential profit of a product, we forecast our anticipated
market share, pricing, including the expected price erosion caused by competition from other generic manufacturers, and the estimated cost to manufacture the products.
Manufacturing. We generally seek to develop and manufacture products at our own
? manufacturing plants in order to optimize the utilization of our facilities,
ensure quality control in our products, and maximize profit potential.
Competition. When determining whether to develop or acquire a product, we
research existing and expected competition. We seek to develop products for
? which we can obtain sufficient market share and may decline to develop a
product if we anticipate significant competition. Our specialized manufacturing
facilities provide a means of entering niche markets, such as hormone
therapies, in which fewer generic companies are able to compete.
35
Table of Contents
Recent Developments
Pending Business Acquisition
On March 8, 2021 , we entered into a definitive agreement to acquire Novitium
Pharma LLC ("Novitium"), a privately held New Jersey -based pharmaceutical
company with development, manufacturing, and commercial capabilities (the
"Acquisition"). The closing of the acquisition will occur (a) within five
business days after all of the conditions to the closing set forth in the merger
agreement are satisfied or waived or (b) at such other time, date and place as
may be agreed by us and Novitium, subject to the completion of a minimum period.
The closing is subject to the satisfaction of customary closing conditions and
necessary regulatory approvals and we expect it to close in the second halfof 2021.
Consideration will consist of a combination of (i) an estimated cash amount of$89.5 million , subject to various adjustments and expected to be financed by a$25.0 million private placement of preferred stock (the "PIPE Investment ") and new debt financing, both described below, (ii) an aggregate of 2,466,667 shares of ANI common stock, and (iii) up to$46.5 million in contingent future earn-out payments. We will finance the transaction with a new$340.0 million Senior Secured Credit Facility (the "New Facility"), consisting of a$300.0 million term loan and a$40.0 million revolving credit facility, the issuance of 2,466,667 shares of ANI common stock (approximately$74.0 million in value based on a$30 stock price), and a$25.0 million PIPE Investment by Ampersand 2020 Limited Partnership ("Ampersand"), an affiliate ofAmpersand Capital Partners . The New Facility will be secured by substantially all the assets of ANI and its subsidiaries and used for the cash portion of the acquisition and to refinance ANI's existing senior credit facilities. The term loan portion of the New Facility, which was successfully syndicated onMay 24, 2021 , represents fully committed capital and, as such, carries customary ticking fees that commence 45 days and 90 days post allocation. Concurrently with the execution of the definitive agreement, onMarch 8, 2021 , we entered into an Equity Commitment and Investment Agreement with Ampersand (the "PIPE Investor"), pursuant to which we agreed to issue and sell to the PIPE Investor, and the PIPE Investor agreed to purchase, 25,000 shares of our Series A Convertible Preferred Stock, for a purchase price of$1,000 per share and an aggregate purchase price of$25.0 million PIPE Investment .
As of the date of filing of this quarterly report on Form 10-Q, the Acquisition remains under review by theU.S. Federal Trade Commission and we remain actively engaged in discussions with the commission.
For more information about the pending Novitium acquisition transaction, please
see our Form 8-K filed with the
NDA Acquisition OnApril 1, 2021 , we acquired the NDAs for OXISTAT®, VEREGEN®, and Pandel® and the ANDA for Apexicon® fromSandoz Inc. for total consideration of$20.7 million . The acquisition was funded through a$24 million borrowing under our pre-existing Revolver.
Cortrophin Gel Re-commercialization Update
InApril 2020 , theU.S. Food and Drug Administration ("FDA") issued a Refusal to File ("RTF") letter for our Supplemental New Drug Application ("sNDA") for Cortrophin Gel. Subsequently, we retained a prominent regulatory consulting firm, restructured the internal Cortrophin development team, and focused our efforts on a comprehensive review of the original sNDA to execute a plan that addressed all gaps for a planned re-submission to the FDA. During the second quarter of 2021, we re-submitted the sNDA to the FDA. 36
Table of Contents
In addition, in the third quarter of 2019, we began purchasing materials that are intended to be used commercially in anticipation of FDA approval of Cortrophin Gel and the resultant product launch. UnderU.S. GAAP, we cannot capitalize these pre-launch purchases of materials as inventory prior to FDA approval, and accordingly, they are charged to expense in the period in which they are incurred. We expect these pre-launch purchases of material to continue in 2021 as we build raw materials, API and finished goods for the expected
launch of this product.
COVID-19 Impact
We continue to closely monitor the impact of the novel coronavirus ("COVID-19")
pandemic on our business and the geographic regions where we operate. During the
three months ended March 31, 2021 per IQVIA/IMS data, total market generic
prescriptions in the United States declined when compared to the three months
ended December 31, 2020 and March 31, 2020 . Over these same periods, total
market brand prescriptions were steady or increased. The decline in generic
prescriptions, which generally make up 70-80% of our net revenues, during this
period was in part attributable to the COVID-19 pandemic, as subsequent waves
impacted patient and customer behavior. The decline in generic prescriptions due
to the COVID-19 pandemic negatively impacted our generic net revenues during the
three months ended March 31, 2021 . During the three months ended June 30, 2021 ,
per IQVIA/IMS data, total market generic and brand prescriptions increased when
compared to the three months ended March 31, 2021 and the three months ended
June 30, 2020 , in part due to easing of local restrictions and availability of
COVID-19 vaccines. We have not experienced a significant impact to our
manufacturing operations; however, we continue to see minor disruptions to our
supply chain from the COVID-19 pandemic during 2021. Our manufacturing
facilities in Baudette, Minnesota and Oakville, Ontario have remained open
throughout the pandemic and have operated in accordance with local, state and
national safety guidelines. The pandemic has not impacted our access to capital
and has not significantly impacted our use of funds, including but not limited
to capital expenditures, spend on research and development activities and
business development opportunities.
We are unable to predict the impact that the COVID-19 pandemic will continue to
have on our future financial condition, results of operations and cash flows due
to numerous uncertainties. These uncertainties include the scope, severity and
continued duration of the pandemic, the level of success of continued actions
taken to contain the pandemic or mitigate its impact, including the availability
and usage of vaccines, and the direct and indirect economic effects of the
pandemic and containment measures, among others. The outbreak of COVID-19 in
many countries, including the United States and Canada , has had a significant
adverse impact on global economic activity and has contributed to significant
volatility and negative pressure in financial markets. As a result, the COVID-19
pandemic has negatively impacted almost every industry, either directly or
indirectly. Further, the impacts of a potential worsening of global economic
conditions and the continued disruptions to, and volatility in, the credit and
financial markets, pharmaceutical supply chains, patient access to healthcare as
well as other unanticipated consequences remain unknown.
Settlement of Pending Litigation
OnAugust 3, 2021 , the Company entered into a Settlement Agreement withArbor Pharmaceuticals, LLC to resolve all claims related to Civil Action 17-4910,Arbor Pharmaceuticals, LLC ("Arbor") v.ANI Pharmaceuticals, Inc. , which was pending trial in theUnited States District Court for the District of Minnesota . Under the terms of the agreement, ANI will pay Arbor$8.4 million and Arbor will dismiss the action with prejudice. Neither party admitted wrongdoing in reaching this settlement. The Company will pay the settlement from cash on the balance sheet. We recognized the$8.4 million settlement as legal settlement expense on the unaudited interim condensed consolidated statements of operations in the three months endedJune 30, 2021 . 37 Table of Contents GENERAL The following table summarizes our results of operations for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2021 2020 2021 2020 Net revenues$ 48,625 $ 48,470 $ 103,146 $ 98,244 Operating expenses Cost of sales (exclusive of depreciation and amortization) 22,314 20,695 42,299 42,499 Research and development 2,805 3,035 5,773 9,379 Selling, general, and administrative 18,820 21,213 36,407 34,896 Depreciation and amortization 11,324 11,198 22,222 22,381 Legal settlement expense 8,400 - 8,400 - Cortrophin pre-launch charges 515 3,636
553 8,238
Operating loss (15,553) (11,307) (12,508) (19,149)
Interest expense, net (2,531) (2,356) (4,985) (4,388)
Other expense, net (67) (116) (582) (106)Loss before benefit for income taxes (18,151) (13,779)
(18,075) (23,643) Benefit for income taxes 4,045 1,443 4,055 4,296 Net loss$ (14,106) $ (12,336) $ (14,020) $ (19,347) The following table sets forth, for all periods indicated, items in our unaudited interim condensed consolidated statements of operations as a percentage of net revenues: Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Net revenues 100.0 % 100.0 % 100.0 % 100.0 % Operating expenses Cost of sales (exclusive of depreciation and amortization) 45.9 % 42.7 % 41.0 % 43.3 % Research and development 5.8 % 6.3 % 5.6 % 9.5 % Selling, general, and administrative 38.7 % 43.8 % 35.3 % 35.5 % Depreciation and amortization 23.3 % 23.1 % 21.5 % 22.8 % Legal settlement expense 17.3 % - % 8.1 % - % Cortrophin pre-launch charges 1.1 % 7.5 %
0.5 % 8.4 %
Operating loss (32.1) % (23.4) % (12.0) % (19.5) %
Interest expense, net (5.2) % (4.9) % (4.8) % (4.5) %
Other expense, net (0.1) % (0.2) % (0.6) % (0.1) %Loss before benefit for income taxes (37.4) % (28.5) %
(17.4) % (24.1) %
Benefit for income taxes 8.3 % 3.0 % 3.9 % 4.4 %
Net loss (29.1) % (25.5) % (13.5) % (19.7) %
38
Table of Contents
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Net Revenues
Three Months Ended June 30,
(in thousands) 2021 2020 Change % Change
Generic pharmaceutical products $ 34,199 $ 33,400 $ 799 2.4 %
Branded pharmaceutical products 11,038 10,633 405 3.8 %
Contract manufacturing 2,322 2,900 (578) (19.9) % Royalty and other 1,066 1,537 (471) (30.6) % Total net revenues$ 48,625 $ 48,470 $ 155 0.3 % We derive substantially all of our revenues from sales of generic and branded pharmaceutical products, contract manufacturing, and contract services, which include product development services, laboratory services, and royalties on net sales of certain products.
Net revenues for the three months ended
Net revenues for generic pharmaceutical products were
three months ended
for the same period in 2020. From a product perspective, the net increase was
? due to increased sales of Fenofibrate, Potassium Citrate Extended Release,
Vancomycin Oral Solution, and the second quarter 2021 launch of Nicardipine.
These increases were partially offset by declines in sales of Methazolamide,
Miglustat, Penicillamine, and Mixed Amphetamine Salts.
During the three months endedJune 30, 2020 , the overall generic pharmaceutical product market and our net revenues for generic pharmaceutical products, which generally make up 70-80% of our net revenues, were negatively impacted by the COVID-19 pandemic, including but not limited to effects from state "shelter-in-place" orders and the prohibition of elective medical procedures. These actions resulted in suppressed generic prescriptions during the three months endedJune 30, 2020 . During the three months endedJune 30, 2021 , generic prescription levels on a total market basis increased when compared to the immediately prior three-month period and the comparable three-month period in 2020. Net revenues during the three months endedJune 30, 2021 were negatively impacted by decreases in average selling prices and a shift in mix towards products with lower average selling prices, tempered by increased volumes.
Net revenues for branded pharmaceutical products were
three months ended
? for the same period in 2020. The primary reason for the increase was the launch
of the products acquired in the
2021 and increased sales of InnoPran XL. These increases were tempered by
decreased revenues from sales of Atacand and Arimidex.
During the three months endedJune 30, 2020 , the overall brand pharmaceutical product market and our brand revenue results were negatively impacted by the COVID-19 pandemic, including but not limited to effects from state "shelter-in-place" orders and the prohibition of elective medical procedures. These actions resulted in suppressed brand prescriptions during the three months endedJune 30, 2020 . During the three months endedJune 30, 2021 , brand prescription levels on a total market basis increased when compared to the prior three-month period and the comparable three-month period in 2020. Net revenues during the three months endedJune 30, 2021 were negatively impacted by a shift in mix towards product with lower average selling prices, tempered by increased volumes. 39 Table of Contents
Contract manufacturing revenues were
?
in 2020, due to a decreased volume of orders from contract manufacturing customers in the period.
Royalty and other revenues were
30, 2021, a decrease of
? 2020, primarily due to decreases in product development revenues earned by ANI
decreases were tempered by licensing revenues earned during the three months
ended
Cost of Sales (Excluding Depreciation and Amortization)
Three Months Ended June 30,
(in thousands) 2021 2020 Change % Change
Cost of sales (excl. depreciation and
amortization) $ 22,314 $ 20,695 $ 1,619 7.8 %
Cost of sales consists of direct labor, including manufacturing and packaging,
active and inactive pharmaceutical ingredients, freight costs, packaging
components, and royalties related to profit-sharing arrangements. Cost of sales
does not include depreciation and amortization expense, which is reported as a
separate component of operating expenses on our unaudited interim condensed
consolidated statements of operations.
For the three months ended June 30, 2021 , cost of sales increased to $22.3
million from $20.7 million for the same period in 2020, an increase of $1.6
million , or 7.8%, primarily as a result of increased volumes in the current year
period. The increase was tempered by a $1.2 million decrease related to a
decrease in sales of products subject to profit sharing arrangements. During the
three months ended June 30, 2021 and 2020, we recognized $1.5 million and $1.4
million , respectively, in cost of sales representing the excess of fair value
over cost for inventory acquired in acquisitions and subsequently sold during
the three months ended June 30, 2021 and 2020, respectively.
Cost of sales as a percentage of net revenues increased to 42.8% during the
three months ended June 30, 2021 , from 39.8% during same period in 2020
(exclusive of cost of sales representing the excess of fair value over cost for
inventory acquired in the acquisitions and subsequently sold during the period),
primarily as a result of increased volumes in a period of declining average
selling prices across generic and brand products and a shift in mix towards
generic and brand products with lower average selling prices. The negative
impacts were tempered by a decrease in sales of products subject to profit
sharing arrangements.
During the three months ended June 30, 2021 , no single vendor represented at
least 10% of inventory purchases. During the three months ended June 30, 2020 ,
we purchased approximately 13% of our inventory from one supplier.
Other Operating Expenses
Three Months Ended June 30,
(in thousands) 2021 2020 Change % Change
Research and development $ 2,805 $ 3,035 $ (230) (7.6) %Selling, general, and administrative 18,820 21,213 (2,393) (11.3) % Depreciation and amortization 11,324 11,198 126 1.1 % Legal settlement expense 8,400 - 8,400 NM (1) Cortrophin pre-launch charges 515 3,636 (3,121) (85.8) % Total other operating expenses$ 41,864 $ 39,082
$ 2,782 7.1 % (1) Not Meaningful
Other operating expenses consist of research and development costs, selling, general, and administrative expenses, depreciation and amortization, and Cortrophin pre-launch charges.
40
Table of Contents
For the three months endedJune 30, 2021 , other operating expenses increased to$41.9 million from$39.1 million for the same period in 2020, an increase of$2.8 million , or 7.1%, primarily as a result of the following factors:
Research and development expenses decreased from
? a decrease of 7.6%, primarily due to the non-recurrence of
severance related expense associated with the restructuring of our internal
Cortrophin development team.
Selling, general, and administrative expenses decreased from
non-recurrence of
2020 departure of our former President and CEO. We also incurred recruitment
? and related legal charges associated with our CEO search in the second quarter
2020. These decreases were offset by
related to the pending Novitium acquisition and
marketing expenses related to Cortrophin pre-launch activities incurred during
the three months ended
Depreciation and amortization increased from
? increase of 1.1%, primarily due to the amortization of the NDAs acquired in
amortized in 2020.
As described in Note 14, Subsequent Event, in the unaudited interim condensed
consolidated financial statements included in Part I, Item 1 of this Quarterly
? Report on Form 10-Q, we recognized Legal settlement expense of
the three months endedJune 30, 2021 . No Legal settlement expenses were recognized in the three months endedJune 30, 2020 . As described in Note 13, Cortrophin Pre-Launch Charges, in the unaudited
interim condensed consolidated financial statements included in Part I, Item 1
? of this Quarterly Report on Form 10-Q, we recognized Cortrophin pre-launch
charges of
Cortrophin pre-launch charges of$3.6 million in the three months endedJune 30, 2020 . Other Expense, net Three Months Ended June 30, (in thousands) 2021 2020 Change % Change Interest expense, net$ (2,531) $ (2,356) $ (175) 7.4 % Other expense, net (67) (116) 49 (42.2) % Total other expense, net$ (2,598) $ (2,472) $ (126) 5.1 % For the three months endedJune 30, 2021 , we recognized other expense of$2.6 million versus other expense of$2.5 million for the same period in 2020, an increase of$0.1 million . Interest expense, net for the three months endedJune 30, 2021 and 2020 consists primarily of interest expense on borrowings under our secured term loan ("Term Loan"), delayed draw term loan ("DDTL"), and line of credit ("Revolver"). For the three months endedJune 30, 2021 and 2020, there was less than$0.1 million of interest capitalized into construction in progress.
Benefit for Income Taxes
Three Months Ended June 30,
(in thousands) 2021 2020 Change % ChangeBenefit for income taxes$ 4,045 $ 1,443 $ 2,602
180.3 %
Our provision for income taxes consists of current and deferred components, which include changes in our deferred tax assets, our deferred tax liabilities, and our valuation allowance.
For the three months endedJune 30, 2021 , we recognized an income tax benefit of$4.0 million . The income tax benefit resulted from applying an estimated annual worldwide effective tax rate of 22.3% to pre-tax consolidated loss of$18.2 41
Table of Contents
million reported during the period, reduced by the net effects of certain
discrete items occurring in 2021 which impact our income tax provision in the
period in which they occur. There were no material discrete items occurring
during the three months ended
For the three months endedJune 30, 2020 , we recognized an income tax benefit of$1.4 million . The income tax benefit resulted from applying an estimated annual worldwide effective tax rate of 10.5% to pre-tax consolidated loss of$13.8 million reported during the period, reduced by the net effects of certain discrete items occurring which impact our income tax provision in the period in which they occur. There were no material discrete items occurring during the three months endedJune 30, 2020 . Net Revenues Six Months Ended June 30, (in thousands) 2021 2020 Change % Change Generic pharmaceutical products$ 66,812 $ 70,895 $ (4,083) (5.8) % Branded pharmaceutical products 18,555 19,790 (1,235) (6.2) % Contract manufacturing 4,895 4,874 21 0.4 % Royalty and other income 12,884 2,685 10,199 379.9 % Total net revenues$ 103,146 $ 98,244 $ 4,902 5.0 % Net revenues for the six months endedJune 30, 2021 were$103.1 million compared to$98.2 million for the same period in 2020, an increase of$4.9 million , or 5.0%, primarily as a result of the following factors:
Net revenues for generic pharmaceutical products were
six months ended
for the same period in 2020. From a product perspective, the net decrease was
? driven by declines in sales of Ezetimibe Simvastatin, Methazolamide, Miglustat,
and Mixed Amphetamine Salts, and tempered by increased revenues from sales of
Fenofibrate, Paliperidone Extended Release, Potassium Citrate Extended Release,
and the second quarter 2021 launch of Nicardipine.
During the six months endedJune 30, 2020 , and primarily the three months endedJune 30, 2020 , the overall generic pharmaceutical product market and our net revenues from generic pharmaceutical products were negatively impacted by the COVID-19 pandemic, including but not limited to effects from state "shelter-in-place" orders and the prohibition of elective medical procedures. These actions resulted in suppressed generic prescriptions during the six months endedJune 30, 2020 . During the six months endedJune 30, 2021 , generic prescription levels on a total market basis decreased when compared to the comparable six-month period in 2020. Based upon an analysis of IQVIA/IMS data, during the three months endedMarch 31, 2021 , the total market for generic prescriptions inthe United States declined approximately 9% when compared to the three months endedMarch 31, 2020 . We believe that this overall decline in prescription activity during this period was principally due to the COVID-19 pandemic, and it negatively impacted the market for many of our generic pharmaceutical products. Total generic market prescriptions increased during the three months endedJune 30, 2021 when compared to the prior year comparable period. Net revenues during the six months endedJune 30, 2021 were negatively impacted by decreases in average selling prices and a shift in mix towards products with lower average selling prices, tempered by increased volumes.
Net revenues for branded pharmaceutical products were
six months ended
? for the same period in 2020. The primary reasons for the decrease were lower
unit sales of Inderal XL and decreased unit sales and of Atacand. These
decreases were tempered by the launch of the products acquired in the Sandoz,
Inc. acquisition in the second quarter 2021.
During the six months endedJune 30, 2020 , the overall brand pharmaceutical product market and our brand revenue results were negatively impacted by the COVID-19 pandemic, including but not limited to effects from state "shelter-in-place" orders and the prohibition of elective medical procedures. These actions resulted in suppressed brand prescriptions during the three months endedJune 30, 2020 . During the six months ended June 42
Table of Contents
30, 2021, brand prescription levels on a total market basis increased when compared to the prior six-month period and the comparable six-month period in 2020. Net revenues during the six months endedJune 30, 2021 were negatively impacted by a shift in mix towards product with lower average selling prices, tempered by increased volumes.
Contract manufacturing revenues were
?
period in 2020.
Royalty and other revenues were
30, 2021, an increase of
? 2020, primarily due to the recognition of the final royalty related to the Kite
in the first quarter 2021.
Cost of Sales (Excluding Depreciation and Amortization)
Six Months Ended June 30,
(in thousands) 2021 2020 Change % Change
Cost of sales (excl. depreciation and
amortization) $ 42,299 $ 42,499 $ (200) (0.5) %
For the six months ended June 30, 2021 , cost of sales decreased to $42.3 million
from $42.5 million for the same period in 2020, a decrease of $0.2 million , or
0.5%. During the six months ended June 30, 2021 , we incurred $1.5 million in
cost of sales representing the excess of fair value over cost for inventory
acquired in the Sandoz, Inc. acquisition and subsequently sold during the
period, compared to $4.1 million during the six months ended June 30, 2020 ,
related to the Amerigen acquisition. Excluding these impacts, the cost of sales
increase during the six months ended June 30, 2021 was due primarily to
increased volumes during the current year period and tempered by a $1.3 million
decrease in inventory reserve charges related to excess and obsolete inventory
and discontinued projects.
Cost of sales as a percentage of net revenues increased to 39.6% during the
six months ended June 30, 2021 , from 39.1% during same period in 2020 (exclusive
of cost of sales representing the excess of fair value over cost for inventory
acquired in the acquisitions and subsequently sold during the period), primarily
as a result of increased volumes in a period of declining average selling prices
across generic and brand products and a shift in mix towards generic and brand
products with lower average selling prices. The negative impacts were
significantly tempered by $11.2 million of royalty revenue in the first quarter
2021 with no associated cost of sales.
During the six months ended
Other Operating Expenses
Six Months Ended June 30,
(in thousands) 2021 2020 Change % Change
Research and development $ 5,773 $ 9,379 $ (3,606) (38.4) %
Selling, general, and administrative 36,407 34,896 1,511 4.3 %
Depreciation and amortization 22,222 22,381 (159) (0.7) %
Legal settlement expense 8,400 - 8,400 NM (1)
Cortrophin pre-launch charges 553 8,238 (7,685) (93.3) %
Total other operating expenses $ 73,355 $ 74,894 $ (1,539) (2.1) %
(2) Not Meaningful
For the six months endedJune 30, 2021 , other operating expenses decreased to$73.4 million from$74.9 million for the same period in 2020, a decrease of$1.5 million , or 2.1%, primarily as a result of the following factors: 43 Table of Contents
Research and development expenses decreased from
? a decrease of 38.4%, primarily due to the non-recurrence of the
in-process research and development expense from the
Ltd. acquisition in the first quarter 2020.
Selling, general, and administrative expenses increased from
million of transaction expenses related to the pending Novitium acquisition and
activities incurred in the six months ended
? pharmacovigilance compliance costs in continued support of the expansion of our
commercial portfolio, and increased legal, insurance, and other professional
fees. These increases were offset by the non-recurrence of
termination benefit expenses related to the departure of our former President
and CEO and non-recurrence of other recruitment and related legal charges
associated with our CEO search in the second quarter 2020.
Depreciation and amortization decreased from
? decrease of
in 2020, partially offset by the amortization of the NDAs acquired in April
2021 from
As described in Note 14, Subsequent Event, in the unaudited interim condensed
consolidated financial statements included in Part I, Item 1 of this Quarterly
? Report on Form 10-Q, we recognized Legal settlement expense of
the six months endedJune 30, 2021 . No Legal settlement expenses were recognized in the six months endedJune 30, 2020 . As described in Note 13, Cortrophin Pre-Launch Charges, in the unaudited
interim condensed consolidated financial statements included in Part I, Item 1
? of this Quarterly Report on Form 10-Q, we recognized Cortrophin pre-launch
charges of
Cortrophin pre-launch charges of$8.2 million in the six months endedJune 30, 2020 . Other Expense, net Six Months Ended June 30, (in thousands) 2021 2020 Change % Change Interest expense, net$ (4,985) $ (4,388) $ (597) 13.6 % Other expense, net (582) (106) (476) 449.1 % Total other expense, net$ (5,567) $ (4,494) $ (1,073) 23.9 %
For the six months endedJune 30, 2021 , we recognized other expense of$5.6 million versus other expense of$4.5 million for the same period in 2020, an increase of$1.1 million , due in part to increased interest expense on borrowings on our Revolver. Interest expense, net for the six months endedJune 30, 2021 and 2020 consists primarily of interest expense on borrowings under our Term Loan, DDTL, and Revolver. For the six months endedJune 30, 2021 and 2020 there was less than$0.1 million of interest capitalized into construction
in
progress.
Benefit for Income Taxes
Six Months Ended June 30,
(in thousands) 2021 2020 Change % Change
Benefit for income taxes $ 4,055 $ 4,296 $ (241) (5.6) %
For the six months endedJune 30, 2021 , we recognized an income tax benefit of$4.1 million . The income tax benefit resulted from applying an estimated annual worldwide effective tax rate of 22.4% to pre-tax consolidated loss of$18.1 million reported during the period, reduced by the net effects of certain discrete items occurring in 2021 which impact our income tax provision in the period in which they occur. There were no material discrete items occurring during the six months endedJune 30, 2021 . 44
Table of Contents
For the six months endedJune 30, 2020 , we recognized an income tax benefit of$4.3 million . The income tax benefit resulted from applying an estimated annual worldwide effective tax rate of 18.2% to pre-tax consolidated loss of$23.6 million reported during the period, reduced by the net effects of certain discrete items occurring which impact our income tax provision in the period in which they occur. There were no material discrete items occurring during the six months endedJune 30, 2020 .
LIQUIDITY AND CAPITAL RESOURCES
OnJune 30, 2021 , we had$24.3 million in unrestricted cash and cash equivalents. OnDecember 31, 2020 , we had$7.9 million in unrestricted cash and cash equivalents. InApril 2021 , we drew$24.0 million under the Revolver. We generated$20.9 million of cash from operations in the six months endedJune 30, 2021 . InApril 2021 , we acquired three NDAs and an ANDA and certain related inventories fromSandoz Inc. for total consideration of$20.7 million . The acquisition was funded through borrowings under our Revolver. Subsequent to theJune 30, 2021 balance sheet date, we utilized$8.4 million of cash from the balance sheet to settle litigation with Arbor. We believe that our financial resources, consisting of current working capital, anticipated future operating revenue and corresponding collections from customers, and our revolving line of credit facility, under which$43.5 million remains available for borrowing as ofJune 30, 2021 , will be sufficient to enable us to meet our working capital requirements and debt obligations for
at least the next 12 months. Cash Flows
The following table summarizes the net cash and cash equivalents provided by/(used in) by operating activities, investing activities, and financing activities for the periods indicated:
Six Months Ended June 30,
(in thousands) 2021 2020
Operating Activities $ 20,909 $ 22,590
Investing Activities $ (22,687) $ (60,394)
Financing Activities $ 18,173 $ 3,147 Net Cash Provided by Operations
Net cash provided by operating activities was$20.9 million for the six months endedJune 30, 2021 , compared to$22.6 million provided by operating activities during the same period in 2020, a decrease of$1.7 million . The decrease was due to changes in working capital, including payments for income taxes of$8.4 million partially offset by a reduction in net loss in the six months endedJune 30, 2021 against the comparable 2020 period.
Net cash used in investing activities for the six months endedJune 30, 2021 was$22.7 million , principally due to the acquisition of three NDAs and an ANDA fromSandoz, Inc. for$20.7 million in consideration and$1.6 million of capital expenditures during the period. Net cash used in investing activities for the six months endedJune 30, 2020 was$60.4 million , principally due to theJanuary 2020 acquisition of 23 generic products and inventory and materials fromAmerigen Pharmaceuticals, Ltd. for$57.4 million and$2.3 million of capital expenditures during the period.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was$18.2 million for the six months endedJune 30, 2021 , principally due to borrowings of$24.0 million on the Revolver,$5.2 million of maturity payments on the Term Loan and DDTL, and$0.8 million of treasury stock purchased in relation to restricted stock vests. Net cash provided by financing activities was$3.1 million for the six months endedJune 30, 2020 , principally due to net borrowings of$7.5 million on the Revolver and$0.4 million of proceeds from stock option exercises, partially offset by$3.3 million of maturity payments on the Term Loan and DDTL and$1.5 million of treasury stock purchased in relation to restricted stock vests. 45
Table of Contents
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
This Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. In our consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, allowance for doubtful accounts, accruals for chargebacks, government rebates, returns, and other allowances, allowance for inventory obsolescence, valuation of financial instruments and intangible assets, accruals for contingent liabilities, fair value of long-lived assets, deferred taxes and valuation allowance, and the depreciable lives of long-lived assets. A summary of our significant accounting policies is included in Part II, Item 8. Consolidated Financial Statements, Note 1, Description of Business and Summary of Significant Accounting Policies, in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in Part I, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
A discussion of the recently issued accounting pronouncements is described in Note 1, Business, Presentation, and Recent Accounting Pronouncements, in the unaudited interim condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and is incorporated herein by reference.
OFF-BALANCE SHEET ARRANGEMENTS
As of
CONTRACTUAL OBLIGATIONS
As of
© Edgar Online, source
