# Amneal Pharmaceuticals, Inc. (AMRX) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Amneal Pharmaceuticals, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1723128/000172312823000009/amrx-20221231.htm
Accession: 0001723128-23-000009
Filing date: 2023-03-03
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/AMRX/
All MD&A years: /company/AMRX/mda/
Previous year: /company/AMRX/mda/fy2021/ (FY 2021)
Next year: /company/AMRX/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Amneal Pharmaceuticals, Inc. (the “Company”, “we,” “us,” or “our”) is a global pharmaceutical company that develops, manufactures, markets and distributes a diverse portfolio of essential medicines, including complex generics, injectables, biosimilars and specialty branded pharmaceuticals. We operate principally in the United States, India, and Ireland, and sell to wholesalers, distributors, hospitals, chain pharmacies and individual pharmacies, either directly or indirectly. We are a holding company, whose principal assets are common units (“Amneal Common Units”) of Amneal Pharmaceuticals, LLC (“Amneal”).

The group, together with their affiliates and certain assignees, who owned Amneal when it was a private company (the “Amneal Group”) held 50.1% of Amneal Common Units and the Company held the remaining 49.9% as of December 31, 2022. Although the Company has a minority economic interest in Amneal, it is Amneal’s sole managing member, having the sole voting power to make all of Amneal’s business decisions and control its management. Therefore, the Company consolidates the financial statements of Amneal and its subsidiaries. The Company records non-controlling interests for the portion of Amneal’s economic interests that it does not hold.

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 and under the heading Forward-Looking Statements in this Annual Report on Form 10-K. The following discussion and analysis, as well as other sections in this report, should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included elsewhere herein.

For a discussion of our financial condition and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, see “Results of Operations” and “Liquidity and Capital Resources” under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K, which discussion is incorporated herein by reference.

Overview

Segments

We have three reportable segments: Generics, Specialty, and AvKARE.

Generics

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 the United States (“U.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 CNS disorders, including Parkinson’s disease, and endocrine disorders. 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 also includes Unithroid® (levothyroxine sodium), for the treatment of hypothyroidism, which is sold under a license and distribution agreement with Jerome Stevens Pharmaceuticals, Inc., and Lyvispah® (baclofen), a unique dissolvable granule formulation used to treat muscle stiffness, spasms and pain from multiple sclerosis.

Our Specialty products are marketed through skilled specialty sales and marketing teams, who call on neurologists, movement disorder specialists, endocrinologists and primary care physicians in key markets throughout the U.S. Our Specialty segment also has a number of product candidates that are in varying stages of development.

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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.

AvKARE

Our AvKARE 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 of AvKARE and AvPAK, which service the Department of Defense and Department of Veteran 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 throughout the U.S. 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 Item 1. Business and Item 1A. Risk Factors in this Form 10-K.

Inflation

While it is difficult to accurately measure the impact of inflation, we estimate our business experienced an increase in costs due to inflation of approximately $30.0 million for the year ended December 31, 2022. We expect an inflationary impact of approximately $15.0 million for the year ending December 31, 2023. Notwithstanding our estimates, rising inflationary pressures due to higher input costs, including higher material, transportation, labor and other costs, could exceed our expectations and may adversely impact our operating results in future periods.

COVID-19 Pandemic

In March 2020, the World 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.

The occurrence of regional epidemics or a global pandemic, such as the COVID-19 pandemic, have had and may continue to have an adverse effect on how we and our customers are operating our respective businesses and our operating results. Our operations have also been and may in the future be negatively affected by a range of external factors related to the pandemic that are not within our control, including the emergence and spread of more transmissible variants. The extent to which global pandemics, such as the COVID-19 pandemic, impact our financial condition or results of operations will depend on factors such as the duration and scope of the pandemic, as well as whether there is a material impact on the businesses or productivity of our customers, partners, employee, suppliers and other partners. To the extent that the pandemic harms our business and results of operations, many of the risks described in Item 1A. Risk Factors in this Form 10-K may be heightened

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Results of Operations

Consolidated Results

The following table sets forth our summarized, consolidated results of operations (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,","","Increase (Decrease)"],["","2022","","2021","","$","","%"],["Net revenue","$","2,212,304","","","$","2,093,669","","","$","118,635","","","5.7%"],["Cost of goods sold","1,416,485","","","1,302,004","","","114,481","","","8.8%"],["Cost of goods sold impairment charges","11,111","","","22,692","","","(11,581)","","","(51.0)%"],["Gross profit","784,708","","","768,973","","","15,735","","","2.0%"],["Selling, general and administrative","399,700","","","365,504","","","34,196","","","9.4%"],["Research and development","195,688","","","201,847","","","(6,159)","","","(3.1)%"],["In-process research and development impairment charges","12,970","","","710","","","12,260","","","nm"],["Intellectual property legal development expenses","4,358","","","7,716","","","(3,358)","","","(43.5)%"],["Acquisition, transaction-related and integration expenses","709","","","8,055","","","(7,346)","","","(91.2)%"],["Restructuring and other charges","1,421","","","1,857","","","(436)","","","(23.5)%"],["Change in fair value of contingent consideration","731","","","200","","","531","","","nm"],["(Insurance recoveries) charges for property losses and associated expenses, net","(1,911)","","","5,368","","","(7,279)","","","(135.6)%"],["Charges related to legal matters, net","269,930","","","25,000","","","244,930","","","nm"],["Other operating income","(3,960)","","","\u2014","","","(3,960)","","","nm"],["Operating (loss) income","(94,928)","","","152,716","","","(247,644)","","","(162.2)%"],["Total other expense, net","(153,199)","","","(121,350)","","","(31,849)","","","26.2%"],["(Loss) income before income taxes","(248,127)","","","31,366","","","(279,493)","","","nm"],["Provision for income taxes","6,662","","","11,196","","","(4,534)","","","(40.5)%"],["Net (loss) income","$","(254,789)","","","$","20,170","","","$","(274,959)","","","nm"]]
[[/GREPCENT_TABLE]]
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Net Revenue

Net revenue for the year ended December 31, 2022 increased by 5.7%, or $118.6 million, compared to the prior year, and was attributable to growth in net revenue in both the Generics and AvKARE segments, partially offset by a slight decrease in net revenue in the Specialty segment as follows:

•Generics net revenue for the year ended December 31, 2022 increased by 4.8%, or $65.7 million, as compared to the prior year, primarily due to new products launched in 2022 and 2021 that contributed net revenue growth of $42.4 million, the favorable year-over-year impact of lower returns relating to Oseltamivir (generic Tamiflu®), volume growth, and $8.0 million in license revenue from an agreement with Orion Corporation (“Orion”), partially offset by continued price erosion. Refer to Note 5. Alliance and Collaboration for additional information on the agreement with Orion.

•AvKARE net revenue for the year ended December 31, 2022 increased 16.4%, or $57.1 million, compared to the prior year, driven by growth in our distribution channel.

•Specialty net revenue for the year ended December 31, 2022 decreased 1.1%, or $4.2 million, compared to the prior year, 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 Unithroid® and Rytary®, increased 33% and 8%, respectively, as prescription growth remained strong for both products.

Cost of Goods Sold and Gross Profit

Cost of goods sold, including impairment charges, increased 7.8%, or $102.9 million, for the year ended December 31, 2022 as compared to the prior year, and was attributable to increased Generics and AvKARE volume, inflation and a year-over-year reduction in operating efficiency, partially offset by the loss of exclusivity on Zomig® nasal spray and a reduction in marketed

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product intangible asset impairment charges. Year-over-year, inflation increased cost of goods sold by approximately $17.0 million, primarily related to freight charges.

Gross profit for the year ended December 31, 2022 was $784.7 million (35.5% of net revenue) as compared to gross profit of $769.0 million (36.7% of net revenue) for the prior year. Our gross profit as a percentage of net revenue decreased as compared to the prior year primarily as a result of the factors noted above.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2022 increased 9.4%, or $34.2 million, compared to the prior period. The increase was primarily due to an increase in employee compensation, costs associated with our biosimilar launches, including a $5.0 million expense associated with a biosimilar regulatory approval, the launches of our new specialty products and increased logistics costs.

Research and Development

R&D expenses for the year ended December 31, 2022 decreased 3.1%, or $6.2 million, compared to the prior year . The decrease was primarily attributable to a decrease in in-licensing and upfront milestone payments of $15.3 million and reduced project spend primarily related to IPX203, partially offset by inflation, costs related to complex generics of $17.9 million associated with acquired businesses in 2021.

In-Process Research and Development Impairment Charges

IPR&D impairment charges of $13.0 million for the year ended December 31, 2022 were related to one Generics asset which experienced a delay in its expected launch date and one Generics asset which experienced significant expected price erosion, both of which resulted in significantly lower than expected future cash flows. IPR&D impairment charges of $0.7 million in the prior year were related to one Generics asset which experienced a delay in its expected launch date, resulting in significantly lower than expected future cash flows.

Intellectual Property Legal Development Expenses

Intellectual property legal development expenses for the year ended December 31, 2022 were $4.4 million as compared to $7.7 million in the prior year. These costs include, but are not limited to, formulation assessments, patent challenge opinions and strategy, and litigation expenses to defend our intellectual property. The $3.3 million decrease from the prior year was due to the timing of specific cases. Expenses may vary based upon the number of individual cases and corresponding litigation outstanding in a particular period.

Acquisition, Transaction-Related and Integration Expenses

Acquisition, transaction-related and integration expenses, primarily consisting of legal, investment banking and consulting fees, were $0.7 million for the year ended December 31, 2022, as compared to $8.1 million in the prior year.

Acquisition, transaction-related and integration expenses for the year ended December 31, 2022 were primarily related to the Saol Acquisition. For the year ended December 31, 2021, acquisition, transaction-related and integration expenses primarily related to the acquisitions and integration of Puniska and KSP, and the integration of the businesses that comprise our AvKARE segment. Refer to Note 3. Acquisitions for additional information.

(Insurance Recoveries) Charges for Property Losses and Associated Expenses, Net

On September 1, 2021, Tropical Storm Ida brought extreme rainfall and flash flooding to New Jersey that caused damage to two of our facilities. We 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, we incurred significant costs to repair both facilities. Accordingly, we recorded $10.4 million of charges for property losses and associated expenses in our Generics segment for the year ended December 31, 2021. For the years ended December 31, 2022 and December 31, 2021, we recorded insurance recoveries of $1.9 million and $5.0 million, respectively, as a reduction of property losses and associated expenses in our Generics segment. Refer to Note 27. (Insurance Recoveries) Charges for Property Losses and Associated Expenses, Net for additional information.

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Charges Related to Legal Matters, Net

For the year ended December 31, 2022, we recorded charges of $269.9 million, primarily for corporate Opana® ER antitrust litigation of $262.8 million and Generics segment civil prescription opioid litigation of $18.0 million, partially offset by corporate insurance recoveries associated with securities class actions of $15.5 million. For the year ended December 31, 2021, we recorded a net charge of $25.0 million for corporate securities class actions. For further details, refer to Note 21. Commitments and Contingencies.

Other Operating Income

Other operating income for the year ended December 31, 2022 of $4.0 million was comprised of income earned from the India Production Linked Incentive Scheme for the Pharmaceutical Sector in our Generics segment. Refer to Note 6. Government Grants for additional information.

Total Other Expense, Net

Total other expense, net was $153.2 million for the year ended December 31, 2022, as compared to $121.4 million in the prior year. Overall, the increase of $31.8 million from the prior year was primarily due to a $22.1 million increase in interest expense as a result of higher rates on our variable rate debt and a $12.0 million increase in net foreign exchange losses related to the Indian rupee and the Euro.

Provision For Income Taxes

The provision for income taxes was $6.7 million and $11.2 million for the years ended December 31, 2022 and 2021, respectively. The effective tax rates for the years ended December 31, 2022 and 2021 were (2.7%) and 35.7%, respectively. The year-over-year change in the provision for income taxes was primarily related to the timing and mix of income, and to the release of reserves for uncertain tax positions under FIN 48 (codified at ASC 740-10, Income Taxes).

Generics

The following table sets forth the results of operations for our Generics segment (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,","","Increase (Decrease)"],["","2022","","2021","","$","","%"],["Net revenue","$","1,432,073","","","$","1,366,338","","","$","65,735","","","4.8%"],["Cost of goods sold","890,245","","","825,568","","","64,677","","","7.8%"],["Cost of goods sold impairment charges","5,786","","","22,692","","","(16,906)","","","(74.5)%"],["Gross profit","536,042","","","518,078","","","17,964","","","3.5%"],["Selling, general and administrative","109,781","","","64,500","","","45,281","","","70.2%"],["Research and development","167,509","","","158,365","","","9,144","","","5.8%"],["In-process research and development impairment charges","12,970","","","710","","","12,260","","","nm"],["Intellectual property legal development expenses","4,251","","","7,562","","","(3,311)","","","(43.8)%"],["Acquisition, transaction-related and integration expenses","25","","","\u2014","","","25","","","nm"],["Restructuring and other charges","821","","","80","","","741","","","nm"],["(Insurance recoveries) charges for property losses and associated expenses, net","(1,911)","","","5,368","","","(7,279)","","","(135.6)%"],["Charges related to legal matters, net","22,400","","","\u2014","","","22,400","","","nm"],["Other operating income","(3,960)","","","\u2014","","","(3,960)","","","nm"],["Operating income","$","224,156","","","$","281,493","","","$","(57,337)","","","(20.4)%"]]
[[/GREPCENT_TABLE]]

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Net Revenue

Generics net revenue for the year ended December 31, 2022 increased by 4.8%, or $65.7 million, as compared to the prior year, primarily due to new products launched in 2022 and 2021 that contributed net revenue growth of $42.4 million, the favorable year-over-year impact of lower returns relating to Oseltamivir (generic Tamiflu®), volume growth, and $8.0 million in license

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revenue from the agreement with Orion, partially offset by continued price erosion. Refer to Note 5. Alliance and Collaboration for additional information on the agreement with Orion.

Cost of Goods Sold and Gross Profit

Generics cost of goods sold, including impairment charges increased 5.6%, or $47.8 million, for the year ended December 31, 2022 as compared to the prior year. The increase was primarily attributable to increased volume, inflation, and a year-over-year reduction in operating efficiency, partially offset by a reduction in marketed product intangible asset impairment charges. Year-over-year, inflation increased cost of goods sold by approximately $17.0 million, primarily related to freight costs.

Generics gross profit for the year ended December 31, 2022 was $536.0 million (37.4% of net revenue) as compared to gross profit of $518.1 million (37.9% of net revenue) for the prior year as a result of the factors described above.

Selling, General, and Administrative

Generics SG&A for the year ended December 31, 2022 increased by 70.2% or $45.3 million, compared to the prior year. The increase was primarily attributable to an increase in employee compensation, costs associated with our biosimilar launches, including the Saol Acquisition and a $5.0 million expense associated with a biosimilar regulatory approval, and increased freight due to rising fuel costs.

Research and Development

Generics R&D expense for the year ended December 31, 2022 increased 5.8%, or $9.1 million, as compared to the prior year.  The increase was primarily associated with increased project spending as our complex portfolio continued to advance, inflation, and the costs related to complex generics of $16.3 million associated with acquired businesses in 2021, partially offset by a decrease in in-licensing and upfront milestone payments of $12.4 million.

In-Process Research and Development Impairment Charges

Generics IPR&D impairment charges of $13.0 million for the year ended December 31, 2022 were related to one asset that experienced a delay in its expected launch date and one asset that experienced significant expected price erosion, both of which resulted in significantly lower than expected future cash flows. Generics IPR&D impairment charges of $0.7 million in the prior year were related to one asset that experienced a delay in its expected launch date, resulting in significantly lower than expected future cash flows.

Intellectual Property Legal Development Expenses

Generics intellectual property legal development expenses for the year ended December 31, 2022 were $4.3 million as compared to $7.6 million in the prior year. These costs include, but are not limited to, formulation assessments, patent challenge opinions and strategy, and litigation expenses to defend our intellectual property. The $3.3 million decrease from the prior year was due to the timing of specific cases. Expenses may vary based upon the number of individual cases and corresponding litigation outstanding in a particular period.

(Insurance Recoveries) Charges for Property Losses and Associated Expenses, Net

On September 1, 2021, Tropical Storm Ida brought extreme rainfall and flash flooding to New Jersey that caused damage to two of our facilities. We 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, we incurred significant costs to repair both facilities. Accordingly, we recorded $10.4 million of charges for property losses and associated expenses in our Generics segment for the year ended December 31, 2021. For the years ended December 31, 2022 and December 31, 2021, we recorded insurance recoveries associated with property and equipment of $1.9 million and $5.0 million, respectively, as a reduction of property losses and associated expenses in our Generics segment. Refer to Note 27. (Insurance Recoveries) Charges for Property Losses and Associated Expenses, Net for additional information.

Charges Related to Legal Matters, Net

Generics charges related to legal matters, net for the year ended December 31, 2022 were $22.4 million and were primarily comprised of $18.0 million of charges for civil prescription opioid litigation. Refer to Note 21. Commitments and Contingencies for additional information.

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Other Operating Income

Generics other operating income for the year ended December 31, 2022 of $4.0 million was comprised of income earned from the India Production Linked Incentive Scheme for the Pharmaceutical Sector. Refer to Note 6. Government Grants for additional information.

Specialty

The following table sets forth the results of operations for our Specialty segment (dollars in thousands): 

[[GREPCENT_TABLE]]
[["","Years Ended December 31,","","Increase (Decrease)"],["","2022","","2021","","$","","%"],["Net revenue","$","374,121","","","$","378,319","","","$","(4,198)","","","(1.1)%"],["Cost of goods sold","177,107","","","193,562","","","(16,455)","","","(8.5)%"],["Cost of goods sold impairment charges","5,325","","","\u2014","","","5,325","","","nm"],["Gross profit","191,689","","","184,757","","","6,932","","","3.8%"],["Selling, general and administrative","90,031","","","84,481","","","5,550","","","6.6%"],["Research and development","28,179","","","43,482","","","(15,303)","","","(35.2)%"],["Intellectual property legal development expenses","107","","","154","","","(47)","","","(30.5)%"],["Acquisition, transaction-related and integration expenses","49","","","16","","","33","","","nm"],["Change in fair value of contingent consideration","731","","","200","","","531","","","nm"],["Operating income","$","72,592","","","$","56,424","","","$","16,168","","","28.7%"]]
[[/GREPCENT_TABLE]]

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Net Revenue

Specialty net revenue for the year ended December 31, 2022 decreased 1.1%, or $4.2 million, compared to the prior year, 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 Unithroid® and Rytary®, increased 33% and 8%, respectively, as prescription growth remained strong for both products.

Cost of Goods Sold and Gross Profit

Specialty cost of goods sold, including impairment charges, for the year ended December 31, 2022 decreased 5.8%, or $11.1 million, as compared to the prior year.  Specialty gross profit for the year ended December 31, 2022 was $191.7 million (51.2% of net revenue) as compared to gross profit of $184.8 million (48.8% of net revenue) for the prior year. The increase in gross margin was due to growth in higher margin products, offsetting declines in net revenue for Zomig® nasal spray, which has a higher cost structure and lower margin than the overall Specialty portfolio.

Selling, General, and Administrative

Specialty SG&A expense for the year ended December 31, 2022 increased $5.6 million, or 6.6%, as compared to the prior year, driven by an increase in expenses related to upcoming launches of specialty products and the launch of Lyvispah™ during 2022.

Research and Development

Specialty R&D expense for the year ended December 31, 2022 decreased 35.2% or $15.3 million, compared to the prior year, driven by lower project costs as our IPX203 study wound down and a decrease in in-licensing and upfront milestone payments of $2.9 million.

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AvKARE

The following table sets forth the results of operations for our AvKARE segment (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December, 31","","Increase (Decrease)"],["","2022","","2021","","$","","%"],["Net revenue","$","406,110","","","$","349,012","","","$","57,098","","","16.4%"],["Cost of goods sold","349,133","","","282,874","","","66,259","","","23.4%"],["Gross profit","56,977","","","66,138","","","(9,161)","","","(13.9)%"],["Selling, general and administrative","53,659","","","57,918","","","(4,259)","","","(7.4)%"],["Acquisition, transaction-related and integration expenses","\u2014","","","1,422","","","(1,422)","","","(100.0)%"],["Operating income (loss)","$","3,318","","","$","6,798","","","$","(3,480)","","","(51.2)%"]]
[[/GREPCENT_TABLE]]

Net Revenue

AvKARE net revenue for the year ended December 31, 2022 increased 16.4%, or $57.1 million, compared to the prior year, driven by growth in our distribution channel.

Cost of Goods Sold and Gross Profit

AvKARE cost of goods sold for the year ended December 31, 2022 increased 23.4%, or $66.3 million, compared to the prior year. AvKARE gross profit for the year ended December 31, 2022 was $57.0 million (14.0% of net revenue) as compared to gross profit of $66.1 million (19.0% of net revenue) for the prior year. The year-over-year decrease in gross profit as a percentage of net revenue primarily related to the increase in sales through our lower margin distribution channel. The year-over-year decrease in gross profit was primarily related to a decrease in government label sales.

Selling, General, and Administrative

AvKARE SG&A expense for the year ended December 31, 2022 decreased 7.4%, or $4.3 million, compared to the prior year, primarily due to a year-over-year decrease in amortization expense.

Acquisition, Transaction-Related and Integration Expenses

Acquisition, transaction-related and integration expenses for the year ended December 31, 2021 were comprised of finance integration expenses associated with the acquisitions of the businesses comprising our AvKARE segment. Refer to Note 3. Acquisition for additional information.

Liquidity and Capital Resources

Our primary source of liquidity is cash generated from operations, available cash and borrowings under debt financing arrangements, including $285.9 million of available capacity on our New Revolving Credit Facility as of December 31, 2022, as defined in Note 16. Debt. We believe these sources are sufficient to fund our planned operations, meet our interest and contractual obligations and provide sufficient liquidity over the next 12 months. However, our ability to satisfy our working capital requirements and debt obligations will depend upon economic conditions, our ability to negotiate and maintain satisfactory terms under our borrowing and debt facilities in the future, 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 R&D expenses associated with new product filings, and pharmaceutical product manufacturing expenses, license payments, spending on production facility expansions, capital equipment, acquisitions, and legal settlements.

We estimate that we will invest approximately $50.0 million to $60.0 million during 2023 for capital expenditures to support and grow our existing operations, primarily related to investments in manufacturing equipment, information technology and facilities.

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Debt Instruments

Over the next 12 months, we expect to make substantial payments for monthly interest and quarterly principal amounts due for our debt instruments, including our Term Loan and Rondo Term Loan, contractual payments for leased premises, and payments for legal settlements. Annually, we are also required to calculate the amount of excess cash flows, as defined in the Term Loan agreement. Based on the results of the excess cash flows calculation for the year ended December 31, 2020, the Company made a $14.4 million additional principal payment towards our Term Loan March 2021. Based on the results of the excess cash flows calculation for the years ended December 31, 2022 and 2021, no excess cash flows principal payments were required. Related to our Rondo Term Loan, we made prepayments totaling $58.3 million towards the outstanding principal during the year ended December 31, 2022, in addition to planned principal payments. Refer to Note 16. Debt for additional information.  

Tax Receivable Agreement

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. 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 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 to December 31, 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 $202.7 million contingent liability as of December 31, 2022. As a result of the foregoing, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity. For further information, refer to Item 1A. Risk Factors and Note 7. Income Taxes.

Tax-related Distributions to Amneal Members

In addition, pursuant to the limited liability operating agreement of Amneal, as amended, in connection with any tax period, we are 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 its U.S. federal, state and local and non-U.S. tax liabilities, and meet its obligations pursuant to the tax receivable agreement. During the years ended December 31, 2022 and 2021, we made tax distributions of $10.6 million and $53.5 million, respectively, to Amneal's members.

Cash Balances

At December 31, 2022, our cash and cash equivalents consist of cash on deposit and highly liquid investments. A portion of our cash flows are derived outside the U.S. As a result, we are subject to market risk associated with changes in foreign exchange rates. We maintain cash balances at both U.S. based and foreign country based commercial banks. At various times during the year, our cash balances held in the United States may exceed amounts that are insured by the Federal Deposit Insurance Corporation. 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

For a discussion comparing of our cash flows for the fiscal years 2021 to 2020, see Cash Flows under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K.

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The following table sets forth our summarized, consolidated cash flows for the years ended December 31, 2022 and 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,","","Increase (Decrease)"],["","2022","","2021","","$","","%"],["Cash provided by (used in):"],["Operating activities","$","65,100","","","$","241,820","","","$","(176,720)","","","(73.1)","%"],["Investing activities","(174,309)","","","(194,182)","","","19,873","","","(10.2)","%"],["Financing activities","(106,620)","","","(138,122)","","","31,502","","","(22.8)","%"],["Effect of exchange rate changes on cash","(5,683)","","","102","","","(5,785)","","","(5671.6)","%"],["Net decrease in cash, cash equivalents, and restricted cash","$","(221,512)","","","$","(90,382)","","","$","(131,130)","","","145.1","%"]]
[[/GREPCENT_TABLE]]

Cash Flows from Operating Activities

Net cash provided by operating activities was $65.1 million for the year ended December 31, 2022 as compared to $241.8 million for the prior year.  The year-over-year decrease was primarily driven by $140.6 million in payments associated with the Opana® ER antitrust litigation and the securities class action - Cambridge Retirement System v. Amneal, in addition to the corresponding legal fees. Refer to Note 21. Commitments and Contingencies for additional information.

Cash Flows from Investing Activities

Net cash used in investing activities was $174.3 million for the year ended December 31, 2022 compared to $194.2 million for the prior year.  The $19.9 million year-over-year decrease was primarily due to a decrease of $61.8 million in cash paid for business acquisitions (refer to Note 3. Acquisitions for additional information), partially offset by a $40.1 million increase in cash paid for intangible assets associated with marketed product licenses.

Cash Flows from Financing Activities

Net cash used in financing activities was $106.6 million for the year ended December 31, 2022 as compared to net cash used in financing activities of $138.1 million for prior year. The year-over-year decrease of $31.5 million was primarily due to $85.0 million of borrowings under the New Revolving Credit Facility and a $39.6 million decrease in tax distributions, partially offset by $44.5 million paid for deferred consideration associated with the acquisition of Kashiv Specialty Pharmaceuticals, LLC and Puniska Healthcare Pvt. Ltd. (refer to Note 3. Acquisitions) and an increase in principal payments made on borrowings of $45.2 million, including repayment of $25.0 million of borrowings under the New Revolving Credit Facility (refer to Note 16. Debt).

Commitments and Contractual Obligations

Our contractual obligations as of December 31, 2022 were as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["Contractual Obligations","","Total","","Less Than 1 Year","","1-3 Years","","3-5 Years","","More Than 5 Years"],["Term Loan and other (1)","","$","2,563,876","","","$","27,000","","","$","2,536,876","","","$","\u2014","","","$","\u2014"],["Interest payments on Term Loan (1)","","487,155","","","209,487","","","277,668","","","\u2014","","","\u2014"],["Operating lease obligations (2)","","76,028","","","15,843","","","30,822","","","17,813","","","11,550"],["Financing lease obligation (3)","","118,209","","","7,976","","","13,379","","","11,634","","","85,220"],["Rondo Term Loan (4)","","72,000","","","9,000","","","63,000","","","\u2014","","","\u2014"],["Interest payments on Rondo Term Loan (4)","","7,986","","","4,120","","","3,866","","","\u2014","","","\u2014"],["New Revolving Credit Facility (5)","","60,000","","","60,000","","","\u2014","","","\u2014","","","\u2014"],["Interest payments on New Revolving Credit Facility(5)","","4,259","","","4,259","","","\u2014","","","\u2014","","","\u2014"],["Opana ER\u00ae antitrust litigation settlements (6)","","133,944","","","83,944","","","50,000","","","\u2014","","","\u2014"],["Interest associated with Opana ER\u00ae antitrust litigation settlements (6)","","3,951","","","1,536","","","2,415","","","\u2014","","","\u2014"],["Total","","$","3,527,408","","","$","423,165","","","$","2,978,026","","","$","29,447","","","$","96,770"]]
[[/GREPCENT_TABLE]]

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(1)A description of our Term Loan due May 2025, and related debt service and interest requirements is contained in Note 16. Debt. Interest on our Term Loan was calculated based on applicable rates at December 31, 2022, excluding the impact of our interest rate swap.

(2)Amounts represent future minimum rental payments under non-cancelable facility leases. A discussion of our operating lease obligations is contained in Note 18. Leases.

(3)Amounts primarily represent future minimum rental payments under non-cancelable financing lease obligation for a production facility in New York. A discussion of our financing lease obligations is contained in Note 18. Leases.

(4)Rondo Term Loan relates to the Rondo Acquisitions (each as defined in Note 3. Acquisitions). Interest on the Rondo Term Loan was calculated based on the applicable rate at December 31, 2022. A discussion of the Rondo Term Loan, and related debt service and interest requirements is contained in Note 16. Debt.

(5)Represents the amount due on the New Revolving Credit Facility (as defined in Note 16. Debt). Interest on the New Revolving Credit Facility was calculated based on the applicable rate at December 31, 2022. A discussion of the New Revolving Credit Facility is contained in Note 16. Debt.

(6)Refer to Note 21. Commitments and Contingencies for additional information.

The foregoing table does not include milestone payments potentially payable by the Company under its collaboration agreements and potential payments under the Company’s contingent consideration arrangements. Such 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 and a discussion of our contingent consideration arrangements is contained in Note 3. Acquisitions and Note 19. Fair Value Measurements. Additionally, the foregoing table does not include $44.2 million of aggregate principal and related interest due on the Sellers Notes (as defined in Note 3. Acquisitions) because the timing of the associated payments is dependent on the occurrence of future events. Refer to the section Rondo Acquisitions Financing – Notes Payable-Related Party in Note 16. Debt for a discussion of the terms of this indebtedness and descriptions of terms.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2022.

Critical Accounting Policies

Our significant accounting policies are described in Note 2. Summary of Significant Accounting Policies.

Included within these policies are certain policies which contain critical accounting estimates and, therefore, have been deemed to be “critical accounting policies.” Critical accounting estimates are those which require management to make assumptions about matters that were uncertain at the time the estimate was made and for which the use of different estimates, which reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur from period to period could have a material impact on our financial condition or results of operations. We have identified the following to be our critical accounting policies: sales-related deductions, business combinations (including contingent consideration) impairment of goodwill and intangible assets, income taxes and contingencies.

Sales-Related Deductions

Our gross product revenue is subject to a variety of deductions, which are estimated and recorded in the same period that the revenue is recognized, and primarily represent chargebacks, rebates, group purchasing organization fees, prompt payment (cash) discounts, consideration payable to the customer, billbacks, Medicaid and other government pricing programs, price protection and shelf stock adjustments, and sales returns. Those deductions represent estimates of rebates and discounts related to gross sales for the reporting period and, as such, knowledge and judgment of market conditions and practice are required when estimating the impact of these revenue deductions on gross sales for a reporting period.

Historically, our changes of estimates reflecting actual results or updated expectations have not been material to our overall business. If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. The sensitivity of our estimates can vary by program, type of customer and geographic location. However, estimates associated with governmental allowances, Medicaid and other performance-based contract rebates are most at risk for material adjustment because of the extensive time delay between the recording of the accrual and its ultimate settlement, an interval that can generally range up to one year. Because of this time lag, in any given quarter, our adjustments to actual can incorporate revisions of several prior quarters.

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Business Combinations

We account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition. The fair value of the consideration paid is assigned to the underlying net assets of the acquired business based on their respective fair values as determined using a market participant concept. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill.

Intangible assets are amortized over the estimated useful life of the asset. Significant judgments are used in determining the estimated fair values assigned to the assets acquired and liabilities assumed and in determining estimates of useful lives of long-lived assets. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future net cash flows, estimates of appropriate discount rates used to present value expected future net cash flow streams, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream, as well as other factors. These judgments can materially impact the estimates used to allocate acquisition date fair values to assets acquired and liabilities assumed and the future useful lives. For these and other reasons, actual results may vary significantly from estimated results.

Impairment of Goodwill and Intangible Assets

Goodwill

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

In order to test goodwill for impairment, an entity is permitted to first assess qualitative factors to determine whether a quantitative assessment of goodwill is necessary. The qualitative factors considered by the Company may include, but are not limited to, general economic conditions, the Company’s outlook, market performance of the Company’s industry and recent and forecasted financial performance. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. If a quantitative assessment is required, the Company determines the fair value of its reporting unit using a combination of the income and market approaches.  If the net book value of the reporting unit exceeds its fair value, the Company recognizes a goodwill impairment charge for the reporting unit equal to the lesser of (i) the total goodwill allocated to that reporting unit and (ii) the amount by which that reporting unit’s carrying amount exceeds its fair value.

Goodwill is allocated and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment.  Our reportable segments are the same as the respective operating segments and reporting units. As of December 31, 2022, $366.3 million, $163.1 million, and $69.5 million of goodwill was allocated to our Specialty, Generics, and AvKARE segments, respectively. During the fourth quarter of 2022, we tested each of the reporting units for impairment using a quantitative assessment. The determination of fair value in the quantitative assessment required us to make significant estimates and assumptions. These estimates and assumptions primarily included, but were not limited to: the selection of appropriate peer group companies, the discount rate, terminal growth rates, forecasts of revenue, operating income, depreciation and amortization, restructuring charges and capital expenditures. For more information see Note 13. Goodwill and Other Intangible Assets. There was no impairment of goodwill in any reporting unit for the year ended December 31, 2022.

Significant judgment is used in determining the assumptions utilized in our quantitative assessment. Accordingly, any changes in assumptions described above could have a material impact on our consolidated results of operations. Additionally, for each of our reporting units, there are a number of future events and factors that may impact future results and the outcome of subsequent goodwill impairment testing. For a list of these factors, see Item 1A. Risk Factors.

Intangible Assets

We review our long-lived assets, including intangible assets with finite lives, for recoverability whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the asset. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value which is generally an expected present value cash flow technique. Our

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policy in determining whether an impairment indicator exists comprises measurable operating performance criteria as well as other qualitative measures. Events giving rise to impairment are an inherent risk in the pharmaceutical industry and cannot be predicted. Factors that we consider in deciding when to perform an impairment review include significant under-performance of a product in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. If our assumptions are not correct, there could be an impairment loss in subsequent periods or, in the case of a change in the estimated useful life of the asset, a change in amortization expense.

Intangible assets with indefinite lives, including IPR&D, are tested for impairment if impairment indicators arise and, at a minimum, annually. However, an entity is permitted to first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount. Otherwise, no further impairment testing is required. The indefinite-lived intangible asset impairment test consists of a one-step analysis that compares the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We consider many factors in evaluating whether the value of its intangible assets with indefinite lives may not be recoverable, including, but not limited to the discount rate, terminal growth rates, general economic conditions, our outlook and market performance of our industry and recent and forecasted financial performance.

For the year ended December 31, 2022, we recognized a total of $24.1 million of intangible asset impairment charges, of which $11.1 million was recognized in cost of goods sold and $13.0 million was recognized in IPR&D. The impairment charges for the year ended December 31, 2022 primarily related to three currently marketed products and two IPR&D products. Cost of sales impairment charges for the year ended December 31, 2022 of $11.1 million related to currently marketed products, of which (i) one product experienced significant price erosion during 2022, resulting in significantly lower than expected future cash flows and negative margins, (ii) the supply agreement of one product was terminated during 2022 and therefore the asset was not recoverable and (iii) one product was no longer expected to be sold to a key customer, and therefore the asset was not recoverable. IPR&D impairment charges for the year ended December 31, 2022 of $13.0 million related to (i) one asset that experienced a delay in its expected launch date and (ii) one asset that experienced significant expected price erosion, both of which resulted in significantly lower than expected future cash flows.

Income Taxes

We record valuation allowances against our DTAs when it is more likely than not that all or a portion of a DTA will not be realized. We routinely evaluate the realizability of our DTAs by assessing the likelihood that our DTAs will be recovered based on all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including projected new product launches, revenue growth, and operating margins, among others.

A valuation allowance, if needed, reduces DTAs to the amount expected to be realized. When determining the amount of net DTAs that are more likely than not to be realized, we assess all available positive and negative evidence. This evidence includes, but is not limited to, prior earnings history, projected future earnings, carryback and carry-forward periods and the feasibility of ongoing tax strategies that could potentially enhance the likelihood of the realization of a DTA. The weight given to the positive and negative evidence is commensurate with the extent the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income to outweigh objective negative evidence of recent financial reporting losses.

As of December 31, 2022, based upon all available objective and verifiable evidence both positive and negative, including historical levels of pre-tax income (loss) both on a consolidated basis and tax reporting entity basis, legislative developments, expectations and risks associated with estimates of future pre-tax income, and prudent and feasible tax planning strategies, we determined that it is more likely than not that we will not realize the benefits of our gross DTAs. Accordingly, as of December 31, 2022, this valuation allowance was $434.9 million and reduced the carrying value of these gross DTAs, net of the impact of the reversal of taxable temporary differences, to zero.

As described in Note 7. Income Taxes, we are a party to a TRA under which we are generally required to pay to the other holders of Amneal Common Units 85% of the applicable tax savings, if any, in U.S. federal and state income tax that we are deemed to realize as a result of certain tax attributes of their Amneal Common Units sold to us (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Amneal Common Units for shares of Class A common stock and (ii) tax benefits attributable to payments made under the TRA.

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The timing and amount of any payments under the TRA may vary, depending upon a number of factors including the timing and number of Amneal common units sold 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 the our taxable income (the TRA liability is determined based on a percentage of the corporate tax savings from the use of the TRA’s attributes). Further sales or exchanges occurring subsequent to December 31, 2022 could result in future Amneal tax deductions and obligations to pay 85% of such benefits to the holders of Amneal common units.

The projection of future taxable income involves significant judgment. Actual taxable income may differ materially from our estimates, which could significantly impact our liabilities under the TRA. As noted above, we have determined it is more-likely-than-not we will be unable to utilize all of our DTAs subject to the TRA; therefore, as of December 31, 2022 and 2021, we had not recognized the entire contingent liability under the TRA related to the tax savings we may realize from common units sold or exchanged. If utilization of these DTAs becomes more-likely-than-not in the future, at such time, these TRA liabilities (which amount to approximately $202.7 million as of December 31, 2022, as a result of basis adjustments under Internal Revenue Code Section 754) will be recorded through charges to our statements of operations. However, if the tax attributes are not utilized in future years, it is reasonably possible no amounts would be paid under the TRA in excess of the $0.6 million accrued as of December 31, 2022. Should we determine that a DTA with a valuation allowance is realizable in a subsequent period, the related valuation allowance will be reversed and if a resulting TRA payment is determined to be probable, a corresponding TRA liability will be recorded.

Contingencies

We are involved in various litigation, government investigations and other legal proceedings that arise from time to time in the ordinary course of business. Our legal proceedings are complex, constantly evolving and subject to uncertainty. As such, we cannot predict the outcome or impact of our legal proceedings.

While we believe we have valid claims and/or defenses for the matters described in Note 21. Commitments and Contingencies, the nature of litigation is unpredictable and the outcome of the proceedings could include damages, fines, penalties and injunctive or administrative remedies. For any proceedings where losses are probable and reasonably capable of estimation, we accrue for a potential loss. When we have a probable loss for which a reasonable estimate of the liability is a range of losses and no amount within that range is a better estimate than any other amount, we record the loss at the low end of the range. While these accruals have been deemed reasonable by our management, the assessment process relies heavily on estimates and assumptions that may ultimately prove inaccurate or incomplete. Additionally, unforeseen circumstances or events may lead us to subsequently change our estimates and assumptions. The process of analyzing, assessing and establishing reserve estimates relative to legal proceedings involves a high degree of judgment.

The ultimate resolution of any or all claims, legal proceedings or investigations are inherently uncertain and difficult to predict, could differ materially from our estimates and could have a material adverse effect on our results of operations and/or cash flows in any given accounting period, or on the Company's overall financial condition.

For further details, see Note 21. Commitments and Contingencies.

Recently Issued Accounting Standards  

Recently issued accounting standards are discussed in Note 2. Summary of Significant Accounting Policies.