Amneal Pharmaceuticals Inc (AMRX) 2018 Q2 法說會逐字稿

Good morning. My name is Tom, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amneal Second Quarter 2018 Earnings Conference Call.

(Operator Instructions)

I would like to turn the call over now to Mr. Mark Donohue. Sir, you may begin your conference.

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Ladies and gentlemen, this is the operator. We're having some technical difficulties. Please stand by.

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Mr. Mark Donohue, you may begin your conference.

Thank you, and we apologize. We're getting a few minutes late start here. We had an issue with the phone. So good morning, everyone, and welcome to Amneal's Second Quarter 2018 Earnings Call. A copy of the slides that will be presented on this call are available within the Investor Relations section of Amneal's website at amneal.com and as part of the webcast.

Our discussion today includes certain forward-looking statements, and actual results may differ from those presented here. The factors that could cause such a difference are outlined in our SEC filings and on our website.

Our discussion today includes certain non-GAAP measures as defined by the SEC. Management uses both GAAP financial measures and the disclosed non-GAAP financial measures internally to evaluate and manage the company's operations and to better understand its business.

Further, management believes the inclusion of non-GAAP financial measures provides meaningful supplementary information to and facilitates analysis by investors in evaluating the company's financial performance, results of operations and trends. A reconciliation of GAAP to non-GAAP measures is available in this morning's press release.

On the call this morning are Rob Stewart, our President and Chief Executive Officer; and Bryan Reasons, our Chief Financial Officer. Following their prepared remarks we will hold a Q&A session. Also on the call and available for Q&A is Paul Bisaro, our Executive Chairman.

And with that, I'm going to turn the call over to Rob.

Thanks, Mark. Good morning, everyone, and thank you for joining us today. We're excited to be here to report earnings for the first time as the new Amneal Pharmaceuticals.

The second quarter was defined by solid financial performance and several strategic achievements, including the completion of the combination with Impax Laboratories, which closed on May 4. We also enhanced our Specialty franchise with the previously announced acquisition of Gemini Laboratories and continued to build our biosimilar pipeline with an agreement with mAbxience to commercialize a biosimilar candidate, Avastin.

Although we're revising our 2018 guidance to primarily reflect the delayed timing of deliveries of our epinephrine autoinjector product from our third-party manufacturer, Pfizer, and the timing of certain launches, as I'll touch upon later, we are confident in the long-term growth potential for Amneal. We are focused on leveraging our enhanced portfolio and executing on our operational and commercial priorities to fuel growth, generate synergies and strong cash flow, and delivering long-term returns for our shareholders.

We delivered solid sequential growth and a combined adjusted revenue, EBITDA and dilutive EPS as we began to realize the benefits of our combination with Impax. Through this combination we have strengthened Amneal's market position and have already made tremendous progress with our integration. By combining Impax and Amneal we have advanced to the top tier of companies in a fast-changing healthcare market.

On a combined adjusted basis, second quarter revenue increased 8%, to $462 million, compared to this year's first quarter. The combination of higher sales, favorable product sales mix, and cost synergy resulted in a 45% increase in adjusted EBITDA, a 79% increase in adjusted net income, and a 71% increase in adjusted EPS. Compared to last year's second quarter, combined adjusted revenue was down 2%, but adjusted net income grew 9% and adjusted EBITDA increased 17% as we rationalized the portfolio.

Following the May 4 close of the combination our team has hit the ground running with a rapid and seamless integration of the 2 companies. We have focused on capturing targeted synergies, driving for excellence in customer service, containing costs, and ensuring that we are efficiently utilizing our resources. I'm very proud of the progress we've made so far.

We're on track to achieve more than $200 million in cost synergies we anticipate at an accelerated pace and progressing ahead of schedule with the closure of the Hayward, California, facility, a major driver of synergy. In addition, we have initiated the rebranding of the Impax Specialty as Amneal Specialty, which is an important step forward in leveraging potential sales synergies in the future. And with an expanded set of capabilities, scale and resources, the new Amneal is solidly positioned to deliver sustainable growth, value and success, and we're very excited about the possibilities that lie ahead.

Before Bryan reviews the details of our second quarter results, I would like to review the highlights from our segment performance. Let's start with the Generics business on Slide 6.

In the second quarter, on an adjusted basis, the Generics business achieved 7% top line sequential growth as we capitalized on 16 product launches during the first 6 months of 2018. This included the launch of generic versions of Concerta, Mephyton and Welchol. We also benefited from a greater level of sales from high-value opportunities like generic Vagifem, Aggrenox and Voltaren Gel, which more than offset the anticipated seasonal decline in generic Tamiflu.

On a year-over-year basis, Generic revenue declined 6% due largely to the ongoing intermittent supply on epinephrine autoinjector as well as the competition on base business and our decision to proactively discontinue low-value products. Regarding epinephrine, we continued to experience intermittent supplier product from our third-party manufacturer throughout the second quarter and during the month of July. We were optimistic in May that the availability of supply would improve. It has been slower and below our expectations. We are continuing to work closely with Pfizer in order to meet the high patient demand for our product.

We have a strong track record for getting complex, hard-to-manufacture generic products approved and launched. Year-to-date, we have received 33 ANDA approvals and 9 tentative approvals from the FDA, of which we launched 22 products, a metric that I believe sets us apart from our peer group. Amneal leads the industry in approvals and launches over the past 6 months.

Turning to the Specialty Pharma division on Slide 7. In the second quarter on a combined basis we delivered top line growth of 16% sequentially and 27% year-over-year as we capitalized on strong demand for Rytary. This performance reflects the benefits we are beginning to see from the changes that were made last year to the Rytary programs and within the sales and marketing organization.

We had 2 significant litigation developments in the quarter. This included settling the ongoing Rytary litigation with Actavis and receiving a favorable U.S. Court of Appeals ruling regarding the patent validity for Zomig nasal spray, which expires in May of 2021. We also advanced the development of IPX-203 extended-release formulation of carbidopa-levodopa and with patient enrollment for Phase III study scheduled to begin in early Q4 of 2018.

Moving to Slide 9. Growing our pipeline to drive expansion into complex dosage forms and technologies is a top priority for Amneal, and we're making good progress on this front with 10 ANDAs filed so far in 2018. We continue to target more than 30 ANDAs to be filed this year.

Today Amneal has one of the largest pipelines of filed and developed products in the U.S. We currently have 258 projects in the pipeline targeting more than $114 billion in value in the U.S. brand and generic sales, more than half of which are considered high-value opportunities. We have a solid track record of getting products approved and commercialized, and we have confidence in our ability to execute on our pipeline.

With that, I'll turn the call over to Bryan to review the details of the second quarter.

Thanks, Rob. Good morning, everyone. Our earnings release this morning included GAAP results from the May 4 closing date of the combination with Impax as well as the combined adjusted results for a full quarter as if the combination closed on April 1. My remarks will focus on the combined results as we believe they provide a better comparison of our performance and trends in the quarter. A full reconciliation of all GAAP to adjusted results can be found in the tables in our press release.

Turning to Slide 10 and a review of the Generic division results for the second quarter of 2018. On a sequential basis, net revenue increased 7% compared to the first quarter of 2018. The largest driver of this increase was new products launched during the first half of this year, which added approximately $41 million in second quarter sales. Additionally, we benefited from increased sales of key products, as Rob noted. As expected, sales of generic Tamiflu declined $43 million from this year's first quarter due to seasonality.

Compared to the second quarter of 2017, net revenue declined 6% as a result of additional competition on base business products, and lower sales of epinephrine autoinjector, which had an unfavorable impact of $12 million year-over-year due to intermittent supply.

The pruning of our portfolio of low-value products accounted for approximately $8 million of year-over-year decline in sales. However, this action was slightly favorable to our overall gross profit.

Our adjusted gross margin improved in the second quarter by more than 500 basis points on a sequential basis, primarily due to favorable product mix. Adjusted operating income in the second quarter of 2018 increased to $112 million, up 29% compared to the first quarter due to an improvement in gross profit. Compared to last year's second quarter, adjusted operating income increased 6%, driven by lower operating expenses, as we begin to realize the benefits of synergies.

Moving to Slide 11 and our Specialty division results. On a sequential basis, adjusted net revenue in the second quarter increased 16%, driven by growth in Rytary. We're very pleased with the consistent growth in Rytary scripts, which recently passed 4,200 weekly TRxes. We expect growth to continue throughout 2018.

Compared to the second quarter of 2017, net revenues increased 27% due to higher sales of Rytary and Albenza. The year-over-year increase in sales of Albenza was primarily due to a supply disruption which impacted last year's second quarter sales. Adjusted gross margin in the second quarter was 79%, up a couple hundred basis points from this year's first quarter. Adjusted operating income in the Specialty Pharma business increased to $38 million, up 24% from this year's first quarter and up 104% from the same period last year, primarily due to favorable product mix.

We recorded several charges in the second quarter related to the combination with Impax which impacted our GAAP results. As shown on Slide 12, this included charges of approximately $213 million for acquisition, transaction and integration expenses. This included a noncash charge for profit participation units related to Amneal's historical capital structure and awards to its global workforce in connection with the combination not paid by Amneal.

We also recorded restructuring and severance charges of $45 million as we continue to execute on integration and capture cost synergies ahead of plan. And we recorded approximately $15 million in inventory-related noncash charges, primarily due to higher amortization of purchase accounting for inventory.

On foreign currency movements, we recorded a $26-million foreign exchange loss caused by fluctuation in the Swiss franc and Indian rupee.

As part of the closing of the business combination with Impax, we refinanced the debt of both companies. We entered into a senior credit agreement that provided a Term Loan B with a principal amount of $2.7 billion. The term loan bears a variable annual interest rate, which is LIBOR plus 350. The refinancing resulted in a $20-million charge for loss on early extinguishment of debt.

During the first half of the year, cash flows were impacted by several items, including severance and product transfer costs, as we accelerated integration and synergy capture; increases in inventory and accounts receivables as we launched new products and prepared for future new product launches; and several nonrecurring items, including the acquisition of Gemini and legal settlements. We expect this cash flow trend to reverse in the second half of the year.

So, as Rob mentioned in this opening remarks, we delivered a solid second quarter, with combined adjusted net income of $70 million, or $0.24 per share. I will now turn the call back to Rob for a review of our guidance and closing remarks.

Thank you, Bryan. Now let's turn to Slide 14 to discuss our updated outlook for 2018.

As the second half of '18 unfolds, we continue to expect our financial performance to benefit from the full year impact of new generic product launches, exclusive positions on generics Vagifem and Aggrenox, synergy capture, and growth within our Specialty business. While we believe there is some potential for upside from projects in the pipeline, we've determined that it's prudent to revise our guidance expectations to reflect the reduction of epinephrine autoinjector deliveries through July of this year. Additionally, the timing of approval of certain key launches has had an impact on this year's results.

As a result, on a full year, pro forma, adjusted basis, we now expect adjusted EBITDA between $580 million and $620 million and adjusted diluted EPS between $0.90 and $1.00. Slide 15 reflects where the second half contributions to adjusted EBITDA results are expected to come from.

As mentioned, we expect a number of positive drivers to more than offset competition in our base business. This includes the full year benefit of products launched in the first half, synergies, branded product growth, continued exclusive markets on generic Vagifem and Aggrenox, and the benefit of second half product launches. As we have said before, we continue to expect double-digit growth in adjusted EBITDA for 2018 compared to last year, which will be more heavily weighted to the back half of the year, with sequential quarterly growth throughout 2018.

Looking ahead, we're focusing on delivering on our operational and commercial priorities. We'll drive toward our targeted post-transaction synergies while concurrently positioning Amneal to strengthen our generics growth engine by continuing to invest in strategically focused R&D, maintaining high levels of quality and compliance and providing superior service to our customers. We will prioritize our efforts to maximize the value of our enhanced commercial portfolio in order to grow revenue and profits, and we'll bring products to market on time, with consistent supply. And finally, we will strategically deploy our capital in pursuit of longer-term value-enhancing opportunities.

In conclusion, the new Amneal is solidly positioned to deliver long-term value and be one of the most relevant and dynamic companies in the industry. We are committed to executing against our long-term growth plan, which includes investing in organic growth through targeted R&D, pursuing creative business development to substantially strengthen our key portfolio, and continuing to evaluate additional adjacencies as market dynamics develop.

With an expanded set of capabilities, a compelling mission, a defined strategy and a track record of success, we are excited for the opportunities that lie ahead for the new Amneal, our employees, customers and our valued shareholders. I want to thank all of our employees for their hard work, commitment and passion for delivering a solid quarter.

With that we'll open the call to questions.

Thanks, Rob. And so before we open up the call to questions, I'd just ask if you'd keep your questions to a minimum so we can get through everybody in the queue. And I'll turn the call back to the operator.

(Operator Instructions)

Your first question comes from the line of Greg Fraser of Deutsche Bank.

It's Greg Fraser on for Greg Gilbert. How much visibility do you have on potential resolution of the epi supply issue, and are you assuming the supply issues continue through year-end in the revised guidance? And then are there any exclusivity periods tied to competitive generic therapy designations that are affecting your launch timing or that you could benefit from in the future on your own launches?

So regarding the supply of EAI, we continue to work with Pfizer. We're seeing improved performance around their deliveries, and we're able to keep a supply to patients. But unfortunately, their ramp-up has been slower than expected, and because of the seasonality of this product being largely second and third quarter, that's why we took our guidance down because of -- just because of the seasonality and coupled with the delivery performance. We do expect continuing to rebuild our inventory levels here throughout the course of the year, but at this point it is still intermittent supply from Pfizer due to some of their compliance issues and some of their challenges that they're having with their Hospira manufacturing operations. With regards to launches and launch timing and exclusivities, the number of date-certain or exclusive launches are not necessarily big drivers for our performance this year. We have a number of date-certain launches that are relatively small in the grand scheme of things as we look at the number of launches that we have available to us in the balance of this year. But our portfolio is really driven by first the market opportunities that are not necessarily tied to exclusivities, and by default because of the fact that they're first to market and you're more in the incumbent position, those are generally longer durable -- more -- longer duration type of assets and more durable. But they're not necessarily tied to exclusivities.

Your next question comes from the line of David Risinger of Morgan Stanley.

So I have a number of questions. I'll try to keep it relatively quick. So first, could you just provide a little bit more perspective on reducing your target for new product launches from 60 to 47? I guess, what has surprised Amneal in the last few months? And then with respect to your slide on the EBITDA bridge, why would 25 over the rest of 2018 contribute such a small amount of just $40 million at the midpoint as reflected in that EBITDA bridge bar chart? And then, finally, if you could just talk about some of your top products and the assumptions you've made for either new competition coming in in the second half of the year or not? So for example, on Yuvafem or diclofenac or other top products, just what your assumptions are that you've baked in.

That's quite an array of questions there, but I'll try and get through them. Regarding the launches, we had said we had up to 60 launches when we initially launched the company on May 7. We said that we had the ability this year to launch up to 60. We always said, too, that we didn't include all 60 in our guidance assumptions, because there's always timing issues, there's always additional requests for information from FDA, and things along those lines. I think still the fact that we have -- we've got great approval and launch success within the company, as I mentioned in my prepared remarks that we had the number -- we're the #1 company this year in terms of the number of approvals that we've received and launched. As you look at it over a 3-month period, 6-month period, full year period, we're continuing to really, I think, accelerate our launch engine, and a lot of those launches you've seen come through already this year with some of the more complex ones. We still have good opportunities in front of us for pipeline launches. The timing of such is always a question mark and challenge in terms of, do they happen in fourth quarter of this year or first quarter in 2019? That's what we're up against in terms of kind of some of the timings. But that kind of gives you a flavor for it. But still I think that we've got a very productive R&D and launch engine within the company. Regarding the EBITDA bridge, if you look at that Slide 15, when you kind of look at that small bucket now that's on the -- between the 2018 adjusted column to the full year guidance, some of that moved from the right-hand side of this graph over to the left-hand side where that first column on full year first half launches. So some of those have happened, and that's why you see kind of a reduction in the contributions. So stated differently, we don't need that many more launches or contribution from launches to be able to get to the guidance that we've provided. And although we still have opportunities to outperform that, because of the epinephrine situation and because of the seasonality of that we took the steps to lower our guidance. Regarding the top product assumptions, no, we did assume competition on diclofenac gel. We have not assumed competition on Yuvafem or on Aspirin BP, and so -- but then we do have, within our overall portfolio, a competition assumption and base price erosion that's factored into our guidance. But in terms of top products, the ones that you had mentioned, that's the assumptions on those 3 products.

Your next question comes from the line of Chris Schott of JPMorgan.

I just had 2. Do you want to come back, just so I'm sure I'm clear on the new launch forecast? I think obviously you've got the buckets moving from one to the other. But if I just go back to that Q1 slide where I think you were targeting $160 million of EBITDA for new launches, where does that number stand if we were looking at that on an apples-to-apples basis? Is that still $160 million? Is it something less? Just any color there would be appreciated. And the second was on Yuvafem. You just mentioned that you haven't assumed additional competition. It's been a great product for you. Is the $30 million or so run rate that we saw this quarter, is that a decent way to think about that product until we see additional competition, or could that further step up from here?

Yes, regarding the new launches, Chris, what I'd say is that when you look at kind of apples to apples, a number of those launches have now actually happened. So, for example, in the past slide deck that we used one, it didn't -- one of the launches that was assumed at that point to come was potassium chloride. Well, now that has happened, and that's why you see it shift from the right-hand side to the left-hand side. Another one would be cyclophosphamide. That was in a launch-to-go assumption in the past; now it's in -- embedded within our kind of first half to numbers to get to the full year. They came late, either late in the second quarter or very early in the third quarter. But that kind of gives you a little bit, I think, the color in terms of kind of the apples-to-apples comparison. Regarding Yuvafem, I think the run rate that you've assumed is the right run rate, assuming that there's no additional competition. That's the way we're modeling it, as well.

Your next question comes from the line of Randall Stanicky of RBC Capital.

This is Dan Busby on for Randall. First question, just given some of the dynamics we've discussed, including some of the new launch delays, has your view changed at least qualitatively around your out-year EBITDA projections, given what you've seen this quarter?

No, absolutely not. We're committed to the $1.1 billion in the out years, and we're standing firm on that. In fact, we're even more bullish around our assumption, so even with the delayed launches we're delivering great quarter-over-quarter, sequential quarter-over-quarter growth here in 2018. We see that continuing into the future, and we've got a great pipeline that's going to drive growth as well as synergy capture. And I don't want to undermine the performance on the Specialty side as well; that is also continuing to drive great growth year-over-year as well. So when I look at the Specialty performance, the Generic performance and the assets that we have available to us in the pipeline coupled with synergy capture, I'm very, very confident in the out year -- in the outlook for the future.

Okay. And then just one follow-up question. You said on the last call that your top 5 generic products accounted for approximately 27% of your revenue base. It's fairly concentrated, and I think the Adrenaclick shortage demonstrates one of the risks associated with that. So do you expect that percentage to come down over time as the pipeline matures and products rotate in and out, or is that a realistic baseline going forward?

Yes, look, I think we've got a diversified portfolio that's not necessarily concentrated. We're not reliant on any one particular product, and you see that even with some of the launches that we've just had. Potassium's going to be a great product for us and a good contributor. Cyclophosphamide will be a good contributor for us as well. So we're not concentrated on any particular product. So the epinephrine is just an unfortunate situation where we've got intermittent supply, but that could -- if not for that supply we would've had, frankly, a blowout quarter here in the second quarter. But I'm confident that we're not concentrated, that you'll continue to see diversification in our portfolio, especially as you see some of these pipeline assets come through and launch. A number of them we just recently launched.

Your next question comes from the line of David Amsellem of Piper Jaffray.

Can you hear me?

Yes.

Okay. Sorry about that. Got a question on Unithroid and levothyroxine. So one, on the brand, you've seen some strong volume growth. So I wanted to get your thoughts on what you're doing to drive the brand going forward in what is, admittedly, a pretty complex market. And then as related to that, what are your thoughts on being able to expand your relationship with the JSP? I know there's been a lot of chatter about what Lannett is trying to do in terms of renegotiating its agreement. Wanted to get your thoughts on the potential opportunity for levothyroxine on the generic side.

Yes. So look, we're happy with our Gemini acquisition here, and specifically Unithroid. There's a tremendous amount of brand loyalty to that brand, and we see that in terms of its performance year-over-year and quarter-to-quarter. We have a small, just to kind of provide a little insight, we do have a small sales team that has a niche strategy in terms of out there doing some limited promotion around the product. But this is a great brand that patients, once on therapy, desire to stay on therapy, and we see good adhesion and stickiness to that business because it's a good asset. Regarding looking at how do we potentially expand that relationship, I know there's a lot of speculation out there around what's going to happen with the generic relationships that Jerome Stevens has. We like the Jerome Stevens family, and we've got a good working relationship with them. We certainly would be interested in that asset and expanding the relationship further. But beyond that I'm not going to comment, because obviously it's a delicate situation. So, but I like the relationship. I like what -- the position that we have with Gemini. We've got, I think, great performance with that brand, and we'll see what comes next.

Your next question comes from the line of Dana Flanders of Goldman Sachs.

I guess my first one here. Can you just talk a little bit about just the price increases you took across the portfolio in Q1? How sticky has that been, and is that something that you're continuing to evaluate as you get into the back half? And then on just the new launches, again, I mean, has that solely been a timing issue? Or has the value of any of these new launches changed? And I guess the read-through is just how the competitive landscape is playing out in the generic environment. Maybe you can just comment on that.

Sure. Thanks, Dave (sic) [Dan]. Regarding price increases, the price increases we've called out in the first quarter were specifically on the Impax side because it was such a big component of their quarter performance. We take price increases routinely, and the stickiness of those depends on product to product. But overall, when we generally take them they generally stick, and we're always disciplined in making sure that we're getting the right value for our capacity. And so the generic industry is always a dynamic one, and so we've always got to constantly evaluate our portfolio and see where there's some opportunistic -- when there's opportunistic price increases available to us, and we'll continue to do that. But for the most part they generally, from what we see, stick. On the new launches, it's all purely timing for us. There's always going to be products that may not necessarily do as well as what you had initially modeled because of either competitive aspects where the brand groups become a bit more defensive and do stronger contracting and rebating. That's just an inherent part of the business that we just have to continue to adjust to. But then there's other products that outperform what you assumed because you don't have as much competition. I would say that the way that we've kind of modeled out the business, the net/net effect is that the assets in the portfolio are generally producing the returns that we had expected and had modeled. So in terms of the actual contribution of the new products, it's -- this is purely a timing issue where something moves from second quarter to third quarter or third quarter to fourth. But these continue to ramp up. And I'd also say, is that when you're in somebody's more competitive type of programs where you launch a product via a REMS program, the uptake on some of those products are generally slower than anticipated. But then on the flip side, when competition comes in, you hold onto the business longer than you may have initially thought because the ramp-up is slower, but then the ramp-out is slower as well. And so I think that the fact that when you look at Amneal's portfolio and the type of assets that we have, even if there is a slower uptake, I feel good about the ultimate return on that investment that we've made because we're going to hold onto the asset longer than maybe what we had originally modeled as well. So that's a plus/minus in there.

Your next question comes from the line of Louise Chen of Cantor Fitzgerald.

Can you hear me now? Sorry, I was on mute.

Yes, we can hear you.

Okay, sorry about that. Okay, so I wanted to see -- just a few questions here. I wanted to see if you could break out the components of the restructuring expenses for the Amneal acquisition and how you expect those to play out for the rest of the year. And then my second question was just, before you had mentioned that you might consider adding an OTC or cash-pay component to your business down the line. Is this something that you're still thinking of? And then the last thing here is just on the market disruption front. You've been a leader in talking about this. It's been really quiet here for a while, but does the PillPack deal stir any of your thoughts here?

I'm going to take this question off. I'm going to pass the financial one to Bryan, and since my Executive Chairman here has been so outspoken around disruption in the industry I'm going to allow him to opine on that one, so.

Yes, it's a bit of a confusing quarter, because there's -- we have quite a bit of restructuring-type activity. But as far as the share of cash charges, the bulk of it is around severance. And going forward, until completion, the two main cash components are severance and tech transfers of inventory, and it's probably 75% severance and the rest tech transfers. And then all the other items that I described, like the charge for the stock, the one-time bonuses and stuff like that are behind us. So, and it'll be fully broken out in our 10-Q in the restructuring and integration footnote that'll be filed at 4:31. But I guess the one thing I will add is the bulk of the restructuring charge was taken in Q2. So you'll see the actual severance tail off quickly.

And Louise, it's Paul. Actually, there's a lot -- obviously, there's a lot going on disruption-wise in the marketplace right now. We certainly have seen a lot of the things that we had talked about starting to come to pass. Certainly the Amazon PillPack deal is a prelude to what we had originally started talking about almost a year ago, and that's access for Amazon to achieve pharmacy access across 50 states and be able to move into that space. So it's certainly not a surprise. And I think from our perspective, we have to continue to focus on -- we're 3 or 4 months now into our integration, and we want to make sure we focus on that integration. The good news that sort of as I see is this integration is creating for us the infrastructure and the skill sets that we need at Amneal to be able to make integration one of our strong suits. And that will help us as we move forward in capital deployment. And so as Rob said in his prepared remarks, our long-term capital deployment is obviously we'll continue to invest in R&D and internal R&D, but also creative business development to support our Specialty franchises, and then finally those adjacencies, which were the OTC cash-pay kinds of adjacencies we were talking about, and even potentially distribution. For now our focus has to remain on completing the integration, making sure that we do the blocking and tackling we need to do get the company ready to be able to make those leaps. I am pleased to report that we are very far along in that process, and we can now start thinking about and turning our attention to participating in the changing market dynamics. But you've hit on all the hot buttons were looking at.

Your next question comes from the line of Gary Nachman of BMO Capital Markets.

Rob, the upper end of the R&D guidance, 10% to 15%, seems high to me. So how aggressive do you want to be pushing the pipeline forward while also managing EBITDA growth and the long-term target that you talked about? And then is epinephrine something you could look to bring in-house at some point to avoid some of these issues with Pfizer? I know you talked about that at some point, but any updated thoughts there?

Yes so Gary, the upper end of R&D is driven, or I should say our R&D spend is driven by a couple things. One, we have kind of timing of synergy, because we are synergizing the generic arm of Impax with Amneal, and so there's some kind of timing kind of anomalies there as we transition some of that activity across. We also have a number of inhalation products that are going into clinical studies. We have one basically completed. We've got two more that we expect to start, one in the third quarter, one in the fourth quarter. They're registered on clinicaltrials.gov, so you can see which ones they are. But we expect that we'll have some ramp-up spend in that as well as IPX-203. But we've committed to staying in and around that 10% of top line, is what we would expect to be at in a steady state. So you may see that number kind of flex a little bit quarter to quarter, but overall what we're trying to do is kind of peg around, roughly around 10% of our top line as an R&D investment. But again, some of these bigger investments, whether it be 203, whether it be some of these bigger clinical studies for inhalation, could potentially flex that up a little bit in the quarter. But these are going to be the type of opportunities that we're going to continue to invest behind. We think they're great assets, and we think that these could be very durable assets even in a competitive environment for us. Regarding EAI, that is something that we potentially could bring in-house. Obviously, we're thinking that through as it relates to some of the challenges that we're having with Pfizer. I mean, our near-term focus has to be working with Pfizer to address kind of the -- let's call it the short-term supply issues and making sure that we've got enough capacity. But if we have to supplement that capacity with internal capability, we are prepared to do that.

Your next question comes from the line of John Boris of SunTrust.

The first one, Bob, on Slide 6, you lay out your key product launches year-to-date. I think there are 7 on there. Can you just give some commentary around what percent of your revenue that they accounted for and what the contribution was to the EBIT line from those 7 assets? Second question just has to do with your synergies. You certainly gave commentary about the cadence of the synergies, and certainly Hayward being closed sooner than expected. Obviously that's pitted up against your long-term strategy to bring a lot of the product opportunities in-house. Just some thoughts around the cadence of the synergies at least going forward. And then last one for Bryan, what was your free cash flow in the quarter?

So I'll start on the key launches. I believe the number was roughly around $40 million of -- $40 million in total for the second quarter, to kind of just kind of give you a general idea. And, again, some of the timing of these launches could've been late in the second quarter or maybe not necessarily having full launch quantities in the second quarter. So I just would state that in the sense that you can't necessarily look at that as kind of a run rate type of thing. But you'll see continued improvement as the quarters do progress here through the year around what the contribution is on those new product launches. Regarding synergies, we are well ahead on all of the announcements associated with that. I think we'll be largely completed with our integration within the first calendar year of our announcement. We're ahead of schedule in terms of the shutdown activities of Hayward and the transfer activities. There's always going to be a timing component to this, because although we may have executed the closure of the facility you may not necessarily recognize the full benefit in the P&L until you've exhausted the inventories that were manufactured out of that facility. So there's always kind of a lag within the P&L in terms of when you would actually see the savings. But all of the decisions that needed to be made to get to the $200 million have already been made. And so that's why I feel we're not only ahead on that decision-making process but we're ahead around all the execution that goes with it. Regarding the free cash flow, I'm going to turn that one back over here to Bryan.

Thanks, Rob. Thanks for the question, John. Free cash flow during the quarter was negative, and we expected that. The key things driving that, severance and product transfer costs, dealing with integration and allowing us to capture synergies ahead of schedule. We did have quite a bit of inventory builds and account receivable builds as a result of the new product launches. The $41 million of new product launches, that's predominantly sitting on our balance sheet in the form of receivables. And we continue to build inventory in anticipation of the new product launches in the second half. And then we did have -- on a nonoperating side, we did have the Solodyn settlement as well as the acquisition of Gemini during the quarter. So all of those, as anticipated, created negative free cash flow during the quarter. But we do expect that to quickly reverse in the second half.

Your next question comes from the line of David Buck of B. Riley FBR.

Just a couple of quick ones maybe for Rob. Can you talk a little bit about -- you talked -- you mentioned price increases. Can you talk a little bit about what generic pricing was for your business overall in the second quarter and what's the assumption for the remainder of 2018? And then just a couple of housekeeping ones. What is the impact of pruned products on 2018 sales expected to be? What's the impact of Gemini for full year sales? And then maybe if I could sneak one in for Paul. Can you talk a little bit about your view of the return on complex products, including biosimilars, going forward? Do you think there's adequate return for your investments?

Yes. So I'll talk about general pricing here. I still see that we're seeing a lot of positive signs in terms of price stability, especially as large companies like Teva and Mylan and others have been rationalizing the portfolio just like we have as well. I think that that's creating a different discussion with the buying groups and therefore also driving, I think, a bit more stability in pricing. I think it's also a function of a little bit more maturity in the market as well as people now have realized the consequences of some of these onerous terms and conditions with some of the agreements, that people are realizing that there needs to be more profit embedded kind of within their pricing structures. And so overall, I do see that there's more stability in pricing and more discipline in pricing than what we have seen over the last, say, several years. Regarding price expectations, we don't get into disclosing a target because that just becomes the starting point of the negotiations on any RFPs. And so we're not going to get into the business of forecasting what the price assumptions are going to be in the remainder of the year. I will just say that we have generally used an overall kind of assumption within our models, and again, we just are not going to provide that or telegraph that. Regarding pruning the portfolio, I mentioned -- I’ll ask Bryan to talk specifically around that.

Thanks, Rob. So for the products that we've pruned in the last year, the impact for the full year will be around $20 million, give or take, but would actually be slightly positive on our gross margin. Yes, the business is continually evaluating the portfolio, so that's related to the products that they've pruned in the last year.

And yes -- and Paul, maybe you want to talk about some returns on...

Yes. Well, David, thanks for the question. I think everyone is surprised that the -- at sort of the fact that the biosimilar return is not achieving what I think people anticipated. Certainly the rhetoric coming from the administration and the FDA is positive in potentially reversing that trend. Amneal is, I think, well positioned to participate in the biosimilar programs and I think in a responsible and thoughtful way. The partnerships that we have, have allowed us to sort of spread that risk and participate in the upside if it does in fact appear and come. I would expect that ultimately it will. And I would also make the observation that there are different levels of complexity in the franchises that we talk about. Certainly the most complex would be the biosimilars, but there are other complex products and high-value assets that Amneal is working on that don't suffer from loss of value. And I think it's very important to recognize that a lot of the stuff that we're working on can be called complex, but they're very difficult to do. And that's really the more important thing. And as we are able to bring those to market as either first or one of just a few participants, we are recognizing the value that we expected to recognize from those products.

Rob, I don't know if you want to add anything.

Yes, I think that's exactly right. I mean, every company has erosion assumptions, and it really depends on the product mix. On the Amneal side, we have a better mix, if you can call it that, of higher-barrier products. And I do think that our approach to these markets, whether it be more the complex type of products, is to make sure that we're putting the right effort and the right investment behind products that we think ultimately would be still durable for us even in a competitive marketplace. And on the biosimilars side, we're still kind of evaluating how that is all going to play out, which is why we've taken a partnered approach where we haven't committed a lot of upfront capital to those businesses or to those type of portfolios. And we're taking a little bit more of a wait-and-see approach. But we do think that this marketplace is going to open up. As Paul said, the rhetoric coming out of both HHS as well as FDA as well as the administration certainly suggests the need for a competitive biosimilar market and there -- I think there's recognition within the administration on steps that they have to take in order to be able to have a healthy biosimilar environment. And we'll participate in that, but we're going to take a little bit slower approach to it.

Your next question comes from the line of Sriker Nadipuram of Barclays.

I'm interested in hearing more -- a few more details on the new product launches and the ANDAs that are approved that are yet to be launched. You've had 22 new product launches year-to-date. How many of these 22 are from the 33 that have been approved this year? And then of the approved ANDAs that weren't launched, do you ever expect to launch these? Or will these ANDAs just be kept on the shelf?

Yes, so thanks for the question. Out of the 33 ANDAs approved this year and out of the 22 launches this year, I think all but one of them were from approvals this year. And so that would suggest that we have a few more that we have not launched. Some of those are either launching imminently or some of them are -- we're basically taking a wait-and-see approach because we don't see necessarily a commercial opportunity for a few of them. Some of them have been kind of deprioritized just because of other, let's call it, use of our capacity for other products. So there's not a specific answer to -- each one of them has kind of its own unique answer. But out of the launches that we have not actually executed yet, there's a number of them that we will launch in the second half of this year.

There are no further questions.

Thank you much for -- great. Well, thank you all for joining us today. We really appreciate it, your time. And should you have any questions, Investor Relations will be available all week to follow up. Thank you, and enjoy the rest of your day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.