Good afternoon, everyone, thank you for joining us. My name is David Risinger, and I'm responsible for U.S. pharmaceuticals at Morgan Stanley, including both major and specialty pharmaceuticals. It's very much my pleasure to welcome the senior leaders of Amneal to join us for the conversation. I do need to refer you to a disclaimer at www.morganstanley.com/researchdisclosures. If you're a member of the press, we ask you to disconnect and reach out to Morgan Stanley Public Relations. With us today, we have both Chirag Patel and also Chintu Patel, who are the original co-founders and co-CEOs of the company. They originally founded Amneal in 2002, and they returned last summer, in the summer of 2019, as Co-CEOs. They also brought in Tasos Konidaris, who is the company CFO. We're pleased to have Tasos with us as well.
I thought I would first turn it over to you, Chirag, just to maybe introduce yourself briefly. I actually think it would be helpful for each of you to just touch on how you are spending your time. Chirag, would also love to hear some opening comments from you as well. Let me pass it to you.
Great. Thank you. Thank you everyone for joining, and David, thank you very much. Chirag Patel, I'm a Co-Founder and Co-CEO of Amneal. We founded the company along with my brother and from help from my father, who is also a pharmacist scientist. We call it Amneal 1.0. That story, we grew Amneal substantially from 2002. When we launched our label in 2007 to 2017, we experienced a remarkable growth for the generic side of the business. We're very excited to be back on Amneal 2.0. First, let me answer David's question. What I do as Co-CEO structure sometimes sounds confusing, but we are brothers who get along really well. We have complementary skills that my liking and what I add values to Amneal is on business development, self-marketing, finance, legal, all those areas I look after.
My brother looks after R&D, operations, quality, and we always team up on all the key decisions, and great to have Tasos on board as well. The second part of the questions on what we are excited, summary of Amneal, where we stand after one year coming back. We feel very strong where we stand. The foundations, we have stabilized the generics business. We have grown our base business, launched new products, reignited and refreshed the entire generics pipeline, including injectables, ophthalmics, transdermal, pretty much all of the products that are available, we have it. Lots of manufacturing still in the U.S., we're very excited about any government actions that may be for bringing manufacturing back to the U.S. Very excited about generics, which is about $1.4 billion of the business, and we expect growth in coming years.
The second growth engine we have is distribution. That is the good acquisitions we did early part of this year, which is growing, and government business is growing as well. We're able to sell Amneal's product through that channel, which improves our margins and very excited to launch the unit dose business part of our distribution business called AvKARE. The third part of our business is specialty, which is rightfully so underappreciated in the market at this point, but we do about $360 million in sales and growing that business. We got IPX203 as a pipeline. Existing business is growing. IPX203 is in phase III. We expect the top line results in third quarter next year. K127, which is a treatment for the myasthenia gravis patient, we added that in the pipeline in the first half of this year, which we are very excited about as well.
We are working on more growth stories within our specialty. I'll stop there, David. That's just a highlight where we are headed.
Excellent. That's a great framework. Thank you for that, Chirag. Maybe just add a little bit more, for those who aren't familiar with Amneal, and it was helpful for you to start with the revenues, but if you could go into a little bit of the operations, the employee base, just to give a sense for how the company is structured. How you also expect to leverage that structure with your pipeline over time.
Fantastic. Everybody asked us that why were we successful in Amneal 1.0? That is because of our teams, and most of the team is intact. It's 5,500 people strong, which includes 2,100 employees in the U.S. We're very proud of our U.S. infrastructure. India, we have 3,200 + employees, an excellent team. Ireland, we have a smaller team, but it's growing. It's inhalation platform there. Generics side, we are well set with our infrastructure, where we don't spend time on closure of the plant or consolidation. We're solely focused on launching products, increasing our pipeline, increasing our baseline business. Very excited about the team and infrastructure on generics side. The distribution, we had decided to run separately because it's a different cup of tea.
We have the founders of that business that we bought from, they still have a vested interest as they own 35% of the company still. They're running it and running it well because they did it for over 30 years and they have a great name in central part of the country in Kentucky. That is well set and they have about 150 employees. Specialty side of the business we run separately because there is no synergy per se. There's scientific synergy because of CMC and other things, but marketing, market access, we're very proud of leadership provided by our head of commercial there and how he's able to build a specialty business on a commercial side. Now we are looking to strengthen our R&D engine within our specialty business. That's very proud of the teams and they're very excited.
Excellent. With respect to R&D, could you just discuss your focus there? Clearly that's on high value opportunities, but if you could put some framework around that and then discuss key developments we should be watching for your R&D organization in coming years.
Sure. We've been investing in generics for a long time, so there is no need to over-invest in generics. We have taken certain part of that R&D budget and put it in specialty. The two areas where we are focusing is generics, which includes injectables, which has a certain complex injectables. Ophthalmic, inhalation, that is where we are spending generics R&D dollars. Slowly but surely we're taking 30%, 40%, 50% of our R&D budget, not increasing it, and taking it to specialty which our sweet spots are those unmet needs, drug delivery technologies between the peak sales between $100 million and $400 million, which is ignored by big pharma and it's not a biotech play. We are playing in that sandbox and the investment there will be $20 million-$50 million per product and likelihood of success is higher as well.
This is how we are allocating our R&D dollars and our platform.
Okay, very good. With respect to just to go back to the top line. You mentioned $1.4 billion in generics set to grow. Could you talk about the pushes and pulls for that top line and the opportunity for growth?
Yes. Focusing on baseline, which is we have a large portfolio. We have 330 products approved, 250 + marketed. We're not taking our eyes off those baseline products because we're finding ways to increase business within baseline, which helps us protect against the competition when they show up. The second part is new product launches. We've been launching key new products since we came back, and we expect to launch even more. Also, we have refreshed the pipelines. Every year we expect to launch new products as well. Within that, the main advantage would be in the ophthalmics, a few more transdermals coming along. Even the OTC side of business is growing with diclo going OTC, the more injectable products coming in. Those are on the generic side. We plan to not lose as much in a baseline.
We have seen the stabilization in the market, much better than 2018 and 2019 this year. Keep launching new products and increase our efficiency throughout the operations because our margins took hit and we are recovering and we know how to do that because we operated at higher margins before and we are trying to get back in 40s as soon as possible
Excellent. What are some of the higher value new product launch opportunities in coming years? Obviously you can really only talk about what you've disclosed, but what are some of those and what is the potential timing?
We expect about 8- 10 high-value launches here for the next 9- 12 months. Every year, we expect 5- 10 new high-value launches coming in. The areas these launches will be is still in transdermal. Ophthalmic, we have an entire portfolio that will start getting approval. More injectable products, and we hope to launch our first inhalation product next year as well. As you disclose, pipeline has Copaxone and other products which we have disclosed. Many we do not disclose because of the competitive nature of the generics industry.
You touched on Copaxone. What are the lessons learned from Copaxone? Not only Amneal, but other companies expected to launch years ago, but it seems like either it was more difficult for you to do what the FDA asked for, or the FDA raised the bar versus where it was three years ago. Could you just help us and educate us about that process and the lessons learned?
Sure. I'm going to pass that to Chintu, who's very close with R&D. Chintu?
Yeah. Hi, David. A good question. I think the first company, Momenta Pharmaceuticals, and then through Sandoz, when they received approval, it took them over 10 years to get that approval. Every time a complex is a complex fusion protein, it's not an easy process and you are relying, mainly it's the entire API play. FDA is asking for very detailed characterization of the processes of every step. There were a lot of lessons learned and even the companies that's coming after the first approval, the bar to approval still remains very high. It's one of the most complex product because in Europe, let's say, for approval, they require clinical. In U.S., there is a waiver, but higher degree of characterization is required. The lessons learned is that's why Amneal really transition into complex product.
We are first movers on many complex products, as it's shown in the history from Epinephrine Auto-injector launch to NuvaRing to sucralfate. We work very closely with FDA and kind of create a pathway. Copaxone, for our perspective, was delayed as we work on a partnership because it's not an in-house project. Amneal, the beauty of our R&D and complex product and our confidence to bring those products to market, we are doing majority or all of the complex dosage from development to manufacturing in-house. A lot of timelines and everything was added. Second thing, it's very complex product. A lot of lessons are learned, so for future peptides and more, it's now the biosimilars are also being developed.
These are kind of similar nature of the products where companies and including us, for the future product, it will be much easier than what it used to be done. FDA also every time keeps coming out with new and new questions, even though they had one approved. Usually, once you get CR, that suffice the queries from FDA, but they keep adding new and new queries as a part of review process, which is not usually on a lesser complex product. I think we feel good about launching that product in second half of 2021 with after all the learnings we have done. It is being delayed, we do accept, but many lessons learned, and I think we are fully stacked on other products that we'll be launching eight or 10 on next 12- 14 months.
That's very helpful. That's interesting. You see those learnings as an opportunity to do more, not to back away, meaning it sounds like, as you mentioned, you've always worked on complex generics. Could you just talk about opportunities for other very complex branded drugs for which there are no generics? You mentioned fusion proteins broadly, but I'm not asking you to give specific drug names, but is that a big opportunity for you outside of biosimilars?
Absolutely. Our portfolio, first of all, our pipeline is 80% non-oral solid. Oral solid, there are less product, but in a non-oral solid space, we are working in a microsphere depot technology, long-acting injectable. Inhalation is a big area where still generics have not penetrated. There's a liposomal product in. There's ophthalmic portfolio. There are many areas where generic hasn't been. We have many product and Amneal historically been known for first to market products for last many years, for last 10 years, whether it was liquid, whether it was even oral solid, or now in a non-oral solid and other space. Plenty of opportunity. That's why we are focused on a first to market. FTF times are gone, it's more about innovations and science and working and staying, working with FDA.
We have a solid quality track record, which also helps to work with FDA to develop pathways or new regulatory guidances, especially on a local acting products. FDA is opening up. On a topical side also, there are good products where before it was required heavy-duty clinical studies. Now it's more of a skin study, in vitro characterization. FDA is moving, but somebody has to take a lead, so we took our lessons from some of the delays and learning on other complex products, applied them on many of the other categories. We are much more working with FDA very closely. We have 750 people team in-house, and every dosage complex from development to manufacturing. We are very excited in how we are transitioning from a common, simple generic product, as we have a large portfolio, about 400 products. Our focus is heavily on the complex products.
That's very helpful. Great. Maybe I'll transition to Tasos. Tasos, you have an interesting background. Could you just discuss your career and what brought you to Amneal and the opportunities you see?
Sure. I'll condense 35 years into 60 seconds. I speak funny because I came off the boat from Greece, 1984. After going to school here, I spent 17 years with a number of companies, Bristol-Myers Squibb, Novartis, Pharmacia. After spending 17 years with big pharma, I was recruited to Dun & Bradstreet. I was their corporate CFO for seven years, and those were interesting times between went through the financial crisis of 2007. I spent the last eight years, four as a CFO of Ikaria, which we end up selling to Mallinckrodt for $2.4 billion. The other four just doing something more entrepreneurship, which is a small biotech with a drug device combination. Last, a few months ago, Chirag and Chintu gave me a call, and that's where we began kind of learning about each other.
For me, I just saw a great opportunity to create a lot of value for our shareholders, our employees, and our patients. There were three things that I saw and why I'm excited every day that I go to work. Number one, I just saw a company with a lot of substance and a solid base of products, revenue, infrastructure that can benefit from excellent management. That's number one. Number two, I saw a passion for innovation. I think that comes across when you talk to Chirag, Chintu, our R&D organization, because we need to transition over time to just much more of an innovative company with a lot more runway behind our products. Number three, I just saw a true alignment of interests. That's the one thing I look at, between the management team that has voted with their own wallet, and the shareholders.
There is a difference between management teams that are getting compensated based on stock options, as opposed to people that truly have an equity stake. In that way, that cuts through a lot of things that have caused destruction of shareholder value. You really cut through the politics. Everyone can see things. The management team and the investor can look at the same thing and really come up with the same desired outcome. That's a little bit about me, David.
Excellent. Thank you very much. That's very helpful. Maybe you could talk about the financials.
Sure.
Just remind us the prospects for the second half, how you're talking about the financials longer term, even though you haven't given explicit guidance. Also discuss the balance sheet and debt pay down plans.
Just a couple of things. For us, this year is a turnaround year. I think all of us internally at the company, we're just proud of how well everyone has executed. Even in the midst of COVID, in a pandemic, revenues are up, EBITDA is up, EPS is up 40% first half versus prior first half of last year. There has been a substantial amount of cash flow generation because we're maniacally focused on cash flow generation. We feel great about the way the team has executed the first half of the year. We kind of look at the second half, we feel great where we are. We feel great how the company's positioned. I think the macro dynamics in the generic marketplace, price pressure, we don't see as much price pressure as we saw in the second half of last year, number one.
Number two, we're coming in with a stronger pipeline of products. As we think about generics, we look at the second half versus the second half of last year to just be organically up, number one. Number two, AvKARE has been integrated greatly. My gut feel is AvKARE should do about $300 million of revenue this year. The specialty business should have a very solid second half. We feel very good about the second half trajectory of the business. From an operating expense, the margins have been solid. The margin has been solid. The Q1 gross margin, we blew it out of the water. As we told people, Q2 is not going to be as strong just because mix of products, COVID, and just the fixed overhead absorption, just because of the COVID challenges. There is nothing fundamentally wrong with the margins.
We should see some pickup in the second half. The team has done a great job on an operating expense perspective. We have kept a lid on operating expenses and we continue to drive efficiencies. For example, Chintu and his team are really focused on insourcing and a lot of third-party manufacture products. I think that's going to bode well for gross margin over a period of time, right? R&D, we're focused on shifting resources over time, in a thoughtful way from our generics products, more so to some of our pipeline. IPX203, K127. Cash flow generation, we expect it to be very solid. We feel great about our guidance. Now, I know after the second quarter, people were trying to look at the guidance compared to where we were in the first half.
When you do the math, you say, "Hey, Tasos, what you're telling me now doesn't necessarily jive with the guidance you guys issued." As I mentioned on the call, what goes into guidance is a lot of things, right? It's a pandemic, which no one really knows exactly how it's going to play out. It's about reestablishing credibility, right, in the organization. We feel great about achieving our guidance. Longer term, we're looking to create a sustainable business that's based on innovation, right? Innovation around generics, innovation around expansion of the specialty business. We're very focused on reducing our leverage, right? We were successful. We reduced leverage from 7x net debt to EBITDA from December of last year. In June, we were at 6x.
When you extrapolate that based on the implied EBITDA guidance, we're going to be at 5.5x by the end of this year. With continued growth, we expect that level of debt to decline. We're looking for growing EBITDA over time, reducing our reliance on debt, and utilizing our cash generation, David, to, A, continue to organically drive growth and do some smart acquisitions around the specialty area. Let me stop here and see if that was helpful.
Yes. That is extremely helpful. I'd like to go back to Chirag. We actually are going to be running out of time in a few minutes here. I'd like to extend it an extra five minutes if that's okay. Chirag, you mentioned the opportunity in the U.S. to potentially capitalize on government business opportunities. Could you provide some additional color on that?
The one part we are already doing quite a bit of government business as part of AvKARE acquisition and Amneal having a large U.S. manufacturing base, we've been supplying to U.S. government for a long time.
The new initiatives which Administration, Congress, and both parties are very interested in securing a pharmaceutical supply chain in case of pandemics, in case of any other emergencies which are not in our hands. Especially for the essential products, especially to get at least 35%-40% capacity in the U.S. Which will provide for the surge capacity. Creating a real industry. That is what we are also advocating that, hey, we cannot just have a one-offer deal or things that the industry will not be sustainable in the U.S. You have to have a market for U.S.-made products. We know we cannot compete with China and India in cost. Yes, we'll bring the technologies here.
We probably is one of only generics company have maintained large scale of manufacturing. We know how tough it is in the competition with the Indian players, and Chinese could cut the prices because their operating costs are lower. All this is aligning really well what administration's thinking, Congress is thinking, the both sides of presidential campaigns thinking. They really want to bring the infrastructure, create jobs, and we feel like there's a lot of momentum for bringing the production back to United States, including API and finished products.
Excellent. That's very helpful. Before we go, I was hoping that you or Chintu can talk about IPX203, and your level of confidence and potential differentiation.
A very good question. Just start with RYTARY. RYTARY is picking momentum because it took time to educate the doctors and then patient benefit, the Good On time. When it was launched, it was used for more advanced patient. Now it's being used a little bit lesser. When you start out with Parkinson's disease, this is where it is we're trying to push to use early, and which has a great advantage. IPX203 even increases more Good On time, and symptom controls are better as we have seen in phase II. We do not have phase III readout until third quarter next year. We have learned what is being required. The payer coverage is good as well now.
Almost everybody's covering the product, and if we are successful in educating the providers, the physicians that, hey, start using early, and that could have a great outcome and longer-lasting impact with which this lesser dyskinesia and other side effects and lower CD/LD level. That would be very helpful. IPX203, we see when we launch in 2023, RYTARY goes up to 2025, that more of IR patient going into IPX203 right away. That's what we'll be pushing for, because what we have seen so far is good results on Good On time.
Wonderful. Well, I think we should close it out there. Thank you so much, all three of you, for sharing your thoughts and insights and being with us today. We'll look forward to speaking to you again soon.
Always a pleasure, David. Thank you.
All right. Thanks again.
Thank you, David. Thanks. Bye-bye.
Bye-bye.