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Amneal Pharmaceuticals, Inc. (AMRX) Q4 2018 Earnings Conference Call Transcript

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Amneal Pharmaceuticals, Inc.  (NYSE: AMRX)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Amneal Pharmaceuticals Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

At this time, I would like to turn the conference over to Mark Donohue, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.

Mark Donohue -- Vice President of Investor Relations and Corporate Communications

Thank you. Good morning, everyone. Welcome to Amneal's Fourth Quarter and Full Year 2018 Earnings Call. Earlier this morning, we issued a press release reporting our earnings for the fourth quarter and full year, press release as well as the slides that will be presented on this call are available on our website at www.amneal.com. We are conducting a live webcast of this call. A replay of which will also be available on our website after its conclusion.

Please note that today's call is copyrighted material of Amneal, cannot be rebroadcast it without the company's expressed written consent. I'd also like to remind you that during the course of this call, management will make projections or other forward-looking remarks regarding future events or the future financial performance of the company. It's important to note that such statements about estimated or anticipated annual results, prospects or other non-historical facts are forward-looking statements and reflect our current perspective of existing trends and information as of today's date.

Amneal disclaims any intent or obligation to update these forward-looking statements except as expressly required by law. Actual results may differ materially from current expectations and projections depending on a number of factors affecting the Amneal business. These factors are detailed in our periodic public filings with the Securities and Exchange Commission, including but not limit to the Amneal Pharmaceuticals, Inc.'s Form 10-Q for the period ending September 30, 2018.

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 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. Reconciliation of GAAP, non-GAAP measures is available in this morning's press release and in the appendix of today's presentation.

On the call this morning are Rob Stewart, our President and Chief Executive Officer; Todd Branning, our Chief Financial Officer. Following the prepared remarks, we will hold a Q&A session. Also on the call and available for Q&A is Paul Bisaro, our Executive Chairman; Andy Boyer, our Executive Vice President of Commercial Operations; Joe Todisco, Senior Vice President of Specialty Commercial; and David Buchen, Chief Legal Officer and Corporate Secretary.

For our agenda today, Rob will begin with a review of our fourth quarter and full year 2018 highlights. Following that, Todd will review detailed financial results, after which Rob will conclude with our 2019 outlook and a review of our strategic priorities going forward.

With that, I'll turn the call over to Rob.

Robert Stewart -- President and Chief Executive Officer

Thank you, Mark. Good morning, everyone, and thank you for joining us today. I want to welcome Todd Branning for his first earnings call, as our new CFO. We are excited he agreed to join Amneal and we look forward to his experience guidance and leadership in the years ahead. Todd, it's great to work with you again.

Please turn to Slide 6, 2018 was a year of significant progress for Amneal, as we continue to integrate, grow and diversify our business. We are building Amneal from a foundation of strength as demonstrated by our numerous achievements last year and sequential growth throughout the year. Notably through our focus on operational excellence, we led the US generics industry in both approvals and launches including 62 ANDA approvals, 10 tentative approvals and 42 new products launched. Our Specialty segment delivered strong script and revenue growth from Rytary and Unithroid. And our R&D group was very active submitting 31 ANDAs, and we dosed our first patients in our Phase III study for IPX203.

in May, we completed the reshaping of our company through the combination of Impax and Amneal. By the end of 2018, we completed the major tasks of integration. This included shutting down the Hayward manufacturing facility in December, approximately nine months ahead of what we had initially scheduled in our pre-integration planning. As a result we captured an accelerated rate of synergies and the amount of approximately $60 million and we are on track to achieve more than $200 million in cost savings at a faster pace than what we had originally planned.

Throughout the year, we strategically deployed our capital with the acquisition of Gemini Laboratories, as well as through several partnerships. These included agreements with Jerome Stevens, and Lannett for Levothyroxine, American Regent for Generic Makena and the biosimilar version of Avastin in partnership with mAbxience .

Turning now to Slide 7. From a financial perspective on a full year basis, we benefited from several factors including our strategic investments through business development, our ability to capture synergies at an accelerated rate, 42 new product launches and base business performance. As a result, although 2018 combined revenues were essentially flat combined adjusted EBITDA grew by 16% to $584 million and combined adjusted diluted earnings per share came in at $0.98.

Turning to Slide 8. For the fourth quarter, we delivered solid financial and operational results continuing a streak of three consecutive quarters of sequential growth. Fourth quarter combined net revenue grew 4% on a sequential basis and 2% year-over-year, adjusted EBITDA grew 15% on a sequential basis and 34% compared to a year ago, and adjusted diluted earnings per share grew 22% on a sequential basis.

Before Todd covers the details of our financial results, I'd like to review highlights from our segment. Turning to Slide 9 to take a look at our generic segment. We had a great year of pipeline execution and advanced our strategy to diversify our portfolio with a focus on higher value, higher return opportunities. As shown on the slide, Amneal led the US generics industry, with 62 ANDA approvals. We also launched 42 new products, representing a $171 million in net revenue contribution with the rate of new product introductions accelerating as we move through the year .

We are especially proud of the fact that we are not only getting generic products approved, but we are also launching them. This is demonstrated by our launch ratio, which is very high relative to our peer group. This means we are selecting the right products and excelling at executing both operationally and commercially. Of note, 37% of our new product launches were from injectable topical or liquid products, further diversifying our portfolio of more than 200 generic product families.

Turning now to Slide 10. As you have heard us say before, when it comes to our Generics business, it's not just about quantity, it's about value, and Amneal's committed to building a diversified generic pipeline to drive sustainable growth. We've made great progress with this effort in 2018, as 65% of the 31 ANDAs submitted by Amneal were for non-oral solid dosage forms. Our current submitted pipeline includes a 118 products pending at the FDA. Our momentum is carrying through the first two months of 2019 with nine ANDA approvals, two tentative approvals and we've already launched two products. We have the opportunity to launch upto 50 products this year.

Turning to Slide 11 for the update of generic R&D development pipeline. As shown here approximately two-thirds of the products in our R&D pipeline are focused on non-oral solid dosage products. Again, this is a demonstration of our company's emphasis on investing in complex products that have the potential to be more durable and have higher and more sustainable value.

On Slide 12, we recap the Specialty segment, which delivered sequential and year-over-year revenue growth in 2018. Within the important Rytary franchise, we grew net sales by 43% year-over-year as we continued our focus on growth and improving access for patients. We had several important managed care wins in 2018 and in December, we had an all-time high and total scripts per week of 4,237. Our team has done a fantastic job of executing on our new positioning, simpler messaging and refreshed concepts to establish the importance of the Rytary value proposition and better connect with both prescribers and patients.

Turning now to Zomig nasal spray, another important specialty franchise. In 2018, net sales grew 11% year-over-year overcoming managed care headwinds, we are actively taking steps to improve patient access and affordability to maximize brand penetration.

Turning now to Slide 13 to discuss Unithroid and Emverm, two specialty franchises that we believe have the potential for growth. Unithroid's net sales in 2018 grew by 39% over the prior year with double-digit growth in both total and new prescriptions. Looking forward, we believe there is continued growth potential for this product and we are committed to implementing strategies to deliver growth for the brand. This includes executing on our existing promotional strategy as well as sales force expansion in the second half of the year. Emverm sales declined 4% over 2017. We have already implemented an action plan for 2019 to increase patient awareness, access and affordability. This includes the launch of the new point-of-sale eVoucher to replace CoPay cards and increased direct-to-physician promotion.

2018 also marked the start of our Phase III study for IPX203, as highlighted on Slide 14. We are enrolling patients and continue to expect top line data in the first half of 2020 with the filing date in 2021. This product has the opportunity to reduce of time and a BID dosing, which is a potential game-changer for patients suffering from Parkinson's disease. We're excited about this opportunity.

With that, I will turn the call over to Todd to walk through the financials.

Todd P. Branning -- Senior Vice President, Chief Financial Officer

Thanks, Rob. Good morning, everyone. Before I get to our results, I want to thank, Rob, Paul, the leadership team and our employees for their warm welcome since joining in January. I'm excited about what has been built here at Amneal and I look forward to helping us reach greater heights in the years ahead. My remarks will focus on our combined adjusted results as we believe they provide a better comparison of our performance and trends in the quarter. A full reconciliation of our GAAP to adjusted results can be found in the tables and our press release and in the appendix of this presentation.

Turning to Slide 16 and a review of the Generics segment results for the fourth quarter. On a sequential basis, net revenue increased 5% compared to the third quarter. The increase was driven primarily by new product launches, which contributed approximately $78 million to fourth quarter revenue, partially offsetting the increase were lower sales of Yuvafem and Aspirin Dipyridamole, which were down approximately $34 million compared to the third quarter due to new competition, which entered the market in September of last year. Sales of our Epinephrine auto-injector also declined in the fourth quarter by $12 million compared to the third quarter, due primarily to seasonality and the inconsistent supply from our third-party manufacturer. Compared to last year's fourth quarter, net revenue increased 1%, new product launches more than offset a $54 million decline in sales of Aspirin Dipyridamole, generic Tamiflu, Yuvafem and Diclofenac Gel due to new competition.

Our adjusted gross margin declined in the fourth quarter by approximately 460 basis points on a sequential basis and 190 basis points year-over-year, due primarily to unfavorable product sales mix following additional competition on several high-margin generics and inventory adjustments. Adjusted operating income in the fourth quarter increased to $150 million, up 14% compared to the third quarter and up 23% compared to last year's fourth quarter. The sequential and year-over-year increases were primarily due to an increase in revenue and lower R&D and SG&A expenses as we began to realize the benefit of cost synergies.

Moving to Slide 17 in our specialty segment results. On a sequential basis, net revenue in the fourth quarter increased 2% by the year-over-year basis, net revenue increased 7%. The growth was driven by Rytary primarily the result of continued strong volume growth, higher sales Zomig nasal spray and Unithroid. These increases were partially offset by a more than 90% decline in sales of Albenza as a result of generic competition.

Adjusted gross margin for the fourth quarter was 81%, up when compared with both the third quarter and 2017's fourth quarter due to favorable product sales mix. Adjusted operating income for the Specialty segment in the fourth quarter increased to $51 million, up 16% from the third quarter and up 30% from the same period last year due primarily to higher revenues and lower SG&A expenses as a result of cost synergies.

Turning to Slide 18 and a review of a few balance sheet and cash flow items. We ended 2018 with $213 million in cash and cash equivalents, an increase of $48 million compared to the third quarter of 2018. The increase was the result of strong operating cash flow of $260 million in the fourth quarter. Additionally, we received $25 million from the sale of a few buildings and some equipment in Hayward, California. Major uses of cash during the fourth quarter included the full repayment of the $100 million borrowed under our revolving credit facility, which was used to fund working capital during the second and third quarters. We also paid $77 million to Gemini Laboratories relating to the acquisition in May of 2018.

In November 2018, we announced an agreement with Lannett to begin commercializing Levothyroxine in December, approximately fourth months before our agreement with Jerome Stevens, which is set to begin in late March of this year. As part of the transition agreement, we paid Lannett $43 million. During the fourth quarter, we also made a $35 million tax distribution payment and invested $20 million on capital projects. We currently expect to generate strong cash flow in 2019 to reinvest in the business, support our business development and to continue to pay down debt.

I will now turn the call back to Rob for a review of our 2019 outlook and closing remarks.

Robert Stewart -- President and Chief Executive Officer

Thanks, Todd. For Amneal, although we achieved industry leading pipeline execution with a strong cadence of new approvals and launches, the financial benefits have been slower to materialize because of market factors currently impacting the generic industry. Concentrated buying power has created price deflation and challenging contract terms. In addition, brand rebating tactics have led to formulary exclusion of generics. Taken together, these factors are slowing both the value realized and the uptake of generic substitution. As a result, industry pipelines are not delivering their expected value as demonstrated by the fact that in 2018, roughly 30% of all ANDAs approved in the industry were actually launched.

Please turn to Slide 20. As we look forward to 2019, we still see growth in the business, but not at the rate we originally expected. As a management team, we believe it is important to be realistic and nimble and how we respond to these market factors. As such, we have and will continue to take actions to better align the business with the current market realities. These include delivering bottom-line savings by continuing to rationalize lower value products from our portfolio and pursue additional cost reductions. We're also playing to our strength as a reliable and consistent supplier by capitalizing on supply chain disruptions and shortages. In our generic segment, revenues are expected to increase in 2019, driven by the full year impact of 2018 product launches.

In addition, we are currently targeting up to 50 new generic product launches including Generic Nuvaring, which we currently project as a mid-year opportunity assuming FDA approval. This will be partially offset by declines on key products Yuvafem, Aspirin Dipyridamole, Oseltamivir, Diclofenac Gel due to competition and price erosion of the base business. In the Specialty segment, revenues are expected to decline due to the loss of the exclusivity on Albenza. We expect this will be partially offset by growth from both the Rytary and Unithroid.

Overall, gross margin is expected to decline slightly due to the product mix as the impact of late 2018 competition on a few of our largest products flows into 2019 and the addition of the Levothyroxine product, which is at a lower margin than our current Generics segment margin. R&D and SG&A expenses will be down as a result of reduced project spend and the benefits of full year cost synergies. And interest expense is expected to increase as we incur a full year of interest in 2019 compared to only eight months in 2018. We expect to generate positive cash flow this year, which we anticipate utilizing for the optionality of either delevering or investing in other transactions on the M&A side.

Now please turn to Slide 21, which outlines the 2019 outlook metric on a full year adjusted basis. For 2019, we expect adjusted EBITDA in the range of $600 million to $650 million and adjusted diluted EPS -- earnings per share in the range of $0.94 to $1.04. Based on the expected timing of 2019 approvals and launches, we expect our results to be back half weighted.

Turning now to Slide 22. Our near-term priorities are to build Amneal from our position of strength in order to continue to drive for double-digit earnings growth and to achieve strong operational cash flows. We're going to capitalize on organic growth, we'll continue to drive our operational excellence, making sure that we always strive to be a high quality, reliable supplier with exceptional customer service and compliance. And we will continue to work on improving our earnings potential, capturing targeted synergies, so that we can reinvest back into the business to propel growth.

On Slide 23, from a long-term perspective, we're focused on strategically deploying our capital, support our long-term aspiration of double-digit earnings growth. We want to continue to add to our generics, our specialty and our biosimilars businesses, while at the same time looking at other adjacencies to insulate the company from the traditional kind of quarter-to-quarter type of fluctuations that are inherent within generics. I've mentioned a few times that with the integration of Amneal and Impax behind us, we are in a position to use business development to accelerate our growth.

In conclusion, we're very optimistic about Amneal's long-term growth potential. I'm extremely proud of the hard work by our more than 6,000 employees worldwide over the past year have executed against our strategy and navigated through market headwinds. In 2018, our team did an incredible job of completing the Impax integration, while advancing our operational excellence priorities to launch high-value products and driving future value through the effective deployment of our capital.

We are truly building this organization from a position of strength with an industry-leading rate of new high-value products and expanded set of skill sets through the addition of Impax and our new strategic partnerships and strong operating cash flow. As a result, Amneal is solidly positioned to execute against our long-term growth plan to diversify and grow the business and we are exiting the year stronger than we began with a very bright growth prospects ahead.

With that, I'll turn the call back to Mark.

Mark Donohue -- Vice President of Investor Relations and Corporate Communications

Thanks, Rob. Before we open the call for questions, I'd ask if please keep your questions to a minimum, so that we can get through everyone in today's queue. With that Denise, you can take our first question.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And your first question will come from Randall Stanicky of RBC Capital Markets. Please go ahead.

Randall Stanicky -- RBC Capital Markets -- Analyst

Great. Thanks, guys. So the focus this morning is going to be on the guidance outlook and particularly how conservative or not is that range. So can you help us with the bridge from 2018 to the guidance of 2019. What are the big swing factors? How much is erosion versus assumed new launch revenue and so on? And then the follow-up question is given the lower EBITDA outlook leverage metrics go higher, but you're still planning to business development in 2019. So can you comment on how much flexibility you have to pursue deals and what type of deals you're looking for? Thanks.

Robert Stewart -- President and Chief Executive Officer

Yes, good morning, Randall. And thanks for the question. Regarding our guidance, we thought it was prudent to be -- to provide prudent guidance, I would say, given the environmental factors that are impacting and influencing the business. We're still committed to growth, we're committed to driving value. But we also felt that it was prudent to relook at the value of the pipeline that how quick the pipeline was actually going to be able to contribute. And we think that we have a balanced guidance out there that has both opportunities as well as risk in it, but we think, we've captured the downside risks, while at the same time allowing for opportunity for upside and we didn't dial in all of our opportunities for 2019. So we think our guidance I would say is prudent. Regarding business development and the opportunity to do additional transactions we still do have some firepower. Yes, our leverage ratio is not driving -- is not lowering as quickly as we expected because the growth rate is a bit more moderated. But that said, we are still delevering the company through our growth rate and we still do have great -- we do have strong cash flow generation and we'll be able -- that's going to provide us the optionality to do additional tuck-in transactions. Obviously, the ability to lever up is still there as well. And depending on the contribution in the synergy capture that we can get from whatever transaction we do would all way into how much firepower that we actually have. We're still focused on diversifying the company away from the kind of traditional solid oral dosage type formulations. I still think that if there is opportunities to add products, or portfolios, or companies that accelerate our injectable and institutional side of the business, that's something that is a priority for us, as well as looking at other adjacencies, whether it'd be cash pay, whether it'd be specialty to further insulate the company from the typical fluctuations that you see in the generic market. So hope that answers your questions.

Randall Stanicky -- RBC Capital Markets -- Analyst

Yes, I mean are sizable and or complex transaction still something that you guys have an interest in?

Robert Stewart -- President and Chief Executive Officer

Yes, look --I'll never say never, it would have to be always pass our test for both strategic and industrial logic, it would have to be something that we think that we can integrate and operate, it would -- we'd also have to make sure that we have creative structures that address the risk. And so I would never take anything off the table, but -- and we're going to look at everything.

Randall Stanicky -- RBC Capital Markets -- Analyst

Okay, great. Thanks.

Operator

The next question will be from David Risinger of Morgan Stanley. Please go ahead.

David Risinger -- Morgan Stanley -- Analyst

Thanks very much. So I wanted to ask a couple of questions please. First, with respect to cost efficiencies. I may have missed it, but could you update us on cost efficiencies achieved to date? And then what inning you think you'll be in at the end of 2019? The second, with respect to revenue growth in 2020, previously the company had projected substantial growth in 2020. Could you just talk about, at least, at a high level, how we should think about the revenue growth outlook for 2020? And then finally, just a very quick question. Net debt to EBITDA, assuming you don't do any deals, what's a reasonable target for the end of '19? Thank you.

Robert Stewart -- President and Chief Executive Officer

Okay. So I'll take the first couple and then I'll pass the last one over to Todd. On terms of cost efficiencies we have been able to accelerate our synergy capture and you see that come through the P&L this year, we delivered 60 -- approximately $60 million in synergy capture. We're in mid innings of being able to reckon I should say, realize that within the P&L, but in terms of, we are in the late innings of all the strategic decisions that were required in order to actuate those synergies. So we've announced the closure of Hayward right after the acquisition and we closed the facility nearly nine months ahead of what we had planned. And all of the major structural changes that we need to make with the integration of Impax has all been done, decided and moved on. And so now it's just a function of when it gets recognized within the P&L and that will continue through and strengthened all the way through 2019 into 2020. Regarding our 2020 guidance, we're not providing 2020 guidance on this call. But what we are committed to is, is having that target of double-digit growth for the long term. We've got a lot of pipeline opportunities not only in late 2019, but also going into 2020 that we think will help sustain that growth for the future. And then as far as the debt to EBITDA, I'll pass that over to Todd.

Todd P. Branning -- Senior Vice President, Chief Financial Officer

Yes, David, thanks for the question. So with respect to the leverage ratio and where we see the end of 2019. So we did mentioned that at the end of 2018 on a net debt basis, we were about 4.2 times assuming and we will payoff our term loan as scheduled and the payments that we have due in 2019 we will pay those as scheduled, depending on exactly where our EBITDA comes in for the year. I would expect that we will tick down a little bit probably closer to 4.1 maybe four times leverage ratio again depending on how 2019 materializes.

David Risinger -- Morgan Stanley -- Analyst

Thank you.

Mark Donohue -- Vice President of Investor Relations and Corporate Communications

Thank you, David.

Operator

The next question will be from Louise Chen of Cantor Fitzgerald. Please go ahead.

Louise Chen -- Cantor Fitzgerald -- Analyst

Hi, thanks for taking my questions. So my first question is just how confident you are in the large pipeline that you have acquired from Amneal? And I know you mentioned Nuvaring, but what are some other sizable launches coming up over the -- say, the next 12 to 18 months? And then second question I had was on business development, you mentioned that. Just curious if you're more interested in generics or specialty on that front? Thank you.

Robert Stewart -- President and Chief Executive Officer

Yes, thanks. Louise. With -- I'm really confident around the pipeline opportunities that we've assembled together between Amneal and Impax. We've got a very, very strong pipeline, a lot of high-value durable products. For strategic and stealth reasons, we're not going to describe a lot of them because of the fact that we have -- because there's still is an advantage in this especially given the market dynamics that are going on, you don't want to necessarily telegraph launches and talk about what products you have in your pipeline because it allows even brand companies to even further insulate themselves to generic entry with additional brand rebating tactics and things along those lines. So Nuvaring was the one major one that we disclosed that we expect to get approval on that this year and launched that this year. And we think that'll be a nice opportunity for Amneal. But we have several other, let's call it Nuvaring like opportunities that will potentially come in late in 2019, as well as into 2020. As we get closer to those events, we'll talk about them, but we're not going to really talk about what those big opportunities are simply because of the environmental conditions that exist within the industry. In terms of business development, my priority is not to increase scale on the generic side. I think we have all the technologies and capabilities that we need. But about the only caveat I would say to that or carve out of that statement would be something on the injectable side, we've got 17 products actually more than that now in market with a number of opportunities in the pipeline as well. If we could find portfolios of products that would help us accelerate our injectable and institutional business that's something that would be potentially of interest to me, but just increasing scale in generics right now is not something that's a priority for us because we have both the development and manufacturing in-house capability to deliver virtually every dosage form that's out there. So our focus is really on more injectable institutional side, specialty type assets that we think could help fit the bag of our sales force, both in terms of endocrinology as well as CNS movement disorders and neurology.

Mark Donohue -- Vice President of Investor Relations and Corporate Communications

Thanks, Louise.

Operator

The next question will be from Chris Schott of JP Morgan. Please go ahead.

Chris Schott -- JP Morgan -- Analyst

Great, thanks very much. Actually my first question is just elaborating a little bit more on the generic environment at this point. I think your comments in the past have been maybe alluded to at some point industry pricing may be stabilizing. So the comments today still highlight a number of challenges the industry is amazing. So I guess I was wondering what do you think it takes to get back to more normalized industry dynamics or is what we're seeing today kind of the new norm? My second question was just trying to get little bit more color on the gaining of earnings and EBITDA in 2019. You mentioned this back half weighted, a sense of just how back half weighted should we be thinking about here just so make sure we're setting expectations properly to think what kind of first half results versus second half? Thanks so much.

Robert Stewart -- President and Chief Executive Officer

Yes. So terms at the generic environment really, I have to answer the question kind of two different ways. In terms of the base business, I do think the industry has stabilized and I think you're starting to see kind of a consequence of what's happened with pricing getting solo and the terms and conditions in some of these buying groups getting so onerous, that people are now just walking away from portfolios of product. So that because the pricing is got to a point where it's just no longer worth making the manufacturing investment and having to deal with the complexity factor of all of these different products. People are simplifying their businesses and getting out of portfolios, just because of the fact that the pricing environment has gotten so low. So I do think that, that is creating, basically let's call it a new environmental kind of condition for the base products where you're seeing stability in pricing just because of the fact that people are just not going to continue to allow double-digit price declines. They will just walk away from the products because it's gotten so low. So that to me means that the industry itself has stabilized on the base business. In terms of the new product launches, that's where I see maybe the biggest change and the biggest challenge. Because some of the policies and some of the -- I should say the tactics that exist are preventing generic substitution, preventing access, and as a result, we're not getting necessarily the pricing environment because we have to discount the price to such a degree to be able to offset, let's call it, some of the rebating that goes on. And I think as a result, we have to -- we and everyone within the industry has basically relooking at their R&D portfolios, their investment levels and deciding whether or not it makes sense to continue to invest in certain product opportunities because of the fact that the pricing environment on new product launches isn't necessarily yielding the same level of return that we saw in the past. Regarding the cadence of earnings, I'll let Todd share some feedback on that.

Todd P. Branning -- Senior Vice President, Chief Financial Officer

Yes. So Chris in respect of how our phasing looks in 2019, I think in the -- it's fair to say in the early part of the year where we will see some of the competitive effects that we saw beginning in Q4 on products on the generic side that had additional competition come to the market. So that will have some impact in the early part of 2019. Our launches as we've talked about, we have more launches right now budgeted in the second half of the year versus the first half of the year. So I think you'll see a period where you see some improvement in our earnings performance throughout 2019 as we begin to get pass the drop in performance driven by the competition on some of our key generic products and replace those with new product launches. From a specialty side, it's broadly stable throughout 2019. So really been the swing factor of the timing of our new product launches coming to market on the generic side and as we've said that's, more in the back half of the year than the first half.

Chris Schott -- JP Morgan -- Analyst

Thank you.

Operator

The next question will be from Dana Flanders of Goldman Sachs. Please go ahead.

Dana Flanders -- Goldman Sachs -- Analyst

Hi, thanks for the questions. Can you maybe just elaborate a little bit on the gross margin outlook? I know you're calling for it to decline in 2019. How should we think about the contribution of new launch gross margins, the contribution of some of those COGS synergies and just the ability to drive that gross margin higher over time? And then just my quick follow-up, can you give us any product level sales, like you have in the past couple of quarters on Aggrenox, you've -- and some of your higher margin generic products? Thanks.

Robert Stewart -- President and Chief Executive Officer

I'll start with the last question and then we'll talk about gross, I'll turn it back to Todd on the gross margin discussion. On product sales, we don't necessarily break down or provide specific performance relative to products. I will say that all the products that you mentioned there in terms of Yuvafem and Generic Aggrenox, as well as generic product in terms of Diclofenac Gel also a competition in the fourth quarter, these are still though good contributors and durable products. You can see that we have lost some market share as generic entries, as other competitions has come in and you as you would expect the pricing environment on those products has decreased year-over-year. But those are still good products that are durable, that are going to continue to provide value for us through the course of 2019. And although we do expect all of these -- our products are going to see competition because of the fact that we were there at market formation which is an important aspect of this business that we think that, that allows for those assets to continue to be durable for the future. Regarding COGS and gross margin, Todd, maybe you want to make a comment there?

Todd P. Branning -- Senior Vice President, Chief Financial Officer

Right. So, Dana, when we look at our gross margin, if you look at where we were in Q4, we did see some margin compression relative to where we were in Q3 that was a function of primarily the additional competition that we signed, key generic products. We did also have some inventory adjustments that contributed to the margin compression that we saw in Q4 relative to where we had been. As we look forward into 2019, some of those factors will continue. We will also -- we expect that our largest single product in generics in 2019 will be the Levothyroxine and once we commence our deal with Jerome Stevens, we will have additional royalties. So I would say that it's likely in 2019 that we're going to have some compression relative to 2018. We will probably fluctuate a bit within the range that we provided in our outlook, depending on the performance and pricing of new product launches.

Operator

Our next question will come from Gary Nachman of BMO Capital Markets. Please go ahead.

Gary Nachman -- BMO Capital Markets -- Analyst

Hi, good morning. Rob, regarding the changing dynamics of new product launches, do you need to invest more behind launches of more complex generics to get traction in those markets like one of your competitors recently said? And then has the FDA been timely with new generic approvals, maybe you could talk quantitatively about expected impact from your pipeline in 2019 in aggregate? Thanks.

Robert Stewart -- President and Chief Executive Officer

Yes. So I would echo some of the feedback that you've heard from our peer group and some of the other industry leaders that as you move your portfolio into the more complex product lines and more complex generics. There is not this automatic substitution that we kind of enjoyed as an industry for the last decades. Now you actually have to go out and do some levels of promotion, and detailing, and provide MSL liaisons and things like that to help not only position your product, but also to help support it and also patient support programs as well. I think that's the new norm of this industry, as we've kind of moved up the food chain from your traditional kind of solid oral dosage form kind of products where it was automatic substitution as you get into these genericizing some of these patient centric brands with patient centric programs that support the brands. I think we as an industry have to recognize that there's going to be an investment level behind it to be able to get to that substitution and also continue to provide the patient support that people rely on. And so I do share some of the sentiments that you've heard from some of the, some of the other industry leaders within the industry. Regarding FDA, I applaud what Scott Gottlieb has done. I think he has brought discipline within the FDA to be able to not only bring these complex generic products to the market and get increased productivity in terms of ANDA approvals, but also I find that the guidance that they've provided for some of the complex products as well as the communication that exist between the agency and the industry has dramatically improved that's allowing us to make better decisions around timing of launches. It allows us to make better decisions in terms of when we with the timing of kind of scaling up and investing in and launch quantities and all that I think that I applaud what the FDA has done and I see that, that has been just continuing to improve on their under Scott's leadership and we -- I see that continuing in 2019 and beyond.

Gary Nachman -- BMO Capital Markets -- Analyst

Okay. And then just the impact -- potential impact from the pipeline in 2019. If you could give some sort of quantification in aggregate that would be helpful?

Robert Stewart -- President and Chief Executive Officer

Yes, we do not break out at this point what the new product launch contribution expectation is. I will tell you that we were prudent in how we valued -- not only the value of the launches, but the timing of the launches within 2019 what we've kind of qualified for you is that we expect the contribution to be more back half loaded and you'll see us, we've already had a number of approvals this year, -- as we mentioned, we're going to be launching the Rivastigmine here within the quarter as well as we've got some a series of other products that you'll see us continue to launch and we'll press release the important ones as we go through the year, so that you can see that the cadence of those launches and the timing of when they would actually prompt that they would contribute, but it will be more back half loaded this year than front half.

Gary Nachman -- BMO Capital Markets -- Analyst

Okay. Thank you.

Robert Stewart -- President and Chief Executive Officer

Thank you.

Operator

The next question will be from David Amsellem of Piper Jaffray. Please go ahead.

David Amsellem -- Piper Jaffray -- Analyst

Thanks. So just a couple of quick ones. So first on business development and I know you've talked a lot about your approach, but can talk about the extent. So what you're prioritizing the addition of brands or specialty assets. How important is that to you? And given that you have the neurology focused infrastructure, is that something that you're really looking to leverage in terms of thinking about BD? So that's number one. And then number two, as I know you're still very much to the idea of double-digit growth longer term, but as you look at the portfolio mean is that going to be challenging given that you still have certain products that are significant contributors, are higher margin products such as Opana ER and even Levothyroxine with the potential competition down the road. So I guess the question is how aggressive is that long-term aspirational goal of double-digit growth given those dynamics? Thanks.

Robert Stewart -- President and Chief Executive Officer

Yes, I think in -- thanks for the question, David. In terms of business development priorities, of course, I'm looking to look at other assets and what other things that we could do the drop in the bag of our sales force on the specialty side, we've got great coverage across the US. We're calling on virtually all of the movement disorder specialists, high concentration of neurologists if we have the ability to add additional assets to the bag and increase the utilization of that sales force and those relationships that we have with the specialist, that is something that would be important for us. But with every business development transaction, it's got to be at the right price. It's got to be at the -- it's got to be something that we think is got industrial and strategic logic that we can bring and offer value to our shareholders. We are not in the business of just going out and buying melting ice cubes, we want to go and add assets to the bag that we think that we could -- that we could go out and create value for us. So that we not only consisting that double-digit growth in the near term, but the longer term as well. We believe with the assets that we have in our pipeline on a organic basis that we can continue to drive double-digit growth in the near term and we're going to continue to invest in products like IPX203 so that we have additional assets to bring to the market on our specialty side and we're continuing to invest on the generic side, we've got over 100 projects in development right now that we think are value creation for us to keep the generic business growing at double-digit and -- on an organic basis. Business development would be used as of means to be able to accelerate and diversify our growth. And so that's the way I'm thinking about it. When I look at the pipeline, even with the new realities of today. I still think that that this business has the means within it, as well as the ability to continue to capture the incremental synergies, that that's going to allow us to grow and in 2019 and 2020. And then that pipeline will continue to deliver value for us beyond that.

Operator

And the next question will be from Elliot Wilbur of Raymond James. Please go ahead.

Elliot Wilbur -- Raymond James -- Analyst

Good morning. First, I guess two questions for Todd. With respect to Yuvafem, could you provide the sequential revenue change 4Q to 3Q. If you did that in your prepared comments, I missed it, I heard Aggrenox and Epinephrine just curious on Yuvafem? And then with respect to any color you can provide on operating cash flow expectations for 2019. I mean, I guess your cash conversion ratio, if we look at CFO relative to adjusted net income has been about 85% the last two years. Not sure if that's expected to improve materially or not, but just some sort of color on operating cash flow outlook would be helpful? Then I've got a follow-up question for Rob as well.

Robert Stewart -- President and Chief Executive Officer

Yes, good morning, Elliot, it's Rob. I'll take the Yuvafem question. We don't break out specific differences between Q3 to Q4, what I'll tell you in Q4, we did see incremental competition on Yuvafem, you see it reflected in the IMS data in terms of the market share dynamics that we still -- this is still an important product for us. We saw both Teva (ph) come back into the marketplace, as well as the launch of Glenmark that obviously, any time that you have competitive entry at these stabilizers price -- these stabilizes some volume in market share. But overall, this is still a good product, and it was a strong contributor in the fourth quarter. In terms of cash flows, Todd?

Todd P. Branning -- Senior Vice President, Chief Financial Officer

Yes. So Elliot in respect of the operating cash flow as we see it in 2019. We -- so as we said earlier, we do expect to have strong cash flow. This year we will have to deal with a bit more cash for the interest expense that we'll be paying since we have a full year's worth of that in 2019. I would say early in the year, we do have some additional payments that we will need to make. For example, we have the upfront payment to Jerome Stevens for that agreement that we want to pay in the first part of the year. So we see a picture where we should generate strong operating cash flow throughout the year, but probably growing a little bit more as we progress into the year.

Elliot Wilbur -- Raymond James -- Analyst

Okay. And follow-up question for Rob, you mentioned sort of one of the key headwinds in terms of sort of realizing full value of new product launches, of course, is the evolution of these large buying groups the consortium which seems kind of obvious on the surface, one of your Board members has been rather vocal about exploring some sort of newer alternative forms of distribution going forward. But I guess the feedback from some smaller players has been that those -- the evolution the consortium maybe been a little bit less owners than they expected, meaning that those buying groups have been a little bit more generous in terms of allocating secondary sources of supply just because of some of the disruption out there and if you think about what's going on Washington, obviously the rebate systems under attack, which would certainly seem to benefit the generic industry in terms of some of these more recent tactics that have emerged. So I'm just wondering, if you think that initiative or sort of that discussion, really is going to continue to kind of move forward at least sort of the same extent that maybe has been talked about in the last 12, 18 months.

Robert Stewart -- President and Chief Executive Officer

Elliot, I want to congratulate you on asking that question because it's going to give me the opportunity to get my -- the Board -- the bulk of Board member voice on this call.

Elliot Wilbur -- Raymond James -- Analyst

I could remember his last name. That was the problem.

Robert Stewart -- President and Chief Executive Officer

So I'll open it up on a comment to say that I do agree that the buying groups have I think have recognized the issues with excess and with concentrated market share and I think they are trying to change some of their buying behaviors and I'm seeing much more constructive dialog with the buying groups, than what we've had over the last several years, simply because of -- I think you're right, that you can point to the fact that there is a lot of supply chain disruptions because people are walking away from portfolios or where people have allocated too much market share to A, individual company. And then when they are not able to supply, creates all kinds of supply chain disruption in the industry. I think the bigger challenge that we're faced with now is really getting access on those Specialty Generics in terms of getting the access on in terms of market share as well as the pricing that we have to drop to, to be able to overcome the rebating issue. I do agree with you that some of the policy changes that this administration is looking to put in place, I think, will help alleviate some of those issues. But I know Paul has got some strong opinions on this. So I'm going to give him a chance to provide a voice.

Paul M. Bisaro -- Executive Chairman

Rob, thanks and thank you, Elliot. Yes, look, I think we've been talking about ultimate distribution in any -- in many forms, over the last 18 months. And I think we're starting to see it happen. We're starting to see new pharmacy distribution models popping up. Sometimes it's going directly to doctors and giving doctors away to point patients to various online pharmacies in the US to be able to access drugs through a blink health or somebody like that and I think that will continue. The big disruption hasn't occurred yet, although, it does appear that some of the companies are looking at that. Certainly the Amazon transaction, which we've talked about for a while, would be a major disruptor. Also you see Walmart and Target and others using their online capabilities to bring patients to their pharmacies more directly. All of that stuff is moving outside of the buying group structure, which is again not too surprising because as Rob indicated and we've been talking about for a while. Certainly, the balance of power has shifted if you want to say to those buying groups and the manufacturers are reactive and not controlling their own destiny and the minute that happens, we are forced to find ways around it. And so inevitably this will occur. It's just a question of how quickly and how deeply that will go. But I still think that that's something that we're very active at watching and looking to see where it makes sense for us to step in and participate as opposed to just be on the sidelines. So more on that as we go through the year as these things develop, I would say.

Operator

Our next question will be from Tim Chiang of BTIG. Please go ahead.

Timothy Chiang -- BTIG -- Analyst

Hi, thanks. I think in your 2019 guidance you sort of highlighted recovery in Epinephrine supply. Could you talk a little bit more about how much supply you think you can get this year? And can you get back to more normalized levels?

Robert Stewart -- President and Chief Executive Officer

Yes. Thanks, Tim. This has been a challenge for us throughout all of 2018. It was one of our bigger disappointments, because we had opportunities to continue to improve market share, but also to is that we had to jump through hoops to make absolutely certain that we were getting product directly to patients at the retail level, because of -- and managing through a lot of that supply chain complexity and risk. I do think we will see (inaudible) return back to our normal supply and inventory levels. We continue to work with our third-party manufacturer. I think all of you know who that is and we continue to work with them to try and improve this situation. They are committed to improving it, the relationship between the company is strong and we're hopeful that we're going to see that continue would improve throughout the course of the year. Our first quarter will be lower, just because of the seasonality. You see that in both the fourth quarter and first quarter on this product, the seasonality is really the second and third quarter. But we'll be working with our -- within our supply chain to try and increase our inventory levels to make absolutely sure that we've got full supply for the season and are not playing with the same situation that we -- that occurred throughout 2018.

Timothy Chiang -- BTIG -- Analyst

Rob, I just had one follow-up if I could ask. It's really just on your biosimilar pipeline, what's the outlook for your pipeline/ And when do you think you can get some material launches out in the US?

Robert Stewart -- President and Chief Executive Officer

Yes, we do not have anything in 2019 for our biosimilar pipeline. This will be something that we'll talk about more when we get closer to 2020. We are taking the partner approach with biosimilars. We've got three in our pipeline, both for gastrin as well as PEG. And then on top of that the relationship that we formed with mAbxience on Avastin. Our approach with biosimilars is if we can find assets that are in the right structures that are more tied to milestone payments around commercial success and more late stage kind of milestone type payments with more certainty. That's kind of the approach that we're taking. We want to be a fast follower in this space, because if you look at the returns on some of those early investments, they have not necessarily panned out and materialize. I do think that the biosimilar market will open up. I think it has to for the healthcare system to work. We will participate in that, but we're going to be a fast follower and we're going to take the approach on bringing biosimilar products that we think fit our institutional side of the business that where we can leverage our injectable portfolio and platform.

Timothy Chiang -- BTIG -- Analyst

Okay, great. That's helpful

Mark Donohue -- Vice President of Investor Relations and Corporate Communications

Thank you, Tim.

Operator

And our last question this morning will be from Catherine Novak of Canaccord. Please go ahead.

Dewey Steadman -- Canaccord Genuity -- Analyst

Hey, this is actually Dewey Steadman from Canaccord. I guess for Paul and Bob -- Rob, just spot on going back to Watson and sort of the -- and the distribution system there. Is there any way you can build a similar system at Amneal RDF desire to? And then also with the direct consumer players that are out there like Crow and Hems & Hers, does it make sense to make a partnership with one of those organizations or even potentially get creative and maybe acquire one of those organizations over time? Thanks.

Robert Stewart -- President and Chief Executive Officer

Yes, great question Dewey. You know from our past life that I absolutely love the -- and the business and I do think that there's a tremendous amount of value of having that type of distribution capability within a company. It's hard to see, especially with the margins of that type of a business us to go out and try to organically build that. So if we were to ever -- I think the way that we would approach it is if we can find ways of partnering in that type of a model, but that would be something that might be of interest, but to go out and build that capability, given all the other kind of priorities that we have within the company, I don't necessarily see that that would be a high priority. But I do think when you look at some of these alternative distribution models that Paul mentioned kind of popping up like Crow and stuff like that, I do think, Amneal is the type of company that we're nimble enough and flexible enough that we could participate in those type of companies depending on how that model ultimately, I guess, formalizes overtime and solidifies. That could be something that we do think about. But right now our near-term priority is kind of more the other things that I outlined that are priorities for business development, but I love the distribution model and what I'd love to be able to do is get closer to it.

Dewey Steadman -- Canaccord Genuity -- Analyst

Excellent. Thank you.

Robert Stewart -- President and Chief Executive Officer

Thank you.

Mark Donohue -- Vice President of Investor Relations and Corporate Communications

Thank you. Thank you all for joining us today. That concludes our call. We're available today and tomorrow for any questions you may have. Have a great day.

Operator

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.

Duration: 64 minutes

Call participants:

Mark Donohue -- Vice President of Investor Relations and Corporate Communications

Robert Stewart -- President and Chief Executive Officer

Todd P. Branning -- Senior Vice President, Chief Financial Officer

Randall Stanicky -- RBC Capital Markets -- Analyst

David Risinger -- Morgan Stanley -- Analyst

Louise Chen -- Cantor Fitzgerald -- Analyst

Chris Schott -- JP Morgan -- Analyst

Dana Flanders -- Goldman Sachs -- Analyst

Gary Nachman -- BMO Capital Markets -- Analyst

David Amsellem -- Piper Jaffray -- Analyst

Elliot Wilbur -- Raymond James -- Analyst

Paul M. Bisaro -- Executive Chairman

Timothy Chiang -- BTIG -- Analyst

Dewey Steadman -- Canaccord Genuity -- Analyst

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