Amphastar Pharmaceuticals, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Financial amounts below are in millions of U.S. dollars unless stated otherwise. The interim financial statements are unaudited.
Business context
Amphastar develops, manufactures and sells technically challenging generic and proprietary injectable, inhalation and intranasal medicines, as well as insulin active pharmaceutical ingredients (API). Its reportable segments are finished pharmaceutical products and API. Most products are sold through wholesalers and group purchasing organizations; Primatene Mist is primarily sold through retailers.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $120.1 | $112.2 | $364.0 | $316.9 |
| Gross profit | $58.5 | $51.2 | $177.7 | $143.5 |
| Gross margin | 48.7% | 45.6% | 48.8% | 45.3% |
| Operating income | $23.2 | $24.8 | $69.7 | $45.6 |
| Net income attributable to Amphastar | $15.9 | $29.5 | $57.5 | $42.4 |
| Diluted earnings per share | $0.30 | $0.59 | $1.09 | $0.85 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $74.0 | $57.6 |
- Revenue drivers: Q3 finished-product sales increased 7% to $117.1 million; API revenue declined 6% to $3.0 million. For the first nine months, finished-product revenue rose 17% to $353.8 million while API revenue fell 33% to $10.2 million.
- Product mix: Q3 revenue growth included epinephrine (+40%), Primatene Mist (+11%), glucagon (+17%) and phytonadione (+21%). The company attributed much of the growth to higher demand, competitor supply shortages, increased unit sales and, for some products, higher prices. API sales depend on customer purchasing timing and are exposed to euro exchange-rate changes.
- Profitability: Q3 operating income declined despite higher revenue and gross profit, as operating expenses increased 34% to $35.3 million. Research and development expense rose 72% to $18.5 million, largely from materials and clinical studies. Nine-month operating income increased 53%.
- Cash flow and investment: Nine-month operating cash flow was $74.0 million. Investing activities used $32.5 million, including $17.7 million for property, plant and equipment; financing activities used $10.3 million, including $21.8 million of share repurchases. Cash, cash equivalents and restricted cash ended the period at $157.5 million.
- Liquidity and debt: Current assets were $384.2 million and current liabilities $102.2 million; reported working capital was $282.0 million, up from $214.3 million at year-end 2021. Total debt was $77.3 million, including current maturities and finance leases. The company reported compliance with all debt covenants.
Material changes and unusual items
- Q3 net income and diluted EPS were lower than the prior-year quarter, when results included a $13.6 million gain from the 2021 ANP restructuring and Hanxin deconsolidation. Q3 2022 also had slightly negative non-operating income/expense, compared with $12.9 million of net non-operating income in Q3 2021.
- Nine-month 2022 results included a $5.4 million settlement payment from Astellas relating to regadenoson patent litigation, recorded in other income. The parties resolved the lawsuit in January 2022.
- The company recorded $5.9 million of gains from changes in fair value of interest-rate swaps for the first nine months of 2022. These swaps exchange variable interest rates for fixed rates and are not designated as hedges.
- Amphastar launched ganirelix in June 2022 and vasopressin in August 2022. Regadenoson received FDA approval in May; launch timing is subject to a confidential settlement agreement.
- During Q3, the company repurchased 478,255 shares for $14.5 million. The board authorized a further $50 million increase to the buyback program in November 2022, after quarter-end.
Outlook, risks and contingencies
- Management said it expects increased R&D spending, particularly for insulin and inhalation candidates, and anticipates further spending growth over coming quarters and years. It also expects marketing expense to rise, partly due to Primatene Mist.
- Management expects higher-margin products, including Primatene Mist, glucagon, ganirelix and vasopressin, and planned 2023 launches to help offset higher labor, purchased-component and heparin costs. No specific revenue or earnings guidance is provided.
- The company reported an approximately $6.5 million backlog in Q3, partly related to competitor shortages, labor shortages and supplier constraints. Management said it was working to reduce the backlog and believed it could do so in the near future; historically, backlog has not been a reliable indicator of future revenue.
- Risks include dependence on a small number of wholesale distributors, limited or single-source suppliers, manufacturing and shipping disruptions, and operations and supply-chain exposure in China. The COVID-19 pandemic, inflation, higher interest rates and the Russia-Ukraine conflict may add uncertainty; one European insulin API customer that resold product in Russia did not purchase from Amphastar in 2022.
- The three largest wholesalers together represented 63% of Q3 revenue and 60% of nine-month revenue. The company also disclosed a cybersecurity incident at its Chinese subsidiary in Q1 2022 that temporarily disrupted some internal systems and led to response costs.
- Purchase commitments for equipment and raw materials totaled approximately $70.5 million at September 30, 2022; most commitments with terms exceeding one year were expected to be fulfilled in 2023. Management believes cash, operating cash flows and borrowing availability are sufficient for at least 12 months from filing.
- An FDA cGMP inspection of the IMS facility resulted in one Form 483 observation; the company responded and believes no significant further action will be necessary. Other reported FDA inspections had no Form 483 findings. Management said resolution of other ordinary-course legal matters is not expected to materially affect financial position, results or cash flows, while noting litigation outcomes are inherently uncertain.
Important facts for investors to verify
- Whether recent finished-product revenue gains—some attributed to competitor shortages—persist as competitors normalize supply, and whether the reported backlog is reduced.
- How R&D investment, clinical-trial progress and planned product launches affect expenses, cash flow and future margins.
- Whether API revenue remains pressured by customer order timing, the MannKind supply arrangement and foreign-exchange movements.
- Whether labor, heparin and other input costs offset gains from higher-margin products, and whether the $70.5 million of purchase commitments and facility expansion remain fundable from operating cash.
- Developments in China-related operations and supply chains, the disclosed cyber incident, the FDA observation, and material legal or regulatory matters.