Amphastar Pharmaceuticals, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; amounts below are in millions of U.S. dollars except per-share data. Amphastar develops, manufactures, markets and sells generic and proprietary injectable, inhalation and intranasal medicines, as well as insulin active pharmaceutical ingredients (API).
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $123.5 | $101.7 | $243.8 | $204.7 |
| Gross profit | $63.4 | $47.4 | $119.2 | $92.3 |
| Gross margin | 51% | 47% | 49% | 45% |
| Operating income | $24.8 | $10.6 | $46.4 | $20.9 |
| Net income attributable to Amphastar | $17.3 | $7.8 | $41.6 | $12.8 |
| Diluted EPS | $0.33 | $0.16 | $0.79 | $0.26 |
| Operating cash flow | Not separately provided for the quarter | $53.6 | $55.0 |
Q2 revenue increased 21% year over year, driven by finished pharmaceuticals, up 27% to $120.1 million; API revenue declined 52% to $3.3 million. First-half revenue rose 19%, with finished pharmaceuticals up 23% and API down 41%. In Q2, epinephrine revenue nearly doubled to $18.1 million, while lidocaine rose 38% to $16.0 million and Primatene Mist increased 14% to $19.0 million. API sales are sensitive to customer purchasing timing and euro-dollar movements.
Finished pharmaceuticals generated gross profit of $67.1 million in Q2; API reported a gross loss of $3.7 million. Management attributed improved margins to higher sales of higher-margin products, including Primatene Mist and ganirelix, and lower heparin/enoxaparin component purchase-commitment costs. Labor and heparin costs, and lower enoxaparin pricing, partly offset the benefit.
Liquidity, cash flow and debt
- Cash and cash equivalents were $166.2 million at June 30, 2022, up from $126.4 million at year-end; short-term investments were $17.2 million. Working capital was $273.5 million, versus $214.3 million at December 31, 2021.
- First-half operating cash flow was $53.6 million. Investing activities used $17.3 million, including $12.1 million for property, plant and equipment; financing activities provided $3.7 million. Cash, cash equivalents and restricted cash increased $39.8 million.
- Total debt was $77.4 million, including $2.1 million current; long-term debt, net of current portion and issuance costs, was $73.9 million. The company reported compliance with debt covenants and no borrowings on its listed revolving credit facilities.
- Management believes cash reserves, operating cash flows and credit-facility availability will fund operations for at least 12 months. $13.2 million of foreign-subsidiary cash was not available to fund U.S. parent operations. The company plans to fund facility expansion, including increased 2022 capital spending, with operating cash flows.
Changes, outlook and notable items
- Operating income more than doubled in Q2 year over year. General and administrative expense fell 31% to $10.0 million, primarily due to lower legal costs and reduced China expenses after the ANP restructuring. Research and development expense rose 26% to $22.8 million, mainly from increased materials and supplies for AMP-018 and insulin programs.
- First-half net income included $6.1 million of net other income; this included a $5.4 million Regadenoson patent-litigation settlement and $3.9 million of gains on interest-rate swaps. Q2 other expense was $1.5 million, primarily reflecting foreign-currency fluctuations. These items affect period-to-period comparability.
- Management expects R&D spending to increase, particularly for insulin and inhalation candidates, and expects marketing expense to rise with Primatene Mist promotion. It expects higher-margin product sales and new launches to help offset labor and component-cost inflation; no quantified financial guidance was provided.
- Ganirelix was launched in June after FDA approval in April. Regadenoson was approved in May, with launch timing subject to a confidential settlement agreement. Vasopressin was approved in July, after quarter-end, and management planned an August launch. Three ANDAs and one NDA were on file with the FDA at June 30.
- Q2 backlog was approximately $5.6 million, partly attributed to competitor shortages and supplier constraints; management expected to reduce it in the near future but cautioned backlog is not a reliable indicator of future results. The company also reported $65.9 million of equipment and raw-material purchase commitments.
- Key risks include single- or limited-source suppliers, China-related manufacturing and shipping disruptions, inflation and rising interest rates, foreign exchange exposure, competition and customer concentration. Three wholesale distributors collectively represented large portions of revenue and receivables. COVID-related Shanghai port delays affected shipments of certain APIs and starting materials, though management said they had not ultimately delayed manufacturing.
- The epinephrine prefilled syringe remains marketed without FDA approval and could face enforcement, recall or cessation-of-marketing action. It generated $14.7 million of first-half 2022 revenue. An FDA inspection of the IMS facility resulted in one Form 483 observation; the company responded and believed no significant further action was necessary.
- Hanxin, a related party in which Amphastar holds a 14% equity-method investment, agreed to convert certain shareholder loans to equity; the conversion rate was not set and any conversion could dilute Amphastar’s interest. A July 2022 related-party research agreement had a stated maximum cost of approximately $2.2 million.
Most important facts for investors to verify
- Whether elevated demand from competitor shortages persists, and whether the $5.6 million backlog is resolved without disrupting sales.
- Launch timing, market uptake and margins for ganirelix, regadenoson and vasopressin, as well as the regulatory status of the unapproved epinephrine prefilled syringe.
- Whether rising labor, heparin and other component costs, supplier constraints and China-related disruptions pressure gross margins or production.
- How much earnings improvement is repeatable after considering the Regadenoson settlement, swap gains, foreign-exchange movements and tax-rate changes.
- Progress and spending on clinical programs and facility expansion, and whether operating cash flow remains sufficient to fund these plans and debt obligations.
- Developments in Hanxin’s loan conversion and related-party arrangements, and any resulting dilution or economic exposure.