Amphastar Pharmaceuticals, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; filed August 7, 2020. Amphastar develops, manufactures and sells generic and proprietary injectable, inhalation and intranasal medicines, as well as insulin active pharmaceutical ingredients (API).
Financial performance
Amounts below are in millions of dollars except per-share data. Year-over-year comparisons are with the corresponding 2019 period.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $85.8 | $79.0 | $170.5 | $158.8 |
| Gross profit / margin | $33.2 / 39% | $32.4 / 41% | $70.0 / 41% | $63.3 / 40% |
| Operating income (loss) | $(2.9) | $1.0 | $4.6 | $(2.2) |
| Net income (loss), consolidated | $(1.4) | $46.9 | $2.1 | $44.8 |
| Net income (loss) attributable to Amphastar | $(0.2) | $47.8 | $3.8 | $48.7 |
| Diluted EPS attributable to Amphastar | $(0.00) | $0.96 | $0.08 | $0.97 |
- Revenue mix: Q2 finished pharmaceuticals revenue rose 10% to $80.9 million; API revenue declined 8% to $4.9 million. For the six months, finished pharmaceuticals rose 9% to $162.2 million, while API fell 22% to $8.3 million.
- Cash flow: Six-month operating cash flow was $31.6 million, versus $48.1 million a year earlier. Investing cash outflow was $18.8 million, principally $18.9 million of capital expenditures; financing provided $1.0 million. Cash, cash equivalents and restricted cash ended at $89.3 million, compared with $122.2 million at June 30, 2019.
- Liquidity and debt: Working capital was $173.5 million, up from $165.2 million at year-end 2019. Cash and cash equivalents were $87.4 million; short-term investments were $11.1 million. Total debt was $46.7 million, including $12.1 million current. The company reported $49.0 million of unused borrowing capacity and compliance with debt covenants. Management said available cash, operating cash flow and borrowing availability should fund operations for at least 12 months.
Material changes and unusual items
- Q2 revenue increased 9%, led by Primatene Mist (+396% to $12.5 million) and epinephrine (+122% to $7.0 million). The newly approved epinephrine multiple-dose vial launched in May. Naloxone revenue rose 11%.
- Q2 gross margin fell to 39% from 41%. The company cited inventory reserves, including a $3.6 million reserve for crude heparin purchases and commitments at ANP, partly offset by higher-margin Primatene Mist and epinephrine sales. Six-month gross margin increased to 41% from 40%.
- Q2 operating expenses increased to $36.1 million from $31.4 million. General and administrative expense included $4.9 million related to a former executive’s separation agreement, including cash and share-based compensation. Six-month G&A declined 7%, primarily reflecting lower legal expenses following the 2019 enoxaparin litigation settlement.
- 2019 comparisons include a $59.9 million gain from settlement of enoxaparin patent and antitrust litigation. This drove much of the prior-year net income and cash flow comparison; the company reported no comparable settlement gain in 2020.
- The company repurchased $16.7 million of shares in the first half. In August 2020, the board authorized a further $20 million increase to the buyback program.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance was provided. Management expects increased Primatene Mist marketing expense and rising R&D spending, particularly for biosimilar and inhalation candidates. Some clinical-trial recruitment was interrupted by COVID-19, potentially delaying spending and results.
- COVID-19 caused temporary disruption to China operations, which resumed full operation in February; facilities continued operating during Q2 with enhanced safety measures. Pantry loading supported Primatene Mist and some hospital-product sales, while reduced elective procedures hurt demand for lidocaine and certain other products. The longer-term effect remains uncertain.
- Management reported no COVID-related supply disruption to date, but highlighted single- or limited-source suppliers, foreign sourcing and China operations as risks. Heparin costs had risen and were expected to increase further, pressuring margins; management expected higher-margin products to help offset this pressure.
- API sales may fluctuate with customer purchase timing, uncertainty regarding the MannKind supply agreement and euro/U.S. dollar movements. Enoxaparin and naloxone sales may fluctuate due to competition.
- A cyber-event after Q1 temporarily disrupted some internal computer systems; the company was still evaluating the business impact. It cautioned that future cyber incidents could affect operations, data, costs and reputation.
- Material legal matters include a vasopressin patent case with trial scheduled for January 2021 and a regadenoson patent case scheduled for June 2021. Employment-related claims are also pending. Management said it did not expect current matters to materially adversely affect financial position, results or cash flows, while noting litigation outcomes are inherently unpredictable.
- The company had approximately $50 million of equipment and raw-material purchase commitments. It also disclosed certain prescription products marketed without FDA approval, subject to potential FDA enforcement, and ongoing efforts to seek approvals for remaining products.
Investor facts to verify
- Whether Primatene Mist growth and pandemic-related pantry loading persist, and how demand for products used in elective procedures recovers.
- Whether heparin cost increases and inventory reserves continue to pressure gross margin, and whether higher-margin launches offset them.
- Cash generation, capital spending, debt maturities and access to the disclosed borrowing capacity, including the geographic availability of cash held by foreign subsidiaries.
- Updates on the cyber-event, clinical-trial timing, supplier continuity and COVID-19 effects on demand and operations.
- Developments in patent and employment litigation, and FDA actions or approvals relating to marketed products and product candidates.