Amphastar Pharmaceuticals, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. Amphastar develops, manufactures, and sells generic and proprietary injectable, inhalation, and intranasal medicines, as well as insulin active pharmaceutical ingredients (API). Its reportable segments are finished pharmaceuticals and API.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the same 2018 period.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $80.1 | $75.5 | $239.0 | $205.0 |
| Gross profit / margin | $35.3 / 44% | $29.3 / 39% | $98.5 / 41% | $72.3 / 35% |
| Operating income (loss) | $2.4 | $2.6 | $0.2 | $(10.2) |
| Net income (loss) attributable to Amphastar | $1.3 | $2.4 | $50.0 | $(7.6) |
| Diluted EPS | $0.03 | $0.05 | $1.00 | $(0.16) |
| Operating cash flow | Not presented separately | Not presented separately | $36.1 | $28.7 |
- Revenue mix: Q3 finished-pharmaceutical revenue rose 6% to $75.7 million; API revenue rose 17% to $4.4 million. For nine months, finished pharmaceuticals increased 19% to $224.0 million, while API decreased 11% to $15.0 million.
- Q3 drivers: Higher lidocaine, phytonadione, naloxone, and epinephrine sales, plus the launch of Primatene Mist, outweighed a 48% decline in enoxaparin revenue, attributed to lower volumes and competition.
- Nine-month earnings: Results include a $59.9 million litigation settlement recorded as other income. Excluding that item, reported net income is not a like-for-like measure of underlying operating performance; the filing does not provide a separately stated adjusted earnings figure.
- Cash flow and investment: Nine-month operating cash flow was $36.1 million. Investing outflow was $43.2 million, including $33.1 million of property and equipment purchases and $9.8 million of short-term investments. Financing provided $6.6 million. Cash, cash equivalents, and restricted cash ended at $87.5 million, down $0.7 million from year-end 2018.
- Balance sheet and liquidity: At September 30, cash and cash equivalents were $85.6 million, short-term investments $12.7 million, and working capital $182.3 million. Inventory increased to $109.9 million from $69.3 million at December 31, 2018. Total debt was $45.0 million, versus $50.2 million at year-end; unused revolving credit capacity was $45.0 million. Foreign subsidiaries held $33.4 million in cash and cash equivalents, which the company said was not available to fund U.S. parent operations.
Changes, outlook, and risks
- Gross margin improved year over year, helped by higher-margin products, including Primatene Mist, launched in December 2018. Management noted that Primatene’s reported margin benefited from API and components expensed in prior periods.
- Management expects increased R&D spending, particularly for biosimilar and inhalation candidates, and increased marketing spending for Primatene Mist. It also expects rising heparin costs to pressure enoxaparin margins, partly offset by higher-margin products. Sales of naloxone, enoxaparin, medroxyprogesterone, and API may fluctuate; API sales are exposed to MannKind purchase timing and euro exchange rates.
- No significant backlog was reported. The company said cash reserves, operating cash flow, and borrowing availability should fund operations for at least the next 12 months; this is management’s assessment, not a revenue or earnings forecast.
- In August, Amphastar amended its MannKind supply agreement, extending commitments through 2026 and agreeing to a $2.75 million amendment fee. It recognized $1.5 million in revenue in the period; the balance was due in December 2019.
- Regulatory and legal exposure: FDA preapproval inspections at two California facilities earlier in 2019 generated Form 483 observations; the company reported submitting responses. The October 2019 ANP inspection also generated one observation, and a later IMS inspection generated observations requiring a response. The company markets certain unapproved prescription products; these generated $29.1 million of revenue in the first nine months of 2019 and could face FDA enforcement, recall, or marketing restrictions.
- Other disclosed litigation includes a pending attorneys’ fee application in the dismissed Aventis case, stayed epinephrine litigation, consolidated vasopressin patent litigation with trial scheduled for January 2021, and a new employment class action. Management said resolution of claims was not expected to materially affect the company, while noting litigation outcomes are unpredictable.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of nine-month earnings and liquidity improvement reflects the nonrecurring $59.9 million settlement rather than ongoing operations.
- Whether the elevated inventory balance converts to sales and cash, and whether its composition creates expiration, demand, or write-down risk.
- Trends in competition, pricing, and volumes for enoxaparin and naloxone, and the effects of higher heparin costs on gross margin.
- FDA follow-up on inspection observations, approval timing for pending applications, and continued ability to market unapproved products.
- Progress and spending on clinical development and facility projects, alongside available cash, debt maturities, covenants, and access to credit.
- Developments in the vasopressin and employment cases and the potential outcome of the Aventis fee request.