Business context and reporting period
Amphastar Pharmaceuticals, Inc. filed this Form 10-K for the fiscal year ended December 31, 2017. It develops, manufactures, markets and sells technically complex generic and proprietary injectable, inhalation and intranasal medicines, as well as insulin active pharmaceutical ingredients (API). The filing also provides unaudited fourth-quarter results.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net revenue | $240.2 million | $255.2 million |
| Gross profit / margin | $90.8 million / 37.8% | $104.2 million / 40.8% |
| Operating income (loss) | ($0.9 million) | $15.7 million |
| Net income | $4.5 million | $10.5 million |
| Diluted earnings per share | $0.09 | $0.22 |
| Cash from operations | $39.2 million | $38.6 million |
Fourth-quarter 2017 revenue was $60.4 million, versus $63.5 million in fourth-quarter 2016; quarterly net income was $1.5 million, compared with a $2.7 million loss. Fourth-quarter gross profit was $20.6 million, up from $20.0 million.
At year-end, cash and cash equivalents were $65.6 million; cash, short-term investments and restricted cash/investments totaled $72.4 million. Working capital was $120.6 million, and total debt and capital leases were $47.2 million. The company reported $43.0 million of unused revolving credit capacity and compliance with debt covenants. Investing cash outflow was $38.8 million, including $35.1 million of property and equipment purchases; financing cash outflow was $7.7 million, including $30.7 million of share repurchases.
Material changes versus the prior comparable period
- Revenue decreased 6% year over year, and gross margin fell about 3 percentage points. Enoxaparin revenue declined 38% to $36.6 million, reflecting lower volume and selling prices; naloxone revenue declined 11% to $42.3 million.
- Growth in phytonadione, lidocaine and other finished products partly offset declines in enoxaparin, naloxone and API. API revenue fell 33% to $10.0 million, primarily due to lower shipments to MannKind.
- Research and development expense rose 5% to $43.4 million. General and administrative expense increased 6% to $44.5 million, principally due to legal costs associated with the July 2017 patent trial.
- Inventory write-downs were $8.5 million in 2017, including $5.5 million for enoxaparin. A $2.6 million gain on sale of acquired ANDAs was recorded. The company also recorded a $2.9 million income tax benefit despite pretax income of $1.6 million.
Outlook, commentary and key risks
Management expects continued investment in research and development and manufacturing capacity. It anticipates pressure on enoxaparin margins and volatility in enoxaparin, naloxone and insulin API sales; it expects new product launches to help offset margin pressure. The filing provides no quantified revenue or earnings guidance. Management said existing cash, operating cash flows and borrowing availability should fund operations for at least the next 12 months.
- The pipeline includes 15 generic ANDAs, three biosimilar candidates and six proprietary candidates. Primatene Mist remained subject to FDA requests for additional labeling, packaging and human-factors work; intranasal naloxone had received a complete response letter identifying four issues to address.
- The FDA requested discontinuation of the epinephrine injection vial product marketed under a grandfather exception; sales ended in the second quarter of 2017. The company reported $17.8 million of 2017 revenue from that product. FDA approval of the sodium bicarbonate injection ANDA was received in September 2017.
- Enoxaparin and naloxone together represented about one-third of 2017 revenue. Competition, pricing pressure, customer concentration and single-source suppliers are material risks. Three distributors accounted for 78% of revenue.
- In enoxaparin patent litigation, the jury found infringement but also found the asserted patent invalid and awarded zero damages; the court’s February 2018 ruling found waiver and estoppel as to one test, but not a second. Final judgment was still pending at filing. The company intends to defend the verdict and seek recovery of a $100.1 million bond, which is not assured.
- Other exposures include ongoing antitrust litigation, an appeal and attorneys’ fee proceedings in False Claims Act litigation, FDA inspection observations at two U.S. facilities, foreign exchange exposure, and a $15.0 million Nanjing development commitment where potential penalties were considered remote by management.
Important facts for investors to verify
- Whether enoxaparin and naloxone sales, volumes and pricing stabilize, and whether newer products can replace discontinued or declining revenue.
- FDA progress and approval timing for Primatene Mist, intranasal naloxone and the broader development pipeline, including manufacturing readiness and required facility validations.
- MannKind’s ability to meet amended insulin API purchase commitments and the effect of lower volumes on French facility utilization and API segment profitability.
- Final outcomes and potential financial effects of enoxaparin patent, antitrust and False Claims Act litigation, including recovery of the bond and any attorneys’ fees.
- Cash conversion, inventory valuation and returns reserves; the 2017 inventory write-downs and customer rebate/chargeback balances; and future capital spending, debt maturities and covenant headroom.