Amphastar Pharmaceuticals, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. Amphastar develops, manufactures, markets, and sells generic and proprietary injectable, inhalation, and intranasal drugs, as well as insulin active pharmaceutical ingredients (API).
Financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $79.0 | $71.0 | $158.8 | $129.4 |
| Gross profit | $32.4 | $26.1 | $63.3 | $43.0 |
| Gross margin | 41% | 37% | 40% | 33% |
| Operating income (loss) | $1.0 | $(2.9) | $(2.2) | $(12.7) |
| Net income (loss) | $46.9 | $(2.9) | $44.8 | $(10.0) |
| Net income (loss) attributable to Amphastar | $47.8 | $(2.9) | $48.7 | $(10.0) |
| Diluted EPS attributable to Amphastar | $0.96 | $(0.06) | $0.97 | $(0.21) |
- Revenue and mix: Q2 revenue increased 11%; first-half revenue increased 23%. Finished pharmaceutical revenue rose 17% in Q2 and 27% for the first half, while API revenue fell 32% and 19%, respectively.
- Products: First-half growth included enoxaparin (+55%), medroxyprogesterone (+53%), Primatene Mist ($5.4 million, launched in late 2018), and other finished products (+57%). Naloxone declined 24% for the first half, primarily due to lower unit volumes. API declines reflected purchase timing.
- Profit and margins: The reported net profit primarily reflects a one-time $59.9 million enoxaparin litigation settlement recorded in other income. Operating results were much weaker than reported net income suggests: operating income was $1.0 million in Q2 and the company recorded a $2.2 million operating loss for the first half. Management attributed margin improvement to higher-margin products and enoxaparin pricing; it warned that rising heparin costs may pressure margins.
- Cash flow: First-half operating cash flow was $48.1 million, versus $12.9 million a year earlier; investing cash outflow was $24.6 million, mainly capital spending; financing cash inflow was $10.5 million, including $18.3 million from an ANP private placement. Cash, cash equivalents, and restricted cash ended at $122.2 million. Inventory increased $29.9 million from year-end, contributing to operating-asset cash use.
- Liquidity and debt: Working capital was $183.1 million, up from $113.5 million at December 31, 2018, largely due to the litigation settlement. Cash and cash equivalents were $120.4 million; total debt, including finance leases, was $46.7 million. Unused revolving credit capacity was $45.0 million. Management said cash reserves, operating cash flow, and borrowing availability should fund operations for at least 12 months. $38.7 million held by foreign subsidiaries was not available to fund U.S. parent operations.
- Capital spending and commitments: First-half property, plant, and equipment spending was $24.5 million. Equipment and raw-material purchase commitments totaled approximately $55.1 million at June 30.
Material changes and unusual items
- The $59.9 million settlement with Momenta Pharmaceuticals and Sandoz resolved the enoxaparin patent and antitrust litigation; payment was received June 27, 2019. The company has no future royalty rights under the settlement.
- Primatene Mist, approved by the FDA in November 2018, contributed $2.5 million of Q2 revenue and $5.4 million for the first half.
- ANP completed a private placement in 2018 and Amphastar retained approximately 58% ownership. First-half 2019 financing cash flow included $18.3 million in related proceeds.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recording operating lease right-of-use assets and liabilities; management reported no material impact on the financial statements.
Outlook, risks, and contingencies
- No quantified revenue or earnings guidance is provided. Management expects selling and marketing expense to rise with Primatene Mist promotion, G&A expense to increase with public-company compliance and patent litigation costs, and R&D expense to rise as clinical trials advance. It expects development costs to increase significantly over coming quarters and years.
- Management expects continued sales volatility in naloxone, enoxaparin, and medroxyprogesterone due to competition. API sales may fluctuate or decline due to customer uncertainty, particularly MannKind, and euro-dollar movements. The company reported no significant backlog.
- Heparin, a key enoxaparin input, has become more expensive and management expects further increases, potentially pressuring gross margins. The company does not hedge foreign-currency exposure; it estimated that a 10% unfavorable strengthening of the U.S. dollar would reduce foreign-currency gains by approximately $2.0 million and other comprehensive income by approximately $3.9 million.
- FDA preapproval inspections at two California facilities resulted in multiple Form 483 observations; the company submitted responses and believed no significant further action would be necessary. A separate July 2019 FDA post-marketing inspection had no Form 483 findings.
- Some prescription products remain marketed without FDA approval. Revenue from these products was $8.9 million in the first half of 2019; the FDA could require approvals, recalls, or cessation of marketing.
- Other litigation remains unresolved, including an Aventis False Claims Act attorneys’ fees matter, a Belcher epinephrine patent case stayed pending a related trial ruling, and Par’s vasopressin patent case scheduled for trial in January 2021. Management said litigation outcomes are unpredictable.
- In August 2019, Amphastar amended its MannKind supply agreement: aggregate RHI API commitment was not reduced, annual minimum purchases were extended through 2026, and MannKind agreed to a $2.75 million amendment fee, payable in September and December 2019.
Important facts for investors to verify
- How much of reported earnings and operating cash flow is attributable to the nonrecurring $59.9 million settlement, and what are underlying operating trends?
- Whether recent product revenue and gross-margin gains can persist as competition, heparin costs, and Primatene Mist launch spending evolve.
- Whether API customer demand, including MannKind purchases, and euro-dollar movements materially affect future revenue.
- Progress and financial exposure in the pending legal matters, including the Aventis fee determination and patent cases.
- FDA follow-up on the Form 483 observations and the status of approval filings for products currently marketed without approval.
- Whether inventory growth, capital commitments, and cash held outside the U.S. affect liquidity and investment needs.