Amphastar Pharmaceuticals, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Amounts are in U.S. dollars.
Business context
Amphastar develops, manufactures, and sells technically challenging generic and proprietary injectable, inhalation, and intranasal drugs, as well as insulin active pharmaceutical ingredients (API). It reported two segments: finished pharmaceutical products and API. Enoxaparin, its largest product, is a generic anticoagulant; insulin API sales include supply to MannKind for Afrezza.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $251.5 million | $210.5 million |
| Gross profit / gross margin | $77.3 million / 30.8% | $51.3 million / 24.4% |
| Operating income (loss) | ($6.9 million) | ($18.0 million) |
| Net income (loss) | ($2.8 million) | ($10.7 million) |
| Operating cash flow | $10.7 million | $21.1 million |
| Cash, restricted cash and short-term investments | $67.4 million | $69.3 million |
| Working capital | $116.0 million | $135.4 million |
| Total debt and capital leases | $41.1 million | $43.7 million |
- Revenue rose 20%, led by other finished products and API. Enoxaparin revenue fell 21% to $84.5 million; other finished-product revenue increased 54% to $140.4 million; API revenue increased to $26.6 million from $12.0 million.
- Enoxaparin represented 34% of revenue, down from 51% in 2014. Management attributed its decline to lower average selling prices amid competition, including Teva’s 2015 launch.
- Research and development expense increased 30% to $37.1 million. General and administrative expense rose 19% to $41.5 million, including a $3.3 million employment-litigation settlement and higher public-company and acquired-subsidiary costs.
- Net loss improved from 2014, but the company remained loss-making for the full year. The $7.6 million income-tax benefit reduced the reported loss. Other non-operating expense was $2.8 million, primarily reflecting foreign-currency transaction effects.
- Fourth-quarter revenue was $76.9 million versus $55.9 million in 2014; fourth-quarter net income was $7.5 million versus a $2.5 million loss. Full-year 2015 operating cash flow was positive but lower than 2014.
Changes, outlook and significant matters
- Amphadase was relaunched in the fourth quarter following FDA approval of an NDA supplement in June 2015; the approval also qualified the Nanjing facility for the relevant starting material.
- Management expected near-term declines in enoxaparin prices and volume and lower insulin API sales, with the latter also exposed to euro weakness. It expected gross margin to vary with product mix and said cash, operating cash flows, and borrowing availability should fund operations for the next 12 months. No specific revenue or earnings guidance was provided.
- MannKind did not purchase the full contractually obligated 2015 insulin amount; 2015 RHI sales to MannKind were $20.8 million. MannKind declined the option for additional 2016 quantities and paid a capacity-cancellation fee recognized as 2015 revenue. Amphastar said it was discussing future purchase timing with MannKind.
- The Primatene HFA OTC NDA remained unresolved after an FDA complete response letter requiring additional information, labeling changes, and consumer-use studies. The company was generating remaining data and planned an NDA amendment; approval and timing were uncertain.
- The Federal Circuit vacated part of a lower-court ruling in the enoxaparin patent dispute and remanded the case for further proceedings. A separate False Claims Act case was dismissed; Amphastar appealed, and Aventis sought sanctions and other relief, which Amphastar disputed.
- FDA inspections resulted in Form 483 observations at the South El Monte facility in 2015 and the French facility in February–March 2016. The company planned to respond to the latter observations. Its French facility had received EU-GMP certification in April 2015.
- Management identified a material weakness in internal controls over non-standard and complex transactions and concluded disclosure controls and internal control over financial reporting were ineffective at year-end. Remediation was underway. The independent auditor audited the financial statements but did not audit internal-control effectiveness.
- Capital commitments included up to $15.0 million for Nanjing facility development, with the project behind contractual development schedules and potential monetary penalties. The company also reported $30.0 million of unused revolving credit capacity at year-end; the two revolving facilities were due to mature in 2016.
- After year-end, Amphastar refinanced a mortgage to a February 2021 maturity at a fixed 4.39% rate through a swap, acquired a small Nanjing supplier, and acquired 14 injectable ANDAs from Hikma for $4.0 million, subject to transfer and FDA approval before launch.
Investor verification priorities
- Track enoxaparin pricing, volume, competitive share, and the outcome and potential exposure in the patent litigation.
- Verify MannKind’s actual purchase commitments, cancellation-fee treatment, and future demand for insulin API.
- Assess progress and FDA feedback on Primatene HFA, pending product applications, and responses to inspection observations.
- Review cash conversion, inventory and receivables changes, upcoming debt maturities, covenant compliance, and the Nanjing capital commitments.
- Monitor remediation of the material weakness and the filing’s disclosure that prior-period and quarterly errors were corrected as immaterial; the fourth-quarter correction reduced 2015 net income by $1.1 million.