Amphastar Pharmaceuticals, Inc. annual report, FY2014

Amphastar Pharmaceuticals, Inc. — FY 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014, with unaudited fourth-quarter data. The filing was signed March 26, 2015. Amphastar develops, manufactures and sells technically challenging generic and proprietary injectable and inhalation drugs; in 2014 it added insulin active pharmaceutical ingredient (API) sales through its acquisition of a French manufacturing business.

Financial performance and position

Metric	FY 2014	FY 2013
Net revenue	$210.5 million	$229.7 million
Gross profit / margin	$51.3 million / 24%	$87.0 million / 38%
Operating income (loss)	$(18.0) million	$17.5 million
Net income (loss)	$(10.7) million	$11.9 million
Diluted earnings (loss) per share	$(0.25)	$0.31
Cash from operating activities	$21.1 million	$31.0 million
Cash used in investing activities	$39.8 million	$18.3 million
Cash from (used in) financing activities	$32.1 million	$(9.4) million

At December 31, 2014, cash and cash equivalents were $67.8 million; restricted cash and investments were $1.5 million. Working capital was $135.4 million, total assets $389.4 million, and total debt and capital leases $43.7 million. The company reported $38.0 million of unused capacity under revolving credit lines. Capital expenditures and related self-constructed asset costs were substantial; reported purchases of property, plant and equipment were $18.7 million, with another $1.8 million of capitalized labor, overhead and interest.

Fourth quarter: Revenue was $55.9 million versus $54.9 million in Q4 2013; gross profit was $12.0 million versus $19.6 million; net loss was $2.5 million versus net income of $1.8 million. Q4 2014 diluted loss per share was $0.06.

Material changes versus the prior year

• Revenue declined 8%, principally because enoxaparin revenue fell 26% to $107.5 million from $145.9 million. Enoxaparin contributed 51% of total 2014 revenue, down from 64% in 2013.
• Other finished-product revenue increased to $91.0 million from $83.8 million, while newly acquired API operations contributed $12.0 million. API recorded a $1.5 million gross loss in 2014, partly reflecting costs and added staffing ahead of planned production volumes.
• Gross margin fell to 24% from 38%, reflecting lower pricing on enoxaparin and Cortrosyn and the initial negative gross margin in the API business. The company moved from net income in 2013 to a net loss in 2014; management attributed the loss principally to reduced enoxaparin profit-sharing revenue under the Actavis arrangement.
• Operating cash flow remained positive but declined to $21.1 million from $31.0 million. Year-end cash and cash equivalents increased to $67.8 million from $53.6 million, supported in part by the IPO.
• Total debt and capital leases increased to $43.7 million from $32.2 million, primarily due to financing the Merck API acquisition. The 2014 IPO generated $34.7 million of net proceeds.

Outlook, risks and unusual items

• Management expected enoxaparin unit sales and average selling prices to continue declining in 2015, with additional competition from Teva. Price increases on several other finished products were expected to partly offset pressure.
• Management expected insulin API sales to rise under the MannKind supply agreement and stated that higher production could return the API business to profitability. The agreement covers minimum purchases aggregating approximately €120.1 million (about $146 million) in 2015–2019; MannKind paid a non-refundable reservation fee of approximately $14 million, recorded as deferred revenue. The contract and expected demand are subject to customer, product and regulatory risks, including Afrezza approval status.
• Management expected the euro’s decline against the U.S. dollar to weigh on API revenue, expected general and administrative costs to rise with the acquired business and public-company/Sarbanes-Oxley costs, and anticipated R&D costs could increase significantly in 2015–2017. It stated existing cash, operating cash flow and credit availability were expected to meet obligations for at least 12 months.
• Primatene Mist HFA received an FDA complete response letter requiring additional information, labeling changes and consumer-use studies. The supplier’s cited manufacturing deficiencies were reported as resolved, but approval remained uncertain. Amphadase was awaiting FDA action on its supplement; the China facility inspection had produced Form 483 observations, to which the company said it had responded.
• At year-end, the company was out of compliance with two Cathay Bank financial covenants; it obtained waivers for the December 31, 2014 period on March 13, 2015. Debt is secured and subject to financial and operating restrictions.
• Key exposures include enoxaparin dependence and price competition; concentrated customers and reliance on Actavis; single-source suppliers, including heparin; FDA/cGMP and product-approval risks; and China construction and regulatory risks. The company disclosed ongoing enoxaparin patent appeal proceedings and a False Claims Act case; it described a California employment claim and other litigation as not expected to have a material adverse effect, while noting outcomes are uncertain.
• The Nanjing expansion carries up to approximately $15 million of construction commitments, and the company separately reported a further $16 million capital commitment to ANP due by December 2017. Delays in required development could result in monetary penalties. In the fourth quarter, the company corrected an immaterial prior-period error related to capitalized construction interest; it reported a $0.3 million decrease in 2014 net loss with no per-share impact.

Important facts for investors to verify

• Whether enoxaparin revenue, unit volume and pricing continue to decline, and how the added competitor affects market share and profit-sharing receipts.
• Whether MannKind takes the contracted insulin API quantities, whether production achieves positive margins, and the effect of euro-dollar movements on reported sales.
• Current status of FDA submissions, inspections and corrective actions, especially Primatene Mist HFA, Amphadase, and outstanding ANDAs.
• Compliance with debt covenants after the waiver period, debt repayment requirements, and funding needs for China construction, R&D and other commitments.
• Developments in the enoxaparin appeal and False Claims Act litigation, as well as customer and supplier concentration and the adequacy of return, chargeback and inventory reserves.