Amphastar Pharmaceuticals, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited, compared with Q1 2017. Amphastar develops, manufactures and sells generic and proprietary injectable, inhalation and intranasal pharmaceuticals, as well as insulin active pharmaceutical ingredients (API).
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / prior balance |
|---|---|---|
| Net revenue | $58.4 million | $56.7 million; up 3% |
| Gross profit / margin | $17.1 million / 29% | $22.8 million / 40% |
| Operating income (loss) | $(9.9) million | $1.4 million |
| Net income (loss) / diluted EPS | $(7.2) million / $(0.16) | $0.9 million / $0.02 |
| Operating cash flow | $8.4 million | $22.4 million |
| Capital expenditures | $12.3 million | $7.3 million |
| Cash and cash equivalents | $54.5 million | $65.6 million at Dec. 31, 2017 |
| Total debt and capital leases | $45.8 million | $47.2 million at Dec. 31, 2017 |
- Working capital was $101.5 million, down $19.1 million from year-end. The company reported $43.0 million of unused revolving credit capacity. Restricted cash and investments were $4.2 million.
- Cash, cash equivalents and restricted cash declined $11.0 million to $56.4 million. Investing cash use was $8.7 million; financing cash use was $10.8 million, including $7.6 million of share repurchases and $1.4 million of debt principal payments.
- Debt covenants were met at quarter-end. $14.6 million of debt had unhedged variable rates; management estimated a 1 percentage-point rate increase would add about $0.1 million to annual interest expense.
Material changes and operating drivers
- Finished-product revenue declined 5% to $53.1 million; API revenue rose to $5.3 million from $0.7 million, mainly reflecting timing of customer purchases. API gross loss widened to $2.7 million from $1.5 million.
- Finished-product sales were affected by lower enoxaparin revenue (down 33%), naloxone (down 18%) and epinephrine (down 66%). Epinephrine vial sales had been discontinued in Q2 2017 at FDA request. Lidocaine and phytonadione revenue increased; medroxyprogesterone acetate launched in January and February 2018.
- Gross margin fell as production costs rose, including lower U.S. facility productivity, higher labor costs and a $1.9 million inventory and purchase-commitment valuation charge, of which $1.2 million related to enoxaparin. Management also cited higher heparin input costs and competition affecting enoxaparin pricing and volume.
- Research and development expense increased 27% to $14.3 million, including higher testing and lab costs and FDA fees. Management expects R&D spending to increase significantly over coming quarters and years, with quarterly variation based on trials, pre-launch activity and filing fees.
- The prior-year quarter included a $2.6 million gain on sale of intangible assets; no comparable gain was recorded in Q1 2018. Q1 2018 operating cash flow also benefited from the timing of working-capital movements and included $4.7 million of non-cash share-based compensation.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management believes cash reserves, operating cash flow and available borrowing capacity will fund operations for at least 12 months, while noting increased future needs for development, trials, regulatory approvals and facility investment. Backlog was about $1.5 million and management said it is not a meaningful indicator of future performance.
- Management expects enoxaparin prices and volumes to fluctuate amid competition, and anticipates possible fluctuations and likely decreases in insulin API sales given uncertainty around MannKind. API revenue is also exposed to euro-dollar movements; the company does not hedge foreign currency exposure.
- Primatene Mist’s NDA was resubmitted after an additional human-factors study; approval and timing remain uncertain. The company is also developing a portfolio of 15 generic ANDAs, three biosimilar candidates and six proprietary candidates, with three ANDAs and two NDAs on file with FDA.
- Some marketed prescription products lack FDA approval. The company reported $11.4 million of Q1 2018 revenue from certain unapproved products, versus $5.8 million a year earlier; FDA could require applications, recalls or cessation of sales. In April 2018, a contract laboratory serving the current heparin supplier received one minor Form 483 observation; a laboratory related to a pending China submission received none.
- Major distributors McKesson, AmerisourceBergen and Cardinal represented 28%, 26% and 23% of Q1 revenue, respectively. Some raw materials have limited or foreign sources, creating supply-continuity risk.
- In enoxaparin patent litigation, the court entered judgment reflecting a jury verdict finding the asserted patent invalid and zero damages; plaintiffs appealed. Amphastar is pursuing recovery on a $100.1 million bond, but the outcome and timing are uncertain. Other disclosed matters include ongoing antitrust litigation and a False Claims Act case dismissed on appeal, with attorneys’ fees proceedings remanded; management disputes any fee liability.
- The company had $50.0 million of equipment and raw-material purchase commitments at quarter-end. Potential penalties related to delayed development of Chinese property were described as remote. The company’s accounting for the 2017 Tax Act remained provisional, with a measurement period ending December 22, 2018.
- On May 7, 2018, after quarter-end, the board authorized an additional $20.0 million for the share-buyback program. Management said the program primarily offsets equity-compensation dilution.
Most important facts for investors to verify
- Whether gross margins recover as new products ramp, production productivity improves and heparin costs and competitive pricing evolve.
- Actual revenue and profitability contribution from medroxyprogesterone and other launches, and the trajectory of enoxaparin, naloxone and insulin API.
- FDA progress on Primatene Mist and pending applications, and any further action involving unapproved products or the heparin laboratory observation.
- Cash generation relative to capital spending, purchase commitments, buybacks and clinical-development needs; confirm debt covenant compliance and borrowing availability.
- Appeal developments in the enoxaparin patent case and the uncertain bond-recovery claim, as well as outcomes in other litigation.
- Customer and supplier concentration, foreign-exchange exposure, and final tax-accounting adjustments under the Tax Act.