Amphastar Pharmaceuticals, Inc. — Q3 2018 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Amphastar develops, manufactures and sells injectable, inhalation and intranasal pharmaceuticals, as well as insulin active pharmaceutical ingredients (API). Its reporting segments are finished pharmaceutical products and API.
Financial results and liquidity
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $75.5 | $57.9 | $205.0 | $179.8 |
| Gross profit | $29.3 | $20.6 | $72.3 | $70.0 |
| Gross margin | 38.7% | 35.5% | 35.3% | 39.0% |
| Operating income (loss) | $2.6 | $(2.9) | $(10.2) | $0.5 |
| Net income (loss) attributable to Amphastar | $2.4 | $0.1 | $(7.6) | $2.9 |
| EPS attributable to Amphastar | $0.05 | $0.00 | $(0.16) | $0.06 |
| Operating cash flow | — | — | $28.7 | $29.4 |
- Balance sheet at September 30: Cash and cash equivalents were $68.7 million; short-term investments were $2.8 million and restricted cash and investments were $4.2 million. Working capital was $98.2 million, down from $120.6 million at December 31, 2017.
- Debt and liquidity: Debt and capital leases totaled $51.2 million, including $18.6 million current. The company reported $35.0 million of unused capacity under revolving credit lines and said available cash, operating cash flow and borrowing capacity should fund operations for at least 12 months. Debt covenants were met.
- Cash uses and sources: Nine-month investing cash outflow was $33.4 million, including $37.2 million for property, plant and equipment. Financing provided $8.1 million, including $26.2 million received from the ANP private placement, partly offset by $22.4 million of share repurchases and debt principal payments.
Material changes versus the prior period
- Q3 revenue rose 30%, led by finished pharmaceuticals, up 32%. Enoxaparin revenue increased to $18.6 million from $6.5 million, reflecting a market shortage, higher-priced non-contract sales, price increases and higher volume. Medroxyprogesterone acetate, launched in early 2018, contributed $7.6 million in Q3.
- Naloxone revenue declined 26% in Q3, primarily on lower unit volume. Nine-month epinephrine revenue fell 60%, largely following the FDA-requested discontinuation of the vial product in 2017.
- Nine-month API revenue increased to $16.9 million from $5.6 million, mainly due to customer purchase timing. The API segment nevertheless recorded a $5.6 million gross loss, versus a $4.3 million loss in the prior-year period.
- Q3 gross margin improved year over year, while nine-month gross margin declined. Management cited product mix, higher production labor costs and inventory write-downs; it recorded $6.6 million of inventory and purchase-commitment charges in the first nine months, versus $7.3 million in 2017.
- Nine-month R&D expense increased 27% to $40.8 million. Operating results also compared against a $2.6 million gain on an intangible-asset sale recognized in 2017.
- Amphastar retained approximately 58% of ANP after its July private placement. The placement represented approximately $57.2 million in aggregate proceeds, of which $26.2 million had been received by September 30; remaining contributions were due by December 31, 2018. ANP remains consolidated, with a non-controlling interest recognized.
Outlook, risks and unusual items
- Outlook: The filing provides no numerical revenue or earnings guidance. Management expected Primatene Mist, approved by the FDA in November 2018, to reach drug-store shelves in early 2019. It expects R&D costs to rise with biosimilar and inhalation trials and G&A costs to increase with compliance and patent-related legal expenses.
- Product and margin risks: Management expects enoxaparin and naloxone sales to fluctuate with competition. Heparin input costs had risen and were expected to rise further, pressuring margins; management expected recently launched higher-margin products to help offset this. MannKind declined its minimum 2019 RHI API purchase option; Amphastar recognized a $1.0 million cancellation fee in Q3 and expected API sales to fluctuate and likely decrease.
- Regulatory and supply risks: The company relies on some single- or limited-source suppliers and foreign materials. FDA inspections resulted in one Form 483 observation at a heparin-testing laboratory and five at the French subsidiary; management said responses were submitted and expected to satisfy FDA requirements. Unapproved products remain exposed to potential FDA enforcement.
- Trade and foreign-exchange exposure: A U.S. tariff effective September 24, 2018 applied a 10% rate to a specified range of Chinese imports, with an expected increase to 25% at year-end; management warned this could raise costs. The company does not hedge foreign currency exposure and estimated that a 10% adverse currency move could reduce foreign-exchange gains by about $2.3 million and other comprehensive income by about $4.2 million.
- Litigation: In the enoxaparin patent case, a jury found the asserted patent invalid and awarded zero damages, and the court entered judgment with mixed findings on equitable defenses. Plaintiffs appealed; Amphastar continues to seek recovery on a $100.1 million bond, with consideration deferred pending appeal. Other matters include a patent suit concerning an epinephrine application and an ongoing dispute over attorneys’ fees in the False Claims Act case. Management cautioned litigation outcomes are unpredictable.
- Commitments and accounting: Purchase commitments for equipment and raw materials totaled approximately $55.0 million. ANP’s land-development timetable was behind schedule, although management considered penalties remote. The company revised prior-period statements for a depreciation error it deemed immaterial; the filing gives inconsistent figures for the related December 2017 balance-sheet reductions in different sections. ASC 606 adoption had no material impact.
Important facts for investors to verify
- Whether Q3’s enoxaparin price and shortage-related sales gains persist, and how lower naloxone volume and competition affect future revenue.
- How MannKind’s decision not to exercise its 2019 API purchase option affects API revenue, capacity use and segment losses.
- Whether higher heparin costs, tariffs and production expenses pressure margins, and whether new products offset those pressures.
- Completion and deployment of ANP placement proceeds, facility expansion progress, and the timing and cost of planned capital projects.
- Developments in FDA observations, unapproved-product compliance, product approvals and the cited litigation, including any bond recovery or fee exposure.
- The depreciation-error disclosure: the filing reports differing amounts for the December 2017 PP&E and retained-earnings adjustments; the precise figures are unclear from the filing text.