Amphastar Pharmaceuticals, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statements are unaudited. Amphastar develops, manufactures and sells generic and proprietary injectable, inhalation and intranasal medicines, as well as insulin active pharmaceutical ingredients (API).
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $68.0 million | $53.9 million | $127.4 million | $110.7 million |
| Gross profit / margin | $31.7 million / 47% | $13.3 million / 25% | $56.6 million / 44% | $26.6 million / 24% |
| Operating income (loss) | $10.3 million | $(10.3) million | $14.4 million | $(17.5) million |
| Net income (loss) | $6.9 million | $(6.6) million | $9.4 million | $(7.3) million |
| Diluted earnings (loss) per share | $0.15 | $(0.15) | $0.21 | $(0.16) |
- Q2 revenue increased 26%; six-month revenue rose 15%. Growth came mainly from other finished products, including naloxone, phytonadione, epinephrine and lidocaine. Enoxaparin revenue declined, and API revenue fell 48% for the first half because there were no MannKind purchases in Q1.
- Gross margin improved substantially, reflecting lower heparin material and enoxaparin unit costs, higher prices on several products and increased manufacturing volume. The company recorded a €0.6 million Merck reimbursement for environmental remediation costs as a reduction of API cost of sales.
- For the first six months, operating cash flow was $23.3 million; investing cash outflow was $17.4 million and financing cash outflow was $5.1 million. Cash increased by $0.6 million to $66.7 million.
- At June 30, cash and cash equivalents were $66.7 million, current assets $181.3 million and current liabilities $65.7 million; working capital was $115.6 million. Debt and capital leases totaled $42.6 million, including $10.9 million current. The company reported $37.1 million of unused revolving credit capacity and compliance with debt covenants.
- Total assets were $408.6 million and stockholders’ equity was $307.5 million. Inventory increased to $88.3 million from $70.7 million at year-end.
Outlook, developments and risks
- Enoxaparin and Actavis: The retail distribution and profit-sharing agreement with Actavis is scheduled to end no later than January 1, 2017, and could end earlier under the agreed inventory-related condition. Amphastar expected to stop shipping to Actavis in Q3 and could not sell directly into the retail market until termination. Management anticipated continued enoxaparin price and near-term volume declines, and warned that revenue for the remainder of 2016 could be negatively affected. Higher prices on other products were expected to partly offset the decline.
- Profitability and spending: Management said gross margin would vary with product mix and that it planned continued substantial R&D investment, with annual R&D costs expected to increase over the next several years. The company believed cash, operating cash flow and available borrowing capacity would fund operations for the next 12 months; this is not a revenue or earnings forecast.
- Customer and supply exposure: Sales depend significantly on a small number of distributors and customers. MannKind purchases are uncertain, and API sales are exposed to euro-dollar movements. Certain raw materials have limited or single sources, and supplier replacement can require regulatory approval.
- Regulatory and product pipeline: Primatene HFA’s NDA amendment was submitted June 28, 2016, with an FDA target response date of December 28, 2016; approval is not assured. The 14 ANDAs acquired from Hikma require transfer to Amphastar facilities and FDA approval before launch. FDA inspections of the France facility in Q1 2016 resulted in Form 483 observations; the company submitted a response. Its Nanjing inspection resulted in no Form 483 observations.
- Litigation: Enoxaparin patent litigation with Momenta and Sandoz returned to the district court for further proceedings; trial was scheduled for July 2017, and Amphastar also sought Supreme Court review of the safe-harbor issue. The company was defending against requested sanctions in its False Claims Act case. Its antitrust case against Momenta and Sandoz was dismissed in July 2016, and Amphastar was evaluating an appeal.
- Internal controls: Management concluded disclosure controls were ineffective because of a material weakness involving review and analysis of non-standard and complex transactions. Remediation was underway, including plans to add technical accounting expertise and strengthen review procedures. Management said identified prior-period errors were not material and that the financial statements fairly presented the reported periods.
- Other items: In August 2016, Amphastar acquired UK product assets and marketing authorizations for 33 products for $7.7 million; regulatory approvals are needed before transferred products can be sold. A $16.9 million commitment for equipment and raw materials was outstanding at June 30; the company also committed a further $12.0 million investment in its Chinese subsidiary by December 2017.
Important facts for investors to verify
- Whether Amphastar establishes replacement retail distribution or direct-market access for enoxaparin after the Actavis agreement ends, and the resulting effect on sales, pricing and margins.
- How much MannKind purchases under its supply arrangement and whether API revenue and euro-denominated sales recover.
- FDA decisions and required approvals for Primatene HFA, acquired injectable products and facility-related regulatory matters.
- Developments, potential financial exposure and timing in the enoxaparin, False Claims Act and antitrust litigation.
- Progress in remediating the material weakness, and whether subsequent reporting confirms effective controls.
- Cash conversion and inventory levels, the costs and approvals associated with acquisitions, and the company’s ability to meet commitments while sustaining R&D and capital investment.