Amphastar Pharmaceuticals, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results; dollar amounts below are in millions unless stated otherwise. Amphastar develops, manufactures, and sells technically challenging injectable, inhalation, and intranasal pharmaceuticals, as well as insulin API.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $64.2 | $63.9 | $191.6 | $174.6 |
| Gross profit / margin | $27.6 / 43% | $17.6 / 28% | $84.2 / 44% | $44.2 / 25% |
| Operating income (loss) | $5.8 | $(3.7) | $20.2 | $(21.3) |
| Net income (loss) | $3.9 | $(3.0) | $13.3 | $(10.3) |
| Diluted EPS | $0.08 | $(0.07) | $0.29 | $(0.23) |
- Revenue mix: Q3 finished products generated $59.1 million, up 2%; API revenue was $5.2 million, down 13%. Nine-month finished-product revenue rose 14% to $181.4 million; API revenue fell 35% to $10.3 million.
- Cash flow: Nine-month operating cash flow was $24.6 million, versus $7.4 million in 2015. Investing used $32.4 million, including acquisitions and capital spending; financing provided $8.4 million. Cash increased $0.5 million to $66.6 million.
- Balance sheet: Current assets were $190.2 million and current liabilities $60.8 million; working capital was $129.3 million, up from $116.0 million at year-end 2015. Total debt and capital leases were $42.7 million, including $8.5 million current. Unused revolving-credit capacity was $37.1 million. The company reported compliance with debt covenants.
- Capital expenditures and capitalized construction costs totaled approximately $16.0 million over the nine months. Inventory increased $20.0 million to $90.7 million.
Changes versus comparable periods
- Q3 revenue was nearly flat, while gross profit rose 57%, reflecting lower cost of revenues, lower heparin input costs, and increased manufacturing volume and overhead absorption.
- Enoxaparin revenue fell 28% in Q3 to $15.4 million and 21% over nine months to $51.0 million. Other finished-product sales offset the decline: nine-month naloxone, lidocaine, phytonadione, and epinephrine revenue increased versus 2015.
- API revenue declined as MannKind had not purchased its 2016 minimum quantities by September 30. Nine-month results also benefited from a $0.6 million reimbursement from Merck for French-site remediation expenses, recorded as a reduction to API cost of sales.
- The company acquired 14 injectable-product ANDAs from Hikma for $4.0 million and UK product rights and assets from UCB for $7.7 million; it also acquired a Chinese subsidiary for $0.8 million cash, plus a previously paid $0.9 million deposit.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided. Management said it expects remaining-2016 revenue may be negatively affected by the Actavis transition and expects enoxaparin price and volume pressure. It expects product price increases elsewhere to partly offset lower enoxaparin sales; gross margin may vary with product mix.
- The Actavis enoxaparin distribution agreement is scheduled to end no later than January 1, 2017, and shipments to Actavis ended in August 2016. Management cannot sell directly into the retail market until the agreement terminates and expects near-term sales disruption.
- MannKind had fulfilled its remaining 2015 purchase commitment but had not bought its 2016 minimum commitment by quarter-end. Amphastar was discussing timing and terms; management anticipated possible extensions and reductions in capacity-cancellation fees. API sales are also exposed to euro/dollar movements, which the company does not hedge.
- Management believes cash, operating cash flow, and available borrowing capacity will fund operations for the next 12 months. It expects cash needs to rise as it funds development, regulatory work, manufacturing upgrades, and potential acquisitions.
- Regulatory and operating risks: FDA inspections at the French and Rancho Cucamonga facilities resulted in Form 483 observations; the company had responded to the cited observations. A later Chino inspection also produced observations, with a response planned. The company cites single-source suppliers, manufacturing and supply interruptions, regulatory approvals, competition, and underutilized capacity as risks.
- Litigation: Enoxaparin patent litigation remains pending, with trial scheduled for July 2017; the Supreme Court declined the company’s petition in October 2016. The False Claims Act case was dismissed and is on appeal, with a related sanctions matter ongoing. A separate antitrust claim was dismissed and appealed. The company accrued approximately $0.4 million in patent-case fees in Q1. A $3.2 million employment settlement was approved in 2015.
- Accounting controls: Management concluded disclosure controls were not effective because of an unresolved material weakness involving review of non-standard and complex transactions. Remediation includes additional qualified accounting staff and enhanced review procedures. Management said the weakness did not materially affect the financial statements presented.
- Primatene Mist NDA amendment was submitted in June 2016, with an FDA target response date of December 28, 2016; approval is not assured. A November 2016 board action increased the share-buyback authorization by $20.0 million.
Important facts for investors to verify
- Whether Amphastar establishes retail distribution or direct sales after the Actavis agreement ends, and the resulting enoxaparin revenue and margin trend.
- Whether MannKind meets its 2016 and later purchase commitments, and any changes to cancellation fees or manufacturing utilization.
- FDA outcomes for Primatene Mist and the acquired products, and resolution of inspection observations and product-transfer approvals.
- Progress and potential financial exposure in the enoxaparin patent, False Claims Act, antitrust, and sanctions proceedings.
- Remediation of the material weakness, inventory growth and cash conversion, and the effect of acquisitions and capital spending on liquidity.