Amphastar Pharmaceuticals, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited. Unless stated otherwise, amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions.
Business context
Amphastar develops, manufactures and sells generic and proprietary injectable, inhalation and intranasal medicines, as well as insulin active pharmaceutical ingredients (API). It reports two segments: finished pharmaceutical products and API. Most products are sold through wholesalers and group purchasing organizations. At quarter-end, the company had 15 generic ANDAs, three biosimilar insulin candidates and four proprietary candidates in development; six ANDAs and one NDA were on file with the FDA.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net revenue | $84.7 million | $79.8 million |
| Gross profit / gross margin | $36.8 million / 43% | $30.9 million / 39% |
| Operating income (loss) | $7.5 million | ($3.2 million) |
| Net income (loss), consolidated | $3.5 million | ($2.2 million) |
| Net income attributable to Amphastar / diluted EPS | $3.9 million / $0.08 | $0.9 million / $0.02 |
| Net cash from operating activities | $1.5 million | ($3.6 million) |
| Capital expenditures | $8.0 million | $14.7 million |
- Revenue increased 6%; finished pharmaceutical product revenue rose 9% to $81.3 million, while API revenue fell 35% to $3.4 million.
- Primatene Mist sales increased to $12.9 million from $2.9 million, supported by the national advertising campaign and late-quarter pandemic-related pantry loading. Other notable changes included higher phytonadione, naloxone and epinephrine sales, offset by a 37% decline in enoxaparin revenue.
- Gross margin improved, aided by higher sales of higher-margin Primatene Mist and phytonadione. Management cautioned that rising heparin input costs could pressure enoxaparin margins.
- Operating expenses declined to $29.3 million from $34.1 million, mainly because general and administrative costs fell with lower legal expenses after the 2019 enoxaparin litigation settlement. R&D increased 5% to $15.3 million, principally reflecting higher clinical-trial costs.
- Other non-operating expenses were $1.8 million versus $0.6 million. The filing does not provide a clear breakdown of the increase in the results discussion; the notes report a higher fair-value liability on interest-rate swaps.
Financial position and liquidity
- At March 31, 2020, cash and cash equivalents were $54.8 million, short-term investments were $12.2 million, and restricted cash and investments totaled $4.2 million. Cash, cash equivalents and restricted cash together were $56.7 million, down $18.8 million since year-end.
- Current assets were $246.7 million and current liabilities $83.4 million, giving working capital of $163.4 million, down from $165.2 million at December 31, 2019. Accounts receivable rose to $57.8 million from $45.4 million, while inventory decreased to $107.9 million from $110.5 million.
- Total debt was $47.9 million, including $11.5 million current and $36.4 million long-term. The company reported $35.0 million of unused revolving credit capacity and compliance with debt covenants.
- Operating cash flow was positive but modest; the company cited a $14.8 million net cash outflow from changes in operating assets and liabilities, including higher receivables and lower payables. Investing and financing activities used $8.7 million and $11.4 million, respectively; financing use primarily reflected $11.0 million of share repurchases.
- Foreign subsidiaries held $24.5 million in cash and cash equivalents, which the company said was not available to fund U.S. parent operations. Management believed cash reserves, operating cash flows and borrowing availability would fund operations for at least 12 months.
Outlook, risks and unusual items
- Management provided no quantified revenue or earnings guidance. It expects selling and marketing costs to rise with Primatene Mist advertising and R&D expenses to increase as clinical trials advance. It anticipates ongoing variability in naloxone, enoxaparin and API sales; API revenue may also be affected by customer-purchase timing and euro-dollar movements.
- COVID-19 had not significantly affected quarterly results, apart from increased Primatene Mist and some hospital-product orders. China operations temporarily paused after Lunar New Year but resumed in February; facilities otherwise continued operating with enhanced safety measures. Management said the longer-term impact could not be estimated and warned that renewed restrictions, demand changes, supply interruptions and clinical-trial recruitment delays could adversely affect results.
- After quarter-end, a cyber-event temporarily disrupted some internal computer systems; the company was still evaluating its business impact when it filed.
- In April 2020, the FDA approved Epinephrine Injection, USP 30 mg/30 mL multiple-dose vial; the company planned to begin sales within two to three months of approval. The filing also reports approval of the product in its business overview; verify subsequent launch timing and sales.
- On April 10, 2020, President and General Counsel Jason Shandell resigned. His separation agreement included $2.4 million cash severance, accelerated vesting of 80% of unvested options and RSUs, purchase of his ANP ownership interest at fair value, and three years of health coverage. Amphastar expected additional Q2 compensation expense.
- Material risks include dependence on a small number of major wholesalers, single- or limited-source and foreign suppliers, China manufacturing and construction exposure, competition and product pricing, FDA approval and compliance risks, and patent and employment litigation. The company markets certain unapproved prescription products; Q1 revenue from those products was $9.6 million, and FDA enforcement or withdrawal could affect sales. A remaining False Claims Act fee matter and several patent and employment cases are described; management did not expect the matters to have a material adverse effect, but litigation outcomes are uncertain.
- Purchase commitments for equipment and raw materials totaled approximately $42.3 million at quarter-end. Separately, the company expected to complete approximately $1.5 million of remaining land-development spending in China by the end of 2020.
Most important facts for investors to verify
- Whether pandemic-related Primatene Mist and hospital-product orders represented lasting demand or temporary stocking, and how the cyber-event affected operations or data.
- Cash conversion and working-capital trends, especially receivables, alongside capital spending, share repurchases and the availability of cash held overseas.
- Progress and costs for clinical trials, product approvals and launches, including the newly approved epinephrine vial and the effect of trial delays.
- Enoxaparin input-cost pressure, product competition, API customer concentration and foreign-exchange exposure.
- Developments in the disclosed patent, employment and fee litigation, and potential FDA action involving unapproved products.