Amphastar Pharmaceuticals, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2019, compared with Q1 2018. Amphastar develops, manufactures, and sells generic and proprietary injectable, inhalation, and intranasal medicines, as well as insulin active pharmaceutical ingredients (API). Its reportable segments are finished pharmaceutical products and API.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net revenue | $79.8 million | $58.4 million |
| Gross profit / gross margin | $30.9 million / 38.7% | $17.0 million / 29.1% |
| Operating loss | $3.2 million | $9.8 million |
| Consolidated net loss | $2.2 million | $7.1 million |
| Net income (loss) attributable to Amphastar shareholders | $0.9 million; $0.02 per diluted share | $(7.1) million; $(0.15) per diluted share |
| Operating cash flow | $(3.6) million | $8.4 million |
| Capital spending on property, plant, and equipment | $14.7 million | $12.3 million |
- Revenue increased 37%; finished-product revenue rose 40% to $74.5 million, while API revenue was essentially flat at $5.3 million. Finished products generated $32.3 million of gross profit; API recorded a $1.4 million gross loss.
- Q1 2019 consolidated results include ANP, in which Amphastar retained approximately 58% ownership after a private placement. The $3.0 million net loss attributable to non-controlling interests accounts for the difference between the consolidated net loss and the $0.9 million profit attributable to Amphastar shareholders.
- At March 31, cash and cash equivalents were $79.1 million; restricted cash was $1.9 million. Including restricted cash, cash totaled $81.0 million. Working capital was $118.2 million, up from $113.5 million at year-end. The company reported $37.4 million held by foreign subsidiaries, which it said was unavailable to fund U.S. parent operations.
- Total debt was $48.6 million, down from $50.2 million at December 31, 2018. Unused borrowing capacity under revolving credit lines was $45.0 million. The company was in compliance with debt covenants at quarter-end; certain Cathay Bank profitability covenants become effective December 31, 2019.
Changes, outlook, and material considerations
- Revenue growth was led by enoxaparin, up $7.5 million (107%), and medroxyprogesterone, up $4.5 million (167%). Primatene Mist, relaunched in December 2018 after FDA approval, contributed $2.9 million. Naloxone revenue fell 18% and epinephrine revenue fell 17%.
- Management attributed improved gross margin to product mix, higher enoxaparin prices, and sales of higher-margin products, including Primatene Mist. Primatene margins also benefited from API and components expensed in prior periods. Higher heparin costs are expected to pressure margins; management expects newer higher-margin products to partly offset this pressure. ANP expansion costs also weighed on results.
- Selling, distribution, and marketing expense rose 83% to $3.1 million, mainly from Primatene Mist marketing and freight. General and administrative expense rose 48% to $16.3 million, primarily due to legal costs. Research and development expense was $14.6 million, up 4%; management expects R&D spending to increase as clinical trials advance.
- Operating cash flow turned negative, primarily reflecting working-capital outflows, including inventory growth. Inventory increased to $78.6 million from $69.3 million, partly due to Primatene Mist production and replenishment of enoxaparin stock. Financing cash flow of $11.2 million included $18.3 million of ANP private-placement proceeds.
- Backlog declined from approximately $5 million at December 31, 2018 to $3 million at March 31, 2019. Management anticipated further reduction to normal levels by June 30 and cautioned that backlog has not historically been a meaningful indicator of revenue or financial performance. No specific revenue or earnings guidance was provided.
- Management said cash reserves, operating cash flow, and borrowing capacity should fund operations for at least 12 months, while noting that future development, clinical trials, facility expansion, and potential acquisitions could increase cash needs. Purchase commitments for equipment and raw materials were approximately $67.8 million; a separate China land-development spending commitment was expected to be met by year-end 2019.
- FDA preapproval inspections at Amphastar’s Rancho Cucamonga and IMS facilities in early 2019 resulted in multiple Form 483 observations. The company submitted responses and believed no significant further actions would be necessary; the outcome remained subject to FDA review.
- Material legal matters include ongoing enoxaparin patent litigation and attempts to collect a $100.1 million bond, pending sanctions proceedings, a False Claims Act case in which the company is defending against an attorneys’ fee award, and patent litigation concerning epinephrine and vasopressin. The filing does not establish that the bond will be recovered or quantify any eventual litigation costs or outcomes.
- Revenue from certain unapproved prescription products was $9.8 million in Q1 2019, versus $7.6 million in Q1 2018. The company warned that FDA enforcement could require cessation of marketing, recalls, or other actions. It also identified supplier concentration, competition, product pricing, regulatory approval, and foreign-exchange exposure as risks; it does not hedge foreign-currency exposure.
- In May 2019, after quarter-end, the board authorized a $20 million increase to the share-repurchase program. The company also adopted lease accounting on January 1, 2019, recognizing approximately $13.9 million of operating-lease right-of-use assets and $14.1 million of lease liabilities, with no material reported impact on results or cash flows.
Key facts investors should verify
- Whether revenue and gross-margin gains are sustainable, particularly enoxaparin pricing and availability, Primatene Mist demand, and contribution from newer products.
- Whether working-capital investment and capital spending continue to pressure operating cash flow, and how ANP expansion and its remaining proceeds are funded.
- The effect of higher heparin costs, competition, and changing customer mix on future product margins and sales.
- FDA follow-up on the Form 483 observations and the status of approvals for the company’s pending applications and products marketed without FDA approval.
- Developments in the disclosed litigation, including potential sanctions, fee awards, patent outcomes, and the company’s effort to collect the $100.1 million bond.
- Availability of foreign-held cash for U.S. operations, debt refinancing and covenant requirements, and execution of the announced share-buyback increase.