Amphastar Pharmaceuticals, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are from the filing’s unaudited quarterly data. Amounts are in U.S. dollars.
Business context and reporting period
Amphastar develops, manufactures, markets and sells technically challenging generic and proprietary injectable, inhalation and intranasal medicines, and insulin active pharmaceutical ingredients (API). It reported more than 20 marketed products and a pipeline of 15 generic ANDAs, three biosimilar candidates and five proprietary candidates. In November 2018, the FDA approved the non-CFC Primatene Mist; sales began in December.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net revenue | $294.7 million | $240.2 million |
| Gross profit / margin | $107.0 million / 36% | $90.5 million / 38% |
| Operating income (loss) | $(8.6) million | $(1.3) million |
| Net income (loss) attributable to Amphastar | $(5.7) million | $3.6 million |
| Net income (loss) per diluted share | $(0.12) | $0.08 |
| Cash from operating activities | $38.2 million | $39.2 million |
| Cash, cash equivalents, restricted cash and short-term investments | $93.3 million | $72.4 million |
| Working capital | $113.5 million | $120.6 million |
| Total debt and capital leases | $50.2 million | $47.2 million |
Revenue rose 23%, while gross margin declined approximately two percentage points. Finished pharmaceutical products generated $271.1 million in revenue and $113.2 million gross profit; API generated $23.6 million in revenue but a $6.2 million gross loss. R&D expense increased 32% to $57.6 million, and G&A increased 12% to $49.9 million. The company reported a $3.3 million income tax benefit for 2018. Its cash balance includes restricted amounts; management said cash reserves, operating cash flow and available borrowing capacity should fund operations for at least 12 months.
Fourth-quarter 2018 revenue was $89.7 million versus $60.4 million in Q4 2017; gross profit was $34.7 million versus $20.5 million; and net income attributable to Amphastar was $1.9 million versus $0.8 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher enoxaparin sales (up 46%), launches of medroxyprogesterone acetate and Primatene Mist, and growth in lidocaine and phytonadione. Enoxaparin benefited from price increases and market shortages late in the year.
- Naloxone revenue fell 12%, principally because of lower unit volume. Epinephrine revenue fell 61%, following the FDA-requested discontinuation of the vial product in 2017.
- API revenue increased 135%, mainly due to the timing of MannKind purchases and contract-related fees; management cautioned that API sales may fluctuate and likely decrease.
- Cost of revenue included a $12.9 million inventory and purchase-commitment adjustment, versus $8.5 million in 2017; $9.1 million of the 2018 charge related to enoxaparin.
- Operating cash flow was broadly stable, but investing cash outflow increased to $42.2 million, including $46.8 million of capital expenditures. The company spent $25.0 million on share repurchases.
Outlook, risks, contingencies and unusual items
- Outlook: No numerical revenue or earnings guidance is provided. Management expects increased R&D spending, continued investment in manufacturing, and higher G&A costs, including legal and public-company compliance expenses. It expects recently launched products to help offset higher heparin costs, but notes that sales and pricing for key products may fluctuate.
- Product and customer concentration: Enoxaparin and naloxone together represented 31% of 2018 revenue. AmerisourceBergen, McKesson and Cardinal Health together accounted for 75% of revenue. Single-source supplier dependence, generic competition and pricing pressure pose material risks.
- Manufacturing and regulatory: FDA inspections in France in 2018 and at Rancho Cucamonga and South El Monte in early 2019 produced Form 483 observations. The company submitted or planned responses and expressed its expectation that these would satisfy FDA requirements; outcomes are not assured. Serialization-related production disruption created an approximately $5.0 million year-end backlog, which the company said it had resolved.
- Pipeline: Intranasal naloxone remained subject to an FDA Complete Response Letter and unresolved device, human-factors and dosing issues. FDA approval and commercial timing for candidates remain uncertain.
- Debt and commitments: Debt covenants were met at year-end, and $35.0 million of revolving borrowing capacity was unused. Contractual obligations totaled $139.7 million, including $59.5 million of purchase obligations. A $12.0 million approximate balloon payment on the Cathay acquisition loan was due in April 2019.
- Legal matters: Enoxaparin patent and antitrust litigation remained active. The company is pursuing recovery of a $100.1 million injunction bond, which is uncertain and should not be treated as assured proceeds. Separately, an adverse appellate ruling in the False Claims Act case led to proceedings over Aventis’s attorneys’ fees; the amount was unresolved in the filing.
- Other notable items: ANP raised $56.3 million in a private placement after year-end collections; Amphastar retained approximately 58% ownership and continued consolidating ANP. Comparative financial statements were revised for immaterial depreciation errors, reducing 2017 and 2016 net income by $0.9 million and $0.7 million, respectively. The auditor issued an unmodified opinion on the financial statements but did not attest to internal controls.
Most important facts for investors to verify
- Whether recent product launches can sustain revenue and improve margins amid price competition, especially for enoxaparin and naloxone.
- Whether ANP expansion and the French and South El Monte manufacturing projects meet validation, regulatory and cost expectations.
- Resolution of FDA Form 483 observations and the status of the intranasal naloxone application and other pending filings.
- Actual cash availability across the parent and foreign subsidiaries, upcoming debt maturities, covenant requirements and committed capital spending.
- Developments and potential financial exposure in the enoxaparin, antitrust, False Claims Act fee, epinephrine and vasopressin litigation.
- How much of reported growth depends on MannKind purchases, one-time contract fees, market shortages and customer purchasing timing.