Amphastar Pharmaceuticals, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; financial statements are unaudited. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Amphastar develops, manufactures and sells technically challenging generic and proprietary injectable, inhalation and intranasal medicines, as well as insulin active pharmaceutical ingredients (API). Its two reporting segments are finished pharmaceutical products and API. Most finished products are sold through wholesalers and group purchasing organizations. The company reported more than 20 marketed products and a pipeline of 15 generic ANDAs, three biosimilar candidates and six proprietary candidates.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $71.0m | $65.2m | $129.4m | $121.9m |
| Gross profit | $26.2m | $26.7m | $43.2m | $49.6m |
| Gross margin | 36.8% | 41.0% | 33.4% | 40.7% |
| Operating income (loss) | $(2.9)m | $2.2m | $(12.8)m | $3.6m |
| Net income (loss) | $(2.8)m | $2.0m | $(10.0)m | $2.9m |
| Diluted EPS | $(0.06) | $0.04 | $(0.22) | $0.06 |
- Cash flow, six months: Operating cash flow was $12.9m, versus $27.0m in 2017. Capital spending was $24.6m; investing cash outflow was $20.5m. Financing cash outflow was $9.7m, including $14.9m of treasury-stock purchases. Cash, cash equivalents and restricted cash declined $17.5m to $49.9m.
- Balance sheet at June 30: Cash and cash equivalents were $48.1m; current assets $169.9m and current liabilities $87.6m, yielding reported working capital of $82.4m, down from $120.6m at year-end. Total debt and capital leases were $52.6m, including $18.9m current. Unused capacity under revolving credit lines was $35.0m.
- Management stated that cash reserves, operating cash flow and borrowing capacity should fund operations for at least 12 months. Cash held by foreign subsidiaries was $5.9m and was not available to fund U.S. parent operations.
Changes versus prior comparable periods
- Q2 revenue rose 9%, driven principally by API sales, which increased to $7.8m from $1.4m, largely due to the timing of MannKind insulin API purchases. Finished-product revenue was nearly flat. For the first half, total revenue rose 6%, while finished-product revenue fell 3% and API revenue increased to $13.1m from $2.2m.
- Revenue mix shifted: medroxyprogesterone acetate launched in early 2018 and generated $6.4m in Q2; epinephrine revenue fell after the FDA-requested discontinuation of the vial product in 2017. First-half enoxaparin revenue fell 16%, and naloxone revenue fell 5%; phytonadione and lidocaine increased.
- Gross margin declined to 36.8% in Q2 and 33.4% for the first half. Management cited higher production and labor costs, new quality standards and the absence of discontinued epinephrine vial sales. Higher-margin medroxyprogesterone sales partly offset pressure. Inventory and purchase-commitment write-downs were $1.2m in Q2 and $3.1m for the half, compared with $4.7m and $5.1m, respectively, in 2017.
- First-half R&D expense increased 35% to $29.7m, including Primatene Mist pre-launch inventory and higher pipeline-related testing and materials. The prior-year first half included a $2.6m gain on the sale of injectable ANDAs; there was no comparable gain in 2018.
Outlook, risks and notable items
- No numerical revenue or earnings guidance was provided. Management expects R&D expense to increase as clinical trials, product development and filing costs rise; it also expects API sales to fluctuate and likely decrease given uncertainty around MannKind purchases. The company reported no significant backlog at June 30.
- Management warned that higher heparin input costs may pressure margins, while expecting launches of higher-margin products—including medroxyprogesterone, neostigmine and isoproterenol—to help offset the pressure. Isoproterenol launched in Q3, after the reporting period; sodium nitroprusside was described as a planned launch.
- Primatene Mist remained subject to FDA review. Following additional human-factors work, the company resubmitted its NDA; management discussed a planned launch later in 2018 but cautioned that approval and timing were uncertain.
- In July 2018, subsidiary ANP raised approximately $57.2m gross in a private placement; Amphastar retained about 58% ownership and continues consolidating ANP. Company executives and directors invested approximately $23.5m in aggregate through related arrangements. Proceeds are intended to support ANP’s expansion.
- Litigation remains material to monitor. In the enoxaparin patent case, the court entered judgment reflecting a jury verdict of patent invalidity and zero damages, but plaintiffs appealed; Amphastar is pursuing recovery of a $100.1m injunction bond, and the court deferred consideration until the appeal is resolved. A separate epinephrine patent-infringement complaint was filed in June 2018, and Amphastar moved to dismiss in July.
- Regulatory and operating risks include FDA enforcement concerning certain unapproved legacy products, supply dependence on sole or limited-source suppliers, and exposure to competition, foreign exchange and potential U.S.-China trade tariffs. A French subsidiary FDA inspection resulted in five Form 483 observations; one contract laboratory inspection resulted in one observation. The company said it had responded and expected the responses to satisfy FDA requirements.
- Three major wholesalers represented about 73% of Q2 revenue and about 81% of first-half revenue, underscoring customer concentration. The company also noted that it does not hedge foreign-currency exposure.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Debt covenants were met at June 30.
Important facts for investors to verify
- Whether API revenue and gross margins can be sustained as MannKind purchasing timing normalizes, and whether input-cost increases—especially heparin—outpace the benefit of new products.
- FDA progress and timing for Primatene Mist and other pending submissions, plus the status of the French facility and laboratory inspection observations.
- Developments in the enoxaparin appeal and bond claim, the epinephrine patent case, and other litigation exposure.
- Execution, funding use and governance implications of ANP’s private placement, including Amphastar’s retained ownership and continued consolidation.
- Capital spending, working-capital trends, debt maturities and borrowing availability; confirm the company’s stated 12-month liquidity outlook against subsequent results.
- Potential effects of trade tariffs, foreign-exchange movements, supplier constraints and concentrated wholesaler relationships.