Amphastar Pharmaceuticals, Inc. — Q1 2016 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. Amphastar develops, manufactures, and sells generic and proprietary injectable, inhalation, and intranasal medicines, as well as insulin active pharmaceutical ingredients (API). Its two reportable segments are finished pharmaceuticals and API. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $59.4 | $56.9 | Up 4% |
| Gross profit / margin | $24.9 / 42% | $13.3 / 23% | Margin up 19 percentage points |
| Operating income (loss) | $4.1 | $(7.3) | Turned profitable |
| Net income (loss) | $2.5 | $(0.7) | Turned profitable |
| Diluted EPS | $0.05 | $(0.01) | — |
| Operating cash flow | $13.9 | $1.3 | Up $12.6 |
- Finished pharmaceutical revenue grew 15% to $58.6 million; API revenue fell 86% to $0.8 million. Segment gross profit was $25.8 million for finished products and a $0.9 million loss for API.
- Enoxaparin revenue fell 23% to $18.4 million, principally due to lower average selling prices. Other finished-product revenue rose 49% to $40.2 million, including higher sales of naloxone ($10.3 million), lidocaine ($9.9 million), and phytonadione ($6.1 million).
- There were no RHI sales to MannKind in Q1 2016; API revenue declined $5.2 million year over year.
- Gross profit improved primarily from lower enoxaparin unit costs, lower heparin material costs, higher prices on several products, and increased manufacturing volume and overhead absorption.
- R&D expense rose 28% to $8.4 million, primarily from clinical trials, including intranasal naloxone, and higher personnel costs. G&A fell 13% to $10.9 million, largely because Q1 2015 included costs related to a $3.2 million employment-litigation settlement; legal and personnel costs partly offset the decline.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $63.3 million at March 31, 2016, down from $66.1 million at year-end 2015. Working capital was $108.5 million, down from $116.0 million.
- Operating cash flow of $13.9 million was offset by $9.4 million of investing outflows and $7.0 million of financing outflows; cash declined $2.7 million during the quarter.
- Total debt and capital leases were $40.3 million, including $11.2 million current; total debt declined $0.8 million from year-end. The company reported compliance with debt covenants and $40.0 million of unused revolving credit capacity.
- Investing included $4.0 million for Hikma product rights, $0.8 million for the Letop acquisition, and capital spending and related costs. The company repurchased 398,600 shares for $4.7 million under its $10 million buyback program; $5.1 million remained available at quarter-end.
- Management said cash, operating cash flows, and borrowing availability should fund operations for the next 12 months. It also expects cash requirements to rise with clinical development, regulatory work, facility investment, and potential acquisitions.
Outlook, risks, and notable items
- Management outlook: Management expects continued near-term enoxaparin price and volume pressure from competition, partly offset by price increases on other finished products. It expects insulin API sales to continue declining, particularly due to reduced MannKind purchases. Gross margin may vary with product mix; no quantified revenue or earnings guidance is provided.
- Pipeline and acquisitions: The company acquired 14 ANDAs from Hikma for $4.0 million and Letop for $0.8 million. Hikma products require manufacturing transfer and FDA approval before launch. The company reported more than 20 product candidates and ongoing development of generic and proprietary products.
- Regulatory and product risk: Primatene HFA remained subject to an FDA complete response letter and additional data requirements; approval and timing are uncertain. A March 2016 FDA inspection of the French facility resulted in multiple Form 483 observations; the company submitted a response and believed no further action would be necessary. A 2015 IMS inspection also had observations. The April 2016 Nanjing inspection occurred after quarter-end and reported no Form 483 observations.
- Legal contingencies: Enoxaparin patent litigation returned to the district court for further proceedings after an appellate ruling; the company intends to defend the case. In the False Claims Act matter against Aventis, the case had been dismissed and was on appeal; a May 2016 court order also sought explanations concerning possible sanctions against the company and outside counsel. The filing records approximately $0.4 million of patent-case fees and costs in Q1 2016. Outcomes remain uncertain.
- Controls: Management concluded disclosure controls were ineffective because of a material weakness in review of non-standard and complex transactions. Remediation was in progress, including plans for additional technical accounting staff and stronger review procedures. Management stated the reported financial statements were fairly presented in all material respects.
- Other commitments and risks: The company had $17.5 million of equipment and raw-material purchase commitments and committed a further $12.0 million to its Nanjing subsidiary by December 2017. Supplier concentration, manufacturing interruptions, FDA approvals, customer concentration, litigation, and unhedged foreign-currency exposure are significant risks. The company also disclosed that two shareholders had pledged 1.9 million shares for personal borrowing, creating potential forced-sale pressure on the stock.
Most important facts for investors to verify
- Whether enoxaparin pricing and volumes continue to decline, and whether other products can offset that pressure.
- Timing and extent of any resumed MannKind RHI purchases, and the impact of lower API sales on the French business.
- FDA progress for Primatene HFA and responses to inspection observations, including any effects on product launches or manufacturing.
- Developments in the enoxaparin patent, False Claims Act, and related sanctions proceedings and any resulting financial exposure.
- Progress remediating the material weakness, and the sustainability of improved gross margin, earnings, and operating cash flow.
- Acquisition integration costs, launch approvals for the Hikma products, and funding needs for capital commitments and pipeline development.