Amphastar Pharmaceuticals, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company develops, manufactures, markets, and sells generic and proprietary injectable, inhalation, and intranasal medicines, as well as insulin active pharmaceutical ingredients (API). Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $83.4 | $80.1 | $253.9 | $239.0 |
| Gross profit / margin | $36.5 / 43.8% | $35.3 / 44.0% | $106.5 / 42.0% | $98.5 / 41.2% |
| Operating income | $3.5 | $2.4 | $8.1 | $0.2 |
| Net income attributable to Amphastar | $3.9 | $1.3 | $7.7 | $50.0 |
| Diluted earnings per share | $0.08 | $0.03 | $0.16 | $1.00 |
- Q3 revenue rose 4%; finished pharmaceutical product revenue increased 7% to $81.3 million, while API revenue fell 52% to $2.1 million. For the nine-month period, revenue rose 6%; finished products increased 9% and API declined 31%.
- Key Q3 product movements: Primatene Mist revenue was $13.0 million versus $3.7 million; enoxaparin rose 22% to $11.6 million; epinephrine rose 43% to $5.4 million. Naloxone fell 18% to $8.7 million, and lidocaine fell 9% to $10.7 million.
- API gross profit was negative $3.0 million in Q3 and negative $7.3 million year to date; finished-product gross profit was $39.5 million and $113.8 million, respectively.
- Nine-month operating cash flow was $40.4 million, compared with $36.1 million. Capital expenditures were $24.5 million, versus $33.1 million; cash used in financing was $2.0 million, versus cash provided of $6.6 million. Cash, cash equivalents, and restricted cash ended at $89.8 million.
- At September 30, cash and cash equivalents were $87.9 million; short-term investments were $10.9 million. Working capital was $179.8 million, up from $165.2 million at year-end 2019. Total debt was $45.1 million, down from $47.1 million; unused revolving credit capacity was $59.2 million. The company reported compliance with debt covenants.
Material changes and unusual items
- Primatene Mist growth reflected continuing national advertising, online sales, and shipments to Kroger beginning in September. The company launched a 30 mg/30 mL multiple-dose epinephrine vial in May 2020.
- Q3 gross margin was essentially unchanged year over year. For the first nine months, margin improved to 42% from 41%, helped by higher-margin Primatene Mist and epinephrine sales, partly offset by inventory reserves, including a $3.8 million reserve for crude-heparin purchases and commitments at ANP.
- Nine-month 2019 results included a $59.9 million gain from settlement of the Momenta/Sandoz enoxaparin patent and antitrust litigation. This largely explains why nine-month 2019 net income attributable to Amphastar substantially exceeded 2020; it is not a like-for-like operating comparison.
- General and administrative expense for the first nine months of 2020 included $4.9 million of cash and share-based compensation related to a former executive’s separation agreement. The agreement also accelerated vesting of certain awards.
- The company repurchased $21.0 million of shares in the first nine months and authorized a further $20.0 million increase to its buyback program in August. The stated primary purpose is to offset equity-compensation dilution.
Outlook, risks, and contingencies
- No specific numerical revenue or earnings guidance is provided. Management expects research and development spending to increase over time as clinical-trial activity expands, and expects higher Primatene Mist marketing expenditures. Management said the company’s cash, operating cash flows, and borrowing capacity should fund operations for at least 12 months from the filing date.
- Management expects enoxaparin and naloxone sales to fluctuate with competition. API sales may fluctuate or decrease because of customer-purchase timing, uncertainty under the MannKind supply agreement, and euro/U.S. dollar movements. Rising heparin costs may pressure margins; management expects higher-margin products to help offset this pressure.
- COVID-19 caused temporary disruption to China operations, which resumed full operation in February; facilities continued operating with enhanced safety measures. Demand for some hospital and elective-procedure products varied during the pandemic, and some clinical-trial recruitment was interrupted. The overall future effect remains uncertain, including possible resurgences, economic weakness, supply interruptions, or distribution constraints.
- Risks include reliance on limited or single-source suppliers, manufacturing and construction execution (including in China), FDA approval and compliance requirements, competition and product pricing, and customer concentration: AmerisourceBergen, McKesson, and Cardinal together accounted for substantial portions of revenue and receivables.
- Litigation matters include a pending Regadenoson patent case, with trial scheduled for June 2021 and an FDA stay expiring August 2022; several California employment/PAGA matters; and an unresolved request for attorneys’ fees in the dismissed False Claims Act case. The Belcher epinephrine patent case was dismissed with prejudice, and the Vasopressin patent litigation was settled and dismissed. Management does not expect current matters to materially affect financial position, results, or cash flows, but notes litigation outcomes are unpredictable.
- A second-quarter 2020 cyber-event temporarily disrupted some internal systems; the company said certain current and former employees’ personal information was obtained. It notified affected individuals and regulators as considered required or appropriate and incurred response costs.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing also notes that some marketed prescription products lack FDA approval and may be subject to regulatory action.
Investor facts to verify
- Whether Primatene Mist and newly launched epinephrine sales can sustain growth, and how competition affects enoxaparin and naloxone.
- Whether API losses, crude-heparin reserves, and higher input costs continue to weigh on gross margin.
- Cash generation relative to planned facility investment, debt maturities, and the pace of share repurchases.
- COVID-19 effects on product demand, supply continuity, and clinical-trial schedules, alongside developments in the identified litigation and cyber-risk matters.