Amphastar Pharmaceuticals, Inc. — Q3 2023 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2023. Amphastar develops, manufactures and sells generic and proprietary injectable, inhalation and intranasal pharmaceuticals, and insulin API. It reports finished pharmaceutical products and API as its two segments. The period includes the June 30 acquisition of BAQSIMI from Eli Lilly.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $180.6m | $120.1m | $466.3m | $364.0m |
| Gross profit | $108.4m | $58.5m | $255.0m | $177.7m |
| Gross margin | 60% | 49% | 55% | 49% |
| Operating income | $72.7m | $23.2m | $143.0m | $69.7m |
| Net income | $49.2m | $15.9m | $101.4m | $57.5m |
| Diluted EPS | $0.91 | $0.30 | $1.91 | $1.09 |
| Net cash from operating activities | — | — | $159.6m | $74.0m |
- Q3 revenue rose 50%; nine-month revenue rose 28%. BAQSIMI contributed $28.7m of reported revenue in both comparisons for the nine-month period and Q3, respectively; reported BAQSIMI revenue was recognized net, similar to a royalty arrangement.
- Q3 finished-product revenue excluding BAQSIMI was $147.7m, up 26%; API revenue was $4.2m, up 39%. Glucagon, Primatene MIST and lidocaine were among the products with higher Q3 sales. Phytonadione and naloxone declined.
- Cash and cash equivalents were $266.8m at September 30; restricted cash was $4.3m and short-term investments were $33.1m. Working capital was $285.0m, versus $283.5m at December 31, 2022. The company reported no borrowings on its $200m revolving facility.
- Debt was $653.9m before unamortized issuance costs; long-term debt, net of current portion and issuance costs, was $638.2m. Q3 interest expense was $13.7m versus $0.6m a year earlier. In October, Amphastar paid $50m on the Wells Fargo term loan, reducing its balance to $250m.
- Nine-month investing cash outflow was $546.1m, primarily reflecting $506.4m paid for the BAQSIMI acquisition and $28.7m of capital expenditures. Financing cash inflow was $501.2m, including debt issuance proceeds, partly offset by debt repayments, issuance costs and $58.1m of share repurchases.
Material changes and unusual items
- The BAQSIMI acquisition added $591.3m of product rights, amortized over an estimated 24-year life. Amphastar paid $500m at closing and owes a guaranteed $125m payment on the first anniversary, plus $4m for certain contract assignments. Additional milestone consideration could reach $450m; the company also assumed contingent obligations of up to $125m.
- Amphastar issued $345m of 2.00% convertible notes due 2029. Proceeds included repayment of approximately $200m of the Wells Fargo term loan and a $50m share repurchase. The notes have an initial conversion price of approximately $62.96 per share; conversion, repurchase and cash-settlement terms may affect liquidity and dilution.
- Q3 gross margin benefited from higher sales of certain higher-margin products and the net presentation of BAQSIMI revenue without related cost of revenue. Nine-month results included a $2.7m impairment of IMS (UK) product rights and inventory and purchase-commitment valuation charges. Nine-month 2022 other income included a $5.4m regadenoson litigation settlement.
- Share repurchases totaled $58.1m in the first nine months, including $50m in Q3. In August, the board authorized a further $50m increase to the buyback program.
Outlook, commentary and risks
- The filing gives no specific numerical revenue or earnings guidance. Management expects BAQSIMI U.S. marketing authorizations to transfer in Q1 2024 and expects to assume distribution responsibilities; thereafter, it expects to report gross BAQSIMI revenue and related cost of revenue rather than net revenue.
- Management expects R&D spending to increase annually, particularly for insulin and inhalation candidates, and anticipates higher Primatene MIST marketing spending. It expects higher-margin product sales and new launches to help offset increased labor and purchased-component costs; heparin costs may pressure margins.
- Sales of medroxyprogesterone were substantially halted from August after its API supplier discontinued supply. Amphastar is qualifying an internal source, but timing depends on FDA approval of the relevant Drug Master File. Management also notes competitive fluctuations in naloxone and enoxaparin sales and dependence on competitors’ supply for some products.
- BAQSIMI integration depends on transition and manufacturing services from Lilly, regulatory authorization transfers, and establishing supply, distribution and payer arrangements. Lilly’s manufacturing and transition support is limited to no more than 18 months.
- Risks include increased debt and interest obligations, variable-rate exposure, debt covenants and potential dilution or cash requirements under the convertible notes; supplier concentration and manufacturing interruptions; regulatory delays; and pricing, reimbursement, geopolitical and macroeconomic uncertainty. The company reported compliance with debt covenants at quarter end.
- An FDA pre-approval inspection of the IMS facility resulted in two Form 483 observations. Amphastar responded and stated it believed no significant further actions would be necessary. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- BAQSIMI sales, margin contribution and the timing and cost of transition from Lilly-supported net reporting to Amphastar’s own distribution and gross reporting.
- Funding of the $125m guaranteed BAQSIMI payment, other acquisition obligations and any sales-based milestone payments.
- Debt service capacity, interest-rate exposure, covenant headroom and potential cash or share settlement of the 2029 convertible notes.
- FDA approval timing for the replacement medroxyprogesterone API source, and supply continuity for products dependent on limited or foreign suppliers.
- Whether product-level revenue trends, customer concentration, inventory adjustments and working-capital movements persist; Q3 receivables were affected by the timing of Lilly’s BAQSIMI payment.