Amphastar Pharmaceuticals, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. Comparisons are with Q1 2022 unless otherwise noted. Amounts below are in U.S. dollars.
Business context and financial performance
Amphastar develops, manufactures, markets and sells technically challenging generic and proprietary injectable, inhalation and intranasal medicines, as well as insulin active pharmaceutical ingredients (API). It reports two segments: finished pharmaceutical products and API.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenue | $140.0 million | $120.4 million | +16% |
| Gross profit / margin | $73.8 million / 52.7% | $55.8 million / 46.4% | +32% gross profit |
| Operating income / margin | $33.4 million / 23.9% | $21.6 million / 18.0% | +55% operating income |
| Net income | $26.0 million | $24.3 million | +7% |
| Diluted earnings per share | $0.50 | $0.47 | +$0.03 |
| Cash provided by operating activities | $40.4 million | $50.8 million | −20% |
Finished-product revenue increased 17% to $136.0 million; API revenue rose 5% to $4.0 million. Finished-product gross profit was $76.2 million, while API recorded a gross loss of $2.3 million. At the product level, glucagon revenue increased 134% to $25.7 million, epinephrine rose 33% to $20.1 million and lidocaine rose 29% to $13.6 million. Primatene MIST revenue declined 5% to $23.5 million; phytonadione fell 26% to $7.7 million and naloxone fell 33% to $5.0 million.
Cash and cash equivalents were $176.6 million at quarter-end; short-term investments were $16.3 million and working capital was $302.0 million. Total debt was $76.5 million, including $2.2 million current. The company reported compliance with debt covenants. Current assets were $407.7 million and current liabilities $105.6 million. Capital expenditures were $9.5 million.
Material changes and unusual items
- Higher sales of glucagon and epinephrine, plus launches of ganirelix and vasopressin in 2022, supported revenue and gross-margin expansion. Management also cited increased labor, material and overhead costs.
- Operating expenses rose 18% to $40.4 million: R&D increased 22% to $19.8 million, selling and marketing rose 29% to $7.1 million, and general and administrative expense increased 8% to $13.5 million.
- Q1 2022 included $5.4 million of income from settlement of Regadenoson patent litigation. Other income/expense was a $0.4 million expense in Q1 2023 versus $7.6 million income in Q1 2022, contributing to the smaller increase in net income than operating income.
- Operating cash flow declined partly because of working-capital timing, including higher accounts receivable; Q1 2022 had benefited from a net cash inflow from operating asset and liability changes.
- The company repurchased 263,131 shares for $8.0 million in Q1 2023. As of March 31, $35.6 million remained under the then-current buyback authorization.
Outlook, developments and risks
- Management expects higher R&D spending, including clinical-trial costs for insulin and inhalation candidates, and expects selling and marketing expense to increase with Primatene MIST advertising. It expects higher-margin product sales and launches to help offset cost inflation, but notes that margins may be pressured by labor, purchased components and heparin costs. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Management reported a $4.9 million backlog at March 31, attributed partly to competitor shortages and supplier constraints; it had reduced backlog by $2.1 million during Q1 and expected further reduction. It cautioned that historical backlog has not been a meaningful indicator of overall revenue or performance.
- On April 20, 2023, after quarter-end, Amphastar agreed to acquire Lilly’s BAQSIMI glucagon nasal powder business for $500 million cash at closing, plus a guaranteed $125 million payment on the first anniversary and up to $450 million in additional milestone consideration. It will also assume certain earnout obligations of up to $125 million. The deal remained subject to customary closing conditions, including antitrust review; the agreement allows termination if not completed by October 21, 2023, and certain termination circumstances could trigger a $5 million fee.
- Lenders committed to financing that includes a $500 million senior secured term loan and a $150 million revolving facility, subject to conditions and definitive documentation. The company identified increased leverage, interest and principal obligations, covenant constraints, integration execution, and BAQSIMI revenue assumptions as risks. It also expects to rely on Lilly for transition and manufacturing services and to establish certain supply, distribution and payer arrangements.
- Other risks include dependence on limited or single-source suppliers, manufacturing and supply-chain exposure in China, competitive product and pricing dynamics, inflation and interest rates, healthcare regulation, and potential COVID-19 or geopolitical disruptions. Three wholesale distributors accounted for 63% of Q1 revenue and 68% of accounts receivable at March 31.
- An FDA pre-approval inspection of the IMS facility in February 2023 resulted in two Form 483 observations. The company said it had responded and believed no significant further action would be necessary; this is management’s assessment, not an FDA determination.
- Purchase commitments for equipment and raw materials totaled approximately $60.1 million at March 31. The company reported various ordinary-course claims and litigation, but said their resolution was not expected to materially affect its financial position, results or cash flows; outcomes remain uncertain.
- Management said cash reserves, operating cash flow and borrowing availability were expected to fund operations for at least 12 months from the filing date. Foreign subsidiaries held $15.2 million of cash and cash equivalents that management said was not available to fund U.S. parent operations.
Most important facts for investors to verify
- BAQSIMI closing status, total funding needs, final debt terms and covenants, and the effect of the acquisition’s fixed and contingent payments on leverage and liquidity.
- BAQSIMI sales assumptions, customer and supplier retention, transition arrangements, and the company’s ability to integrate the business and achieve anticipated benefits.
- Whether product-level revenue trends persist, especially glucagon and epinephrine growth and declines in Primatene MIST, phytonadione and naloxone.
- Whether the company reduces backlog as expected and resolves supplier constraints without disrupting production or margins.
- FDA follow-up to the two Form 483 observations and progress on regulatory approvals, launches and clinical trials.
- Cash conversion, receivables and working-capital movements, capital spending, buybacks, and the availability of cash held by foreign subsidiaries.