Business context and reporting period
Amphastar Pharmaceuticals, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019; it also reports unaudited fourth-quarter results. The company develops, manufactures and sells technically challenging generic and proprietary injectable, inhalation and intranasal medicines, and insulin active pharmaceutical ingredients (API). It marketed more than 20 products and reported a pipeline of 15 generic ANDAs, three insulin biosimilar candidates and four proprietary candidates. The filing was signed March 16, 2020.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net revenue | $322.4 million | $294.7 million |
| Gross profit / gross margin | $131.9 million / 40.9% | $107.0 million / 36.3% |
| Operating income (loss) | $(0.04) million | $(8.6) million |
| Net income (loss), consolidated | $46.5 million | $(6.7) million |
| Net income (loss) attributable to Amphastar | $48.9 million; diluted EPS $0.98 | $(5.7) million; diluted EPS $(0.12) |
| Operating cash flow | $41.8 million | $38.2 million |
| Cash, restricted cash and short-term investments | $89.5 million | $93.3 million |
| Working capital | $165.2 million | $113.5 million |
| Total debt and finance leases | $47.1 million | $50.2 million |
Revenue increased 9% year over year, primarily from finished pharmaceuticals, whose sales rose 11% to $302.0 million. API revenue declined 14% to $20.4 million. The $59.9 million settlement payment from Momenta Pharmaceuticals and Sandoz was recorded as other income and was the principal reason for the reported annual profit; operating results remained approximately break-even. Consolidated net income differs from income attributable to Amphastar because of losses allocated to non-controlling interests.
Gross margin improved, aided by Primatene Mist sales and higher average selling prices for phytonadione. Research and development expense increased 20% to $68.9 million, while selling, distribution and marketing expense rose 57% to $12.8 million, largely reflecting Primatene Mist advertising. The API segment recorded a gross loss of $4.7 million.
In Q4 2019, revenue was $83.4 million, compared with $89.7 million in Q4 2018; gross profit was $33.4 million versus $34.7 million. Amphastar-attributable net loss was $1.0 million, compared with attributable net income of $1.9 million a year earlier.
Material changes versus the prior comparable period
- Revenue growth and a higher gross margin accompanied sharply improved annual net income, but the improvement depended heavily on the one-time litigation settlement.
- Primatene Mist revenue rose to $18.1 million from $3.6 million as the product had a full year of sales; a nationwide radio and television campaign began in July 2019.
- Enoxaparin revenue fell 20% to $42.7 million, with lower unit volume from competition partly offset by higher average selling prices from customer mix. Naloxone revenue declined 7% to $34.8 million.
- Inventory increased to $110.5 million from $69.3 million, including higher raw-material purchases and production for enoxaparin and Primatene Mist. Operating cash flow increased modestly despite this working-capital use.
- Total debt fell by $3.1 million. The company repurchased $22.3 million of shares during 2019.
Outlook, risks, contingencies and unusual items
- No quantified revenue or earnings guidance is provided. Management expects research and development expense to rise as clinical trials progress, particularly for biosimilar and inhalation candidates, and expects continued Primatene Mist marketing spending and higher public-company compliance costs.
- Management said cash reserves, operating cash flow and available borrowing capacity should fund operations for at least 12 months. It reported $41.4 million of unused borrowing capacity at year-end. This outlook is subject to execution, regulatory and market risks.
- Competition and pricing pressure remain material, particularly for enoxaparin; the company also warns that lidocaine, phytonadione and other established products contribute significantly to revenue. Its three largest wholesale customers accounted for 71% of 2019 revenue.
- Supply-chain exposure includes single-source suppliers and animal-derived heparin. In February 2020, the company received notice that a permit to import heparin from one Chinese supplier would not be renewed; it said existing U.S. supply was sufficient for the foreseeable future while it sought renewal and evaluated ANP-produced material.
- The filing identifies COVID-19, African swine fever-related import restrictions, China operations, tariffs and foreign exchange as potential risks. A 10% unfavorable currency move was estimated to reduce foreign currency gains by about $2.5 million and other comprehensive income by about $3.5 million.
- FDA inspections in 2019 generated Form 483 observations at Rancho Cucamonga, South El Monte and ANP. The company reported responses to observations; an additional response concerning the South El Monte inspection was planned for March 2020. FDA approvals and pipeline timing remain uncertain.
- Material legal matters include the settled enoxaparin litigation; a pending fee application in a dismissed False Claims Act case; patent litigation involving vasopressin and epinephrine; and litigation filed in February 2020 concerning regadenoson, plus employment claims. Management said it did not expect other matters to materially affect results, while noting litigation outcomes are unpredictable.
- The company reported $38.0 million in purchase commitments, principally for inventory, equipment and manufacturing needs, and $120.5 million in total contractual obligations. It had $8.3 million of unrecognized tax benefits. The Primatene trademark and goodwill showed no impairment in 2019.
- The financial statements received an unqualified audit opinion; management and the auditor concluded internal control over financial reporting was effective at December 31, 2019.
Most important facts for investors to verify
- How much of 2019 profitability and cash generation is attributable to the nonrecurring $59.9 million settlement, and what underlying operating profitability looks like without it.
- Whether enoxaparin revenue, pricing and margins stabilize, and whether growth in Primatene Mist and other products offsets declines in established products.
- Whether heparin import permissions and alternative supply arrangements support uninterrupted production, including the use of ANP-manufactured material.
- Progress, cost and FDA review outcomes for the ANDA, biosimilar and proprietary pipeline, and resolution of inspection observations and pending litigation.
- Inventory conversion, customer concentration, available liquidity and compliance with debt covenants as capital spending and research investment continue.