Amphastar Pharmaceuticals, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless otherwise indicated.
Business context
Amphastar develops, manufactures, and sells technically challenging generic and proprietary injectable and inhalation drugs, and insulin active pharmaceutical ingredients (API). Its two reportable segments are finished pharmaceutical products and API. Enoxaparin remained its largest product by revenue. In June, the FDA approved an Amphadase supplement, qualifying the Nanjing facility for the relevant starting material; Amphastar expected to relaunch Amphadase in Q4 2015.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $53.9m | $49.0m | $110.7m | $94.9m |
| Gross profit / margin | $13.3m / 25% | $15.0m / 31% | $26.6m / 24% | $27.5m / 29% |
| Operating expenses | $23.6m | $16.2m | $44.1m | $30.6m |
| Operating loss | $(10.3)m | $(1.2)m | $(17.5)m | $(3.1)m |
| Net loss | $(6.6)m | $(1.2)m | $(7.3)m | $(2.8)m |
| Net loss per diluted share | $(0.15) | $(0.03) | $(0.16) | $(0.07) |
- Revenue mix: Q2 finished-product revenue was $50.1m and API revenue $3.8m, versus $48.9m and $0.1m, respectively, in Q2 2014. For the first half, those segments generated $100.9m and $9.8m.
- Cash flow: First-half operating cash flow was $3.8m, compared with cash used of $4.9m in 2014. Investing used $8.8m, principally for capital expenditures and equipment deposits; financing provided $11.5m. Cash and cash equivalents ended at $74.5m.
- Balance sheet: Working capital was $134.5m, down from $135.4m at year-end 2014. Total debt and capital leases were $47.4m, including $12.6m current and $34.8m long-term; unused revolving-credit capacity was $30.0m. Total assets were $398.9m.
- Management said available cash, operating cash flows, and credit availability should fund operations for the next 12 months; this is a forward-looking assessment, not a guarantee.
Material changes versus comparable periods
- First-half revenue rose 17%, but gross profit fell 3% and gross margin declined to 24% from 29%. Q2 revenue increased 10%, while gross profit fell 11% and margin declined to 25% from 31%.
- Enoxaparin revenue declined 28% in Q2 and 19% for the first half, despite higher unit volumes, as average selling prices fell. Management expected further pricing and volume pressure after Teva launched a competing product in February 2015.
- Growth in naloxone, other finished products, and insulin API offset the enoxaparin decline. First-half API revenue increased to $9.8m from $0.1m, reflecting the acquired insulin business and sales under the MannKind arrangement.
- Operating costs increased materially: first-half G&A rose 53%, including a $3.2m accrual for an employment-litigation settlement, and R&D rose 42%, driven in part by naloxone nasal clinical work and development materials. Management expected R&D investment to continue and increase over the next several years.
- The effective tax benefit was unusually high for the first half (reported tax benefit of $9.1m, or 55.5% of pretax loss), partly reflecting reversal of a deferred-tax valuation allowance in Q1.
Outlook, risks, and unusual items
- Management anticipated further enoxaparin price and volume declines, partly offset by pricing increases on certain other finished products, and expected insulin API sales to increase under the MannKind supply agreement. A weaker euro was expected to weigh on API revenue; the company does not hedge its foreign-currency exposure.
- The MannKind agreement includes approximately $146m of aggregate minimum purchases for 2015–2019, subject to the agreement’s terms and termination provisions. The filing reports $3.8m of related deferred revenue at June 30, 2015.
- Regulatory risk remains important. The Primatene Mist HFA application had received an FDA complete response letter requiring additional information and studies; approval and timing were uncertain. Amphastar also reported multiple FDA Form 483 observations from an inspection of its IMS facility conducted July 22–August 10, after quarter-end, and planned to respond by August 31.
- Amphastar disclosed reliance on major wholesale customers and certain limited-source suppliers; interruptions, regulatory issues, or manufacturing problems could affect sales. It also noted that a 10% currency-rate move could materially affect financial position, results, or cash flows.
- Legal matters include an enoxaparin patent appeal, a False Claims Act case dismissed in July 2015 with appeals filed, and a proposed $3.2m California employment settlement plus payroll taxes, preliminarily approved by the court in July and awaiting final approval.
- At June 30, the company was in compliance with debt covenants; it had obtained waivers in March for two covenant failures at December 31, 2014. Debt includes secured borrowings and restrictions on certain actions.
- Management reported no material change in previously disclosed risk factors and assessed disclosure controls as effective. No material change to internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether enoxaparin pricing and volumes continue to decline, and whether growth in other products offsets the resulting margin pressure.
- Actual sales, collections, and purchase performance under the MannKind supply agreement, including any impact from euro exchange rates.
- Progress toward Amphadase relaunch and resolution of Primatene Mist HFA FDA requirements; follow-up on the IMS inspection observations.
- Final court approval and cash cost of the employment settlement, plus developments in the patent and False Claims Act appeals.
- Cash generation, capital spending, near-term debt maturities, covenant compliance, and the basis for management’s 12-month liquidity assessment.