Amphastar Pharmaceuticals, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results. Amphastar develops, manufactures, markets, and sells generic and proprietary injectable and inhalation pharmaceuticals, with sales concentrated in the U.S.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenue | $49.0 million | $62.5 million | $94.9 million | $115.5 million |
| Gross profit | $15.0 million | $27.5 million | $27.5 million | $47.0 million |
| Gross margin | 31% | 44% | 29% | 41% |
| Operating income (loss) | $(1.2) million | $12.0 million | $(3.1) million | $14.3 million |
| Net income (loss) | $(1.2) million | $7.8 million | $(2.8) million | $10.2 million |
| Diluted EPS | $(0.03) | $0.20 | $(0.07) | $0.26 |
- Revenue and margins: Q2 revenue fell 22%; six-month revenue fell 18%. Enoxaparin revenue declined 34% in Q2 and 29% for the half, primarily because of lower units and selling prices. Other-product revenue increased 3% in both comparisons, supported by naloxone, partly offset by weaker sales of other injectables and Cortrosyn. Management attributed lower gross margins chiefly to enoxaparin price declines.
- Expenses: Q2 general and administrative expense increased 33% to $8.6 million, mainly from compensation and stock-based compensation. R&D decreased 23% to $6.0 million, primarily because of lower pre-launch inventory expense. Six-month G&A rose 15% to $15.5 million and R&D fell 27% to $12.2 million. The company recorded $0.2 million of Q2 and $0.3 million of six-month long-lived asset impairment, mainly on equipment for abandoned projects.
- Cash flow: Six-month operating cash flow was $(4.9) million, versus $21.8 million provided in the prior-year period. Inventory growth, primarily for enoxaparin, was a significant cash use. Investing cash flow was $(26.7) million, including the French acquisition and capital spending; financing cash flow was $42.1 million, principally reflecting IPO proceeds and borrowings. Cash and equivalents ended the period at $64.1 million, up from $53.6 million.
- Liquidity and debt: Working capital was $157.9 million, compared with $107.6 million at year-end 2013. Total debt and capital leases were $53.5 million, up from $32.2 million; $10.7 million was current and $42.9 million long-term. The company reported $38.0 million of unused revolving-credit capacity and said cash reserves, operating cash flows, and credit availability should meet needs for the foreseeable future. It reported compliance with debt covenants.
- Other balance-sheet changes: Net inventory increased to $106.0 million from $69.9 million. Total assets were $397.3 million and stockholders’ equity was $287.7 million at June 30, 2014.
Material developments and outlook
- France acquisition: On April 30, Amphastar acquired Merck’s API manufacturing business in Éragny-sur-Epte, France, for approximately $34.4 million, payable over time. The site makes porcine and recombinant human insulin API. Purchase accounting remained preliminary. The acquisition was financed partly with a $21.9 million variable-rate Cathay Bank loan and a $15.9 million payment obligation to Merck at quarter-end.
- IPO: The June offering generated $40.9 million gross proceeds and $34.7 million net proceeds for Amphastar. The company reported 44.6 million common shares outstanding at June 30.
- Management outlook: No specific revenue or earnings guidance was provided. The filing cautions that results may not indicate future performance and identifies the possibility of near-term losses as enoxaparin sales and pricing weaken while the company invests in new products.
- Subsequent supply agreement: On July 31, 2014, the French subsidiary agreed to supply recombinant human insulin to MannKind for AFREZZA. MannKind committed to annual minimum purchases with an aggregate stated value of approximately €120.1 million (about $160.7 million) for calendar years 2015–2019 and paid a non-refundable €11.0 million reservation fee. The agreement includes termination provisions; certain terminations require payment of remaining purchase commitments.
Risks, contingencies, and unusual items
- Regulatory: FDA issued a complete response letter for Primatene Mist HFA in May, requiring additional nonclinical information, label revisions, and consumer-use studies. The FDA also cited supplier manufacturing deficiencies; the supplier said these were resolved, but approval remained uncertain. FDA inspections found multiple Form 483 observations at the Nanjing facility in March–April and in a separate inspection during July–August; the company planned to respond to the latter observations by August 25, 2014.
- Concentration and supply: Enoxaparin was 56% of Q2 revenue. Actavis represented 35% of Q2 revenue and 45% of receivables at June 30; the three large wholesalers also represented substantial sales. The company depends on some single- or limited-source suppliers and warned that interruptions could materially affect operations.
- Litigation: Amphastar prevailed at the district court in enoxaparin patent litigation, but Momenta and Sandoz appealed. Amphastar intended to seek recovery of their $100.1 million bond. Separately, the company’s False Claims Act case against Aventis remained pending, with an evidentiary hearing and further proceedings scheduled; any recovery is uncertain. Management said other ordinary-course claims were not expected to materially affect results, while noting litigation outcomes are unpredictable.
- China investment and environmental matters: Amphastar had invested $37.8 million of a $61.0 million registered-capital commitment to its China subsidiary; the remaining $23.2 million was due by December 2014. Delayed development of China properties could lead to potential contractual penalties, and discussions with the government entity were ongoing. Merck agreed to cover remediation costs for identified potential minor environmental issues at the acquired French site, within specified limits.
- Market and currency exposure: $31.9 million of debt carried variable rates; a 100-basis-point increase would raise annual interest expense by about $0.3 million. The company did not hedge foreign-currency exposure. It also identified pricing competition, customer concentration, reimbursement, product liability, regulatory compliance, and product approval as material risks.
Key facts investors should verify
- Whether enoxaparin unit sales, pricing, and gross margins stabilize, and whether other products can offset the decline.
- Progress and FDA requirements for Primatene Mist HFA, corrective actions at inspected facilities, and any impact on product approvals or supply.
- Conversion of the French acquisition into revenue and cash flow, completion of purchase accounting, and fulfillment of MannKind’s minimum purchase commitments.
- Operating cash flow, inventory levels, debt repayment and covenant compliance, including the effect of variable interest rates and acquisition-related payments.
- Outcomes of the enoxaparin appeal and False Claims Act proceedings, and the timing or collectability of any potential bond recovery or litigation proceeds.