Amphastar Pharmaceuticals, Inc. — Q2 2023 Form 10-Q
Unaudited results for the quarter and six months ended June 30, 2023. Unless stated otherwise, financial amounts below are in U.S. dollars; statement amounts are in millions.
Business context and reporting period
Amphastar develops, manufactures, markets and sells generic and proprietary injectable, inhalation and intranasal pharmaceuticals, as well as insulin active pharmaceutical ingredients (API). It reports finished pharmaceutical products and API as its two segments.
On June 30, 2023, the company completed its acquisition of BAQSIMI, a glucagon nasal powder used for severe hypoglycemia. Because the acquisition closed on the final day of the quarter, no BAQSIMI revenue or cost of sales was recorded in Q2.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $145.7 | $123.5 | $285.7 | $243.8 |
| Gross profit | $72.7 | $63.4 | $146.6 | $119.2 |
| Gross margin | 49.9% | 51.3% | 51.3% | 48.9% |
| Operating income | $36.9 | $24.8 | $70.3 | $46.4 |
| Net income | $26.1 | $17.3 | $52.2 | $41.6 |
| Diluted EPS | $0.49 | $0.33 | $0.99 | $0.79 |
| Operating cash flow | Not separately presented | Not separately presented | $95.3 | $53.6 |
Q2 revenue grew 18% year over year, while net income grew about 51%. For the first half, revenue increased 17% and net income increased about 25%. Six-month cost of revenue included $10.2 million of inventory and firm-purchase-commitment charges, versus $8.6 million in the prior-year period, and a $2.7 million impairment charge on IMS (UK) product rights.
At June 30, cash and cash equivalents were $148.6 million; restricted cash was $2.7 million, and short-term investments were $14.5 million. Working capital was $133.3 million, down from $283.5 million at year-end 2022. Six-month operating cash flow was $95.3 million. Investing cash outflow was $514.9 million, principally reflecting the $500.8 million BAQSIMI cash acquisition payment and $18.5 million of property, plant and equipment spending. Financing cash inflow was $414.6 million, including $500 million of new term borrowing.
Total debt was $509.0 million gross at June 30, including a $500 million Wells Fargo term loan; the balance-sheet carrying amount of current and long-term debt was approximately $501.2 million after unamortized issuance costs. The loan matures in June 2028, has a variable SOFR-based rate, and requires scheduled principal payments. A $250 million interest-rate swap fixes that portion at 4.04%. The $200 million revolving facility was undrawn. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Finished-product revenue rose 19% in Q2 and 18% in the first half; API revenue declined 15% in Q2 and 4% in the first half.
- Glucagon revenue increased 131% in Q2 and 133% in the first half, mainly because two competitors discontinued glucagon injection products. Other finished-product sales also benefited from supplier shortages and newer product launches. Primatene MIST sales fell 13% in Q2 and 8% in the first half, largely due to retailer inventory drawdowns.
- Q2 gross margin declined to 49.9% from 51.3%, while first-half gross margin increased to 51.3% from 48.9%. Higher-margin product mix helped the first-half comparison; impairment and inventory-related charges weighed on results.
- Q2 operating expenses declined 7% overall, as research and development spending fell 26%, largely reflecting lower materials and supply spending. Selling, distribution and marketing rose 17%, and general and administrative expense rose 23%. First-half research and development expense declined 6%.
- Interest expense increased to $3.6 million in Q2 from $0.4 million, reflecting the new debt and related financing costs. First-half non-operating results also compared unfavorably with 2022, which included a $5.4 million Regadenoson litigation settlement.
- The BAQSIMI acquisition added $591.3 million of product rights and $34.4 million of property, plant and equipment to the acquired-asset allocation. The product rights are amortized over an estimated 24 years.
Outlook, risks, contingencies and unusual items
- No quantified company-wide revenue or earnings guidance is provided in the filing. Management expects BAQSIMI to contribute revenue, but cautions that acquisition benefits, integration and revenue assumptions are uncertain. Lilly is to provide certain manufacturing and transition services for up to 18 months.
- BAQSIMI consideration includes $500 million paid at closing, a guaranteed $125 million payment on the first anniversary, a $4 million payment tied to assignment of certain contracts, and up to $450 million of milestone consideration. The company also assumed contingent payments of up to $125 million tied to annual sales milestones.
- Management expects research and development expense to increase annually as insulin and inhalation clinical-trial spending rises. It expects increased marketing spending for Primatene MIST. Management believes higher-margin products and launches may help offset increased labor and component costs, but notes that heparin costs may fluctuate.
- Medroxyprogesterone sales are expected to stop temporarily in Q3 2023 after the API supplier discontinued the product. Amphastar is qualifying its subsidiary as a replacement supplier, but the timing of FDA approval of the required Drug Master File is uncertain. The product generated $4.6 million of Q2 sales and $10.0 million in the first half.
- Other key exposures include dependence on a limited number of suppliers, competitor-driven shortages and pricing or volume changes, and customer concentration: McKesson, AmerisourceBergen and Cardinal Health together represented 65% of Q2 revenue. The company reported a $6.5 million product backlog but said backlog historically has not reliably indicated future revenue.
- Debt increased materially to finance BAQSIMI. The term loan is variable-rate apart from the swapped portion, secured by substantially all U.S. assets, and subject to financial and operating covenants. Management said cash reserves, operating cash flow and borrowing availability should fund operations for at least 12 months from filing.
- The IMS facility received two FDA Form 483 observations following a February 2023 pre-approval inspection; the company responded and believed no significant further action would be necessary. Management also highlights regulatory, clinical-trial, manufacturing, China-related, geopolitical, inflation, interest-rate and drug-pricing risks. It reported no material change to other previously disclosed risk factors.
- The company recorded an immaterial valuation allowance expense for U.K. deferred tax assets and continues full valuation allowances for certain French and state deferred tax assets. Management said ordinary-course litigation was not expected to materially affect financial position, results or cash flows, while noting litigation outcomes are inherently unpredictable.
Most important facts for investors to verify
- BAQSIMI’s post-acquisition sales trajectory, integration progress, supply transition from Lilly and any milestone payments triggered by sales.
- The timing and effect of the $125 million anniversary payment, the additional contract-assignment payment and the assumed contingent consideration.
- Debt-service capacity, variable-rate exposure, covenant headroom and the company’s ability to sustain planned capital investment and share repurchases.
- FDA approval timing for the replacement medroxyprogesterone API supplier and the resulting duration of the sales interruption.
- Whether glucagon and other shortage-driven sales gains persist as competitors restore supply, and whether weaker products and customer inventory drawdowns continue.
- Resolution of the FDA inspection observations, key supplier constraints, and the effect of inventory charges and product-return or rebate estimates on future margins and cash flow.