Amphastar Pharmaceuticals, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited; amounts below are in U.S. dollars unless noted. Amphastar develops, manufactures, markets, and sells generic and proprietary injectable and inhalation drugs, and insulin active pharmaceutical ingredients (API).
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenue | $63.9 million | $59.7 million | $174.6 million | $154.6 million |
| Gross profit | $17.6 million | $11.8 million | $44.2 million | $39.3 million |
| Gross margin | 28% | 20% | 25% | 25% |
| Operating loss | $3.7 million | $7.8 million | $21.3 million | $11.0 million |
| Net loss | $3.0 million | $5.4 million | $10.3 million | $8.2 million |
| Diluted loss per share | $0.07 | $0.12 | $0.23 | $0.20 |
- Q3 revenue rose 7%; nine-month revenue rose 13%. Other finished products, notably naloxone, and insulin API drove growth, offsetting lower enoxaparin revenue.
- Enoxaparin revenue declined 34% in Q3 and 24% for the nine-month period, mainly due to lower average selling prices. Other finished-product revenue rose 69% in Q3, including higher naloxone volumes and prices. Nine-month API revenue increased to $15.8 million from $6.1 million, reflecting the acquired insulin business and MannKind supply sales.
- Q3 gross margin improved to 28%, primarily due to higher prices for naloxone and other finished products and lower unit costs for enoxaparin. Nine-month margin was unchanged at 25%; API generated a gross loss of $0.6 million for the nine months and $1.7 million in Q3.
- Research and development expense increased 37% to $28.4 million for nine months, including higher clinical-trial costs and pre-launch materials. General and administrative expense increased 31% to $32.8 million, including a $3.2 million employment-settlement accrual plus payroll taxes and higher public-company, compliance, and acquired French-subsidiary costs.
- Cash and cash equivalents were $70.7 million at September 30, versus $67.8 million at year-end 2014. Working capital was $128.4 million, down from $135.4 million. Total debt and capital leases were $46.1 million, including $14.8 million current; unused revolving-credit capacity was $30 million.
- Nine-month operating cash flow was $7.4 million, compared with $8.7 million in 2014. Investing cash use was $12.5 million, chiefly for property and equipment; financing provided $7.8 million. Capital expenditures, including capitalized costs, were approximately $11.9 million.
Changes, outlook, and material matters
- Management expects further enoxaparin price and near-term volume pressure following Teva’s competing product launch in February 2015; it expects price increases on some other finished products to partly offset the impact. Management also anticipates higher insulin API sales under the MannKind agreement, while noting euro weakness reduces reported API revenue.
- Management expects continued substantial R&D investment and increasing annual R&D costs over the next several years. It also expects annual G&A costs to rise due to public-company expenses and Sarbanes-Oxley compliance.
- Management stated that cash reserves, operating cash flow, and available revolving credit should fund operations for the next 12 months. The filing provides no specific earnings or revenue guidance.
- Amphadase received FDA approval in June 2015 and was relaunched in October 2015. The company reported 21 product candidates in development and four FDA applications filed (three ANDAs and one NDA).
- Risks include customer concentration, limited or single-source suppliers and supply interruptions, manufacturing and regulatory issues, and unhedged foreign-currency exposure. Five named major customers collectively accounted for significant revenue and receivables; MannKind’s supply agreement includes minimum purchase commitments but also termination provisions.
- The company reported multiple FDA Form 483 observations following an inspection of its IMS facility in July–August 2015 and said it responded on August 31. Its French facility received GMP compliance certification valid through January 2018 after an inspection and responses to observations.
- Litigation developments: the California employment settlement was finally approved November 5, 2015 for $3.2 million plus applicable payroll taxes. On November 10, 2015, the Federal Circuit affirmed part of the enoxaparin patent decision but vacated part and remanded for further proceedings. The company’s False Claims Act case against Aventis had been dismissed in July 2015; appeals were pending, and Aventis sought penalties and other relief in November, which Amphastar said it would contest.
- Debt covenants were met at September 30, 2015; the company had received waivers for two covenant breaches at December 31, 2014. A $10 million share-buyback increase was authorized in November 2015, after quarter-end.
Important facts for investors to verify
- Whether enoxaparin pricing and volumes continue to decline, and whether growth and price increases in other products offset that pressure.
- Execution, production economics, customer demand, and euro-related exposure for the MannKind insulin API supply agreement; API segment gross losses merit monitoring.
- Progress and costs for the R&D pipeline, including intranasal naloxone, and regulatory milestones for Primatene Mist HFA; FDA approval of Primatene Mist HFA was not assured.
- Resolution of the enoxaparin patent litigation and the False Claims Act appeal, including any potential financial exposure or recovery.
- Cash generation, capital spending, current debt maturities, covenant compliance, and the company’s ability to maintain liquidity while funding investment and repurchases.
- Any further FDA follow-up at IMS, supplier disruptions, customer concentration changes, and developments in the employment settlement and other claims.