Amphastar Pharmaceuticals, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Unless stated otherwise, financial amounts are in U.S. dollars. Amphastar develops, manufactures, markets, and sells injectable and inhalation pharmaceuticals and insulin active pharmaceutical ingredients (API).
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenue | $56.9 million | $45.9 million | +24% |
| Gross profit / margin | $13.3 million / 23% | $12.5 million / 27% | Profit +6%; margin lower |
| Operating expenses | $20.5 million | $14.5 million | +$6.1 million |
| Operating loss | $(7.3) million | $(2.0) million | Loss widened |
| Net loss | $(0.7) million | $(1.6) million | Loss narrowed |
| Operating cash flow | $1.3 million | $(5.8) million | Improved |
- Revenue growth was driven by $6.0 million of API sales from the Merck insulin business acquired in April 2014, and higher sales of other finished products. Enoxaparin revenue fell 9% to $23.8 million; other finished-product revenue rose 37% to $27.0 million.
- Gross margin declined primarily because of lower enoxaparin pricing. Cost of revenue rose 31% to $43.6 million.
- General and administrative expense increased 82% to $12.5 million, including the acquired French business and a $3.2 million accrual for a California employment-litigation settlement, plus applicable payroll taxes.
- The $5.5 million income tax benefit, versus $0.9 million in Q1 2014, substantially reduced the reported net loss. The filing attributes the increase mainly to the pretax loss and reversal of a deferred-tax valuation allowance.
- Cash and cash equivalents were $68.6 million at quarter-end, versus $67.8 million at year-end 2014; restricted cash and short-term investments were an additional $1.5 million. Working capital was $130.5 million, down from $135.4 million.
- Investing cash outflow was $5.0 million, mainly for property, equipment, and related costs. Financing cash inflow was $4.4 million, including $6.8 million of new debt proceeds; cash increased by $0.8 million overall.
- Total debt and capital leases were $48.4 million, including $12.5 million current and $35.9 million long-term, up $4.7 million from December 31, 2014. The increase was primarily the January $6.2 million equipment-facility draw, subsequently converted to a loan. The company reported $30.0 million of unused revolving credit capacity.
Material changes, outlook, and risks
- Management outlook: Amphastar expected further enoxaparin price declines and lower unit volume in 2015 following Teva’s competing product launch in February. It expected pricing increases on certain other finished products to partly offset pressure on revenue and margins. Management anticipated increased insulin API sales under its MannKind supply agreement, but warned that euro weakness could reduce reported API revenue. No specific earnings or revenue guidance was provided.
- Customer and supply exposure: Five major customers represented significant shares of revenue; Actavis contributed 23%, and the three named wholesalers together contributed 53% in Q1 2015. The company also relies on some single- or limited-source suppliers, whose replacement may require regulatory approval.
- Product and regulatory risk: The FDA had issued a complete response letter on the Primatene Mist HFA application, requiring additional information, studies, and label revisions. Amphastar said it was preparing an amendment, but approval and timing were uncertain. The company had $3.6 million of equipment specifically intended for that product.
- Acquired API operations: MannKind’s agreement includes minimum purchase commitments for 2015–2019 totaling approximately $146 million, subject to the contract’s terms; the agreement also provides termination rights. The French manufacturing site received a GMP compliance certificate dated April 9, 2015, valid until January 2018, after responding to inspection observations.
- Litigation and contingencies: On April 7, 2015, after quarter-end, the company reached an agreement in principle to settle a California employment class-action matter for $3.2 million plus payroll taxes, subject to final documentation and court approval. Enoxaparin patent litigation remained on appeal; oral argument occurred May 4, 2015. The company’s False Claims Act case against Aventis also remained pending.
- Debt, currency, and investment obligations: Amphastar reported compliance with debt covenants at March 31, 2015, after obtaining waivers for two covenant breaches at December 31, 2014. It does not hedge foreign-currency exposure and said an immediate 10% exchange-rate change could materially affect its financial position, results, or cash flows. It had committed a further $16 million to its China subsidiary by December 2017; development of the associated property was behind schedule, potentially exposing it to penalties.
- Management stated that cash reserves, operating cash flows, and revolving-credit availability should be sufficient for foreseeable cash needs. Research and development investment was expected to increase over the next several years. These are forward-looking statements subject to regulatory, competitive, supply, currency, and other risks.
Most important facts for investors to verify
- Whether enoxaparin pricing and volume declines, including competition from Teva, continue and how they affect margins.
- Whether expected MannKind-related API volumes and purchase commitments are fulfilled, and the impact of euro movements on reported results.
- The status and requirements for FDA action on Primatene Mist HFA, and the recoverability of associated assets if approval is delayed or denied.
- Final settlement terms and court approval of the California employment case, along with developments in the patent appeal and False Claims Act litigation.
- Debt covenant compliance, repayment and refinancing needs, and the company’s capacity to fund manufacturing investment and its China commitments.
- Whether customer concentration and reliance on limited-source suppliers create disruptions or changes in receivables, chargebacks, or product returns.