Amphastar Pharmaceuticals, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results. Amphastar develops, manufactures, markets and sells generic and proprietary injectable and inhalation drugs, including enoxaparin. In April 2014, it acquired Merck’s French insulin active pharmaceutical ingredient (API) manufacturing business.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $59.7 million | $59.3 million | $154.6 million | $174.8 million |
| Gross profit / margin | $11.8 million / 20% | $20.3 million / 34% | $39.3 million / 25% | $67.3 million / 39% |
| Operating income (loss) | $(7.8) million | $0.2 million | $(11.0) million | $14.6 million |
| Net income (loss) | $(5.4) million | $(0.2) million | $(8.2) million | $10.0 million |
| Diluted EPS | $(0.12) | $0.00 | $(0.20) | $0.26 |
- Q3 revenue was nearly flat year over year: insulin sales from the newly acquired France operation contributed $6.0 million, largely offset by lower enoxaparin and other-product sales. Enoxaparin revenue fell 11% to $32.0 million.
- Nine-month revenue declined 12%, primarily from lower enoxaparin and Cortrosyn sales. Enoxaparin revenue fell 23% to $85.3 million; insulin added $6.1 million.
- Gross margin weakened substantially. Management cited lower enoxaparin and Cortrosyn pricing, negative API-segment margins, purchase-accounting fair-value inventory costs that brought insulin shipments to approximately break-even gross margin, and temporary manufacturing variances from reduced production.
- Nine-month operating expenses were $50.3 million, versus $52.8 million. R&D fell 19% to $20.8 million, mainly due to lower FDA submission fees and materials spending; G&A rose 9% to $25.0 million, including compensation and France-operation costs. A $0.4 million impairment related mainly to a suspended project.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $72.9 million; working capital was $152.1 million, up from $107.6 million at year-end 2013. Total assets were $401.1 million.
- For the first nine months, operating cash flow was $8.7 million, investing cash flow was $(29.8) million and financing cash flow was $40.7 million. Cash increased $19.3 million. Investing outflows included $18.4 million paid at the France acquisition closing and $11.7 million in capital expenditures.
- Total debt and capital leases were $51.3 million, up from $32.2 million at year-end; $10.1 million was current and $41.3 million long-term. The company reported $38.0 million of unused revolving-credit capacity and compliance with debt covenants.
- The June IPO generated $40.9 million gross proceeds and $34.7 million net proceeds. Management said cash reserves, operating cash flow and available credit should fund cash needs for the foreseeable future.
Business developments, outlook and risks
- The Merck API acquisition added insulin manufacturing in France and created a new API reporting segment. Total consideration was approximately $34.4 million, with payments extending through 2017; the acquisition loan bears variable interest and the Merck payment obligation bears fixed interest. Acquisition accounting remains preliminary.
- In July, the French subsidiary agreed to supply insulin to MannKind for AFREZZA. MannKind committed to minimum purchases totaling approximately $152.3 million for 2015–2019 and paid a non-refundable reservation fee of approximately $14.0 million, recorded as deferred revenue. The agreement permits termination in specified circumstances, with unpaid purchase commitments generally payable on certain termination events.
- Management expects R&D spending to increase over the next several quarters as additional clinical and preclinical trials begin. No specific revenue or earnings guidance is provided. The filing warns that losses may continue, and that enoxaparin price or volume declines could materially affect results.
- Primatene Mist HFA received an FDA complete response letter in May requiring additional nonclinical information, label revisions and consumer-use studies. The supplier’s cited manufacturing deficiencies were reported resolved; Amphastar was preparing an NDA amendment. Approval timing or approval itself is not assured.
- FDA inspections at the Nanjing, Rancho Cucamonga and South El Monte facilities resulted in Form 483 observations. The company submitted responses and said it believed corrective actions would satisfy the FDA; regulatory outcomes remain uncertain.
- Customer concentration is significant: Actavis represented 35% of Q3 revenue and the three major wholesalers collectively represented 46%. Enoxaparin was 54% of Q3 revenue. The company also cites limited-source suppliers, pricing pressure, product-return estimates, foreign-exchange exposure and possible enforcement affecting certain products marketed without FDA approval.
- Enoxaparin patent litigation had resulted in a judgment for Amphastar, but the plaintiffs appealed; Amphastar said it intended to seek recovery of their $100.1 million bond. A separate False Claims Act case involving Aventis remained pending, with an appeal and an unresolved “original source” issue. Neither potential recovery is assured.
- On November 6, 2014, after quarter-end, the board authorized a $10.0 million share repurchase program intended primarily to offset equity-compensation dilution. The company also disclosed possible minor environmental remediation at the acquired French facility; Merck agreed to fund remediation up to specified limits.
Most important facts for investors to verify
- Whether enoxaparin pricing, volume and Actavis profit-sharing recover or continue to decline, given the product’s large revenue contribution.
- Whether gross margins improve as acquired insulin inventory fair-value effects and temporary production variances subside, and whether the API business becomes profitable.
- FDA progress on Primatene Mist HFA, facility inspection observations and pending product approvals.
- Execution, economics and termination protections under the MannKind supply agreement, including whether minimum purchase commitments translate into recognized revenue and cash.
- Debt repayment, variable-rate exposure, cash needs for China investment commitments and planned capital spending; management’s liquidity assessment is not a guarantee.
- Outcomes of the enoxaparin appeal and False Claims Act litigation, and any resulting costs or recoveries.