Amphastar Pharmaceuticals, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Unless otherwise noted, financial amounts below are in millions of U.S. dollars.
Business context
Amphastar develops, manufactures, markets and sells generic and proprietary injectable, inhalation and intranasal pharmaceuticals, plus insulin active pharmaceutical ingredients (API). Its two reportable segments are finished pharmaceutical products and API. The company reported 19 products currently manufactured and sold, with a pipeline of generic, biosimilar and proprietary candidates. The FDA approved its Neostigmine Methylsulfate Injection ANDA in September 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $57.9 | $64.2 | $179.8 | $191.6 |
| Gross profit | $20.6 | $27.6 | $70.2 | $84.2 |
| Gross margin | 36% | 43% | 39% | 44% |
| Operating income (loss) | $(2.8) | $5.8 | $0.8 | $20.2 |
| Net income | $0.2 | $3.9 | $3.0 | $13.3 |
| Diluted EPS | $0.00 | $0.08 | $0.06 | $0.29 |
- Q3 revenue fell 10%; nine-month revenue fell 6%. Finished-product sales declined 8% in Q3 and 4% year to date; API sales declined 33% and 45%, respectively.
- Enoxaparin revenue dropped 57% in Q3 to $6.5 million and 51% year to date to $25.2 million, reflecting lower volumes and selling prices. Q3 cost of revenues included a $2.0 million inventory write-down for enoxaparin; nine-month inventory write-downs totaled $7.3 million, including $4.9 million for enoxaparin.
- Other finished-product sales partly offset declines: Q3 lidocaine and other-product revenue increased, while nine-month phytonadione, epinephrine and other-product revenue increased. Epinephrine vial sales were discontinued in Q2 at the FDA’s request.
- Q3 operating expenses increased to $23.5 million, including higher legal costs related to the patent trial. Nine-month R&D expense rose 11% to $32.0 million, largely on testing and pipeline materials.
- Nine-month other income included a $2.6 million gain on sale of acquired ANDAs. Q3 and nine-month 2017 income tax benefits were $2.2 million and $0.4 million, respectively; the filing cites discrete tax benefits and changes in pretax income.
Cash, debt and liquidity
- Cash and cash equivalents were $66.9 million at September 30, 2017, down from $72.4 million at December 31, 2016. Working capital was $119.1 million, down $4.4 million from year-end.
- Nine-month operating cash flow was $29.4 million, compared with $24.6 million in 2016. Investing cash outflow was $28.6 million, including $25.0 million for property, plant and equipment. Financing cash outflow was $6.9 million, including $24.8 million of share repurchases, partly offset by debt proceeds and equity-plan proceeds.
- Total debt and capital leases were $48.4 million, up $10.7 million from December 2016. The company reported $43.0 million of unused revolving credit capacity and compliance with debt covenants.
- Foreign subsidiaries held $22.5 million of cash and equivalents that management said it did not plan to repatriate and that was not available for U.S. parent operations. Management believed cash reserves, operating cash flow and borrowing availability would fund operations for at least 12 months.
Outlook, risks and unusual items
- No numeric revenue or earnings guidance was provided. Management expects enoxaparin pricing and volumes to continue fluctuating amid competition, putting pressure on margins; gross margin may vary with product mix. It expects R&D costs to rise significantly over coming quarters and years.
- API revenue is expected to fluctuate and may decline, given uncertainty around MannKind demand and foreign-exchange movements. MannKind declined its 2018 minimum purchase option; Amphastar recorded and collected a $0.9 million cancellation fee.
- Key business risks include FDA approval and inspection outcomes, manufacturing and supply continuity, competition and pricing, customer concentration, foreign currency exposure, and commercialization of pipeline products. The filing describes multiple FDA Form 483 observations at U.S. and China facilities; management stated it had responded and expected no significant further action. A later October 2017 China inspection had no Form 483 observations.
- Primatene Mist remained subject to FDA follow-up requirements after a December 2016 complete response letter; approval and timing were uncertain. The company also discontinued its epinephrine vial product after an FDA request and noted that certain unapproved products remain exposed to FDA enforcement action.
- In the enoxaparin patent case, a July 2017 jury found the asserted patent invalid and awarded plaintiffs zero damages, while also finding infringement. Post-trial motions and final judgment remained pending; Amphastar intended to defend the verdict and seek recovery of the plaintiffs’ $100.1 million bond after final judgment. Other matters include an appeal/remand over attorneys’ fees in the False Claims Act case and pending antitrust proceedings.
- Capital commitments included approximately $48.4 million for equipment and raw materials. The company also noted potential penalties tied to delayed development of land in China, which management considered remote.
Most important facts for investors to verify
- Whether enoxaparin sales prices and volumes stabilize, and whether further inventory write-downs or margin pressure arise.
- FDA outcomes for facility observations, product applications and Primatene Mist, including any impact on product availability or launch timing.
- Final court rulings and any appeals in the enoxaparin patent litigation, as well as developments in the fee and antitrust matters.
- MannKind’s future API purchases and the extent to which cancellation fees offset lower shipments.
- Cash availability after capital spending, buybacks and debt payments, including the restricted availability of foreign-held cash and the terms of debt facilities.
- Revenue concentration: three major wholesalers accounted for a substantial share of sales, while supplier dependence and limited-source materials pose supply risks.