Amphastar Pharmaceuticals, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. Comparisons are with Q1 2016 unless otherwise noted. Amounts are in U.S. dollars.
Business context
Amphastar develops, manufactures and sells generic and proprietary injectable, inhalation and intranasal drugs, as well as insulin active pharmaceutical ingredients (API). It reports two segments: finished pharmaceuticals and API. The company reported 18 marketed products and a pipeline of 16 generic ANDAs, three biosimilar candidates and six proprietary candidates. It had six ANDAs and two NDAs on file with the FDA.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $56.7 million | $59.4 million | Down 5% |
| Gross profit / margin | $22.8 million / 40% | $24.9 million / 42% | Profit down 8%; margin down about 2 percentage points |
| Operating income | $1.4 million | $4.1 million | Down 66% |
| Net income | $0.9 million | $2.5 million | Down 64% |
| Diluted EPS | $0.02 | $0.05 | Down $0.03 |
| Cash from operations | $22.4 million | $13.9 million | Up $8.5 million |
| Capital spending | $7.3 million | $3.9 million | Up $3.3 million |
Finished-product revenue was $55.9 million, down 4%; API revenue was $0.7 million, down 9%. API gross loss widened to $1.5 million from $0.9 million. Research and development expense rose 31% to $11.3 million, primarily reflecting testing and pipeline materials, plus Primatene Mist pre-launch inventory. A $2.6 million gain on the sale of 14 injectable ANDAs partially offset operating costs; $5.4 million of the $6.4 million sale consideration remained due on milestones, with a fallback payment date in December 2017. The sale also provides for a 2% royalty on product net sales through February 2027.
Liquidity, debt and cash flows
At March 31, cash and cash equivalents were $76.8 million, versus $72.4 million at year-end; working capital was $118.6 million, down from $123.5 million. Current assets were $191.4 million and current liabilities $72.9 million. Total debt and capital leases were $36.4 million, down $1.3 million since year-end; $5.3 million was current. The company reported $37.1 million of unused revolving credit capacity and compliance with debt covenants.
Operating cash flow included a $15.5 million contribution from changes in operating assets and liabilities, primarily higher accounts payable and accrued liabilities; management said the payment timing would result in Q2 cash outflows. Investing used $6.1 million, mainly for property and equipment. Financing used $11.7 million, including $8.2 million of share repurchases and $1.3 million of debt principal payments. Foreign subsidiaries held $16.8 million of cash; Amphastar said it did not plan to repatriate foreign earnings.
Material changes and management outlook
- Enoxaparin revenue fell 43% to $10.4 million, primarily from lower unit volume and selling prices. The Actavis retail distribution agreement ended in December 2016; Actavis represented 22% of total revenue in Q1 2016 and none in Q1 2017. Management expects near-term enoxaparin pricing and volumes to fluctuate with competition.
- Epinephrine revenue rose 118% to $9.6 million, including $8.0 million from the vial product. In March 2017, the FDA requested discontinuation of manufacturing and distribution of that product. Unless an extension is granted, sales are expected to end in Q2 2017. The product generated $18.6 million of 2016 revenue.
- Other product trends were mixed: naloxone revenue increased 7% to $10.9 million, phytonadione rose 29% to $7.9 million, and lidocaine fell 16% to $8.3 million. Management anticipates possible naloxone declines from future competition.
- Gross margin is expected to remain variable with product mix; management cited competitive pressure on enoxaparin and lower volume for an epinephrine product, partly offset by price increases on other products. R&D spending is expected to increase over coming quarters and years. Management believes cash, operating cash flow and borrowing availability will fund operations for at least 12 months.
- The company reported an approximately $8.0 million backlog at March 31, primarily due to reduced production during a partial IMS facility shutdown for construction of a new sterile suite. Construction, equipment installation and validation were expected to continue during 2017; management cautioned backlog is not a reliable indicator of future revenue.
Risks, contingencies and unusual items
- Regulatory and manufacturing: Several FDA inspections at IMS, Rancho Cucamonga and Nanjing resulted in Form 483 observations. The company submitted or planned responses and believed no significant further actions would be necessary, but regulatory outcomes remain uncertain. Some marketed drugs are unapproved and subject to potential FDA enforcement; unapproved products generated $15.1 million of Q1 2017 revenue.
- Litigation: Enoxaparin patent litigation remained active, with summary judgment motions and a July 2017 trial date then scheduled. Amphastar said it would continue to defend the case. In a separate False Claims Act matter, the district court had dismissed the company’s case and was considering potential sanctions; appeals were pending. The company’s antitrust case against Momenta and Sandoz was revived by the First Circuit and returned to the district court.
- Commitments: Purchase commitments for equipment and raw materials totaled approximately $45.6 million. A Chinese land-development schedule was behind plan, potentially exposing the company to penalties, although management considered the likelihood remote. The MannKind insulin API agreement’s annual minimum commitments were amended and extended through 2023; sales remain subject to uncertainty.
- Other risks: Three large wholesalers accounted for 80% of Q1 revenue, and single- or limited-source suppliers could disrupt production. A 1 percentage-point increase in rates on unhedged variable-rate debt was estimated to raise annual interest expense by about $0.2 million. The company did not hedge foreign currency exposure.
- Accounting and controls: The company adopted ASU 2016-09 on January 1, 2017, recording an $0.9 million increase to deferred tax assets and retained earnings. Management reported disclosure controls effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the FDA granted an extension for epinephrine vial sales and the resulting revenue, inventory and manufacturing impact.
- Whether IMS sterile-suite construction and validation were completed on schedule, and whether production and backlog normalized.
- Subsequent enoxaparin pricing and volume, competitive conditions, and the effect of the Actavis agreement termination.
- Progress and outcomes in the enoxaparin patent, False Claims Act and antitrust proceedings, including possible costs or sanctions.
- Collection of the $5.4 million milestone-based receivable from the ANDA sale, and performance of the MannKind commitments.
- Whether FDA inspection observations require further remediation or affect pending product applications, and the company’s ability to meet its $45.6 million purchase commitments while maintaining liquidity.