Amphastar Pharmaceuticals(AMPH) - 2019 Q3 - Quarterly Report

Part I. FINANCIAL INFORMATION Financial information includes unaudited statements, management's discussion, market risk, and controls Item 1. Financial Statements (unaudited) This section presents unaudited condensed consolidated financial statements and detailed notes Condensed Consolidated Balance Sheets Summary of assets, liabilities, and equity as of September 30, 2019, and December 31, 2018 Condensed Consolidated Balance Sheets (in thousands) | Item | September 30, 2019 (unaudited) | December 31, 2018 | |:---|:---|:---|\ | ASSETS | | |\ | Cash and cash equivalents | $85,611 | $86,337 |\ | Short-term investments | $12,666 | $2,831 |\ | Total current assets | $268,903 | $220,342 |\ | Property, plant, and equipment, net | $222,158 | $210,418 |\ | Total assets | $585,636 | $513,563 |\ | LIABILITIES & EQUITY | | |\ | Total current liabilities | $86,596 | $106,834 |\ | Total liabilities | $151,983 | $149,204 |\ | Total equity | $433,653 | $364,359 |\ | Total liabilities and stockholders' equity | $585,636 | $513,563 | Condensed Consolidated Statements of Operations Overview of revenues, expenses, and net income (loss) for specified periods Condensed Consolidated Statements of Operations (in thousands, except per share data) | Item | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | |:---|:---|:---|:---|:---|\ | Net revenues | $80,137 | $75,543 | $238,974 | $204,976 |\ | Cost of revenues | $44,885 | $46,283 | $140,432 | $132,680 |\ | Gross profit | $35,252 | $29,260 | $98,542 | $72,296 |\ | Total operating expenses | $32,848 | $26,710 | $98,337 | $82,464 |\ | Income (loss) from operations | $2,404 | $2,550 | $205 | $(10,168) |\ | Net income (loss) attributable to Amphastar Pharmaceuticals, Inc. | $1,310 | $2,389 | $49,965 | $(7,605) |\ | Basic EPS | $0.03 | $0.05 | $1.06 | $(0.16) |\ | Diluted EPS | $0.03 | $0.05 | $1.00 | $(0.16) | Condensed Consolidated Statements of Comprehensive Income (Loss) Details of net income (loss) and other comprehensive income (loss) components Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Item | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | |:---|:---|:---|:---|:---|\ | Net income (loss) attributable to Amphastar Pharmaceuticals, Inc. | $1,310 | $2,389 | $49,965 | $(7,605) |\ | Foreign currency translation adjustment | $(1,625) | $(410) | $(1,835) | $(1,476) |\ | Total comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc. | $(315) | $1,979 | $48,130 | $(9,081) | Condensed Consolidated Statements of Cash Flows Analysis of cash flows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Item | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | |:---|:---|:---|\ | Net cash provided by operating activities | $36,110 | $28,674 |\ | Net cash used in investing activities | $(43,175) | $(33,385) |\ | Net cash provided by financing activities | $6,599 | $8,086 |\ | Effect of exchange rate changes on cash | $(260) | $(235) |\ | Net increase (decrease) in cash, cash equivalents, and restricted cash | $(726) | $3,140 |\ | Cash, cash equivalents, and restricted cash at end of period | $87,476 | $70,599 | Notes to Condensed Consolidated Financial Statements Detailed explanations of accounting policies, segment performance, and other financial disclosures Note 1. Business Overview of the company's specialty pharmaceutical business and product offerings - Amphastar Pharmaceuticals, Inc. is a specialty pharmaceutical company focused on developing, manufacturing, marketing, and selling generic and proprietary injectable, inhalation, and intranasal products, including those with high technical barriers. The company also sells insulin active pharmaceutical ingredient (API) products[15] - Most products are used in hospital or urgent care settings and distributed through group purchasing organizations and drug wholesalers. Primatene Mist, an inhalation product, is primarily distributed through drug retailers[15] Note 2. Summary of Significant Accounting Policies Key accounting principles and policies applied in preparing the financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP, including all necessary recurring adjustments. Certain information and footnote disclosures are condensed or omitted compared to annual financial statements[16][17] - The Company's subsidiaries include IMS, Armstrong, ANP, Letop, Hanxin, Baixin, AFP, AUK, and IMS UK[18] - In July 2018, ANP completed a private placement, raising approximately $57 million. The Company retained approximately 58% equity interest in ANP and continues to consolidate its financial results[19][20] - The functional currency for the Company, its domestic subsidiaries, ANP, and AUK is USD. AFP, ANP's other Chinese subsidiaries, and IMS UK maintain books in euros, Chinese yuan, and British pounds, respectively, which are translated into USD[21][22] - Restricted cash and short-term investments, totaling $1.9 million in cash and $2.3 million in certificates of deposit as of September 30, 2019, serve as collateral for standby letters of credit, workers' compensation self-insurance, and vendor guarantees[23] - The Company adopted ASC 2016-13 (Financial Instruments – Credit Losses), ASC 2017-04 (Goodwill Impairment), ASC 2018-13 (Fair Value Measurement), ASC 2018-14 (Defined Benefit Plans), and ASC 2018-17 (Related Party Guidance for VIEs) effective for periods ending December 31, 2020 or 2021, but does not expect a material impact[26][27][28][29][30] - The Company is evaluating the impact of ASU No. 2018-18 (Clarifying the Interaction between Topic 808 and Topic 606) on its consolidated financial statements and related disclosures, effective for periods ending December 31, 2020[31] Note 3. Revenue Recognition Policies and estimates for recognizing revenue, including discounts and returns - Revenue is recognized when customers obtain control of promised goods, generally at product delivery or shipment. Reductions for discounts, product returns, and pricing adjustments (chargebacks, rebates) are estimated and recorded concurrently[32][33][34] Chargeback and Rebate Provision (in thousands) | Item | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | |:---|:---|:---|\ | Beginning balance | $22,423 | $18,470 |\ | Provision for chargebacks and rebates | $94,548 | $88,797 |\ | Credits and payments issued to third parties | $(97,324) | $(86,892) |\ | Ending balance | $19,647 | $20,375 | - The Company estimates chargebacks and rebates using the expected value method based on wholesaler inventory, historical rates, and contract pricing. Changes are primarily driven by sales, wholesaler inventory levels, and customer mix[35][36][37] Product Return Liability (in thousands) | Item | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | |:---|:---|:---|\ | Beginning balance | $8,030 | $6,522 |\ | Provision for product returns | $4,611 | $2,248 |\ | Credits issued to third parties | $(3,945) | $(1,995) |\ | Ending balance | $8,696 | $6,775 |\ | Aggregate product return rate | 0.9% | 1.3% | - An accrual for product returns is recorded at revenue recognition, estimated using the expected value method based on historical return rates and customer contract terms. API product sales are generally non-returnable[38] Note 4. Income (Loss) per Share Attributable to Amphastar Pharmaceuticals, Inc. Shareholders Calculation of basic and diluted earnings per share for the company's shareholders - Basic EPS is calculated based on weighted-average shares outstanding, while diluted EPS includes potential dilutive shares (stock options, RSUs, ESPP shares)[40] - For the nine months ended September 30, 2019, 783,193 stock options and 3,648,932 ANP stock options were excluded from diluted EPS calculation due to their anti-dilutive effect. For the nine months ended September 30, 2018, a net loss resulted in basic EPS equaling diluted EPS, with 10,646,602 stock options, 1,210,718 non-vested RSUs, and 60,854 ESPP shares excluded as anti-dilutive[41][43] Net Income (Loss) Per Share Attributable to Amphastar Pharmaceuticals, Inc. Shareholders | Item | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | |:---|:---|:---|:---|:---|\ | Net income (loss) attributable to Amphastar Pharmaceuticals, Inc. (in thousands) | $1,310 | $2,389 | $49,965 | $(7,605) |\ | Weighted-average shares outstanding — basic (in thousands) | 47,239 | 46,241 | 47,030 | 46,437 |\ | Weighted-average shares outstanding — diluted (in thousands) | 50,075 | 48,281 | 50,128 | 46,437 |\ | Basic EPS | $0.03 | $0.05 | $1.06 | $(0.16) |\ | Diluted EPS | $0.03 | $0.05 | $1.00 | $(0.16) | Note 5. Segment Reporting Financial performance breakdown by the company's operating segments - The Company operates in two reportable segments: Finished pharmaceutical products and API. The finished pharmaceutical products segment includes enoxaparin, naloxone, phytonadione, lidocaine, medroxyprogesterone acetate, and Primatene Mist. The API segment manufactures and distributes recombinant human insulin API and porcine insulin API[45] Selected Financial Information by Reporting Segment (in thousands) | Item | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | |:---|:---|:---|:---|:---|\ | Net revenues: | | | | |\ | Finished pharmaceutical products | $75,729 | $71,767 | $224,003 | $188,125 |\ | API | $4,408 | $3,776 | $14,971 | $16,851 |\ | Total net revenues | $80,137 | $75,543 | $238,974 | $204,976 |\ | Gross profit: | | | | |\ | Finished pharmaceutical products | $34,992 | $30,571 | $101,844 | $77,856 |\ | API | $260 | $(1,311) | $(3,302) | $(5,560) |\ | Total gross profit | $35,252 | $29,260 | $98,542 | $72,296 |\ | Income (loss) before income taxes | $1,582 | $2,574 | $59,042 | $(10,515) | Finished Pharmaceutical Products Net Revenues by Product (in thousands) | Product | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | |:---|:---|:---|:---|:---|\ | Enoxaparin | $9,573 | $18,564 | $33,895 | $34,286 |\ | Lidocaine | $11,670 | $9,875 | $33,731 | $29,667 |\ | Phytonadione | $10,916 | $8,968 | $33,477 | $28,955 |\ | Naloxone | $10,613 | $9,432 | $25,810 | $29,492 |\ | Medroxyprogesterone | $7,879 | $7,552 | $21,788 | $16,623 |\ | Epinephrine | $3,756 | $1,881 | $9,574 | $8,791 |\ | Primatene Mist | $3,654 | $0 | $9,063 | $0 |\ | Other | $17,668 | $15,495 | $56,665 | $40,311 |\ | Total | $75,729 | $71,767 | $224,003 | $188,125 | Note 6. Customer and Supplier Concentration Analysis of significant customer and supplier relationships and associated risks - Three major wholesale drug distributors—McKesson, AmerisourceBergen, and Cardinal Health—account for a significant portion of the Company's net revenue and accounts receivable[50] Major Customer Concentrations | Customer | % of Total Accounts Receivable (Sep 30, 2019) | % of Total Accounts Receivable (Dec 31, 2018) | % of Net Revenue (Three Months Ended Sep 30, 2019) | % of Net Revenue (Three Months Ended Sep 30, 2018) | % of Net Revenue (Nine Months Ended Sep 30, 2019) | % of Net Revenue (Nine Months Ended Sep 30, 2018) | |:---|:---|:---|:---|:---|:---|:---|\ | McKesson | 31% | 28% | 24% | 30% | 26% | 27% |\ | AmerisourceBergen | 10% | 19% | 26% | 30% | 24% | 28% |\ | Cardinal Health | 21% | 21% | 21% | 23% | 22% | 22% | - The Company relies on a limited number of suppliers for raw materials, APIs, and other components, many of which are foreign sources and subject to stringent FDA approval. Delays in securing these materials could materially impact the business[52] Note 7. Fair Value Measurements Methodologies and hierarchy used for valuing financial instruments at fair value - Fair value is defined as the exit price in an orderly transaction, categorized into a three-level hierarchy based on input observability (Level 1: quoted prices in active markets; Level 2: observable inputs other than Level 1; Level 3: unobservable inputs)[54] - As of September 30, 2019, cash equivalents include money market accounts, and short-term investments consist of certificates of deposit and investment-grade corporate bonds. Certificates of deposit and corporate bonds are carried at amortized cost, approximating fair value based on Level 2 inputs[55] Fair Value Measurement as of September 30, 2019 (in thousands) | Item | Total | Level 1 | Level 2 | Level 3 | |:---|:---|:---|:---|:---|\ | Cash equivalents - money market | $42,564 | $42,564 | $0 | $0 |\ | Restricted cash - money market | $1,865 | $1,865 | $0 | $0 |\ | Short-term investments - certificates of deposit | $8,844 | $0 | $8,844 | $0 |\ | Restricted short-term investments - certificates of deposit | $2,290 | $0 | $2,290 | $0 |\ | Total | $55,563 | $44,429 | $11,134 | $0 | Note 8. Investments Details on the company's debt investment securities and their fair value Summary of Debt Investment Securities Classified as Held-to-Maturity (in thousands) | Item | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |:---|:---|:---|:---|:---|\ | Corporate bonds | $3,795 | $0 | $(2) | $3,793 |\ | Total investments as of September 30, 2019 | $3,795 | $0 | $(2) | $3,793 | - The Company believes unrealized losses on corporate bonds are due to interest rate changes, not credit quality deterioration, and expects to collect principal and interest[58] Note 9. Goodwill and Intangible Assets Information on the company's goodwill and intangible assets, including amortization and impairment Goodwill and Intangible Assets as of September 30, 2019 (in thousands) | Item | Weighted-Average Life (Years) | Original Cost | Accumulated Amortization | Net Book Value | |:---|:---|:---|:---|:---|\ | Definite-lived intangible assets | | | | |\ | IMS (UK) international product rights | 10 | $8,606 | $2,725 | $5,881 |\ | Patents | 12 | $486 | $244 | $242 |\ | Land-use rights | 39 | $2,540 | $535 | $2,005 |\ | Other intangible assets | 4 | $69 | $69 | $0 |\ | Subtotal | 13 | $11,701 | $3,573 | $8,128 |\ | Indefinite-lived intangible assets | | | | |\ | Trademark | * | $29,225 | $0 | $29,225 |\ | Goodwill - Finished pharmaceutical products | * | $3,786 | $0 | $3,786 |\ | Subtotal | * | $33,011 | $0 | $33,011 |\ | Total as of September 30, 2019 | * | $44,712 | $3,573 | $41,139 | - In February 2017, the Company sold 14 ANDAs for $6.4 million, receiving the final $4.4 million in January 2018. A 2% royalty on net sales from these products is also part of the agreement, though no royalty revenue has been recognized[62] Changes in Carrying Amounts of Goodwill (in thousands) | Item | September 30, 2019 | December 31, 2018 | |:---|:---|:---|\ | Beginning balance | $3,951 | $4,461 |\ | Currency translation | $(165) | $(510) |\ | Ending balance | $3,786 | $3,951 | - The Primatene Mist trademark, acquired in January 2009 for $29.2 million, has an indefinite life due to factors like brand longevity, regulatory provisions, and the Company's ability to renew its legal life[64][65] - The FDA granted over-the-counter approval for the non-CFC formulation of Primatene Mist in November 2018, and the product was re-launched in December 2018[67] Note 10. Inventories Breakdown of inventory components and adjustments to net realizable value Inventories (in thousands) | Item | September 30, 2019 | December 31, 2018 | |:---|:---|:---|\ | Raw materials and supplies | $57,043 | $30,153 |\ | Work in process | $37,208 | $30,272 |\ | Finished goods | $15,603 | $8,897 |\ | Total inventories | $109,854 | $69,322 | - Charges to adjust inventory to net realizable value were $0.4 million for the three months and $6.1 million for the nine months ended September 30, 2019, compared to $3.5 million and $6.6 million for the same periods in 2018[68] Note 11. Property, Plant, and Equipment Details of the company's fixed assets, including buildings, machinery, and construction in progress Property, Plant, and Equipment (in thousands) | Item | September 30, 2019 | December 31, 2018 | |:---|:---|:---|\ | Buildings | $98,968 | $96,287 |\ | Machinery and equipment | $152,090 | $143,299 |\ | Construction in progress | $73,690 | $66,390 |\ | Total property, plant, and equipment, net | $222,158 | $210,418 | Note 12. Accounts Payable and Accrued Liabilities Breakdown of current liabilities, including customer fees, payroll, and product returns Accounts Payable and Accrued Liabilities (in thousands) | Item | September 30, 2019 | December 31, 2018 | |:---|:---|:---|\ | Accrued customer fees and rebates | $10,323 | $15,215 |\ | Accrued payroll and related benefits | $22,845 | $19,430 |\ | Accrued product returns, current portion | $5,724 | $5,349 |\ | Reserve for net loss on firm purchase commitments | $2,094 | $5,355 |\ | Other accrued liabilities | $12,107 | $10,746 |\ | Total accrued liabilities | $53,093 | $56,095 |\ | Accounts payable | $22,044 | $31,323 |\ | Total accounts payable and accrued liabilities | $75,137 | $87,418 | Note 13. Debt Details of the company's debt obligations, including mortgages, equipment loans, and acquisition loans Debt (in thousands) | Item | September 30, 2019 | December 31, 2018 | |:---|:---|:---|\ | Mortgage payable due February 2021 | $3,423 | $3,491 |\ | Equipment loan due June 2021 | $2,143 | $3,061 |\ | Equipment loan due December 2022 | $6,500 | $8,000 |\ | Mortgage payable due October 2026 | $3,416 | $3,463 |\ | Mortgage payable due June 2027 | $8,695 | $8,801 |\ | Mortgage payable due August 2027 | $7,497 | $7,627 |\ | Acquisition loan due June 2024 | $11,462 | $13,025 |\ | French government loans | $558 | $663 |\ | Payment Obligation to Merck | $541 | $552 |\ | Equipment under Finance Leases | $813 | $0 |\ | Equipment under Capital Leases | $0 | $1,055 |\ | Total debt | $45,048 | $50,213 |\ | Less current portion of long-term debt | $6,969 | $18,229 |\ | Long-term debt, net of current portion | $38,079 | $31,984 | - The acquisition loan related to the AFP acquisition was amended in July 2019, extending its maturity to June 2024 and requiring monthly principal and interest payments amortized over 60 months, with a variable interest rate at prime (minimum 5.00%)[75] - As of September 30, 2019, the Company was in compliance with all debt covenants, including minimum current ratio, debt service coverage, tangible net worth, and debt-to-effective-tangible-net-worth ratio[76] Note 14. Income Taxes Analysis of income tax provision (benefit) and effective tax rates Income Tax Provision (Benefit) (in thousands) | Item | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | |:---|:---|:---|:---|:---|\ | Income (loss) before taxes | $1,582 | $2,574 | $59,042 | $(10,515) |\ | Income tax provision (benefit) | $598 | $958 | $13,292 | $(2,137) |\ | Net income (loss) | $984 | $1,616 | $45,750 | $(8,378) |\ | Effective tax rate | 38% | 37% | 23% | 20% | - The increase in the effective tax rate for the three and nine months ended September 30, 2019, was primarily due to differences in pre-tax income (loss) positions[77] - The Company has recorded a full valuation allowance for AFP's deferred tax assets, discontinuing recognition of its income tax benefits until sufficient taxable income is probable[79] Note 15. Stockholders' Equity Changes in equity, including net income, comprehensive income, and share repurchases Changes in Stockholders' Equity (in thousands) | Item | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | |:---|:---|:---|:---|:---|\ | Stockholders' equity beginning balance | $432,288 | $316,975 | $364,359 | $333,736 |\ | Net income (loss) attributable to Amphastar Pharmaceuticals, Inc. | $1,310 | $2,389 | $49,965 | $(7,605) |\ | Other comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc. | $(1,625) | $(410) | $(1,835) | $(1,476) |\ | Net proceeds from the private placement of ANP | $0 | $26,202 | $18,966 | $26,202 |\ | Net loss attributable to non-controlling interests | $(326) | $(773) | $(4,215) | $(773) |\ | Net proceeds from equity plans, net of withholding tax payments | $2,138 | $568 | $1,981 | $274 |\ | Share-based compensation expense | $4,294 | $3,908 | $13,000 | $12,770 |\ | Purchase of treasury stock | $(4,426) | $(7,589) | $(8,514) | $(22,440) |\ | Stockholders' equity ending balance | $433,653 | $341,270 | $433,653 | $341,270 | - The Company repurchased 206,686 shares ($4.4 million) and 403,145 shares ($8.5 million) of common stock during the three and nine months ended September 30, 2019, respectively, under its share buyback program. In November 2019, the Board authorized an additional $20.0 million for the program[82][83] - As of September 30, 2019, $13.6 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of 2.4 years[92] - As of September 30, 2019, $14.8 million of unrecognized compensation cost related to non-vested Restricted Stock Units (RSUs) is expected to be recognized over a weighted-average period of 2.4 years[94] - In June 2019, ANP issued 3,648,932 stock options to employees under the 2018 ANP Equity Incentive Plan, with a total fair value of $2.1 million. The Company recorded $0.1 million and $0.2 million in expense for the three and nine months ended September 30, 2019, respectively[97] Note 16. Employee Benefits Information on employee benefit plans, including 401(k) and defined-benefit pension plans - Employer contributions to the 401(k) plan were approximately $0.3 million for the three months and $1.0 million for the nine months ended September 30, 2019, a slight increase from the prior year[98] - The Company assumed a defined-benefit pension plan for AFP employees, with a benefit obligation of $2.2 million as of September 30, 2019, and December 31, 2018. An immaterial expense was recorded for the three months, and $0.2 million for the nine months ended September 30, 2019[99][100] Note 17. Commitments and Contingencies Details on lease obligations, purchase commitments, and other contingent liabilities - Upon adopting ASC 842 on January 1, 2019, the Company recognized right-of-use (ROU) assets of approximately $13.9 million and related lease liabilities of approximately $14.1 million for operating lease commitments[101] Components of Lease Costs (in thousands) | Item | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | |:---|:---|:---|\ | Operating lease costs | $1,082 | $2,872 |\ | Short-term lease costs | $150 | $457 |\ | Finance lease costs (Amortization of ROU assets) | $86 | $257 |\ | Finance lease costs (Interest on lease liabilities) | $12 | $36 |\ | Total lease costs | $1,330 | $3,622 | - As of September 30, 2019, the Company had purchase commitments for equipment and raw materials totaling approximately $42.4 million, mostly expected to be fulfilled by 2020[105] - The Company committed to spend approximately $15.0 million on land development for ANP in China, having spent $8.3 million as of September 30, 2019, with the remainder expected by the end of 2019[106] Note 18. Related-Party Transactions Disclosure of transactions involving related parties, including management and directors - In July 2018, ANP completed a private placement, raising approximately $56.3 million. Management and directors, including Stephen Shohet, Howard Lee, and Richard Koo, indirectly invested approximately $29.7 million through investment vehicles[107] Note 19. Litigation Overview of ongoing legal proceedings and their potential financial impact - The Momenta/Sandoz Enoxaparin Patent and Antitrust Litigation was settled on May 20, 2019, with the plaintiffs paying the Company $59.9 million on June 27, 2019. The Company recorded this amount as other income[108][109][110] - In the False Claims Act Litigation against Aventis, the Company's lawsuit was dismissed in May 2017. Aventis's application for attorneys' fees was granted, and the Company intends to vigorously defend against the imposition of fees[111][112][113] - The Epinephrine Injection, 0.1 mg/mL Litigation initiated by Belcher Pharmaceuticals against IMS was stayed in July 2019, pending the outcome of Belcher's trial with Hospira. The Company intends to vigorously defend this lawsuit[114] - The Vasopressin (20 units/mL) Patent Litigation initiated by Par Pharmaceutical against the Company was consolidated with two other lawsuits in September 2019. Trial is scheduled for January 2021, and the Company's 30-month FDA stay is maintained until May 21, 2021. The Company intends to vigorously defend this lawsuit[115][116] - An Employment Litigation class action complaint was filed against IMS et al. on September 11, 2019, alleging violations of California labor laws. The Company intends to vigorously defend this litigation[117] - The Company records provisions for contingent losses when probable and estimable, and management believes the ultimate resolution of current matters will not materially adversely affect financial position, results of operations, or cash flows, despite the inherent unpredictability of litigation[119] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Detailed analysis of the company's financial performance, liquidity, and critical accounting policies Overview Summary of Amphastar's business, product pipeline, and strategic developments - Amphastar is a specialty pharmaceutical company developing, manufacturing, marketing, and selling generic and proprietary injectable, inhalation, and intranasal products, including insulin API. It currently markets over 20 products[122] - The Company is developing 15 generic ANDAs, three biosimilar product candidates, and four proprietary product candidates. Five ANDAs and one NDA are currently filed with the FDA[123] - Key products by net revenues include enoxaparin sodium injection, naloxone hydrochloride injection, lidocaine jelly and sterile solution, phytonadione, medroxyprogesterone acetate, and Primatene Mist (re-launched in Q4 2018)[124] - Strategic acquisitions have strengthened the Company's infrastructure, adding manufacturing, marketing, and R&D capabilities, including raw material and API production. This includes marketing authorizations for 33 products in the UK, Ireland, Australia, and New Zealand, with manufacturing transfer underway[125][126] - In July 2018, ANP, the Chinese subsidiary, completed a private placement, raising approximately $56.3 million. The Company retains about 58% equity interest[127] - On May 20, 2019, the Company settled the enoxaparin patent and antitrust litigation, receiving $59.9 million on June 27, 2019[128] Business Segments Description of the company's two reportable segments: finished pharmaceutical products and API - The Company's two reportable segments are finished pharmaceutical products (including enoxaparin, naloxone, phytonadione, lidocaine, medroxyprogesterone acetate, Primatene Mist, and other critical/non-critical care drugs) and API products (recombinant human insulin API and porcine insulin API)[129][130] Results of Operations Comparative analysis of financial performance for the reported periods Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018 Comparison of financial results for the three-month periods ended September 30, 2019 and 2018 Net Revenues and Cost of Revenues (Three Months Ended September 30, in thousands) | Item | 2019 | 2018 | Change (Dollars) | Change (%) | |:---|:---|:---|:---|:---|\ | Net revenues - Finished pharmaceutical products | $75,729 | $71,767 | $3,962 | 6% |\ | Net revenues - API | $4,408 | $3,776 | $632 | 17% |\ | Total net revenues | $80,137 | $75,543 | $4,594 | 6% |\ | Cost of revenues - Finished pharmaceutical products | $40,737 | $41,196 | $(459) | (1)% |\ | Cost of revenues - API | $4,148 | $5,087 | $(939) | (18)% |\ | Total cost of revenues | $44,885 | $46,283 | $(1,398) | (3)% |\ | Gross profit | $35,252 | $29,260 | $5,992 | 20% |\ | Gross profit as % of net revenues | 44% | 39% | | | - Finished pharmaceutical product net revenues increased by 6% due to higher sales of lidocaine (18% increase, equally from price and volume), phytonadione (22% increase, primarily from price), epinephrine (100% increase, from volume), naloxone (13% increase, from volume), and Primatene Mist (new launch). Enoxaparin sales decreased by 48% due to increased competition[132] - API sales increased by 17%, partly due to a $1.5 million amendment fee recognized from MannKind Corporation, extending their RHI API supply agreement through 2026[134] - Gross margins increased due to the launch of higher-margin Primatene Mist and higher average selling prices for phytonadione. Primatene Mist margins were boosted by expensed pre-launch inventory[137] - Selling, distribution, and marketing expenses increased by 64% due to marketing for Primatene Mist. General and administrative expenses decreased by 18% primarily due to lower legal expenses from the enoxaparin litigation settlement[138][140] Research and Development Expenses (Three Months Ended September 30, in thousands) | Item | 2019 | 2018 | Change (Dollars) | Change (%) | |:---|:---|:---|:---|:---|\ | Salaries and personnel-related expenses | $6,979 | $4,313 | $2,666 | 62% |\ | Clinical trials | $2,238 | $193 | $2,045 | 1,060% |\ | Testing, operating and lab supplies | $4,770 | $4,286 | $484 | 11% |\ | Depreciation | $2,171 | $1,291 | $880 | 68% |\ | Total research and development expenses | $18,606 | $11,340 | $7,266 | 64% | - R&D expenses increased by 64%, driven by higher salaries, personnel-related expenses, and depreciation due to API and key component development at the ANP facility, and increased clinical trial expenses for generic product pipeline (inhalation ANDAs)[141][142] Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018 Comparison of financial results for the nine-month periods ended September 30, 2019 and 2018 Net Revenues and Cost of Revenues (Nine Months Ended September 30, in thousands) | Item | 2019 | 2018 | Change (Dollars) | Change (%) | |:---|:---|:---|:---|:---|\ | Net revenues - Finished pharmaceutical products | $224,003 | $188,125 | $35,878 | 19% |\ | Net revenues - API | $14,971 | $16,851 | $(1,880) | (11)% |\ | Total net revenues | $238,974 | $204,976 | $33,998 | 17% |\ | Cost of revenues - Finished pharmaceutical products | $122,159 | $110,269 | $11,890 | 11% |\ | Cost of revenues - API | $18,273 | $22,411 | $(4,138) | (18)% |\ | Total cost of revenues | $140,432 | $132,680 | $7,752 | 6% |\ | Gross profit | $98,542 | $72,296 | $26,246 | 36% |\ | Gross profit as % of net revenues | 41% | 35% | | | - Finished pharmaceutical product net revenues increased by 19%, driven by lidocaine (14% increase, mainly volume), phytonadione (16% increase, mainly price), medroxyprogesterone (31% increase, from increased unit sales due to Q1 2018 launch), Primatene Mist (new launch), and other products (41% increase, due to demand for Cortrosyn, atropine, calcium chloride, dextrose, and isoproterenol). Naloxone sales decreased by 12% due to lower average selling prices[146] - API sales decreased by 11%, despite recognizing a $1.5 million amendment fee from MannKind. Fluctuations in euro-USD exchange rates also impacted API sales[147][148] - Gross margins increased due to the launch of higher-margin Primatene Mist, increased sales of medroxyprogesterone and Cortrosyn, and higher average selling prices for enoxaparin and phytonadione. Primatene Mist margins benefited from expensed pre-launch inventory[150] - Selling, distribution, and marketing expenses increased by 68% due to Primatene Mist marketing. General and administrative expenses increased by 10% due to higher personnel-related and legal expenses[151] Research and Development Expenses (Nine Months Ended September 30, in thousands) | Item | 2019 | 2018 | Change (Dollars) | Change (%) | |:---|:---|:---|:---|:---|\ | Salaries and personnel-related expenses | $19,621 | $12,691 | $6,930 | 55% |\ | Pre-launch inventory | $158 | $1,573 | $(1,415) | (90)% |\ | Clinical trials | $5,471 | $2,219 | $3,252 | 147% |\ | FDA fees | $598 | $1,690 | $(1,092) | (65)% |\ | Testing, operating and lab supplies | $11,220 | $15,349 | $(4,129) | (27)% |\ | Depreciation | $6,447 | $3,852 | $2,595 | 67% |\ | Other expenses | $5,694 | $3,456 | $2,238 | 65% |\ | Total research and development expenses | $49,209 | $40,830 | $8,379 | 21% | - R&D expenses increased by 21%, primarily due to higher salaries, personnel-related expenses, and depreciation from API and key component development at ANP, and increased clinical trial expenses for generic product pipeline. These increases were partially offset by decreased pre-launch inventory for Primatene Mist and lower FDA fees[153][154] - Other income (expenses), net, saw a significant increase due to the $59.9 million gain from the enoxaparin patent and antitrust litigation settlement in June 2019[156][159] - The income tax provision increased significantly due to differences in pre-tax income (loss) positions, resulting in a 23% effective tax rate for the nine months ended September 30, 2019, compared to 20% benefit in the prior year[156][158] Liquidity and Capital Resources Assessment of the company's cash position, funding needs, and capital management - The Company expects cash requirements to increase significantly due to clinical trials, regulatory approvals, product development, manufacturing, marketing, and strategic acquisitions. Future capital expenditures include facility upgrades and expansions in the U.S., China, and France[157] - As of September 30, 2019, foreign subsidiaries held $33.4 million in cash and cash equivalents, which are not available to fund U.S. parent company operations. The Company believes current cash reserves, operating cash flows, and credit facilities will fund operations for at least the next 12 months[157][160] - Working capital increased by $68.8 million to $182.3 million at September 30, 2019, primarily due to the $59.9 million settlement received from the enoxaparin patent and antitrust litigation[162] Statement of Cash Flow Data (Nine Months Ended September 30, in thousands) | Item | 2019 | 2018 | |:---|:---|:---|\ | Net cash provided by operating activities | $36,110 | $28,674 |\ | Net cash used in investing activities | $(43,175) | $(33,385) |\ | Net cash provided by financing activities | $6,599 | $8,086 |\ | Effect of exchange rate changes on cash | $(260) | $(235) |\ | Net increase (decrease) in cash, cash equivalents, and restricted cash | $(726) | $3,140 | - Net cash provided by operating activities was $36.1 million for the nine months ended September 30, 2019, driven by net income of $45.8 million and non-cash items like depreciation/amortization ($13.3 million) and share-based compensation ($13.0 million). This was partially offset by a $48.9 million net cash outflow from changes in operating assets and liabilities, including increased inventory (enoxaparin and Primatene Mist) and decreased accounts payable[163][164] - Net cash used in investing activities was $43.2 million for the nine months ended September 30, 2019, primarily due to $33.1 million in property, plant, and equipment purchases (U.S., France, China) and $9.8 million in short-term investments[168] - Net cash provided by financing activities was $6.6 million for the nine months ended September 30, 2019, from $18.3 million in ANP private placement proceeds and $2.0 million from equity plans, partially offset by $8.5 million for treasury stock purchases and $5.2 million in debt principal payments[170] - As of September 30, 2019, the Company had $45.0 million in unused borrowing capacity under revolving lines of credit[173] Critical Accounting Policies Review of accounting policies requiring significant judgment and estimation - There were no material changes to critical accounting policies during the three and nine months ended September 30, 2019, other than the adoption of ASC 2016-02, Leases, using the alternative transition method. Comparative information has not been restated[176] Recent Accounting Pronouncements Updates on newly adopted or pending accounting standards and their potential impact - Information regarding recent accounting pronouncements is detailed in Note 2 to the condensed consolidated financial statements[177] Off-Balance Sheet Arrangements Disclosure of any off-balance sheet transactions or relationships - The Company does not have relationships or financial partnerships with unconsolidated entities (e.g., structured finance or special purpose entities) for off-balance sheet arrangements, nor does it engage in trading activities involving non-exchange traded contracts[178] Government Regulation Impact of regulatory environment on the company's operations and product approvals - The 340(B) Public Health Services drug pricing program provides increased discounts for certain products, including Cortrosyn, as of January 1, 2019[179] - The Company's facilities and products are subject to regulation by federal and state agencies, including the FDA (formulation, manufacture, distribution, packaging, labeling) and DEA (controlled substances)[180] - FDA preapproval inspections at the Amphastar facility (Feb 2019) and IMS facility (Feb-Mar 2019) resulted in Form 483 observations, to which the Company responded and believes will satisfy FDA requirements[181][182] - A routine post-marketing adverse drug experience reporting (PADE) inspection at the Amphastar facility (Jul 2019) and a pre-approval biomonitoring inspection at a California clinical trial site (Aug-Sep 2019) resulted in no Form 483 findings[183][184] - A cGMP inspection at the Chinese subsidiary ANP (Oct 2019) resulted in one Form 483 observation, to which the Company responded and believes will satisfy FDA requirements[185] - A preapproval inspection at the IMS facility (Oct-Nov 2019) resulted in Form 483 observations, to which the Company will respond within the required timeframe[186] Item 3. Quantitative and Qualitative Disclosure about Market Risk This section discusses the Company's exposure to market risks, including investment, interest rate, and foreign currency risks Investment Risk Assessment of risks related to the company's investment portfolio - The Company regularly reviews investments for impairment and recognizes losses when declines in fair value are other than temporary. As of September 30, 2019, no investments experienced such declines[189] - As of September 30, 2019, the Company held $28.3 million in Chinese banks, $4.3 million in a French bank, $0.8 million in a UK bank, $42.6 million in money market accounts, and approximately $3.8 million in corporate bonds[190] Interest Rate Risk Evaluation of the impact of interest rate fluctuations on financial instruments - The Company's primary exposure to market risk is interest-rate-sensitive investments and credit facilities. Due to the short-term nature of investments, material interest rate risk is not anticipated for them[191] - As of September 30, 2019, $11.5 million of the $45.0 million long-term debt and finance leases had variable interest rates (weighted-average 5.3%). A 1% increase in these rates would raise annual interest expense by approximately $0.1 million[192] Foreign Currency Exchange Risk Analysis of exposure to fluctuations in foreign currency exchange rates - Finished pharmaceutical products, primarily sold in the U.S., have minimal foreign currency exposure. However, API sales contracts are often euro-denominated, exposing the Company to euro-USD fluctuations[193] - ANP's books are remeasured from Chinese yuan to USD, with adjustments reflected in the statement of operations. AFP (euros) and IMS UK (British pounds) results are translated to USD, with translation adjustments in comprehensive income (loss)[194][195] - As of September 30, 2019, a 10% unfavorable change (USD strengthening) would result in approximately $3.2 million reduction in foreign currency gains and $3.5 million reduction in other comprehensive income. Foreign subsidiaries held $7.0 million in foreign currency cash balances[197] Item 4. Controls and Procedures Assessment of disclosure controls and internal control over financial reporting - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of September 30, 2019, ensuring timely and accurate reporting under the Exchange Act[198] - There were no material changes in internal control over financial reporting during the quarter ended September 30, 2019[199] - Management acknowledges that internal control systems, no matter how well designed, can only provide reasonable assurance and have inherent limitations, meaning they may not prevent or detect all errors or fraud[200] Part II. OTHER INFORMATION Additional information including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings Reference to detailed information on the company's legal matters - For information regarding legal proceedings, refer to "Part I – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Litigation"[201] Item 1A. Risk Factors Updates on significant risks affecting the company's business and operations - No material changes from previously disclosed risk factors in the Annual Report on Form 10-K for the year ended December 31, 2018, except as noted[201] - A significant risk remains from marketing certain prescription products without formal FDA approval, which may be subject to enforcement actions, recalls, or marketing cessation by the FDA at any time, despite the Company's efforts to comply with 'grandfather' exceptions or file ANDAs/NDAs[202][203][206] - The Company reintroduced several withdrawn products (atropine, morphine, dextrose, epinephrine prefilled syringes) at the FDA's request during drug shortages in 2010, while preparing applications for approval. The epinephrine injection, USP vial product was discontinued in Q2 2017 at FDA's request[204][205] - Net revenues from unapproved products were $29.1 million for the nine months ended September 30, 2019, and $19.8 million for the same period in 2018[206] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details on share repurchase activities during the reporting period Issuer Purchases of Equity Securities (Third Quarter 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | |:---|:---|:---|:---|\ | July 1 – July 31, 2019 | — | $— | — |\ | August 1 – August 31, 2019 | 72,125 | $21.50 | 72,125 |\ | September 1 – September 30, 2019 | 134,561 | $21.32 | 134,561 |\ | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (as of Sep 30, 2019) | | | $35.6 million | Item 3. Defaults Upon Senior Securities Statement on the applicability of this item to the company Item 4. Mine Safety Disclosures Statement on the applicability of this item to the company Item 5. Other Information Statement on the applicability of this item to the company Item 6. Exhibits List of documents filed as part of the Form 10-Q - Exhibits include the Ninth Amendment to the Acquisition Loan with Cathay Bank (July 19, 2019), the Fifth Amendment to the Supply Agreement with MannKind Corporation (August 2, 2019), CEO and CFO certifications (302 and 906), and XBRL Instance, Schema, Calculation, Label, and Presentation Linkbase Documents[209] Signatures Official certifications and signatures for the Form 10-Q filing - The report was signed by Jack Y. Zhang, Chief Executive Officer (Principal Executive Officer), and William J. Peters, Chief Financial Officer (Principal Financial and Accounting Officer), on November 8, 2019[210]