Amphastar Pharmaceuticals(AMPH) - 2022 Q1 - Quarterly Report

Special Note About Forward-Looking Statements This section cautions readers about forward-looking statements, highlighting inherent risks and uncertainties that may cause actual results to differ materially - Forward-looking statements are identified by words such as "expect," "intend," "plan," "anticipate," and "believe" - Key areas of uncertainty include sales and marketing, manufacturing and supply chain integrity (especially single-source suppliers), COVID-19 impact, ability to attract personnel, natural catastrophic events, global economic conditions, FDA approvals, clinical trial success, regulatory compliance costs, competition, business expansion in China, environmental regulations, market acceptance of new products, healthcare reforms, intellectual property, product liability, acquisitions, international expansion, and compliance with laws[10][11][12] - Readers should not place undue reliance on these statements, as actual results may differ materially due to significant risks and uncertainties, many of which are detailed in the 10-K and 10-Q[13] Part I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the Company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, segment performance, and other financial disclosures for the periods ended March 31, 2022, and December 31, 2021 Condensed Consolidated Balance Sheets Balance Sheet Highlights | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (YoY) | | :----- | :---------------------------- | :------------------------------- | :----------- | | Total Assets | $716,238 | $671,529 | +$44,709 | | Total Liabilities | $236,713 | $226,007 | +$10,706 | | Total Equity | $479,525 | $445,522 | +$34,003 | | Cash and Cash Equivalents | $172,627 | $126,353 | +$46,274 | | Total Current Assets | $364,415 | $318,119 | +$46,296 | | Total Current Liabilities | $114,364 | $103,810 | +$10,554 | Condensed Consolidated Statements of Operations Statements of Operations Highlights | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (YoY) | | :----- | :----------------------------------------------- | :----------------------------------------------- | :----------- | | Net Revenues | $120,368 | $103,020 | +$17,348 | | Gross Profit | $55,826 | $44,946 | +$10,880 | | Income from Operations | $21,614 | $10,306 | +$11,308 | | Total Non-operating Income (expenses), net | $7,419 | $(5,192) | +$12,611 | | Income before Income Taxes | $29,033 | $5,114 | +$23,919 | | Net Income attributable to Amphastar Pharmaceuticals, Inc. | $24,253 | $5,041 | +$19,212 | | Basic EPS | $0.50 | $0.11 | +$0.39 | | Diluted EPS | $0.47 | $0.10 | +$0.37 | Condensed Consolidated Statements of Comprehensive Income Comprehensive Income Highlights | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (YoY) | | :----- | :----------------------------------------------- | :----------------------------------------------- | :----------- | | Net income attributable to Amphastar Pharmaceuticals, Inc. | $24,253 | $5,041 | +$19,212 | | Foreign currency translation adjustment | $(480) | $(1,921) | +$1,441 | | Total comprehensive income attributable to Amphastar Pharmaceuticals, Inc. | $23,773 | $3,120 | +$20,653 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' Equity Highlights | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | Change (YoY) | | :----- | :---------------------------- | :------------------------------- | :----------- | | Total Equity | $479,525 | $445,522 | +$34,003 | | Additional Paid-in Capital | $433,454 | $422,423 | +$11,031 | | Retained Earnings | $204,590 | $180,337 | +$24,253 | | Treasury Stock | $(151,280) | $(150,479) | -$(801) | Condensed Consolidated Statements of Cash Flows Cash Flow Highlights | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (YoY) | | :----- | :----------------------------------------------- | :----------------------------------------------- | :----------- | | Net cash provided by operating activities | $50,765 | $22,825 | +$27,940 | | Net cash used in investing activities | $(9,110) | $(8,695) | -$(415) | | Net cash provided by (used in) financing activities | $4,648 | $(6,639) | +$11,287 | | Net increase in cash, cash equivalents, and restricted cash | $46,274 | $7,329 | +$38,945 | | Cash, cash equivalents, and restricted cash at end of period | $172,862 | $101,836 | +$71,026 | Notes to Condensed Consolidated Financial Statements Note 1. General Amphastar Pharmaceuticals, Inc. is a bio-pharmaceutical company specializing in generic and proprietary injectable, inhalation, and intranasal products, including insulin API - The Company develops, manufactures, markets, and sells generic and proprietary injectable, inhalation, and intranasal products, including those with high technical barriers[30] - Insulin API products are sold to other pharmaceutical companies and used internally for product development[30] - Primatene Mist®, an inhalation product, is primarily distributed through drug retailers[30] Note 2. Summary of Significant Accounting Policies This note outlines the significant accounting policies used in preparing the condensed consolidated financial statements, including the basis of presentation, impact of the COVID-19 pandemic, use of estimates, foreign currency translation, advertising expense recognition, and fair value measurement of financial instruments Basis of Presentation - Unaudited condensed consolidated financial statements include the Company and its subsidiaries, prepared in accordance with GAAP[32] - Intercompany activity is eliminated; prior period cash flow amounts reclassified for conformity[32] - Subsidiaries include International Medication Systems, Limited (IMS), Armstrong Pharmaceuticals, Inc. (Armstrong), Amphastar Nanjing Pharmaceuticals Inc. (ANP), Amphastar France Pharmaceuticals, S.A.S. (AFP), Amphastar UK Ltd. (AUK), and International Medication Systems (UK) Limited (IMS UK)[33] COVID-19 Pandemic - The Company is subject to risks and uncertainties from the ongoing COVID-19 pandemic, with the full impact being highly uncertain and difficult to predict[34] - Production facilities continued to operate with enhanced safety measures; recent increases in COVID-19 cases in Shanghai, China, have led to port shutdowns and delays, which could impact operations[35] Use of Estimates - Financial statements require management to make estimates and assumptions, including allowances for credit losses, fair value of financial instruments, chargebacks, rebates, product returns, inventory adjustments, impairment of assets, litigation reserves, share-based compensation, and deferred tax assets[36] Foreign Currency - The functional currency for the Company, domestic subsidiaries, ANP (China), and AUK (UK) is the U.S. Dollar. ANP's books are remeasured into USD, with adjustments reflected in consolidated statements of operations[37] - AFP (France) and IMS UK (UK) use local currencies (euros, British pounds) as functional currencies; their financial statements are translated to USD, with translation adjustments reflected in stockholders' equity as accumulated other comprehensive income (loss)[38] Foreign Currency Transaction Losses | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :----- | :---------------------------------------------- | :---------------------------------------------- | | Unrealized losses of intercompany foreign currency transactions (long-term investment nature) | $0.6 | $1.5 | Advertising Expense - Advertising expenses, primarily for Primatene Mist®, are expensed as incurred or in the period a major campaign is first presented, and are included as a component of selling, distribution and marketing[40][42] Advertising Expenses | Metric | Three Months Ended March 31, 2022 (in millions) | Three Months Ended March 31, 2021 (in millions) | | :----- | :---------------------------------------------- | :---------------------------------------------- | | Advertising Expenses | $2.4 | $2.2 | Financial Instruments - Carrying amounts of most short-term financial instruments approximate fair value due to short maturities[43] - Long-term obligations, primarily variable rate debt, approximate fair value as stated borrowing rates are comparable to current market rates[43] - The Company uses fixed interest rate swap contracts to manage variable interest rates, recorded at fair value[43] Cash and Cash Equivalents - Consist of cash, money market accounts, certificates of deposit, and highly liquid investments purchased with original maturities of three months or less[43] Investments - Investments as of March 31, 2022, and December 31, 2021, included certificates of deposit and investment grade corporate and municipal bonds with original maturity dates between three and fifteen months[44] Restricted Cash - Restricted cash of $0.2 million as of March 31, 2022, and December 31, 2021, serves as collateral required for the Company to guarantee certain vendor payments in France[44] Restricted Short-Term Investments - Restricted short-term investments of $2.2 million as of March 31, 2022, and December 31, 2021, are certificates of deposit collateralizing standby letters of credit for workers' compensation self-insurance[44] Deferred Income Taxes - The Company uses the liability method for income taxes, determining deferred taxes based on temporary differences between financial statements and tax basis using enacted tax rates[45] - A valuation allowance is recorded if deferred tax assets are unlikely to be realized[45] Litigation, Commitments and Contingencies - Provisions for contingent losses are accrued when a liability is probable and estimable; legal fees are expensed as incurred[45] - Potential gains are generally not recognized until realized[45] Recent Accounting Pronouncements - The Company does not believe any recently issued or not-yet-effective accounting pronouncements would materially affect its condensed consolidated financial statements[46] Note 3. ANP Restructuring Following the ANP restructuring in Q3 2021, the Company now holds a 14% noncontrolling equity method investment in Hanxin, maintaining significant influence and a related party relationship - The ANP restructuring in Q3 2021 reduced the Company's ownership in Hanxin to a 14% noncontrolling equity method investment[47] - The Company retains significant influence over Hanxin, including a board seat, and Hanxin remains a related party[47] Note 4. Revenue Recognition Revenue is recognized when customers gain control of goods, typically upon delivery or shipment, with significant estimates made for variable consideration like chargebacks, rebates, and product returns Provision for Chargebacks and Rebates - Chargebacks relate to reimbursements to wholesalers for price differences, while rebates are paid to retailers, payers, and providers based on contracts or statutory requirements[53] - Estimates are made using the expected value method based on wholesaler inventory, historical rates, and current contract pricing[53] Chargebacks and Rebates Provision | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----- | :----------------------------------------------- | :----------------------------------------------- | | Beginning balance | $20,167 | $20,380 | | Provision for chargebacks and rebates | $46,779 | $47,031 | | Credits and payments issued to third parties | $(48,394) | $(46,881) | | Ending balance | $18,552 | $20,530 | Accrual for Product Returns - The Company accrues for product returns, primarily expired products, at the time of revenue recognition using the expected value method, based on historical data, contract terms, and market conditions. API product sales are generally non-returnable[56][57] Product Returns Accrual | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----- | :----------------------------------------------- | :----------------------------------------------- | | Beginning balance | $21,677 | $14,204 | | Provision for product returns | $1,192 | $3,233 | | Credits issued to third parties | $(1,480) | $(2,517) | | Ending balance | $21,389 | $14,920 | | Aggregate product return rates (% of qualified sales) | 1.6% | 1.4% | Note 5. Income per Share Attributable to Amphastar Pharmaceuticals, Inc. Stockholders This note details the calculation of basic and diluted net income per share, showing a significant increase in both metrics for the three months ended March 31, 2022, compared to the prior year, reflecting improved profitability - Basic EPS is calculated based on weighted-average shares outstanding, while diluted EPS includes potential dilutive shares from stock options, restricted stock units, and ESPP[59] Earnings Per Share Calculation | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :----- | :-------------------------------- | :-------------------------------- | | Net income attributable to Amphastar Pharmaceuticals, Inc. | $24,253 (in thousands) | $5,041 (in thousands) | | Weighted-average shares outstanding — basic | 48,138 (in thousands) | 47,520 (in thousands) | | Weighted-average shares outstanding — diluted | 51,979 (in thousands) | 49,518 (in thousands) | | Basic EPS | $0.50 | $0.11 | | Diluted EPS | $0.47 | $0.10 | Note 6. Segment Reporting The Company operates in two reportable segments: finished pharmaceutical products and API products. The finished pharmaceutical products segment, which includes Primatene Mist®, glucagon, and other critical care drugs, significantly outperformed the API segment in net revenues and gross profit for the three months ended March 31, 2022 - The Company has two reportable segments: Finished pharmaceutical products and APIs[63] - Finished pharmaceutical products include Primatene Mist®, glucagon, enoxaparin, naloxone, phytonadione, lidocaine, epinephrine, and contract manufacturing/research[64] - API segment manufactures and distributes recombinant human insulin API and porcine insulin API[64] Segment Net Revenues and Gross Profit | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (YoY) | | :----- | :----------------------------------------------- | :----------------------------------------------- | :----------- | | Net Revenues: | | | | | Finished pharmaceutical products | $116,546 | $97,882 | +$18,664 | | API | $3,822 | $5,138 | -$(1,316) | | Gross Profit (Loss): | | | | | Finished pharmaceutical products | $56,939 | $45,286 | +$11,653 | | API | $(1,113) | $(340) | -$(773) | Finished Pharmaceutical Product Sales | Product | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----- | :----------------------------------------------- | :----------------------------------------------- | | Primatene Mist® | $24,697 | $18,383 | | Epinephrine | $15,156 | $15,578 | | Glucagon | $10,984 | $7,984 | | Lidocaine | $10,590 | $9,071 | | Phytonadione | $10,475 | $9,565 | | Enoxaparin | $10,124 | $10,658 | | Naloxone | $7,413 | $6,341 | | Other finished pharmaceutical products | $27,107 | $20,302 | Geographic Segment Data | Geographic Region | Net Revenue (3 Months Ended March 31, 2022) (in thousands) | Net Revenue (3 Months Ended March 31, 2021) (in thousands) | Long-Lived Assets (March 31, 2022) (in thousands) | Long-Lived Assets (December 31, 2021) (in thousands) | | :---------------- | :--------------------------------------------------------- | :--------------------------------------------------------- | :------------------------------------------------ | :--------------------------------------------------- | | United States | $117,114 | $99,170 | $137,423 | $134,731 | | China | $933 | $1,121 | $90,770 | $91,876 | | France | $2,321 | $2,729 | $43,176 | $44,884 | | Total | $120,368 | $103,020 | $271,369 | $271,491 | Note 7. Customer and Supplier Concentration The Company has significant customer concentration with three major wholesale drug distributors (AmerisourceBergen, McKesson, and Cardinal Health) accounting for a large portion of net revenue and accounts receivable - Three major wholesale drug distributors (AmerisourceBergen, Cardinal Health, and McKesson) are significant customers, representing a large percentage of net revenue and accounts receivable[74] Customer Concentration Metrics | Customer | % of Total Accounts Receivable (March 31, 2022) | % of Total Accounts Receivable (December 31, 2021) | % of Net Revenue (3 Months Ended March 31, 2022) | % of Net Revenue (3 Months Ended March 31, 2021) | | :------- | :---------------------------------------------- | :------------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | AmerisourceBergen | 13% | 13% | 22% | 25% | | McKesson | 23% | 30% | 18% | 20% | | Cardinal Health | 22% | 20% | 16% | 15% | - The Company depends on a limited number of suppliers for FDA-regulated raw materials, APIs, and components, with potential for adverse effects if supply is disrupted[76][77] Note 8. Fair Value Measurements This note describes the Company's fair value measurements, categorizing financial assets and liabilities into a three-level hierarchy based on input observability - Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants[78] - A three-level hierarchy prioritizes inputs: Level 1 (quoted prices in active markets for identical assets), Level 2 (quoted prices for similar assets or observable market data), and Level 3 (unobservable inputs)[78] Fair Value Measurement Hierarchy | Financial Instrument | Fair Value (March 31, 2022) (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | | :------------------- | :----------------------------------------- | :--------------------- | :--------------------- | :--------------------- | | Cash equivalents - money market | $140,991 | $140,991 | $— | $— | | Restricted cash - money market | $235 | $235 | $— | $— | | Short-term investments - certificates of deposit | $4,600 | $— | $4,600 | $— | | Restricted short-term investments - certificates of deposit | $2,200 | $— | $2,200 | $— | | Corporate and municipal bonds | $9,676 | $— | $9,676 | $— | | Interest rate swap related to variable rate loans | $3,609 | $— | $3,609 | $— | | Total Fair Value Measurement | $161,311 | $141,226 | $20,085 | $— | Note 9. Investments The Company's held-to-maturity investments, primarily corporate and municipal bonds, increased in amortized cost from December 31, 2021, to March 31, 2022 Held-to-Maturity Investments | Investment Type | Amortized Cost (March 31, 2022) (in thousands) | Fair Value (March 31, 2022) (in thousands) | Amortized Cost (December 31, 2021) (in thousands) | Fair Value (December 31, 2021) (in thousands) | | :-------------- | :--------------------------------------------- | :----------------------------------------- | :------------------------------------------------ | :------------------------------------------------ | | Corporate bonds (due within 1 year) | $5,557 | $5,527 | $2,481 | $2,478 | | Municipal bonds (due within 1 year) | $4,162 | $4,149 | $3,263 | $3,261 | | Corporate bonds (due within 1 to 3 years) | $— | $— | $1,248 | $1,245 | | Total Investments | $9,719 | $9,676 | $6,992 | $6,984 | - The Company's share of Hanxin's losses for the three months ended March 31, 2022, was $0.7 million, recorded in the "Equity in losses of unconsolidated affiliate" line on the consolidated statement of operations[86] Note 10. Goodwill and Intangible Assets The Company's goodwill and intangible assets, net, decreased slightly from December 31, 2021, to March 31, 2022 Goodwill and Intangible Assets Net Book Value | Asset Type | Net Book Value (March 31, 2022) (in thousands) | Net Book Value (December 31, 2021) (in thousands) | | :--------- | :--------------------------------------------- | :------------------------------------------------ | | Definite-lived intangible assets | $5,955 | $6,332 | | Indefinite-lived intangible assets | $32,481 | $32,538 | | Total Goodwill and Intangible Assets, net | $38,436 | $38,870 | - The Primatene® trademark, acquired in January 2009 for $29.2 million, is an indefinite-lived intangible asset[92] Goodwill Changes | Goodwill Changes | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--------------- | :---------------------------- | :------------------------------- | | Beginning balance | $3,313 | $3,940 | | ANP restructuring | $— | $(374) | | Currency translation | $(57) | $(253) | | Ending balance | $3,256 | $3,313 | Note 11. Inventories Total inventories increased to $95.1 million as of March 31, 2022, from $92.8 million at December 31, 2021, primarily due to an increase in work in process Inventory Composition | Inventory Component | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------ | :---------------------------- | :------------------------------- | | Raw materials and supplies | $40,358 | $41,853 | | Work in process | $40,264 | $33,298 | | Finished goods | $14,525 | $17,656 | | Total Inventories | $95,147 | $92,807 | - Charges of $8.0 million (Q1 2022) and $9.5 million (Q1 2021) were included in the cost of revenues to adjust inventory and related firm purchase commitments to their net realizable value[93] - Losses on firm purchase commitments related to raw materials on order were $6.4 million as of March 31, 2022[94] Note 12. Property, Plant, and Equipment Property, plant, and equipment, net, decreased slightly to $243.2 million as of March 31, 2022, from $244.2 million at December 31, 2021, with construction in progress increasing Property, Plant, and Equipment Net Book Value | Asset Component | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------- | :---------------------------- | :------------------------------- | | Buildings | $130,364 | $130,582 | | Machinery and equipment | $207,006 | $207,883 | | Construction in progress | $44,685 | $41,186 | | Total property, plant, and equipment, net | $243,248 | $244,244 | Note 13. Accounts Payable and Accrued Liabilities Total accounts payable and accrued liabilities increased to $95.8 million as of March 31, 2022, from $89.5 million at December 31, 2021, primarily driven by increases in accrued customer fees and rebates, accrued payroll, and accrued loss on firm purchase commitments Accounts Payable and Accrued Liabilities Breakdown | Liability Component | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------ | :---------------------------- | :------------------------------- | | Accrued customer fees and rebates | $12,903 | $12,121 | | Accrued payroll and related benefits | $24,178 | $23,256 | | Accrued product returns, current portion | $15,898 | $16,028 | | Accrued loss on firm purchase commitments | $9,779 | $7,133 | | Other accrued liabilities | $9,209 | $8,793 | | Accounts payable | $23,843 | $22,214 | | Total accounts payable and accrued liabilities | $95,810 | $89,545 | Note 14. Debt The Company's total debt, net of current portion and unamortized debt issuance costs, remained stable at $74.3 million as of March 31, 2022 Debt Structure | Debt Type | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------- | :---------------------------- | :------------------------------- | | Term loan with Capital One N.A. due August 2026 | $69,125 | $69,563 | | Mortgage loan with East West Bank due June 2027 | $8,313 | $8,353 | | Finance lease obligations due December 2026 | $267 | $269 | | Other debt | $337 | $398 | | Total Debt | $78,042 | $78,583 | | Less: Current portion of long-term debt | $(2,159) | $(2,202) | | Less: Unamortized debt issuance costs | $(1,535) | $(1,605) | | Long-term debt, net of current portion and unamortized debt issuance costs | $74,348 | $74,776 | - The Company was in compliance with all debt covenants as of March 31, 2022, and December 31, 2021[102] - The Company has entered into fixed interest rate swap contracts for its mortgage loan and term loan to exchange variable interest rates for fixed rates[100] Note 15. Income Taxes The income tax provision for the three months ended March 31, 2022, was $4.1 million, significantly higher than the prior year, with an effective tax rate of 14%, down from 23% Income Tax Provision and Effective Rate | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----- | :----------------------------------------------- | :----------------------------------------------- | | Income before taxes | $29,033 | $5,114 | | Income tax provision | $4,077 | $1,155 | | Effective tax rate | 14% | 23% | - The Company continues to record a full valuation allowance on AFP's net deferred income tax assets until AFP generates sufficient taxable income to realize its deferred income tax assets[105] Note 16. Stockholders' Equity This note details changes in stockholders' equity, including share buyback activities, equity incentive plans, and share-based compensation expenses Share Buyback Program - The Company repurchased 51,168 shares ($1.2 million) in Q1 2022 and 204,698 shares ($3.8 million) in Q1 2021[106] - In May 2022, the Board authorized a $25.0 million increase to the share buyback program, bringing the aggregate authorization to $185.0 million, primarily to offset dilution created by equity compensation programs[106] - As of March 31, 2022, $7.3 million remained available for repurchase under the program[216] Amended and Restated 2015 Equity Incentive Plan - As of March 31, 2022, 6,462,223 shares of common stock were reserved for future issuance under the 2015 Plan, including 1,192,873 shares reserved in January 2022 pursuant to the evergreen provision[109] 2014 Employee Stock Purchase Plan - As of March 31, 2022, 954,456 shares of common stock were issued under the ESPP, with 1,045,544 shares remaining available for issuance[109] - ESPP expenses were $0.2 million in Q1 2022 and $0.1 million in Q1 2021[110] Share-Based Award Activity and Balances (excluding the ANP Equity Plan) - Share-based compensation expense is recognized at fair value using the Black-Scholes option-pricing model for options and the Company's common share price for RSUs[110] Share-Based Compensation Assumptions | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :----- | :-------------------------------- | :-------------------------------- | | Average volatility | 41.1% | 42.2% | | Average risk-free interest rate | 2.2% | 1.3% | | Weighted-average expected life in years | 6.3 | 6.3 | | Dividend yield rate | 0% | 0% | - Options outstanding as of March 31, 2022, were 8,355,106 with a weighted-average exercise price of $17.40[115] - Total unrecognized compensation cost for non-vested stock option based compensation arrangements was $18.8 million as of March 31, 2022, expected to be recognized over a weighted-average period of 3.1 years[118] Restricted Stock Units - RSUs are granted to certain employees and Board members with vesting periods up to five years; expense is based on common stock fair value at grant and amortized over the service period[119][121] - Expenses related to RSU awards were $2.4 million in Q1 2022 and $2.2 million in Q1 2021[121] - Total unrecognized compensation cost for non-vested RSU stock-based compensation arrangements was $20.0 million as of March 31, 2022, expected to be recognized over a weighted-average period of 3.1 years[122] The 2018 ANP Equity Incentive Plan - The 2018 ANP Equity Incentive Plan was terminated during Q2 2021 in connection with the ANP restructuring[124] - Prior to termination, the Company recorded $0.1 million expense in Q1 2021 related to stock options issued by ANP under the 2018 Plan[124] Share-based Compensation Expense Share-Based Compensation Expense by Category | Expense Category | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :--------------- | :----------------------------------------------- | :----------------------------------------------- | | Cost of revenues | $1,385 | $1,146 | | Selling, distribution, and marketing | $168 | $127 | | General and administrative | $2,861 | $2,968 | | Research and development | $608 | $593 | | Total share-based compensation | $5,022 | $4,834 | Note 17. Employee Benefits This note outlines the Company's employee benefit plans, including a 401(k) plan with employer matching, a defined benefit pension plan for its French subsidiary (AFP), and a non-qualified deferred compensation plan 401(k) Plan - The Company matches contributions at a rate of 50% on the first 6% of employee contributions[127] - Total employer contributions for the three months ended March 31, 2022, and 2021, were approximately $0.6 million and $0.5 million, respectively[127] Defined Benefit Pension Plan - The Company's French subsidiary, AFP, has an unfunded defined-benefit plan with a benefit obligation of $2.7 million at March 31, 2022, and December 31, 2021[128] - The liability is based on a discount rate of 1.00% and is included in other long-term liabilities[128] Non-qualified Deferred Compensation Plan - The plan allows certain eligible participants to defer a portion of their cash compensation and provides a matching contribution at the discretion of the Company[129] - Plan assets were valued at approximately $3.5 million and plan liabilities at approximately $3.6 million as of March 31, 2022[129] Note 18. Commitments and Contingencies As of March 31, 2022, the Company had purchase commitments totaling approximately $72.9 million for equipment and raw materials, with most expected to be fulfilled by 2023 - The Company has entered into commitments to purchase equipment and raw materials for an aggregate amount of approximately $72.9 million as of March 31, 2022[130] - Most of these commitments with a remaining term in excess of one year are anticipated to be fulfilled by 2023[130] Note 19. Litigation The Company settled the Regadenoson patent litigation in January 2022, receiving $5.4 million, which was recorded as other income - The Company and Astellas-Gilead reached an agreement to resolve the Regadenoson patent litigation, with the Company receiving $5.4 million in January 2022, recorded as other income[132] - Management believes the ultimate resolution of other claims, arbitrations, investigations, and lawsuits is not expected to have a material adverse effect on its financial position, results of operations, or cash flows[133] Note 20. Subsequent Event In April 2022, ANP entered a contract manufacturing agreement with related party Hanxin to develop and manufacture APIs and finished products for the Chinese market on a cost-plus basis, subject to marketing authorizations - In April 2022, the Company's Chinese subsidiary, ANP, entered into a contract manufacturing agreement with Hanxin, a related party[134] - Hanxin will develop several active pharmaceutical ingredients and finished products for the Chinese market, with ANP manufacturing them on a cost-plus basis, subject to Hanxin obtaining required marketing authorizations[134] Item 2. Management's Discussion and Analysis of Financial Condition and Operations This section provides management's perspective on the Company's financial condition, results of operations, liquidity, and cash flows for the three months ended March 31, 2022 Overview - Amphastar is a bio-pharmaceutical company focused on developing, manufacturing, marketing, and selling technically challenging generic and proprietary injectable, inhalation, and intranasal products, as well as insulin API products[136] - The Company has over 20 products and a portfolio of generic abbreviated new drug applications (ANDAs), biosimilar insulin product candidates, and proprietary product candidates in various development stages[136] - Key products by net revenues currently include Primatene Mist®, epinephrine, glucagon, phytonadione, lidocaine, and enoxaparin sodium injection[137] - FDA granted approval of ganirelix acetate injection in April 2022, with a planned launch in the second quarter of 2022[137] - The 2021 restructuring of the Chinese subsidiary, ANP, reduced ownership in Hanxin Pharmaceutical Technology Co., Ltd. to 14%, accounted for as an equity method investment, with Hanxin remaining a related party[138] COVID-19 Pandemic - Production facilities continue to operate with enhanced safety measures; however, recent COVID-19 increases in Shanghai have caused port shutdowns and delays, potentially impacting operations[139][140] - Some ongoing clinical trials experienced short-term interruptions in patient recruitment and increased expenses due to new protocols to protect participants from COVID-19[139] - Certain suppliers had difficulties meeting delivery commitments, leading to longer lead times for components[139] Business Segments - The Company's two reportable segments are finished pharmaceutical products and API products[143] - Finished pharmaceutical products include Primatene Mist®, epinephrine, glucagon, phytonadione, lidocaine, enoxaparin, and naloxone[143] - The API segment manufactures and distributes recombinant human insulin API and porcine insulin API[143] Results of Operations For the three months ended March 31, 2022, net revenues increased by 17% year-over-year, primarily driven by a 19% increase in finished pharmaceutical products Net revenues Net Revenues by Segment | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (YoY) | % Change (YoY) | | :----- | :----------------------------------------------- | :----------------------------------------------- | :----------- | :------------- | | Finished pharmaceutical products | $116,546 | $97,882 | +$18,664 | 19% | | API | $3,822 | $5,138 | $(1,316) | (26)% | | Total net revenues | $120,368 | $103,020 | +$17,348 | 17% | - Primatene Mist® sales grew 34% due to increased unit volumes, primarily from the continued success of advertising campaigns[146] - Glucagon sales increased 38% due to an increase in unit volumes, as the prior year period did not include a full quarter of sales due to its Q1 2021 launch[146] - Lidocaine sales increased 17% primarily due to an increase in unit volumes[146] - Phytonadione sales increased 10% primarily due to higher average selling price[146] - Enoxaparin sales decreased 5% primarily due to a competitor re-entering the market during Q2 2021[146] - Naloxone sales increased 17% primarily due to an increase in unit volumes[146] - Other finished pharmaceutical products increased 34% primarily due to higher unit volumes of calcium chloride and sodium bicarbonate, which were in high demand due to market shortages[146] - API sales primarily depend on the timing of customer purchases and are impacted by euro-USD fluctuations. The remaining $1.0 million amendment fee from MannKind Corporation will be recognized ratably to net revenues in 2022[148] - The Company experienced a backlog of approximately $5.9 million in Q1 2022 for various products, partially brought on by competitor shortages and supplier constraints[149] Gross Margins Gross Margin Percentage | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :----- | :-------------------------------- | :-------------------------------- | | Gross profit as % of net revenues | 46% | 44% | - Gross margins increased due to higher sales of Primatene Mist® and glucagon, which are higher-margin products[150] - These increases were partially offset by overall increases in labor cost, increased cost for heparin raw material (for enoxaparin), and a lower average selling price for enoxaparin[150][152] - The Company believes increased sales of higher-margin products (Primatene Mist®, glucagon, and new products) will offset rising labor and component costs[152] Selling, distribution and marketing, and general and administrative Operating Expenses | Expense Category | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (YoY) | % Change (YoY) | | :--------------- | :----------------------------------------------- | :----------------------------------------------- | :----------- | :------------- | | Selling, distribution, and marketing | $5,519 | $4,537 | +$982 | 22% | | General and administrative | $12,470 | $15,338 | $(2,868) | (19)% | - Selling, distribution and marketing expenses increased primarily due to increased freight expenses[153] - General and administrative expense decreased primarily due to a decrease in legal expenses and a decrease in expenses in China due to the ANP restructuring[153] - Selling, distribution and marketing expenses are expected to continue to increase due to increased marketing expenditures for Primatene Mist®[154] Research and development Research and Development Expenses | Expense Category | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (YoY) | % Change (YoY) | | :--------------- | :----------------------------------------------- | :----------------------------------------------- | :----------- | :------------- | | Salaries and personnel-related expenses | $6,484 | $6,979 | $(495) | (7)% | | Clinical trials | $105 | $738 | $(633) | (86)% | | Testing, operating and lab supplies | $5,401 | $2,153 | +$3,248 | 151% | | Total research and development expenses | $16,223 | $14,765 | +$1,458 | 10% | - R&D expenses increased primarily due to an increase in testing, operating, and lab supplies as a result of increased expenditures on raw materials and components for pipeline products, partially offset by a decrease in clinical trial expense due to a shift in timing[155] - Substantial investments in R&D are expected to continue, with anticipated increases in clinical trial costs related to biosimilar and inhalation product candidates over the next several quarters and years[156][157] Other income (expense), net Other Income (Expense) Net | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | Change (YoY) | | :----- | :----------------------------------------------- | :----------------------------------------------- | :----------- | | Other income (expense), net | $7,593 | $(5,249) | +$12,842 | - The significant increase in other income was primarily due to a $5.4 million settlement received in January 2022 in connection with the Regadenoson patent litigation[160] - In the first quarter of 2021, the Company recorded an additional $4.4 million of expense in connection with the Aventis litigation[160] Income tax provision Income Tax Provision and Effective Rate | Metric | Three Months Ended March 31, 2022 (in thousands) | Three Months Ended March 31, 2021 (in thousands) | | :----- | :----------------------------------------------- | :----------------------------------------------- | | Income before taxes | $29,033 | $5,114 | | Income tax provision | $4,077 | $1,155 | | Effective tax rate | 14% | 23% | - The effective tax rate for the three months ended March 31, 2022, decreased primarily due to differences in pre-tax income positions and timing of discrete tax items[161] Liquidity and Capital Resources The Company's liquidity improved significantly, with working capital increasing to $250.1 million and net cash provided by operating activities more than doubling Cash Requirements and Sources - Cash requirements are expected to increase significantly in the foreseeable future for clinical trials, regulatory approvals, product development, manufacturing, marketing, and strategic acquisitions[162] - Future capital expenditures include projects to upgrade, expand, and improve manufacturing facilities in the United States and China, with a significant increase expected in 2022[162] - The Company plans to fund facility expansion with cash flows from operations[162] - As of March 31, 2022, foreign subsidiaries collectively held $19.4 million in cash and cash equivalents, which are not available to fund the parent company's operations in the United States[163] - Management believes that cash reserves, operating cash flows, and borrowing availability under credit facilities will be sufficient to fund operations for at least the next 12 months[163] Cash Flows from Operations - Net cash provided by operating activities was $50.8 million for the three months ended March 31, 2022, compared to $22.8 million for the same period in 2021[168][169] - Q1 2022 operating cash flow included $24.3 million net income, $6.8 million depreciation and amortization, $5.0 million share-based compensation expense, and a $17.0 million net cash inflow from changes in operating assets and liabilities (increase in accounts payable and accrued liabilities, decrease in accounts receivable)[168] Investing Activities - Net cash used in investing activities was $9.1 million for the three months ended March 31, 2022, primarily due to $6.1 million in purchases of property, plant, and equipment ($4.3 million in U.S., $0.3 million in France, and $1.5 million in China)[170] - This compares to $8.7 million used in Q1 2021, primarily from $7.6 million in purchases of property, plant, and equipment ($2.6 million in U.S., $0.1 million in France, and $4.9 million in China)[170] Financing Activities - Net cash provided by financing activities was $4.6 million for the three months ended March 31, 2022, primarily from $6.4 million in net proceeds from equity plan settlements, partially offset by $1.2 million to purchase treasury stock and $0.5 million in principal payments on long-term debt[171][174] - Net cash used in financing activities was $6.6 million for the three months ended March 31, 2021, primarily from $3.8 million to purchase treasury stock, $0.9 million in net proceeds used to settle share-based compensation awards, and $2.0 million in principal payments on long-term debt[174] Indebtedness - For more information regarding outstanding indebtedness, refer to "Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Debt" (Note 14)[175] Critical Accounting Policies - There have been no material changes to critical accounting policies as compared to those described in the Annual Report on Form 10-K for the year ended December 31, 2021[176] Recent Accounting Pronouncements - For information regarding recent accounting pronouncements, refer to "Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Summary of Significant Accounting Policies" (Note 2)[177] Off-Balance Sheet Arrangements - The Company does not have any relationships or financial partnerships with unconsolidated entities for off-balance sheet arrangements and does not engage in trading activities involving non-exchange traded contracts[178] Government Regulation - The Company's products and facilities are subject to regulation by federal and state governmental agencies, including the FDA (formulation, manufacture, distribution, packaging, and labeling) and the DEA (controlled substances)[179] Item 3. Quantitative and Qualitative Disclosure about Market Risk There have been no material changes in market risk since the December 31, 2021, Annual Report on Form 10-K, beyond the broad impact of the COVID-19 pandemic - There have been no material changes in market risk from the information provided in the Annual Report on Form 10-K for the year ended December 31, 2021, except for the broad, ongoing effects of the COVID-19 pandemic[180] - The Company is exposed to market risk for changes in the market values of its investments (Investment Risk), the impact of interest rate changes (Interest Rate Risk), and the impact of foreign currency exchange changes (Foreign Currency Exchange Risk)[180] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2022 Evaluation of Disclosure Controls and Procedures - Management, under the supervision and with the participation of the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2022[182] - Based on this evaluation, the CEO and CFO concluded that disclosure controls and procedures were effective to ensure timely and accurate reporting of required information[182] Changes in Internal Control Over Financial Reporting - There have been no changes in internal control over financial reporting that occurred during the quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[183] Inherent Limitations of Internal Controls - Management acknowledges that control systems provide only reasonable, not absolute, assurance and may not prevent or detect all errors and fraud due to inherent limitations like faulty judgments, simple errors, circumvention by individuals, or management override[184] Part II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 19 of the financial statements for information regarding legal proceedings, which includes details on the Regadenoson patent litigation settlement and other ongoing claims - For information regarding legal proceedings, refer to "Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Litigation" (Note 19)[185] Item 1A. Risk Factors This section updates previously disclosed risk factors, emphasizing the ongoing adverse impacts of the COVID-19 pandemic on global economic activity, supply chains, clinical trials, and regulatory compliance COVID-19 Pandemic Impact - The ongoing COVID-19 pandemic, including the recent Omicron variants, has continued to impact worldwide economic activity and financial markets, posing challenges to the business[187] - Mass and rapid production of vaccines has placed increased pressure on the availability of supplies (e.g., glass vials and needles) also used in the Company's products[188] - Disruptions to customers, suppliers, and partners (travel restrictions, business shutdowns) could negatively impact business and results of operations, including cash flows[188] - Some ongoing clinical trials experienced short-term interruptions in patient recruitment and increased expenses due to new protocols to protect participants from COVID-19[190] - Recent increases in COVID-19 cases in Shanghai, China, have led to shutdowns and delays at the ports, which could impact operations[190][191] China Manufacturing Risks - Manufacturing in China (starting materials for Amphadase® and enoxaparin, APIs for isoproterenol and nitroprusside) involves significant risks[193] - Risks include disruptions in facility construction/operation, interruptions due to natural disasters or disease outbreaks (e.g., African swine flu, COVID-19), political unrest, tariffs, and potential nationalization of enterprises or intellectual property[193][194] - Recent COVID-19 shutdowns and delays at Shanghai ports could impact manufacturing operations or raw material supply from China[195] Epinephrine Prefilled Syringe Marketing Without FDA Approval - The Company markets an epinephrine prefilled syringe prescription product without formal FDA approval, under a "grandfather" exception that the FDA strictly construes as unlikely to apply[195][198] - The FDA may require submission for approval, direct recall, or cease marketing, and could take enforcement actions (untitled/warning letters, injunctions, product seizure, penalties)[198] - Net revenues for epinephrine prefilled syringes were $6.2 million for the three months ended March 31, 2022, and $9.3 million for the same period in 2021[201] - An NDA has been filed for epinephrine prefilled syringes to mitigate risk; the long-term impact of changing FDA policy on unapproved drugs remains unclear[201] System Breach or Failure - The Company and its collaborators, third-party providers, distributors, and customers utilize information technology systems and networks to transmit, store, and process electronic data, including clinical data and business proprietary information[203] - Systems are vulnerable to cyber-attacks (e.g., malware, hacking, ransomware, social engineering) and other disruptions, which could lead to data loss, production impairment, and increased costs[206][207] - In Q1 2022, the Chinese subsidiary, ANP, was subject to a security incident that resulted in a temporary disruption to some internal computer systems, incurring response costs[210] - In Q2 2020, the Company experienced a security incident where cyber criminals illegally obtained personal information of certain current and former employees, incurring response and security enhancement costs[212] - Cyber insurance coverage may not be adequate for all losses, and denials of coverage or increased premiums could have a material adverse effect on the business[214] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company repurchased 51,168 shares of common stock totaling $1.2 million during January and February 2022 under its share buyback program Share Repurchase Activity | Period | Total Number of Shares Purchased | Price Paid per Share | | :----- | :------------------------------- | :------------------- | | January 1 – January 31, 2022 | 41,416 | $23.97 | | February 1 – February 28, 2022 | 9,752 | $24.09 | | March 1 – March 31, 2022 | — | — | - As of March 31, 2022, $7.3 million remained available for repurchase under the share buyback program[216] Item 3. Defaults Upon Senior Securities This item is not applicable to the Company for the reported period - Not applicable[217] Item 4. Mine Safety Disclosures This item is not applicable to the Company for the reported period - Not applicable[217] Item 5. Other Information This item is not applicable to the Company for the reported period - Not applicable[217][218] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including certifications, XBRL documents, and other required disclosures - Includes certifications (Rule 13a-14(a), 18 U.S.C. Section 1350) and XBRL instance and taxonomy documents[219] Signatures - The report is signed by Jack Y. Zhang, Chief Executive Officer, and William J. Peters, Chief Financial Officer[220][221] - Date of signing: May 10, 2022[220]