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Amphastar Pharmaceuticals, Inc. - Quarter Report: 2019 March (Form 10-Q)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to             

Commission file number 001-36509

 

 

AMPHASTAR PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

33-0702205

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

11570 6th Street

 

 

Rancho Cucamonga, CA

 

91730

(Address of principal executive offices)

 

(zip code)

 

(909) 980-9484

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒     No  ◻     

Indicate by check mark whether the registrant  has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒     No  ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

◻  

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ◻    No  ☒

Securities registered pursuant to Section 12(b) of the Act:

 

T

 

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

 

 

 

 

Common Stock, par value $0.0001 per share

 

AMPH

 

The NASDAQ Stock Market LLC

 

 

 

 

 

 

The number of shares outstanding of the registrant’s only class of common stock as of May 3, 2019 was 47,065,369.

 

 


 

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AMPHASTAR PHARMACEUTICALS, INC.

TABLE OF CONTENTS

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

 

Special Note About Forward-Looking Statements 

 

 

 

Part I. FINANCIAL INFORMATION 

 

 

PAGE

Item 1. Financial Statements (unaudited) 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 

 

1

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019  and 2018 

 

2

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018 

 

3

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 

 

4

Notes to Condensed Consolidated Financial Statements 

 

5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

33

Item 3. Quantitative and Qualitative Disclosure about Market Risk 

 

40

Item 4. Controls and Procedures 

 

41

Part II. OTHER INFORMATION 

Item 1. Legal Proceedings 

 

42

Item 1A. Risk Factors 

 

42

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

43

Item 3. Defaults Upon Senior Securities 

 

43

Item 4. Mine Safety Disclosures 

 

43

Item 5. Other Information 

 

43

Item 6. Exhibits 

 

44

Signatures 

 

45

 

 

 


 

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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, or Quarterly Report, contains “forward-looking statements” that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the following words: “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these identifying words. Forward-looking statements relate to future events or future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by the forward-looking statements. These forward-looking statements include, but are not limited to, statements about:

 

·

our expectations regarding the sales and marketing of our products;

 

·

our expectations regarding our manufacturing and production and the integrity of our supply chain for our products, including the risks associated with our single source suppliers;

 

·

the timing and likelihood of U.S. Food and Drug Administration, or FDA, approvals and regulatory actions on our product candidates, manufacturing activities and product marketing activities;

 

·

our ability to advance product candidates in our platforms into successful and completed clinical trials and our subsequent ability to successfully commercialize our product candidates;

 

·

our ability to compete in the development and marketing of our products and product candidates;

·

our expectations regarding the business expansion plans for our Chinese subsidiary, ANP;

 

·

the potential for adverse application of environmental, health and safety and other laws and regulations on our operations;

 

·

our expectations for market acceptance of our new products and proprietary drug delivery technologies, as well as those of our active pharmaceutical ingredient, or API, customers;

 

·

the potential for our marketed products to be withdrawn due to patient adverse events or deaths, or if we fail to secure FDA approval for products subject to the Prescription Drug Wrap-Up program;

 

·

our expectations in obtaining insurance coverage and adequate reimbursement for our products from third-party payers;

 

·

the amount of price concessions or exclusion of suppliers adversely affecting our business;

 

·

our ability to establish and maintain intellectual property protection for our products and our ability to successfully defend our intellectual property in cases of alleged infringement;

 

·

the implementation of our business strategies, product development strategies and technology utilization;

 

·

the potential for exposure to product liability claims;

 

·

future acquisitions, divestitures or investments, including the anticipated benefits of such acquisitions, divestitures or investments;

 

·

our ability to expand internationally;

 

·

economic and industry trends and trend analysis;

 

·

our ability to remain in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

·

global, national and local economic and market conditions, specifically with respect to geopolitical uncertainty;

·

the impact of trade tariffs or other trade barriers;

·

the impact of Patient Protection and Affordable Care Act (as amended) and other legislative and regulatory healthcare reforms in the countries in which we operate including the potential for drug price controls;

·

the impact of global and domestic tax reforms, including the Tax Cuts and Jobs Act of 2017, or the Tax Act; 

 

·

the timing for completion of the validation of the new construction at our ANP and IMS facilities; and

 

 

·

our financial performance expectations, including our expectations regarding our backlog, revenue, cost of revenue, gross profit or gross margin, operating expenses, including changes in research and development, sales and marketing and general and administrative expenses, and our ability to achieve and maintain future profitability.

 

You should read this Quarterly Report and the documents that we reference elsewhere in this Quarterly Report completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward-looking statements. In light of the significant risks and uncertainties to which our forward-looking statements are subject, you should not place undue reliance on or regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. We discuss many of these risks and uncertainties in greater detail in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2018, particularly in Item 1A. “Risk Factors.” These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report regardless of the time of delivery of this Quarterly Report, and such information may be limited or incomplete, and our statements should not be read to indicate that we

 


 

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have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report.

 

Unless expressly indicated or the context requires otherwise, references in this Quarterly Report to “Amphastar,” “the Company,” “we,” “our,” and “us” refer to Amphastar Pharmaceuticals, Inc. and our subsidiaries.

 

 

 


 

Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2019

 

2018

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

79,096

 

$

86,337

 

Restricted cash

 

 

1,865

 

 

1,865

 

Short-term investments

 

 

2,834

 

 

2,831

 

Restricted short-term investments

 

 

2,290

 

 

2,290

 

Accounts receivable, net

 

 

54,930

 

 

52,163

 

Inventories

 

 

78,580

 

 

69,322

 

Income tax refunds and deposits

 

 

1,592

 

 

49

 

Prepaid expenses and other assets

 

 

8,956

 

 

5,485

 

Total current assets

 

 

230,143

 

 

220,342

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

 

214,836

 

 

210,418

 

Finance lease right-of-use assets

 

 

1,094

 

 

 —

 

Operating lease right-of-use assets

 

 

13,480

 

 

 —

 

Goodwill and intangible assets, net

 

 

42,255

 

 

42,267

 

Other assets

 

 

12,292

 

 

9,918

 

Deferred tax assets

 

 

30,618

 

 

30,618

 

Total assets

 

$

544,718

 

$

513,563

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

90,795

 

$

87,418

 

Income taxes payable

 

 

1,017

 

 

1,187

 

Current portion of long-term debt

 

 

17,587

 

 

18,229

 

Current portion of operating lease liabilities

 

 

2,560

 

 

 —

 

Total current liabilities

 

 

111,959

 

 

106,834

 

 

 

 

 

 

 

 

 

Long-term reserve for income tax liabilities

 

 

415

 

 

415

 

Long-term debt, net of current portion

 

 

30,973

 

 

31,984

 

Long-term operating lease liabilities, net of current portion

 

 

11,174

 

 

 —

 

Deferred tax liabilities

 

 

1,067

 

 

1,031

 

Other long-term liabilities

 

 

8,864

 

 

8,940

 

Total liabilities

 

 

164,452

 

 

149,204

 

Commitments and contingencies:

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock: par value $0.0001; 20,000,000 shares authorized; no shares issued and outstanding

 

 

 

 

 

Common stock: par value $0.0001; 300,000,000 shares authorized; 52,043,326 and 47,098,624 shares issued and outstanding as of March 31, 2019 and 51,438,675 and 46,631,118 shares issued and outstanding as of December 31, 2018, respectively

 

 

 5

 

 

 5

 

Additional paid-in capital

 

 

349,201

 

 

344,434

 

Retained earnings

 

 

68,299

 

 

67,485

 

Accumulated other comprehensive loss

 

 

(4,126)

 

 

(4,013)

 

Treasury stock

 

 

(78,393)

 

 

(75,476)

 

Total Amphastar Pharmaceuticals, Inc. stockholders’ equity

 

 

334,986

 

 

332,435

 

Non-controlling interests

 

 

45,280

 

 

31,924

 

Total equity

 

 

380,266

 

 

364,359

 

Total liabilities and stockholders’ equity

 

$

544,718

 

$

513,563

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

-1-


 

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

 

Net revenues

 

$

79,790

 

$

58,393

 

Cost of revenues

 

 

48,887

 

 

41,421

 

Gross profit

 

 

30,903

 

 

16,972

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Selling, distribution, and marketing

 

 

3,141

 

 

1,721

 

General and administrative

 

 

16,327

 

 

10,998

 

Research and development

 

 

14,607

 

 

14,030

 

Total operating expenses

 

 

34,075

 

 

26,749

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(3,172)

 

 

(9,777)

 

 

 

 

 

 

 

 

 

Non-operating income (expenses):

 

 

 

 

 

 

 

Interest income

 

 

148

 

 

124

 

Interest expense

 

 

(30)

 

 

(18)

 

Other income (expenses), net

 

 

(579)

 

 

782

 

Total non-operating income (expenses), net

 

 

(461)

 

 

888

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(3,633)

 

 

(8,889)

 

Income tax benefit

 

 

(1,479)

 

 

(1,748)

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,154)

 

$

(7,141)

 

 

 

 

 

 

 

 

 

Net loss attributable to non-controlling interests

 

$

(3,022)

 

$

 —

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Amphastar Pharmaceuticals, Inc.

 

$

868

 

$

(7,141)

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders:

 

 

 

 

 

 

 

Basic

 

$

0.02

 

$

(0.15)

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.02

 

$

(0.15)

 

 

 

 

 

 

 

 

 

Weighted-average shares used to compute net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders:

 

 

 

 

 

 

 

Basic

 

 

46,744

 

 

46,514

 

 

 

 

 

 

 

 

 

Diluted

 

 

50,416

 

 

46,514

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

-2-


 

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited; in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

 

Net income (loss) attributable to Amphastar Pharmaceuticals, Inc.

 

$

868

 

$

(7,141)

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc., net of income taxes

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(113)

 

 

1,190

 

Total other comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc.

 

 

(113)

 

 

1,190

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc.

 

$

755

 

$

(5,951)

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

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AMPHASTAR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net loss

 

$

(2,154)

 

$

(7,141)

 

Reconciliation to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Loss on impairment and disposal of assets

 

 

805

 

 

598

 

Depreciation of property, plant, and equipment

 

 

4,158

 

 

3,060

 

Amortization of product rights, trademarks, and patents

 

 

360

 

 

729

 

Share-based compensation expense

 

 

4,674

 

 

4,666

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,061)

 

 

4,635

 

Inventories

 

 

(9,507)

 

 

1,441

 

Prepaid expenses and other assets

 

 

(4,729)

 

 

(761)

 

Income tax refund, deposits, and payable

 

 

(1,713)

 

 

(1,725)

 

Accounts payable and accrued liabilities

 

 

5,557

 

 

2,858

 

Net cash provided by (used in) operating activities

 

 

(3,610)

 

 

8,360

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Purchases and construction of property, plant, and equipment

 

 

(14,744)

 

 

(12,340)

 

Purchase of intangible assets

 

 

(151)

 

 

 —

 

Sale of intangible assets

 

 

 —

 

 

4,400

 

Purchase of short-term investments

 

 

 —

 

 

(201)

 

Payment of deposits and other assets

 

 

11

 

 

(597)

 

Net cash used in investing activities

 

 

(14,884)

 

 

(8,738)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Proceeds from the private placement of ANP

 

 

18,298

 

 

 —

 

Proceeds from equity plans, net of withholding tax payments

 

 

(2,397)

 

 

(1,793)

 

Purchase of treasury stock

 

 

(3,015)

 

 

(7,624)

 

Principal payments on long-term debt

 

 

(1,657)

 

 

(1,411)

 

Net cash provided by (used in) financing activities

 

 

11,229

 

 

(10,828)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

24

 

 

159

 

 

 

 

 

 

 

 

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(7,241)

 

 

(11,047)

 

 

 

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

88,202

 

 

67,459

 

 

 

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at end of period

 

$

80,961

 

$

56,412

 

 

 

 

 

 

 

 

 

Noncash Investing and Financing Activities:

 

 

 

 

 

 

 

Capital expenditure included in accounts payable

 

$

6,511

 

$

4,802

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

898

 

$

532

 

Income taxes paid

 

$

234

 

$

 8

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

-4-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.  General

 

Amphastar Pharmaceuticals, Inc., a California corporation, was incorporated in February 1996 and merged with and into Amphastar Pharmaceuticals, Inc., a Delaware corporation, in July 2004 (together with its subsidiaries, hereinafter referred to as the “Company”). The Company is a specialty pharmaceutical company that develops, manufactures, markets, and sells generic and proprietary injectable, inhalation, and intranasal products, including products with high technical barriers to market entry. Additionally, the Company sells insulin active pharmaceutical ingredient, or API, products.  Most of the Company’s products are used in hospital or urgent care clinical settings and are primarily contracted and distributed through group purchasing organizations and drug wholesalers. The Company’s insulin API products are sold to other pharmaceutical companies for use in their own products and are being used by the Company in the development of injectable finished pharmaceutical products.  The Company’s inhalation products are primarily distributed through drug retailers.

 

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2018 and the notes thereto as filed with the Securities and Exchange Commission, or SEC, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles, or GAAP, have been condensed or omitted from the accompanying condensed consolidated financial statements. The accompanying year-end condensed consolidated balance sheet was derived from the audited financial statements. The accompanying interim financial statements are unaudited, but reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the Company’s consolidated financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented. Unless otherwise noted, all such adjustments are of a normal, recurring nature. The Company’s results of operations, comprehensive income (loss) and cash flows for the interim periods are not necessarily indicative of the results of operations and cash flows that it may achieve in future periods.

 

Note 2.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, and are prepared in accordance with United States GAAP, or GAAP. All significant intercompany activity has been eliminated in the preparation of the condensed consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations, and cash flows of the Company.

 

The Company’s subsidiaries include: (1) International Medication Systems, Limited, or IMS, (2) Armstrong Pharmaceuticals, Inc., or Armstrong, (3) Amphastar Nanjing Pharmaceuticals Inc., or ANP, (4) Nanjing Letop Fine Chemistry Co., Ltd., or Letop, (5) Nanjing Hanxin Pharmaceutical Technology Co., Ltd., or Hanxin, (6) Nanjing Baixin Trading Co., Ltd., or Baixin, (7) Amphastar France Pharmaceuticals, S.A.S., or AFP, (8) Amphastar UK Ltd., or AUK, and (9) International Medication Systems (UK) Limited, or IMS UK.

 

In July 2018, the Company’s Chinese subsidiary, ANP, completed a private placement of its common equity interest to accredited investors for aggregate gross proceeds of approximately $57 million. While investors were initially required to complete their contributions in cash by December 31, 2018, ANP granted an extension to certain investors. Certain investors contributed their payments in Chinese yuan, which resulted in a difference in U.S. dollars, or USD, due to currency fluctuations subsequent to the execution of the placement agreement. A total of $56.3 million was received by ANP as of March 31, 2019. The difference received in USD was expensed in the quarter ended March 31, 2019. The Company has retained approximately 58% of the equity interest in ANP following the private placement and continues 

-5-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

to consolidate the financial results of ANP with the Company’s results of operations. ANP’s net loss after July 2, 2018, was attributed to the Company in accordance with the Company’s equity interest of approximately 58% in ANP.

In 2018, the Company identified certain errors in its accounting primarily related to the depreciation of certain leasehold improvements within property, plant and equipment. The errors were not material to any of the Company’s prior period annual financial statements. However, for comparative purposes, the Company has revised the prior period consolidated financial statements included herein. As a result, the net loss for the three months ended March 31, 2018 was reduced by $0.1 million. The errors resulted in a change to the basic and diluted net income per share for the three months ended March 31, 2018, which was increased by $0.01 and $0.01, respectively. The balances of property, plant, and equipment, net and retained earnings as of March 31, 2018, were reduced by $4.7 million and $3.5 million, respectively. The error did not result in a change to the net cash provided by operating activities in the Company’s consolidated statement of cash flows for the three months ended March 31, 2018.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The principal accounting estimates include determination of allowances for doubtful accounts and discounts, provision for chargebacks and rebates, provision for product returns, adjustment of inventory to their net realizable values, impairment of long-lived and intangible assets and goodwill, self-insured claims, workers’ compensation liabilities, litigation reserves, stock price volatilities for share-based compensation expense, valuation allowances for deferred tax assets, and liabilities for uncertain income tax positions.

 

Foreign Currency

 

The functional currency of the Company, its domestic subsidiaries, its Chinese subsidiary, ANP, and its U.K. subsidiary, AUK, is the USD. ANP maintains its books of record in Chinese yuan. These books are remeasured into the functional currency of USD using the current or historical exchange rates. The resulting currency remeasurement adjustments and other transactional foreign currency exchange gains and losses are reflected in the Company’s statements of operations. 

 

The Company’s French subsidiary, AFP, maintains its book of record in euros. Its other Chinese subsidiaries maintain their books of record in Chinese yuan. Its U.K. subsidiary IMS UK, maintains its book of record in British pounds. These local currencies have been determined to be the subsidiaries’ respective functional currencies. These books of record are translated into USD using average exchange rates during the period.  Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing rate of exchange at the date of the equity transactions. Translation adjustments are reflected in stockholders’ equity and are included as a component of other accumulated comprehensive income (loss). The unrealized gains or losses of intercompany foreign currency transactions that are of a long-term investment nature are reported in other accumulated comprehensive income (loss). The unrealized gains and losses of intercompany foreign currency transactions that are of a long-term investment nature for the three months ended March 31, 2019 and 2018 were $0.7 million gain, and a $0.9 million loss, respectively. 

 

The Company does not undertake hedging transactions to cover its foreign currency exposure.

 

Comprehensive Income (Loss)

 

For the three months ended March 31, 2019 and 2018, the Company included its foreign currency translation gain or loss as part of its comprehensive income (loss). There was no material income tax expense (benefit) allocated to other comprehensive income (loss) for the three months ended March 31, 2019. Income tax expense of $0.3 million was allocated to other comprehensive income (loss) for the three months ended March 31, 2018.

-6-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Restricted Cash and Short-Term Investments

 

Restricted cash and short-term investments are collateral required for the Company to effect a standby letter of credit and to qualify for workers’ compensation self-insurance and are available to meet the Company’s workers’ compensation obligations on a current basis, as needed. As of March 31, 2019 and December 31, 2018, restricted cash and short-term investments include $1.9 million in cash and $2.3 million in certificates of deposit, respectively. The certificates of deposit have original maturities greater than three months and are classified as short-term investments.

 

Financial Instruments

 

The carrying amounts of cash and cash equivalents, short-term investments, restricted cash and short-term investments, accounts receivable, accounts payable, accrued expenses, and short-term borrowings approximate fair value due to the short maturity of these items. The majority of the Company’s long-term obligations consist of variable rate debt, and their carrying value approximates fair value as the stated borrowing rates are comparable to rates currently offered to the Company for instruments with similar maturities. The Company at times enters into fixed interest rate swap contracts to exchange the variable interest rates for fixed interest rates without the exchange of the underlying notional debt amounts. Such interest rate swap contracts are recorded at their fair values.

 

Deferred Income Taxes

 

The Company utilizes the liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statements and the tax basis of assets and liabilities using enacted tax rates. A valuation allowance is recorded when it is more likely than not that the deferred tax assets will not be realized.

 

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU No. 2016-02 Leases, which is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheets as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The ASU and the related clarifications subsequently issued by the FASB became effective for the Company’s interim and annual reporting periods during the year ending December 31, 2019, and all annual and interim reporting periods thereafter. In July 2018, the FASB further amended the standard to allow for a new transition method that offers the option of using the effective date as the date of initial application. The Company elected the alternative transition method and therefore has not adjusted comparative-period financial information. The Company has finalized its assessment related to policies, processes and internal controls to comply with the guidance. On January 1, 2019, the Company adopted ASC 842, which resulted in the recognition of right-of-use assets of approximately $13.9 million and lease liabilities of approximately $14.1 million related to its operating lease commitments. The Company elected the available practical expedients at transition including the package of expedients pursuant to which (i) the Company has not reassessed its prior conclusion related to whether a contract contains a lease, the underlying lease classification or accounting for initial direct cost in a lease, and (ii) the Company has elected the hindsight practical expedient of determining the lease term and the short-term lease exception such that it did not recognize a right-of-use asset or lease liability for leases with a term of 12 months or less. The new standard also provided practical expedients for the Company’s ongoing accounting and the Company has elected the practical expedient of not separating lease and non-lease components for its asset classes. Footnote 16 provides details on the Company’s current operating lease arrangements. The adoption of ASC 842 did not have a material impact on the Company’s results of operations or cash flows.

 

In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments – Credit Losses, which is aimed at providing

-7-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit. The standard update changes the impairment model for financial assets measured at amortized cost, requiring presentation at the net amount expected to be collected. The measurement of expected credit losses requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Available-for-sale debt securities with unrealized losses will be recorded through an allowance for credit losses. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted for interim or annual periods after December 31, 2019. The Company will be required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company does not believe the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued ASU No. 2017-04 Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill. An entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The update also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020, and applied on a prospective basis. Early adoption is permitted for interim and annual goodwill impairment testing dates after January 1, 2017. The Company currently does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

 

In August 2017, the FASB issued ASU No. 2017-12 Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting model in ASC 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The amendments also simplify the application of hedge accounting in certain situations. The new guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2019. Early adoption is permitted. The adoption of this accounting guidance did not have a material impact on its consolidated financial statements and related disclosures.

 

In February 2018, the FASB issued ASU No. 2018-02 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows entities to reclassify from accumulated other comprehensive income to retained earnings stranded tax effects resulting from the Tax Act. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2019. Early adoption is permitted. The adoption of this accounting guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

 

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies, and adds certain disclosure requirements to ASC 820, Fair Value Measurement. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

 

In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, which removes, modifies, and adds certain disclosure requirements to ASC 715-20, Defined Benefit Plans. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2021. Early adoption is permitted. The Company does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

-8-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

In October 2018, the FASB issued ASU No. 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities, which requires indirect interests held through related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted. The Company currently does not believe that the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.

 

In November 2018, the FASB issued ASU No. 2018-18, Clarifying the Interaction between Topic 808 and Topic 606, which requires transactions in collaborative arrangements to be accounted for under ASC 606, Revenue from Contracts with Customers, or ASC 606, if the counterparty is a customer for a good or service that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. The guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted, including in any interim period.  The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements and related disclosures. 

 

Note 3.  Revenue Recognition

 

According to ASC 606, revenue is recognized at the time that the Company’s customers obtain control of the promised goods.

 

Generally, revenue is recognized at the time of product delivery to the Company’s customers. In some cases, revenue is recognized at the time of shipment when stipulated by the terms of the sale agreements. Revenues derived from contract manufacturing services are recognized when third-party products are shipped to customers, after the customer has accepted test samples of the products to be shipped.

 

The Company only records revenue to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved, by estimating and recording reductions to revenue for discounts, product returns, and pricing adjustments, such as wholesaler chargebacks and retailer rebates, in the same period that the related revenue is recorded.

 

The Company’s accounting policy is to review each agreement involving contract development and manufacturing services to determine if there are multiple revenue-generating activities that constitute more than one unit of accounting. Revenues are recognized for each unit of accounting based on revenue recognition criteria relevant to that unit. The Company does not have any revenue arrangements with multiple performance obligations.

 

Provision for Chargebacks and Rebates

 

The provision for chargebacks and rebates is a significant estimate used in the recognition of revenue. Wholesaler chargebacks relate to sales terms under which the Company agrees to reimburse wholesalers for differences between the gross sales prices at which the Company sells its products to wholesalers and the actual prices of such products that wholesalers resell under the Company’s various contractual arrangements with third parties such as hospitals and group purchasing organizations in the United States. Rebates include primarily amounts paid to retailers, payers, and providers in the United States, including those paid to state Medicaid programs, and are based on contractual arrangements or statutory requirements. The Company estimates chargebacks and rebates using the expected value method at the time of sale to wholesalers based on wholesaler inventory stocking levels, historic chargeback and rebate rates, and current contract pricing.

 

-9-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The provision for chargebacks and rebates is reflected in net revenues. The following table is an analysis of the chargeback and rebate provision:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Beginning balance

    

$

22,423

    

$

18,470

 

Provision for chargebacks and rebates

 

 

26,982

 

 

25,334

 

Credits and payments issued to third parties

 

 

(28,861)

 

 

(28,774)

 

Ending balance

 

$

20,544

 

$

15,030

 

 

Changes in the chargeback provision from period to period are primarily dependent on the Company’s sales to its wholesalers, the level of inventory held by wholesalers, and the wholesalers’ customer mix. Changes in the rebate provision from period to period are primarily dependent on retailer’s and other indirect customers’ purchases. The approach that the Company uses to estimate chargebacks has been consistently applied for all periods presented. Variations in estimates have been historically small. The Company continually monitors the provision for chargebacks and rebates and makes adjustments when it believes that the actual chargebacks and rebates may differ from the estimates. The settlement of chargebacks and rebates generally occurs within 30 days to 60 days after the sale to wholesalers. Accounts receivable and/or accounts payable and accrued liabilities are reduced and/or increased by the chargebacks and rebate amounts depending on whether the Company has the right to offset with the customer. Of the provision for chargebacks and rebates as of March 31, 2019 and December 31, 2018,  $11.3 million and $12.0 million were included in accounts receivable, net, on the condensed consolidated balance sheets, respectively. The remaining provision of $9.2 million and $10.4 million were included in accounts payable and accrued liabilities, respectively.

 

Accrual for Product Returns

 

The Company offers most customers the right to return qualified excess or expired inventory for partial credit; however, API product sales are generally non-returnable. The Company’s product returns primarily consist of the returns of expired products from sales made in prior periods. Returned products cannot be resold. At the time product revenue is recognized, the Company records an accrual for product returns estimated using the expected value method. The accrual is based, in part, upon the historical relationship of product returns to sales and customer contract terms. The Company also assesses other factors that could affect product returns including market conditions, product obsolescence, and the introduction of new competition. Although these factors do not normally give the Company’s customers the right to return products outside of the regular return policy, the Company realizes that such factors could ultimately lead to increased returns. The Company analyzes these situations on a case-by-case basis and makes adjustments to the product return reserve as appropriate. 

 

The provision for product returns is reflected in net revenues.  The following table is an analysis of product return liability:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Beginning balance

    

$

8,030

    

$

6,522

 

Provision for product returns

 

 

1,968

 

 

747

 

Credits issued to third parties

 

 

(1,275)

 

 

(498)

 

Ending balance

 

$

8,723

 

$

6,771

 

 

-10-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Of the provision of product returns as of March 31, 2019 and December 31, 2018, $6.0 million and $5.3 million were included in accounts payable and accrued liabilities on the condensed consolidated balance sheets, respectively. The remaining provision of $2.7 million and $2.7 million were included in other long-term liabilities, respectively. For the three months ended March 31, 2019 and 2018,  the Company’s aggregate product return rate was 1.4% and 1.3% of qualified sales, respectively.

 

Note 4.  Income (Loss) per Share Attributable to Amphastar Pharmaceuticals, Inc. Shareholders

 

Basic income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders is calculated based upon the weighted-average number of shares outstanding during the period. Diluted net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders gives effect to all potential dilutive shares outstanding during the period, such as stock options, non-vested restricted stock units and shares issuable under the Company’s Employee Stock Purchase Plan, or ESPP.

 

As the Company reported a net loss for the three months ended March 31, 2018, the diluted net loss per share attributable to Amphastar Pharmaceuticals, Inc. shareholders, as reported, equals the basic net loss per share attributable to Amphastar Pharmaceuticals, Inc. shareholders since the effect of the assumed exercise of stock options, vesting of non-vested RSUs, and issuance of common shares under the Company’s ESPP are anti-dilutive. Total stock options, non-vested RSUs, and shares issuable under the Company’s ESPP excluded from the three months ended March 31, 2018 net loss per share were 11,610,229 stock options; 1,259,273 non-vested RSUs, and 56,128 shares issuable under the ESPP.

 

The following table provides the calculation of basic and diluted net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders for each of the periods presented:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

 

2019

 

2018

 

 

 

(in thousands, except per share data)

 

Basic and dilutive numerator:

    

 

    

    

 

    

 

Net income (loss) attributable to Amphastar Pharmaceuticals, Inc.

 

$

868

 

$

(7,141)

 

Denominator:

 

 

 

 

 

 

 

Weighted-average shares outstanding — basic

 

 

46,744

 

 

46,514

 

 

 

 

 

 

 

 

 

Net effect of dilutive securities:

 

 

 

 

 

 

 

Incremental shares from equity awards

 

 

3,672

 

 

 —

 

Weighted-average shares outstanding — diluted

 

 

50,416

 

 

46,514

 

Net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders — basic

 

$

0.02

 

$

(0.15)

 

Net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc. shareholders — diluted

 

$

0.02

 

$

(0.15)

 

 

 

Note 5.  Segment Reporting

 

The Company’s business is the development, manufacture, and marketing of pharmaceutical products. The Company has established two reporting segments that each report to the Chief Operating Decision Maker, or CODM, as defined in ASC 280, Segment Reporting.  The Company’s performance is assessed and resources are allocated by the CODM based on the following two reportable segments:

 

·

Finished pharmaceutical products

·

API

-11-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The finished pharmaceutical products segment manufactures, markets and distributes enoxaparin, naloxone, phytonadione, lidocaine, medroxyprogesterone acetate, Primatene® Mist, as well as various other critical and non-critical care drugs.  The API segment manufactures and distributes recombinant human insulin API and porcine insulin API for external customers and internal product development.

 

Selected financial information by reporting segment is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

 

 

 

2019

 

2018

 

 

 

 

(in thousands)

 

 

Net revenues:

    

 

    

    

 

    

 

 

Finished pharmaceutical products

 

$

74,539

 

$

53,117

 

 

API

 

 

5,251

 

 

5,276

 

 

Total net revenues

 

 

79,790

 

 

58,393

 

 

 

 

 

 

 

 

 

 

 

Gross profit:

 

 

 

 

 

 

 

 

Finished pharmaceutical products

 

 

32,312

 

 

19,636

 

 

API

 

 

(1,409)

 

 

(2,664)

 

 

Total gross profit

 

 

30,903

 

 

16,972

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

34,075

 

 

26,749

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(3,172)

 

 

(9,777)

 

 

Non-operating income

 

 

(461)

 

 

888

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

$

(3,633)

 

$

(8,889)

 

 

 

The Company manages its business segments to the gross profit level and manages its operating and other costs on a company-wide basis. The Company does not identify total assets by segment for internal purposes, as the Company’s CODM does not assess performance, make strategic decisions, or allocate resources based on assets.

 

The amount of net revenues in the finished pharmaceutical product segment is presented below:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Finished pharmaceutical products net revenues:

    

 

    

    

 

    

 

Enoxaparin

 

$

14,484

 

$

7,007

 

Lidocaine

 

 

11,979

 

 

9,782

 

Phytonadione

 

 

10,120

 

 

9,181

 

Naloxone

 

 

7,364

 

 

8,927

 

Medroxyprogesterone

 

 

7,213

 

 

2,706

 

Primatene® Mist

 

 

2,897

 

 

 —

 

Epinephrine

 

 

2,679

 

 

3,223

 

Other finished pharmaceutical products

 

 

17,803

 

 

12,291

 

Total finished pharmaceutical products net revenues

 

$

74,539

 

$

53,117

 

 

-12-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Net revenues and carrying values of long-lived assets of enterprises by geographic regions are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Revenue

 

Long-Lived Assets

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

March 31, 

 

March 31, 

 

December 31, 

 

 

 

2019

 

2018

 

2019

 

2018

 

 

 

(in thousands)

 

United States

    

$

76,457

    

$

53,104

    

$

107,286

    

$

109,331

 

China

 

 

 —

 

 

 —

 

 

64,281

 

 

58,059

 

France

 

 

3,333

 

 

5,289

 

 

43,269

 

 

43,028

 

United Kingdom

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

79,790

 

$

58,393

 

$

214,836

 

$

210,418

 

 

 

Note 6.  Customer and Supplier Concentration

 

Customer Concentrations

 

Three large wholesale drug distributors, AmerisourceBergen Corporation, or AmerisourceBergen, Cardinal Health, Inc., or Cardinal, and McKesson Corporation, or McKesson, are all distributors of the Company’s products, as well as suppliers of a broad range of health care products. The Company considers these three customers to be its major customers, as each individually, and these customers collectively, represented a significant percentage of the Company’s net revenue for the three months ended March 31, 2019 and 2018 and accounts receivable as of March 31, 2019 and December 31, 2018. The following table provides accounts receivable and net revenue information for these major customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Total Accounts

 

% of Net

 

 

 

Receivable

 

Revenue

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

December 31, 

 

March 31, 

 

 

    

2019

    

2018

    

2019

    

2018

    

McKesson

 

29

%

28

%

29

%

28

%

Cardinal Health

 

24

%

21

%

25

%

23

%

AmerisourceBergen

 

12

%

19

%

20

%

26

%

 

Supplier Concentrations

 

The Company depends on suppliers for raw materials, APIs, and other components that are subject to stringent FDA, requirements. Some of these materials may only be available from one or a limited number of sources. Establishing additional or replacement suppliers for these materials may take a substantial period of time, as suppliers must be approved by the FDA. Furthermore, a significant portion of raw materials may only be available from foreign sources. If the Company is unable to secure, on a timely basis, sufficient quantities of the materials it depends on to manufacture and market its products, it could have a materially adverse effect on the Company’s business, financial condition, and results of operations.

 

-13-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 7.  Fair Value Measurements

 

The accounting standards of the FASB, define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the measurement date (an exit price). These standards also establish a hierarchy that prioritizes observable and unobservable inputs used in measuring fair value of an asset or liability, as described below:

 

·

Level 1 – Inputs to measure fair value are based on quoted prices (unadjusted) in active markets on identical assets or liabilities;

 

·

Level 2 – Inputs to measure fair value are based on the following: a) quoted prices in active markets on similar assets or liabilities, b) quoted prices for identical or similar instruments in inactive markets, or c) observable (other than quoted prices) or collaborated observable market data used in a pricing model from which the fair value is derived; and

 

·

Level 3 – Inputs to measure fair value are unobservable and the assets or liabilities have little, if any, market activity; these inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities based on best information available in the circumstances.

 

As of March 31, 2019, cash equivalents include money market accounts. Short-term investments consist of certificates of deposit with original expiration dates within 12 months. These certificates of deposit are carried at amortized cost in the Company’s consolidated balance sheet, which approximates their fair value determined based on Level 2 inputs. The restrictions on restricted cash and short-term investments have a negligible effect on the fair value of these financial assets.

 

The Company does not hold any Level 2 or Level 3 instruments that are measured for fair value on a recurring basis.

 

Nonfinancial assets and liabilities are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances. These items primarily include long-lived assets, goodwill, and intangible assets for which the fair value of assets is determined as part of the related impairment test. As of March 31, 2019 and December 31, 2018, there were no significant adjustments to fair value for nonfinancial assets or liabilities.

 

-14-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 8.  Goodwill and Intangible Assets

 

The table below shows the weighted-average life, original cost, accumulated amortization, and net book value by major intangible asset classification:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

Accumulated

 

 

 

 

 

    

Life (Years)

    

Original Cost

    

Amortization

    

Net Book Value

 

 

 

(in thousands)

 

Definite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

IMS (UK) international product rights

 

10

 

 

9,113

 

 

2,430

 

 

6,683

 

Patents

 

12

 

 

638

 

 

225

 

 

413

 

Land-use rights

 

39

 

 

2,540

 

 

502

 

 

2,038

 

Other intangible assets

 

4

 

 

69

 

 

68

 

 

 1

 

Subtotal

 

14

 

 

12,360

 

 

3,225

 

 

9,135

 

Indefinite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

Trademark

 

*

 

 

29,225

 

 

 —

 

 

29,225

 

Goodwill - Finished pharmaceutical products

 

*

 

 

3,895

 

 

 —

 

 

3,895

 

Subtotal

 

*

 

 

33,120

 

 

 —

 

 

33,120

 

As of March 31, 2019

 

*

 

$

45,480

 

$

3,225

 

$

42,255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

Accumulated

 

 

 

 

 

    

Life (Years)

    

Original Cost

    

Amortization

    

Net Book Value

 

 

 

(in thousands)

 

Definite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

Cortrosyn® product rights

 

12

 

$

27,134

 

$

27,134

 

$

 —

 

IMS (UK) international product rights

 

10

 

 

8,911

 

 

2,153

 

 

6,758

 

Patents

 

12

 

 

486

 

 

213

 

 

273

 

Land-use rights

 

39

 

 

2,540

 

 

486

 

 

2,054

 

Other intangible assets

 

4

 

 

69

 

 

63

 

 

 6

 

Subtotal

 

12

 

 

39,140

 

 

30,049

 

 

9,091

 

Indefinite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

Trademark

 

*

 

 

29,225

 

 

 —

 

 

29,225

 

Goodwill - Finished pharmaceutical products

 

*

 

 

3,951

 

 

 —

 

 

3,951

 

Subtotal

 

*

 

 

33,176

 

 

 —

 

 

33,176

 

As of December 31, 2018

 

*

 

$

72,316

 

$

30,049

 

$

42,267

 


*Intangible assets with indefinite lives have an indeterminable average life.

 

Sale of Fourteen Injectable ANDAs

 

In February 2017, the Company sold the 14 ANDAs it acquired in March 2016 from Hikma Pharmaceuticals, Inc. to an unrelated party. The consideration included a purchase price of $6.4 million of which $1.0 million was received upon closing, $1.0 million was received in the second quarter of 2017 and the remaining $4.4 million was received in January 2018. In addition to the purchase price, the purchaser agreed to pay the Company a royalty fee equal to 2% of net sales derived from purchaser’s sales of the products for the period from February 2017 through February 2027. The Company has not recognized any royalty fee revenue. In 2017, the Company recognized a gain of $2.6 million within operating (income) expenses on its consolidated statement of operations.

 

-15-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Goodwill

 

The changes in the carrying amounts of goodwill were as follows:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Beginning balance

    

$

3,951

    

$

4,461

 

Currency translation

 

 

(56)

 

 

(510)

 

Ending balance

 

$

3,895

 

$

3,951

 

 

Primatene® Trademark

 

In January 2009, the Company acquired the exclusive rights to the trademark, domain name, website and domestic marketing, distribution and selling rights related to Primatene® Mist, an over-the-counter bronchodilator product, recorded at the allocated fair value of $29.2 million, which is its carrying value as of March 31, 2019.

 

The trademark was determined to have an indefinite life. In determining its indefinite life, the Company considered the following: the expected use of the intangible; the longevity of the brand; the legal, regulatory and contractual provisions that affect their maximum useful life; the Company’s ability to renew or extend the asset’s legal or contractual life without substantial costs; effects of the regulatory environment; expected changes in distribution channels; maintenance expenditures required to obtain the expected future cash flows from the asset; and considerations for obsolescence, demand, competition and other economic factors.

 

As a result of environmental concerns about chlorofluorocarbons, or CFCs, the FDA required the CFC formulation of Primatene® Mist to be phased out on December 31, 2011.

 

In 2013, the Company filed a new drug application, or NDA, for Primatene® Mist, which utilizes a non-CFC propellant. In November 2018, the FDA granted over-the-counter approval of the NDA for Primatene® Mist, and the Company re-launched this product in December 2018.

 

Note  9.  Inventories

 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Raw materials and supplies

    

$

32,653

    

$

30,153

 

Work in process

 

 

31,175

 

 

30,272

 

Finished goods

 

 

14,752

 

 

8,897

 

Total inventories

 

$

78,580

 

$

69,322

 

 

Charges of $3.2 million and $1.9 million were included in the cost of revenues in the Company’s consolidated statements of operations for the three months ended March 31, 2019 and 2018, respectively, to adjust the Company’s inventory and related firm inventory purchase commitments to their net realizable value.

 

 

-16-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 10.  Property, Plant, and Equipment

 

Property, plant, and equipment consist of the following:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Buildings

    

$

96,340

    

$

96,287

 

Leasehold improvements

 

 

29,276

 

 

26,755

 

Land

 

 

7,603

 

 

7,628

 

Machinery and equipment

 

 

145,581

 

 

143,299

 

Furniture, fixtures, and automobiles

 

 

19,507

 

 

19,151

 

Construction in progress

 

 

68,773

 

 

66,390

 

Total property, plant, and equipment

 

 

367,080

 

 

359,510

 

Less accumulated depreciation

 

 

(152,244)

 

 

(149,092)

 

Total property, plant, and equipment, net

 

$

214,836

 

$

210,418

 

 

 

 

Note 11.  Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities consisted of the following:

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

2019

 

2018

 

(in thousands)

Accrued customer fees and rebates

$

13,932

 

$

15,215

Accrued payroll and related benefits

 

20,876

 

 

19,430

Accrued product returns, current portion

 

6,027

 

 

5,349

Reserve for net loss on firm purchase commitments

 

4,946

 

 

5,355

Other accrued liabilities

 

10,741

 

 

10,746

Total accrued liabilities

 

56,522

 

 

56,095

Accounts payable

 

34,273

 

 

31,323

Total accounts payable and accrued liabilities

$

90,795

 

$

87,418

 

 

-17-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note  12.  Debt

 

Debt consists of the following:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Loans with East West Bank

    

 

    

    

 

    

 

 

 

 

 

 

 

 

 

Equipment loan paid off January 2019

 

$

 —

 

$

128

 

Line of credit facility due December 2020

 

 

 —

 

 

 —

 

Mortgage payable due February 2021

 

 

3,469

 

 

3,491

 

Equipment loan due June 2021

 

 

2,755

 

 

3,061

 

Equipment loan due December 2022

 

 

7,500

 

 

8,000

 

Line of credit facility due February 2024

 

 

 —

 

 

 —

 

Mortgage payable due October 2026

 

 

3,448

 

 

3,463

 

Mortgage payable due June 2027

 

 

8,767

 

 

8,801

 

 

 

 

 

 

 

 

 

Loans with Cathay Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition loan due June 2019

 

 

12,504

 

 

13,025

 

Line of credit facility due May 2020

 

 

 —

 

 

 —

 

Mortgage payable due August 2027

 

 

7,583

 

 

7,627

 

 

 

 

 

 

 

 

 

Loans with Bank of Nanjing

 

 

 

 

 

 

 

Working capital loan due June 2019

 

 

356

 

 

347

 

 

 

 

 

 

 

 

 

Loans with Seine-Normandie Water Agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

French government loan due June 2020

 

 

54

 

 

55

 

French government loan due July 2021

 

 

171

 

 

172

 

French government loans due December 2026

 

 

430

 

 

436

 

 

 

 

 

 

 

 

 

Payment Obligation to Merck

 

 

546

 

 

552

 

 

 

 

 

 

 

 

 

Equipment under Finance Leases

 

 

977

 

 

 —

 

Equipment under Capital Leases

 

 

 —

 

 

1,055

 

Total debt

 

 

48,560

 

 

50,213

 

Less current portion of long-term debt

 

 

17,587

 

 

18,229

 

Long-term debt, net of current portion

 

$

30,973

 

$

31,984

 

 

As of March 31, 2019, the fair value of the loans listed above approximated their carrying amount. The interest rate used in the fair value estimation was determined to be a Level 2 input. For certain loans with East West Bank, the Company has entered into fixed interest rate swap contracts to exchange the variable interest rates for fixed interest rates over the life of certain debt instruments without the exchange of the underlying notional debt amount. The interest rate swap contracts do not qualify for hedge accounting and are recorded at fair value based on Level 2 inputs. As of March 31, 2019, these swap contracts are recorded at fair value for an immaterial amount. As of December 31, 2018, these swap contacts had an aggregate fair value of $0.2 million.  The change in fair value is recorded in other income (expense) in the Company’s condensed consolidated statement of operations.

-18-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Equipment credit line—Due February 2024

 

In January 2019, the Company entered into a $10.0 million equipment credit line with East West Bank which has a 12-month draw down period. Interest payments are due monthly through February 2020 at the prime rate as published by The Wall Street Journal minus 1%. After the draw down period, the outstanding principal balance converts into a 48-month term loan which bears a variable interest rate at the prime rate as published by The Wall Street Journal minus 1%. The loan matures in February 2024, and the principal and interest payments are due monthly. Borrowings under the facility are secured by equipment. As of March 31, 2019, the Company did not have any amounts outstanding under this facility.

 

Acquisition loan—Due June 2019

 

In April 2019, the Company entered into an agreement with Cathay Bank to extend the term of the loan related to the AFP acquisition from April 2019 to June 2019.

 

Covenants

 

At March 31, 2019 and December 31, 2018, the Company was in compliance with its debt covenants, which include a minimum current ratio, minimum debt service coverage, minimum tangible net worth, maximum debt-to-effective-tangible-net-worth ratio, and minimum deposit requirement computed on a consolidated basis. The profitability-related covenants for loans with Cathay Bank were not effective as of March 31, 2019 or December 31, 2018. Such covenants will become effective as of December 31, 2019.

 

Note  13.  Income Taxes

 

The following table sets forth the Company’s income tax benefit for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

 

 

(in thousands)

 

Loss before taxes

 

$

(3,633)

 

$

(8,889)

 

Income tax benefit

 

 

(1,479)

 

 

(1,748)

 

Net loss

 

$

(2,154)

 

$

(7,141)

 

Income tax benefit as a percentage of loss before income taxes

 

 

40.7

%

 

19.7

%

 

The increase in the Company’s effective tax rate for the three months ended March 31, 2019, was primarily due to differences in pre-tax loss positions and timing of discrete tax items.

 

Valuation Allowance

 

In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Ultimately, the realization of deferred tax assets depends on the existence of future taxable income. Management considers sources of taxable income such as income in prior carryback periods, future reversal of existing deferred taxable temporary differences, tax-planning strategies, and projected future taxable income.    

 

The Company has discontinued recognizing AFP’s income tax benefits by recording a full valuation allowance until it is determined that it is more likely than not that AFP will generate sufficient taxable income to realize its deferred income tax assets.

 

-19-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In 2019, for purposes of computing its annual effective tax rate, the Company did not benefit from its losses in the states where it files separately. This decreased the Company’s income tax benefit by $0.1 million during the three months ended March 31, 2019.

 

Note  14. Stockholders' Equity

 

The changes in stockholders’ equity for the three months ended March 31, 2019 and 2018 consisted of the following:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

 

2018

 

 

(in thousands)

Stockholders’ equity beginning balance

 

$

364,359

 

$

333,736

Beginning balance adjustment as a result of the adoption of new accounting standards

 

 

(54)

 

 

582

Net income (loss) attributable to Amphastar Pharmaceuticals, Inc.

 

 

868

 

 

(7,141)

Other comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc.

 

 

(113)

 

 

1,190

Net proceeds from the private placement of ANP

 

 

18,966

 

 

 —

Net loss attributable to non-controlling interests

 

 

(3,022)

 

 

 —

Net proceeds from equity plans, net of withholding tax payments

 

 

(2,397)

 

 

(1,793)

Share-based compensation expense

 

 

4,674

 

 

4,666

Purchase of treasury stock

 

 

(3,015)

 

 

(7,624)

Stockholders’ equity ending balance

 

$

380,266

 

$

323,616

 

Share Buyback Program

 

Pursuant to the Company’s existing share buyback program, the Company purchased 145,479 and 407,604 shares of its common stock during the three months ended March 31, 2019 and 2018, totaling $3.0 million and $7.6 million, respectively.

 

In May 2019, the Company’s Board of Directors authorized an increase of $20.0 million to the Company’s share buyback program, which is expected to continue for an indefinite period of time. The primary goal of the program is to offset dilution created by the Company’s equity compensation programs.

 

Purchases are made through open market and private block transactions pursuant to Rule 10b5-1 plans, privately negotiated transactions or other means as determined by the Company’s management and in accordance with the requirements of the SEC and applicable laws. The timing and actual number of treasury share purchases will depend on a variety of factors including price, corporate and regulatory requirements, and other conditions. These treasury share purchases are accounted for under the cost method and are included as a component of treasury stock in the Company’s consolidated balance sheets. 

 

The 2015 Equity Incentive Plan

 

As of March 31, 2019, the Company reserved an aggregate of 6,279,610 shares of common stock for future issuance under the 2015 Equity Incentive Plan, or the 2015 Plan, including 1,165,778 shares which were reserved in January 2019 pursuant to the evergreen provision in the 2015 Plan.

 

-20-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Share-Based Award Activity and Balances

 

The Company accounts for share‑based compensation payments in accordance with ASC 718, which requires measurement and recognition of compensation expense at fair value for all share‑based payment awards made to employees and directors. Under these standards, the fair value of option awards and the option components of the Employee Stock Purchase Plan awards are estimated at the grant date using the Black-Scholes option-pricing model. The fair value of RSUs is estimated at the grant date using the Company’s common share price. Prior to the adoption of ASU No. 2018-07, Improvements to Non-employees Share-Based Payment Accounting, non‑vested stock options held by non-employees were revalued at each balance sheet date. As a result of the Company’s early adoption of the guidance in July 2018, stock options held by non-employees are no longer revalued after grant. The portion that is ultimately expected to vest is amortized and recognized in compensation expense on a straight-line basis over the requisite service period, generally from the grant date to the vesting date.

 

The weighted-averages for key assumptions used in determining the fair value of options granted during the three months ended March 31, 2019 and 2018, are as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

 

 

    

2019

    

2018

    

 

Average volatility

 

42.4

%  

39.6

%  

 

Risk-free interest rate

 

2.5

%  

2.7

%  

 

Weighted-average expected life in years

 

5.8

 

5.8

 

 

Dividend yield rate

 

 —

%  

 —

%  

 

 

A summary of option activity under all plans for the three months ended March 31, 2019, is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

 

Weighted-Average

 

Remaining

 

Aggregate

 

 

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Options

 

Price

 

Term (Years)

 

Value(1)

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Outstanding as of December 31, 2018

    

10,105,565

    

$

14.69

    

    

    

 

    

 

Options granted

 

926,083

 

 

21.04

 

 

 

 

 

 

Options exercised

 

(1,003,377)

 

 

15.60

 

 

 

 

 

 

Options cancelled

 

(3,832)

 

 

18.45

 

 

 

 

 

 

Options expired

 

(500)

 

 

14.66

 

 

 

 

 

 

Outstanding as of March 31, 2019

 

10,023,939

 

$

15.18

 

5.44

 

$

53,803

 

Exercisable as of March 31, 2019

 

7,324,996

 

$

14.17

 

4.34

 

$

46,006

 


(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the estimated fair value of the Company’s common stock for those awards that have an exercise price below the estimated fair value at March 31, 2019.

 

For the three months ended March 31, 2019 and 2018,  the Company recorded an expense of $2.4 million and $2.6 million, respectively, related to stock options granted under all plans.  

 

-21-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Information relating to option grants and exercises is as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

 

 

 

(in thousands, except per share data)

 

Weighted-average grant date fair value per option share

 

$

8.49

 

$

7.94

 

Intrinsic value of options exercised

 

 

5,370

 

 

1,061

 

Cash received from options exercised

 

 

3,939

 

 

1,861

 

Total fair value of the options vested during the year

 

 

7,115

 

 

6,407

 

 

A summary of the status of the Company’s non-vested options as of March 31, 2019, and changes during the three months ended March 31, 2019, are presented below:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-Average

 

 

 

 

 

Grant Date

 

 

 

Options

 

Fair Value

 

Non-vested as of December 31, 2018

 

3,279,026

 

$

5.47

 

Options granted

 

926,083

 

 

8.49

 

Options vested

 

(1,502,334)

 

 

4.74

 

Options forfeited

 

(3,832)

 

 

7.81

 

Non-vested as of March 31, 2019

 

2,698,943

 

 

6.91

 

 

As of March 31, 2019, there was $15.9 million of total unrecognized compensation cost, net of forfeitures, related to non-vested stock option based compensation arrangements granted under all plans. The cost is expected to be recognized over a weighted-average period of 2.7 years and will be adjusted for future changes in estimated forfeitures. 

 

Restricted Stock Units

 

The Company grants restricted stock units, or RSUs, to certain employees and members of the Board of Directors with a vesting period of up to five years. The grantee receives one share of common stock at a specified future date for each RSU awarded. The RSUs may not be sold or otherwise transferred until certificates of common stock have been issued, recorded, and delivered to the participant. The RSUs do not have any voting or dividend rights prior to the issuance of certificates of the underlying common stock. The share-based expense associated with these grants was based on the Company’s common stock fair value at the time of grant and is amortized over the requisite service period, which generally is the vesting period using the straight-line method. During the three months ended March 31, 2019 and 2018, the Company recorded a total expense of $2.1 million and $1.9 million, respectively, related to RSU awards granted under all plans.

 

As of March 31, 2019, there was $17.5 million of total unrecognized compensation cost, net of forfeitures, related to non-vested RSU-based compensation arrangements granted under all plans. The cost is expected to be recognized over a weighted-average period of 2.7 years and will be adjusted for future changes in estimated forfeitures.

 

-22-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Information relating to RSU grants and deliveries is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair Market

 

 

 

 

 

Value of RSUs

 

 

 

 

 

Issued

 

 

 

Total RSUs

 

as

 

 

    

Issued

    

Compensation(1)

 

 

 

 

 

(in thousands)

 

RSUs outstanding at December 31, 2018

 

1,206,661

 

 

 

 

RSUs granted

 

388,463

 

$

7,859

 

RSUs forfeited

 

(2,098)

 

 

 

 

RSUs vested(2)

 

(501,490)

 

 

 

 

RSUs outstanding at March 31, 2019

 

1,091,536

 

 

 

 


(1)

The total fair market value is derived from the number of RSUs granted times the current stock price on the date of grant.

(2)

Of the vested RSUs, 229,932 shares of common stock were surrendered to fulfil tax withholding obligations.

 

The Company recorded share-based compensation expense under all plans and is included in the Company’s consolidated statement of operations as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2019

 

2018

 

 

(in thousands)

Cost of revenues

    

$

1,279

    

$

1,160

Operating expenses:

 

 

 

 

 

 

Selling, distribution, and marketing

 

 

94

 

 

107

General and administrative

 

 

2,791

 

 

2,893

Research and development

 

 

510

 

 

506

Total share-based compensation

 

$

4,674

 

$

4,666

 

 

Note 15.  Employee Benefits

 

401(k) Plan

 

The Company has a defined contribution 401(k) plan, or the Plan, whereby eligible employees voluntarily contribute up to a defined percentage of their annual compensation. The Company matches contributions at a rate of 50% on the first 6% of employee contributions, and pays the administrative costs of the Plan. Total employer contributions for the three months ended March 31, 2019 and 2018, were approximately $0.4 million and $0.3 million, respectively.

 

Defined Benefit Pension Plan

 

In connection with the Merck API Transaction, the Company assumed an obligation associated with a defined-benefit plan for eligible employees of AFP.  This plan provides benefits to the employees from the date of retirement and is based on the employee’s length of time employed by the Company.  The calculation is based on a statistical calculation combining a number of factors that include the employee’s age, length of service, and AFP employee turnover rate.

 

The liability under the plan is based on a discount rate of 1.70% as of each of March 31, 2019 and December 31, 2018.  The liability is included in accrued liabilities in the accompanying consolidated balance sheets. The plan is currently unfunded, and the benefit obligation under the plan was $2.2 million and $2.2 million at March 31, 2019 and December 31, 2018, respectively. The Company recorded an immaterial amount of expense under the plan for the three months ended March 31, 2019 and 2018.    

 

-23-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note  16.  Commitments and Contingencies

 

Collaboration Agreements with Medical Device Manufacturers

 

In August 2014, the Company entered into a collaboration agreement with a medical device manufacturer to develop a drug delivery system to be used by the Company for one of its pipeline products. As of March 31, 2019, the Company has paid an upfront payment of $0.5 million and $1.8 million in milestone payments under this agreement, which were classified as research and development expense as the milestones were met. The Company is obligated to pay up to an additional $0.3 million if certain research and development milestones are met. As of March 31, 2019, no such obligation existed. Pursuant to the collaboration agreement, if the medical device manufacturer is successful in the development of this drug delivery system and the Company’s pipeline products receive appropriate regulatory approval, the Company intends to enter into a commercial supply agreement with such medical device manufacturer for a minimum purchase of 1.0 million units during the first 12 months.

 

In October 2017, the Company entered into a collaboration agreement with a medical device manufacturer to develop a drug delivery system to be used by the Company for one of its pipeline products for a total of $1.6 million. As of March 31, 2019, the Company has paid and expensed an upfront payment of $0.4 million and $0.2 million in milestone payments under this agreement, which were classified as research and development expenses as the milestones were met. The Company is obligated to pay up to an additional $1.0 million, if certain research and development milestones are met. As of March 31, 2019, no such obligation existed for the milestones. In addition, pursuant to the collaboration agreement, if the medical device manufacturer is successful in the development of this drug delivery system and the Company’s pipeline products receive appropriate regulatory approval, the Company intends to enter into a commercial supply agreement with such medical device manufacturer under which the Company is obligated to pay an additional $1.0 million, if certain commercial development milestones are met and to purchase a minimum of 100,000 units per year for three years.

 

Lease Liabilities

 

On January 1, 2019, the Company adopted ASC 842, which resulted in the recognition of right-of-use, or ROU, assets of approximately $13.9 million and related lease liabilities in the consolidated balance sheets of approximately $14.1 million related to its operating lease commitments. ROU assets represent the Company’s right to control an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of its leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at the commencement date in determining the discount rate used to present value the lease payments. The Company leases real and personal property, in the normal course of business, under various non-cancelable operating leases. The Company, at its option, can renew a substantial portion of its leases, at the market rate, for various renewal periods ranging from one to six years.

 

-24-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The components of lease costs for the three months ended March 31, 2019 were as follows:

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2019

 

 

(in thousands)

Operating lease costs

    

$

888

 

 

 

 

Short-term lease costs

 

 

130

 

 

 

 

Finance lease costs

 

 

 

Amortization of right-of-use assets

 

 

83

Interest on lease liabilities

 

 

12

Total finance lease costs

 

$

95

 

 

 

 

Total lease costs

 

$

1,113

 

Other information to leases are as follows:

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

 

2019

 

Supplemental cash flow information

 

(in thousands, except lease term and discount rate)

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

Operating cash flows from operating leases

    

$

908

 

Operating cash flows from finance leases

 

 

12

 

Financing cash flows from finance leases

 

 

84

 

 

 

 

 

 

 

 

 

 

 

Right-of use assets obtained in exchange for lease liabilities

 

 

265

 

 

 

 

 

 

Weighted-average remaining lease term (years)

 

 

 

 

Operating leases

 

 

4.8

 

Finance leases

 

 

3.0

 

 

 

 

 

 

Weighted-average discount rate

 

 

 

 

Operating leases

 

 

5.9

%

Finance leases

 

 

4.5

%

 

-25-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Future minimum rental payments under operating leases that have initial or remaining non-cancelable lease terms in excess of 12 months as of March 31, 2019, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

Finance

 

 

 

 

 

Leases

 

Leases

 

Total

 

 

 

(in thousands)

2019

(excluding the three months ended March 31, 2019)

    

$

3,212

 

$

331

 

$

3,543

2020

 

 

 

3,760

 

 

346

 

 

4,106

2021

 

 

 

3,523

 

 

282

 

 

3,805

2022

 

 

 

2,601

 

 

94

 

 

2,695

2023

 

 

 

1,381

 

 

 —

 

 

1,381

Thereafter

 

 

1,396

 

 

 —

 

 

1,396

Total lease payments

 

$

15,873

 

$

1,053

 

$

16,926

Less: interest

 

 

2,139

 

 

76

 

 

2,215

Total

 

$

13,734

 

$

977

 

$

14,711

 

Purchase Commitments

 

As of March 31, 2019, the Company has entered into commitments to purchase equipment and raw materials for an aggregate amount of approximately $67.8 million. The Company anticipates that most of these commitments with remaining terms in excess of one year will be fulfilled by 2020.  

 

The Company entered into agreements with a Chinese governmental entity to acquire land-use rights to real property in Nanjing, China. Under the terms of these agreements, the Company committed to invest capital in its wholly-owned subsidiary, ANP, and to develop these properties as an API manufacturing facility for the Company’s pipeline products. In conjunction with these agreements, ANP modified its business license on July 3, 2012, to increase its authorized capital. As of December 31, 2016, the Company had completed its investment of total registered capital commitment of $61.0 million to ANP. This investment in ANP resulted in cash being transferred from the U.S. parent company to ANP.

 

In accordance with certain agreements between ANP and the Chinese government in January 2010 and November 2012, the Company acquired certain land-use rights for $1.2 million and $1.3 million, respectively. As required by these agreements, the Company committed to spend approximately $15.0 million in the related land development, which primarily includes the construction of fixed assets according to a specific timetable. As of March 31, 2019, the Company has spent $6.3 million on such construction. The Company anticipates that this spending commitment will be met by the end of 2019.

 

Note 17.   Related-Party Transactions

 

ANP Private Placement

 

As discussed in footnote 2, in July 2018 ANP completed a private placement of its common equity interest and received approximately $56.3 million of cash proceeds. In connection with the private placement, all of the executive officers of the Company, Stephen Shohet, Howard Lee, and Richard Koo, directors of the Company, and certain employees of ANP entered into subscription agreements (each, a “Subscription Agreement”) for the indirect investment in ANP. These Subscription Agreements were transacted either through an investment in Amphastar Cayman, a Cayman Islands limited liability company, or Qianqia or Zhongpan, Chinese partnerships. The aggregate gross proceeds received from management and directors were approximately $29.7 million.

 

-26-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 18.   Litigation

 

Enoxaparin Patent Litigation

 

In September 2011, Momenta Pharmaceuticals, Inc., or Momenta, a Boston‑based pharmaceutical company, and Sandoz Inc., or Sandoz, the generic division of Novartis, initiated litigation against the Company for alleged patent infringement of two patents related to testing methods for batch release of enoxaparin, which the Company refers to as the “’886 patent” and the “’466 patent.” The lawsuit was filed in the United States District Court for the District of Massachusetts, or the Massachusetts District Court. In October 2011, the Massachusetts District Court issued a preliminary injunction barring the Company from selling its generic enoxaparin product and also requiring Momenta and Sandoz to post a $100.1 million bond. The preliminary injunction was stayed by the United States Court of Appeals for the Federal Circuit, or the Federal Circuit, in January 2012, and reversed by the Federal Circuit in August 2012.

 

In January 2013, the Company moved for summary judgment of non‑infringement of both patents. Momenta and Sandoz withdrew their allegations as to the ’466 patent, and in July 2013, the Massachusetts District Court granted the Company’s motion for summary judgment of non‑infringement of the ’886 patent and denied Momenta and Sandoz’s motion for leave to amend their infringement contentions. On January 24, 2014, the Massachusetts District Court judge entered final judgment in the Company’s favor on both patents. Momenta and Sandoz also filed a motion to collect attorneys’ fees and costs relating to a discovery motion, which the Massachusetts District Court granted. On May 9, 2016, the Massachusetts District Court issued an order imposing fees and costs of approximately $0.4 million in relation to this discovery motion. This amount has been accrued in the general and administrative expense for the quarter ended March 31, 2016.  On January 30, 2014, Momenta and Sandoz filed a notice of appeal to the Federal Circuit appealing the court’s final judgment including summary judgment denying Momenta and Sandoz’s motion for leave to amend their infringement contentions.

 

Following appeal briefing filed by the parties, the Federal Circuit held oral argument on May 4, 2015. On November 10, 2015, the Federal Circuit panel affirmed-in-part and vacated-in-part the decision of the Massachusetts District Court granting summary judgment of non-infringement as to the Company, and it remanded the case to the Massachusetts District Court for further proceedings consistent with its opinion. The Federal Circuit panel affirmed the Massachusetts District Court’s holding in the Company’s favor that the Company does not infringe under 35 U.S.C. 271(g), and the panel vacated the grant of summary judgment to the extent it was based on the determination that the Company’s activities fall within the 35 U.S.C. 271(e)(1) safe harbor. The Federal Circuit panel also left to the Massachusetts District Court’s discretion whether to reconsider on remand its denial of leave for Momenta and Sandoz to amend their infringement contentions. On January 11, 2016, the Company filed a Petition for Rehearing En Banc with the Federal Circuit. On February 17, 2016, the Federal Circuit denied the Company’s Petition, and the Federal Circuit issued its mandate on February 24, 2016, whereby the case returned to the Massachusetts District Court for further proceedings. 

 

On March 18, 2016, the parties filed a joint status report with the Massachusetts District Court. On June 21, 2016, the Massachusetts District Court granted Momenta and Sandoz’s Motion for Leave to Amend its Infringement Contentions. In light of Momenta and Sandoz’s Amended Infringement Contentions and recent changes in Supreme Court precedent since the case was stayed in 2012, the Company sought to amend its Non-Infringement and Invalidity Contentions.

 

On July 18, 2016, the Company submitted its Motion for Leave to Amend Its Non-Infringement and Invalidity Contentions and Momenta and Sandoz responded on July 25, 2016. In light of the new arguments made in their response, the Company further filed a Motion For Leave to Reply in Further Support of Defendants’ Motion for Leave to Amend Non-Infringement and Invalidity Contentions, which was granted. A hearing was held on August 23, 2016, where the Magistrate Judge ordered the Company to file its proposed amended contentions, which it filed on August 31, 2016. On February 4, 2017, the Magistrate Judge issued an order denying the Company leave to amend its contentions. The Company filed objections to this order with the District Court on February 21, 2017. On April 13, 2017, the District Court rejected the determination of the Magistrate Judge with respect to the Company’s amended non-infringement

-27-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

contentions, and allowed the Company to amend its non-infringement contentions. With respect to the Company’s amended invalidity contentions, the District Court accepted the Magistrate Judge’s determination; however, the District Court specifically stated that the Company can argue changes in law at the summary judgment stage or at trial.

 

In parallel with the Massachusetts District Court proceedings, the Company appealed the Federal Circuit’s decision to vacate the grant of the Company’s summary judgment to the extent it was based on the determination that the Company’s activities are protected under the Safe Harbor. The Company filed a Petition for a Writ of Certiorari with the Supreme Court on May 17, 2016. Momenta and Sandoz initially waived their right to respond to the petition; however, on May 31, 2016, the Supreme Court requested a response from Momenta and Sandoz. The response from Momenta and Sandoz was initially due on June 30, 2016, but they requested an extension. Momenta and Sandoz filed their response on August 1, 2016. On October 3, 2016, the Supreme Court declined the Petition for a Writ of Certiorari.

 

Fact discovery in the Massachusetts District Court proceedings closed on November 22, 2016, and the parties proceeded with expert discovery and exchanged opening and rebuttal expert reports. Expert discovery closed on March 24, 2017. On April 14, 2017, Plaintiffs filed a Motion for Summary Judgment seeking to dismiss the Company’s equitable defenses. On April 14, 2017, the Company filed Defendants’ Motion for Summary Judgment of Invalidity and Noninfringement. In the Motion, the Company moved for the District Court to grant summary judgment in favor of the Company on the following issues: (1) the ’886 patent is invalid under 35 U.S.C. § 101 as claiming non-patentable subject matter; (2) the ’886 patent is invalid under 35 U.S.C. § 112 because the claims are indefinite; and (3) the Company’s tests do not infringe the claims of the ’886 patent. Oppositions to the motions for summary judgment were filed on May 5, 2017. Replies in support of the motions for summary judgment were filed on May 19, 2017. On June 16, 2017, the District Court issued an order denying the summary judgment motions. The District Court also denied Plaintiffs’ motion for summary judgment dismissing the Company’s defenses of implied waiver and equitable estoppel, and denied Plaintiffs’ alternative request for a separate hearing on the implied waiver and equitable estoppel defenses holding that the defenses would be submitted to the jury for an advisory verdict.

 

Trial in the Massachusetts District Court on all claims and defenses began on July 10, 2017. On July 21, 2017, the jury returned a unanimous verdict finding that although the Company’s tests infringed the asserted patent, the patent was invalid for lack of enablement and lack of written description and the jury further found that Plaintiffs are entitled to zero ($0) damages. As for the Company’s defenses of implied waiver and equitable estoppel, the jury found that Plaintiffs waived their right to recover for infringement of the asserted patent and that Plaintiffs are estopped from enforcing the asserted patent against the Company. The verdict on these equitable defenses was briefed by the parties and submitted to the Court. In the post-trial briefing, the Company requested the Court to adopt the findings of the jury on the equitable defenses, and to set aside the jury’s finding of infringement. In Plaintiffs’ post-trial briefing, Plaintiffs requested a new trial, and requested the Court to set aside the jury’s finding that the asserted patent was invalid for lack of enablement and lack of written description. In a February 7, 2018 Memorandum and Order and with respect to the equitable defenses, the Court found that Plaintiffs waived their right to enforce the ’866 patent against the Company for its use of one of its test, and are equitably estopped from enforcing the ’866 patent against the Company for its use of that same test. The Court also found that Plaintiffs have not waived their right to enforce the ’866 patent against the Company for its use of a second test, and are not equitable estopped from enforcing the ’866 patent against the Company for its use of that same second test. On February 7, 2018, the Court also denied all other post-trial motions. On March 20, 2018, the Court entered final judgment in this matter reflecting the jury’s verdict and the Court’s February 7, 2018 Memorandum and Order.

 

Plaintiffs filed a motion for sanctions on January 14, 2019. The Company filed its opposition brief to the motion for sanctions on February 4, 2019. Plaintiffs filed a reply on February 14, 2019 and the Company filed a sur-reply on February 22, 2019. The Magistrate Judge set a hearing on the motion for sanctions for May 7, 2019, which has been rescheduled to May 21, 2019 at the request of the parties’ counsel.  The Company filed its opposition to the motion for relief from the final judgment on March 20, 2019, along with a motion to strike the Plaintiffs’ improper use of privileged material. The Company intends to continue to vigorously defend against Plaintiffs’ motion for sanctions.

-28-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

On March 23, 2018, the Company filed a motion to enforce liability on the bonds related to the preliminary injunction issued in October 2011, stayed in January 2012, and reversed by the Federal Circuit in August 2012. On March 27, 2018, Plaintiffs filed a notice of appeal with the Federal Circuit. On April 3, 2018, Plaintiffs filed a motion with the District Court to defer decision on the Company’s motion to enforce liability on the bonds pending their appeal. On July 13, 2018, the District Court allowed Plaintiffs motion to defer consideration of the Company’s motion to enforce liability on the bonds until the appeal is resolved. The Plaintiffs filed their Opening Brief on July 30, 2018, the Company filed its Response Brief on September 21, 2018, and Plaintiffs filed their Reply Brief on November 19, 2018. The briefing in the appeal has concluded and the parties are waiting for the Federal Circuit to set a date for oral arguments. On February 28, 2019, the Plaintiffs filed a motion to stay the appeal, and the Company’s opposition to their motion to stay is due May  28, 2019.

 

The Company intends to continue to vigorously defend the jury’s verdict and the District Court’s Final Judgment, including against any appeal by the Plaintiffs. The Company intends to continue to pursue its attempt to collect the $100.1 million bond posted by Momenta and Sandoz.

 

False Claims Act Litigation

 

In January 2009, the Company filed a qui tam complaint in the U.S. District Court for the Central District of California, or the California District Court, alleging that Aventis Pharma S.A., or Aventis, through its acquisition of a patent through false and misleading statements to the U.S. Patent and Trademark Office, as well as through false and misleading statements to the FDA, overcharged the federal and state governments for its Lovenox® product. If the Company is successful in this litigation, it could be entitled to a portion of any damage award that the government ultimately may recover from Aventis. In October 2011, the California District Court unsealed the Company’s complaint.

 

On February 28, 2014, Aventis filed a motion for summary judgment on the issue of the adequacy of the Company’s notice letter to the government, and the California District Court denied Aventis’ motion for summary judgment in a final order it issued on May 12, 2014. On June 9, 2014, at Aventis’ request, the California District Court issued an order certifying for appeal its order denying Aventis’ motion for summary judgment. On June 9, 2014, Aventis filed with the United States Court of Appeals for the Ninth Circuit, or the Ninth Circuit, a petition for permission to appeal the California District Court’s denial of Aventis’ motion for summary judgment, and the Company filed an opposition to Aventis’ petition on June 19, 2014. On August 22, 2014, the Ninth Circuit granted Aventis’ petition. The parties filed their respective appeal briefs with the Ninth Circuit. On November 10, 2016, the Ninth Circuit heard oral argument on the appeal.

 

The California District Court set an evidentiary hearing for July 7, 2014 on the “original source” issue, a key element under the False Claims Act. The evidentiary hearing was conducted as scheduled, from July 7, 2014 through July 10, 2014. On July 13, 2015, the California District Court issued a ruling concluding that the Company is not an original source under the False Claims Act, and entered final judgment dismissing the case for lack of subject matter jurisdiction.

 

On July 20, 2015, the Company filed with the Ninth Circuit a notice of appeal of the California District Court’s dismissal of the case, and Aventis filed a notice of cross-appeal on August 5, 2015. On November 12, 2015, Aventis filed a pleading asking that the California District Court impose various monetary penalties and fines against the Company, including disgorgement of enoxaparin revenues and attorneys’ fees expended by Aventis in this action, based on Aventis’ allegations that the Company engaged in sanctionable conduct. On November 23, 2015, the California District Court issued an order setting forth a procedure for sanctions proceedings as to the Company as well as its outside counsel. On December 24, 2015, the Company filed a pleading with the California District Court opposing the imposition of sanctions, and on January 20, 2016, Aventis filed a response pleading further pressing for the imposition of sanctions. On May 4, 2016, the California District Court issued three orders requesting that the Company and its outside counsel file a document showing cause as to why sanctions should not be imposed and to set up a conference call with

-29-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

the parties and the Court to discuss whether any discovery and/or a hearing is necessary. On June 13, 2016, the Company and its outside counsel each filed responses to the Court’s order to show cause as to why sanctions should not be imposed. On July 21, 2016, Aventis filed a response contending that the Court should impose sanctions. On February 10, 2017, the Court held a show cause hearing regarding the potential imposition of sanctions and took the matter under submission. On September 18, 2017, the District Court issued its decision that no sanctions will be imposed on either the Company or its counsel.

 

On March 28, 2016, the Company filed its opening brief with the Ninth Circuit Court of Appeals setting forth detailed arguments as to why the False Claims Act litigation should not have been dismissed by the California District Court. On June 20, 2016, Aventis filed its principal brief in the appeal, responding to the Company’s arguments regarding dismissal of the False Claims Act litigation, and setting forth Aventis’ argument that it should be awarded attorneys’ fees and expenses. On September 19, 2016, the Company filed its reply brief to Aventis’ principal brief. On October 3, 2016, Aventis filed its reply brief in support of its cross-appeal of the District Court’s denial of attorneys’ fees. On November 10, 2016, the Ninth Circuit heard oral argument on the appeals.

 

On May 11, 2017, the Ninth Circuit issued an opinion affirming the California District Court’s dismissal of the action for lack of subject matter jurisdiction; dismissing as moot Aventis’ appeal of the District Court’s denial of its motion for summary judgment on the issue of the adequacy of the Company’s notice letter to the government; reversing the District Court’s denial of Aventis’ motion for attorneys’ fees; and remanding the case to the District Court for resolution of the attorneys’ fees issue. On July 14, 2017, Aventis filed an application with the District Court for entitlement to attorneys’ fees and expenses. On November 20, 2017, the District Court issued its order granting Aventis’ application for fees, stating that it would refer the matter to a magistrate judge for a report and recommendation regarding the amount of the award to be made. On November 21, 2017, the District Court referred the matter to a magistrate judge.

 

On August 7, 2018, Aventis filed its Application for Fees and Expenses. On November 26, 2018, the Company filed its Opposition to Aventis’ Application for Fees and Expenses. On February 12, 2019, following further briefing on the attorneys’ fee issue, the District Court approved of the parties’ consent for the Magistrate Judge to conduct all further proceedings in this matter at the district court level, including determining the amount of attorneys’ fees to be awarded and entering a final judgment. The Magistrate Judge set a hearing on the application for May 8, 2019. The Company intends to continue to vigorously defend against any imposition of attorneys’ fees and expenses in this case.

 

Momenta/Sandoz Antitrust Litigation

 

On September 17, 2015, the Company initiated a lawsuit by filing a complaint in the California District Court against Momenta and Sandoz, or the Defendants. The Company’s complaint generally asserts that Defendants have engaged in certain types of illegal, monopolistic, and anticompetitive conduct giving rise to various causes of action against them. On December 9, 2015, Defendants filed a motion to dismiss and a motion to transfer the case to the District of Massachusetts. On January 4, 2016, the Company filed oppositions to both motions. On January 26, 2016, the California District Court granted Defendants’ motion to transfer and did not rule on Defendants’ motion to dismiss. Accordingly, the case was transferred to the District of Massachusetts. On February 9, 2016, the Company filed a writ of mandamus with the Ninth Circuit to attempt to appeal the California District Court’s granting of Defendants’ motion to transfer to the District of Massachusetts. The Ninth Circuit denied this petition on May 20, 2016, and as such the case will remain before the District of Massachusetts. On July 27, 2016, the Massachusetts District Court granted Defendants’ motion to dismiss based on antitrust immunity doctrine, without addressing the substantive merits of the claims.

 

On August 25, 2016, the Company filed with the First Circuit Court of Appeals a notice of appeal of the Massachusetts District Court’s dismissal of the antitrust case. On October 31, 2016, the Company filed its appeal brief with the First Circuit Court of Appeals. On December 5, 2016, Defendants filed their response brief with the First Circuit Court of Appeals. On December 19, 2016, the Company filed its rely brief with the First Circuit Court of Appeals, which concluded the briefing on this appeal. On February 9, 2017, the First Circuit Court of Appeals heard oral arguments. On

-30-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

March 6, 2017, the First Circuit Court of Appeals issued its decision, in which it held 3 to 0 that the District Court of Massachusetts erred in dismissing the Company’s antitrust case and sent the case back to the District Court to consider additional arguments.

 

On April 20, 2017, Defendants filed their supplemental motion to dismiss and the Company filed its opposition on May 4, 2017. On March 19, 2018, the District Court entirely denied the Defendants’ motion to dismiss. On April 19, 2018, the Defendants filed a motion to seek interlocutory appeal of the District Court’s motion to dismiss opinion. The Company filed its opposition to interlocutory appeal on May 1, 2018. On June 1, 2018, the District Court denied Defendants’ motion seeking interlocutory appeal.

 

Defendants filed motions for sanctions on January 14, 2019 and January 22, 2019, respectively. The Company filed its opposition briefs to both motions on February 4, 2019 and February 5, 2019, respectively. Momenta and Sandoz filed replies to both motions on February 14, 2019. The Company filed sur-replies to both motions on February 22, 2019. The Magistrate Judge set a hearing on the motions for sanctions for May 7, 2019, which has been rescheduled to May 21, 2019 at the request of the parties’ counsel.  The Company intends to vigorously defend against these sanctions motions.

 

On August 23, 2018, the Massachusetts District Court granted the parties’ joint motion to extend the schedule as to the fact and expert discovery and accepted their proposed dates. Fact discovery closed on November 30, 2018 and expert discovery closed on April 12, 2019. On February 19, 2019, the Company filed a Motion for Partial Summary Judgment on Issues Previously Litigated in the Patent Action (the “Company’s Summary Judgment Motion”). Sandoz filed its oppositions to the Company’s Summary Judgment Motion on April 9, 2019 and Momenta filed its oppositions to the Company’s Summary Judgment Motion on April 10, 2019. The Company filed its reply to those oppositions on May 3, 2019. On April 26, 2019, Momenta and Sandoz each separately filed Motions for Summary Judgment on the Company’s antitrust claims. The Company’s Opposition is due June 14, 2019 and Defendants’ replies are due July 10, 2019.

 

Epinephrine Injection, 0.1 mg/mL Litigation

 

On June 28, 2018, Belcher Pharmaceuticals, LLC, or Belcher initiated a lawsuit by filing a complaint against IMS for infringement of U.S. Patent No. 9,283,197 (“the ‘197 Patent”), with regard to IMS’s New Drug Application No. 211363, filed under 21 U.S.C. § 355(b)(2) of the Hatch-Waxman Act, for FDA approval to manufacture and sell 0.1 mg/mL epinephrine injections. On July 20, 2018, the Company filed a motion to dismiss Belcher’s complaint for patent infringement under Federal Rule of Civil Procedure 12(b)(6). On March 31, 2019, the Court denied the Company’s motion to dismiss. On April 15, 2019, the Company filed its Answer and Counterclaims. On April 24, 2019, the Court entered the Parties’ Joint Stipulation to stay the litigation until after Belcher’s June 2019 trial with Hospira, Inc. regarding the ‘197 patent. The Company intends to vigorously defend this patent lawsuit.

 

Vasopressin (20 units/mL) Patent Litigation

 

On December 20, 2018, Par Pharmaceutical, Inc., Par Sterile Products, LLC and Endo Par Innovation Company (collectively, “Par”) initiated a patent lawsuit by filing a Complaint against the Company for infringement of U.S. Patent Nos. 9,375,478 (“the ‘478 Patent”), 9,687,526 (“the ‘526 Patent”), 9,744,209 (“the ‘209 Patent”), 9,744,239 (“the ‘239 Patent”), 9,750,785 (“the ‘785 Patent”) and 9,937,223 (“the ‘223 Patent”) (collectively, “Par Patents”) with regard to the Company’s Abbreviated New Drug Application No. 211,857 for FDA approval to manufacture and sell Vasopressin (20 units/ mL). The Company filed its Answer to this Complaint on February 19, 2019. On April 18, 2019, the Court held a scheduling conference and entered a Scheduling Order. Trial is scheduled for January 2021. The Company intends to vigorously defend this patent lawsuit.

 

-31-


 

 

AMPHASTAR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Other Litigation

 

The Company is also subject to various other claims and lawsuits from time to time arising in the ordinary course of business. The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the opinion of management, the ultimate resolution of any such matters is not expected to have a material adverse effect on its financial position, results of operations, or cash flows; however, the results of litigation and claims are inherently unpredictable and the Company’s view of these matters may change in the future. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.

 

 

 

 

-32-


 

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is a discussion and analysis of the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the “Condensed Consolidated Financial Statements” and the related notes thereto included in this Quarterly Report on Form 10-Q, or Quarterly Report. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by  forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under the “Special Note About Forward-Looking Statements,” above and described in greater detail elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2018, particularly in Item 1A. “Risk Factors”.

 

Overview

 

We are a specialty pharmaceutical company that focuses primarily on developing, manufacturing, marketing and selling technically challenging generic and proprietary injectable, inhalation and intranasal products as well as insulin API products. We currently manufacture and sell over 20 products. In November 2018, the FDA granted over-the-counter approval for our NDA for Primatene® Mist in a new CFC-free formulation.

 

We are currently developing a portfolio of 15 generic abbreviated new drug applications, or ANDAs, three biosimilar product candidates and five proprietary product candidates, which are in various stages of development and target a variety of indications. Four ANDAs and one NDA are currently on file with the FDA.

 

Our largest products by net revenues currently include enoxaparin sodium injection, naloxone hydrochloride injection, lidocaine jelly and sterile solution, phytonadione, medroxyprogesterone, and Primatene® Mist. We launched Primatene® Mist in the fourth quarter of 2018.

 

To complement our internal growth and expertise, we have made several strategic acquisitions of companies, products and technologies. These acquisitions collectively have strengthened our core injectable and inhalation product technology infrastructure by providing additional manufacturing, marketing, and research and development capabilities including the ability to manufacture raw materials, APIs and other components for our products.

 

Included in these acquisitions are marketing authorizations for 33 products in the UK, Ireland, Australia, and New Zealand, representing 11 different injectable chemical entities, from UCB Pharma GmbH. We are in the process of transferring the manufacturing of these products to our facilities in California, which will require approvals from the UK Medicines and Healthcare products Regulatory Agency before we can relaunch the products.

 

In July 2018 ANP completed a private placement of its common equity interest and received approximately $56.3 million of cash proceeds. In connection with the private placement, all of our executive officers, Stephen Shohet, Howard Lee, and Richard Koo, our directors, and certain employees of ANP entered into subscription agreements for the indirect investment in ANP. The aggregate gross proceeds received from management and directors was approximately $29.7 million. We have retained approximately 58% of the equity interest in ANP following the private placement. ANP intends to use the net proceeds from the private placement for its business expansion plans. ANP’s net income or loss after July 2, 2018, is attributed to us in accordance with our equity interest of approximately 58% in ANP.

 

Business Segments

 

As of March 31, 2019, our performance is assessed and resources are allocated based on the following two reportable segments: (1) finished pharmaceutical products and (2) API products. The finished pharmaceutical products segment manufactures, markets and distributes enoxaparin, naloxone, phytonadione, lidocaine, medroxyprogesterone acetate, Primatene® Mist, as well as various other critical and non-critical care drugs. The API segment manufactures and distributes RHI API and porcine insulin API for external customers and internal product development. Information

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reported herein is consistent with how it is reviewed and evaluated by our chief operating decision maker. Factors used to identify our segments include markets, customers and products.

 

For more information regarding our segments, see “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Segment Reporting.”

 

Results of Operations

 

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

 

Net revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

Change

 

 

 

    

2019

    

2018

    

Dollars

    

%

 

 

 

 

(in thousands)

 

 

 

 

Net revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Finished pharmaceutical products

 

$

74,539

 

$

53,117

 

$

21,422

 

40

%

 

API

 

 

5,251

 

 

5,276

 

 

(25)

 

(0)

%

 

Total net revenues

 

$

79,790

 

$

58,393

 

$

21,397

 

37

%

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Finished pharmaceutical products

 

$

42,227

 

$

33,481

 

$

8,746

 

26

%

 

API

 

 

6,660

 

 

7,940

 

 

(1,280)

 

(16)

%

 

Total cost of revenues

 

$

48,887

 

$

41,421

 

$

7,466

 

18

%

 

Gross profit

 

$

30,903

 

$

16,972

 

$

13,931

 

82

%

 

as % of net revenues

 

 

39

%  

 

29

%  

 

 

 

 

 

 

 

The increase in net revenues of the finished pharmaceutical products for the three months ended March 31, 2019, was primarily due to the following changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

Change

 

 

 

    

2019

    

2018

    

Dollars

    

%

 

 

 

 

(in thousands)

 

 

 

 

Finished pharmaceutical products net revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Enoxaparin

 

$

14,484

 

$

7,007

 

$

7,477

 

107

%

 

Lidocaine

 

 

11,979

 

 

9,782

 

 

2,197

 

22

%

 

Phytonadione

 

 

10,120

 

 

9,181

 

 

939

 

10

%

 

Naloxone

 

 

7,364

 

 

8,927

 

 

(1,563)

 

(18)

%

 

Medroxyprogesterone

 

 

7,213

 

 

2,706

 

 

4,507

 

167

%

 

Primatene® Mist

 

 

2,897

 

 

 —

 

 

2,897

 

N/A

 

 

Epinephrine

 

 

2,679

 

 

3,223

 

 

(544)

 

(17)

%

 

Other finished pharmaceutical products

 

 

17,803

 

 

12,291

 

 

5,512

 

45

%

 

Total finished pharmaceutical products net revenues

 

$

74,539

 

$

53,117

 

$

21,422

 

40

%

 

 

The increase in sales of enoxaparin during the first quarter of 2019 was primarily driven by higher average selling price due to a price increase and a change in customer mix, which resulted in an increase of $4.6 million. Increased unit volumes to return inventory at wholesaler levels to normal levels due to enoxaparin market shortages in the prior year also contributed to the sales increase during the first quarter of 2019. The $1.6 million of increase in sales of lidocaine was due to higher unit volumes, while the remainder was due to higher average selling price. The increase in sales of phytonadione was primarily driven by a higher average selling price. The decrease in sales of naloxone was primarily driven by lower unit volumes. The increase in sales of medroxyprogesterone was due to increased unit sales as it was launched in the first quarter of 2018, so the prior year did not include a full quarter of sales. Other finished

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pharmaceutical products sales increased primarily due to higher unit sales volumes of Cortrosyn®, atropine and dextrose which were in high demand due to market shortages.

 

We anticipate that the sales of naloxone, enoxaparin, and medroxyprogesterone will continue to fluctuate in the future as a result of competition.

 

Sales of API were relatively unchanged compared to the first quarter of 2018.  

 

We anticipate that sales of API will continue to fluctuate and may decrease due to the inherent uncertainties related to sales to MannKind. In addition, most of our API sales are denominated in euros, and the fluctuation in the value of the euros versus the U.S. dollar has had, and will continue to have, an impact on API sales revenues in the near term.

 

A significant portion of our customer shipments in any period relate to orders received and shipped in the same period, generally resulting in low product backlog relative to total shipments at any time. However, at December 31, 2018, our backlog was approximately $5 million. By March 31, 2019, our backlog had dropped to approximately $3 million, and we anticipate further reductions to normal levels by June 30, 2019. Historically, our backlog has not been a meaningful indicator in any given period of our ability to achieve any particular level of overall revenue or financial performance.

 

Cost of revenues

 

The launch of Primatene® Mist and an increase in sales of medroxyprogesterone and Cortrosyn®, which are higher margin products, as well as the higher average selling price of enoxaparin, helped increase our gross margins for the first quarter of 2019.  Gross margins for Primatene® Mist were magnified by the use of API and components which were expensed to pre-launch inventory in prior years. These effects were partially offset by an increase in expense at our ANP facility during the three months ended March 31, 2019, as we added headcount and brought more equipment online as part of an ongoing expansion of such facility.  

 

In 2018, we received FDA approval of our ANDA supplement for the manufacture of semi-purified heparin at ANP, and the manufacture of heparin sodium at IMS. The cost of heparin, which is the starting material for enoxaparin, has increased and is expected to increase further, putting downward pressure on our gross margins. However, we believe that this trend will be offset by sales of our higher-margin products, such as medroxyprogesterone, isoproterenol, and Primatene® Mist, which were recently launched.

 

Selling, distribution and marketing, and general and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

Change

 

 

 

 

2019

 

2018

 

Dollars

 

%

 

 

 

 

(in thousands)

 

 

 

 

Selling, distribution, and marketing

    

$

3,141

    

$

1,721

    

$

1,420

    

83

%

 

General and administrative

 

$

16,327

 

$

10,998

 

$

5,329

 

48

%

 

 

The increase in selling, distribution, and marketing expenses was primarily due to marketing expenses related to Primatene® Mist and increased freight costs. The increase in general and administrative expense was primarily due to increased legal expenses (see Note 18 to the condensed consolidated financial statements for more information regarding litigation matters). 

 

We expect that selling, distribution and marketing expenses will increase due to the increase in marketing expenditure for Primatene® Mist. We expect that general and administrative expenses will increase on an annual basis due to increased costs associated with ongoing compliance with public company reporting obligations and an increase in legal fees associated with patent challenges.

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Research and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

Change

 

 

 

    

2019

    

2018

    

Dollars

    

%

 

 

 

 

(in thousands)

 

 

 

 

Salaries and personnel-related expenses

 

$

6,406

 

$

4,765

 

$

1,641

 

34

%

 

Pre-launch inventory

 

 

15

 

 

738

 

 

(723)

 

(98)

%

 

Clinical trials

 

 

1,702

 

 

808

 

 

894

 

111

%

 

FDA fees

 

 

300

 

 

1,226

 

 

(926)

 

(76)

%

 

Testing, operating and lab supplies

 

 

2,572

 

 

3,409

 

 

(837)

 

(25)

%

 

Depreciation

 

 

2,128

 

 

1,532

 

 

596

 

39

%

 

Other expenses

 

 

1,484

 

 

1,552

 

 

(68)

 

(4)

%

 

Total research and development expenses

 

$

14,607

 

$

14,030

 

$

577

 

 4

%

 

 

Research and development costs consist primarily of costs associated with the research and development of our product candidates. We expense research and development costs as incurred.

 

Salaries and personnel-related expenses increased during the first quarter of 2019 primarily due to the expansion of our ANP facility. Clinical trial expense increased due to external studies related to our generic product pipeline.

 

We have made, and expect to continue to make, substantial investments in research and development to expand our product portfolio and grow our business. We expect that research and development expenses will increase on an annual basis due to increased clinical trial costs related to our biosimilar and inhalation product candidates. These expenditures will include costs of APIs developed internally and purchased externally, the cost of purchasing reference listed drugs and the costs of performing the clinical trials. As we undertake new and challenging research and development projects, we anticipate that the associated costs will increase significantly over the next several quarters and years.

 

Provision for income tax benefit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

Change

 

 

 

    

2019

    

2018

    

Dollars

    

%

 

 

 

 

(in thousands)

 

 

 

 

Income tax benefit

 

$

(1,479)

 

$

(1,748)

 

$

269

 

NM

 

 

Effective tax rate

 

 

41

%  

 

20

%  

 

 

 

 

 

 

 

The difference in income tax benefit was primarily due to differences in pre-tax loss positions and timing of discrete tax items.

 

Liquidity and Capital Resources 

Cash Requirements and Sources 

We need capital resources to maintain and expand our business. We expect our cash requirements to increase significantly in the foreseeable future as we sponsor clinical trials for, seek regulatory approvals of, and develop, manufacture and market our current development‑stage product candidates and pursue strategic acquisitions of businesses or assets. Our future capital expenditures include projects to upgrade, expand and improve our manufacturing facilities in the United States, China and France. Our cash obligations include the principal and interest payments due on our existing loans and lease payments, as described below and throughout this Quarterly Report on Form 10-Q. As of March 31, 2019, our foreign subsidiaries collectively held $37.4 million in cash and cash equivalents. Cash or cash equivalents held at foreign subsidiaries are not available to fund the parent company’s operations in the United States. We believe that our cash reserves, operating cash flows, and borrowing availability under our credit facilities will be sufficient to fund our operations for at least the next 12 months. We expect additional cash flows to be generated in the longer term from future product introductions, although there can be no assurance as to the receipt of regulatory approval

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for any product candidates that we are developing or the timing of any product introductions, which could be lengthy or ultimately unsuccessful.

 

We maintain a shelf registration statement on Form S-3 pursuant to which we may, from time to time, sell up to an aggregate of $250 million of our common stock, preferred stock, depositary shares, warrants, units, or debt securities. If we require or elect to seek additional capital through debt or equity financing in the future, we may not be able to raise capital on terms acceptable to us or at all. To the extent we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities will result in dilution to our stockholders. If we are required and unable to raise additional capital when desired, our business, operating results and financial condition may be adversely affected. 

   

Working capital increased $4.7 million to $118.2 million at March 31, 2019, compared to $113.5 million at December 31, 2018.

Cash Flows from Operations

 

The following table summarizes our cash flows used in operating, investing, and financing activities for the three months ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2019

 

2018

 

 

 

(in thousands) 

 

Statement of Cash Flow Data:

 

 

 

 

 

 

 

Net cash provided by (used in)

 

 

 

 

 

 

 

Operating activities

 

$

(3,610)

 

$

8,360

 

Investing activities

 

 

(14,884)

 

 

(8,738)

 

Financing activities

 

 

11,229

 

 

(10,828)

 

Effect of exchange rate changes on cash

 

 

24

 

 

159

 

Net decrease in cash, cash equivalents, and restricted cash

 

$

(7,241)

 

$

(11,047)

 

 

Sources and Use of Cash

 

Operating Activities

 

Net cash used in operating activities was $3.6 million for the three months ended March 31, 2019, which included net loss of $2.2 million. Non-cash items were primarily comprised of $4.5 million of depreciation and amortization, and $4.7 million of share-based compensation expense.

 

Additionally, there was a net cash outflow from changes in operating assets and liabilities of $11.5 million which resulted from the increase in accounts receivable and inventory offset by an increase in accounts payable and accrued liabilities. The increase in accounts receivable was due to the timing of sales in the quarter.  The increase in inventory was due to increased purchases of raw materials and production of finished goods for Primatene® Mist. Additionally, enoxaparin finished product increased from the unusually low levels at year-end, which had been caused by market shortages. These trends were partially offset by a decrease in API at AFP. Accounts payable and accrued liabilities increased primarily due to the timing of payments.

 

Net cash provided by operating activities was $8.4 million for the three months ended March 31, 2018, which included net loss of $7.1 million. Non-cash items were comprised of $3.8 million of depreciation and amortization, and $4.7 million of share-based compensation expense. Operating assets and liabilities changed primarily due to the timing of sales and purchases activities in the normal course of business and the timing of the related cash receipts and disbursements.

 

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Investing Activities

 

Net cash used in investing activities was $14.9 million for the three months ended March 31, 2019, primarily as a result of $14.7 million in purchases of property, plant, and equipment, which included $4.0 million incurred in the United States, $3.3 million in France, and $7.4 million in China.

 

Net cash used in investing activities was $8.7 million for the three months ended March 31, 2018, primarily as a result of $12.3 million in purchases of property, machinery, and equipment, which included $3.3 million incurred in the United States, $5.4 million in France, and $3.6 million in China. The cash used was partially offset by the $4.4 million receipt of the remaining consideration of the sale of the various ANDAs in February 2017 (see Note 8 to the condensed consolidated financial statements for more information).

 

Financing Activities

 

Net cash provided by financing activities was $11.2 million for the three months ended March 31, 2019, primarily as a result of the receipt of $18.3 million for ANP private placement, which was partially offset by  $2.4 million of net proceeds used to settle share-based compensation awards under our equity plans, and  $3.0 million used to purchase treasury stock. Additionally, we made $1.7 million in principal payments on our long-term debt.

 

Net cash used in financing activities was $10.8 million for the three months ended March 31, 2018, primarily as a result of $7.6 million used to purchase treasury stock and $1.8 million of net proceeds used to settle share-based compensation awards under our equity plans. Additionally, we made $1.4 million in principal payments on our long-term debt.

 

Indebtedness

 

For more information regarding our outstanding indebtedness, see “Part I – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Debt”.

 

Contractual Obligations

 

There have been no material changes outside the ordinary course of our business in the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, except that our outstanding debt obligations have changed as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

 

 

    

2019

    

2018

    

Change

 

 

 

(in thousands)

 

Short-term debt and current portion of long-term debt

 

$

17,587

 

$

18,229

 

$

(642)

 

Long-term debt

 

 

30,973

 

 

31,984

 

 

(1,011)

 

Total debt

 

$

48,560

 

$

50,213

 

$

(1,653)

 

 

As of March 31, 2019, we had $45.0 million in unused borrowing capacity under revolving lines of credit with Cathay Bank and East West Bank.

 

Critical Accounting Polices

 

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2018.

 

There were no material changes to our critical accounting policies during the three months ended March 31, 2019, other than the adoption of ASC 2016-02, Leases or ASC 2016-02, using the transition method. The adoption of ASC 2016-02 

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did not have a material impact on the Company’s condensed consolidated financial statements. The results for the reporting period beginning after January 1, 2018, are presented in accordance with the new standard, although comparative information has not been restated and continues to be reported under the accounting standards and policies in effect for those periods.

 

Recent Accounting Pronouncements

 

For information regarding recent accounting pronouncements, see “Part I – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Summary of Significant Accounting Policies”.

 

Off-Balance Sheet Arrangements

 

We do not have any relationships or financial partnerships with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts.

 

Government Regulation

 

Our products and facilities are subject to regulation by a number of federal and state governmental agencies. The FDA, in particular, maintains oversight of the formulation, manufacture, distribution, packaging, and labeling of all of our products.  The Drug Enforcement Administration, or DEA, maintains oversight over our products that are considered controlled substances.

 

From February 5, 2019 through February 12, 2019, our Amphastar facility in Rancho Cucamonga, California was subject to a preapproval inspection by the FDA. The inspection included a review of our corrective actions taken from the previous cGMP inspection in March 2017, as well as review of data to support our pending applications. The inspections resulted in multiple observations on Form 483. We fully responded to those observations on March 6, 2019. We believe that our responses to the observations will satisfy the requirements of the FDA and that no significant further actions will be necessary.

From February 25 through March 1, 2019, our IMS facility in South El Monte, California was subject to a preapproval inspection by the FDA. The inspection included a review of our corrective actions taken from the 2017 inspection as well as review of data to support our pending applications. The inspection resulted in multiple observations on Form 483. We responded to those observations on March 22, 2019. We believe that our responses to the observations will satisfy the requirements of the FDA and that no significant further actions will be necessary.    

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

The following discussion provides forward-looking quantitative and qualitative information about our potential exposure to market risk. Market risk represents the potential loss arising from adverse changes in the value of financial instruments. The risk of loss is assessed based on the likelihood of adverse changes in fair values, cash flows or future earnings. We are exposed to market risk for changes in the market values of our investments (Investment Risk), the impact of interest rate changes (Interest Rate Risk), and the impact of foreign currency exchange changes (Foreign Currency Exchange Risk).

 

Investment Risk

 

We regularly review the carrying value of our investments and identify and recognize losses, for income statement purposes, when events and circumstances indicate that any declines in the fair values of such investments below our accounting basis are other than temporary. As of March 31, 2019, we did not have any such investments. We do not enter into investments for trading or speculative purposes.

 

As of March 31, 2019, we had $34.1 million deposited in seven banks located in China, $2.3 million deposited in one bank located in France, and $1.0 million deposited in one bank located in the United Kingdom. We also maintained $34.3 million in cash equivalents that include money market accounts, as of March 31, 2019. The remaining amounts of our cash equivalent as of March 31, 2019, are in non-interest bearing accounts.

 

Interest Rate Risk

 

Our primary exposure to market risk is interest‑rate‑sensitive investments and credit facilities, which are affected by changes in the general level of U.S. interest rates. Due to the nature of our short-term investments, we believe that we are not subject to any material interest rate risk with respect to our short-term investments.

 

As of March 31, 2019,  we had $48.6 million in long-term debt and finance leases outstanding. Of this amount, $12.9 million had variable interest rates which were not locked-in through fixed interest rate swap contracts. The debt with variable interest rate exposure had a weighted-average interest rate of 5.5% at March 31, 2019. An increase in the index underlying these rates of 1% (100 basis points) would increase our annual interest expense on the debt with variable interest rate exposure by approximately $0.1 million per year. 

 

Foreign Currency Exchange Risk

 

Our finished pharmaceutical products are primarily sold in the U.S. domestic market, and have little exposure to foreign currency price fluctuations. However, as a result of our acquisition of the API manufacturing business in Éragny-sur-Epte, France, we are exposed to market risk related to changes in foreign currency exchange rates. Specifically, our insulin sales contracts are frequently denominated in euros, which are subject to fluctuations relative to the USD.  

 

Our Chinese subsidiary, ANP, maintains its books of record in Chinese yuan. These books are remeasured into the functional currency of USD, using the current or historical exchange rates. The resulting currency remeasurement adjustments and other transactional foreign exchange gains and losses are reflected in our statement of operations.

 

Our French subsidiary, AFP, maintains its books of record in euros. Our U.K. subsidiary, IMS UK, maintains its books of record in Great British pounds. These books are translated to USD at the average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing exchange rate at the date of the equity transactions. Translation adjustments are reflected in stockholders’ equity and are included as a component of other comprehensive income (loss).  

 

We are also exposed to the potential earnings effects from intercompany foreign currency assets and liabilities that arise from normal trade receivables and payables and other intercompany loans.

 

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We do not undertake hedging transactions to cover our foreign currency exposure. As of March 31, 2019, a 10% unfavorable change in the exchange rate of the U.S. dollar strengthening against the foreign currencies to which we have exposure would result in approximately $2.3 million reduction of foreign currency gains, and approximately $4.3 million reduction in other comprehensive income.

 

As of March 31, 2019, our foreign subsidiaries had cash balances denominated in foreign currencies in the amount of $13.0 million. 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, our principal executive and principal financial officers, respectively, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were effective (a) to ensure that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (b) to include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). 

 

Inherent Limitations of Internal Controls

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management overriding of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

For information regarding legal proceedings,  see “Part I – Item 1. Financial Statements – Notes to Consolidated Financial Statements – Litigation”.

 

ITEM 1A. RISK FACTORS

 

Except as noted below, there were no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 15, 2019. 

 

Some of our products are marketed without FDA approval and may be subject to enforcement actions by the FDA.

 

A number of our prescription products are marketed without FDA approval. These products, like many other prescription drugs on the market that the FDA has not formally evaluated as being effective, contain active ingredients that were first marketed prior to the enactment of the Federal Food, Drug and Cosmetic Act, or FFDCA. The FDA has assessed these products in a program known as the “Prescription Drug Wrap-Up” and has stated that these drugs cannot be lawfully marketed unless they comply with certain “grandfather” exceptions to the definition of “new drug” in the FFDCA. These exceptions have been strictly construed by FDA and by the courts, and the FDA has stated that it is unlikely that any of the unapproved prescription drugs on the market, including certain of our drugs, qualify for the exceptions. At any time, the FDA may require that some or all of our unapproved prescription drugs be submitted for approval and may direct us to recall these products and/or cease marketing the products until they are approved. The FDA may also take enforcement actions based on our marketing of these unapproved products, including but not limited to the issuance of an untitled letter or a warning letter, and a judicial action seeking an injunction, product seizure and/or civil or criminal penalties. The enforcement posture could change at any time and our ability to market such drugs could terminate with little or no notice. Moreover, if our competitors seek and obtain approval and market FDA-approved prescription products that compete against our unapproved prescription products, we would be subject to a higher likelihood that the FDA may seek to take action against our unapproved products. Such competitors have brought and may bring claims against us alleging unfair competition or related claims.

 

As a result of our meetings with the FDA in 2009, we decided to discontinue all of our products that were subject to the Prescription Drug Wrap-Up program, with the exception of epinephrine in vial form. These products were all produced at our subsidiary, IMS. During the third quarter of 2010, the FDA requested that we reintroduce several of the withdrawn products to cope with a drug shortage, while we prepared and filed applications for approval of the products. Between August and October, 2010, we reintroduced atropine, morphine, dextrose, and epinephrine prefilled syringes.

 

In February 2017, the FDA requested that we discontinue the manufacturing and distribution of our epinephrine injection, USP vial product, which had been marketed under the “grandfather” exception to the FDA’s “Prescription Drug Wrap-Up” program. We discontinued selling this product in the second quarter of 2017.

 

For the years ended December 31, 2018, 2017, 2016, and the three months ended March 31, 2019 and 2018, we recorded net revenues of $26.4 million, $22.0 million, $17.4 million, $9.8 million, and $7.6 million, respectively, from our unapproved products. Our unapproved products currently on the market include: atropine, morphine, dextrose and epinephrine prefilled syringes. We have filed three ANDAs and one NDA with respect to our remaining unapproved products in order to mitigate all risk associated with the marketing of unapproved drug products. Prior to the approval of our ANDA and NDA submissions, we continue to operate in compliance with the FDA Compliance Policy Guide, CPG Sec. 440.100 Marketed New Drugs Without Approved NDAs and ANDAs.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(c)Issuer Purchases of Equity Securities

 

The table below provides information with respect to repurchases of our common stock.

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Number of Shares

    

Maximum Number of

 

 

 

 

 

Average

 

Purchased as Part of

 

Shares that May Yet Be

 

 

 

Total Number of Shares

 

Price Paid

 

Publicly Announced Plans

 

Purchased Under the Plans

 

Period

 

Purchased (1)

 

per Share

 

or Programs

 

or Programs

 

January 1 – January 31, 2019

 

72,738

 

$

20.78

 

72,738

 

 

February 1 – February 28, 2019

 

 —

 

 

 —

 

 —

 

 

March 1 – March 31, 2019

 

72,741

 

 

20.61

 

72,741

 

 


(1)

During the first quarter of 2019, we repurchased shares of our common stock as part of the share buyback program authorized by our Board of Directors on May 7, 2018.  As of March 31, 2019, $1.1 million remained available for repurchase under such program. In May 2019, the Company’s Board of Directors authorized an increase of $20.0 million to the Company’s share buyback program, which is expected to continue for an indefinite period of time.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

Not applicable.

 

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ITEM 6. EXHIBITS

 

 

 

 

 

 

 

Exhibit
No.

    

Description

 

 

 

10.1

 

Equipment Line of Credit, dated January 8, 2019, between International Medication Systems, Limited and East West Bank in the original principal sum of $10,000,000

 

 

 

10.2

 

First Modification to the Loan Agreement, dated April 22, 2019, between Amphastar Pharmaceuticals, Inc. and Cathay Bank

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32.1#

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.2#

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101.INS

 

XBRL Instance Document

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

101.DEF

 

XBRL Taxonomy Extension Definitions Linkbase Document


#   The information in Exhibits 32.1 and 32.2 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act (including this Report), unless the Registrant specifically incorporates the foregoing information into those documents by reference.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

AMPHASTAR PHARMACEUTICALS, INC.
(Registrant)

By:

/s/ JACK Y. ZHANG

 

Jack Y. Zhang

 

Chief Executive Officer
(Principal Executive Officer)

 

Date: May 10, 2019

 

 

 

AMPHASTAR PHARMACEUTICALS, INC.
(Registrant)

By:

/s/ WILLIAM J. PETERS

 

William J. Peters

 

Chief Financial Officer
(Principal Financial and Accounting Officer)

 

Date: May 10, 2019

 

 

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