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 SEPTEMBER 30, 2020
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. EmployerIdentification 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 common stock as of November 2, 2020 was 47,504,019.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
Special Note About Forward-Looking Statements
Part I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019
2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2020 and 2019
3
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019
4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019
6
Notes to Condensed Consolidated Financial Statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3. Quantitative and Qualitative Disclosure about Market Risk
41
Item 4. Controls and Procedures
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
42
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
46
Item 3. Defaults Upon Senior Securities
47
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Signatures
48
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:
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. In particular, the extent of COVID-19’s impact on our business will depend on several factors, including the severity, duration and extent of the pandemic, as well as actions taken by governments, businesses,
and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. 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, 2019, 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 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.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30,
December 31,
2020
2019
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
87,910
73,685
Restricted cash
1,865
Short-term investments
10,873
11,675
Restricted short-term investments
2,200
2,290
Accounts receivable, net
52,382
45,376
Inventories
108,870
110,501
Income tax refunds and deposits
1,455
311
Prepaid expenses and other assets
10,986
9,538
Total current assets
276,541
255,241
Property, plant, and equipment, net
245,881
233,856
Finance lease right-of-use assets
693
887
Operating lease right-of-use assets
20,256
18,805
Goodwill and intangible assets, net
40,377
41,153
Other assets
7,735
11,156
Deferred tax assets
22,235
25,873
Total assets
613,718
586,971
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities
79,292
77,051
Income taxes payable
1,619
2,042
Current portion of long-term debt
12,167
7,741
Current portion of operating lease liabilities
3,639
3,175
Total current liabilities
96,717
90,009
Long-term reserve for income tax liabilities
3,425
Long-term debt, net of current portion
32,903
39,394
Long-term operating lease liabilities, net of current portion
17,534
16,315
Deferred tax liabilities
823
867
Other long-term liabilities
11,354
9,433
Total liabilities
162,756
159,443
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; 54,623,837 and 47,534,215 shares issued and outstanding as of September 30, 2020 and 52,495,483 and 46,576,968 shares issued and outstanding as of December 31, 2019, respectively
5
Additional paid-in capital
404,084
367,305
Retained earnings
124,046
116,370
Accumulated other comprehensive loss
(4,478)
(4,687)
Treasury stock
(118,425)
(97,627)
Total Amphastar Pharmaceuticals, Inc. stockholders’ equity
405,232
381,366
Non-controlling interests
45,730
46,162
Total equity
450,962
427,528
Total liabilities and stockholders’ equity
See Accompanying Notes to Condensed Consolidated Financial Statements.
-1-
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share data)
Three Months Ended
Nine Months Ended
Net revenues
83,431
80,137
253,925
238,974
Cost of revenues
46,923
44,885
147,417
140,432
Gross profit
36,508
35,252
106,508
98,542
Operating expenses:
Selling, distribution, and marketing
3,673
3,221
10,993
9,354
General and administrative
11,674
11,021
38,344
39,774
Research and development
17,644
18,606
49,096
49,209
Total operating expenses
32,991
32,848
98,433
98,337
Income from operations
3,517
2,404
8,075
205
Non-operating income (expenses):
Interest income
161
450
512
741
Interest expense
(175)
(22)
(286)
(76)
Other income (expenses), net
3,575
(1,250)
3,078
58,172
Total non-operating income (expenses), net
3,561
(822)
3,304
58,837
Income before income taxes
7,078
1,582
11,379
59,042
Income tax provision
2,285
598
4,490
13,292
Net income
4,793
984
6,889
45,750
Net income (loss) attributable to non-controlling interests
874
(326)
(787)
(4,215)
Net income attributable to Amphastar Pharmaceuticals, Inc.
3,919
1,310
7,676
49,965
Net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders:
Basic
0.08
0.03
0.16
1.06
Diluted
1.00
Weighted-average shares used to compute net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders:
47,496
47,239
46,886
47,030
49,848
50,075
48,922
50,128
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited; in thousands)
Other comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc., net of income taxes
Foreign currency translation adjustment
695
(1,625)
209
(1,835)
Total other comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc.
Total comprehensive income (loss) attributable to Amphastar Pharmaceuticals, Inc.
4,614
(315)
7,885
48,130
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited; in thousands, except share data)
Common Stock
Accumulated
Treasury Stock
Total
Additional
Other
Amphastar
Non-
Paid-in
Retained
Comprehensive
Stockholders'
controlling
Shares
Amount
Capital
Earnings
loss
Equity
Interest
Balance as of December 31, 2019
52,495,483
(5,918,515)
3,949
Other comprehensive loss attributable to Amphastar Pharmaceuticals, Inc.
(774)
Net loss attributable to non-controlling interest
(424)
Purchase of treasury stock
(647,246)
(10,950)
Issuance of treasury stock in connection with the Company's equity plans
(84)
6,873
84
Issuance of common stock in connection with the Company's equity plans
369,508
(1,238)
Share-based compensation expense
5,161
121
5,282
Balance as of March 31, 2020
52,864,991
371,144
120,319
(5,461)
(6,558,888)
(108,493)
377,514
45,859
423,373
Net loss attributable to Amphastar Pharmaceuticals, Inc.
(192)
Other comprehensive income attributable to Amphastar Pharmaceuticals, Inc.
288
(1,237)
(329,391)
(5,756)
(130)
10,913
130
1,507,284
19,448
6,379
134
6,513
Balance as of June 30, 2020
54,372,275
396,841
120,127
(5,173)
(6,877,366)
(114,119)
397,681
44,756
442,437
Acquisition of additional ownership interest in ANP
(106)
Net income attributable to non-controlling interest
(214,256)
(4,329)
(23)
2,000
23
251,562
3,102
4,164
206
4,370
Balance as of September 30, 2020
54,623,837
(7,089,622)
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Balance as of December 31, 2018
51,438,675
344,434
67,485
(4,013)
(4,807,557)
(75,476)
332,435
31,924
364,359
Beginning balance adjustment as a result of the adoption of new accounting standards
(54)
868
(113)
Proceeds from the private placement of ANP
2,588
16,378
18,966
(3,022)
(145,479)
(3,015)
(98)
8,334
98
604,651
(2,397)
4,674
Balance as of March 31, 2019
52,043,326
349,201
68,299
(4,126)
(4,944,702)
(78,393)
334,986
45,280
380,266
47,787
(97)
(867)
(50,980)
(1,073)
(7)
597
169,434
2,240
4,002
4,032
Balance as of June 30, 2019
52,212,760
355,436
116,086
(4,223)
(4,995,085)
(79,459)
387,845
44,443
432,288
(206,686)
(4,426)
(32)
2,634
32
186,284
2,138
4,163
131
4,294
Balance as of September 30, 2019
52,399,044
361,705
117,396
(5,848)
(5,199,137)
(83,853)
389,405
44,248
433,653
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities:
Reconciliation to net cash provided by operating activities:
Loss on impairment and disposal of assets
869
Depreciation of property, plant, and equipment
14,946
12,527
Amortization of product rights, trademarks, and patents
771
777
Operating lease right-of-use asset amortization
2,693
2,188
16,165
13,000
Changes in deferred taxes, net
3,638
9,872
Changes in operating assets and liabilities:
(6,706)
6,722
2,351
(41,146)
(3,755)
(3,607)
Income tax refunds, deposits, and payable, net
(1,973)
(631)
Operating lease liabilities
(2,478)
(1,866)
7,671
(8,345)
Net cash provided by operating activities
40,373
36,110
Cash Flows From Investing Activities:
Purchases and construction of property, plant, and equipment
(24,526)
(33,145)
Purchase of short-term investments
(9,825)
Maturity of short-term investments
961
Payment of deposits and other assets
(674)
(205)
Net cash used in investing activities
(24,239)
(43,175)
Cash Flows From Financing Activities:
18,298
Proceeds from equity plans, net of withholding tax payments
21,312
1,981
(21,035)
(8,514)
Proceeds from borrowing under lines of credit
1,072
Repayments under lines of credit
(347)
Proceeds from issuance of long-term debt
3,067
Principal payments on long-term debt
(6,329)
(4,819)
Net cash (used in) provided by financing activities
(2,019)
6,599
Effect of exchange rate changes on cash
110
(260)
Net increase (decrease) in cash, cash equivalents, and restricted cash
14,225
(726)
Cash, cash equivalents, and restricted cash at beginning of period
75,550
88,202
Cash, cash equivalents, and restricted cash at end of period
89,775
87,476
Noncash Investing and Financing Activities:
Capital expenditure included in accounts payable
6,477
5,279
4,119
7,848
Equipment acquired under finance leases
61
Supplemental Disclosures of Cash Flow Information:
Interest paid, net of capitalized interest
1,678
1,874
Income taxes paid
2,807
4,189
-6-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. General
Amphastar Pharmaceuticals, Inc., a Delaware corporation (together with its subsidiaries, hereinafter referred to as 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 product, Primatene Mist®, is 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, 2019 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, 2019. 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), stockholders’ equity, 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 generally accepted accounting principles, or GAAP. All 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 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 Biological Technology Co., Ltd., or Letop, (5) Nanjing Hanxin Pharmaceutical Technology Co., Ltd., or Hanxin, (6) Nanjing Hanxin Biomedical Testing Service Co., Ltd., or Hanxin Biomedical, (7) Nanjing Haiziquan Biotechnology Co., Ltd., or Haiziquan Biotechnology, (8) Nanjing Baixin Trading Co. Ltd., or Baixin, (9) Amphastar France Pharmaceuticals, S.A.S., or AFP, (10) Amphastar UK Ltd., or AUK, and (11) 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, a portion of which was received in 2019. The Company has retained approximately 58% of the equity interest in ANP following the private placement and continues to consolidate the financial results of ANP with the Company’s results of operations. ANP’s net income after July 2, 2018, was attributed to the Company in accordance with the Company’s equity interest of approximately 58% in ANP.
-7-
COVID-19 Pandemic
The Company is subject to risks and uncertainties as a result of the novel coronavirus pandemic, or COVID-19. The complete extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as the information is constantly evolving. The Company considered the impact of COVID-19 on the assumptions and estimates used to determine the results reported and asset valuations as of September 30, 2020.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a pandemic, which continues to spread throughout the world, including locations where the Company operates, such as the United States, China and France. The Company has been actively monitoring the COVID-19 pandemic and its impact globally. In late January 2020, China implemented extensive curfews and travel restrictions to control the outbreak, and started easing these restrictions in March. Our business operations in China experienced a temporary disruption but resumed full operation in February 2020. In March 2020, France also implemented a stay-at-home order limiting movement and restricting travel, however, the Company was deemed to be an essential business and was not impacted by the restrictions. In March 2020, the Governors of the States of California and Massachusetts declared a health emergency and issued orders to close all nonessential business; as a specialty pharmaceutical company, the Company was deemed to be an essential businesses. In June 2020, some but not all of the restrictions were lifted in China, France, and states where the Company operates, and most businesses were allowed to reopen. All of the Company’s production facilities continued to operate during the quarter as they had prior to the COVID-19 pandemic with very little change, other than for enhanced safety measures intended to prevent the spread of the virus.
It is not possible at this time to estimate the complete impact that COVID-19 could have on the Company’s business, including its customers and suppliers, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. Infections may resurge or become more widespread and the limitation on the Company’s ability to travel and timely sell and distribute its products, as well as any closures or supply disruptions, may be extended for longer periods of time, all of which would have a negative impact on the Company’s business, financial condition and operating results. The Company will continue to monitor the impact of COVID-19 on all aspects of its business.
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 credit losses, allowance for 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, 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 condensed consolidated statements of operations.
The Company’s French subsidiary, AFP, maintains its book of record in euros. ANP’s Chinese subsidiaries maintain their books of record in Chinese yuan. AUK’s 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
-8-
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 on intercompany foreign currency transactions that are of a long-term investment nature were $1.4 million for both the three and nine months ended September 30, 2020. For the three and nine months ended September 30, 2019, the unrealized gains or losses on intercompany foreign currency transactions that are of a long-term investment nature were $1.5 million loss and $1.7 million loss, respectively.
Comprehensive Income (Loss)
For the three and nine months ended September 30, 2020 and 2019, the Company included its foreign currency translation gain or loss as part of its comprehensive income (loss). Income tax expense of $0.4 million was allocated to other comprehensive income for both the three and nine months ended September 30, 2020. There was no material income tax (benefit) expense allocated to other comprehensive income (loss) for the three and nine months ended September 30, 2019.
Advertising Expense
In connection with the launch of Primatene Mist®, in July 2019, the Company began to incur advertising expenses. Advertising expenses are recorded as they are incurred, except for expenses related to the development of a major commercial or media campaign, which are expensed in the period in which the commercial or campaign is first presented, and are reflected as a component of selling, distribution, and marketing in the Company’s condensed consolidated statement of operations. For the three and nine months ended September 30, 2020, advertising expenses were $1.5 million and $3.9 million, respectively. For the three and nine months ended September 30, 2019, advertising expenses were $1.1 million and $2.9 million, respectively.
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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market accounts, certificates of deposit and highly liquid investments purchased with original maturities of three months or less.
Short-Term Investments
Short-term investments as of September 30, 2020 and December 31, 2019 consisted of certificates of deposit and investment grade corporate bonds with original expiration dates within 12 months.
Restricted Cash
Restricted cash is collateral required for the Company to guarantee certain vendor payments in France. As of September 30, 2020 and December 31, 2019, the restricted cash balance was $1.9 million.
-9-
Restricted Short-Term Investments
Restricted short-term investments consist of certificates of deposit that are collateral for standby letter of credit to qualify for workers’ compensation self-insurance. The certificates of deposit have original maturities greater than three months but less than one year. As of September 30, 2020 and December 31, 2019, the balance of restricted short-term investments was $2.2 million and $2.3 million, respectively.
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 December 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU, No. 2019-12 Simplifying the Accounting for Income Taxes (Topic 740), which simplifies various aspects related to accounting for income taxes. The amendment also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The guidance is effective for the Company’s interim and annual reporting periods during the year ended December 31, 2021, with early adoption permitted, including in any interim period. The Company is currently evaluating the impact that the adoption of this guidance will have on its condensed consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This new guidance is effective prospectively beginning on March 12, 2020 through December 31, 2022. As of September 30, 2020, the Company has not modified any contracts that will be impacted by reference rate reform. The Company will continue to assess the impact the adoption of this standard will have on its consolidated financial position, results of operations, and related disclosures as and when its contracts impacted by the reference rate reform are modified.
Note 3. Revenue Recognition
In accordance with Accounting Standard Codification, or ASC, 606 Revenue from Contacts with Customers, 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.
The consideration the Company receives in exchange for its goods or services is only recognized when it is probable that a significant reversal will not occur. The consideration to which the Company expects to be entitled includes a stated list price, less various forms of variable consideration. The Company makes significant estimates for related variable consideration at the point of sale, including chargebacks, rebates, product returns, other discounts and allowances.
Provisions for estimated chargebacks, rebates, discounts, product returns and credit losses are made at the time of sale and are analyzed and adjusted, if necessary, at each balance sheet date.
Revenues derived from contract manufacturing services are recognized when third-party products are shipped to customers, and after the customer has accepted test samples of the products to be shipped.
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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.
The provision for chargebacks and rebates is reflected as a component of net revenues. The following table is an analysis of the chargeback and rebate provision:
(in thousands)
Beginning balance
21,644
22,423
Provision for chargebacks and rebates
110,763
94,548
Credits and payments issued to third parties
(113,576)
(97,324)
Ending balance
18,831
19,647
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 September 30, 2020 and December 31, 2019, $14.9 million and $15.4 million were included in accounts receivable, net, on the condensed consolidated balance sheets, respectively. The remaining provision as of September 30, 2020 and December 31, 2019 of $3.9 million and $6.2 million, respectively, were included in accounts payable and accrued liabilities.
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
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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 as a component of net revenues. The following table is an analysis of the product return liability:
10,339
8,030
Provision for product returns
9,084
4,611
Credits issued to third parties
(6,731)
(3,945)
12,692
8,696
Of the provision of product returns as of September 30, 2020 and December 31, 2019, $8.6 million and $7.1 million, respectively, were included in accounts payable and accrued liabilities on the condensed consolidated balance sheets. The remaining provision as of September 30, 2020 and December 31, 2019, of $4.1 million and $3.2 million, respectively, were included in other long-term liabilities. For the nine months ended September 30, 2020 and 2019, the Company’s aggregate product return rate was 1.3% and 0.9% of qualified sales, respectively.
Note 4. Income per Share Attributable to Amphastar Pharmaceuticals, Inc. Stockholders
Basic net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders is calculated based upon the weighted-average number of shares outstanding during the period. Diluted net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders 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 and the reallocation of net income attributable to non-controlling interest from the assumed dilutive effect of stock options issued under the 2018 ANP Equity Incentive Plan, or the 2018 Plan.
For the three and nine months ended September 30, 2020, options to purchase 1,271,347 and 1,928,629 shares of stock, respectively, with a weighted-average exercise price of $21.35 and $20.84 per share, respectively, and the reallocation of net income attributable to non-controlling interest were excluded in the computation of diluted net income per common share attributable to Amphastar Pharmaceuticals, Inc.’s stockholders because the effect would be anti-dilutive.
For the three and nine months ended September 30, 2019, options to purchase 803,257 and 783,193 shares of stock, respectively, with a weighted-average exercise price of $21.99 per share and $22.02 per share, respectively, and the reallocation of net income attributable to non-controlling interest were excluded in the computation of diluted net income per common share attributable to Amphastar Pharmaceuticals, Inc.’s stockholders because the effect would be anti-dilutive.
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The following table provides the calculation of basic and diluted net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders for each of the periods presented:
(in thousands, except per share data)
Basic and dilutive numerator:
Denominator:
Weighted-average shares outstanding — basic
Net effect of dilutive securities:
Incremental shares from equity awards
2,352
2,836
2,036
3,098
Weighted-average shares outstanding — diluted
Net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders — basic
Net income per share attributable to Amphastar Pharmaceuticals, Inc. stockholders — diluted
Note 5. Segment Reporting
The Company’s business is the development, manufacture, and marketing of pharmaceutical products. The Company has identified 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:
The finished pharmaceutical products segment manufactures, markets and distributes Primatene Mist®, enoxaparin, naloxone, phytonadione, lidocaine, epinephrine, 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.
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Selected financial information by reporting segment is presented below:
Net revenues:
Finished pharmaceutical products
81,335
75,729
243,568
224,003
API
2,096
4,408
10,357
14,971
Total net revenues
Gross profit (loss):
39,546
34,992
113,793
101,844
(3,038)
260
(7,285)
(3,302)
Total gross profit
Operating expenses
Non-operating income (expense)
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:
Finished pharmaceutical products net revenues:
Primatene Mist®
12,988
3,654
38,333
9,063
Phytonadione
10,470
10,916
32,188
33,477
Enoxaparin
11,647
9,573
31,033
33,895
Lidocaine
10,657
11,670
28,922
33,731
Naloxone
8,739
10,613
26,337
25,810
Epinephrine
5,370
3,756
16,317
9,574
Other finished pharmaceutical products
21,464
25,547
70,438
78,453
Total finished pharmaceutical products net revenues
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The amount of depreciation and amortization expense included in cost of revenue, by reporting segments, is presented below:
Depreciation and amortization expense
1,408
1,407
4,325
4,128
1,048
2,205
863
Total depreciation and amortization expense
2,456
1,695
6,530
4,991
Net revenues and carrying values of long-lived assets of enterprises by geographic regions are as follows:
Net Revenue
Long-Lived Assets
United States
79,407
76,070
242,370
227,308
106,725
108,399
China
1,959
59
2,482
1,043
88,032
79,846
France
2,065
4,008
9,073
10,623
51,124
45,611
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 and nine months ended September 30, 2020 and 2019, and accounts receivable as of September 30, 2020 and December 31, 2019, respectively. The following table provides accounts receivable and net revenue information for these major customers:
% of Total Accounts
% of Net
Receivable
Revenue
AmerisourceBergen
11
%
13
26
24
McKesson
34
21
22
Cardinal Health
17
18
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
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and market its products, it could have a materially adverse effect on the Company’s business, financial condition, and results of operations.
Note 7. Fair Value Measurements
GAAP defines 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:
As of September 30, 2020, cash equivalents include money market accounts. Short-term investments consist of certificates of deposit as well as investment-grade corporate bonds with original expiration dates within 12 months. The certificates of deposit are carried at amortized cost in the Company’s condensed consolidated balance sheet, which approximates their fair value determined based on Level 2 inputs. The corporate bonds are classified as held-to-maturity and are carried at amortized cost net of an allowance for credit losses, 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 fair value of the Company’s financial assets and liabilities measured on a recurring basis as of September 30, 2020 and December 31, 2019, are as follows:
(Level 1)
(Level 2)
(Level 3)
Cash equivalents - money market
70,291
Restricted cash - money market
Short-term investments - certificates of deposit
9,080
Restricted short-term investments - certificates of deposit
Corporate bonds
1,764
Fair value measurement as of September 30, 2020
85,200
72,156
13,044
29,521
8,867
2,789
Fair value measurement as of December 31, 2019
45,332
31,386
13,946
The Company does not hold any Level 3 instruments that are measured at fair value on a recurring basis.
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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 September 30, 2020 and December 31, 2019, there were no adjustments to the fair value for nonfinancial assets or liabilities.
Note 8. Investments
A summary of the Company’s investments that are classified as held-to-maturity is as follows:
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
1,763
Total investments as of September 30, 2020
2,790
(1)
Total investments as of December 31, 2019
The Company believes that the unrealized gains and losses disclosed above were primarily driven by interest rate change rather than by unfavorable changes in the credit ratings associated with these securities and as a result, the Company continues to expect to collect the principal and interest due on its debt securities that have an amortized cost in excess of fair value. At each reporting period, the Company evaluates securities for impairment when the fair value of the investment is less than its amortized cost. The Company evaluated the underlying credit quality and credit ratings of the issuers, noting neither a significant deterioration since purchase nor any other factors that would indicate a material credit loss.
The Company measures expected credit losses on held-to-maturity investments on a collective basis. All the Company’s held-to-maturity investments were considered to be one pool. The estimate for credit losses considers historical loss information that is adjusted for current conditions and reasonable and supportable forecasts. Expected credit losses on held-to-maturity investments were not material to the condensed consolidated financial statements.
Note 9. 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
Life (Years)
Original Cost
Amortization
Net Book Value
Definite-lived intangible assets
IMS (UK) international product rights
10
8,983
3,743
5,240
Patents
12
486
287
199
Land-use rights
39
2,540
600
1,940
Subtotal
12,009
4,630
7,379
Indefinite-lived intangible assets
Trademark
*
29,225
Goodwill - Finished pharmaceutical products
3,773
32,998
As of September 30, 2020
45,007
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9,226
3,152
6,074
255
231
551
1,989
Other intangible assets
69
12,321
4,027
8,294
3,634
32,859
As of December 31, 2019
45,180
Intangible assets with indefinite lives have an indeterminable average life.
Goodwill
The changes in the carrying amounts of goodwill were as follows:
3,951
Currency translation
139
(317)
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 September 30, 2020.
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.
Note 10. Inventories
Inventories consist of the following:
Raw materials and supplies
52,403
59,233
Work in process
38,424
35,548
Finished goods
18,043
15,720
Total inventories
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Charges totaling $2.5 million and $12.7 million were included in the cost of revenues in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2020, respectively, to adjust the Company’s inventory and related firm inventory purchase commitments to their net realizable value. For the three and nine months ended September 30, 2019, charges totaling $0.4 million and $6.1 million were included in the cost of revenues, respectively, to adjust the Company’s inventory and related firm inventory purchase commitments to their net realizable value.
Note 11. Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
Buildings
123,552
117,928
Leasehold improvements
29,674
29,531
Land
7,656
7,603
Machinery and equipment
199,399
164,802
Furniture, fixtures, and automobiles
24,761
22,043
Construction in progress
39,671
56,354
Total property, plant, and equipment
424,713
398,261
Less accumulated depreciation
(178,832)
(164,405)
Total property, plant, and equipment, net
Note 12. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following:
Accrued customer fees and rebates
8,126
9,633
Accrued payroll and related benefits
26,430
21,872
Accrued product returns, current portion
8,626
7,126
Accrued loss on firm purchase commitments
4,156
3,352
Other accrued liabilities
8,784
10,007
Total accrued liabilities
56,122
51,990
Accounts payable
23,170
25,061
Total accounts payable and accrued liabilities
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Note 13. Debt
Debt consists of the following:
Loans with East West Bank
Line of credit facility due December 2020
Mortgage payable due February 2021
3,330
3,401
Equipment loan due June 2021
918
1,837
Equipment loan due December 2022
4,500
6,000
Equipment loan due February 2024
5,669
3,570
Equipment line of credit facility due September 2025
Mortgage payable due October 2026
3,351
3,400
Mortgage payable due June 2027
8,548
8,659
Loans with Cathay Bank
Line of credit facility due May 2022
Acquisition loan due June 2024
9,276
10,928
Mortgage payable due August 2027
7,315
7,452
Loans with Seine-Normandie Water Agency
French government loan paid off June 2020
28
French government loan due July 2021
114
French government loans due December 2026
398
374
Loan with China Everbright Bank
Line of credit facility due June 2021
734
Loan with China Merchant Bank
Line of credit facility due August 2021
367
Payment Obligation to Merck
561
Equipment under Finance Leases
605
811
Total debt
45,070
47,135
Less current portion of long-term debt
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As of September 30, 2020, 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. These swap contracts were all in a liability position with an aggregate fair value of $1.0 million and $0.4 million as of September 30, 2020 and December 31, 2019, respectively. The change in fair value is recorded in other income (expense) in the Company’s condensed consolidated statement of operations.
Loan with East West Bank
Equipment Line of Credit—Due September 2025
In September 2020, the Company entered into a $10.0 million equipment credit line with a 12-month draw down period. Interest payments are due monthly through September 2021 at the prime rate as published by The Wall Street Journal minus 0.5%. After the draw down period, the outstanding principal balance converts into a 48-month term loan that bears a variable interest rate at the prime rate as published by The Wall Street Journal minus 0.5%. The loan matures in September 2025, and the principal and interest payments are due monthly. Borrowings under the facility are secured by equipment. As of September 30, 2020, there was no outstanding balance on the equipment line of credit.
Covenants
At September 30, 2020 and December 31, 2019, the Company was in compliance with its debt covenants.
Note 14. Income Taxes
The following table sets forth the Company’s income tax provision for the periods indicated:
Income before taxes
Income tax provision as a percentage of income before income taxes
32.3
37.8
39.5
22.5
The change in the Company’s effective tax rate for the three and nine months ended September 30, 2020, was primarily due to differences in pre-tax income positions, nondeductible executive severance compensation, and timing of discrete tax items.
CARES Act
The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, became law on March 27, 2020. It provides additional economic stimulus to address the impact of the COVID-19 pandemic. The Company does not expect there to be any significant benefit to its income tax provision as a result of the CARES Act, and will continue to closely monitor the impact of the COVID-19 pandemic, as well as any effects that may result from the CARES Act or future legislation.
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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 continues to record a full valuation allowance on AFP’s income tax benefits and will continue to do so until AFP generates sufficient taxable income to realize its deferred income tax assets. However, a tax benefit is included in the annual effective tax rate computation due to AFP reporting a year-to-date foreign exchange gain in other comprehensive income.
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 increased the Company’s income tax provision for the three and nine months ended September 30, 2020, by $0.2 million and $0.4 million, respectively.
Note 15. Stockholders' Equity
Share Buyback Program
Pursuant to the Company’s existing share buyback program, the Company purchased 214,256 and 1,190,362 shares of its common stock during the three and nine months ended September 30, 2020, for total consideration of $4.3 million and $21.0 million, respectively. The Company purchased 206,686 and 403,145 shares of its common stock during the three and nine months ended September 30, 2019, for total consideration of $4.4 million and $8.5 million, respectively.
In August 2020, 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 condensed consolidated balance sheets.
2015 Equity Incentive Plan
As of September 30, 2020, the Company reserved an aggregate of 6,358,084 shares of common stock for future issuance under the 2015 Equity Incentive Plan, or the 2015 Plan, including 1,164,425 shares that were reserved in January 2020 pursuant to the evergreen provision in the 2015 Plan.
2014 Employee Stock Purchase Plan
As of September 30, 2020, the Company has issued 738,780 shares of common stock under the ESPP, and 1,261,220 shares of its common stock remains available for issuance under the ESPP.
In May 2020, the Company issued 79,245 shares at a weighted-average purchase price of $15.84 per share under the ESPP. For the three and nine months ended September 30, 2020, the Company recorded ESPP, expense of $0.1 million and $0.5 million, respectively. For the three and nine months ended September 30, 2019, the Company recorded ESPP expense of $0.2 million and $0.5 million, respectively.
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Share-Based Award Activity and Balances (excluding the ANP Equity Plan)
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. 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 and nine months ended September 30, 2020 and 2019, are as follows:
Average volatility
43.7
41.9
43.1
42.5
Risk-free interest rate
0.5
1.5
0.8
2.4
Weighted-average expected life in years
6.3
5.7
Dividend yield rate
A summary of option activity for the nine months ended September 30, 2020, is presented below:
Remaining
Aggregate
Exercise
Contractual
Intrinsic
Options
Price
Term (Years)
Value(1)
Outstanding as of December 31, 2019
9,763,485
15.26
Options granted
1,799,106
13.56
Options exercised
(1,693,393)
14.03
Options cancelled
(91,568)
16.53
Options expired
(1,108,951)
16.45
Outstanding as of September 30, 2020
8,668,679
14.98
5.43
36,693
Exercisable as of September 30, 2020
5,824,852
14.38
4.16
27,154
For the three and nine months ended September 30, 2020, the Company recorded an expense of $1.9 million and $7.1 million, respectively, related to stock options granted. For the three and nine months ended September 30, 2019, the Company recorded an expense of $2.0 million and $6.2 million, respectively, related to stock options granted under all plans.
In April 2020, Jason Shandell resigned from his position as the Company’s President and General Counsel and as a member of the Company’s board of directors. In connection with his resignation, the Company and Mr. Shandell entered into a separation agreement. As part of the separation agreement, the Company agreed to accelerate 80% of his unvested stock options and extended the expiration date of certain vested stock option awards. As a result of this modification, the Company incurred share-based compensation expense of $0.7 million, which is included within general and administration expenses in the condensed consolidated statement of operations for the nine months ended September 30, 2020.
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Information relating to option grants and exercises is as follows:
Weighted-average grant date fair value per option share
8.64
9.50
5.50
8.48
Intrinsic value of options exercised
1,687
1,700
8,661
7,522
Cash received from options exercised
3,195
2,234
23,534
7,281
Total fair value of the options vested during the year
85
9,965
7,587
A summary of the status of the Company’s non-vested options as of September 30, 2020, and changes during the nine months ended September 30, 2020, is presented below:
Grant Date
Fair Value
Non-vested as of December 31, 2019
2,747,133
6.99
Options vested
(1,610,844)
6.19
Options forfeited
7.13
Non-vested as of September 30, 2020
2,843,827
6.50
As of September 30, 2020, there was $13.0 million of total unrecognized compensation cost, net of forfeitures, related to non-vested stock option based compensation arrangements granted. The cost is expected to be recognized over a weighted-average period of 2.3 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 and nine months ended September 30, 2020, the Company recorded a total expense of $2.0 million and $8.0 million, respectively, related to RSU awards granted. During the three and nine months ended September 30, 2019, the Company recorded expenses of $2.1 million and $6.2 million, respectively, related to RSU awards granted.
As part of the separation agreement with Mr. Shandell, the Company agreed to accelerate the vesting of 80% of his RSU awards. As a result of this modification, the Company incurred share-based compensation expense of $1.6 million, which is included within general and administrative expenses in the condensed consolidated statement of operations for the nine months ended September 30, 2020.
As of September 30, 2020, there was $14.0 million of total unrecognized compensation cost, net of forfeitures, related to non-vested RSU-based compensation arrangements granted. The cost is expected to be recognized over a weighted-average period of 2.3 years and will be adjusted for future changes in estimated forfeitures.
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Information relating to RSU grants and deliveries is as follows:
Total Fair Market
Value of RSUs
Issued
Total RSUs
as
Compensation(1)
RSUs outstanding at December 31, 2019
1,099,496
RSUs granted
731,921
9,896
RSUs forfeited
(39,434)
RSUs vested(2)
(626,772)
RSUs outstanding at September 30, 2020
1,165,211
The 2018 ANP Equity Incentive Plan
In December 2018, ANP’s board of directors approved the 2018 Plan, which is set to expire in December 2023. The 2018 Plan permits the grant of stock options and other equity awards in ANP shares to ANP employees. During the nine months ended September 30, 2020, ANP has granted 2,433,445 stock options to its employees under the 2018 Plan. In 2019, 3,648,932 stock options were granted to its employees under the 2018 Plan. As of September 30, 2020, the number of stock options outstanding was 5,727,677. The options vest over a period of approximately four years and have up to a 10 year contractual term. For the three and nine months ended September 30, 2020, the Company recorded expense of $0.2 million and $0.5 million related to stock options issued by ANP under the 2018 Plan, respectively. For the three and nine months ended September 30, 2019, the Company recorded expense of $0.1 million and $0.2 million related to stock options issued by ANP under the 2018 Plan, respectively.
The Company recorded the aggregated share-based compensation expense in the consolidated statement of operations as follows:
947
701
3,276
2,939
120
96
350
285
2,899
3,138
11,170
8,577
404
359
1,369
1,199
Total share-based compensation
Note 16. 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 and nine months ended September 30, 2020 were approximately $0.4 million and $1.4 million, respectively, compared to the prior year expense of $0.3 million and $1.0 million for the three and nine months ended September 30, 2019, respectively.
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Defined Benefit Pension Plan
The Company’s subsidiary, AFP, has an obligation associated with a defined-benefit plan for its eligible employees. 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 0.9% as of September 30, 2020 and December 31, 2019. The liability is included in accrued liabilities in the accompanying condensed consolidated balance sheets. The plan is currently unfunded, and the benefit obligation under the plan was $2.6 million and $2.4 million at September 30, 2020 and December 31, 2019, respectively. The Company recorded an immaterial amount of expense under the plan for the three and nine months ended September 30, 2020 and 2019.
Deferred Compensation Plan
In December 2019, the Company established a non-qualified deferred compensation plan. The deferred compensation plan allows certain eligible participants to defer a portion of their cash compensation and provides a matching contribution at the discretion of the Company. The plan’s obligations are payable upon retirement, termination of employment and/or certain other times in a lump-sum distribution or in installments, as elected by the participant in accordance with the plan. Participants can allocate their deferred compensation amongst various investment options with earnings accruing to the participant. The Company has established a Rabbi Trust to fund the plan obligations and to hold the plan assets. Eligible participants began contributing to the plan in January 2020. As of September 30, 2020, the plan assets and liabilities were valued at approximately $0.7 million and $0.8 million, respectively.
Note 17. Commitments and Contingencies
Purchase Commitments
As of September 30, 2020, the Company has entered into commitments to purchase equipment and raw materials for an aggregate amount of approximately $46.6 million. The Company anticipates that most of these commitments with remaining terms in excess of one year will be fulfilled by the end of 2021.
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 was committed to spend approximately $15.0 million in the related land development, which primarily included the construction of fixed assets according to a specific timetable. As of September 30, 2020, the Company has spent $15.8 million on such construction, fulfilling its commitment.
Note 18. Litigation
Momenta/Sandoz Enoxaparin Patent and Antitrust 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.
On September 17, 2015, the Company initiated an antitrust lawsuit by filing a complaint in the California District Court against Momenta and Sandoz, or the Defendants. The Company’s complaint generally asserted that Defendants had engaged in certain types of illegal, monopolistic, and anticompetitive conduct giving rise to various causes of action against them. This lawsuit was subsequently transferred to the Massachusetts District Court.
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On May 20, 2019, the Company and the Plaintiffs entered into a Settlement Agreement to fully settle the patent litigation and antitrust litigation. The Settlement Agreement was contingent upon the District Court’s granting a Joint Motion to Vacate the Patent Judgment and thereafter, the Plaintiffs’ payment of $59.9 million to the Company. On June 18, 2019, the parties filed a Joint Motion to Vacate the Patent Judgment with the District Court, and on the same day, the District Court granted such motion. Accordingly, on June 19, 2019, the parties filed Joint Stipulations with the District Court to dismiss the patent litigation and the antitrust litigation, each of which is self-executing and effective upon filing pursuant to the Federal Rules of Civil Procedure 41(a)(1)(A)(ii). Furthermore, on June 26, 2019, the Federal Circuit issued an Order and a Mandate dismissing the appeal of the patent litigation. On June 27, 2019, pursuant to the Settlement Agreement, the Plaintiffs paid the Company $59.9 million. The Company is not entitled to future rights or royalties related to this settlement.
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.
On May 11, 2017, the Company’s lawsuit against Aventis was dismissed for lack of jurisdiction. 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 February 12, 2019, 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 held a hearing on the Application on May 8, 2019, and indicated that a written opinion on this Application for Fees and Expenses would be forthcoming. The Magistrate Judge’s written opinion on this Application for Fees and Expenses has not been issued yet. The Company intends to continue to vigorously defend against any imposition of attorneys’ fees and expenses in this case.
Epinephrine (0.1 mg/mL) Patent Litigation
On June 28, 2018, Belcher Pharmaceuticals, LLC, or Belcher initiated a lawsuit in the United States District Court for the District of Delaware 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 3, 2019, Parties filed a Joint Stipulation to stay the litigation pending the Court’s ruling on the outcome of Belcher’s trial with Hospira. On August 19, 2019, the judge signed the order staying the litigation pending the Court’s ruling on the outcome of Belcher’s trial with Hospira because it involves the same ‘197 Patent as the Company’s litigation. On March 31, 2020, the Court in Belcher’s trial with Hospira issued its ruling in favor of Hospira and invalidated the ‘197 Patent based on obviousness and the ‘197 Patent is unenforceable due to inequitable conduct, and accordingly, the Court entered Final Judgment in favor of Hospira on April 3, 2020. Belcher filed a notice of appeal on only the inequitable conduct rulings from Final Judgment in favor of Hospira on May 4, 2020, and therefore, the ‘197 Patent is still invalid based on obviousness. On May 21, 2020, the Court entered an Order dismissing, with prejudice, the Company’s patent lawsuit with Belcher.
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 in the United States District Court for the District of Delaware 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
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(“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 parties resolved the litigation via settlement. On August 20, 2020, the parties filed a Stipulation of Dismissal pursuant to the settlement. On August 24, 2020, the Court entered the parties’ Stipulation of Dismissal.
Regadenoson (0.4 mg/5 mL, 0.08 mg/mL) Patent Litigation
On February 25, 2020, Astellas US LLC, Astellas Pharma US, Inc., and Gilead Sciences, Inc. (collectively, “Astellas-Gilead”) initiated a patent lawsuit by filing a Complaint in the United States District Court for the District of Delaware against IMS for infringement of U.S. Patent Nos. 8,106,183 (the “‘183 patent”), RE47,301 (the “‘301 patent”), and 8,524,883 (the “‘883 patent”) (collectively, “Astellas-Gilead Patents”) with regard to IMS’s Abbreviated New Drug Application No. 214,252 for FDA approval to manufacture and sell 0.4 mg/5 mL (0.08 mg/mL) intravenous solution of Regadenoson. On March 4, 2020, IMS filed its Answer to the Complaint and its Counterclaims. On March 30, 2020, the Court issued an Order allowing the Company to join the consolidated litigation in which five other generic Regadenoson ANDA filers are currently pending. In the consolidated litigation, trial is currently scheduled for June 14, 2021. The Company’s 30-month FDA stay expires August 10, 2022. The Company intends to vigorously defend this patent lawsuit.
Employment Litigation
On September 11, 2019, a former employee, Raquel Brenes, (“Brenes”), initiated an employment litigation against IMS et al. by filing a Complaint having individual and class action claims for alleged violations of various California labor laws pertaining to wage and hour, and other state laws. This Complaint was filed in the Superior Court of California, Los Angeles County. On September 18, 2019, Brenes filed a First Amended Complaint maintaining the individual and class action claims. On January 21, 2020, Brenes filed a Second Amended Complaint that alleges only Private Attorney General Act, or PAGA, claims and omitted the individual and class action claims. For these PAGA claims, the parties have a mediation scheduled in February 2021.
On February 24, 2020, IMS filed an Answer to the Second Amended Complaint. On February 14, 2020, Brenes filed another Complaint against IMS in the Superior Court of California alleging various individual claims relating to disability discrimination and retaliation. For these individual claims, Brenes filed a demand for arbitration on August 31, 2020. The Company intends to vigorously defend this employment litigation.
On April 7, 2020, a former employee, Robert Navarrette (“Navarrette”), filed a PAGA lawsuit against IMS and Amphastar Pharmaceuticals, Inc. in the Superior Court of California, Los Angeles County. Navarrette has agreed to the mediation scheduled in February 2021 with Brenes. In this PAGA lawsuit, Navarrette alleges various wage and hour claims. The Company intends to vigorously defend this employment litigation.
On April 10, 2020, ex-employee Priscilla Ramirez provided written notice to Amphastar Pharmaceuticals, Inc. that she intends to file a PAGA lawsuit for alleged violations of various California labor laws pertaining to wage and hour. On May 29, 2020, Ramirez filed this PAGA lawsuit against the Company. On August 4, 2020, Ramirez served this PAGA lawsuit on our Company. The parties have agreed to a mediation scheduled in April 2021. The Company intends to vigorously defend this lawsuit.
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Other Litigation
The Company is also subject to various other claims, arbitrations, and lawsuits from time to time arising in the ordinary course of business, including contractual employment matters.
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.
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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, 2019, 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.
We are currently developing a portfolio of 14 generic abbreviated new drug applications, or ANDAs, three biosimilar insulin product candidates and four proprietary product candidates, which are in various stages of development and target a variety of indications. Five ANDAs and one NDA are currently on file with the FDA.
Our largest products by net revenues currently include Primatene Mist®, phytonadione, enoxaparin sodium injection, lidocaine jelly sterile solution, and naloxone hydrochloride injection. In July 2019, we began a national digital, radio, and television campaign for our over-the-counter product Primatene Mist®, which will continue throughout 2020. During the second quarter of 2020, we launched our Epinephrine Injection, USP 30mg/30mL Multiple Dose Vial product.
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, API 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, our Chinese subsidiary, ANP, completed a private placement of its common equity interest and received approximately $56.3 million of cash proceeds. We have retained approximately 58% of the equity interest in ANP following the private placement. 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.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a pandemic, which continues to spread throughout the world, including locations where we operate, such as the United States, China and France. We have been actively monitoring the COVID-19 pandemic and its impact globally. In late January 2020, China implemented extensive curfews and travel restrictions to control the outbreak, and started easing these restrictions in March 2020. Our business operations in China experienced a temporary disruption but resumed full operations in February 2020. In March 2020, France also implemented a stay-at-home order limiting movement and restricting travel, however, we were deemed to be an essential business and was not impacted by the restrictions. In
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March 2020, the Governors of the States of California and Massachusetts declared a health emergency and issued orders to close all nonessential businesses; as a specialty pharmaceutical company we were deemed to be an essential business. In June 2020, some of the restrictions were eased or lifted. Currently, our production facilities in all of our locations continue to operate as they had prior to the COVID-19 pandemic with very little change, other than for enhanced safety measures intended to prevent the spread of the virus.
As a result of the COVID-19 pandemic, during the first quarter and second quarter, sales of Primatene Mist® and certain hospital products increased, while sales of certain products frequently used in elective produces, such as Cortrosyn® and lidocaine jelly, decreased. During the third quarter of 2020, sales of these products returned to levels closer to those experienced prior to the COVID-19 pandemic. Also, some of our ongoing clinical trials have experienced short-term interruptions in the recruitment of patients due to the COVID-19 pandemic, as hospitals prioritize their resources towards the COVID-19 pandemic and governments impose travel restrictions.
It is not possible at this time to estimate the complete impact that COVID-19 could have on our business, including our customers and suppliers, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. Infections may resurge or become more widespread and the limitation on our ability to travel and timely sell and distribute our products, as well as any closures or supply disruptions, may be extended for longer periods of time, all of which would have a negative impact on our business, financial condition and operating results.
The COVID-19 pandemic has and will continue to adversely affect global economies and financial markets, resulting in an economic downturn that could affect demand for our products and impact our operating results. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of the continued global economic impact of the pandemic. We cannot anticipate all of the ways in which health epidemics such as COVID-19 could adversely impact our business. We will continue to monitor the impact of COVID-19 on all aspects of our business. See the Risk Factors section for further discussion of the possible impact of the COVID-19 pandemic on our business.
Business Segments
As of September 30, 2020, 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 Primatene Mist®, enoxaparin, naloxone, phytonadione, lidocaine, epinephrine, 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 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.”
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Results of Operations
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Change
Dollars
5,606
(2,312)
(52)
3,294
41,789
40,737
1,052
5,134
4,148
986
Total cost of revenues
2,038
1,256
as % of net revenues
44
The increase in net revenues of finished pharmaceutical products for the three months ended September 30, 2020 was due to the following changes:
Finished pharmaceutical products net revenues
9,334
2,074
(1,013)
(9)
(446)
(4)
(1,874)
(18)
1,614
43
(4,083)
(16)
The increase in sales of Primatene Mist® in the third quarter of 2020 was a result of the continued success of our nationwide digital, television and radio campaign, which will continue throughout 2020. Additionally, sales of Primatene Mist® increased as we began selling online on Amazon earlier this year and began shipments in September to Kroger, the largest grocery store chain in the United States. Sales of enoxaparin increased during the quarter primarily due to higher unit volumes. Epinephrine sales increased primarily due to the launch of our approved epinephrine injection, USP 30mg/30mL multiple dose vial in the second quarter of 2020, which had sales of $2.8 million during the third quarter. Naloxone sales decreased primarily due to lower average selling price because of increased competition. Lidocaine and other finished pharmaceutical product sales decreased due to lower unit volumes, largely due to competitors returning to their normal distribution levels.
We anticipate that the sales of naloxone and enoxaparin will continue to fluctuate in the future as a result of changing levels of competition.
Sales of API decreased primarily due to the timing of customer purchases.
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We anticipate that sales of API will continue to fluctuate and may decrease due to the inherent uncertainties related to sales to MannKind Corporation pursuant to a supply agreement with them. 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 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. We had no significant backlog as of September 30, 2020. 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.
Gross margins
Gross margins were relatively unchanged during the three months ended September 30, 2020. Higher margins associated with increased sales of Primatene Mist® and the recently launched epinephrine injection multiple dose vial, were offset by a decrease in sales of naloxone and other finished pharmaceutical products which also have higher margins.
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 epinephrine multi dose vial, and Primatene Mist®. Additionally, we have not seen significant supply disruptions due to the COVID-19 pandemic at this time, but we are carefully monitoring our supply chain for any potential problems.
Selling, distribution and marketing, and general and administrative
452
14
653
The increase in selling, distribution, and marketing expenses was primarily due to marketing and distribution expenses related to Primatene Mist®, including the cost of a national digital, television and radio marketing campaign which began in July 2019. The increase in general and administrative expense primarily relates to an increase in legal expenses.
We expect that selling, distribution and marketing expenses will increase due to the increase in marketing expenditures for Primatene Mist®. Legal fees may fluctuate due to the timing of patent challenges and other litigation matters.
Salaries and personnel-related expenses
6,774
6,979
(3)
Clinical trials
2,544
2,238
306
FDA fees
194
(150)
(77)
Testing, operating and lab supplies
3,344
4,770
(1,426)
(30)
Depreciation
2,590
2,171
419
19
Other expenses
2,348
2,254
94
Total research and development expenses
(962)
(5)
Clinical trial expense increased due to external studies related to our generic inhalation product pipeline, our insulin biosimilar programs and our intranasal epinephrine program.
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Research and development costs consist primarily of costs associated with the research and development of our product candidates including the cost of developing APIs. We expense research and development costs as incurred.
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 as well as APIs 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. Some of our ongoing clinical trials have experienced short-term interruptions in the recruitment of patients due to the COVID-19 pandemic, as hospitals prioritize their resources towards the COVID-19 pandemic and governments impose travel restrictions. These conditions may in turn delay spending and delay the results of these trials.
NM
Effective tax rate
38
The difference in income tax provision was primarily due to differences in pre-tax income positions.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
19,565
9
(4,614)
(31)
14,951
129,775
122,159
7,616
17,642
18,273
6,985
7,966
8
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The increase in net revenues of the finished pharmaceutical products for the nine months ended September 30, 2020, was due to the following changes:
29,270
323
(1,289)
(2,862)
(8)
(4,809)
(14)
527
6,743
70
(8,015)
(10)
The increase in sales of Primatene Mist® for the nine months ended September 30, 2020 was a result of the continued success of our nationwide digital, television and radio campaign, which will continue throughout 2020. Additionally, sales of Primatene Mist® increased as we began selling online on Amazon earlier this year and began shipments in September to Kroger, the largest grocery store chain in the United States. The increase in epinephrine was primarily due to an increase in unit volumes relating to the launch of our epinephrine injection, USP 30mg/30mL multiple dose vial product in the second quarter of 2020. The decrease in sales of enoxaparin relates to a decrease in unit volume of $5.5 million, which was partially offset by an increase in average selling price. During the first half of 2020, we experienced lower demand for certain products which are frequently used in elective procedures, including lidocaine jelly and some products such as Cortrosyn® which are included in other finished pharmaceutical products. We attribute these declines in products used in elective procedures to a nationwide decline in these procedures by hospitals and individuals in response to the COVID-19 pandemic. These declines were partially offset by a $5.5 million increase in sales of sodium bicarbonate, included in other finished pharmaceutical products, as we were able to utilize the new production line approved by the FDA earlier in the year to meet strong market demand.
We anticipate that sales of API will continue to fluctuate and may decrease due to the inherent uncertainties related to sales to MannKind Corporation pursuant to a supply agreement with them. 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.
The increase in sales of Primatene Mist® and the launch of epinephrine injection multiple dose vial, which are both higher-margin products, helped increase our gross margins for the nine months ended September 30, 2020. 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 trends were partially offset by inventory reserves, including a $3.8 million reserve for crude heparin purchases and commitments at ANP.
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 Primatene Mist®, and epinephrine multi dose vials, which were launched over the past few years. Additionally, we have not seen significant supply disruption due to the COVID-19 pandemic at this time, but we are carefully monitoring for any potential problems.
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1,639
(1,430)
The increase in selling, distribution, and marketing expenses was primarily due to marketing and distribution expenses related to Primatene Mist®, including the cost of a national digital, television and radio marketing campaign which began in July 2019. The decrease in general and administrative expense was primarily due to a decrease in legal expenses as a result of the enoxaparin patent and antitrust litigation settlement reached in the second quarter of 2019. This was partially offset by an expense of $4.9 million relating to cash compensation and share-based compensation expense in connection with a separation agreement with a former executive during the second quarter of 2020.
For more information regarding litigation matters, see “Part I – Item 1. Financial Statements –Notes to Condensed Consolidated Financial Statements – Litigation.”
19,676
19,621
55
0
Pre-launch inventory
158
(158)
(100)
6,428
5,471
957
133
(465)
(78)
9,375
11,220
(1,845)
7,397
6,447
950
15
6,087
5,694
393
(0)
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.
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 as well as APIs 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. Some of our ongoing clinical trials have experienced short term interruptions in the recruitment of patients due to the COVID-19 pandemic, as hospitals prioritize their resources towards the COVID-19 pandemic and governments impose travel restrictions. These conditions may in turn delay spending and delay the results of these trials.
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Other income, net
(55,094)
In June 2019, we recognized a gain of $59.9 million relating to our settlement of the enoxaparin patent and antitrust litigation with Momenta Pharmaceuticals, Inc. and Sandoz Inc. For more information regarding litigation matters, see “Part I – Item 1. Financial Statements –Notes to Condensed Consolidated Financial Statements – Litigation.”
(8,802)
The difference in income tax provision was primarily due to differences in pre-tax income positions, nondeductible executive severance compensation, 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.
As of September 30, 2020, our foreign subsidiaries collectively held $12.6 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 from the filing date of this Quarterly Report. 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 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 by $14.6 million to $179.8 million at September 30, 2020, compared to $165.2 million at December 31, 2019.
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Cash Flows from Operations
The following table summarizes our cash flows used in operating, investing, and financing activities for the nine months ended September 30, 2020 and 2019:
Nine Months Ended September 30,
Statement of Cash Flow Data:
Net cash provided by (used in)
Operating activities
Investing activities
Financing activities
Sources and Use of Cash
Operating Activities
Net cash provided by operating activities was $40.4 million for the nine months ended September 30, 2020, which included net income of $6.9 million. Non-cash items were primarily comprised of $15.7 million of depreciation and amortization, and $16.2 million of share-based compensation expense.
Additionally, for the nine months ended September 30, 2020, there was a net cash outflow from changes in operating assets and liabilities of $4.9 million, which resulted from an increase in accounts receivable, which was partially offset by a decrease in inventory, as well as an increase in accounts payable and accrued liabilities. The increase in accounts receivable was due to the timing of sales. Accounts payable and accrued liabilities increased primarily due to the timing of payments.
Net cash provided by operating activities was $36.1 million for the nine months ended September 30, 2019, which included net income of $45.8 million. Non-cash items were primarily comprised of $13.3 million of depreciation and amortization, and $13.0 million of share-based compensation expense. Additionally, there was a net cash outflow from changes in operating assets and liabilities of $48.9 million which resulted from the decrease in accounts receivable, offset by an increase in inventory, as well as a decrease in accounts payable and accrued liabilities. The decrease in accounts receivable was due to the timing of sales in the quarter. The increase in inventory was partially due to increased purchases of raw materials and production of finished goods resulting in a net increase of $31.0 million of enoxaparin and a net increase of $8.9 million of Primatene Mist® inventory. We plan to utilize our deferred tax credits to offset a significant portion of the tax liability related to 2019 U.S. federal and California state taxable income. Accounts payable and accrued liabilities decreased primarily due to the timing of payments.
Investing Activities
Net cash used in investing activities was $24.2 million for the nine months ended September 30, 2020, primarily as a result of $24.5 million in purchases of property, plant, and equipment, which included $5.9 million incurred in the United States, $2.7 million in France, and $15.9 million in China.
Net cash used in investing activities was $43.2 million for the nine months ended September 30, 2019, primarily as a result of $33.1 million in purchases of property, plant, and equipment, which included $7.3 million incurred in the United States, $6.6 million in France, and $19.2 million in China. Additionally, we purchased $9.8 million in short-term investments.
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Financing Activities
Net cash used in financing activities was $2.0 million for the nine months ended September 30, 2020, primarily as a result of $21.0 million used to purchase treasury stock offset by $21.3 million in net proceeds from the settlement of share-based compensation awards under our equity plans. Additionally, we also made $6.3 million in principal payments on our long-term debt and received $4.1 million from borrowings on our lines of credit, of which $3.1 million was converted into an equipment loan during the year.
Net cash provided by financing activities was $6.6 million for the nine months ended September 30, 2019, primarily as a result of the receipt of $18.3 million for ANP private placement, and $2.0 million in net proceeds received from our equity plans. This was partially offset by $8.5 million used to purchase treasury stock. Additionally, we made $5.2 million in principal payments on our long-term debt and lines of credit.
Indebtedness
For more information regarding our outstanding indebtedness, see “Part I – Item 1. Financial Statements – Notes to Condensed 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, 2019, except that our outstanding debt obligations have changed as follows:
Short-term debt and current portion of long-term debt
4,426
Long-term debt
(6,491)
(2,065)
As of September 30, 2020, we had $59.2 million in unused borrowing capacity under revolving lines of credit with Cathay Bank, East West Bank, and China Merchant Bank.
Critical Accounting Policies
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, 2019.
For information regarding recent accounting pronouncements, see “Part I – Item 1. Financial Statements – Notes to Condensed 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.
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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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Except for the broad effects of the COVID-19 pandemic as a result of its negative impact on the global economy and financial markets, there have been no material changes in market risk from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2019. We are exposed to market risk in the ordinary course of business. 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).
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 September 30, 2020, 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 Condensed 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, 2019, filed with the Securities and Exchange Commission on March 16, 2020.
Our business may be adversely affected by the current COVID-19 pandemic or other epidemics.
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a pandemic, which continues to spread throughout the world, including locations where we operate, such as the United States, China and France. We have been actively monitoring the COVID-19 pandemic and its impact globally. In late January 2020, China implemented extensive curfews and travel restrictions to control the outbreak, and started easing these restrictions in March. In March 2020, France also implemented a stay-at-home order limiting movement and restricting travel. In March 2020, the Governors of the States of California and Massachusetts declared a health emergency and issued orders to close all nonessential businesses. As a specialty pharmaceutical company we are deemed to be an essential business. Since then, the government in the United States, China and France, have re-opened and re-imposed restrictions on travel and business as the pandemic recedes and grows.
This contagious disease outbreak has continued to spread across the globe and is impacting worldwide economic activity and financial markets. The COVID-19 pandemic may disrupt the operations of our customers, suppliers and partners for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations, including cash flows. Disruptions to our manufacturing partners and suppliers could result in disruption to the production of our products and failure to satisfy demand. More generally, the outbreak of COVID-19 could adversely affect economies and financial markets globally and nationally, potentially leading to an economic downturn, which could decrease spending and adversely affect demand for our products and harm our business and results of operations. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future. Specifically, difficult macroeconomic conditions, increased and prolonged unemployment or a decline in business confidence as a result of the COVID-19 pandemic, could have a continuing adverse effect on the demand for some of our products. The degree of impact of the COVID-19 pandemic on our business will depend on several factors, such as the duration and the extent of the pandemic, as well as actions taken by governments, businesses, and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time.
In addition, some of our ongoing clinical trials have experienced short-term interruptions in the recruitment of patients due to the COVID-19 pandemic, as hospitals prioritize their resources toward the COVID-19 pandemic and governments impose travel restrictions. These conditions may in turn delay spending and delay the results of these trials.
It is not possible at this time to estimate the complete impact that the COVID-19 pandemic could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. Infections may resurge or become more widespread and the limitation on our ability to travel and timely sell and distribute our products, as well as any closures or supply disruptions, may be extended for longer periods of time, all of which would have a negative impact on our business, financial condition and operating results. We will continue to monitor the impact of the COVID-19 pandemic on all aspects of our business.
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Because a portion of our manufacturing takes place in China, a significant disruption in the construction or operation of our manufacturing facility in China, political unrest in China, tariffs, impact of outbreaks of health epidemics, such as the COVID-19 pandemic, or changes in social, political, trade, health, economic, environmental, or climate-related conditions or in laws, regulations and policies governing foreign trade could materially and adversely affect our business, financial condition and results of operations.
We currently manufacture the starting material for Amphadase® and enoxaparin as well as the APIs for isoproterenol and nitroprusside at our manufacturing facility in China, and we plan to use this facility to manufacture several of the APIs for products in our pipeline. Additionally, we intend to continue to invest in the expansion of this manufacturing facility. Our manufacturing facility and operations in China involve significant risks, including:
Any of these matters could materially and adversely affect our business and results of operations. These interruptions or failures could impair our ability to operate our business, impede the commercialization of our product candidates or delay the introduction of new products, impact our product quality, or impair our competitive position.
We are actively monitoring and assessing the potential impact of the COVID-19 pandemic. This includes evaluating the impact on our employees, suppliers, and logistics providers as well as evaluating governmental actions being taken to curtail the spread of the virus. While the Chinese government has been relaxing work restrictions, at this time, it is unclear if the Chinese government will reinstate restrictions or if further restrictions will be put into place by the government. In addition, many countries have placed significant bans on travel to and from China, with many countries and airlines suspending flights to and from mainland China. Any material adverse effect on our employees, suppliers, and logistics providers could have a material adverse effect on our manufacturing operations in China or the supply of raw materials or APIs originating from China.
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Our business and operations have been impacted in the past, and may be impacted in the future, in the event of system breach or failure.
We, our collaborators, third-party providers, distributors, customers and other contractors utilize information technology systems and networks, including internet-based system, to transmit, store and otherwise process electronic data in connection with our business activities, including our supply chain processes, operations and communications. This includes our clinical data and business proprietary information, Electronic Data Interchange, or EDI, on purchase orders, invoices, chargebacks, etc. We, and others on our behalf, also collect and process certain personal data, including about our personnel, business partners, and others, which may be subject to applicable data protection laws and regulations that require adoption of minimum information security standards. The cost of compliance with applicable data protection laws and regulations have increased and may increase in the future. Despite our implementation of security measures to protect the confidentiality, integrity, and availability of the systems and data within our control from various threats (e.g., cyber-attack, insider threat, accidental disclosure, intellectual property theft and economic espionage, natural disaster, war, terrorism, telecommunications and electrical outage), risks remain, and our systems and networks and the systems and networks of third parties that support us and our services may be breached due to these threats. System breaches, malware, ransomware, computer hacking, and insider threats have become more prevalent, and experts have warned that the COVID-19 pandemic has resulted in increased threats and malicious activity.
Potential legal (regulatory or contractual), financial, operational, and reputational harm may arise from the accidental or unlawful destruction, damage, loss, unavailability, alteration, impairment, misuse, unauthorized disclosure of, or unauthorized access to (i) our data, which is transmitted, stored or otherwise processed by us or by collaborators, third-party providers, distributors and other contractors on our behalf (a “data security incident”); and (ii) the systems upon which we rely for our operations (an “other event”). For example:
We have experienced and may continue to experience cyberattacks of varying degrees from time to time. In the second quarter of 2020, we were subject to a cyber-event that resulted in a temporary disruption to some of our internal computer systems. In response to this incident, we engaged a third-party forensic expert to investigate, and determined that cyber criminals illegally obtained certain personal information of certain current and former employees. We notified affected individuals and regulators, as we deemed was required or appropriate. We have incurred costs to respond to this incident and may continue to incur costs to support our efforts to enhance our security measures.
There can be no assurance that we will be successful in preventing other data security incidents or events nor that we will be successful in mitigating their effects, despite the implementation of security measures for systems and data within our control. Similarly, there can be no assurance that our collaborators, third-party providers, distributors and other
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contractors will be successful in protecting our data on their systems or in protecting other systems upon which we may rely. Any such data security incident or other event could have a material adverse effect on our business and prospects.
Some of our products are marketed without FDA approval and may be subject to enforcement actions by the FDA.
Some of our prescription products are marketed without FDA approval. These products, like many other prescription drugs on the market that have not been formally evaluated as being effective by the FDA, 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, 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 help address a national drug shortage, while we prepared and filed applications for approval of the products. Between August and October 2010, we reintroduced 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. In April 2020, the FDA granted approval of our Epinephrine Injection USP 30mg/30mL Multiple Dose Vial, and we launched the product in May 2020.
The FDA granted approval of our Atropine Sulfate Injection 0.1mg/mL in the 10mL Luer-Jet® Prefilled Syringe in October 2020.
For the years ended December 31, 2019, 2018, and 2017, we recorded net revenues of $27.1 million, $19.1 million, and $14.9 million, respectively, from our unapproved products. For the nine months ended September 30, 2020 and 2019, we recorded net revenues of $19.0 million and $19.6 million, respectively, from our unapproved products. Our unapproved products currently on the market include: morphine, dextrose and epinephrine prefilled syringes. We have filed two 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.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws, as well as provisions of the Delaware General Corporation Law, or the DGCL, could depress the trading price of our common stock by making it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so
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would benefit our stockholders, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions include:
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. Furthermore, our amended and restated certificate of incorporation provides that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a breach of fiduciary duty owed by any of our current or former directors, officers or other employees to us or our stockholders; (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation, or our amended and restated bylaws; or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. This provision is not intended to apply to actions arising under the Securities Act or the Exchange Act, or any claim for which the federal courts have exclusive jurisdiction. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to this provision. This exclusive-forum provision may discourage lawsuits against us or our directors, officers, and employees. In addition, we are subject to Section 203 of the DGCL, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our Board of Directors. This provision could delay or prevent a change of control, whether or not it is desired by or beneficial to our stockholders, which could also affect the price that some investors are willing to pay for our common stock.
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
Price Paid
Publicly Announced Plans
Purchased Under the Plans
Period
Purchased (1)
per Share
or Programs
July 1 – July 31, 2020
67,420
20.77
August 1 – August 31, 2020
76,931
20.33
September 1 – September 30, 2020
69,905
19.46
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
ExhibitNo.
Description
10.1
Equipment Line of Credit, dated September 1, 2020, between International Medication Systems, Limited and East West Bank in the original sum of $10,000,000.
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 - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definitions Linkbase Document
104
Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101)
#
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: November 6, 2020
/s/ WILLIAM J. PETERS
William J. Peters
Chief Financial Officer(Principal Financial and Accounting Officer)
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