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, 2024
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 only class of common stock as of November 1, 2024 was 48,081,433.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2024
Special Note About Forward-Looking Statements
Part I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023
1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2024 and 2023
2
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2024 and 2023
3
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2024 and 2023
4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023
5
Notes to Condensed Consolidated Financial Statements
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3. Quantitative and Qualitative Disclosure about Market Risk
44
Item 4. Controls and Procedures
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
45
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
46
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
47
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. 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, 2023, 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,
2024
2023
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
192,116
144,296
Restricted cash
235
Short-term investments
58,375
112,510
Restricted short-term investments
2,200
Accounts receivable, net
139,635
114,943
Inventories
130,316
105,833
Income tax refunds and deposits
5,349
526
Prepaid expenses and other assets
17,723
9,057
Total current assets
545,949
489,600
Property, plant, and equipment, net
295,384
282,746
Finance lease right-of-use assets
426
564
Operating lease right-of-use assets
31,708
32,333
Investment in unconsolidated affiliate
—
527
Goodwill and intangible assets, net
594,796
613,295
Long-term investments
14,685
Other assets
23,663
25,910
Deferred tax assets
53,252
Total assets
1,545,178
1,512,912
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities
153,268
93,366
Accrued payments for BAQSIMI® (see Note 3)
126,090
Income taxes payable
1,281
1,609
Current portion of long-term debt
252
436
Current portion of operating lease liabilities
4,209
3,906
Total current liabilities
159,010
225,407
Long-term reserve for income tax liabilities
6,066
Long-term debt, net of current portion and unamortized debt issuance costs
596,446
589,579
Long-term operating lease liabilities, net of current portion
28,941
29,721
Other long-term liabilities
27,037
22,718
Total liabilities
817,500
873,491
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; 60,690,076 and 48,372,997 shares issued and outstanding, respectively, as of September 30, 2024 and 59,390,194 and 48,068,881 shares issued and outstanding, respectively, as of December 31, 2023
Additional paid-in capital
496,427
486,056
Retained earnings
530,823
409,268
Accumulated other comprehensive loss
(8,821)
(8,478)
Treasury stock
(290,757)
(247,431)
Total equity
727,678
639,421
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:
Product revenues, net
188,819
151,855
525,836
437,589
Other revenues
2,395
28,701
19,608
Total net revenues
191,214
180,556
545,444
466,290
Cost of revenues
89,273
72,153
258,237
211,309
Gross profit
101,941
108,403
287,207
254,981
Operating expenses:
Selling, distribution, and marketing
8,995
6,407
27,378
20,234
General and administrative
14,821
12,654
43,782
38,418
Research and development
21,077
16,664
55,772
53,322
Total operating expenses
44,893
35,725
126,932
111,974
Income from operations
57,048
72,678
160,275
143,007
Non-operating income (expenses):
Interest income
2,427
1,202
8,320
3,156
Interest expense
(6,698)
(13,702)
(23,918)
(17,702)
Other income (expenses), net
(5,094)
3,459
1,125
1,553
Total non-operating income (expenses), net
(9,365)
(9,041)
(14,473)
(12,993)
Income before income taxes
47,683
63,637
145,802
130,014
Income tax provision
7,254
14,025
23,674
27,160
Income before equity in losses of unconsolidated affiliate
40,429
49,612
122,128
102,854
Equity in losses of unconsolidated affiliate
(390)
(573)
(1,476)
Net income
49,222
121,555
101,378
Net income per share:
Basic
0.83
1.01
2.50
2.10
Diluted
0.78
0.91
2.32
1.91
Weighted-average shares used to compute net income per share:
48,621
48,701
48,580
48,368
51,862
53,921
52,307
52,997
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in thousands)
Other comprehensive income (loss), net of income taxes
Foreign currency translation adjustment
(87)
(343)
213
Total other comprehensive income (loss)
Total comprehensive income
40,434
49,135
121,212
101,591
-3-
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited; in thousands, except share data)
Common Stock
Accumulated
Treasury Stock
Additional
Other
Paid-in
Retained
Comprehensive
Shares
Amount
Capital
Earnings
Income (loss)
Total
Balance as of December 31, 2023
59,390,194
(11,321,313)
43,177
Other comprehensive loss
(291)
Issuance of treasury stock in connection with the Company's equity plans
(33)
2,197
33
Issuance of common stock in connection with the Company's equity plans
770,265
(17,311)
Share-based compensation expense
7,360
Balance as of March 31, 2024
60,160,459
476,072
452,445
(8,769)
(11,319,116)
(247,398)
672,356
37,949
(57)
Purchase of treasury stock
(207,288)
(8,498)
(97)
6,363
97
321,996
5,816
5,780
Balance as of June 30, 2024
60,482,455
487,571
490,394
(8,826)
(11,520,041)
(255,799)
713,346
Other comprehensive income
(797,038)
(34,958)
207,621
3,260
5,596
Balance as of September 30, 2024
60,690,076
(12,317,079)
Balance as of December 31, 2022
58,110,231
455,077
271,723
(8,624)
(9,998,162)
(189,524)
528,658
26,032
356
(263,131)
(8,015)
330,300
(4,565)
6,111
Balance as of March 31, 2023
58,440,531
456,623
297,755
(8,268)
(10,261,293)
(197,539)
548,577
26,124
(56)
(3,585)
(129)
(231)
15,207
231
627,946
9,853
4,865
Balance as of June 30, 2023
59,068,477
471,110
323,880
(8,324)
(10,249,671)
(197,437)
589,235
(1,072,041)
(50,000)
151,701
2,126
4,644
Balance as of September 30, 2023
59,220,178
477,880
373,102
(8,411)
(11,321,712)
(247,437)
595,140
-4-
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities:
Reconciliation to net cash provided by operating activities:
Loss on disposal of assets
110
474
Impairment of long-lived assets
2,700
Loss (gain) on interest rate swaps and foreign currency transactions, net
1,496
(1,019)
Depreciation of property, plant, and equipment
20,992
18,559
Amortization of product rights, trademarks, and patents
18,539
6,651
Operating lease right-of-use asset amortization
3,010
2,778
Amortization of discounts, premiums, and debt issuance costs
5,308
8,486
573
1,476
18,736
15,620
Changes in operating assets and liabilities:
(24,577)
(30,175)
(24,329)
(6,537)
(10,489)
105
Income tax refunds, deposits, and payable, net
(5,147)
25,185
Operating lease liabilities
(2,866)
(2,667)
61,451
16,625
Net cash provided by operating activities
184,362
159,639
Cash Flows From Investing Activities:
BAQSIMI® acquisition (see Note 3)
(129,000)
(506,406)
Purchases and construction of property, plant, and equipment
(28,630)
(28,724)
Purchase of investments
(47,507)
(52,802)
Maturity of investments
118,538
38,801
Deposits and other assets
(2,653)
3,064
Net cash used in investing activities
(89,252)
(546,067)
Cash Flows From Financing Activities:
Proceeds from equity plans, net of withholding tax payments
(8,234)
7,414
(43,456)
(58,144)
Debt issuance costs
(838)
(24,589)
Proceeds from borrowing under lines of credit
13,565
Proceeds from issuance of long-term debt
845,000
Principal payments on long-term debt
(8,148)
(268,506)
Net cash provided by (used in) financing activities
(47,111)
501,176
Effect of exchange rate changes on cash
(179)
(44)
Net increase in cash, cash equivalents, and restricted cash
47,820
114,704
Cash, cash equivalents, and restricted cash at beginning of period
144,531
156,333
Cash, cash equivalents, and restricted cash at end of period
192,351
271,037
Noncash Investing and Financing Activities:
Deferred payment for BAQSIMI® acquisition
121,699
Capital expenditures included in accounts payable
5,120
4,496
Operating lease right-of-use assets in exchange for operating lease liabilities
2,386
9,890
Supplemental Disclosures of Cash Flow Information:
Interest paid, net of capitalized interest
22,389
12,098
Income taxes paid
29,000
2,136
-5-
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 bio-pharmaceutical company that focuses primarily on developing, manufacturing, marketing, and selling technically challenging 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, 2023 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, 2023. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, 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 presentation of the Company’s consolidated financial position, results of operations, comprehensive income, 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 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 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, which are of a normal recurring nature, 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) Amphastar France Pharmaceuticals, S.A.S., or AFP, (5) Amphastar UK Ltd., or AUK, (6) International Medication Systems (UK) Limited, or IMS UK, and (7) Amphastar Medication Co., LLC, or Amphastar Medication.
Investment in Unconsolidated Affiliate
The Company applies the equity method of accounting for investments when it has significant influence, but not controlling interest in the investee. The Company’s proportionate share of the earnings or losses resulting from these investments is reported as “Equity in losses of unconsolidated affiliate” in the accompanying condensed consolidated statements of operations. Investments accounted for using the equity method may be reported on a lag of up to three months if financial statements of the investee are not available in sufficient time for the investor to apply the equity method as of the current reporting date.
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The carrying value of equity method investments is reported as “Investment in unconsolidated affiliate” in the accompanying condensed consolidated balance sheets. The Company’s equity method investments are reported at cost and adjusted each period for the Company’s share of the investee’s earnings or losses and dividends paid, if any.
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: fair value of acquired assets, fair value of financial instruments, allowance for discounts, provision for chargebacks and rebates, provision for product returns, adjustment of inventory to its net realizable value, impairment of investments, long-lived and intangible assets and goodwill, litigation reserves, stock price volatility 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 U.S. Dollar, or 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 books of record in euros. AUK’s subsidiary, IMS UK, maintains its books of record in British pounds. These local currencies have been determined to be the subsidiaries’ respective functional currencies. Activities in the statements of operations are translated to USD using average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing rate of exchange at the date of the equity transactions. Translation adjustments are reflected in stockholders’ equity and are included as a component of other comprehensive income (loss). The unrealized gains or losses of intercompany foreign currency transactions that are of a long-term investment nature are reported in other accumulated comprehensive income (loss).
The unrealized gains and losses of intercompany foreign currency transactions that are of a long-term investment nature were a $1.4 million gain and a $0.4 million gain for the three and nine months ended September 30, 2024, respectively. For the three and nine months ended September 30, 2023, the unrealized gains and losses of intercompany foreign currency transactions that are of a long-term investment nature were a $0.9 million loss and a $0.4 million loss, respectively.
Comprehensive Income
The Company’s comprehensive income includes its foreign currency translation gains and losses as well as its share of other comprehensive income from its equity method investments.
Acquisitions
The Company evaluates acquisitions and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs and substantive processes that have the ability to create outputs, which would meet the definition of a business.
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Acquisitions meeting the definition of business combinations are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. In a business combination, any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
For asset acquisitions, a cost accumulation model is used to determine the cost of an asset acquisition. Direct transaction costs are recognized as part of the cost of an asset acquisition. The cost of an asset acquisition, including transaction costs, is allocated to identifiable assets acquired and liabilities assumed based on a relative fair value basis, with the exception of non-qualifying assets. Goodwill is not recognized in an asset acquisition. When a transaction accounted for as an asset acquisition includes an in-process research and development, or IPR&D, asset, the IPR&D asset is only capitalized if it has an alternative future use other than in a particular research and development project. Asset acquisitions may include contingent consideration arrangements that encompass obligations to make future payments to sellers contingent upon the achievement of future financial targets. Contingent consideration, including assumed contingent considerations, is not recognized until all contingencies are resolved and the consideration is paid or becomes payable (unless contingent considerations meets the definition of a derivative, in which case the amount becomes part of the basis in the asset acquired), at which point the consideration is allocated to the assets acquired based on their relative fair values at the acquisition date, with the exception of non-qualifying assets.
Judgments are used in determining estimates of useful lives of long-lived assets. Useful life estimates are based on, among other factors, estimates of expected future net cash flows, the assessment of each asset’s life cycle, and the impact of competitive trends on each asset’s life cycle and other factors. These judgments can materially impact the estimates used to allocate purchase consideration to assets acquired and liabilities assumed, and the resulting timing and amounts charged to or recognized in current and future operating results. For these and other reasons, actual results may vary significantly from estimated results.
Advertising Expense
Advertising expenses, primarily associated with Primatene MIST®, 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 statements of operations. For the three and nine months ended September 30, 2024, advertising expenses were $2.5 million and $7.8 million, respectively. For the three and nine months ended September 30, 2023, advertising expenses were $1.9 million and $8.1 million, respectively.
Financial Instruments
The Company’s accompanying condensed consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses, short-term borrowings, and long-term obligations. The Company considers the carrying amounts of current assets and liabilities on the condensed consolidated balance sheets to approximate the fair value of these financial instruments due to the short maturity of these items. The carrying value of the Company’s long-term obligations, with the exception of the convertible debt (see Note 14), approximates their fair value, as the stated borrowing rates are comparable to rates currently offered to the Company for instruments with similar maturities. Investments and short-term investments are recorded at fair value based on quoted prices from recognized security exchanges and other methods (see Note 9). The Company at times enters into interest rate swap contracts to manage its exposure to interest rate changes and its overall cost of long-term debt. The Company’s interest rate swap contracts exchange the variable interest rates for fixed interest rates.
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Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market accounts, certificates of deposit and highly liquid investments with original maturities of three months or less.
Investments
Investments as of September 30, 2024 and December 31, 2023 consisted of certificates of deposit and investment grade corporate, agency and municipal bonds with original maturity dates between three and fifteen months.
Restricted Cash
Restricted cash is collateral required for the Company to guarantee certain vendor payments in France. As of September 30, 2024 and December 31, 2023, the restricted cash balance was $0.2 million.
Restricted Short-Term Investments
Restricted short-term investments consist of certificates of deposit that are collateral for standby letters 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, 2024 and December 31, 2023, the balance of restricted short-term investments was $2.2 million.
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.
Debt Issuance Costs
Debt issuance costs related to non-revolving debt are recognized as a reduction to the related debt balance in the accompanying condensed consolidated balance sheets and amortized to interest expense over the contractual term of the related debt using the effective interest method. Debt issuance costs associated with revolving debt are capitalized within other long-term assets on the condensed consolidated balance sheets and are amortized to interest expense over the term of the related revolving debt.
Convertible Debt
The Company accounts for its convertible debt instruments as a single unit of accounting, a liability, because the Company concluded that the conversion features do not require bifurcation as a derivative under Accounting Standards Codification, or ASC, 815-15, Derivatives and Hedging and the Company did not issue its convertible debt instruments at a substantial premium. The Company records debt issuance costs as contra-liabilities in its condensed consolidated balance sheets at issuance and amortizes them over the contractual term of the convertible debt instrument using the effective interest rate.
In accordance with Accounting Standards Update, or ASU, 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, the Company evaluates convertible debt instruments to determine if the conversion feature is freestanding or embedded. If the conversion feature is embedded, the conversion
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feature is not bifurcated from the host instrument. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20, “Debt with Conversion and Other Options” for consideration of any beneficial conversion features. If no beneficial conversion features exist that require separate recognition, convertible debt instruments are accounted for as a single liability measured at its amortized cost as long as no other features require separation and recognition as derivatives.
Litigation, Commitments and Contingencies
Litigation, commitments and contingencies are accrued when management, after considering the facts and circumstances of each matter as then known to management, has determined it is probable a liability will be found to have been incurred and the amount of the loss can be reasonably estimated. When only a range of amounts is reasonably estimable and no amount within the range is more likely than another, the low end of the range is recorded. Legal fees are expensed as incurred. Due to the inherent uncertainties surrounding gain contingencies, the Company generally does not recognize potential gains until they are realized.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures which is intended to improve reportable segment disclosure requirements, primarily through additional disclosures about significant segment expenses. The standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the disclosure requirements related to the new standard.
In December 2023, the FASB issued Accounting Standard Update 2023-09, Income taxes (Topic 740): Improvements to Income Tax Disclosures which requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as expanded information on income taxes paid by jurisdiction. The disclosure requirements will be applied on a prospective basis, with the option to apply them retrospectively. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the disclosure requirements related to the new standard.
Note 3. BAQSIMI® Asset Acquisition
On June 30, 2023, the Company completed its acquisition of BAQSIMI® glucagon nasal powder, or BAQSIMI®, pursuant to an asset purchase agreement, or the Purchase Agreement, with Eli Lilly & Company, or Lilly, dated April 21, 2023.
The Company accounted for the BAQSIMI® acquisition as an asset acquisition in accordance with ASC 805, Business Combinations, as substantially all the fair value of the assets acquired was concentrated in a single identifiable asset, BAQSIMI® product rights. The BAQSIMI® product rights include the license for the BAQSIMI® intellectual property, regulatory documentation, marketing authorizations, and domain names, which are considered a single asset as they are inextricably linked.
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The total purchase price was allocated to the acquired assets based on their relative fair values, as follows:
Fair Value
(in thousands)
Property, plant, and equipment
34,426
BAQSIMI® product rights
591,338
2,341
Total assets acquired
628,105
The Company amortizes the acquired intangible asset to cost of revenues on a straight line basis over its estimated useful life of 24 years (see Note 10 for additional information).
A portion of the consideration for the asset acquisition was a deferred cash payment. The fair value of the deferred cash payment was accreted to its full $129.0 million amount over a one-year period from the date of acquisition through interest expense. During the nine months ended September 30, 2024, the Company recognized $3.6 million of interest expense related to accretion of the deferred cash payment. During the three and nine months ended September 30, 2023, $1.8 million of interest expense was recognized related to the accretion of the deferred cash payment. The Company made the $129.0 million deferred cash payment in June 2024.
The Company may also be required to pay additional contingent consideration of up to an aggregate of $575.0 million in cash as part of the BAQSIMI® acquisition, based on the achievement of certain net sales milestones. Through September 30, 2024, the Company has not triggered any milestones and therefore no amounts have been recognized or paid.
Manufacturing Services Agreement
In connection with the closing of the acquisition, the Company entered into a Manufacturing Services Agreement, or the MSA, with Lilly, pursuant to which Lilly has agreed, for a period of time not to exceed 18 months, to provide certain manufacturing, packaging, labeling and supply services for BAQSIMI® directly or through third-party contractors to the Company in connection with its operation of the development, manufacture, and commercialization of BAQSIMI®. Upon termination of the MSA, the Company will be obligated to purchase all API, components, and finished goods on hand at prices agreed upon in the MSA.
Transition Services Agreement
In connection with the closing of the acquisition, the Company also entered into a Transition Services Agreement, or the TSA, with Lilly pursuant to which Lilly has agreed, for a period of time not to exceed 18 months, to provide certain services to the Company to support the transition of BAQSIMI® operations to the Company, including with respect to the conduct of certain clinical, regulatory, medical affairs, and commercial sales channel activities.
Throughout 2024, the Company assumed distribution responsibilities, from Lilly, to its customers in the United States, and certain other countries. As a result, the Company has recorded the sales and related cost of BAQSIMI® in these countries as product revenue, net and cost of revenues, respectively. The Company will continue to assume distribution of BAQSIMI® for the remaining territories on a country by country basis throughout 2024.
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Note 4. Revenue Recognition
In accordance with ASC 606 Revenue from Contracts 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 to which the Company expects to be entitled includes a stated list price, less various forms of variable consideration including provision for chargebacks and rebates, accrual for product returns, prompt pay discounts, distributor fees, patient co-pay assistance, and other related deductions. These deductions to product sales are referred to as gross-to-net deductions and are estimated and recorded in the period in which the related product sales occur. Payment terms offered to customers generally range from 30 to 75 days; however, payment terms differ by jurisdiction, by customer and, in some instances, by type of product. Revenues from product sales, net of gross-to-net deductions, are recorded only to the extent a significant reversal in the amount of cumulative revenue recognized is not probable of occurring when the uncertainty associated with gross-to-net deductions is subsequently resolved. Taxes assessed by governmental authorities and collected from customers are excluded from product sales. If the Company expects, at contract inception, that the period between the transfer of control and corresponding payment from the customer will be one year or less, the amount of consideration is not adjusted for the effects of a financing component. Shipping and handling activities are considered to be fulfillment activities rather than a separate performance obligation and are recorded within selling, distribution and marketing expenses in the accompanying condensed consolidated statements of operations.
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, historical chargeback and rebate rates, and current contract pricing.
The provision for chargebacks and rebates is reflected as a component of product revenues, net. The following table is an analysis of the chargeback and rebate provision:
Beginning balance
27,920
26,606
Provision for chargebacks and rebates
218,312
200,317
Credits and payments issued to third parties
(181,216)
(201,650)
Ending balance
65,016
25,273
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 retailers’ and other indirect customers’ purchases. The approach that the Company uses to estimate chargebacks and rebates has been consistently applied for all periods
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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 20 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.
The provision for chargebacks and rebates is included in the following balance sheet accounts:
Reduction to accounts receivable, net
21,355
21,861
43,661
6,059
Accrual for Product Returns: The Company offers certain 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 new competition.
Prompt Pay Discounts: The Company provides its customers with a percentage discount on their invoice if the customers pay within the agreed upon timeframe. The Company expects that its customers will earn prompt pay discounts. The Company estimates the probability of customers paying promptly based on the percentage of discount outlined in the purchase agreement between the two parties, and deducts the full amount of these discounts from gross product sales and accounts receivable at the time revenue is recognized.
Distributor Fees: The Company engages with wholesalers to distribute its products to end customers. The Company pays the wholesalers a fee for services such as: inventory management, chargeback administration, and service level commitments. The Company estimates the amount of distribution services fees to be paid and adjusts the transaction price with the amount of such estimate at the time of sale to the customer. An accrued liability is recorded for unpaid distribution service fees.
Patient Co-Pay Assistance: Co-pay assistance represents financial assistance to qualified patients, assisting them with prescription drug co-payments required by insurance. The accrual for co-pay is based on an estimate of claims and the cost per claim that the Company expects to receive associated with inventory that exists in the distribution channel at period end.
Revenues derived from contract manufacturing services are recognized when third-party products are shipped to customers. 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.
Service revenues derived from research and development contracts are recognized over time based on progress toward satisfaction of the performance obligation. For each performance obligation satisfied over time, the Company assesses the proper method to be used for revenue recognition, either an input method to measure progress toward the satisfaction of services or an output method of determining the progress of completion of performance obligation. For the three and
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nine months ended September 30, 2024, revenues from research and development services were $0.1 million and $2.0 million, respectively. For the three and nine months ended September 30, 2023, revenues from research and development services were $0.8 million and $2.1 million, respectively.
Revenues related to sales of BAQSIMI®, which was supplied and sold by Lilly under the TSA during the three and nine months ended September 30, 2024 and 2023, or BAQSIMI® NEB, were recorded on a net basis, similar to a royalty arrangement. This includes revenues in the United States and certain other countries for a portion of the period.
Note 5. Net Income per Share
Basic net income per share is calculated based upon the weighted-average number of shares outstanding during the period. Diluted net income per share gives effect to all potentially 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 potential shares of common stock issuable upon conversion of Convertible Notes of the Company, due March 2029, or the 2029 Convertible Notes.
For the three and nine months ended September 30, 2024, options to purchase 619,847 shares of stock with a weighted-average exercise price of $46.63 per share, were excluded in the computation of diluted net income per share because their effect would be anti-dilutive. The 2029 Convertible Notes had no impact on the computation of diluted net income per share as the average stock price during the period was less than the conversion price.
For the three months ended September 30, 2023, none of the Company’s options were excluded from the computation of diluted net income per share. For the nine months ended September 30, 2023, options to purchase 45,934 shares of stock with a weighted-average exercise price of $46.01 per share, were excluded from the computation of diluted net income per share because their effect would be anti-dilutive. The 2029 Convertible Notes had no impact on the computation of diluted net income per share as the average stock price during the period was less than the conversion price.
The following table provides the calculation of basic and diluted net income per share 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
3,241
5,220
3,727
4,629
Weighted-average shares outstanding — diluted
Net income per share — basic
Net income per share — diluted
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Note 6. 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 BAQSIMI®, Primatene MIST®, glucagon, enoxaparin, naloxone, phytonadione, lidocaine, epinephrine, various critical and non-critical care drugs, as well as certain contract manufacturing and contract research revenues. The API segment manufactures and distributes recombinant human insulin API and porcine insulin API for external customers and internal product development.
Other revenues includes the portion of BAQSIMI® sales by Lilly on the Company’s behalf under the TSA and is accounted for as a component of the finished pharmaceutical product segment.
Selected financial information by reporting segment is presented below:
Finished pharmaceutical products
189,752
176,366
538,755
455,242
API
1,462
4,190
6,689
11,048
Gross profit (loss):
105,544
109,499
302,322
262,742
(3,603)
(1,096)
(15,115)
(7,761)
Total gross profit
Operating expenses
Non-operating (expenses) income
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.
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The amount of net revenues in the finished pharmaceutical product segment is presented below:
Finished pharmaceutical products segment net revenues:
BAQSIMI®
40,409
85,106
Glucagon
26,792
29,514
82,700
82,486
Epinephrine
21,341
20,199
75,392
57,004
Primatene MIST®
26,055
24,834
73,077
64,837
Lidocaine
15,884
15,522
41,457
43,174
Phytonadione
11,721
7,449
31,998
33,017
Enoxaparin
5,615
7,702
17,984
25,441
Naloxone
4,037
4,715
12,124
14,774
Other finished pharmaceutical products
35,503
37,730
99,309
105,808
Total finished pharmaceutical products net revenues
187,357
147,665
519,147
426,541
BAQSIMI® NEB
Total finished pharmaceutical products segment net revenues
The amount of depreciation and amortization expense included in cost of revenues by reporting segment is presented below:
Depreciation and amortization expense
8,755
8,616
26,086
13,143
1,038
1,003
3,045
2,938
Total depreciation and amortization expense
9,793
9,619
29,131
16,081
Net revenues and carrying values of long-lived assets, which includes property, plant and equipment, as well as finance and operating lease right-of-use assets, by geographic regions, based on where the Company conducts its operations are as follows:
Net Revenues
Long-Lived Assets
United States(1)
186,514
178,056
532,591
459,909
187,410
186,083
China
178
833
2,145
2,142
103,009
91,913
France
4,522
1,667
10,708
4,239
37,099
37,647
327,518
315,643
(1) Includes Other revenues from the sales of BAQSIMI®.
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Note 7. Customer and Supplier Concentration
Customer Concentrations
Three large wholesale drug distributors, Cencora Inc., formally AmerisourceBergen, or Cencora, 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. Lilly currently manufactures and sells BAQSIMI® on the Company’s behalf pursuant to the terms of the TSA in certain jurisdictions (see Note 3 for additional information). The Company considers these four 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, 2024 and 2023, and accounts receivable as of September 30, 2024 and December 31, 2023, respectively. The following table provides accounts receivable and net revenue information for these major customers:
% of Total Accounts
% of Net
Receivable
Revenues
McKesson
29
%
26
22
25
Cencora
28
16
21
17
20
Cardinal Health
13
15
Lilly
Supplier Concentrations
The Company depends on suppliers for raw materials, APIs, and other components that are subject to stringent FDA requirements. Some of these materials may only be available from one or a limited number of sources. Establishing additional or replacement suppliers for these materials may take a substantial period of time, as suppliers must be approved by the FDA. Furthermore, a significant portion of raw materials may only be available from foreign sources. If the Company is unable to secure, on a timely basis, sufficient quantities of the materials it depends on to manufacture and market its products, it could have a materially adverse effect on the Company’s business, financial condition, and results of operations.
Note 8. 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:
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As of September 30, 2024 and December 31, 2023, cash equivalents include money market accounts and corporate and municipal bonds with original maturities of less than three months. Investments consist of certificates of deposit as well as investment-grade corporate, agency and municipal bonds with original maturity dates between three and fifteen months. The certificates of deposit are carried at amortized cost in the Company’s condensed consolidated balance sheets, which approximates their fair value determined based on Level 2 inputs. The corporate, agency and municipal bonds are classified as held-to-maturity and are carried at amortized cost net of allowance for credit losses. The fair value of such bonds is disclosed in Note 9 and was determined based on Level 2 inputs. The restrictions on restricted cash and investments have an immaterial effect on the fair value of these financial assets.
The fair values of the Company’s financial assets and liabilities measured on a recurring basis as of September 30, 2024 and December 31, 2023, are as follows:
(Level 1)
(Level 2)
(Level 3)
Cash equivalents
143,637
26,322
Interest rate swaps related to variable rate loans
(6,881)
Total assets and liabilities measured at fair value as of September 30, 2024
165,513
143,872
21,641
116,441
37,142
(5,243)
Total assets and liabilities measured at fair value as of December 31, 2023
150,775
116,676
34,099
The Company does not hold any Level 3 instruments that are measured at fair value on a recurring basis.
Nonfinancial assets and liabilities are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances. These items primarily include investments in unconsolidated affiliates, long-lived assets, goodwill, and intangible assets for which the fair value is determined as part of an impairment test. As of September 30, 2024, and December 31, 2023, there were no significant adjustments to fair value for nonfinancial assets or liabilities.
The Company’s deferred compensation plan assets are valued using the cash surrender value of the life insurance policies and are not included in the table above.
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Note 9. Investments
The following is a summary of the Company’s investments that are classified as held-to-maturity:
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
Corporate and agency bonds (due within 1 year)
31,903
67
(2)
31,968
Total investments as of September 30, 2024
73,815
7
(21)
73,801
Corporate and agency bonds (due within 1 to 3 years)
14,621
56
(1)
14,676
Municipal bonds (due within 1 year)
1,081
1,082
Total investments as of December 31, 2023
89,517
64
(22)
89,559
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, identifying 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 10. 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
BAQSIMI® product rights(1)
24
30,799
560,539
Patents
193
92
101
Land-use rights
39
2,540
865
1,675
Subtotal
594,071
31,756
562,315
Indefinite-lived intangible assets
Trademark
*
29,225
Goodwill - Finished pharmaceutical products
3,256
32,481
As of September 30, 2024
626,552
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12,319
579,019
12
486
376
815
1,725
594,364
13,510
580,854
3,216
32,441
As of December 31, 2023
626,805
* Intangible assets with indefinite lives have an indeterminable average life.
See Note 3.
Goodwill
The changes in the carrying amounts of goodwill are as follows:
3,126
Currency translation
40
90
Note 11. Inventories
Inventories consist of the following:
Raw materials and supplies
60,536
50,082
Work in process
36,016
30,822
Finished goods
33,764
24,929
Total inventories
Charges of $0.9 million and $10.1 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, 2024, respectively, to adjust the Company’s inventory and related firm purchase commitments to its net realizable value. For the three months ended September 30, 2023, the Company had an immaterial amount that was included in cost of revenues to adjust the Company’s inventory and related firm purchase commitments to its net realizable value. For the nine months ended September 30, 2023, charges of $9.6 million were included in the cost of revenues to adjust the Company’s inventory and related firm purchase commitments to its net realizable value.
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Note 12. Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
Buildings
170,203
168,771
Leasehold improvements
42,012
41,686
Land
7,499
7,484
Machinery and equipment
278,200
259,484
Furniture, fixtures, and automobiles
34,795
31,943
Construction in progress
28,864
18,676
Total property, plant, and equipment
561,573
528,044
Less accumulated depreciation
(266,189)
(245,298)
Total property, plant, and equipment, net
Note 13. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following:
Accrued customer fees and rebates
59,949
16,702
Accrued payroll and related benefits
29,207
25,203
Accrued product returns, current portion
13,480
12,263
Accrued loss on firm purchase commitments
812
918
Other accrued liabilities
15,732
12,842
Total accrued liabilities
119,180
67,928
Accounts payable
34,088
25,438
Total accounts payable and accrued liabilities
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Note 14. Debt
Debt consists of the following:
2029 Convertible Notes
345,000
Term Loan
Wells Fargo Term Loan due June 2028
250,000
Mortgage Loans
Mortgage payable with East West Bank paid off June 2024
8,016
Other Loans and Payment Obligations
French government loans due December 2026
168
158
Line of Credit Facilities
Line of credit facility with China Merchant Bank due October 2026
Wells Fargo Revolving line of credit facility due June 2028
Line of credit facility with ICBC Bank due November 2033
Equipment under Finance Leases
485
616
Total debt
609,218
603,790
Less current portion of long-term debt
Less: Loan issuance costs
12,520
13,775
Credit Agreement
In September 2023, the Company issued the 2029 Convertible Notes, in the aggregate principal amount of $345.0 million in a private offering pursuant to Section 4(a)(2) and Rule 144A under the Securities Act of 1933, as amended. The Company used portions of the net proceeds from the 2029 Convertible Notes to (i) repay approximately $200.0 million of the Company’s borrowings under the Wells Fargo Term Loan and (ii) repurchase $50.0 million of the Company’s common stock.
In connection with the issuance of the 2029 Convertible Notes, the Company incurred approximately $10.8 million of debt issuance costs, which primarily consisted of underwriting, legal and other professional fees. Unamortized debt issuance costs related to the 2029 Convertible Notes were $8.8 million as of September 30, 2024. The fair value of the 2029 Convertible Notes was approximately $365.4 million as of September 30, 2024 based on level 2 inputs.
The 2029 Convertible Notes are general senior, unsecured obligations and bear an interest rate of 2.0% per year. The
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2029 Convertible Notes were issued pursuant to an indenture, dated September 15, 2023, or the Indenture, between the Company and U.S. Bank Trust Company, National Association, as trustee.
The 2029 Convertible Notes will rank senior in right of payment to all of the Company’s indebtedness that is expressly subordinated in right of payment to the 2029 Convertible Notes; equal in right of payment to all of the Company’s unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness, including any amount outstanding under the Company’s credit facilities; and structurally junior to all indebtedness and other liabilities of the Company’s current or future subsidiaries, including trade payables.
Interest is payable semi-annually in arrears on March 15 and September 15 of each year. The 2029 Convertible Notes may bear additional interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under the Indenture or if the 2029 Convertible Notes are not freely tradeable as required by the Indenture.
The 2029 Convertible Notes will mature on March 15, 2029, unless earlier converted, repurchased or redeemed.
Conversions of the 2029 Convertible Notes will be settled in cash up to the aggregate principal amount of the 2029 Convertible Notes to be converted, and cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, with respect to the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount.
Holders may convert their 2029 Convertible Notes at their option prior to the close of business on the business day immediately preceding December 15, 2028, in multiples of $1,000 principal amount, only under the following circumstances; (i) during any calendar quarter commencing after the calendar quarter ending on December 31, 2023 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the 2029 Convertible Notes on each applicable trading day, (ii) during the five business day period after any five consecutive trading day period in which the trading price, as defined in the Indenture, per $1,000 principal amount of the 2029 Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day, (iii) if the Company calls the 2029 Convertible Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date, and (iv) upon the occurrence of specified corporate events defined in the Indenture.
On or after December 15, 2028, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2029 Convertible Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
The Company may redeem the 2029 Convertible Notes, at its option, in whole or in part (subject to certain limitations), on or after September 20, 2026 and prior to the 41st scheduled trading day preceding the maturity date, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on and including the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2029 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The initial conversion rate is 15.8821 shares of the Company’s common stock per $1,000 principal amount of the 2029 Convertible Notes, which represents an initial conversion price of approximately $62.96 per share of common stock. The initial conversion price of $62.96 represents a premium of approximately 35.0% over the last reported sale price of the
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Company’s common stock on Nasdaq Global Select Market on September 12, 2023. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture.
If a fundamental change, as defined in the Indenture, occurs at any time prior to the maturity date, then, subject to certain conditions, holders of the 2029 Convertible Notes may require the Company to repurchase for cash all or any portion of their 2029 Convertible Notes at a repurchase price equal to 100% of the principal amount of the 2029 Convertible Notes to be repurchased, plus any accrued and unpaid interest. In addition, following certain specified corporate events or if the Company issues a notice of redemption, the Company will, under certain circumstances, increase the conversion rate for holders who convert their 2029 Convertible Notes in connection with such corporate event or during a redemption period.
Syndicated Line of Credit Facility with ICBC Bank – Due November 2033
In January 2024, the Company entered into a credit agreement with Industrial and Commercial Bank of China Limited, or ICBC Bank, acting as a lender and as agent for other lenders. The credit agreement allows the Company to borrow up to $40.0 million secured by equipment and buildings at ANP. The interest rate and other terms will be determined at the time of the borrowing, depending on the type of loan requested. The credit agreement expires in November 2033.
As of September 30, 2024, the Company borrowed approximately $13.6 million under the credit agreement. The loan bears interest at the prime rate as published by The People’s Bank of China minus 0.2%. Interest payments are due quarterly and repayment of the principal amount is biannual and begins in May 2026. As of September 30, 2024, the Company had $13.6 million of principal outstanding under this loan, which is recorded net of loan issuance costs of $0.8 million.
Interest Rate Swap Contract
As of September 30, 2024, the fair value of the loans listed above approximated their carrying amount based on Level 2 inputs, with the exception of the 2029 Convertible Notes. For the Wells Fargo Term Loan, the Company has entered into a fixed interest rate swap contract to exchange the variable interest rates for fixed interest rates. The interest rate swap contract is recorded at fair value in the other assets line in the condensed consolidated balance sheets. Changes in the fair values of interest rate swaps were $7.4 million loss and $1.6 million loss for the three and nine months ended September 30, 2024, respectively. Changes in the fair values of interest rate swaps were $4.9 million gain and $2.7 million gain for the three and nine months ended September 30, 2023, respectively.
Covenants
At September 30, 2024 and December 31, 2023, the Company was in compliance with all of its debt covenants.
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Note 15. 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
15.2
22.0
16.2
20.9
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 income tax assets will be realized. Ultimately, realization 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 the net deferred income tax assets of its France subsidiary, AFP, and its U.K. subsidiaries, AUK and IMS UK. The Company will continue to do so until the subsidiaries generate sufficient taxable income to realize their respective deferred income tax assets.
The Company records a valuation allowance on net deferred income tax assets in states where it files separately and will continue to do so until sufficient taxable income is generated to realize these state deferred income tax assets.
Note 16. Stockholders' Equity
Share Buyback Program
Pursuant to the Company’s existing share buyback program, the Company purchased 797,038 and 1,004,326 shares of its common stock, during the three and nine months ended September 30, 2024, for total consideration of $35.0 million and $43.5 million, respectively. The Company purchased 1,072,041 and 1,338,757 shares of its common stock during the three and nine months ended September 30, 2023, for total consideration of $50.0 million and $58.1 million, respectively.
The Company’s Board of Directors authorized a $50.0 million increase to the Company’s share buyback program in June 2024, and an additional $50.0 million increase in November 2024, which is expected to continue for an indefinite period of time. Since the inception of the program, the Company’s Board of Directors has authorized a total of $385.0 million in the share buyback program. 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.
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Amended and Restated 2015 Equity Incentive Plan
In February 2024, the Board of Directors approved the Company’s amended and restated 2015 Equity Incentive Plan, or the Amended 2015 Plan, which was subsequently approved by the Company’s stockholders, and accordingly, adopted by the Company in June 2024. The Amended 2015 Plan extends the terms of the 2015 Equity Incentive Plan, or the Original 2015 Plan, and makes certain other changes. The term of the Amended 2015 Plan will be extended indefinitely, however, the Company’s ability to grant incentive stock options thereunder will continue through February 2034.
As of September 30, 2024, the Company reserved an aggregate of 7,817,319 shares of common stock for future issuance under the Amended 2015 Plan.
2014 Employee Stock Purchase Plan
As of September 30, 2024, the Company has issued 1,246,323 shares of common stock under the ESPP and 753,677 shares of its common stock remain available for issuance under the ESPP.
In May 2024, the Company issued 54,189 shares at a purchase price of $35.98 per share under the ESPP. For the three and nine months ended September 30, 2024, the Company recorded ESPP expense of $0.2 million and $0.9 million, respectively. For the three and nine months ended September 30, 2023, the Company recorded ESPP expense of $0.2 million and $0.8 million, respectively.
Share-Based Award Activity and Balances
The Company accounts for share-based compensation payments in accordance with ASC 718, which requires measurement and recognition of compensation expense at fair value for all share-based payment awards made to employees and directors. Under these standards, the fair value of option awards and the option components of the ESPP 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. Compensation cost for all share-based payments granted with service-based graded vesting schedules is recognized using the straight-line method over the requisite service period.
The weighted-averages for key assumptions used in determining the fair value of options granted are as follows:
Average volatility
40.2
41.3
41.4
Average risk-free interest rate
4.4
4.2
4.1
Weighted-average expected life in years
6.3
6.2
Dividend yield rate
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A summary of option activity under all plans for the nine months ended September 30, 2024, is presented below:
Remaining
Aggregate
Exercise
Contractual
Intrinsic
Options
Price
Term (Years)
Value(1)
Outstanding as of December 31, 2023
7,762,298
19.70
Options granted
642,985
46.27
Options exercised
(1,611,117)
13.66
Options forfeited
(21,138)
35.10
Options expired
Outstanding as of September 30, 2024
6,773,028
23.61
5.12
168,760
Exercisable as of September 30, 2024
4,968,365
19.02
3.97
146,600
Vested and expected to vest as of September 30, 2024
6,617,113
23.24
5.04
167,346
For the three and nine months ended September 30, 2024, the Company recorded expense of $2.7 million and $9.0 million, respectively, related to stock options granted under all plans. For the three and nine months ended September 30, 2023, the Company recorded expense of $2.2 million and $7.5 million, respectively, related to stock options granted under all plans.
Information relating to option grants and exercises is as follows:
Weighted-average grant date fair value per share
21.49
21.89
16.76
Intrinsic value of options exercised
6,218
5,628
48,381
24,544
Cash received from options exercised
3,332
2,277
9,154
12,015
Total fair value of the options vested during the period
111
167
9,815
8,887
A summary of the status of the Company’s non-vested options as of September 30, 2024, and changes during the nine months ended September 30, 2024, are presented below:
Grant Date
Non-vested as of December 31, 2023
2,076,355
12.68
Options vested
(893,539)
10.98
16.19
Non-vested as of September 30, 2024
1,804,663
As of September 30 2024, there was $21.3 million of total unrecognized compensation cost, net of forfeitures, related to non-vested stock option based compensation arrangements granted under all plans. The cost is expected to be recognized over a weighted-average period of 2.6 years and will be adjusted for future changes in estimated forfeitures.
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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 four 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 vested. The RSUs do not have any voting or dividend rights prior to the issuance 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. For the three and nine months ended September 30, 2024, the Company recorded total expenses of $2.7 million and $8.8 million, respectively, related to RSU awards granted under all plans. For the three and nine months ended September 30, 2023, the Company recorded expenses of $2.2 million and $7.3 million, respectively, related to RSU awards granted under all plans.
As of September 30, 2024, there was $22.6 million of total unrecognized compensation cost, net of forfeitures, related to non-vested RSU-based compensation arrangements granted under all plans. The cost is expected to be recognized over a weighted-average period of 2.6 years and will be adjusted for future changes in estimated forfeitures.
Information relating to RSU grants and deliveries is as follows:
Total Fair Market
Total RSUs
Value of RSUs
Issued
Issued(1)
RSUs outstanding at December 31, 2023
920,376
RSUs granted
303,788
14,060
RSUs forfeited
(9,620)
RSUs vested(2)
(388,668)
RSUs outstanding at September 30, 2024
825,876
Share-based Compensation Expense
The Company recorded share-based compensation expense, which is included in the Company’s condensed consolidated statement of operations as follows:
1,133
1,004
4,583
3,868
249
777
649
3,710
2,975
11,239
9,323
504
452
2,137
1,780
Total share-based compensation
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Note 17. 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, 2024 were approximately $0.6 million and $2.0 million, respectively, compared to the prior year expense of $0.5 million and $1.7 million for the three and nine months ended September 30, 2023, respectively.
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 3.25% as of September 30, 2024 and December 31, 2023. The liability is included in other long-term liabilities in the accompanying condensed consolidated balance sheets. The plan is currently unfunded, and the benefit obligation under the plan was $2.8 million and $2.6 million at September 30, 2024 and December 31, 2023, respectively. The Company recorded an immaterial amount of expense under the plan for each of the three and nine months ended September 30, 2024 and 2023.
Non-qualified Deferred Compensation Plan
In December 2019, the Company established a non-qualified deferred compensation plan. The plan allows certain eligible participants to defer a portion of their cash compensation and provides a matching contribution at the discretion of the Company. The plan 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. The plan assets were valued at approximately $9.4 million and $6.8 million as of September 30, 2024 and December 31, 2023, respectively. The plan liabilities were valued at approximately $9.8 million and $7.1 million as of September 30, 2024, and December 31, 2023, respectively. The plan assets and liabilities are included in other long-term assets and other long-term liabilities, respectively, on the Company’s condensed consolidated balance sheets.
Note 18. Commitments and Contingencies
Purchase Commitments
As of September 30, 2024, the Company has entered into commitments to purchase equipment and raw materials for an aggregate amount of approximately $95.9 million.
Note 19. Related Party Transactions
Investment in Hanxin Pharmaceutical Technology, Co., Ltd.
The Company has an 11.5% ownership in Hanxin Pharmaceutical Technology Co., Ltd, or Hanxin, that is accounted for as an equity method investment. The Company maintains a seat on Hanxin’s board of directors, and Henry Zhang, the
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son of Dr. Jack Zhang, is an equity holder, the general manager, and the chairman of the board of directors of Hanxin. Additionally, Dr. Mary Luo and Dr. Jack Zhang, have an ownership interest in Hanxin through an affiliated entity. As a result, Hanxin is a related party.
Contract manufacturing agreement with Hanxin
The Company, has various contract manufacturing agreements with Hanxin and its subsidiaries, whereby Hanxin will develop several active pharmaceutical ingredients and finished products for the Chinese market and will engage the Company to manufacture the products on a cost-plus basis.
During the three and nine months ended September 30, 2024, the Company recognized $0.1 million and $0.5 million, respectively, of revenue from manufacturing services provided to Hanxin. During the three and nine months ended September 30, 2023, the Company recognized an immaterial amount of revenue from manufacturing services provided to Hanxin. As of September 30, 2024, the Company had $0.4 million of receivables from Hanxin.
Contract Research Agreement with Hanxin
In July 2022, the Company entered into a three-year contract research agreement with Hanxin, a related party, whereby Hanxin will develop Recombinant Human Insulin Research Cell Banks, or RCBs, for the Company and license the RCBs to the Company subject to a fully paid, exclusive, perpetual, transferable, sub-licensable worldwide license. Hanxin will also perform scale-up manufacturing process development using the RCBs for the Company.
During the three months ended September 30, 2024, the Company did not have any payments under the amended agreement and during the nine months ended September 30 2024, the Company paid $0.2 million under the amended agreement. During the three and nine months ended September 30, 2023, the Company paid $0.4 million and $1.0 million, respectively, under the amended agreement. As of September 30, 2024, the Company had an immaterial amount payable to Hanxin.
Supply Agreement with Letop
In November 2022, the Company, entered into a supply agreement with Nanjing Letop Biotechnology Co., Ltd., or Letop, which is considered a related-party due to an ownership stake of Henry Zhang. Under the terms of the supply agreement Letop will manufacture and deliver chemical intermediates to the Company on a cost-plus basis. The agreement is effective for three years and the total cost of the agreement shall not exceed $1.5 million, with payments adjusted based on the then current exchange rates.
During the three and nine months ended September 30, 2024, the Company paid an immaterial amount under this agreement. During the three months ended September 30, 2023, the Company did not have any payments under this agreement. During the nine months ended September 30, 2023, the Company paid $0.7 million, under this agreement. As of September 30, 2024, the Company did not have any amounts payable to Letop.
Primatene MIST® Distribution agreement with Hong Kong Genreach Limited
In August 2024, the Company entered into a distribution agreement with Hong Kong Genreach Limited, or Genreach, a wholly owned subsidiary of Hanxin, a related party. Per the terms of the agreement, the Company has appointed Genrearch as the exclusive distributor to market and sell Primatene MIST® in Mainland China, Taiwan, Hong Kong, and Macau in the Greater China region. Genreach will be responsible for obtaining any and all regulatory approvals in the region for Primatene MIST®.
The term of the agreement is ten years, with both parties having termination rights without cause after the completion of the second contract year.
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Note 20. Litigation
Employment Litigation
On April 15, 2024, a former employee (“Plaintiff”) initiated an employment litigation against Amphastar and IMS by filing a complaint, as amended, having individual and class action claims for alleged violations of the California Labor Code pertaining to wage and hour, and other state laws. This complaint was filed in the Superior Court of California for the County of Los Angeles. In the complaint, the Plaintiff is seeking damages and related remedies under California Law, as well as various penalty payments under the California Labor Code. The Company intends to vigorously defend itself against the class action complaint.
On June 20, 2024, a former employee (“Plaintiff”) initiated an employment litigation against Amphastar, IMS and Roth Staffing Companies L.P. by filing a complaint having individual and class action claims for alleged violations of the California Labor Code pertaining to wage and hour, and other state laws. This complaint was filed in the Superior Court of California for the County of Los Angeles. In the complaint, the Plaintiff is seeking damages and related remedies under California Law, as well as various penalty payments under the California Labor Code. The Company intends to vigorously defend itself against the complaint.
Albuterol sulfate Inhalation Aerosol Patent Litigation
On July 25, 2024, Teva Branded Pharmaceutical Products R&D, Inc. (“Teva Branded”), Norton (Waterford) Ltd. (“Norton”), and Teva Pharmaceuticals USA, Inc. (“Teva USA”), collectively referred to as (“Plaintiff”) filed a Complaint in the United States District Court for the District of Delaware (“Delaware Court”) against the Company for infringement of U.S. Patent No. 9,463,289, with regard to Amphastar’s ANDA No. 212447, for approval to manufacture and sell generic version of ProAir® HFA (albuterol sulfate) Inhalation Aerosol. On October 21, 2024, Plaintiff amended its complaint against the Company to include additional claims for infringement of U.S. Patent No. 9,808,587 and 10,561,808, with regard to Amphastar’s ANDA No. 212447, for approval to manufacture and sell generic version of ProAir® HFA (albuterol sulfate) Inhalation Aerosol. The Company intends to vigorously defend this patent lawsuit.
Other litigation
The Company is subject to various claims, arbitrations, investigations, and lawsuits from time to time arising in the ordinary course of business. In addition, third parties may, from time to time, assert claims against the Company in the forms of letters and other communications. Currently, the Company is subject to a lawsuit for a property and casualty claim, for which it has recorded an estimated liability of $6.0 million within accounts payable and other accrued liabilities on the condensed balance sheet as of September 30, 2024. This estimated liability is fully covered by the Company’s insurance policies. The $6.0 million insurance recovery related to this claim is recorded within prepaid expenses and other current assets on the condensed consolidated balance sheet as of September 30, 2024.
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, 2023, particularly in Item 1A. “Risk Factors”.
Overview
We are a bio-pharmaceutical company focusing 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 25 products.
Our largest products by net revenues currently include BAQSIMI®, Primatene MIST®, glucagon, epinephrine, lidocaine, enoxaparin sodium, and phytonadione.
We are currently developing a portfolio of generic abbreviated new drug applications, or ANDAs, biosimilar insulin product candidates and proprietary product candidates, which are in various stages of development and target a variety of indications. Four of the ANDAs are currently on file with the FDA.
To complement our internal growth and expertise, we have made several strategic acquisitions of companies, products and technologies. These acquisitions collectively have strengthened our injectable, inhalation, and intra-nasal 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.
Macroeconomic Trends and Uncertainties
Recent uncertain macroeconomic conditions and worldwide events, including extended periods of heightened inflation, fluctuating interest rates and instability in the financial systems, ongoing geopolitical conflicts such as the Russia-Ukraine and Middle East conflicts, as well as rising healthcare costs continue to pose challenges to our business.
See the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, for further discussion of the potential adverse impact of unfavorable global and geopolitical economic conditions on our business, results of operations and financial conditions.
Recent Developments
BAQSIMI® Acquisition
In connection with the acquisition of BAQSIMI® in June 2023, we entered into a Transition Service Agreement, or the TSA, with Eli Lilly & Company, or Lilly, pursuant to which Lilly agreed, for a period of time not to exceed 18 months to provide certain services to us to support the transition of the BAQSIMI® operations, including with respect to the conduct of certain clinical, regulatory, medical affairs, and commercial sales channel activities. Revenues from the sales of BAQSIMI® under the TSA with Lilly during the transition period were recognized on a net basis, similar to a royalty arrangement. The impact of this revenue recognition method resulted in lower reported revenues relative to the revenue that would have been reported had we recognized gross revenues from sales of BAQSIMI®.
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Throughout 2024, we assumed distribution responsibilities from Lilly to our customers in the United States, which comprises approximately 80% of BAQSIMI® worldwide revenues, as well as certain other countries. As a result, we started recognizing gross revenues and cost of revenues from the sales of BAQSIMI® in these countries, which is classified as product revenue, net and cost of revenue, respectively on the condensed consolidated statement of operations. The assumption of distribution in countries outside the United States will occur on a country-by-country basis once the marketing authorizations for each territory have been transferred to us, we have set up distribution agreements, and we have obtained sufficient inventory.
For more information regarding our acquisition of BAQSIMI®, see “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 3. BAQSIMI® Acquisition.”
Business Segments
As of September 30, 2024, our performance is assessed and resources are allocated based on the following two reportable segments: (1) finished pharmaceutical products and (2) Active Pharmaceutical Ingredient, or API, products. The finished pharmaceutical products segment manufactures, markets and distributes BAQSIMI®, Primatene MIST®, epinephrine, glucagon, phytonadione, lidocaine, enoxaparin, naloxone, as well as various other critical and non-critical care drugs. The API segment manufactures and distributes Recombinant Human Insulin, or 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 – Note 6. Segment Reporting.”
Results of Operations
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
Net revenues
Change
Dollars
39,692
27
(2,728)
(65)
Total product revenues, net
36,964
(26,306)
(92)
10,658
84,208
66,867
17,341
5,065
5,286
(221)
(4)
Total cost of revenues
17,120
(6,462)
(6)
as % of net revenues
53
60
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The increase in net revenues of the finished pharmaceutical products for the three months ended September 30, 2024 was due to the following changes:
Finished pharmaceutical products net revenues
N/A
(2,722)
(9)
1,221
1,142
362
4,272
57
(2,087)
(27)
(678)
(14)
(2,227)
Product Revenues, net
Throughout 2024, we assumed distribution responsibilities for BAQSIMI® from Lilly to our customers in the United States, and certain other countries. As a result, $40.4 million of our third quarter BAQSIMI® sales were recognized separate from the cost of revenues, similar to our other products. During the third quarter of 2024, while the Company was transitioning from Lilly labeled product to Amphastar labeled product, our supplier was unable to supply Amphastar labeled product in 14 European countries on a timely basis, which limited sales by approximately $2.0 million to $3.0 million.
For more information, see “Part I – Item 1. Financial Statements – Notes to the Condensed Consolidated Financial Statements – Note 4. Revenue Recognition.”
Primatene MIST® sales increased primarily due to an increase in unit volumes. The increase in sales of epinephrine was primarily due to sales of epinephrine pre-filled syringes in Canada, which we began this quarter. The increase in sales of phytonadione was primarily driven by an increase in unit volume, as a result of an increase in demand. The decrease in sales of glucagon was due to a decrease in unit volumes as a result of a move to ready to use glucagon products such as BAQSIMI®, as well as a decrease in average selling price. The decrease in sales of enoxaparin and naloxone was primarily due to a decrease in unit volumes. The decrease in other finished pharmaceutical products was primarily due to lower unit sales of atropine and calcium chloride, as a result of other suppliers returning to their historical distribution levels. This decrease was partially offset by higher unit volumes of sodium bicarbonate due to an increase in capacity at our subsidiary, International Medication Systems, Limited, as well as the launch of albuterol in August 2024. Between $2.0 million and $4.0 million in sales expected to be recognized in the third quarter were not recognized due to delayed shipments caused by the aftermath of Hurricane Helene. Revenues for these shipments are expected to be recognized in the fourth quarter.
We anticipate that sales of naloxone and enoxaparin will continue to fluctuate in the future due to competitive dynamics. We also anticipate that sales of epinephrine and other finished pharmaceutical products will continue to fluctuate depending on the ability of our competitors to supply market demands.
Sales of API primarily depend on the timing of customer purchases, and will be lower for the next two years because MannKind, our largest RHI customer, is in the process of qualifying our upgraded RHI, which uses our internally produced inclusion bodies made at AFP. Until they complete this process, we anticipate sales of RHI will be at levels lower than historical.
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Other Revenues
Other revenues include the portion of BAQSIMI® sales made by Lilly on our behalf under the TSA which amounted to $2.4 million and $28.7 million during the three months ended September 30, 2024 and 2023, respectively, based on total BAQSIMI® sales of $6.4 million and $48.7 million, respectively, as reported to us by Lilly, which was recognized on a net basis, similar to a royalty arrangement. The BAQSIMI® sales made by Lilly on our behalf under the TSA have decreased throughout 2024, due to our assumption of distribution responsibilities for BAQSIMI® from Lilly to our customers in the United States, and certain other countries. We recognized these sales within product net revenues.
Backlog
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. As of September 30, 2024, we experienced an immaterial amount of backlog for various products, primarily as a result of competitor shortages and supplier constraints. 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
The decrease in gross margins during the three months ended September 30, 2024, is primarily due to an increase in labor costs and certain component costs, as well as charges included in cost of revenues to adjust our inventory and related purchase commitments to their net realizable value. As a result of the TSA with Lilly, the portion of revenues relating to BAQSIMI® sales made by Lilly on our behalf are reported on a net basis, similar to a royalty arrangement with no amount reported as cost of revenues. Therefore, in the prior year, BAQSIMI® sales did not have any associated cost of revenues, which increased the gross margins.
The decrease in gross margins was partially offset by an increase in sales of Primatene MIST® and epinephrine, which are higher-margin products.
We are currently experiencing increased costs for labor as well as certain APIs and purchased components. However, we believe that this trend will be offset longer term by increased sales of our higher-margin products, including BAQSIMI®, Primatene MIST®, vasopressin, ganirelix, and albuterol, and new products we anticipate launching.
Selling, distribution and marketing, and general and administrative
2,588
2,167
The increase in selling, distribution and marketing expenses was primarily due to expenses related to the expansion of our sales and marketing efforts related to BAQSIMI®. The increase in general and administrative expense was primarily due to an increase in salary and personnel-related expenses and expenses related to BAQSIMI®.
We expect that selling, distribution and marketing expenses will continue to increase due to the increase in marketing expenditures for BAQSIMI® and Primatene MIST®. Legal fees may fluctuate from period to period due to the timing of patent challenges and other litigation matters.
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Salaries and personnel-related expenses
7,768
7,007
761
11
Pre-launch inventory
222
460
(238)
(52)
Clinical trials
9
673
(664)
(99)
FDA fees
34
(11)
(24)
Materials and supplies
5,852
3,664
2,188
Depreciation
3,278
2,452
826
Other expenses
3,914
2,363
1,551
66
Total research and development expenses
4,413
The increase in research and development expenses is primarily due to an increase in expenditure on raw materials and components for our insulin pipeline products, as well as an increase in salary and personnel-related expenses. This was partially offset by a decrease in clinical trial expense, due to the timing of clinical trials.
Research and development expenses 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 trials costs related to our insulin 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.
Non-operating income (expenses), net
Non-operating income (expenses)
1,225
102
7,004
(51)
(8,553)
(247)
(324)
The change in non-operating income (expenses), net is primarily a result of:
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(6,771)
(48)
Effective tax rate
Our effective tax rate for the three months ended September 30, 2024 decreased in comparison to the three months ended September 30, 2023, primarily due to differences in pre-tax income positions and timing of discrete tax items. For more information regarding our income taxes, see “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 15. Income Taxes.”
Beginning in 2024, many countries are implementing some or all of the Organization for Economic Co-operation and Development’s Inclusive Framework on Base Erosion and Profit Shifting Two-Pillar in response to tax challenges arising from the digitalization of the global economy. While we continue to evaluate those countries’ implementations, we do not expect those implementations to have a material impact on our consolidated financial statements in 2024.
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
92,606
(4,359)
(39)
88,247
(9,093)
(32)
79,154
236,433
192,500
43,933
23
21,804
18,809
2,995
46,928
32,226
55
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The increase in net revenues of the finished pharmaceutical products for the nine months ended September 30, 2024, was due to the following changes:
214
0
18,388
8,240
(1,717)
(3)
(7,457)
(29)
(2,650)
(18)
(6,499)
Throughout 2024, we assumed distribution responsibilities for BAQSIMI ® from Lilly to our customers in the United States, and certain other countries. As a result, $85.1 million of our BAQSIMI® sales for the nine months ended September 30, 2024, are recognized separate from the cost of revenues, similar to our other products.
The increase in sales of epinephrine was primarily due to an increase in unit volumes, as a result of an increase in demand caused by other supplier shortages. Primatene MIST® sales increased primarily due to an increase in unit volumes. The decrease in sales of enoxaparin and naloxone was primarily due to a decrease in unit volumes. The decrease in other finished pharmaceutical products was primarily due to lower unit sales of atropine and calcium chloride, as a result of other suppliers returning to their historical distribution levels, as well as lower unit sales of medroxyprogesterone, as our API supplier discontinued making the active ingredient, which resulted in a halt of sales of medroxyprogesterone after the third quarter of 2023. Subsequently, we qualified our subsidiary, ANP, to manufacture this API, and in September 2024, we re-launched the product. This decrease was partially offset by higher unit volumes of dextrose and sodium bicarbonate due to an increase in demand caused by other supplier shortages, as well as the launch of albuterol in August 2024.
Sales of API primarily depend on the timing of customer purchases, and will be lower for the next two years because MannKind, our largest RHI customer, is in the process of qualifying our upgraded Recombinant Human Insulin, or RHI, which uses our internally produced inclusion bodies made at AFP. Until they complete this process, we anticipate sales of RHI will be at levels lower than historical.
Other revenues include the portion of BAQSIMI® sales made by Lilly on our behalf under the TSA which amounted to $19.6 million and $28.7 million during the nine months ended September 30, 2024 and 2023, respectively, based on total BAQSIMI® sales of $38.6 million and $48.7 million, respectively, as reported to us by Lilly, which was recognized on a net basis, similar to a royalty arrangement. The BAQSIMI® sales made by Lilly on our behalf under the TSA have
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decreased throughout 2024, due to our assumption of distribution responsibilities for BAQSIMI® from Lilly to our customers in the United States, and certain other countries. We recognized these sales within product net revenues.
The decrease in gross margins during the nine months ended September 30, 2024, is primarily due to an increase in depreciation and amortization expenses related to the acquired BAQSIMI® assets, an increase in labor costs and certain component costs, as well as charges included in cost of revenues to adjust our inventory and related purchase commitments to their net realizable value. As a result of the TSA with Lilly, the portion of revenues relating to BAQSIMI® sales made by Lilly on our behalf are reported on a net basis, similar to a royalty arrangement with no amount reported as cost of revenues. Therefore, in the prior year, BAQSIMI® sales did not have any associated cost of revenues, which increased the gross margins.
The decrease in gross margins was partially offset by the increase in sales of Primatene MIST® and epinephrine, which are higher-margin products.
We are currently experiencing increased costs for labor as well as certain APIs and purchased components. However, we believe that this trend will be offset longer term by increased sales of our higher-margin products, including BAQSIMI®, Primatene MIST®, vasopressin, ganirelix, albuterol, and new products we anticipate launching.
7,144
35
5,364
14
23,898
21,653
2,245
10
292
3,430
(3,138)
(91)
1,333
142
1,191
NM
12,334
13,556
(1,222)
9,206
7,282
1,924
8,487
6,799
1,688
2,450
The increase in research and development expenses is primarily due to an increase in salary and personnel-related expenses, as well as an increase in FDA filing fees as we filed the ANDA for AMP-018 in the second quarter of 2024.
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This was partially offset by a decrease in clinical trials expense, as well as a decrease in materials and supply expense, as a result of a ramp-up of expenses in 2023 for our insulin and inhalation pipeline products.
5,164
164
(6,216)
(428)
(28)
Total non-operating income (expense), net
(1,480)
(3,486)
(13)
Our effective tax rate for the nine months ended September 30, 2024 decreased in comparison to the nine months ended September 30, 2023, primarily due to the timing of discrete tax items partially offset by differences in pre-tax income positions. For more information regarding our income taxes, see “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 15. Income Taxes.”
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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 and China, including a significant increase in capital expenditures over the next few years. We plan to fund this facility expansion primarily with cash flows from operations. We may also become subject to cash obligations of up to an aggregate of $575.0 million that are contingent upon certain net sales milestones related to the BAQSIMI® acquisition. No milestone payments have been made through the date of this filing. 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, 2024, our foreign subsidiaries collectively held $9.5 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 date of filing of this Quarterly Report on Form 10-Q. 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.
Working capital increased $122.7 million to $386.9 million at September 30, 2024, compared to $264.2 million at December 31, 2023.
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, 2024 and 2023:
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 $184.4 million for the nine months ended September 30, 2024, which included net income of $121.6 million. Non-cash items comprised primarily of $47.8 million of depreciation and amortization, which includes $21.0 million related to depreciation of property, plant and equipment; $18.5 million related to amortization of product rights, trademarks and patents; $3.0 million related to amortization of operating lease right-of-use assets; $5.3 million related to amortization of discounts, premiums, and debt issuance costs; and share-based compensation expense of $18.7 million.
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Additionally, for the nine months ended September 30, 2024, there was a net cash outflow from changes in operating assets and liabilities of $6.0 million, which resulted primarily from an increase in accounts receivables, an increase in inventories, as well as an increase in prepaid expenses and other assets, which was partially offset by an increase in accounts payable and accrued liabilities. The increase in accounts receivables was primarily due to the increase in sales. The increase in inventories was primarily due to the increased purchases of certain raw materials and components. Accounts payable and accrued liabilities increased primarily due to the increase in accrued customer fees and rebates associated with BAQSIMI® sales, as we continue to assume distribution responsibilities for BAQSIMI® from Lilly to our customers in the United States and certain other countries.
Net cash provided by operating activities was $159.6 million for the nine months ended September 30, 2023, which included net income of $101.4 million. Non-cash items comprised primarily of $36.5 million of depreciation and amortization, $15.6 million of share-based compensation expense, and an impairment charge of $2.7 million relating to the impairment of the IMS (UK) international product rights. Additionally, for the nine months ended September 30, 2023, there was a net cash inflow from changes in operating assets and liabilities of $2.5 million, which resulted from an increase in accounts payable and accrued liabilities, which was partially offset by an increase in accounts receivables and inventories. Accounts payable and accrued liabilities increased primarily due to the timing of payments. The increase in accounts receivables was primarily due to the timing of the payment from Lilly for BAQSIMI® during the quarter, which was received subsequent to the quarter end.
Investing Activities
Net cash used in investing activities was $89.3 million for the nine months ended September 30, 2024, primarily due to the payment of $129.0 million relating to the BAQSIMI® acquisition, $28.6 million in purchases of property, plant, and equipment, which included $10.2 million incurred in the United States, $2.4 million in France, and $15.9 million in China. This was partially offset by a net cash inflow of $71.0 million from sales and purchases of investments during the period.
Net cash used in investing activities was $546.1 million for the nine months ended September 30, 2023, primarily as a result of $506.4 million relating to the BAQSIMI® acquisition, $28.7 million in purchases of property, plant, and equipment, which included $19.5 million incurred in the United States, $1.7 million in France, and $7.5 million in China.
Financing Activities
Net cash used in financing activities was $47.1 million for the nine months ended September 30, 2024, primarily as a result of $43.5 million used to purchase treasury stock and $8.2 million used to settle share-based compensation awards under our equity plan and for tax payments related to the net share settlement of options exercised. Additionally, we made $8.1 million in principal payments on our long-term debt, primarily as a result of paying off the mortgage loan with East West Bank. This was partially offset by $13.6 million of net proceeds from borrowings on our line of credit in China.
Net cash provided by financing activities was $501.2 million for the nine months ended September 30, 2023, primarily due to our entry into the Credit Agreement with Wells Fargo and the issuance of the 2029 Convertible Notes, which was
partially offset by $268.5 million in principal payments of our long-term debt and $24.6 million in debt issuance cost. Additionally, we received $7.4 million in net proceeds from the settlement of share-based compensation awards under our equity plan, which was partially offset by the $58.4 million used to purchase treasury stock.
Indebtedness
For more information regarding our outstanding indebtedness, see “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 14. Debt”.
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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 condensed consolidated financial statements and 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, 2023. There have been no material changes to our critical accounting policies as compared to the critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2023.
For information regarding recent accounting pronouncements, see “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 2. Summary of Significant Accounting Policies”.
Government Regulation
Our products and facilities are subject to regulation by a number of federal and state governmental agencies. The FDA, in particular, maintains oversight of the formulation, manufacture, distribution, packaging, and labeling of all of our products. The Drug Enforcement Administration, or DEA, maintains oversight over our products that are considered controlled substances.
From February 20 through March 1, 2024, our Amphastar facility in Rancho Cucamonga, California was subject to pre-approval and cGMP inspection by the FDA. The inspection included a review of compliance with FDA regulations to support one of our pending applications as well as to compliance with Good Manufacturing Practices. The inspection resulted in several observations on Form 483. We responded to those observations. We believe that our response to the observations will satisfy the requirements of the FDA and that no significant further actions will be necessary.
From July 15 through July 19, 2024, our Armstrong facility in Canton, Massachusetts was subject to a pre-approval inspection by the FDA. The inspection included review of compliance of our analytical laboratory with FDA regulations to support one of our pending applications. The inspection resulted in several observations on Form 483. We responded to those observations. We believe that our response to the observations will satisfy the requirements of the FDA and that no significant further actions will be necessary.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Except for the broad, ongoing macroeconomic challenges facing 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, 2023. 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 (the “Exchange Act”), 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 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, 2024, 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 – Note 20. 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, 2023, filed with the SEC on February 29, 2024.
We or the third parties upon whom we depend may be adversely affected by earthquakes or other natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
The facilities we use for our headquarters, laboratory and research and development activities are located in earthquake-prone areas of California. A significant percentage of the facilities we use for our manufacturing, packaging, warehousing, distribution and administration offices are also located in these areas. Earthquakes or other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects. Additionally, we currently rely on third parties whose operations may be disrupted by natural disasters. For example, the aftermath of Hurricane Helene caused us to experience delays in shipments of certain products.
If a natural disaster, power outage or other event occurred that prevented us or the third parties upon whom we depend from using all or a significant portion of our facilities, that damaged critical infrastructure, such as our or third parties’ manufacturing facilities, or that otherwise disrupted operations of ours or those of third parties, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans.
Jack Y. Zhang and Mary Z. Luo have each pledged shares of our common stock to secure funds borrowed under existing credit lines from three financial institutions. Each of the lenders has varying rights as a lender, including one which has the right to conduct a forced sale at its sole discretion. An action by one of the lenders could include a sale of certain shares of our common stock pledged as collateral, the sale of which could cause the price of our common stock to decline. An action to cure and cover indebtedness by any one of the lenders could also have other negative impacts on our business.
Since September 2015, UBS Bank USA, or UBS, has made extensions of credit up to the amount of $8.0 million to Applied Physics & Chemistry Laboratories, Inc., or APCL, which is controlled by Jack Y. Zhang and Mary Z. Luo. In May 2019, the credit amount was increased to $11.0 million. Since February 2017, UBS Group AG, or UBS AG, has also provided an extension of credit up to the amount of $8.0 million to APCL. In 2021, the outstanding UBS AG credit line was transferred to UBS’s Utah location due to an organizational change and in June 2024, the credit line with UBS was increased to $11.9 million. As of September 30, 2024, the total outstanding UBS combined credit lines were $11.9 million. The UBS credit lines are secured by a pledge of 400,000 shares of our common stock currently held by APCL. Interest on the loans accrues at market rates. UBS has an unlimited and unilateral right to call each of the credit lines for any reason whatsoever.
In October 2017, East West Bank, or East West, entered into an agreement with Drs. Zhang and Luo whereby East West would loan them up to $5.0 million. In March 2023, East West amended the loan to increase the loan amount to $8.0 million. As of September 30, 2024, the loan is secured by a pledge of 500,000 shares of our common stock held by Dr. Zhang. Interest on the loan accrues at market rates. East West has acceleration rights to protect itself in the event of a default.
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In June 2024, Cathay Bank entered into an agreement with APCL and Dr. Luo, whereby Cathay Bank would loan them up to $20.0 million. As of September 30, 2024, the loan is secured by a pledge of 1,000,000 shares of our common stock held by APCL and Dr. Luo. Interest on the loan accrues at market rates. Cathay Bank has acceleration rights to protect itself in the event of a default.
We are not a party to these loans, which are full recourse against APCL and each of Drs. Zhang and Luo, respectively, and are secured by pledges of a portion of the shares of our common stock currently held by APCL and each of Drs. Zhang and Luo.
In 2021, we created a pledging policy to restrict the pledging of shares by our executive officers and directors. The policy prohibits our executive officers and directors from entering into any transaction whereby the executive officer or director, directly or indirectly, pledges, hypothecates, or otherwise encumbers more than twenty (20) percent of shares of common stock held by the individual or more than five (5) percent of our total outstanding shares of common stock as of the date of the transaction, whichever is lower, as collateral for indebtedness. This restriction extends to any hedging or similar transaction designed to decrease the risks associated with holding our securities. For already existing pledges made by executive officers and directors, those existing pledges must be reduced to no more than twenty (20) percent of the shares of our common stock held by such individual as collateral for indebtedness within three (3) years of December 31, 2021. As a result of this policy, Drs. Zhang and Luo reduced their total number of pledged shares to 1,900,000 in June 2024 from 2,350,000 in May 2022, 3,182,898 in February 2022, and 8,582,898 in February 2021.
If the price of our common stock declines, Drs. Zhang and Luo may be forced by these financial institutions to provide additional collateral for the loans or to sell shares of our common stock held by them in order to remain within the margin limitations imposed under the terms of their loans. Furthermore, the pledged shares of our common stock may be acquired and sold by the lenders. These factors may limit Drs. Zhang and Luo’s ability to either pledge additional shares of our common stock or sell shares of our common stock held by them as a means to avoid or satisfy a margin call with respect to their pledged shares of our common stock in the event of a decline in our stock price that is large enough to trigger a margin call. Any significant sales of shares of our common stock by one or more of these three lenders could cause the price of our common stock to decline further.
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, 2024
277,955
39.55
August 1 - August 31, 2024
247,158
44.48
September 1 - September 30, 2024
271,925
47.64
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
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ITEM 5. OTHER INFORMATION
Securities Trading Plans of Directors and Executive Officers
During our last fiscal quarter, none of our officers or directors, as defined in Rule 16a-1(f), adopted or terminated a Rule 10b5-1 trading arrangement, or a non-Rule 10b5-1 trading arrangement, each as defined in Regulation S-K Item 408.
ITEM 6. EXHIBITS
ExhibitNo.
Description
10.1*
Distribution Agreement by and between Armstrong Pharmaceuticals, Inc. and Hong Kong Genreach Limited, dated August 28, 2024
31.1
Certification pursuant to Rule 13a-14(a) or 15d-14a of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of pursuant to Rule 13a-14(a) or 15d-14a of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1#
Certification of Principal 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 Principal 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.
Certain confidential information contained in this exhibit was omitted by means of marking such portions with brackets because the identified confidential information (i) is not material and (ii) is of the type that the registrant treats as private or confidential. In addition, certain schedules (or similar attachments) have been omitted from this exhibit pursuant to Item 601(a)(5) of Regulation S-K.
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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 7, 2024
/s/ WILLIAM J. PETERS
William J. Peters
Chief Financial Officer(Principal Financial and Accounting Officer)
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