Item 7. 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 audited consolidated financial statements and the related notes thereto included in Item 8 under the heading “Financial Statements and Supplementary Data.” 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 Annual Report on Form 10-K, particularly in Item 1A, “Risk Factors.”
In this section, we generally discuss the results of our operations for the year ended December 31, 2023, compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022, to the year ended December 31, 2021, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023, which discussion is hereby incorporated herein by reference.
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 glucagon, Primatene MIST®, epinephrine, lidocaine, BAQSIMI®, and phytonadione. In April 2022, the FDA approved our ganirelix acetate injection 250mg/0.5mL prefilled syringe, which we launched in June 2022. In July 2022, the FDA approved our vasopressin injection, USP 20 Units/mL, 1 mL single-dose vial, which we launched in August 2022. In May 2022, the FDA approved our regadenoson injection, 0.08mg/mL, 5mL, single-dose prefilled syringe, which we launched in April 2023. On June 30, 2023, we completed our acquisition of BAQSIMI®. BAQSIMI® is the first and only nasally administered glucagon for the treatment of severe hypoglycemia in people with diabetes and is currently available in 27 international markets.
In March 2023, the FDA approved our naloxone hydrochloride nasal spray 4mg, REXTOVYTM, which we plan to launch in the first quarter of 2024.
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 and one of the biosimilar insulin candidates 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 core injectable and inhalation product technology infrastructure by providing additional manufacturing, marketing, and research and development capabilities, including the ability to manufacture raw materials, API, and other components for our products.
Macroeconomic Trends and Uncertainties
The Russia-Ukraine conflict and resulting sanctions and other actions against Russia have led to uncertainty and disruption in the global economy. Although the conflict has not had a direct material adverse impact on our revenues or other financial results, one of our insulin API customers in Western Europe, that previously bought our product and resold it into Russia, did not purchase API from us in 2022 and has not purchased from us in 2023. We are closely monitoring the events of the Russia-Ukraine conflict and its impact on Europe and throughout the rest of the world. It is not clear at this time how long the conflict will endure, or if it will escalate further, which could further compound the adverse impact to the global economy and consequently affect our results of operations.
Certain other worldwide events and macroeconomic factors, such as international trade relations, new legislation and regulations, taxation or monetary policy changes, public sector budgetary cycles and funding authorization in the United
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States, political and civil unrest, global conflicts such as the Middle East conflict, supply chain disruptions, inflationary pressures, and rising interest rates, among other factors, also increase volatility in the global economy. For example, the United States has recently experienced historically high levels of inflation. The existence of inflation in the United States, and global economy has and may continue to result in higher interest rates and capital costs, increased costs of labor, weakening exchange rates and other similar effects.
See Item 1A, “Risk Factors” for further discussion of the possible impact of the Russia-Ukraine conflict and other macroeconomic factors on our business.
Recent Developments
BAQSIMI® Acquisition
On June 30, 2023, we completed our acquisition of BAQSIMI® pursuant to an Asset Purchase Agreement, or the Purchase Agreement, with Lilly and Amphastar Medication Co., LLC, a wholly owned subsidiary of Amphastar, dated April 21, 2023. In connection with the closing of the transaction, or the Closing, we paid Lilly $500.0 million in cash. In addition, we are required to pay Lilly a $125.0 million guaranteed payment on the first anniversary of the closing. We may also be required to pay additional contingent consideration of up to $450.0 million to Lilly based on the achievement of certain milestones.
On June 30, 2023, in conjunction with our acquisition of BAQSIMI®, we entered into a $700.0 million syndicated credit agreement, or the Credit Agreement by and among the Company, certain subsidiaries of the Company, as guarantors, certain lenders, and Wells Fargo, as Administrative Agent, (in such capacity, Agent), Swing Line Lender and L/C Issuer.
The Wells Fargo Term Loan matures on June 30, 2028. The Wells Fargo Term Loan was fully funded on June 30, 2023.
The Credit Agreement provides for a senior secured revolving credit facility, or the Revolving Credit Facility, in an aggregate principal amount of $200.0 million, with a $15.0 million letter of credit sublimit and a $15.0 million swingline loan sublimit. The Revolving Credit Facility matures on June 30, 2028. In September 2023, we repaid $200.0 million of the Wells Fargo Term Loan with the proceeds from the issuance of the 2029 Convertible Notes. In October 2023, we repaid an additional $50.0 million of the Wells Fargo Term Loan. As of December 31, 2023, we had no borrowings outstanding under the Revolving Credit Facility.
Revenues from the sales of BAQSIMI® under the TSA with Lilly during the year ended December 31, 2023, 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®. Once we assume distribution responsibilities to our customers, we will begin recognizing gross revenues and cost of revenues from sales of BAQSIMI®, which will be classified as product revenues, net and cost of revenues, respectively. The assumption of distribution activities will occur on a country by country basis throughout 2024, once the marketing authorizations for each territory have been transferred to us, we have setup distribution agreements, and we have obtained sufficient inventory.
For more information regarding our acquisition of BAQSIMI®, see “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 4. BAQSIMI® Acquisition.”
Business Segments
As of December 31, 2023, our performance is assessed and resources are allocated based on the following two reportable segments: (1) finished pharmaceutical products and (2) API products. The finished pharmaceutical products segment manufactures, markets and distributes Primatene MIST®, epinephrine, glucagon, phytonadione, lidocaine, enoxaparin, naloxone, as well as various other critical and non-critical care drugs. Revenues from the sale of BAQSIMI® are also accounted for as a component of the finished pharmaceutical product segment. The API segment manufactures and distributes RHI API and porcine insulin API for external customers and internal product development. Information reported herein is consistent with how it is reviewed and evaluated by our chief operating decision maker. Factors used to identify our segments include markets, customers and products.
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For more information regarding our segments, see “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 7. – Segment Reporting Information.”
Results of Operations
Year ended December 31, 2023 compared to year ended December 31, 2022
Net revenues
Year Ended December 31, Change
(in thousands)
Net revenues
Other revenues 51,157 — 51,157 N/A
Cost of revenues
as % of net revenues 54 % 50 %
The increase in net revenues of finished pharmaceutical products for 2023 was primarily due to the following changes:
Year Ended December 31, Change
(in thousands)
Finished pharmaceutical products net revenues
Product Revenues, net
The increase in sales of glucagon was primarily due to an increase in unit volumes, as a result of two competitors discontinuing their glucagon injection products at the end of 2022. Primatene MIST® sales increased primarily due to an increase in average selling price. The increase in sales of epinephrine and lidocaine was primarily due to an increase in unit volumes, as a result of an increase in demand caused by supplier shortages. The decrease in sales of phytonadione was due to a decrease in unit volumes, as a result of increased competition. The decrease in sales of enoxaparin was primarily due to a decrease in unit volumes. The decrease in sales of naloxone was due to a decrease in unit volumes reducing sales by $4.6 million, as well as a lower average selling price reducing sales by $2.7 million as a result of increased competition. The increase in other finished pharmaceutical products was primarily due to higher unit volumes of dextrose, atropine, calcium chloride, and sodium bicarbonate, due to increased demand caused by supplier shortages, as well as a full period of sales for ganirelix and vasopressin, which were launched in June 2022 and August 2022, respectively, and the launch of regadenoson in April 2023.
We anticipate that sales of naloxone and enoxaparin will continue to fluctuate in the future due to competitive dynamics.
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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 medroxyprogesterone had essentially halted as of August 2023 as our API supplier discontinued manufacturing this product. During the fourth quarter of 2023, we qualified our subsidiary ANP to manufacture this API. Sales of medroxyprogesterone totaled $12.8 million in the year ended December 31, 2023, compared to $26.6 million in the year ended December 31, 2022. We plan to relaunch the product during the first quarter of 2024.
Sales of API primarily depend on the timing of customer purchases.
In December 2023, we amended the Supply Agreement with MannKind Corporation, whereby MannKind’s aggregate total commitment of RHI API under the Supply Agreement was modified and extended for an additional period of time upon receipt of FDA approval of RHI produced from inclusion bodies made at AFP, which timeframe would have previously lapsed after calendar year 2027. MannKind agreed to pay us a capacity fee quarterly beginning in 2025, until it resumes purchases. We anticipate that sales of API will continue to fluctuate and may decrease due to the inherent uncertainties related to sales to MannKind pursuant to the Supply Agreement. In addition, most of our API sales are denominated in euros, and the fluctuation in the value of euros versus the U.S. dollar has had, and may continue to have, an impact on API sales revenues in the near term.
Other Revenues
Other revenues includes revenues from the sales of BAQSIMI® of $51.2 million during the year ended December 31, 2023, based on total BAQSIMI® sales of $86.3 million as reported to us by Lilly, which was recognized on a net basis similar to a royalty arrangement. Currently, BAQSIMI® is being sold by Lilly on our behalf under the TSA, whereby Lilly would provide certain services to support the transition of the BAQSIMI® operations to us. The transfer of the BAQSIMI® distribution to us is anticipated to occur at different points in time depending on the jurisdiction, with the United States occurring in the first quarter of 2024, which makes up approximately 80% of BAQSIMI® worldwide revenues. 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. Upon the assumption of distribution responsibilities, we will begin to recognize gross revenues and cost of revenues in their respective lines on the consolidated statements of operations.
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 December 31, 2023, our backlog was minimal, 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 increase in sales of glucagon, Primatene MIST®, and epinephrine, which are higher-margin products, the sales of ganirelix and vasopressin, both of which we launched last year, as well as the sales of regadenoson, which we launched in April 2023, contributed to the increase in our gross margins for the year ended December 31, 2023. Additionally, as a result of the TSA with Lilly, revenues relating to BAQSIMI® are reported on a net basis similar to a royalty arrangement with no amount reported as cost of revenues. These increases in gross margins were partially offset by an impairment charge of $2.7 million in June 2023 relating to the impairment of the IMS (UK) international product rights, as well as charges included in cost of revenue to adjust our inventory and related purchase commitments to their net realizable value. As a result of amending the Supply Agreement with MannKind in December 2023, we booked a $3.6 million inventory reserve.
We are experiencing increased costs for labor and certain purchased components. Additionally, the cost of heparin may fluctuate, which could put downward pressure on our gross margins. However, we believe that this trend will be offset by increased sales of our higher-margin products, including glucagon, vasopressin, ganirelix, regadenoson and new products we anticipate launching in 2024.
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Selling, distribution, and marketing, and general and administrative
Year Ended December 31, Change
(in thousands)
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®, as well as an increase in advertising spending for Primatene MIST®. The increase in general and administrative expense was primarily due to an increase in salary and personnel-related expenses, as well as costs related to the acquisition of BAQSIMI®, which was partially offset by a decrease in legal fees.
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.
Research and development
Year Ended December 31, Change
(in thousands)
Pre-launch inventory 422 — 422 N/A
The decrease in research and development expenses is primarily due to a decrease in materials and supply expense, as a result of a ramp-up of expenses in 2022 for AMP-018 and insulin pipeline products. This was partially offset by an increase in salary and personnel-related expenses.
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
Year Ended December 31, Change
(in thousands)
Non-operating income (expenses)
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The change in non-operating income (expenses), net is primarily a result of:
● Interest income increased as a result of an increase in cash and investments.
Income tax provision
Year Ended December 31, Change
(in thousands)
Effective tax rate 19 % 20 %
Our effective tax rate for the year ended December 31, 2023 decreased in comparison to the year ended December 31, 2022, primarily due to differences in pre-tax income positions, including jurisdictions where we maintain valuation allowance reserves against our deferred tax assets, and additional research and development credit benefit. For more information regarding our income taxes, see “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 16. – Income Taxes.”
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 with cash flows from operations. Our cash obligations include the principal and interest payments due on our existing loans and lease payments, as described below and throughout this Annual Report on Form 10-K.
As of December 31, 2023, our foreign subsidiaries collectively held $11.2 million in cash and cash equivalents. Cash or cash equivalents held at foreign subsidiaries are not available to fund the parent company’s operations in the United States. We believe that our cash reserves, operating cash flows, and borrowing availability under our credit facilities will be sufficient to fund our operations for at least the next 12 months. We expect additional cash flows to be generated in the longer term from future product introductions, although there can be no assurance as to the receipt of regulatory approval for any product candidates that we are developing or the timing of any product introductions, which could be lengthy or ultimately unsuccessful.
We maintain a shelf registration statement on Form S-3 pursuant to which we may, from time to time, sell up to an aggregate of $250 million of our common stock, preferred stock, debt securities, depositary shares, warrants, subscription rights, purchase contracts, or units. If we require or elect to seek additional capital through debt or equity financing in the future, we may not be able to raise capital on terms acceptable to us or at all. To the extent we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities will result in
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dilution to our stockholders. If we are required and unable to raise additional capital when desired, our business, operating results and financial condition may be adversely affected.
Working capital decreased $19.3 million to $264.2 million at December 31, 2023, compared to $283.5 million at December 31, 2022.
Cash Flows from Operations
The following table summarizes our cash flows from operating, investing, and financing activities for the years ended December 31, 2023 and 2022.
Year Ended December 31,
(in thousands)
Statement of Cash Flow Data:
Net cash provided by (used in)
Effect of exchange rate changes on cash (283) (220)
Sources and Use of Cash
Operating Activities
Net cash provided by operating activities was $183.5 million for the year ended December 31, 2023, which included net income of $137.5 million. Non-cash items comprised primarily of $53.2 million of depreciation and amortization, which includes $25.2 million related to deprecation of property, plant and equipment, $12.8 million related to amortization of product rights, trademarks and patents, $11.4 million related to amortization of discounts, premiums, and debt issuance costs. Additionally, non-cash items included share-based compensation expense of $20.2 million, and an impairment charge of $2.7 million relating to the impairment of the IMS (UK) international product rights.
Additionally, for the year ended December 31, 2023, there was a net cash outflow from changes in operating assets and liabilities of $24.2 million, which resulted from an increase in accounts receivables, an increase in inventories, which was partially offset by an increase in accounts payable and accrued liabilities. Accounts payable and accrued liabilities increased primarily due to the deferred acquisition payment for BAQSIMI® of $129.0 million. The increase in accounts receivables was primarily due to the timing of the payment from Lilly for BAQSIMI® revenues during the fourth quarter, which was received subsequent to the year end.
Net cash provided by operating activities was $89.2 million for the year ended December 31, 2022, which included net income of $91.4 million. Non-cash items comprised primarily of $28.7 million of depreciation and amortization and $17.9 million of share-based compensation expense. Additionally, for the year ended December 31, 2022, there was a net cash outflow from changes in operating assets and liabilities of $32.2 million, which resulted from an increase in accounts receivables; an increase in inventories, as we increased purchases of certain raw materials and components; as well as a decrease in accounts payable and accrued liabilities. Accounts payable and accrued liabilities decreased primarily due to the timing of payments. The increase in accounts receivables was due to both increases in sales and timing of sales.
Investing Activities
Net cash used in investing activities was $649.1 million for the year ended December 31, 2023, primarily as a result of $506.4 million relating to the BAQSIMI® acquisition, $38.2 million in purchases of property, plant, and equipment, which included $24.7 million incurred in the United States, $1.9 million in France, and $11.6 million in China. Additionally, net cash outflows from purchases and sales of investments during the period was $105.9 million.
Net cash used in investing activities was $32.8 million for the year ended December 31, 2022, primarily as a result of
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$24.0 million in purchases of property, plant, and equipment, which included $15.4 million incurred in the United States, $1.4 million in France, and $7.2 million in China. Additionally, net cash outflows from purchases and sales of short-term investments during the period was $7.8 million.
Financing Activities
Net cash provided by financing activities was $454.1 million for the year ended December 31, 2023, primarily as a result of proceeds of $500.0 million from the Credit Agreement with Wells Fargo and $345.0 million from the 2029 Convertible Notes, which were partially offset by $318.7 million in principal payments of our long-term debt and $25.1 million in debt issuance cost. Additionally, we received $11.0 million in net proceeds from the settlement of share-based compensation awards under our equity plan, which was offset by the $58.1 million used to purchase treasury stock.
Net cash used in financing activities was $26.4 million for the year ended December 31, 2022, primarily as a result of purchases of $39.9 million of treasury stock, which was partially offset by $15.7 million in net proceeds from the settlement of share-based compensation awards under our equity plan. Additionally, we also made $1.8 million in principal payments on our long-term debt.
Debt and Borrowing Capacity
Our outstanding debt obligations are summarized as follows:
December 31,
(in thousands)
As of December 31, 2023, we had $204.1 million in unused borrowing capacity under revolving lines of credit with Wells Fargo Bank and China Merchant Bank.
The weighted average interest rates on lines of credit as of December 31, 2023 and 2022 were 7.0% and 5.2%, respectively. For our loans with Wells Fargo Bank and East West Bank, we have entered into fixed interest rate swap contracts to exchange the variable interest rates for fixed interest rates.
For more information regarding our outstanding indebtedness, see “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 15. – Debt.”
Operating Lease Obligations
As of December 31, 2023 we had a total of $41.5 million of minimum rental payments under operating leases. Of that amount, $5.6 million is due within 12 months as of December 31, 2023. For more information regarding our operating lease obligations see “Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – See Note. 19 – Commitments and Contingencies.”
Purchase obligations
We have certain purchase obligations under which we are required to make minimum payments for items including, but not limited to, inventory and pharmaceutical manufacturing and laboratory equipment. As of December 31, 2023, we had an aggregate amount of approximately $93.3 million.
Revenue Recognition
Product revenues, net
Our net revenues consist principally of revenues generated from the sale of our pharmaceutical products. We also generate a small amount of revenues from contract manufacturing services. Generally, we recognize revenues at the time
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of product delivery to our customers in accordance with ASC, 606 Revenue from Contracts with Customers. In some cases, revenues are recognized at the time of shipment when stipulated by the terms of the sale agreements. Revenues derived from contract manufacturing services are recognized when third-party products are shipped to customers, after the customer has accepted test samples of the products to be shipped.
The consideration we receive in exchange for our goods or services is only recognized when it is probable that a significant reversal will not occur. The consideration to which we expect to be entitled includes a stated list price, less various forms of variable consideration. We make significant estimates for related variable consideration at the point of sale, including chargebacks, rebates, product returns, other discounts and allowances.
Provision for estimated chargebacks, rebates, discounts, product returns and credit losses is made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date.
If actual future payments for the discounts, returns, fees, rebates and chargebacks exceed the estimates we made at the time of sale, our financial position, results of operations and cash flows would be negatively impacted. As discussed under “Accrual for Product Returns” below, we are generally obligated to accept from our customers the return of pharmaceuticals that have reached or will soon reach their expiration dates. We establish reserves for such amounts based on historical experience and other information available at the time of sale, but the actual returns will not occur until several years after the sale. Although we believe that our estimates and assumptions are reasonable as of the date when made, actual results may differ significantly from these estimates. Our financial position, results of operations and cash flows may be materially and negatively impacted if actual returns exceed our estimated allowances for returns.
We establish allowances for estimated chargebacks, rebates and product returns based on a number of qualitative and quantitative factors, including:
● contract pricing and return terms of our agreements with customers;
● wholesaler inventory levels and turnover;
● historical chargeback and product return rates;
● direct communication with customers;
● anticipated introduction of competitive products or authorized generics; and
● anticipated pricing strategy changes by us and/or our competitors.
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, we assess 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 years ended December 31, 2023, 2022 and 2021, revenue from research and development services at ANP were $4.5 million, $4.3 million and $5.1 million, respectively.
Other revenues
Revenues related to sales of BAQSIMI®, which was acquired on June 30, 2023 and was manufactured and sold by Lilly under the TSA during the year ended December 31, 2023, were recorded on a net basis, similar to a royalty arrangement.
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 we agree to reimburse wholesalers for differences between the gross sales prices at which we sell our products to wholesalers and the actual prices of such products that wholesalers resell them
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under our 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. We estimate chargebacks and rebates using the expected value method at the time of sale to wholesalers based on wholesaler inventory stocking levels, historic chargeback and rebate rates, and current contract pricing.
The provision for chargebacks and rebates is reflected as a component of net revenues. The following table is an analysis of the chargeback and rebate provision:
Year Ended
December 31,
(in thousands)
Credits and payments issued to third parties (255,905) (201,642)
Changes in the provision for chargebacks from period to period are primarily dependent on our sales to its wholesalers, the level of inventory held by wholesalers, and the wholesalers’ customer mix. Changes in the provision for rebates from period to period are primarily dependent on retailer’s and other indirect customers’ purchases. The approach that we use to estimate chargebacks and rebates has been consistently applied for all periods presented. Variations in estimates have been historically small. We continually monitor the provision for chargebacks and rebates and make adjustments when we believe 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.
The provision for chargebacks and rebates is included in the following balance sheet accounts:
December 31,
(in thousands)
Reduction to accounts receivable, net $ 21,861 $ 20,460
Accounts payable and accrued liabilities 6,059 6,146
Accrual for Product Returns
We offer most customers the right to return qualified excess or expired inventory for partial credit; however, API product sales are generally non-returnable. Our 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, we record 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. We also assesses other factors that could affect product returns including market conditions, product obsolescence, and new competition. Although these factors do not normally give our customers the right to return products outside of the regular return policy, we realize that such factors could ultimately lead to increased returns. We analyze these situations on a case-by-case basis and make adjustments to the product return reserve as appropriate.
The provision for product returns is reflected as a component of net revenues. The following table is an analysis of the product return liability:
Year Ended
December 31,
(in thousands)
Provision for product returns 4,275 4,405
Credits issued to third parties (6,547) (6,631)
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The provision for product returns is included in the following balance sheet accounts:
December 31,
(in thousands)
Accounts payable and accrued liabilities $ 12,263 $ 14,867
Other long-term liabilities 4,916 4,584
For the years ended December 31, 2023 and 2022, our aggregate product return rate was 1.1% and 1.4% of qualified sales, respectively.
Inventories
Inventories consist of currently marketed products and products manufactured under contract. Inventories are stated using the first-in, first-out method, on a consistent basis. Inventory is stated at the lower of cost or net realizable value. We adjust inventories to their net realizable value: (i) if a launch of a new product is delayed and inventory may not be fully utilized and could be subject to impairment, (ii) when a product is close to expiration and not expected to be sold, (iii) when a product has reached its expiration date, (iv) when a product is not expected to be sellable, and (v) when the estimated net realizable value is below cost. In determining the estimated net realizable value of an inventory item, we consider factors such as the forecasted average net selling price, the amount of inventory on hand, its remaining shelf life, its regulatory approval status, and current and expected market conditions, including management forecasts and levels of competition.
The largest adjustment to the net realizable value of our inventory has historically been related to enoxaparin. The adjustment of enoxaparin inventory to its net realizable value has been driven primarily by increases in the prices of heparin, the starting material for the production of the API in our enoxaparin product. Other cost increases relate to labor and overhead also impacted the cost of producing enoxaparin. Additionally, fluctuations in the forecasted average net selling price impact this estimate. The average net selling price has fluctuated due to competitor entries and exits from the market.
Impairment of Intangible and Long-Lived Assets
We review long-lived assets and definite-lived identifiable intangible assets or asset groups for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events and circumstances include decisions by the FDA regarding evidence of effectiveness of proprietary drug candidates or bioequivalence (sameness) of our generic product candidates as compared to the reference drug, communication with the regulatory agencies regarding the safety and efficacy of our products under review, the use of the asset in current research and development projects, any potential alternative uses of the asset in other research and development projects in the short-to-medium term, clinical trial results and research and development portfolio management options. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset or asset groups and its eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset or asset groups, further impairment analysis is performed. An impairment loss is measured as the amount by which the carrying amount exceeds the fair value of the asset or asset groups (assets to be held and used) or fair value less cost to sell (assets to be disposed of). All of our impairments relate primarily to the isolated write-off of certain manufacturing equipment related to abandoned projects. Since we periodically assess our product candidates and make changes to product development plans, we incur impairment charges from time to time which can fluctuate significantly from period to period.
The indefinite-lived intangible asset, the Primatene® trademark acquired in June 2008, and goodwill are tested for impairment annually, in the fourth quarter, or more frequently if indicators of impairment are present. An impairment loss is recorded if the asset’s fair value is less than its carrying value. We also periodically review the Primatene® trademark to determine if events and circumstances continue to support an indefinite useful life. When we choose to perform a qualitative assessment, we evaluate economic, industry and company-specific factors as an initial step. If we determine it is more likely than not that the Primatene® trademark is impaired or the fair value of a reporting unit is less than its carrying amount, further quantitative impairment process is then performed; otherwise, no further testing is
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required. If the life is no longer indefinite, the asset is tested for impairment, and the carrying value, after recognition of any impairment loss, is amortized over its remaining useful life.
We acquired the BAQSIMI® product rights in June 2023. BAQSIMI® is an emergency nasal spray used to treat severe hypoglycemia. The BAQSIMI® product rights intangible asset is amortized over its estimated useful life of 24 years. In determining the BAQSIMI® product rights’ useful life, we considered the following: the expected use of the intangible asset; the longevity of the brand; the legal, regulatory and contractual provisions that affect their maximum useful life; our ability to renew or extend the asset’s legal or contractual life without substantial costs; effects of the regulatory environment; expected changes in distribution channels; maintenance expenditures required to obtain the expected future cash flows from the asset; and considerations for obsolescence, demand, competition and other economic factors.
For the year ended December 31, 2023, we recorded an impairment charge of $2.7 million related to our IMS (UK) international product rights, as we decided to delay the launch of the IMS UK products indefinitely. We recorded the impairment in the cost of revenue line in our consolidated statement of operations. No impairment of indefinite-lived intangible asset and goodwill was recorded during the years ended December 31, 2022 and 2021.
Deferred Income Taxes
We utilize 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.
A number of years may elapse before an uncertain tax position for which we have established a tax reserve is audited and finally resolved. The number of years for which we can be subject to audit varies depending on the tax jurisdiction. While it is often difficult to predict the final outcome or the timing of the resolution of an audit, we believe that our reserves for uncertain tax benefits reflect the outcome of tax positions that is more likely than not to occur. The resolution of a matter could be recognized as an adjustment to our provision for income taxes and our effective tax rate in the period of resolution, and may also require a use of cash.
Share-Based Compensation
Options issued under our 2015 Equity Incentive Award Plan, or the 2015 Plan, and our Amended and Restated 2005 Equity Incentive Award Plan, or 2005 Plan, are granted at exercise prices equal to or greater than the fair value of the underlying common shares on the date of grant and vest based on continuous service. There have been no awards with performance conditions and no awards with market conditions. The options have a contractual term of five to ten years and generally vest over a three- to five-year period.
We use the Black-Scholes option pricing model to determine the fair value of options awards. The Black-Scholes option pricing model has various inputs such as the common share price on the date of grant, exercise price, the risk-free interest rate, volatility, expected life and dividend yield, all of which are estimates. We used the risk free rate on U.S. Treasury securities at the time of grant for instruments with maturities commensurate with the expected term of the stock option. Our volatility estimate was based on the weighted average historical volatility of our stock price since IPO. Our dividend yield was assumed to be 0%, because we have no plans to pay dividends. We estimate the expected term of options with consideration of vesting date, contractual term, and historical experience for employee exercise and post-vesting employment termination behavior after our common stock has been publicly traded. The expected term of “plain vanilla” options is estimated based on the midpoint between the vesting date and the end of the contractual term under the simplified method.
The fair value of each share-based compensation award is amortized into compensation expense on a straight-line basis between the grant date for the option and the vesting date net of expected forfeitures. We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual numbers differ from such estimates. The change of any of these inputs could significantly impact the determination of the fair value of our options as well as significantly impact our results of operations.
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Critical Accounting Policies
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition and results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies, which we discuss further below. While our significant accounting policies are more fully described in Part II – Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 2. – Summary of Significant Accounting Policies”, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our audited consolidated financial statements.
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. We are 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. We are currently evaluating the disclosure requirements related to the new standard.
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 6 through February 16, 2023, our IMS facility in South El Monte, California was subject to pre-approval inspection by the FDA. The inspection included a review of compliance with FDA regulations to support one of our pending applications. The inspection resulted in two 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 7A. Quantitative and Qualitative Disclosures about Market Risk.
The following discussion provides forward-looking quantitative and qualitative information about our potential exposure to market risk. Market risk represents the potential loss arising from adverse changes in the value of financial instruments. The risk of loss is assessed based on the likelihood of adverse changes in fair values, cash flows or future earnings. We are exposed to market risk for changes in the market values of our investments (Investment Risk), the impact of interest rate changes (Interest Rate Risk), and the impact of foreign currency exchange changes (Foreign Currency Exchange Risk).
Investment Risk
We regularly review the carrying value of our investments and identify and recognize losses, for income statement purposes, when events and circumstances indicate that any declines in the fair values of such investments below our accounting basis are other than temporary. As of December 31, 2023, none of our investments experienced any declines in fair value that we believe are other than temporary. We do not enter into investments for trading or speculative purposes.
As of December 31, 2023, we had $5.9 million deposited in four banks located in China, $5.0 million deposited in one bank located in France, and $0.3 million deposited in one bank located in the United Kingdom. We also maintained $116.4 million in cash equivalents that include money market accounts as of December 31, 2023. Additionally, we maintain approximately $90.1 million in investment grade corporate and municipal bonds as of December 31, 2023. The remaining amounts of our cash equivalents as of December 31, 2023, are in non-interest bearing accounts.
As of December 31, 2022, we had $14.1 million deposited in four banks located in China, $0.7 million deposited in one bank located in France, and $0.4 million deposited in one bank located in the United Kingdom. We also maintained $130.2 million in cash equivalents that include money market accounts as of December 31, 2022. Additionally, we maintain approximately $15.1 million in investment grade corporate and municipal bonds as of December 31, 2022. The remaining amounts of our cash equivalents as of December 31, 2022, are in non-interest bearing accounts.
We maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. Interest bearing and non-interest bearing accounts we hold at banking institutions are guaranteed by the Federal Deposit Insurance Corporation, or FDIC, up to $250,000. Substantially all of our cash balances held at banking institutions are in excess of FDIC coverage. We consider this to be a normal business risk.
Interest Rate Risk
Our primary exposure to market risk is interest rate sensitive investments and credit facilities, which are affected by changes in the general level of U.S. interest rates. Due to the nature of our short-term investments, we believe that we are not subject to any material interest rate risk with respect to our short-term investments.
As of December 31, 2023, we had $590.0 million in long-term debt and finance leases outstanding, all of which have either a fixed interest rate or are locked-in fixed interest rates through swap contracts.
As of December 31, 2022, we had $75.9 million in long-term debt and finance leases outstanding. Of this amount, $13.3 million had variable interest rates which were not locked-in through fixed interest rate swap contracts. The debt with variable interest rate exposure had a weighted-average interest rate of 5.2% at December 31, 2022.
Foreign Currency Exchange Risk
Our finished pharmaceutical products are primarily sold in the U.S. domestic market, and have little exposure to foreign currency price fluctuations. Our API manufacturing business in France is exposed to market risk related to changes in foreign currency exchange rates, because our insulin sales contracts are frequently denominated in euros, which are subject to fluctuations relative to the USD.
Our Chinese subsidiary, ANP, maintains its books of record in Chinese yuan. These books are remeasured into the functional currency of USD, using the current or historical exchange rates. The resulting currency remeasurement
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adjustments and other transactional foreign exchange gains and losses are reflected in our statement of operations.
Our French subsidiary, AFP, maintains its books of record in euros. 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 accumulated comprehensive income (loss). The unrealized gains or losses of intercompany foreign currency transactions that are of a long-term investment nature are reported in other accumulated comprehensive income (loss).
We are also exposed to the potential earnings effects from intercompany foreign currency assets and liabilities that arise from normal trade receivables and payables and other intercompany loans.
As of December 31, 2023, a theoretical 10% unfavorable change in the exchange rate of the U.S. dollar strengthening against the foreign currencies to which we have exposure would result in approximately $2.2 million reduction of foreign currency gains, and approximately $1.6 million reduction in other comprehensive income.
As of December 31, 2022, a theoretical 10% unfavorable change in the exchange rate of the U.S. dollar strengthening against the foreign currencies to which we have exposure would result in approximately $2.6 million reduction of foreign currency gains, and approximately $1.6 million reduction in other comprehensive income.
As of December 31, 2023 and 2022, our foreign subsidiaries had cash balances denominated in foreign currencies in the amount of $8.9 million and $2.5 million, respectively.
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Item 8. Financial Statements and Supplementary Data.
Index to Amphastar Pharmaceuticals, Inc. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 103
Consolidated Balance Sheets 106
Consolidated Statements of Operations 107
Consolidated Statements of Comprehensive Income 108
Consolidated Statements of Stockholders’ Equity 109
Consolidated Statements of Cash Flows 110
Notes to Consolidated Financial Statements 111
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Amphastar Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Amphastar Pharmaceuticals, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework),and our report dated February 29, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Provision for chargebacks estimate
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Enoxaparin inventory lower of cost or net realizable value estimate
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BAQSIMI® Acquisition
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1998.
Irvine, California
February 29, 2024
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AMPHASTAR PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, December 31,
ASSETS
Current assets:
Restricted cash 235 235
Restricted short-term investments 2,200 2,200
Income tax refunds and deposits 526 171
Prepaid expenses and other assets 9,057 7,563
Finance lease right-of-use assets 564 753
Operating lease right-of-use assets 32,333 25,554
Investment in unconsolidated affiliate 527 2,414
Long-term investments 14,685 —
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 93,366 $ 84,242
Accrued payments for BAQSIMI® (see Note 4) 126,090 —
Current portion of long-term debt 436 3,046
Current portion of operating lease liabilities 3,906 3,003
Long-term reserve for income tax liabilities 6,066 7,225
Deferred tax liabilities — 144
Commitments and contingencies
Stockholders’ equity:
Accumulated other comprehensive loss (8,478) (8,624)
Total liabilities and stockholders’ equity $ 1,512,912 $ 741,987
See accompanying notes to consolidated financial statements.
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AMPHASTAR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
Net revenues:
Other revenues 51,157 — —
Operating expenses:
Non-operating income (expenses):
Total non-operating income (expenses), net (25,628) 8,543 14,252
Equity in losses of unconsolidated affiliate (1,981) (1,177) (208)
Net income attributable to non-controlling interests $ — $ — $ 1,185
See accompanying notes to consolidated financial statements.
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AMPHASTAR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
Foreign currency translation adjustment 298 (2,335) (2,943)
Change in pension obligations (152) 476 261
See accompanying notes to consolidated financial statements.
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Amphastar Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
Common Stock Accumulated Treasury Stock Total
Additional Other Amphastar Non-
See accompanying notes to consolidated financial statements.
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AMPHASTAR PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
Cash Flows From Operating Activities:
Reconciliation to net cash provided by operating activities:
Loss on disposal of assets 475 141 348
Gain on deconsolidation of subsidiary — — (13,587)
Impairment of long-lived assets 2,700 — —
Depreciation of property, plant, and equipment 25,205 23,815 22,196
Operating lease right-of-use asset amortization 3,742 3,506 3,266
Equity in losses of unconsolidated affiliate 1,981 1,177 208
Changes in reserve for uncertain tax positions (1,159) 694 1,821
Changes in operating assets and liabilities:
Prepaid expenses and other assets (2,728) (1,854) 2,927
Income tax refunds, deposits, and payable, net (3,319) (4,555) 8,349
Operating lease liabilities (3,589) (3,154) (3,198)
Accounts payable and accrued liabilities 13,237 (736) 3,634
Cash Flows From Investing Activities:
BAQSIMI® acquisition (See Note 4) (506,406) — —
Proceeds from the sale of property, plant and equipment — 421 —
Cash Flows From Financing Activities:
ANP restructuring (see Note 3) — — (53,592)
Settlement of ANP equity awards — — (839)
Repayments under lines of credit — — (1,161)
Proceeds from issuance of long-term debt 845,000 — 70,000
Effect of exchange rate changes on cash (282) (220) (223)
Noncash Investing and Financing Activities:
Deferred payment for BAQSIMI® acquisition $ 121,699 $ — $ —
Equipment acquired under finance leases $ — $ 642 $ 107
Supplemental Disclosures of Cash Flow Information:
Interest paid, net of capitalized interest $ 17,573 $ 3,023 $ 2,109
See accompanying notes to consolidated financial statements
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AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business
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.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, and are prepared in accordance with United States generally accepted accounting principles, or GAAP. Certain prior period amounts have been reclassified within the operating activities of the consolidated statements of cash flows to conform to the current period presentation. All intercompany activity has been eliminated in the preparation of the consolidated financial statements. In the opinion of management, the accompanying 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. Judgment regarding the level of influence over each equity method investment includes key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. 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 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. The determination of whether an investee’s results are recorded on a lag is made on an investment-by-investment basis.
The carrying value of equity method investments is reported as “Investment in unconsolidated affiliate” in the accompanying 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.
The Company assesses equity method investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. If the decline in value is considered to be other than temporary, the investment is written down to its estimated fair value, which establishes a new cost basis in the investment. No such impairment was identified for any of the periods presented.
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AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The principal accounting estimates include: fair value of acquired assets, determination of allowances for credit losses, 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, accrual for workers’ compensation liabilities, 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 accompanying consolidated statements of operations.
The Company’s French subsidiary, AFP, maintains its book of record in euros. AUK’s subsidiary, IMS UK, maintains its book of record in British pounds. These local currencies have been determined to be the subsidiaries’ respective functional currencies. 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 comprehensive income (loss).
The unrealized gains and losses of intercompany foreign currency transactions that are of a long-term investment nature for the years ended December 31, 2023, 2022, and 2021 were a $1.1 million gain, a $1.8 million loss, and a $2.6 million loss, respectively.
Comprehensive Income (loss)
The Company’s comprehensive income (loss) includes its foreign currency translation gains and losses, changes in pension obligations 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.
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.
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AMPHASTAR PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Shipping and Handling Costs
For the years ended December 31, 2023, 2022, and 2021, the Company included shipping and handling costs of approximately $7.0 million, $7.4 million and $4.3 million, respectively, in selling, distribution and marketing expenses in the accompanying consolidated statements of operations.
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 consolidated statements of operations. For the years ended December 31, 2023, 2022, and 2021, advertising expenses were $10.4 million, $8.7 million, and $8.1 million, respectively.
Research and Development Costs
Research and development costs are charged to expense as incurred and consist of costs incurred to further the Company’s research and development activities. These include salaries and related employee benefits, costs associated with clinical trials, nonclinical research and development activities, regulatory activities, research-related overhead expenses and fees paid to external service providers.
The Company may produce or purchase inventories prior to or with the expectation of receiving regulatory approval in the near term, based on operational decisions about the most effective use of existing resources. This inventory is referred to as pre-launch inventory. It is the Company’s accounting policy that the pre-launch inventory is capitalized if it has a probable future economic benefit at the time it is purchased or manufactured. If regulatory approval is received and previously expensed pre-launch inventory is sold, such sales may contribute up to a 100% margin to the Company’s operating results. Pre-launch inventory costs include cost of work in process, materials, and finished drug products. For the years ended December 31, 2023, 2022, and 2021, the Company did not have material capitalized pre-launch inventory.