Amphastar (AMPH) growth potential 2025 onwards

Here is full weekend analysis I completed recently. Enjoy

DESCRIPTION

Amphastar Pharmaceuticals, Inc. is a vertically integrated biopharmaceutical company that focuses on developing, manufacturing, and selling generic and proprietary injectable, inhalation, and intranasal products. The company also provides insulin APIs (active pharmaceutical ingredient) used in the development of injectable finished pharmaceutical products. A key driver of Amphastar's recent performance is its acquisition of BAQSIMI®, the first and only nasally administered glucagon for the treatment of severe hypoglycemia in people with diabetes.

Executive Summary

Amphastar continues to leverage its technical expertise in complex generics and proprietary products. The company announced net revenues of $644.4 million for 2023, a substantial increase from $499.0 million in 2022. Similarly, financial results for the second quarter of 2024 are similarly strong, with net revenues growing to $182.4 million, a 25% increase from the prior year. The recent acquisition of BAQSIMI® and the company’s expanding product line signal continued growth.

Amphastar is well-positioned to capitalize on its diverse portfolio of over 25 commercial products, robust pipeline, and growing manufacturing capabilities. While the company's recent acquisitions, such as BAQSIMI®, and its focus on niche markets have strengthened its position in the injectable and inhalation markets, further developments and successful integration of these strategic moves will be crucial in determining its leadership in these sectors.

Market At Large

Amphastar Pharmaceuticals falls under the pharmaceuticals industry and can be classified as a drug manufacturer that specializes in both specialty pharmaceuticals and generic drugs.

The pharmaceutical industry is expected to grow significantly, driven by an aging population, and increasing prevalence of chronic diseases like diabetes. The U.S. injectable drug market was valued at $340 billion in 2023, with Amphastar targeting over $11 billion in opportunities within the space. Additionally, the U.S. inhalation market is valued at $29 billion, where Amphastar’s Primatene MIST® has captured significant market share. The injectable drug market alone is projected to grow at a CAGR of over 8% in the next decade.

Research supports the findings in annual reports. Economic Costs of Diabetes in the U.S. In 2022, published by Parker et al. on November 1st, 2023, stated that In 2022, the total estimated cost of diagnosed diabetes in the U.S. was $412.9 billion, including $306.6 billion in direct medical costs and $106.3 billion in indirect costs attributable to diabetes. For the cost categories analyzed, 1 in 4 health care dollars spent in the U.S. is related to the care of individuals diagnosed with diabetes, with 61% of these costs being directly attributable to diabetes.

Amphastar is well-positioned to capture a share of this growing market due to its focus on diabetes-related products, particularly with its acquisition of BAQSIMI®. With diabetes care accounting for such a significant portion of healthcare spending, Amphastar’s expanding presence in this space provides a substantial growth opportunity.

Company & Business Description

Amphastar’s diversified product line includes injectable, intranasal, and inhalation products. Its portfolio spans over 25 marketed products, including Primatene MIST®, BAQSIMI®, Glucagon for Injection, and REXTOVYTM. The company’s pipeline includes over 20 product candidates, many of which leverage Amphastar’s core strengths in drug delivery technology, particle engineering, and API manufacturing.

Amphastar’s business model includes both selling proprietary products and manufacturing active pharmaceutical ingredients (APIs), which are sold to other pharmaceutical companies.

Key strengths include its vertically integrated infrastructure, which enables the company to oversee all stages of product development from research through commercialization. Amphastar's international expansion is highlighted by the acquisition of BAQSIMI®, which is sold in 27 countries.

Management

Jack Y. Zhang, Ph.D., co-founder and CEO of Amphastar Pharmaceuticals, has led the company since 1996. With over 35 years of experience in chemistry and management, Dr. Zhang has driven Amphastar’s growth through his deep technical expertise and leadership. He holds several patents and a Ph.D. in Chemistry from the State University of New York at Stony Brook.

Founder-led businesses like Amphastar often outperform peers due to the founder’s personal stake, long-term vision, and deep understanding of the company. Dr. Zhang’s leadership, combining scientific knowledge and operational management, is a key driver of Amphastar’s success.

Financial Statements

Amphastar’s financial performance in 2023 was marked by strong revenue growth and profitability. Total net revenues were $644.4 million, with a gross margin of 49.7%. The company’s net income reached $137.5 million, a significant increase from $91.4 million in 2022.

For Q2 2024, Amphastar reported total revenues of $182.4 million, a 25% increase from the same period in 2023. Gross profit also saw a substantial rise to $95.2 million, representing a 31% gross margin, up from $72.7 million a year ago. This was mainly driven by the growth in the sale of BAQSIMI® and Primatene MIST® along with robust performance from its insulin API business.

The company’s balance sheet remains solid, with cash and equivalents of $189.6 million as of June 30, 2024. Amphastar can comfortably cover its current liabilities, but the company has significant long-term debt primarily due to the acquisition of BAQSIMI®. While the company has been actively managing its debt, the liquidity position is still strong, allowing Amphastar to invest in R&D and consider further strategic acquisitions or product development.

Amphastar’s retained earnings grew significantly, reaching $490.4 million as of June 30, 2024, up from $409.3 million at the end of 2023. This is is a positive indicator of profitability and financial health.

Amphastar has $255.8 million in treasury stock, up from $247.4 million at the end of 2023. This increase reflects the company’s continued buyback activity, demonstrating confidence in its own stock and a commitment to enhancing shareholder value by reducing the outstanding share count.

The company reported -$24.3 million in net cash used in financing activities for the first half of 2024. Despite not issuing new shares, Amphastar made debt-related payments (including principal repayments on long-term debt), engaged in share buybacks, and made equity plan payments. The absence of new common share issuance can be a positive signal for investors, as it shows the company is not diluting existing shareholders, and the continued share repurchases signal management’s confidence in the company's future.

BAQSIMI® Acquisition

BAQSIMI® (glucagon), a dry nasal spray used in an emergency for the treatment of severe hypoglycemia in people with diabetes ages four years and above, is the first and only nasally administered glucagon. It is compact, portable and ready to use in a single, fixed 3mg dose.

On June 30, 2023, Amphastar Pharmaceuticals completed the acquisition of BAQSIMI® from Eli Lilly & Company. The total deal value was $628.1 million, including a $500 million upfront cash payment, deferred payments, and potential contingent payments of up to $450 million based on sales milestones:

1. $100 million: If annual net sales of BAQSIMI® and related products reach $175 million within the first five years after acquisition.
2. Two payments of $100 million each: If annual net sales reach $200 million in any year during the same period.
3. $150 million: If cumulative net sales of $950 million are achieved within the first five years.

In addition, the company entered into agreements with Lilly to ensure a smooth transition, including a Manufacturing Services Agreement for continued production and a Transition Services Agreement to support clinical and commercial operations for up to 18 months.

BAQSIMI® strengthens Amphastar’s position in the diabetes care market, providing immediate revenue growth and expanding the company’s global footprint into 27 countries. The company expects BAQSIMI® to generate substantial long-term value, with a product lifespan of 24 years.

The deal was funded through a $700 million credit facility, demonstrating the company’s financial flexibility to pursue strategic growth opportunities.

BAQSIMI® Sales 2021-2024

The sales data for BAQSIMI® has been sourced from both Eli Lilly and Amphastar’s annual and quarterly reports. 

Noteworthy points include:

• 2022 Full Year: BAQSIMI® generated $252.7 million in total sales, with $207 million coming from the U.S. and $45.7 million from international markets.
• 2023 Q2: Eli Lilly reported a significant sales surge of $613.9 million as the company worked to deplete its inventory following the announcement of BAQSIMI®'s sale to Amphastar.
• 2023 Full Year: Total sales for BAQSIMI® amounted to $746.4 million.
• 2024 H1: Sales slowed, totaling $61.9 million by mid-year, likely reflecting transitional factors associated with the Manufacturing and Transition Services Agreements between Eli Lilly and Amphastar.

This data highlights the fluctuations in BAQSIMI® sales leading up to its full transfer to Amphastar in 2025, where a more consistent growth trajectory is expected.

Future Outlook

Total revenues from finished pharmaceutical products for 2023, 2022, and 2021 amounted to $579.1 million, $486.5 million and $419.6 million, respectively. This is significant as it forms the baseline revenue for Amphastar's core business.

Amphastar’s acquisition of BAQSIMI® from Eli Lilly is expected to significantly boost its revenue starting in 2025, once the company takes over the manufacturing and direct sales. Prior to Amphastar's control, Eli Lilly's inventory depletion efforts in 2023 Q2 led to an extraordinary $613.9 million in total BAQSIMI® sales. However, the drop in sales afterward reflects a period where Eli Lilly’s sales incentives waned due to the transitional agreements, resulting in lower sales during 2023 H2 and 2024 H1.

Once Amphastar assumes full control in 2025 Q1, the alignment of sales incentives will likely restore BAQSIMI’s growth trajectory.

BAQSIMI®’s future potential is substantial, particularly as the glucagon market grows and Amphastar expands all its products internationally, especially in China and Europe. This acquisition aligns with Amphastar's long-term strategy of expanding its branded product portfolio, improving operational efficiencies, and capturing high-margin niche markets.

Valuation

Given Amphastar's current P/E of 15.30 and forward P/E of 17x based on 2024 estimates. I disagree with analysts on that because BAQSIMI® is likely to be accretive to earnings starting from 2025 more than expected.

My Sales Scenarios for 2025-2029:

1. Moderate Growth Scenario:

Amphastar steadily grows BAQSIMI® sales from $200 million in 2025 to $400 million by 2029.

Existing products grow at a stable rate of around 5% year-over-year, starting from $579.1 million in 2023.

Total Projected Revenue by 2029:

BAQSIMI®: $400 million

Existing products: ~$730 million

Total Revenue: $1.13 billion

2) Optimistic Growth Scenario:

BAQSIMI® hits $250 million in 2025 and reaches $500 million by 2029.

Existing products maintain a similar growth trajectory.

Total Projected Revenue by 2029:

BAQSIMI®: $500 million

Existing products: ~$730 million

Total Revenue: $1.23 billion

3) Aggressive Growth Scenario:

BAQSIMI® reaches $300 million by 2025 and $700 million by 2029, reflecting the higher sales potential.

Existing product revenues remain steady, growing alongside BAQSIMI®.

Total Projected Revenue by 2029:

BAQSIMI®: $700 million

Existing products: ~$730 million

Total Revenue: $1.43 billion

Rationale:

• Existing Product Sales: Amphastar’s diversified product portfolio is generating strong and stable revenues. This provides a solid foundation for the company’s future growth.
• BAQSIMI® Contribution: Given its potential as a high-margin product, BAQSIMI® will accelerate Amphastar’s revenue growth and drive profitability once manufacturing and sales incentives are aligned in 2025.
• Synergies: The company’s strategy of expanding its branded portfolio and increasing its presence in niche markets supports its premium valuation, especially with BAQSIMI®’s global market potential.

Amphastar’s diversification into proprietary products, combined with its ability to navigate regulatory processes and execute complex acquisitions, adds a premium to its valuation.

If Amphastar can achieve the optimistic or aggressive revenue growth projections, along with corresponding improvements in profitability, it is likely that the market will recognize this performance by significantly re-rating the stock. Companies that demonstrate sustained top-line and bottom-line growth, particularly in high-margin, high-demand segments, often command higher valuation multiples. In such cases, it would not be unusual for Amphastar to enjoy a P/E ratio of 30 or higher, in line with other high-growth pharmaceutical companies that successfully capitalize on niche market leadership and product innovation.

Risks

• Supply Chain Constraints: Amphastar relies on single-source suppliers for key raw materials, especially for complex products like BAQSIMI®. Any disruptions could impact production and sales, particularly during the transition post-acquisition.
• Price Sensitivity: Pricing pressures from healthcare reforms and competition, including biosimilars, could affect margins. Maintaining BAQSIMI®'s profitability in a competitive market will be essential.
• Geopolitical Risks: The company’s operations in China are vulnerable to geopolitical tensions and trade disruptions, which could affect manufacturing and supply chain stability.
• Competitive Pressure: Increased competition from larger pharmaceutical companies could erode market share, especially in glucagon products like BAQSIMI®.
• Regulatory Risks: Delays in regulatory approvals for new products and BAQSIMI®’s integration in international markets could impact sales timelines.
• Acquisition Integration: Smooth integration of BAQSIMI® post-transition is critical to achieving projected sales growth. Any delays could hinder short-term performance.

CATALYSTS

• Successful integration and ramp-up of BAQSIMI®: With BAQSIMI® expected to significantly contribute to revenues post-2025, its integration and performance under Amphastar’s management will be critical.
• REXTOVY™ approval and commercial launch: The rollout of this naloxone nasal spray product will diversify Amphastar’s emergency treatment offerings and strengthen its foothold in opioid overdose treatments.
• Expansion of Primatene MIST® and insulin biosimilars: Continued growth in these key product lines, along with new biosimilars in the pipeline, will drive future revenue streams and enhance market penetration.
• Strategic international expansion through BAQSIMI® channels: Amphastar’s ability to leverage BAQSIMI®’s established presence in over 27 countries will be instrumental in accelerating international growth.
• Ongoing share repurchases: The company’s commitment to returning value to shareholders through stock buybacks will further enhance investor confidence.