Description

Summary

Amphastar Pharmaceuticals, Inc. (ticker: AMPH) is a generic drug company. Apart from its generic portfolio, AMPH also markets an OTC asthma inhaler called Primatene Mist, which uses epinephrine as its active ingredient, much to the chagrin of asthma / allergy specialists who find this dangerous. Key contributors to AMPH’s generics portfolio include various formulations of lidocaine, epinephrine and naloxone, along with a few more complex products. Much of AMPH’s current product portfolio came via the 1998 acquisition of International Medication Systems (“IMS”), with Primatene Mist being developed by subsidiary Armstrong Pharmaceuticals, acquired in 2003. While AMPH touts its R&D abilities, the reality is that very few complex products have been developed via the company’s internal R&D efforts—these products include the anticoagulant enoxaparin, which has now become highly competitive and generates marginally negative gross profit for AMPH, medroxyprogesterone (a birth control injection) that is similarly pressured (AMPH recently discontinued reporting of sales of this product) and the recently approved glucagon emergency kit for hypoglycemic incidents, which is being quickly replaced in the marketplace by newer, more reliable dosage forms (i.e., AMPH makes a generic for an obsolete branded product). AMPH came on our radar as a short due to a long history of the company and the sell-side exaggerating its pipeline capabilities and pace of approvals—sell-side estimates for forward years have been continually revised downward since AMPH’s 2014 IPO as the pipeline suffered setbacks. While AMPH has underperformed the market over the last several years, there is some recent positivity around the stock (all-time highs) that we feel is misplaced and driven by transitory benefits due to competitor shortages of certain products (major contributor to 2021 performance) as well as expectations for near term product approvals (and resultant sell-side buzz). We feel the competitor shortages will resolve themselves and pipeline approvals will take longer than anticipated. If and when approved, we believe commercial opportunities for these products (which are largely anonymous) will prove underwhelming relative to expectations. We see 45%+ downside to our price target of $14/share, which is based on 8x our estimate of AMPH’s true run-rate EBITDA of $85mm.

Key Thesis Points

(1)   Not immune from the generic drug “treadmill”. While the focus has been on new assets, AMPH’s portfolio of more mundane generics is under pressure. Enoxaparin, once the crown jewel, contributes nothing to the bottom-line given competitive dynamics and raw material costs. Medroxyprogesterone, also cited as an example of AMPH’s complex injectable capabilities has seen declining sales due to competitor approvals. At one point, AMPH was the only approved generic for naloxone (Narcan) syringes that could be used with a nasal adapter to treat overdose—that product has also seen new competitor approvals and is eroding. 

(2)   “Crown jewel” products face unique risks. The two products that are most impactful to AMPH’s bottom-line are Primatene Mist and the glucagon emergency kit (we estimate ~45%+ of gross profit together). With respect to Primatene Mist, growth has plateaued as AMPH exhausts potential retail distribution channels. We believe there is tail risk with the product since asthma / allergy societies view inhaled epinephrine as a dangerous and inadequate approach to managing asthma and have expressed outrage over the product’s return to the market (one of many similar discussions: https://www.atsjournals.org/doi/pdf/10.1513/AnnalsATS.201902-164HP). Albuterol, the standard of care rescue inhaler, is increasingly affordable with numerous generics approved. It is important to highlight that the emergency kit, which needs to be quickly administered by a caregiver during an emergency, requires reconstitution of a powder and has a very low administration success rate (31% according to one study). Two products launched recently, Baqsimi, a ready-to-use nasal spray, and Gvoke, a ready-to-use formulation that works like an Epi-Pen are rapidly taking share away from the emergency kit, now dominating the market despite the generally bleak environment for launching new drugs over the past 2 years. Given there is a clear safety disadvantage to carrying the legacy kit vs. one of the newer formulations and AMPH already dominates the market for the legacy kit, we believe the product will soon begin eroding.

(3)   Technical capabilities overstated. While AMPH claims that it is focused on the hardest-to-make generic drugs, its track record suggests that it has bitten off more than it can chew with respect to most programs. For instance, despite years of discussion, there has been almost no progress made on the inhalation pipeline of various liquid and dry powder inhalers or the biosimilar insulin programs, and an intranasal naloxone project remains stalled after receiving its latest CRL from the FDA. Enoxaparin, Primatene Mist and glucagon emergency kit all took longer to get approved than initially communicated—several cycles of review over years. Several of the products AMPH touts as part of its pipeline have stymied industry leaders with significantly greater resources (i.e., Forteo, an osteoporosis treatment that Teva first filed in 2015 and has yet to get approved).

(4)   Nearest-term potential launches not compelling. Recently, AMPH gained tentative approval for Vasopressin, used to increase blood pressure. While this product represents a large branded opportunity, Eagle Pharmaceuticals has the first generic approval and has 180-day exclusivity. Even Eagle won’t enjoy true generic exclusivity, as American Regent got approval via the 505(b)(2) NDA pathway and has also launched its product. When AMPH launches, it could be one of 8-10 competitors, a scenario that typically means nobody makes much gross profit. Further, AMP-002, a mystery product in the pipeline, could see a near-term approval; however, sell-side is already discussing that as <$50mm in revenues, vs. years of citing the $300mm+ branded opportunity. Consensus estimates fully incorporate AMP-002, leading to downside risk if another CRL is received.

(5)   Recent performance driven by unsustainable dynamics. AMPH’s strong 2021 results were driven primarily by an under-spend on R&D and benefit from competitor shortages. We anticipate the shortage dynamic to be transient, leading to a significant giveback of revenue on certain products. Regarding the R&D spend, we believe this is largely timing related and will necessarily have to grow if anyone is to take the pipeline seriously.

Glucagon Emergency Kit:

Helpful to have a visual on what is entailed with the emergency kit (top) vs. the new formulations. Seems clear that this is a potential life-or-death scenario when relying on a potentially untrained individual to administer the rescue treatment.

Valuation

We estimate that AMPH’s true run-rate EBITDA based on existing products and normalized for competitor shortage impact and R&D underspend is ~$85mm. Generally, everything it currently markets apart from Primatene Mist is on a downwards trajectory outside of volatility related to competitor shortages (no fault of AMPH’s, that is just how generics work). Despite this, AMPH trades at ~15x this $85mm, and a still-rich ~11x consensus ’22 EBITDA which we believe fully incorporates an AMP-002 approval and launch and does not back out the transient shortages or contemplate erosion of glucagon emergency kit. There has been little fundamental change in the story since the announcement of AMPH’s earnings beat (on shortages and R&D underspend) in November, subsequent to which the stock traded ~$20/sh. While the Vasopressin announcement in December seems to have triggered the latest leg up and prompted the sell-side to expound on the virtues of the pipeline, it is clear to us that this approval is minimally valuable in the medium term and almost worthless long-term given competitive dynamics. As a base case, we believe 8x $85mm of EBITDA is an appropriate valuation, resulting in a $14/share price target. 8x represents a slight premium to more mundane generics companies that trade 6-7x EBITDA; however, we view a growthier multiple as unwarranted given fragility of the portfolio and dubiousness of the pipeline. While AMP-002 would support a higher run-rate EBITDA, the approval wouldn’t change our view on the opportunity at the current $26/share price (perhaps bumps our base case by ~$2-3/share if they get approval now vs. another CRL) as we expect AMP-002 contribution will be offset by erosion elsewhere over the medium-term and other generics could follow, quickly diminishing the opportunity.

Risks

• Near-term pipeline approvals such as AMP-002 prove more lucrative than sell-side has modeled

• Competitor shortages persist for longer

•  Success with inhalation or insulin biosimilar pipeline

Catalyst

• Pipeline setbacks

• Faster-than-expected portfolio erosion or surprise competitor approval for a key product

• Downward revision of sell-side estimates

• Tail risk event with a key product like Primatene Mist