# Amphastar Pharmaceuticals, Inc. (AMPH) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Amphastar Pharmaceuticals, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1297184/000129718424000009/amph-20231231x10k.htm
Accession: 0001297184-24-000009
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AMPH/
All MD&A years: /company/AMPH/mda/
Previous year: /company/AMPH/mda/fy2022/ (FY 2022)
Next year: /company/AMPH/mda/fy2024/ (FY 2024)

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.

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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.

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Macroeconomic Trends and Uncertainties

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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.

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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.

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Recent Developments

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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.”

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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

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[[/GREPCENT_TABLE]]

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The increase in net revenues of finished pharmaceutical products for 2023 was primarily due to the following changes:

​

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[[/GREPCENT_TABLE]]

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Product Revenues, net

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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.

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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.

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Sales of API primarily depend on the timing of customer purchases.

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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.

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Other Revenues

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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.

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Backlog

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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.

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Gross Margins

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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.

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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

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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.

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We expect that selling, distribution and marketing expenses will continue to increase due to the increase in marketing expenditures for BAQSIMI® and Primatene MIST®. Legal fees may fluctuate from period to period due to the timing of patent challenges and other litigation matters.

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Research and development

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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.

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Non-operating income (expenses), net

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[[/GREPCENT_TABLE]]

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The change in non-operating income (expenses), net is primarily a result of:

​

[[GREPCENT_TABLE]]
[["","\u25cf","Interest income increased as a result of an increase in cash and investments."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","Interest incurred in connection with the Wells Fargo Term Loan used to finance the acquisition of BAQSIMI\u00ae, as well as the interest incurred in connection with the 2029 Convertible Notes. For more information regarding our debt, see \u201cPart II \u2013 Item 8. Financial Statements and Supplementary Data \u2013 Notes to Consolidated Financial Statements \u2013 Note. 15 \u2013 Debt.\u201d"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","Other income (expenses), net is primarily a result of foreign currency fluctuation, as well as the mark-to-market adjustments relating to our interest rate swap contracts during the year ended December 31, 2023. For the year ended December 31, 2022, we received a settlement of $5.4 million in connection with the Regadenoson patent litigation. For more information regarding our litigation matters, see \u201cPart II \u2013 Item 8. Financial Statements and Supplementary Data \u2013 Notes to Consolidated Financial Statements \u2013 Note. 21 \u2013 Litigation.\u201d"]]
[[/GREPCENT_TABLE]]

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Income tax provision

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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.”

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Liquidity and Capital Resources

Cash Requirements and Sources

We need capital resources to maintain and expand our business. We expect our cash requirements to increase significantly in the foreseeable future as we sponsor clinical trials for, seek regulatory approvals of, and develop, manufacture and market our current development stage product candidates and pursue strategic acquisitions of businesses or assets. Our future capital expenditures include projects to upgrade, expand, and improve our manufacturing facilities in the United States and China, including a significant increase in capital expenditures over the next few years. We plan to fund this facility expansion 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. 

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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.

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","Year Ended December 31,"],["\u200b","","\u200b","2023","","2022"],["\u200b","\u200b","\u200b","(in thousands)"],["Statement of Cash Flow Data:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net cash provided by (used in)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Operating activities","\u200b","\u200b","$","183,503","\u200b","$","89,181","\u200b"],["Investing activities","\u200b","\u200b","","(649,116)","\u200b","","(32,777)","\u200b"],["Financing activities","\u200b","\u200b","","454,094","\u200b","","(26,439)","\u200b"],["Effect of exchange rate changes on cash","\u200b","\u200b","","(283)","\u200b","","(220)","\u200b"],["Net (decrease) increase in cash, cash equivalents, and restricted cash","\u200b","\u200b","$","(11,802)","\u200b","$","29,745","\u200b"]]
[[/GREPCENT_TABLE]]

​

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:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","","December 31,","\u200b","\u200b","\u200b"],["\u200b","","","2023","","2022","","Change"],["\u200b","\u200b","","(in thousands)"],["Short-term debt and current portion of long-term debt","\u200b","\u200b","$","436","\u200b","$","3,046","\u200b","$","(2,610)","\u200b"],["Long-term debt","\u200b","\u200b","","589,579","\u200b","","72,839","\u200b","","516,740","\u200b"],["Total debt","\u200b","\u200b","$","590,015","\u200b","$","75,885","\u200b","$","514,130","\u200b"]]
[[/GREPCENT_TABLE]]

​

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:

[[GREPCENT_TABLE]]
[["","\u25cf","contract pricing and return terms of our agreements with customers;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","wholesaler inventory levels and turnover;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","historical chargeback and product return rates;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","shelf lives of our products, which is generally two years, as is the case with enoxaparin;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","direct communication with customers;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","anticipated introduction of competitive products or authorized generics; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","anticipated pricing strategy changes by us and/or our competitors."]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended"],["\u200b","\u200b","December 31,"],["\u200b","","2023","","2022"],["\u200b","\u200b","(in thousands)"],["Beginning balance","\u200b","$","26,606","\u200b","$","20,167","\u200b"],["Provision for chargebacks and rebates","\u200b","","257,219","\u200b","","208,081","\u200b"],["Credits and payments issued to third parties","\u200b","","(255,905)","\u200b","","(201,642)","\u200b"],["Ending balance","\u200b","$","27,920","\u200b","$","26,606","\u200b"]]
[[/GREPCENT_TABLE]]

​

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:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","December 31,"],["\u200b","","2023","\u200b","2022"],["\u200b","","(in thousands)"],["Reduction to accounts receivable, net","\u200b","$","21,861","","$","20,460"],["Accounts payable and accrued liabilities","\u200b","","6,059","\u200b","","6,146"],["Total","\u200b","$","27,920","\u200b","$","26,606"]]
[[/GREPCENT_TABLE]]

​

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:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended"],["\u200b","\u200b","December 31,"],["\u200b","","2023","","2022"],["\u200b","\u200b","(in thousands)"],["Beginning balance","\u200b","$","19,451","\u200b","$","21,677","\u200b"],["Provision for product returns","\u200b","","4,275","\u200b","","4,405","\u200b"],["Credits issued to third parties","\u200b","","(6,547)","\u200b","","(6,631)","\u200b"],["Ending balance","\u200b","$","17,179","\u200b","$","19,451","\u200b"]]
[[/GREPCENT_TABLE]]

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The provision for product returns is included in the following balance sheet accounts:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","December 31,"],["\u200b","","2023","\u200b","2022"],["\u200b","","(in thousands)"],["Accounts payable and accrued liabilities","\u200b","$","12,263","","$","14,867"],["Other long-term liabilities","\u200b","","4,916","\u200b","","4,584"],["Total","\u200b","$","17,179","\u200b","$","19,451"]]
[[/GREPCENT_TABLE]]

​

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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​