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Item 5. Market for Registrant’s Common Equity

2021-03-15 compared with 2020-03-16 · 9 added, 546 removed, 30 unchanged (95% of the section changed)

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed on the Nasdaq Global Select Market and has traded under the symbol “AMPH”

since our initial public offering on June 25, 2014.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed on the Nasdaq Global Select Market and has traded under the symbol “AMPH” since our initial public offering on June 25, 2014.

Prior to this date, there was no public market for our common stock.

6 unchanged sentences

At March 8, 2021, we had 47,432,937 shares of common stock outstanding held by approximately 143 stockholders of record of our common stock.

We believe the actual number of stockholders is greater than this number of record holders, including stockholders who are beneficial owners but whose shares are held in “street”

name by brokers and other nominees.

We believe the actual number of stockholders is greater than this number of record holders, including stockholders who are beneficial owners but whose shares are held in “street” name by brokers and other nominees.

This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

Stock Performance Graph

This graph shall not be deemed “soliciting material”

or to be “filed”

with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Amphastar Pharmaceuticals, Inc.

This graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Amphastar Pharmaceuticals, Inc.

under the Securities Act of 1933, as amended, or the Exchange Act.

14 unchanged sentences

Purchased (1)

October 1 –

October 31, 2019

November 1 –

November 30, 2019

December 1 –

December 31, 2019

During the fourth quarter of 2019, we repurchased shares of our common stock as part of the share buyback programs authorized by our Board of Directors on May 6, 2019.

October 1 – October 31, 2020

November 1 – November 30, 2020

December 1 – December 31, 2020

(1) During the fourth quarter of 2020, we repurchased shares of our common stock as part of the share buyback programs authorized by our Board of Directors on November 4, 2019 and August 4, 2020.

As of December 31, 2020, $17.4 million remained available for repurchase under such programs.

2 unchanged sentences

Securities Authorized for Issuance Under Equity Compensation Plans

See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”

for information regarding securities authorized for issuance.

Selected Financial Data.

The following table sets forth selected financial data as of and for the periods indicated.

The selected consolidated statements of operations data for fiscal 2019, 2018 and 2017 and the consolidated balance sheet data as of December 31, 2019 and 2018, are derived from our audited financial statements appearing in Item 8, “Financial Statements and Supplementary Data,”

of this Annual Report on Form 10-K.

The selected consolidated statements of operations data for fiscal 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017, 2016, and 2015, are derived from audited financial statements not included in this Annual Report on Form 10-K.

Our historical results are not necessarily indicative of the results to be expected in the future.

The data presented below should be read in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Year Ended December 31,

(in thousands, except per share data)

Consolidated Statements of Operations Data:

Cost of revenues

Operating (income) expenses:

Selling, distribution and marketing

General and administrative

Research and development

Gain on sale of intangible assets

Total operating expenses

Income (loss) from operations

Non-operating income (expenses):

Interest income

Interest expense

Other income (expenses), net

Total non-operating income (expenses)

Income (loss) before income taxes

Income tax provision (benefit)

Net income (loss)

Net income (loss) attributable to non-controlling interest

Net income (loss) attributable to Amphastar Pharmaceuticals, Inc.

Net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc.

shareholders:

Weighted-average shares used to compute net income (loss) per share attributable to Amphastar Pharmaceuticals, Inc.

shareholders:

(in thousands)

Consolidated Balance Sheet Data:

Cash, cash equivalents, restricted cash and short-term investments

Working capital

Long-term debt and finance leases, including current portion

Retained earnings

Total stockholders’

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, 2019 compared to the year ended December 31, 2018.

For a discussion of the year ended December 31, 2018 to the year ended December 31, 2017, 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, 2018, filed with the SEC on March 15, 2019, which discussion is hereby incorporated herein by reference.

We are a specialty pharmaceutical company that focuses 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 20 products.

We are currently developing a portfolio of 15 generic abbreviated new drug applications, or ANDAs, three biosimilar insulin product candidates and four proprietary product candidates, which are in various stages of development and target a variety of indications.

Seven of the ANDAs and one NDA are currently on file with the FDA.

Our largest products by net revenues currently include lidocaine jelly sterile solution, phytonadione, enoxaparin sodium injection, naloxone hydrochloride injection, medroxyprogesterone acetate, and Primatene ®

We launched medroxyprogesterone acetate in the first quarter of 2018.

In the fourth quarter of 2018, we launched our over-the-counter product Primatene ®

In July 2019, we began a national radio and television campaign for Primatene ®

Mist, which will continue throughout 2020.

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.

Included in these acquisitions are marketing authorizations for 33 products in the UK, Ireland, Australia, and New Zealand, representing 11 different injectable chemical entities from UCB Pharma GmbH.

We are in the process of transferring the manufacturing of these products to our facilities in California, which will require approvals from the UK Medicines and Healthcare products Regulatory Agency before we can relaunch the products.

In July 2018, our Chinese subsidiary, ANP, completed a private placement of its common equity interest and received approximately $56.3 million of cash proceeds.

We have retained approximately 58% of the equity interest in ANP following the private placement.

ANP’s net income or loss after July 2, 2018, is attributed to us in accordance with our equity interest of approximately 58% in ANP.

On May 20, 2019, we entered into a settlement agreement relating to the enoxaparin patent and antitrust litigation with Momenta Pharmaceuticals, Inc.

and Sandoz Inc.

Pursuant to the settlement agreement, the plaintiffs paid us $59.9 million on June 27, 2019.

For more information regarding the enoxaparin patent and antitrust litigation, see Note 20 to the consolidated financial statements for more information regarding litigation matters.

Business Segments

As of December 31, 2019, 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 enoxaparin, naloxone, phytonadione, lidocaine, medroxyprogesterone acetate, Primatene ®

Mist, as well as various other critical and non-critical care drugs.

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.

For more information regarding our segments, see “Part II –

Financial Statements and Supplementary Data –

Notes to Consolidated Financial Statements –

Segment Reporting Information.”

Results of Operations

Year ended December 31, 2019 compared to year ended December 31, 2018

Year Ended December 31,

(in thousands)

Finished pharmaceutical products

Total net revenues

Cost of revenues

Finished pharmaceutical products

Total cost of revenues

as % of net revenues

The increase in net revenues of finished pharmaceutical products for 2019 was primarily due to the following changes:

Year Ended December 31,

(in thousands)

Finished pharmaceutical products net revenues

Medroxyprogesterone

Primatene ®

Other finished pharmaceutical products

Total finished pharmaceutical products net revenues

Primatene ®

Mist reflects sales for a full year as the product was launched in December 2018.

Sales of Primatene ®

Mist increased in the fourth quarter of 2019 as a result of our nationwide television and radio advertising campaign and the launch of the product into Walmart.

$2.2 million of the increase in sales of lidocaine was driven by higher average selling prices while the remainder was largely due to higher unit volumes.

A higher average selling price led to $6.7 million of the sales increase in phytonadione, which was partially offset by a decrease in unit volumes.

The increase in sales of epinephrine was driven primarily by higher unit volumes.

Enoxaparin sales decreased due to lower unit volumes by $21.7 million as a result of increased competition, which was partially offset by $11.0 million, due to an increase in average selling prices because of a change in customer mix.

$1.6 million of the decrease in naloxone sales were due to

lower average selling prices, while the remainder of the decline was primarily due to lower unit volumes.

Medroxyprogesterone sales increased due to an increase in unit volumes, as the product was launched in 2018, so that year did not reflect a full year of sales.

Other finished pharmaceutical products sales increased primarily due to higher unit sales volumes of atropine, calcium chloride and dextrose, which were in high demand due to market shortages.

We anticipate that sales of naloxone, enoxaparin, and medroxyprogesterone will continue to fluctuate in the future as a result of competition.

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

In August 2019, we amended the Supply Agreement with MannKind Corporation, or MannKind, whereby MannKind’s aggregate total commitment of RHI API under the Supply Agreement was modified and extended for an additional two years through 2026, which timeframe would have previously lapsed after calendar year 2024.

MannKind paid us an amendment fee of $2.75 million, which we recognized in net revenues during the year ended December 31, 2019.

We anticipate that sales of API will continue to fluctuate and may decrease due to the inherent uncertainties related to sales to MannKind.

In addition, most of our API sales are denominated in euros, and the fluctuation in the value of the euro versus the U.S.

dollar has had, and will continue to have, an impact on API sales revenues in the near term.

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.

We had no significant backlog as of December 31, 2019.

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.

Cost of revenues

The launch of Primatene ®

Mist, which is a higher margin product, as well as the higher average selling price of phytonadione, helped increase our gross margins for the year ended December 31, 2019.

Gross margins for Primatene ®

Mist were magnified by the use of API and components which were expensed to pre-launch inventory in prior years.

The cost of heparin, which is the starting material for enoxaparin, has increased and is expected to increase further, putting downward pressure on our gross margins.

However, we believe that this trend will be offset by sales of our higher-margin products, such as medroxyprogesterone, isoproterenol and Primatene ®

Mist, which were launched over the past two years.

Selling, distribution, and marketing, and general and administrative

Year Ended December 31,

(in thousands)

Selling, distribution, and marketing

General and administrative

The increase in selling, distribution, and marketing expenses was primarily due to marketing expenses related to Primatene ®

Mist, including the cost of a national television and radio marketing campaign which began in July 2019.

The increase in general and administrative expense was primarily due to an increase in personnel cost and an increase in accounting audit fees and consultant fees associated with our compliance with public company reporting obligations .

This was partially offset by a decrease in legal expenses as a result of the enoxaparin patent and antitrust litigation settlement (see Note 20 to the consolidated financial statements for more information regarding litigation matters).

We expect that selling, distribution and marketing expenses will increase due to the increase in marketing expenditures for Primatene ®

We expect that general and administrative expenses will increase on an annual basis due to increased costs associated with ongoing compliance with public company reporting obligations.

Legal fees may fluctuate due to the timing of patent challenges and other litigation matters.

Research and development

Year Ended December 31,

(in thousands)

Salaries and personnel-related expenses

Pre-launch inventory

Clinical trials

Testing, operating and lab supplies

Other expenses

Total research and development expenses

Research and development costs 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.

Salaries and personnel-related expenses as well as depreciation expense increased in 2019 primarily due to API and key component development at our ANP facility.

Clinical trial expense increased due to external studies related to our generic product pipeline, primarily for our inhalation ANDAs and our insulin biosimilar programs.

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 trial costs related to our biosimilar 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.

Other income (expense), net

Year Ended December 31,

(in thousands)

Other income (expenses), net

In June 2019, we recognized a gain of $59.9 million relating to our settlement of the enoxaparin patent and antitrust litigation with Momenta Pharmaceuticals, Inc.

and Sandoz Inc.

For more information regarding the enoxaparin patent and antitrust litigation, see Note 20 to the consolidated financial statements for more information regarding litigation matters.

Income tax provision (benefit)

Year Ended December 31,

(in thousands)

Income tax provision (benefit)

Effective tax rate

The difference in income tax provision (benefit) was primarily due to differences in pre-tax income (loss) positions.

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, China, and France.

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, 2019, our foreign subsidiaries collectively held $31.3 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, depositary shares, warrants, units, or debt securities.

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 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 increased $51.7 million to $165.2 million at December 31, 2019, compared to $113.5 million at December 31, 2018.

Cash Flows from Operations

The following table summarizes our cash flows from operating, investing, and financing activities for the years ended December 31, 2019 and 2018 .

Year Ended December 31,

(in thousands)

Statement of Cash Flow Data:

Net cash provided by (used in)

Operating activities

Investing activities

Financing activities

Effect of exchange rate changes on cash

Net increase (decrease) in cash, cash equivalents, and restricted cash

Sources and Use of Cash

Operating Activities

Net cash provided by operating activities was $41.8 million for the year ended December 31, 2019, which included net income of $46.5 million, primarily as a result of the receipt of the $59.9 million relating to the litigation settlement with Momenta Pharmaceuticals, Inc.

and Sandoz Inc.

Non-cash items were primarily comprised of $18.1 million of depreciation and amortization, and $17.3 million of share-based compensation expense.

Additionally, there was a net cash outflow from changes in operating assets and liabilities of $51.7 million which resulted from the decrease in accounts receivable, offset by an increase in inventory, as well as a decrease in accounts payable and accrued liabilities.

The decrease in accounts receivable was due to the timing of sales.

The increase in inventory was primarily due to increased purchases of raw materials and the production of finished goods for enoxaparin and Primatene ®

Mist with an impact of $29.2 million and $9.3 million, respectively.

We plan to utilize deferred tax credits to offset a significant portion of the tax liability related to our 2019 U.S.

federal and California state taxable income, resulting in only $4.6 million tax payments.

Accounts payable and accrued liabilities decreased primarily due to the timing of payments.

Net cash provided by operating activities was $38.2 million for the year ended December 31, 2018, which included net loss of $6.7 million.

Non-cash items were primarily comprised of $16.5 million of depreciation and amortization, and $16.7 million of share-based compensation expense.

Additionally, there was a net cash inflow from changes in operating assets and liabilities of $12.1 million which resulted from the increase in accounts payable and accrued liabilities offset by an increase in accounts receivable and inventory.

The increase in accounts receivable was due to an increase in sales.

An increase in inventory, due to increased purchases of raw materials for Primatene ®

Mist, enoxaparin and other products in the U.S., was partially offset by a decrease in finished RHI API at AFP.

Accounts payable and accrued liabilities increased, primarily due to the timing of payments.

Investing Activities

Net cash used in investing activities was $50.5 million for the year ended December 31, 2019, primarily as a result of $41.6 million in purchases of property, plant, and equipment, which included $11.3 million incurred in the United States, $6.8 million in France, and $23.5 million in China.

Additionally, we purchased $8.8 million in short-term investments in 2019.

Net cash used in investing activities was $42.2 million for the year ended December 31, 2018, primarily as a result of $46.8 million in purchases of property, plant, and equipment, which included $15.7 million incurred in the United States, $9.3 million in France, and $21.8 million in China.

The cash used was partially offset by the $4.4 million receipt of the remaining consideration of the sale of various ANDAs in February 2017 (see Note 10 to the consolidated financial statements for more information).

Financing Activities

Net cash used in financing activities was $3.8 million for the year ended December 31, 2019, primarily as a result of $22.3 million used to purchase treasury stock, which was partially offset by the receipt of $18.3 million for the ANP private placement, and $3.4 million in net proceeds received from our equity plans.

Additionally, we received $3.6 million from borrowings on an equipment line of credit, and made $6.8 million in principal payments on our long-term debt and lines of credit.

Net cash provided by financing activities was $25.0 million for the year ended December 31, 2018, primarily as a result of $38.0 million received from the ANP private placement and $8.9 million of proceeds received from our equity plans, which was partially offset by $25.0 million used to purchase treasury stock.

Additionally, we received proceeds of $8.4 million primarily from borrowings on an equipment line of credit, and made $5.7 million in principal payments on our long-term debt.

Debt and Borrowing Capacity

Our outstanding debt obligations are summarized as follows:

(in thousands)

Short-term debt and current portion of long-term debt

Long-term debt

As of December 31, 2019, we had $41.4 million in unused borrowing capacity under revolving lines of credit and equipment lines of credit with Cathay Bank and East West Bank.

Lines of credit bear variable interest rates and are secured by inventory, accounts receivable, intangible assets, and equipment.

The weighted average interest rates on lines of credit as of December 31, 2019 and 2018 were 4.0% and 5.6%, respectively.

We have also entered into or refinanced certain mortgage and equipment loans with Cathay Bank and East West Bank, which bear variable or fixed interest rates and are secured by buildings and equipment.

On certain loans with East West Bank, we have entered into fixed interest rate swap contracts to exchange the variable interests for fixed interest rates without the exchange of underlying notional debt amounts.

For more information regarding our outstanding indebtedness, see “Part II –

Financial Statements and Supplementary Data –

Notes to Consolidated Financial Statements –

Debt.”

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 Note 2 to our audited consolidated financial statements, 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.

Revenue Recognition

In 2018, we adopted ASC 606, Revenue from Contracts with Customers , or ASC 606, using the modified retrospective transition method.

The adoption of ASC 606 did not have a material impact on our revenues recognition or on the consolidated financial statements and related disclosures.

According to ASC 606, revenue is recognized at the time that our customers obtain control of the promised goods.

Revenues derived from contract manufacturing services are recognized when third-party products are shipped to customers, after customers have accepted test samples of the products to be shipped.

The results for the reporting period beginning after January 1, 2018, are presented in accordance with the new standard, although comparative information continues to be reported under the accounting standards and policies in effect for those periods.

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 of product delivery to our 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 doubtful accounts 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;

shelf lives of our products, which is generally two years, as is the case with enoxaparin;

direct communication with customers;

anticipated introduction of competitive products or authorized generics;

anticipated pricing strategy changes by us and/or our competitors.

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 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:

(in thousands)

Beginning balance

Provision for chargebacks and rebates

Credits and payments issued to third parties

Ending balance

Changes in the chargeback provision from period to period are primarily dependent on our sales to wholesalers, the level of inventory held by wholesalers, and the wholesalers’

customer mix.

Changes in the rebate provision from period to period are primarily dependent on retailer’s and other indirect customers’

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 30 days to 60 days after the sale to wholesalers.

Accounts receivable and/or accounts payable and accrued liabilities are reduced and/or increased by the chargebacks and rebate amounts depending on whether we have the right to offset with the customer.

Of the provision for chargebacks and rebates as of December 31, 2019 and 2018, $15.4 million and $12.0 million were included in accounts receivable, net, on the consolidated balance sheets, respectively.

The remaining provision as of December 31, 2019 and 2018, was $6.2 million and $10.4 million, which were included in accounts payable and accrued liabilities, respectively.

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 assess other factors that could affect product returns including market conditions, product obsolescence and the introduction of 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:

(in thousands)

Beginning balance

Provision for product returns

Credits issued to third parties

Ending balance

Of the provision for product returns as of December 31, 2019 and 2018, $7.1 million and $5.3 million were included in accounts payable and accrued liabilities on the consolidated balance sheets, respectively.

The remaining provision of $3.2 million and $2.7 million were included in other long-term liabilities, respectively.

For the years ended December 31, 2019 and 2018, our aggregate product return rate was 1.1% and 1.3% of qualified sales, respectively.

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 and 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 net realizable value is below cost.

In determining the net realizable value of an inventory item, we consider factors such as 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.

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 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.

No impairment of indefinite-lived intangible asset and goodwill was recorded during the years ended December 31, 2019, 2018, or 2017, respectively.

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.

For awards issued prior to the listing of our common stock on The Nasdaq Global Select Market, or Nasdaq, the fair value of the common stock utilized in the fair value estimation of award arrangements has been determined by our board of directors, utilizing contemporaneous third-party valuations.

Following the listing of our common stock on Nasdaq, we use the closing stock price as reported on Nasdaq on the grant date for the fair value of its stock.

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 and the stock price from a set of peer companies, since our shares do not have sufficient trading history.

We consider factors such as stage of life cycle, competitors, size, market capitalization and financial leverage in the selection of similar entities.

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.

Effective January 1, 2017, we prospectively adopted certain requirements of Auditing Standards Update, or ASU, No.

As a result, cash flows related to excess tax benefits are classified in operating activities and all excess tax benefits and tax deficiencies are directly included in income tax expense or benefit in the consolidated statement of operations without adjusting prior periods.

Additionally, ASU No.

2016-09 eliminated the requirement that excess tax benefits from share-based compensation reduce taxes payable prior to being recognized in the financial statements.

Upon adoption of ASU No.

2016-09, the cumulative excess benefits of stock compensation of $0.9 million that was not previously recognized was established on the balance sheet resulting in an increase in deferred tax assets and retained earnings.

Business Combinations

If an acquired set of activities and assets is capable of being operated as a business consisting of inputs and processes from the viewpoint of a market participant, the assets acquired and liabilities assumed are a business.

Business combinations are accounted for using the acquisition method of accounting, which requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair value as of that date.

Fair value determinations are based on discounted cash flow analyses or other valuation techniques.

In determining the fair value of the assets acquired and liabilities assumed in a material acquisition, we may utilize appraisals from third party valuation firms to determine fair values of some or all of the assets acquired and liabilities assumed, or may complete some or all of the valuations internally.

In either case, we take full responsibility for the determination of the fair value of the assets acquired and liabilities assumed.

The value of goodwill reflects the excess of the fair value of the consideration conveyed to the seller over the fair value of the net assets received.

Acquisition-related costs that we incur to effect a business combination are expensed in the periods in which the costs are incurred.

When the operations of the acquired businesses were not material to our consolidated financial statements, no pro forma presentations were disclosed.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU No.

2016-02 Leases , which is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheets as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases.

The ASU and the related clarifications subsequently issued by the FASB became effective for our interim and annual reporting periods during the year ending December 31, 2019, and all annual and interim reporting periods thereafter.

In July 2018, the FASB further amended the standard to allow for a new transition method that offers the option of using the effective date as the date of initial application.

We elected the alternative transition method and therefore have not adjusted comparative-period financial information.

On January 1, 2019, we adopted ASC 842, which resulted in the recognition of right-of-use assets of approximately $13.9 million and lease liabilities of approximately $14.1 million related to our operating lease commitments.

We elected the available practical expedients at transition including the package of expedients pursuant to which (i) we have not reassessed our prior conclusion related to whether a contract contains a lease, the underlying lease classification or accounting for initial direct cost in a lease, and (ii) we have elected the hindsight practical expedient of determining the lease term and the short-term lease exception such that it did not recognize a right-of-use asset or lease liability for leases with a term of 12 months or less.

The new standard also provided practical expedients for our ongoing accounting and we have elected the practical expedient of not separating lease and non-lease components for our asset classes.

Footnote 18 provides details on our current operating lease arrangements.

The adoption of ASC 842 did not have a material impact on our results of operations or cash flows.

In June 2016, the FASB issued ASU No.

2016-13 Financial Instruments –

Credit Losses , which is aimed at providing financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit.

The standard update changes the impairment model for financial assets measured at amortized cost, requiring presentation at the net amount expected to be collected.

The measurement of expected credit losses requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

Available-for-sale debt securities with unrealized losses will be recorded through an allowance for credit losses.

The ASU and the related clarifications subsequently issued by FASB will become effective for our interim and annual reporting periods during the year ending December 31, 2020.

Early adoption is permitted for interim or annual periods after December 31, 2019.

We will be required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

This new guidance will apply to our held-to-maturity investments and trade receivables.

We do not believe the adoption of this accounting guidance will have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No.

2017-04 Simplifying the Test for Goodwill Impairment , which eliminates the requirement to calculate the implied fair value of goodwill.

An entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;

however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

The update also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative

assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.

An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.

The guidance is effective for our interim and annual reporting periods during the year ending December 31, 2020, and applied on a prospective basis.

Early adoption is permitted for interim and annual goodwill impairment testing dates after January 1, 2017.

We currently do not believe that the adoption of this accounting guidance will have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No.

2018-13 Disclosure Framework –

Changes to the Disclosure Requirements for Fair Value Measurement , which removes, modifies, and adds certain disclosure requirements to ASC 820, Fair Value Measurement.

The guidance is effective for our interim and annual reporting periods during the year ending December 31, 2020.

Early adoption is permitted.

We do not believe that the adoption of this accounting guidance will have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No.

2018-14 Disclosure Framework –

Changes to the Disclosure Requirements for Defined Benefit Plans , which removes, modifies, and adds certain disclosure requirements to ASC 715-20, Defined Benefit Plans.

The guidance is effective for our interim and annual reporting periods during the year ending December 31, 2021.

Early adoption is permitted.

We do not believe that the adoption of this accounting guidance will have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No.

2018-15 Customer’s Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement that is a Service Contract , which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalized implementation cost incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

The guidance also requires the entity to expense the capitalized implementation cost of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonable certain renewals.

This guidance is effective for our interim and annual reporting periods after December 31, 2019.

The adoptions of the guidance will not have a material impact on our consolidated financial statements and related disclosures.

In October 2018, the FASB issued ASU No.

2018-17 Targeted Improvements to Related Party Guidance for Variable Interest Entities , which requires indirect interests held through related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests.

The guidance is effective for our interim and annual reporting periods during the year ending December 31, 2020.

Early adoption is permitted.

We currently do not believe that the adoption of this accounting guidance will have a material impact on our consolidated financial statements and related disclosures.

In November 2018, the FASB issued ASU No.

2018-18 Clarifying the Interaction between Topic 808 and Topic 606 , which requires transactions in collaborative arrangements to be accounted for under ASC 606, Revenue from Contracts with Customers, or ASC 606, if the counterparty is a customer for a good or service that is a distinct unit of account.

The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers.

The guidance is effective for our interim and annual reporting periods during the year ending December 31, 2020.

Early adoption is permitted, including in any interim period.

We are currently evaluating the impact that the adoption of this guidance will have on our consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU No.

2019-12 Simplifying the Accounting for Income Taxes (Topic 740) , which simplifies various aspects related to accounting for income taxes.

The amendment also improves consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

The guidance is effective for our interim and annual reporting periods after the year ended December 15, 2020, with early adoption permitted.

We are currently evaluating the impact that the adoption of this guidance will have on our consolidated financial statements and related disclosures.

Non-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States, or GAAP.

Contractual Obligations

Set forth below are our contractual payment obligations (including interest obligations but excluding intercompany obligations) as of December 31, 2019:

Contractual Obligations (1)

(in thousands)

Long-term debt (2)

Operating leases

Finance leases

Facility construction in Nanjing, China (3)

Purchase obligations (4)

The table above excludes our liability for uncertain tax positions of $8.3 million because the timing of any related payments cannot be reasonably estimated.

Long‑term debt includes accrued and unpaid interest.

As of December 31, 2019, the principal amount of long-term debt with variable interest exposure was $14.5 million.

As of December 31, 2019, the weighted average variable interest rate on our long‑term debt was 4.7%.

Obligation to develop a facility in Nanjing, China.

Please see “—

Investment in China”

below for further discussion.

The purchase obligations principally relate to inventory and pharmaceutical manufacturing and laboratory equipment.

We anticipate meeting these purchase obligations through a combination of cash on hand, future cash flows from operations and debt and lease facilities.

Off‑Balance Sheet Arrangements

We do not have any relationships or financial partnerships with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off‑balance sheet arrangements or other contractually narrow or limited purposes.

In addition, we do not engage in trading activities involving non‑exchange traded contracts.

Investment in China

In accordance with certain agreements between ANP and the Chinese government, in January 2010 and November 2012, we acquired certain land-use rights for $1.2 million and $1.3 million, respectively.

As required by these agreements, we have committed to spending approximately $15.0 million in the related land development, which primarily includes the construction of fixed assets according to a specified timetable.

As of December 31, 2019, we have spent $13.5 million on such construction.

We anticipate that this spending commitment will be met by the end of 2020.

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 5, 2019 through February 12, 2019, our Amphastar facility in Rancho Cucamonga, California was subject to a preapproval inspection by the FDA.

The inspection included a review of our corrective actions taken from the previous cGMP inspection in March 2017, as well as review of data to support our pending applications.

The inspections resulted in multiple observations on Form 483.

We fully responded to those observations on March 6, 2019.

We believe that our responses to the observations will satisfy the requirements of the FDA and that no significant further actions will be necessary.

From February 25 through March 1, 2019, our IMS facility in South El Monte, California was subject to a preapproval inspection by the FDA.

The inspection included a review of our corrective actions taken from the 2017 inspection as well as review of data to support our pending applications.

The inspection resulted in multiple observations on Form 483.

We responded to those observations on March 22, 2019.

We believe that our responses to the observations will satisfy the requirements of the FDA and that no significant further actions will be necessary.

From July 23 through July 25, 2019, our Amphastar facility in Rancho Cucamonga, California was subject to a routine, post-marketing adverse drug experience reporting inspection, or PADE, by the FDA.

The inspection included a review of our processes for collecting, reviewing, investigating and reporting post-marketing adverse drug experiences reported through various sources.

The inspection resulted in no Form 483 findings.

No further actions will be necessary.

From August 27 through September 04, 2019, one of our California clinical trial sites was subject to a pre-approval biomonitoring inspection by the FDA.

The inspection included a review of the clinical trial data to support one of our pending applications.

The inspection resulted in no Form 483 findings.

No further actions will be necessary.

From October 7 through October 11, 2019, our Chinese subsidiary ANP, was subject to a cGMP inspection by the FDA.

The inspection included a review of compliance with FDA regulations relating to Good Manufacturing Practices.

The inspection resulted in one observation on Form 483.

We responded to that observation.

We believe that our response to the observation will satisfy the requirements of the FDA and that no significant further actions will be necessary.

From October 24 to November 5, 2019, our IMS facility in South El Monte, California was subject to a preapproval inspection by the FDA.

The inspection included a review of data to support our pending applications.

The inspection resulted in multiple observations on Form 483.

We responded to the initial observations within the required timeframe, however, there was an additional request for information.

We plan to submit our response in March 2020, and we believe that it will satisfy the requirements of the FDA and that no significant further actions will be necessary.

From November 18 to November 22, 2019, our Amphastar facility in Rancho Cucamonga, California was subject to a pre-approval biomonitoring inspection by the FDA.

The inspection included review of the analytical laboratory used in support of one of our pending applications.

The inspection resulted in no Form 483 findings.

No further actions will be necessary.

From November 18 to November 21, 2019, our IMS facility in South El Monte, California and our Amphastar facility in Rancho Cucamonga, California were subject to a pre-approval biomonitoring inspection by the FDA.

The inspection included review of the analytical laboratory and an in vitro study used in support of one of our pending applications.

The inspection resulted in no Form 483 findings.

No further actions will be necessary.

On December 18, 2019, our IMS facility in South El Monte, California was subject to an inspection by the FDA.

The inspection was part of an overall investigation involving makers of opioid products.

The inspection resulted in no Form 483 findings.

No further actions will be necessary.

See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity