Amphastar Pharmaceuticals: Stock With An Attractive 6 To 1 Risk-Reward Ratio

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Investment Thesis

Amphastar Pharmaceuticals (NASDAQ:AMPH) has a diversified and well-integrated offering in terms of pharmaceutical drugs, with several pending approvals in 2Q22 and 3Q22. In the base-case operation, it has an attractive 6 to 1 reward to risk ratio, with an upside potential of around 42.8%. Investors should consider investing in AMPH to outperform the market.

Background

Amphastar Pharmaceuticals, Inc. envisions itself as a developer, manufacturer, and distributor of pharmaceuticals. According to company management, it plans to compete based on its ability to focus on medication with high barriers to entry, having an integrated manufacturing process, and in-house clinical trials. Currently, it develops drugs for deep vein thrombosis, asthma, opioid overdose, pain management, anesthesia, and hypoglycemia. Its revenue sources have diversified from over 50% of revenue coming from one product in 2014 to over 9 products in 2021, as shown below.

Source: Amphastar

Some key upcoming milestones for the company are 2Q2022 and 3Q2022, when it anticipates General Drug Use Fee Act (GDUFA) authorization approvals for its drugs, as shown below. If approved AMPH would become a key player in a total addressable market of $650 million, which will boost its revenues considerably. These drugs are AMP-002 and AMP-015.

According to clinical trials, AMP-002 or Amphora, is a non-hormonal contraceptive used by women. According to Grand View Research, the TAM for this form of contraceptive is around $800 million.

According to Medicine Plus, AMP-015, or Teriparatide, is an injection used to treat osteoporosis. Osteoporosis is a condition in which the bones become thin and weak and break easily. Teriparatide is used by women who have undergone menopause and who are at high risk of fractures and cannot use other osteoporosis treatments. This product has a TAM of $650 million as predicted by AMPH below.

Source: Amphastar

Company Fundamentals

Based on the company income statement, we see that the cash nearly doubled from $66 million in 2017 to $126 million in 2021. We also note that the total company assets increased from $451 million to $672 million in 2021. Furthermore, the company total equity increased from $334 million in 2017 to $446 million in 2021. The company’s long-term debt less than doubled from $41 million in 2017 to $75 million in 2021.

Looking at the company income statement, we see that the company revenues increased from $240 million in 2017 to $438 million in 2021. We see that gross profits more than doubled from $91 million in 2017 to $200 million in 2021. The company’s EBITDA increased from $17 million to $108 million in 2021, which is over a six-fold increase. Lastly, the net profits after tax accelerated from $4 million per year to $64 million per year, which is a 16 times increase. It is also interesting to note that the company’s R&D expenses reduced from around $39 million in 2017 to $0 in 2021, which is inconsistent with the management goals of expanding further into drug development.

Q1 2022 Earnings Report – Key Takeaways

AMPH is delivering on all 4 fronts of its management operating plan: new product development, developing and manufacturing existing products, marketing of new products, and selling current products through high-volume sales. AMPH currently has a pipeline of 4 abbreviated new drug approvals in the queue for the FDA. It is also developing manufacturing processes for approved generic versions of out-of-patent products with a total addressable market of $26 billion. And on the marketing and sales side, it saw considerable success from the Primatene Mist® marketing campaign, which led to a boost in its revenues. Furthermore, it saw an increase in revenues from high volume sales of Glucagon, deficiency of which is one of the major causes of hypoglycemia, a condition characterized by diminished levels of glucose in the blood.

The company also announced a $25 million share buyback program, which is likely to continue indefinitely.

Company Valuation

For developing a discounted cash flow model for AMPH, we will assume that AMPH will grow at the conservative rate of 8 to 11% based on growth in sales of its existing drugs. We realize that with additional approvals, the potential to grow the revenues is much higher. But we also note that with plans to fund future drug development with sales revenue from approved drugs, AMPH will likely still grow at a conservative pace. We assume that R&D expenses are negligible, but in case this assumption is incorrect, this may be offset by higher revenues from other approvals. Based on this analysis and assumptions therein, we see that AMPH had 42.8% upside potential, with a fair value price target of $47.09 per share.

Revenue Forecast

Investment Risks and Competitor Analysis

In case AMPH fails to deliver on its management plan, we would anticipate a reversion to its industry median PE multiples ranging between 23.7 times trailing PE and 19.9 times forward PE. Based on this evaluation, we see that a fair price will be between $30.86 to $30.42%, which is a downside risk of approximately 7.1%.

Competitor Evaluation

Conclusion

Based on this analysis, we see that the downside risk of investing in AMPH is around 7.1% if it reverts to the industry median by failing to deliver on its management operating plan. The upside potential is around 42.1%, which makes the company have a reward to risk ratio of 6 to 1. It is an attractive investment for investors looking to add pharmaceutical companies to their portfolios.