Specialty generics company Amphastar (NASDAQ:AMPH) received highly disappointing news on February 21 st when the FDA issued a complete response letter ("CRL") for its Intranasal Naloxone spray. Shares are down 18% since I published a bearish note on January 10 th .
I believe shares now have clear downside to the low end of my fair value range, which is now $10, down 20% from my previous fair value range. The market agrees, with shares down 17% in the wake of the news to ~$15. I see further downside, as the company is now likely to fall short of all earnings forecasts.
Why was Naloxne Intranasal so important?
Naloxone Intranasal was a nasal spray a novel attempt to leverage one of Amphastar's core manufacturing technologies, sprays, into a convenient, ready-to-use ("RTU") product that is slightly differentiated from the current vial version of naloxone. Naloxone has taken on greater prominence-its primary indication is heroin overdose rescue, and the product is now required to be in stock at every pharmacy in the country. Amphastar's product would have occupied a strong niche due to its convenience, but the approval is very much off the table for several months at the very least.
The FDA's reasons for not approving the product are human factor studies, device evaluation, and "other items." Studies tend to take a lengthy amount of time; so I believe the odds of the product receiving approval in 2017 are nearly zero.
More importantly, this marks the company's second CRL on its proprietary reformulation pipeline after Primatene Mist received a CRL in late December. At this stage, one must question Amphastar's ability to fully understand the regulatory process to bring its product pipeline to market. This could lead to a sizeable earnings gap for the foreseeable future.
Earnings for 2017 will be poor, but the market may not realize how poor
Based on the two consecutive CRLs and Q3 earnings that showed a material decline in enoxaparin earnings, I believe 2017 earnings will be poor. A few product approvals and strong share gains could easily help compensate for the decline, but I think Amphastar could post EBITDA as low as $30 million. At its current valuation, Amphastar trades at a shocking EV/EBITDA of 22.5x compared to a generics sector that sees companies without as significant product concentration risk like Teva (NYSE:TEVA) and Mylan (NASDAQ:MYL) are trading between 8-12x.
As is the case for any small company in the generics space, a shortage or two could completely change the game for 2017 earnings; however, on a normalized basis, I think earnings will be terrible. I expect shares to trade to a more conservative multiple of 16-18x EV/EBITDA, which would imply a share price of ~$10-$11, which is slightly below my relatively aggressive DCF (9.5% WACC, 2% PGR, 2020 EBITDA of $65M). In my view, the market will rerate Amphastar when the company provides its next quarterly report, which will occur in the next 2-3 weeks. I am staying far away from shares.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.