Amphastar Pharmaceuticals Inc. (AMPH) is a generic drug company founded in 1996 that went public in 2014. Amphastar focuses on drugs that are either injected or inhaled. It looks for opportunities where its unique strengths, especially in manufacturing, allow it to earn attractive margins despite the generic status of the underlying molecule, highlights Doug Gerlach, editor of Investor Advisory Service.
It behaves almost like a junior version of a patent drug maker. The company manufactures and sells just over 25 generic drugs, constituting a very narrow revenue base for a publicly traded generics company. An over-the-counter asthma inhaler, Primatene MIST, was its largest revenue contributor before it acquired the rights to a branded inhalable treatment for low blood sugar, Baqsimi, from Lilly in 2023.
Amphastar Pharmaceuticals Inc. (AMPH)
Focusing on a niche naturally limits the company’s opportunity set. Drugs in its wheelhouse only come off patent occasionally. Not every product winds up commanding the hoped-for price or market share. Successful products also tend to attract increased competition.
For Amphastar to keep growing, it needs to broaden its strategy. Buying Baqsimi as a point of entry into the branded (nongeneric) drug landscape represents a new and potentially risky strategy. The company paid $625 million up front plus contingent consideration that could bring the total price tag to nearly $1 billion.
That is a lot of money for a company with a total stock market capitalization of less than $2 billion. The main attraction of buying Baqsimi seems to be the addition of an inhaled powder platform which could be levered for future branded or generic drugs. Creating new branded drugs by changing the delivery mechanism of existing drugs can be a successful strategy. Amphastar seems particularly keen on applying this strategy to the insulin market.
One downside for fundamental investors is that overall company results are going to be dominated by Baqsimi sales for years to come. On the plus side, this seems like a stock that could offer plentiful opportunities both to buy low and to sell high as Baqsimi results create potential share price volatility that investors can possibly take advantage of.
Another of the company’s emerging platforms is biosimilars, generic biologics which are subject to somewhat better competitive dynamics compared to other generic drugs. If the company’s strategy carries over into the more profitable worlds of biosimilars and branded drugs, then the upside could be considerable.
We expect EPS growth to outpace 12% revenue growth at 14% annually. Five years of such growth could result in EPS of $5.01. A repeat of the typical high P/E ratio of 24.2 could lead to a high stock price of 121. The downside risk is 44% to 22, its low price over the past 12 months.
Recommended Action: Buy AMPH.
