2023-07-12 06:13:33 ET
Summary
- Amphastar Pharmaceuticals' share price has risen 54% in the last 12 months, outperforming the healthcare sector, due to its diversified revenues and recent acquisition of BAQSIMI from Eli Lilly and Company.
- The company's net margins have improved significantly, reaching a record 17.9%, and its EPS has grown each year for the last five years, making it an appealing growth opportunity for investors.
- Despite potential short-term cash flow pressures due to the cost of the BAQSIMI acquisition, the long-term outlook for Amphastar is strong.
Investment Outline
In terms of strong share price momentum, Amphastar Pharmaceuticals ( AMPH ) seems to have been a strong showcase of this. The share price has risen 54% in the last 12 months when much of the healthcare sector as a whole has experienced declines so far into 2023. Both Johnson & Johnson ( JNJ ) and UnitedHealth Group Incorporated ( UNH ) are down between 10 - 11% YTD.
It seems much of the opportunity in the sector might be found in smaller companies like AMPH. What seems to have been a leading cause for this growth is the fact that AMPH has a very diversified set of revenues that are all growing impressively. Strong sales in sodium bicarbonate, dextrose, and isoproterenol are some of the products that are highlighted. Besides this, the recent news that AMPH compelled the acquisition of BAQSIMI from Eli Lilly and Company ( LLY ) presents another solid growth opportunity for the business. It makes AMPH have a stronger international footprint and all in all these results in AMPH look like an intriguing buy right now, despite the runup in share price the last few months.
Recent Developments
The acquisition of BAQSIMI AMPH recently completed marks a significant step in their efforts to further its portfolio of offerings and make a mark in new markets. The acquisition provides AMPH with a branded product that has both growing sales and growing margins.
The commercial portfolio that AMPH has, has now gotten more diabetes products in the lineup and I think the coming quarters will show both better revenues and margins as a result of the acquisition.
However, what inventors should be aware of is that the cash position and the cashflows might be under some pressure in coming years as the closing of the acquisition cost $500 million. But AMPH is also required to pay an additional $125 million on the first anniversary of the acquisition. Between AMPH and LLY there have been set up certain milestones and if achieved could force AMPH to have to pay an additional $450 million to LLY. The amount is based on the achievement of those milestones. As a result, I think the long-term for AMPH looks very strong but in short-medium terms expect some suppression of the cash position.
Margins
In terms of the margins for AMPH, they have made very solid progress over the last few years. The net margins are sitting at a record 17.9%, a big difference when compared to the historical average of 8.3%.
Margin Profile (Seeking Alpha)
What seems to have been a major cause for the recent surge in the share price is the strong improvements that AMPH has been having regarding its margins. Beating out the sector in the bottom line of the business I think shows the adaptation that AMPH has and the resilience of margins and operating costs. The ROA is a solid 12% and as AMPH has a 10-year CAGR of 8.86% of the assets, I think the coming years will show an even better percentage result here.
Value For Investors
Investors seeking a dividend stock or a company buying back massive amounts of shares will have to look elsewhere. AMPH doesn't do any of those yet and has been diluting shares ever so slightly over the last several years. Not enough however to make a significant impact on the share price. But a point worth noting nonetheless.
EPS Growth (Investor Presentation)
The value of AMPH comes with the strong growth trajectory they are on. The EPS has grown 75% each year in the last 5 years, making AMPH a very appealing growth opportunity and an addition to a portfolio seeking further exposure in the healthcare sector.
Revenue Changes (Investor Presentation)
A driving force for this EPS growth seems to have been the further diversification of the product lineup. Back in 2014, AMPH relied on Enox for over half of the revenues, but that has since dropped to 7%. Not a move that should worry investors, quite the opposite. The diversified revenue streams now seem further resilient as we have seen regarding the margins above here previously. The bottom line of AMPH is a key factor as to why I think it's a buy right now. The strength shown is the reason for the valuation to be higher in my opinion when compared to the sector's historical and current multiples.
Valuation
Right now I think the valuation of AMPH seems very intriguing if you are looking for a growth opportunity in the healthcare sector. I think the history of the EPS growth is perhaps not realistic for the coming 5 years, 75% YoY would mean incredible returns and the current valuation of AMPH would be much higher as well I think. But over the coming 5 years, I think a 69% CAGR is possible given the product lineup the company has and that they continue taking steps in broadening it as well. I think there might be some suppressed growth in the coming couple of years as more capital will need to be diverted to paying back to LLY. But after that, I view 15% YoY growth in EPS as very achievable. We have already seen the bottom line margins growing but also remaining very resilient.
Risks
Risks regarding the share price I think it's quite likely we might see a pullback in the coming next few months, or at least very little to modest growth. The company has had a strong start with sales of many of its products surging. This might not be that sustainable throughout the remaining part of the year, and a pullback to a lower multiple might happen. Despite that, I stay put with my target of buying AMPH under 22x earnings. I think the risk/reward ratio still seems very reasonable.
Investor Takeaway
Right now I view AMPH as a very solid opportunity to benefit from growing demand for niche medical products. As AMPH is taking steps to broaden its product portfolio it seems to have quite a significant impact on the bottom line of the business. During the same period of diversifying the revenue streams the EPS has had a 75% CAGR (2018-2022). This momentum will in my opinion carry AMPH forward and yield investors a very satisfying return. Rating AMPH stock a buy right now.
For further details see:
Amphastar Pharma: A Company Growing Quickly As Acquisitions Likely Fuel Growth