Amphastar Pharmaceuticals Inc
For the period ended Dec 31, 2023. Filed Feb 29, 2024.
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FY2023 · Filed Feb 29, 2024
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Amphastar Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Amphastar Pharmaceuticals, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework),** **and our report dated February 29, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Provision for chargebacks estimate | |
| Description of the Matter | The Company’s provision for chargebacks estimate totaled $21.9 million at December 31, 2023. As described in Note 5 to the consolidated financial statements, a provision for chargebacks is made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date. |
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| Auditing the provision for chargebacks estimate, the resulting impact of which is netted on the statement of operations against product sales, was complex, requires significant judgment, and the amounts involved are material to the financial statements taken as a whole. The significant judgment primarily relates to the estimation of the future wholesale customer mix and related contract pricing, which determine the rates at which future chargebacks on current sales will be paid. Revenue from product sales is recognized upon transfer of control of a product to a customer, generally upon delivery, and is based on an amount that reflects the consideration to which the Company expects to be entitled, which represents an amount that is net of the estimated provision for chargebacks, among other deductions. The estimated provision for chargebacks is based on wholesaler inventory levels, historic chargeback rates, and current contract pricing and wholesaler customer mix. | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the provision for chargebacks estimation process. This included testing controls over management’s review of significant assumptions and inputs used in the provision for chargebacks estimate, including actual sales, historical experience, wholesaler inventory levels, customer mix and contract pricing.To test the provision for chargebacks estimate, we obtained management’s calculations and performed the following procedures, among others. We evaluated the appropriateness of the Company’s models and methodology, including recalculating the estimate using those models and testing the completeness and accuracy of the inputs by comparing to internal and external data. We evaluated the reasonableness of significant assumptions (e.g., estimated wholesale customer mix and related contract pricing) by comparing rates at different time periods, including historical and subsequent periods, obtaining an understanding of the facts supporting the selected rates, and performing sensitivity analyses over those rates. We evaluated subsequent events to assess whether there was any new information that would require adjustment to the initial provision. |
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| Enoxaparin inventory lower of cost or net realizable value estimate | |
| Description of the Matter | The Company's inventories totaled $105.8 million as of December 31, 2023 which is net of, amongst other things, provisions to reduce the value of enoxaparin inventory to the lower of its cost and net realizable value. Total charges of $9.1 million related to enoxaparin inventory and related purchase commitments were included in cost of revenues in the Company’s consolidated statement of operations for the year ended December 31, 2023. As explained in Note 2 to the consolidated financial statements, the Company states inventory at the lower of cost and net realizable value. Net realizable value is determined using the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose of the inventory.Auditing management's estimate in determining the net realizable value of enoxaparin inventory involved subjective auditor judgment because the estimation of the average selling price relies on a number of factors that are affected by market conditions outside the Company's control. In particular, the estimated selling price forecast is sensitive to changes in significant assumptions, including demand for the Company’s products, customer mix, and expected competition. |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company's lower of cost or net realizable value estimate process. This included controls over management's assessment of assumptions such as future demand, customer mix and expected competition and data underlying the estimate, including but not limited to the completeness of the underlying inventory.Our substantive audit procedures included, among others, evaluating the significant assumptions stated above and the accuracy and completeness of the underlying data management used to value enoxaparin inventory. We compared the cost of on-hand enoxaparin inventory and related purchase commitments to the estimated net realizable value estimated based on selling price forecasts. We also evaluated adjustments to the estimated selling price for specific considerations, such as new significant customers, competitors, or planned price changes. We evaluated the reasonableness of management’s forecasted selling price and whether expected changes in demand, competition, or customer mix were appropriate by comparing with the Company’s experience. We also assessed the historical accuracy of management's estimates by performing retrospective reviews over prior periods' forecasted average selling prices and performed sensitivity analyses over the Company’s significant assumptions. |
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| | BAQSIMI® Acquisition |
| Description of the Matter | On June 30, 2023, the Company completed its acquisition of BAQSIMI® glucagon nasal powder, or BAQSIMI®, pursuant to an asset purchase agreement, or the Purchase Agreement, dated April 21, 2023, and a manufacturing service agreement, or the MSA, and a transition services agreement, or the TSA, dated June 30, 2023, with Eli Lilly & Company, or Lilly, as disclosed in Note 4 to the consolidated financial statements. The transaction was accounted for as an asset acquisition. Auditing the Company's accounting for its acquisition of BAQSIMI® was complex due to the judgement applied in identifying the elements of the transaction, including but not limited to the assets acquired, the MSA, and the TSA, and the effort in performing procedures and evaluating audit evidence related to the accounting for the transaction. |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company's accounting for the BAQSIMI® acquisition. This included testing the effectiveness of controls over management’s identification of the elements of the transaction.To test the accounting for the BAQSIMI® acquisition, we performed audit procedures that included, among others, reviewing the related Purchase Agreement, the MSA and the TSA, and evaluating management’s identification of the elements of the transaction. We involved subject matter resources to assist in evaluating the identification of elements of the transaction and the related accounting. |
/s/Ernst & Young LLP
We have served as the Company’s auditor since 1998.
Irvine, California
February 29, 2024
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