ALBANY MOLECULAR RESEARCH INC - FORM 10-Q

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EX-2.1 - ALBANY MOLECULAR RESEARCH INC	v183980_ex2-1.htm
EX-31.2 - ALBANY MOLECULAR RESEARCH INC	v183980_ex31-2.htm
EX-31.1 - ALBANY MOLECULAR RESEARCH INC	v183980_ex31-1.htm
EX-32.2 - ALBANY MOLECULAR RESEARCH INC	v183980_ex32-2.htm
EX-32.1 - ALBANY MOLECULAR RESEARCH INC	v183980_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2010

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-25323

ALBANY MOLECULAR RESEARCH, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		14-1742717
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

21 Corporate Circle

PO Box 15098

Albany, New York 12212-5098

(Address of principal executive offices)

(518) 464-0279

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at April 30, 2010
Common Stock, $.01 par value		31,807,521, excluding treasury shares of 3,824,593

ALBANY MOLECULAR RESEARCH, INC.

INDEX

Part I.	Financial Information		3

	Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3

		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

	Item 4.	Controls and Procedures	24

Part II.	Other Information		25

	Item 1.	Legal Proceedings	25

	Item 1A.	Risk Factors	25

	Item 6.	Exhibits	25

Signatures			26

Exhibit Index

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

	Three Months Ended
(Dollars in thousands, except for per share data)	March 31, 2010			March 31, 2009

Contract revenue	$	38,892		$	43,244
Recurring royalties		10,439			10,786
Total revenue		49,331			54,030

Cost of contract revenue		34,761			36,643
Technology incentive award		1,043			1,105
Research and development		2,763			3,385
Selling, general and administrative		10,639			10,302
Total operating expenses		49,206			51,435

Income from operations		125			2,595

Interest income, net		43			111
Other (loss) income, net		(88	)		328

Income before income tax expense		80			3,034

Income tax expense		14			1,092

Net income	$	66		$	1,942

Basic earnings per share	$	0.00		$	0.06

Diluted earnings per share	$	0.00		$	0.06

See notes to unaudited condensed consolidated financial statements.

Albany Molecular Research, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(Dollars and shares in thousands, except for per share data)	March 31, 2010			December 31, 2009
Assets
Current assets:
Cash and cash equivalents	$	55,203		$	80,953
Investment securities		29,532			30,105
Accounts receivable, net		29,165			23,616
Royalty income receivable		9,800			7,101
Inventory		26,403			25,143
Unbilled services		83			58
Prepaid expenses and other current assets		9,956			8,780
Deferred income taxes		4,751			4,708
Total current assets		164,893			180,464

Property and equipment, net		178,517			166,746

Goodwill		22,764			17,551
Intangible assets and patents, net		2,512			2,461
Equity investment in unconsolidated affiliates		956			956
Deferred income taxes		1,304			1,166
Other assets		4,070			4,348
Total assets	$	375,016		$	373,692

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	21,358		$	18,368
Deferred revenue and licensing fees		9,750			10,777
Accrued pension benefits		218			218
Income taxes payable		536			1,101
Current installments of long-term debt		270			270
Total current liabilities		32,132			30,734

Long-term liabilities:
Long-term debt, excluding current installments		13,212			13,212
Deferred licensing fees		6,824			7,143
Deferred rent		1,315			1,354
Pension and postretirement benefits		6,449			6,445
Environmental liabilities		191			191
Total liabilities		60,123			59,079

Commitments and contingencies

Stockholders’ equity:
Common stock, $0.01 par value, 100,000 shares authorized, 35,633 shares issued as of March 31 2010, and 35,467 shares issued as of December 31, 2009		356			355
Additional paid-in capital		202,469			201,667
Retained earnings		174,187			174,121
Accumulated other comprehensive loss, net		(5,231	)		(4,642	)
		371,781			371,501
Less, treasury shares at cost, 3,825 shares as of March 31, 2010 and December 31, 2009		(56,888	)		(56,888	)
Total stockholders’ equity		314,893			314,613
Total liabilities and stockholders’ equity	$	375,016		$	373,692

See notes to unaudited condensed consolidated financial statements.

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Three Months Ended
(Dollars in thousands)	March 31, 2010			March 31, 2009

Operating activities
Net income	$	66		$	1,942
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		4,149			4,331
Deferred income tax benefit		(162	)		(4,309	)
Loss on disposal of property, plant and equipment		—			66
Stock-based compensation expense		549			525
Provision for bad debt		(66	)		—
Write down for obsolete inventories		—			331
Change in assets and liabilities, net of effect of acquisition:
Accounts receivable		(4,453	)		8,197
Royalty income receivable		(2,699	)		(3,713	)
Inventory, prepaid expenses and other assets		(348	)		685
Accounts payable and accrued expenses		(1,333	)		158
Income tax payable		(565	)		3,580
Deferred revenue and licensing fees		(1,346	)		9,546
Pension and postretirement benefits		65			(7	)
Other long-term liabilities		(39	)		614
Net cash (used in) provided by operating activities		(6,182	)		21,946

Investing activities
Purchases of investment securities		(1,577	)		(261	)
Proceeds from sales and maturities of investment securities		1,995			2,932
Purchase of businesses, net of cash acquired		(18,462	)		(12	)
Purchase of property, plant and equipment		(1,898	)		(8,654	)
Payments for patent applications and other costs		(129	)		(97	)
Net cash used in investing activities		(20,071	)		(6,092	)

Financing activities
Proceeds from sale of common stock		254			192
Net cash provided by financing activities		254			192

Effect of exchange rate changes on cash flows		249			(858	)

(Decrease) increase in cash and cash equivalents		(25,750	)		15,188

Cash and cash equivalents at beginning of period		80,953			60,400

Cash and cash equivalents at end of period	$	55,203		$	75,588

See notes to unaudited condensed consolidated financial statements.

(All amounts in thousands, except per share amounts, unless otherwise noted)

Note 1 — Summary of Operations and Significant Accounting Policies

Nature of Business and Operations

Albany Molecular Research, Inc. (the “Company”) provides scientific services, technologies and products focused on improving the quality of life. The Company’s core business consists of a fee-for-service contract services platform encompassing drug discovery, development and manufacturing and a separate stand-alone research and development division consisting of proprietary technology investments, internal drug discovery and niche generic active pharmaceutical ingredient product development. With locations in the U.S., Europe, and Asia, the Company provides customers with a range of services and cost models.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair statement of the results for the interim period have been included. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated during consolidation. Assets and liabilities of non-U.S. operations are translated at period-end rates of exchange, and the statements of operations are translated at the average rates of exchange for the period. Unrealized gains or losses resulting from translating non-U.S. currency financial statements are recorded in accumulated other comprehensive (loss) income in the accompanying unaudited condensed consolidated balance sheets.

Use of Management Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates included in the accompanying consolidated financial statements include assumptions regarding the collectibility of receivables, the valuation of inventory, and the fair value of goodwill, intangible assets, and long-lived assets. Other significant estimates include assumptions utilized in determining the amount and realizabilty of deferred tax assets and assumptions utilized in determining actuarial obligations in conjunction with the Company’s pension and postretirement health plans. Actual results can vary from these estimates.

Contract Revenue Recognition

The Company’s contract revenue consists primarily of fees earned under contracts with third-party customers and reimbursed expenses under such contracts. The Company also seeks to include provisions in certain contracts that contain a combination of up-front licensing fees, milestone and royalty payments should the Company’s proprietary technology and expertise lead to the discovery of new products that become commercial. Reimbursed expenses consist of chemicals and other project specific costs. Generally, the Company’s contracts may be terminated by the customer upon 30 days’ to one year’s prior notice, depending on the terms and/or size of the contract. The Company analyzes its agreements to determine whether the elements can be separated and accounted for individually or as a single unit of accounting in accordance with FASB’s Accounting Standards Codification (“ASC”) 605-25, “Revenue Arrangements with Multiple Deliverables,” and ASC Topic 13 (formerly Staff Accounting Bulletin (“SAB”) 104), “Revenue Recognition”. Allocation of revenue to individual elements that qualify for separate accounting is based on the fair value of the respective elements.

The Company generates contract revenue on the following basis:

Full-time Equivalent (“FTE”). An FTE agreement establishes the number of Company employees contracted for a project or a series of projects, the duration of the contract period, the price per FTE, plus an allowance for chemicals and other project specific costs, which may or may not be incorporated in the FTE rate. FTE contracts can run in one month increments, but typically have terms of six months or longer. FTE contracts typically provide for annual adjustments in billing rates for the scientists assigned to the contract.

These contracts involve the Company’s scientists providing services on a “best efforts” basis on a project that may involve a research component with a timeframe or outcome that has some level of unpredictability. There are no fixed deliverables that must be met for payment as part of these services. As such, the Company recognizes revenue under FTE contracts on a monthly basis as services are performed according to the terms of the contract.

Time and Materials. Under a time and materials contract the Company charges customers an hourly rate plus reimbursement for chemicals and other project specific costs. The Company recognizes revenue for time and material contracts based on the number of hours devoted to the project multiplied by the customer’s billing rate plus other project specific costs incurred.

Fixed-Fee. Under a fixed-fee contract the Company charges a fixed agreed upon amount for a deliverable. Fixed-fee contracts have fixed deliverables upon completion of the project. Typically, the Company recognizes revenue for fixed-fee contracts after projects are completed, delivery is made and title transfers to the customer, and collection is reasonably assured. In certain instances, the Company’s customers request that the Company retain materials produced upon completion of the project due to the fact that the customer does not have a qualified facility to store those materials or for other reasons. In these instances, the revenue recognition process is considered complete when project documents (batch records, Certificates of Analysis, etc.) have been delivered to the customer and payment has been collected.

Up-Front License Fees, Milestone, and Royalty Revenue. The Company recognizes revenue from up-front non-refundable licensing fees on a straight-line basis over the period of the underlying project. The Company will recognize revenue arising from a substantive milestone payment upon the successful achievement of the event, and the resolution of any uncertainties or contingencies regarding potential collection of the related payment, or if appropriate over the remaining term of the agreement.

Recurring Royalties Revenue Recognition. Recurring royalties consist of royalties under a license agreement with sanofi-aventis based on the worldwide sales of fexofenadine HCl, marketed as Allegra in the Americas and Telfast elsewhere, as well as on sales of sanofi-aventis’ authorized generics. The Company records royalty revenue in the period in which the sales of Allegra/Telfast occur, because we can reasonably estimate such royalties. Royalty payments from sanofi-aventis are due within 45 days after each calendar quarter and are determined based on sales of Allegra/Telfast in that quarter, with the exception of Allegra D-12 which has a fixed royalty amount through July 2010.

Long-Lived Assets:

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include, among others, the following:

a significant change in the extent or manner in which a long-lived asset is being used;

a significant change in the business climate that could affect the value of a long-lived asset; and

a significant decrease in the market value of assets.

If the Company determines that the carrying value of long-lived assets may not be recoverable, based upon the existence of one or more of the above indicators of impairment, the Company compares the carrying value of the asset group to the undiscounted cash flows expected to be generated by the asset group. If the carrying value exceeds the undiscounted cash flows an impairment charge is recorded. An impairment charge is recognized to the extent that the carrying amount of the asset group exceeds their fair value and will reduce only the carrying amounts of the long-lived assets. The Company utilizes the assistance of an independent valuation firm in determining the fair values.

Goodwill:

The Company performs an annual assessment of the carrying value of goodwill for potential impairment (or on an interim basis if certain triggering events occur). A determination of impairment is made based upon the comparison of the book value to the fair value of the related reporting unit. If goodwill is determined to be impaired, the Company would be required to record a charge to its results of operations. Factors the Company considers important which could result in an impairment include the following:

· significant underperformance relative to historical or projected future operating results;

· significant negative industry or economic trends; and

· market capitalization relative to net book value

See Note 6 for further information on the Company’s goodwill balances.

Note 2 — Business Combination

Acquisition of Excelsyn Ltd.

On February 17, 2010, the Company completed the purchase of all of the outstanding shares of Excelsyn Ltd. (“Excelsyn”), a chemical development and manufacturing facility located in Holywell, United Kingdom. The aggregate purchase price was $18,462.

Excelsyn provides development and large scale manufacturing services to large pharmaceutical, specialty pharmaceutical and biotechnology customers throughout Europe, Asia and North America. Manufacturing services include pre-clinical and Phase I – III product development as well as commercial manufacturing services for approved products. The acquisition of Excelsyn expands AMRI’s portfolio of development and large scale manufacturing facilities as well as its customer portfolio, with little overlap of customers between the two companies.

A final valuation will be completed to determine the fair value of the acquired property and equipment and any potential identifiable intangibles, which may result in changes to their estimated fair values, as well as changes to the allocated goodwill fair value. The following table summarizes the preliminary allocation of the purchase price to the estimated fair value of the net assets acquired:

	February 17, 2010
Assets Acquired
Accounts receivable	$	1,030
Inventory		1,104
Prepaid expenses and other current assets		750
Property and equipment		14,130
Goodwill		5,771
Total assets acquired	$	22,785

Liabilities Assumed
Accounts payable and accrued expenses	$	4,323
Total liabilities assumed	$	4,323

Net assets acquired	$	18,462

Pro forma financial information for the three months ended March 31, 2010, as if the Excelsyn acquisition had been completed as of January 1, 2010, has been excluded due to the immateriality of the operating results of Excelsyn in relation to the Company’s consolidated operating results as a whole.

Note 3 — Earnings Per Share

The shares used in the computation of the Company’s basic and diluted earnings per share are as follows:

	Three Months Ended March 31,
	2010		2009
Weighted average common shares outstanding		31,168		31,016
Dilutive effect of restricted stock		167		97
Weighted average common shares outstanding		31,335		31,113

The Company has excluded certain outstanding stock options and non-vested restricted shares from the calculation of diluted earnings per share for the three months ended March 31, 2010 and 2009 because the exercise price was greater than the average market price of the Company’s common shares during that period, and as such, these options and shares would be anti-dilutive. The weighted average number of anti-dilutive options and restricted shares outstanding (before the effects of the treasury stock method) was 1,906 for both the three months ended March 31, 2010 and 2009. These amounts are not included in the calculation of weighted average common shares outstanding.

Note 4 — Inventory

Inventory consisted of the following at March 31, 2010 and December 31, 2009:

	March 31, 2010		December 31, 2009
Raw materials	$	8,140	$	7,415
Work in process		3,333		2,213
Finished goods		14,930		15,515
Total	$	26,403	$	25,143

Note 5 — Restructuring

AMRI India

In December 2009, the Company initiated a restructuring of its AMRI India locations which consisted of closing and consolidating its Mumbai administrative office into its Hyderabad location as part of the Company’s goal to streamline operations and eliminate duplicate administrative functions. The Company recorded a restructuring charge of approximately $364 in the fourth quarter of 2009, including lease termination charges of $215, leasehold improvement abandonment charges of $107 and administrative costs of $42.

The restructuring costs are included under the caption “Restructuring charge” in the consolidated statement of operations for the year ended December 31, 2009 and the restructuring liabilities are included in “Accounts payable and accrued expenses” on the consolidated balance sheet at March 31, 2010 and December 31, 2009.

The AMRI India restructuring activity was recorded in the Company’s Large Scale Manufacturing (“LSM”) operating segment. The following table displays AMRI India’s restructuring activity and liability balances within our LSM operating segment:

	Balance at January 1, 2010		Paid Amounts			Foreign Currency Translation Adjustments		Balance at March 31, 2010
Lease termination charges	$	215	$	(165	)	$	4	$	54
Administrative costs associated with restructuring		11		(7	)		—		4
Total	$	226	$	(172	)	$	4	$	58

Lease termination charges and leasehold improvement abandonment charges relate to costs associated with exiting the current facility.

The net cash outflow related to the AMRI India restructuring for the quarter ended March 31, 2010 was $172. Anticipated cash outflows related to the AMRI India restructuring for the remainder of 2010 is approximately $58, which primarily consists of lease termination charges.

AMRI Hungary

In May 2008, the Company initiated a restructuring of its Hungary location. The goal of the restructuring was to realign the business model for these operations to better support the Company’s long-term strategy for providing Discovery Services in the European marketplace. The Company recorded a restructuring charge of approximately $1,833 in the second quarter of 2008, including termination benefits and personnel realignment costs of approximately $901, losses on grant contracts of approximately $389, lease termination charges of approximately $463 and administrative costs associated with the restructuring plan of $80.

During August 2009, the Company closed and consolidated its Balaton, Hungary facility into the new facility in Budapest, Hungary as part of the Company’s goal to streamline operations and to consolidate locations, equipment and operating costs. As a result, the Company recorded a restructuring charge of approximately $327 in the second quarter of 2009, including termination benefits and personnel realignment costs of approximately $134, lease termination charges of $182 and administrative costs associated with the restructuring plan of $11.

The following table displays AMRI Hungary’s restructuring activity and liability balances within our Discovery/Development/Small Scale Manufacturing (“DDS”) operating segment:

	Balance at January 1, 2010		Paid Amounts			Foreign Currency Translation Adjustments			Balance at March 31, 2010
Termination benefits and personnel realignment	$	55	$	(24	)	$	(1	)	$	30
Losses on grant contracts		246		(93	)		(12	)		141
Lease termination charges		275		—			(14	)		261
Administrative costs associated with restructuring		12		—			(2	)		10
Total	$	588	$	(117	)	$	(29	)	$	442

Termination benefits and personnel realignment costs relate to severance packages, outplacement services, and career counseling for employees affected by this restructuring. Losses on grant contracts represent estimated contractual losses that will be incurred in performing grant-based work under Hungary’s legacy business model. Lease termination charges relate to costs associated with exiting the current facility.

Anticipated cash outflows related to the Hungary restructuring for the remainder of 2010 is approximately $180, which primarily consists of the lease termination charges and incurring losses on grant contracts.

Note 6 — Goodwill and Intangible Assets

The carrying amounts of goodwill, by the Company’s DDS and LSM operating segments, as of March 31, 2010 and December 31, 2009 are as follows:

	DDS		LSM		Total

March 31, 2010	$	14,347	$	8,417	$	22,764

December 31, 2009	$	13,199	$	4,352	$	17,551

The increase in goodwill within the DDS segment from December 31, 2009 to March 31, 2010 is due to the goodwill recorded in association with the acquisition of Excelsyn in February 2010. This increase was offset in part by a decrease in goodwill due to the impact of foreign currency translation. The increase in goodwill within the LSM segment from December 31, 2009 to March 31, 2010 is primarily due to the goodwill recorded in association with the acquisition of Excelsyn in February 2010, in addition to the impact of foreign currency translation.

The components of intangible assets are as follows:

	Cost		Accumulated Amortization			Net		Amortization Period
March 31, 2010
Patents and Licensing Rights	$	3,994	$	(1,482	)	$	2,512	2-16 years

December 31, 2009
Patents and Licensing Rights	$	3,897	$	(1,436	)	$	2,461	2-16 years

Amortization expense related to intangible assets was $74 and $60 for the three months ended March 31, 2010 and 2009, respectively.

The following chart represents estimated future annual amortization expense related to intangible assets:

Year ending December 31,
2010 (remaining)	$	214
2011		226
2012		223
2013		212
2014		207
Thereafter		1,430
Total	$	2,512

Note 7 - Defined Benefit and Postretirement Welfare Plan

AMRI Rensselaer previously provided retirement benefits under two non-contributory defined benefit plans and a non-contributory, unfunded post-retirement welfare plan. Future benefits under the defined benefit plans and for salaried participants in the post-retirement welfare plan have been frozen.

Components of Net Periodic Benefit Cost

	Pension Benefits						Postretirement Benefits
	Three Months Ended March 31,						Three Months Ended March 31,
	2010			2009			2010		2009

Service cost	$	—		$	—		$	17	$	20
Interest cost		308			313			16		16
Expected return on plan assets		(338	)		(362	)		—		—
Recognized net loss		59			—			2		6
Net periodic benefit cost (income)	$	29		$	(49	)	$	35	$	42
Recognized in Accumulated Other Comprehensive Loss (“AOCL”), pre-tax
Net actuarial loss		59			—			2		6
Total recognized in AOCL, pre-tax	$	59		$	—		$	2	$	6

Employer Contributions

The Company currently anticipates making $218 of contributions during 2010.

Note 8 — Share-Based Compensation

During the three months ended March 31, 2010 and 2009, the Company recognized total share based compensation cost of $549 and $525, respectively.

The Company grants share-based payments, including restricted shares, under its 2008 Stock Option and Incentive Plan, as well as its 1998 Employee Stock Purchase Plan.

Restricted Stock

A summary of unvested restricted stock activity as of March 31, 2010 and changes during the three months then ended is presented below:

	Number of Shares			Weighted Average Grant Date Fair Value Per Share
Outstanding, December 31, 2009		516		$	10.08
Granted		140		$	8.90
Vested		(90	)	$	9.09
Forfeited		(8	)	$	9.73
Outstanding, March 31, 2010		558		$	9.95

The weighted average fair value of restricted shares per share granted during the three months ended March 31, 2010 and 2009 was $8.90 and $8.37, respectively. As of March 31, 2010, there was $4,160 of total unrecognized compensation cost related to non-vested restricted shares. That cost is expected to be recognized over a weighted-average period of 2.6 years.

Stock Options

The fair value of each stock option award is estimated at the date of grant using the Black-Scholes valuation model based on the following assumptions:

	For the Three Months Ended
	March 31, 2010			March 31, 2009
Expected life in years		5			5
Risk free interest rate		2.42	%		1.76	%
Volatility		46	%		48	%
Dividend yield		—			—

A summary of stock option activity under the Company’s Stock Option and Incentive Plans as of March 31, 2010 and changes during the three month period then ended is presented below:

	Number of Shares			Weighted Exercise Price Per Share		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding, December 31, 2009		1,864		$	19.66
Granted		65			8.90
Exercised		—			—
Forfeited		(4	)		23.45
Expired		(179	)		24.63
Outstanding, March 31, 2010		1,746		$	18.75		4.3	$	3
Options exercisable, March 31, 2010		1,333		$	21.24		2.9	$	—

The weighted average fair value of stock options granted for the three months ended March 31, 2010 and 2009 was $3.82 and $3.61, respectively. As of March 31, 2010, there was $1,138 of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 2.4 years.

Employee Stock Purchase Plan

During the three months ended March 31, 2010 and 2009, 34 and 19 shares, respectively, were issued under the Company’s 1998 Employee Stock Purchase Plan.

During the three months ended March 31, 2010 and 2009, cash received from stock option exercises and employee stock purchases was $254 and $191, respectively. The actual tax benefit realized for the tax deductions from stock option exercises and plan purchases was $0 and $5 during the three months ended March 31, 2010 and 2009, respectively.

Note 9 — Operating Segment Data

The Company has organized its sales, marketing and production activities into the DDS and LSM segments. The Company’s management relies on an internal management accounting system to report results of the segments. The system includes revenue and cost information by segment. The Company’s chief operating decision maker makes financial decisions and allocates resources based on the information it receives from this internal system.

DDS includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. LSM includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates and high potency and controlled substance manufacturing, of our U.S. location is in compliance with the Food and Drug Administration’s (“FDA”) current Good Manufacturing Practices. Corporate activities include business development and administrative functions, as well as research and development costs that have not been allocated to the operating segments.

The following table contains earnings data by operating segment, reconciled to totals included in the unaudited condensed consolidated financial statements:

	Contract Revenue		Milestone & Recurring Royalty Revenue		Income (Loss) from Operations			Depreciation and Amortization
For the three months ended March 31, 2010
DDS	$	21,040	$	10,439	$	12,455		$	2,382
LSM		17,852		—		1,072			1,767
Corporate		—		—		(13,402	)		—
Total	$	38,892	$	10,439	$	125		$	4,149

For the three months ended March 31, 2009
DDS	$	22,524	$	10,786	$	13,825		$	2,641
LSM		20,720		—		2,457			1,690
Corporate		—		—		(13,687	)		—
Total	$	43,244	$	10,786	$	2,595		$	4,331

The following table summarizes other information by segment as of March 31, 2010:

	As of March 31, 2010
	DDS		LSM		Total

Total assets	$	221,374	$	153,642	$	375,016
Goodwill included in total assets		14,347		8,417		22,764

The following table summarizes other information by segment as of December 31, 2009:

	As of December 31, 2009
	DDS		LSM		Total

Total assets	$	236,314	$	137,378	$	373,692
Goodwill included in total assets		13,199		4,352		17,551

Note 10 — Financial Information by Customer Concentration and Geographic Area

Total contract revenue from DDS’s three largest customers represented approximately 22%, 9% and 6% of DDS’s total contract revenue for the three months ended March 31, 2010, and 18%, 11% and 7% of DDS’s total contract revenue for the three months ended March 31, 2009. Total contract revenue from LSM’s largest customer, GE Healthcare (“GE”), represented 41% and 26% of LSM’s total contract revenue for the three months ended March 31, 2010 and 2009, respectively. GE accounted for approximately 19% and 12% of the Company’s total contract revenue for the three months ended March 31, 2010 and 2009, respectively. The increase in GE sales in 2010 is primarily due to a return toward historical demand in 2010 as a result of its 2009 inventory reduction efforts. This is expected to continue throughout 2010 causing full year 2010 sales to GE to be above amounts recognized in 2009. The DDS segment’s largest customer, a large pharmaceutical company, represented approximately 12% and 9% of the Company’s total contract revenue for the three months ended March 31, 2010 and 2009, respectively.

The Company’s total contract revenue for the three months ended March 31, 2010 and 2009 was recognized from customers in the following geographic regions:

	Three Months Ended March 31,
	2010			2009

United States		51	%		58	%
Europe		37			19
Asia		11			22
Other		1			1

Total		100	%		100	%

Note 11 — Comprehensive Loss

The following table presents the components of the Company’s comprehensive loss for the three months ended March 31, 2010 and 2009:

	Three Months Ended March 31,
	2010			2009
Net income	$	66		$	1,942

Other comprehensive loss:
Change in unrealized (loss) gain on investment securities, net of taxes		(23	)		15
Foreign currency translation loss		(627	)		(4,983	)
Net actuarial loss related to pension and postretirement benefits		61			6
Total comprehensive loss	$	(523	)	$	(3,020	)

Note 12 — Legal Proceedings

The Company, from time to time, may be involved in various claims and legal proceedings arising in the ordinary course of business. Except as noted below in regard to litigation relating to Allegra, the Company is not currently a party to any such claims or proceedings which, if decided adversely to the Company, would either individually or in the aggregate have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

The Company, through its former subsidiary AMR Technology that has been merged into the Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of sanofi-aventis S.A., has been involved in legal proceedings with several companies seeking to market or which are currently marketing generic versions of Allegra. Beginning in 2001, Barr Laboratories, Inc., Impax Laboratories, Inc., Mylan Pharmaceuticals, Inc., Teva Pharmaceuticals USA, Dr. Reddy’s Laboratories, Ltd./Dr. Reddy’s Laboratories, Inc., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc., Sandoz Inc., Sun Pharma Global, Inc., Wockhardt, and Actavis Mid Atlantic LLC filed Abbreviated New Drug Applications (“ANDAs”) with the Food and Drug Administration (“FDA”) to produce and market generic versions of Allegra products.

In response to the filings described above, beginning in 2001, Aventis Pharmaceuticals filed patent infringement lawsuits against Barr Laboratories, Impax Laboratories, Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s Laboratories, Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc., Sandoz, Wockhardt, and Sun Pharma Global, Inc. Each of the lawsuits was filed in the U.S. District Court in New Jersey and alleges infringement of one or more patents owned by Aventis Pharmaceuticals. In addition, beginning on November 14, 2006, Aventis filed two patent infringement suits against Teva Pharmaceuticals USA, Barr Laboratories, Inc. and Barr Pharmaceuticals, Inc. in the Eastern District of Texas based on patents owned by Aventis. Those lawsuits were transferred to the U.S. District Court in New Jersey.

Further, beginning on March 5, 2004, the Company, through its former subsidiary AMR Technology, along with Aventis Pharmaceuticals, filed suit in the U.S. District Court in New Jersey against Barr Laboratories, Impax Laboratories, Mylan Pharmaceuticals, Teva Pharmaceuticals, Dr. Reddy’s Laboratories, Amino Chemicals, Ltd., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc., DiPharma S.P.A., DiPharma Francis s.r.l., and Sandoz, asserting infringement of U.S. Patent Nos. 5,581,011 and 5,750,703 that are exclusively licensed to Aventis Pharmaceuticals relating to Allegra and Allegra-D products. On December 11, 2006, the Company through its former subsidiary AMR Technology and sanofi-aventis U.S. LLC, an affiliate of Aventis Pharmaceuticals, also filed a patent infringement lawsuit in the Republic of Italy against DiPharma Francis s.r.l. and DiPharma S.P.A. based on European Patent No. 703,902 which is owned by the Company and licensed to sanofi-aventis. In addition, on December 22, 2006, the Company through its former subsidiary AMR Technology, filed a patent infringement lawsuit in Canada against Novopharm Ltd., Teva Pharmaceutical Industries Ltd., Teva Pharmaceuticals USA, Inc., DiPharma S.P.A. and DiPharma s.r.l. based on Canadian Patent No. 2,181,089. On March 20, 2007, the Company through its former subsidiary AMR Technology filed a patent infringement lawsuit in Australia against Alphapharm Pty Ltd based on Australian Patent No. 699,799. On September 28, 2007, the Company, through its former subsidiary AMR Technology, filed a patent infringement lawsuit in Australia against Arrow Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma Pharmaceuticals Limited based on Australian Patent No. 699,799. On September 9, 2009, the Company filed patent infringement lawsuits in the U.S. District Court in New Jersey against Dr. Reddy’s Laboratories, Ltd, Dr. Reddy’s Laboratories, Inc., and Sandoz, Inc. asserting infringement of U.S. Patent No. 7,390,906, seeking statutory damages.

Aventis Pharmaceuticals, the Company, and its former subsidiary AMR Technology have entered into covenants not to sue on U.S. Patent No. 5,578,610 with defendants other than Novopharm, DiPharma S.P.A., DiPharma Francis s.r.l., Alphapharm, Arrow Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma Pharmaceuticals Limited. Aventis Pharmaceuticals exclusively licenses U.S. Patent No. 5,578,610 from the Company, but that patent has not been asserted in the litigations in the U.S. However, the Company and Aventis Pharmaceuticals have agreed that Aventis Pharmaceuticals will continue to pay royalties to the Company based on that patent under the Company’s original license agreement with Aventis Pharmaceuticals. Under the Company’s arrangements with Aventis Pharmaceuticals, the Company will receive royalties until expiration of the underlying patents (2013 for U.S. Patent No. 5,578,610 and 2015 for U.S. Patent No. 5,750,703) unless the patents are earlier determined to be invalid.

On November 18, 2008, the Company, its former subsidiary AMR Technology, Aventis Pharmaceuticals, sanofi-aventis, Teva Pharmaceuticals, and Barr Laboratories reached a settlement regarding the above-described patent infringement litigations relating to Teva Pharmaceuticals and Barr Laboratories. As part of the settlement, the Company entered into an amendment to its licensing agreement with sanofi-aventis to allow sanofi-aventis to sublicense patents related to ALLEGRA® and ALLEGRA®D-12 to Teva Pharmaceuticals and Barr Laboratories in the United States. Subsequently, Teva Pharmaceuticals acquired Barr Laboratories. The Company received an upfront sublicense fee from sanofi-aventis of $10 million, and sanofi-aventis will pay royalties to the Company on the sale of products in the United States containing fexofenadine hydrochloride (the generic name for the active ingredient in ALLEGRA®) and products containing fexofenadine hydrochloride and pseudoephedrine hydrochloride (generic ALLEGRA®D-12) by Teva Pharmaceuticals through 2015, along with additional consideration. As provided in the settlement, Teva Pharmaceuticals launched a generic version of Allegra D-12 in November 2009. The Company will receive quarterly royalties through July 2010 for the branded Allegra D-12 equal to the royalties paid for the quarter ended June 30, 2009. Thereafter, the royalty rate will revert to the rate in effect prior to the signing of the sub-license amendment and the Company will also receive a royalty on Teva’s sales of the generic D-12. The Company and Aventis Pharmaceuticals have also dismissed their claims against Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc. and Sandoz, Inc. without prejudice. The Company has also dismissed its claims against DiPharma S.P.A. and DiPharma s.r.l. in Canada without prejudice.

On March 19, 2010, the Company and Sanofi-Aventis U.S. LLC filed a motion for a preliminary injunction seeking to enjoin Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. from commercial distribution of a D-24 product.

Under applicable federal law, marketing of an FDA-approved generic version of Allegra may not commence until the earlier of a decision favorable to the generic challenger in the patent litigation or 30 months after the date the patent infringement lawsuit was filed. In general, the first generic filer is entitled to a 180-day marketing exclusivity period upon FDA approval. The launch of a generic product is considered an “at-risk” launch if the launch occurs while there is still on-going litigation. Of the remaining defendants in the pending litigation, Dr. Reddy’s Laboratories and Mylan Pharmaceuticals have engaged in at-risk launches of generic fexofenadine single-entity products.

Note 13 — Income Taxes

A tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement.

During the quarter ended March 31, 2010, approximately $486 of the reserve was effectively settled. The remainder of the reserve at March 31, 2010 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate for future periods.

The Company classifies interest expense and penalties related to unrecognized tax benefits as a component of income tax expense. As of March 31, 2010, the Company has not accrued any penalties related to its uncertain tax position as it believes that it is more likely than not that there will not be any assessment of penalties. The total amount of accrued interest resulting from such unrecognized tax benefits was $2 at March 31, 2010, none of which was recognized in 2010.

The Company files Federal income tax returns, as well as multiple state and foreign jurisdiction tax returns. The Company’s Federal income tax returns have been examined by the Internal Revenue Service through the year ended December 31, 2007. All significant state and foreign matters have been concluded for years through 2005. Tax examinations that commenced during 2009 are in process. Management of the Company believes that the reserves associated with these tax positions are adequate to support any future tax examinations.

The Company intends to reinvest indefinitely any of its unrepatriated foreign earnings. The Company has not provided for U.S. income taxes on these undistributed earnings of its foreign subsidiaries because management considers such earnings to be reinvested indefinitely outside of the U.S. If the earnings were distributed, the Company may be subject to both foreign withholding taxes and U.S. income taxes that may not be fully offset by foreign tax credits.

Note 14 – Fair Value

The Company uses a framework for measuring fair value in generally accepted accounting principles and making disclosures about fair value measurements. A three-tiered fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value.

These tiers include:

Level 1 – defined as quoted prices in active markets for identical instruments;

Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table presents the fair value of marketable securities by type and their determined level based on the three-tiered fair value hierarchy as of March 31, 2010:

	Fair Value Measurements as of March 31, 2010
Marketable Securities	Total		Level 1		Level 2		Level 3
Obligations of states and political subdivisions	$	25,616	$	—	$	25,616	$	—
U.S. Government and agency obligations		1,616		—		1,616		—
Auction rate securities		2,300		—		2,300		—
Total	$	29,532	$	—	$	29,532	$	—

The Company’s marketable securities are fixed maturity securities and are valued using pricing for similar securities, recently executed transactions, cash flow models with yield curves, broker/dealer quotes and other pricing models utilizing observable inputs. The valuation for the Company’s fixed maturity securities is classified as Level 2.

The Company determines its fair value of financial instruments using the following methods and assumptions:

Cash and cash equivalents, receivables, and accounts payable: The carrying amounts reported in the consolidated balance sheets approximate their fair value because of the short maturities of these instruments.

Investment securities: Investment securities’ fair values are based on quoted market prices of comparable instruments. When necessary, the Company utilizes matrix pricing from a third party pricing vendor to determine fair value pricing. Matrix prices are based on quoted prices for securities with similar coupons, ratings, and maturities, rather than on specific bids and offers for the designated security.

Long-term debt: The carrying value of long-term debt was approximately equal to fair value at March 31, 2010 and December 31, 2009 due to the resetting dates of the variable interest rates.

Nonrecurring Measurements:

The preliminary purchase accounting for the acquisition of Excelsyn required the Company to record the assets acquired and the liabilities assumed with this transaction at their estimated fair values. As these amounts have been estimated by the Company at this time, a final valuation will be completed to determine the final fair value of the assets acquired and the liabilities assumed with this purchase.

Note 15 – Recently Issued Accounting Pronouncements

In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements”, which addresses how revenues should be allocated among all products and services included in certain sales arrangements. It establishes a selling price hierarchy for determining the selling price of each product or service, with vendor-specific objective evidence (VSOE) at the highest level, third-party evidence of VSOE at the intermediate level, and a best estimate at the lowest level. It replaces “fair value” with “selling price” in revenue allocation guidance. It also significantly expands the disclosure requirements for such arrangements. ASU 2009-13 will be effective prospectively for sales entered into or materially modified in fiscal years beginning on or after June 15, 2010. The FASB permits early adoption of ASU 2009-13, applied retrospectively, to the beginning of the year of adoption. The Company is currently evaluating the impact on its financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The following discussion of our results of operations and financial condition should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and the Notes thereto included within this report. This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by forward-looking words such as “may,” “could,” “should,” “would,” “will,” “intend,” “expect,” “anticipate,” “believe,” and “continue” or similar words and include, but are not limited to, statements concerning pension and postretirement benefit costs, GE Healthcare, the Company’s collaboration with Bristol-Myers Squibb (“BMS”), future acquisitions, earnings, contract revenues, costs and margins, royalty revenues, patent protection and the ongoing Allegra patent infringement litigation, Allegra royalty revenue, government regulation, retention and recruitment of employees, customer spending and business trends, foreign operations (including Singapore, India, Hungary and the United Kingdom), clinical supply manufacturing, management’s strategic plans, drug discovery, product commercialization, license arrangements, research and development projects and expenses, selling, general and administrative expenses, goodwill impairment, competition and tax rates. The Company’s actual results may differ materially from such forward-looking statements as a result of numerous factors, some of which the Company may not be able to predict and may not be within the Company’s control. Factors that could cause such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on March 12, 2010, as updated by Part II Item 1A, “Risk Factors,” in subsequent Forms 10-Q. All forward-looking statements are made as of the date of this report, and we do not undertake to update any such forward-looking statements in the future, except as required by law. References to “AMRI”, the “Company,” “we,” “us,” and “our,” refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole.

Strategy and Overview

We provide contract services to many of the world’s leading pharmaceutical and biotechnology companies. We derive our contract revenue from research and development expenditures and commercial manufacturing demands of the pharmaceutical and biotechnology industry. We continue to execute our long-term strategy to develop and grow an integrated global platform from which we can provide these services. We have research and/or manufacturing facilities in the United States, Hungary, Singapore, India and the United Kingdom. In 2008, we purchased an additional large-scale manufacturing site in India and completed a 10,000 square foot expansion of our Singapore Research Center. In 2009, we completed the expansion of our Bothell, Washington and Budapest, Hungary facilities. Most recently, in February 2010, we acquired Excelsyn Ltd. (“Excelsyn”), which we believe is a well recognized leader in providing chemical development and manufacturing services to the pharmaceutical industry in Europe.

We continue to integrate our research and manufacturing facilities worldwide, increasing our access to key global markets and enabling us to provide our customers with a flexible combination of high quality services and competitive cost structures to meet their individual outsourcing needs. We seek comprehensive research and/or supply agreements with our customers, incorporating several of our service offerings and spanning across the entire pharmaceutical research and development process. Our research facilities provide discovery, chemical development, analytical, and small-scale current Good Manufacturing Practices (“cGMP”) manufacturing services. Compounds discovered and/or developed in our research facilities can then be more easily transitioned to production at our large-scale manufacturing facilities for use in clinical trials and, ultimately, commercial sales if the product meets regulatory approval. We believe that the ability to partner with a single provider of pharmaceutical research and development services from discovery through commercial production is of significant benefit to our customers. Through our comprehensive service offerings, we are able to provide customers with a more efficient transition of experimental compounds through the research and development process, ultimately reducing the time and cost involved in bringing these compounds from concept to market.

Our global platform has increased our market penetration and was developed in order to allow us to maintain and grow margins. In addition to our globalization, we continue to implement process efficiencies, including our continued efforts of process improvement and cost savings measures, along with efforts to strengthen our sourcing. We believe these factors will lead to improved margins.

We conduct proprietary research and development to discover new therapeutically active lead compounds with commercial potential. We anticipate that we would then license these compounds and underlying technology to third parties in return for up-front and service fees and milestone payments, as well as recurring royalty payments if these compounds are developed into new commercial drugs.

Our total revenue for the three months ended March 31, 2010 was $49.3 million, as compared to $54.0 million for the three months ended March 31, 2009.

Contract services revenue for the first quarter of 2010 was $38.9 million, compared to $43.2 million for the three months ended March 31, 2009. Recurring royalty revenues, which are based on the worldwide sales of fexofenadine HCl, marketed as Allegra in the Americas and Telfast elsewhere, as well as on sales of sanofi-aventis’ authorized generics and estimates of sales of Teva’s authorized generics, were lower in the first quarter of 2010 than in the first quarter of 2009. Consolidated gross margin was 10.6% for the three months ended March 31, 2010 as compared to 15.3% for the three months ended March 31, 2009.

During the three months ended March 31, 2010, cash used by operations was $6.2 million. The decrease of $28.1 million in cash flow from operations from the three months ended March 31, 2009 resulted primarily from an increase in the first quarter of 2009 of deferred revenue due to the receipt of the $10.0 million sub-licensing fee from sanofi-aventis in conjunction with the amended licensing agreement, along with an increase in accounts receivable in 2010, as well as lower net income in 2010. We spent $18.5 million on the acquisition of Excelsyn and $1.9 million in capital expenditures, primarily related to modernization of our lab and production equipment. As of March 31, 2010, we had $84.7 million in cash, cash equivalents and investments and $13.5 million in bank and other related debt.

Results of Operations – Three Months ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Revenues

Total contract revenue

Contract revenue consists primarily of fees earned under contracts with our third party customers. Our contract revenues for each of our Discovery/Development/Small Scale Manufacturing (“DDS”) and Large-Scale Manufacturing (“LSM”) segments were as follows:

	Three Months Ended March 31,
(in thousands)	2010		2009

DDS	$	21,040	$	22,524
LSM		17,852		20,720
Total	$	38,892	$	43,244

DDS contract revenues for the three months ended March 31, 2010, decreased $1.5 million to $21.0 million as compared to $22.5 million for the same period in 2009. This decrease is due primarily to a decrease in contract revenue from development and small-scale manufacturing services of $2.3 million due to lower demand from specialty pharma/biotech customers and more competitive pricing in the overall current economic downturn. This decrease was offset in part by an increase of $0.8 million in contract revenue from discovery services due to an increase in demand for our international discovery services. We currently expect DDS contract revenue for the full year of 2010 to have limited growth over amounts recognized in 2009 primarily due to incremental revenues from the Excelsyn purchase in February 2010 along with an increase in demand for our international discovery services, offset in part by lower U.S. revenue.

LSM revenue for the three months ended March 31, 2010 decreased $2.9 million from the same period in 2009 primarily due to a decrease of $2.6 million from a decrease in demand for existing commercial products and a decrease of $2.4 million driven by the reduced demand for the production of clinical supply material. These decreases were offset, in part by an increase in sales to GE Healthcare (“GE”), LSM’s largest customer, of $2.1 million as they return toward historical levels after reducing their purchases from us in 2009 in an effort to reduce their inventory levels. We expect LSM contract revenue for the full year of 2010 to increase over amounts recognized in 2009, primarily due to incremental revenues from the Excelsyn purchase in February 2010, along with increases in sales to GE as they return toward historical levels.

Recurring royalty revenue

We earn royalties under our licensing agreement with sanofi-aventis S.A. for the active ingredient in Allegra. Royalties were as follows:

Recurring royalties, which are based on the worldwide sales of Allegra®/Telfast, as well as on sales of sanofi-aventis’ authorized generics, decreased $0.3 million for the three months ended March 31, 2010 from the same period in 2009 primarily due to a decrease in sales of Allegra® in Japan.

The recurring royalties we receive on the sales of Allegra®/Telfast have historically provided a material portion of our revenues, earnings and operating cash flows. Teva Pharmaceuticals launched a generic version of Allegra D-12® in November 2009. As part of our amended licensing agreement with sanofi-aventis, we will receive quarterly royalties through July 2010 for the branded Allegra D-12® equal to the royalties paid for the quarter ended June 30, 2009. Thereafter, the royalty rate will revert to the rate in effect prior to the signing of the sub-license amendment and we will also receive a royalty on Teva Pharmaceuticals’ sales of generic Allegra D-12®.

We continue to develop our business in an effort to supplement the revenues, earnings and operating cash flows that have historically been provided by Allegra®/Telfast royalties. We forcefully and vigorously defend our intellectual property related to Allegra®, and we continue to pursue our intellectual property rights as patent infringement litigation progresses.

Costs and Expenses

Cost of contract revenue

Cost of contract revenue consists primarily of compensation and associated fringe benefits for employees, as well as chemicals, depreciation and other indirect project related costs. Cost of contract revenue for our DDS and LSM segments were as follows:

	Three Months Ended March 31,
Segment	2010			2009
(in thousands)

DDS	$	17,981		$	18,380
LSM		16,780			18,263
Total	$	34,761		$	36,643

DDS Gross Margin		14.6	%		18.4	%
LSM Gross Margin		6.0	%		11.9	%
Total Gross Margin		10.6	%		15.3	%

DDS had a contract revenue gross margin of 14.6% for the three months ended March 31, 2010 compared to contract revenue gross margin of 18.4% for the same period in 2009. The decrease in gross margin resulted from lower demand for these services in relation to our fixed costs. We currently expect DDS contract margins for the full year of 2010 to approximate percentages recognized in the first quarter of 2010.

LSM’s contract revenue gross margin decreased to 6.0% for the three months ended March 31, 2010 compared to 11.9% for the same period in 2009. This decrease in gross margin is primarily due to a decrease in commercial sales which have historically generated higher margins. We expect gross margins in the LSM segment for the full year of 2010 to slightly increase over percentages recognized for the full year of 2009.

Technology incentive award

We maintain a Technology Development Incentive Plan, the purpose of which is to stimulate and encourage novel innovative technology developments by our employees. This plan allows eligible participants to share in a percentage of the net revenue earned by us relating to patented technology with respect to which the eligible participant is named as an inventor or made a significant intellectual contribution. To date, the royalties from Allegra are the main driver of the awards. Accordingly, as the creator of the technology, the award is currently payable primarily to Dr. Thomas D’Ambra, our Chief Executive Officer and President of the Company. The incentive awards were as follows:

The decrease in technology incentive award expense for the three months ended March 31, 2010 from the same period ended March 31, 2009 is due to the decrease in Allegra royalty revenue. We expect technology incentive award expense to generally fluctuate directionally and proportionately with fluctuations in Allegra royalties in future periods.

Research and development

Research and development (“R&D”) expense consists of compensation and benefits for scientific personnel for work performed on proprietary technology R&D projects, costs of chemicals and other out of pocket costs and overhead costs. We utilize our expertise in small molecule chemistry, biocatalysis and natural product technologies to perform our internal R&D projects. The goal of these programs is to discover new compounds with commercial potential. We would then seek to license these compounds to a third party in return for a combination of up-front license fees, milestone payments and recurring royalty payments if these compounds are successfully developed into new drugs and reach the market. In addition, R&D is performed at our large-scale manufacturing facility related to the potential manufacture of new products, the development of processes for the manufacture of generic products with commercial potential, and the development of alternative manufacturing processes. Research and development expenses were as follows:

R&D expense decreased to $2.8 million for the three months ended March 31, 2010 from $3.4 million for the three months ended March 31, 2009. This decrease is primarily due to lower compensation costs in 2010 caused by a reduction of research and development scientific resources. We currently expect research and development expenses for the full year of 2010 to remain flat with amounts recognized in 2009, as we manage overall R&D expenditures to move our most advanced programs forward.

Projecting completion dates and anticipated revenue from our internal research programs is not practical at this time due to the early stages of the projects and the inherent risks related to the development of new drugs. Our proprietary amine neurotransmitter reuptake inhibitor program, which was our most advanced project at that time, was licensed to BMS in October 2005 in exchange for up-front license fees, contracted research services, and the rights to future milestone and royalty payments. We also continue to utilize our proprietary technologies to further advance other early to middle-stage internal research programs in the fields of oncology, irritable bowel syndrome, obesity and CNS, with a view to seeking a licensing partner for these programs at an appropriate research or developmental stage.

We budget and monitor our R&D costs by type or category, rather than by project on a comprehensive or fully allocated basis. In addition, our R&D expenses are not tracked by project as they benefit multiple projects or our overall technology platform. Consequently, fully loaded R&D cost summaries by project are not available.

Selling, general and administrative

Selling, general and administrative (“SG&A”) expenses consist of compensation and related fringe benefits for marketing, operational and administrative employees, professional service fees, marketing costs and costs related to facilities and information services. SG&A expenses were as follows:

SG&A expenses for the three months ended March 31, 2010 increased $0.3 million from the three months ended March 31, 2009. This increase is primarily attributable to $0.9 million of transaction costs associated with the purchase of Excelsyn in February 2010, in addition to incremental SG&A expense associated with the purchase. These increases were partially offset by cost savings from a reorganization of our large-scale India operations in December 2009. SG&A expenses for the full year 2010 are expected to increase from amounts recognized in 2009 primarily due to the addition of incremental Excelsyn SG&A expenses, along with the one time transaction costs associated with the purchase. Excluding these factors, SG&A costs for 2010 would remain flat or slightly decrease from amounts recognized in 2009.

Interest income, net

	Three Months Ended March 31,
(in thousands)	2010			2009

Interest expense	$	(36	)	$	(91	)
Interest income		79			202
Interest income, net	$	43		$	111

Net interest income decreased for the three months ended March 31, 2010 from the same period in 2009 due to a decrease in balances of interest bearing assets and overall decreased interest rates on our interest bearing liabilities.

Other (loss) income, net

Three Months Ended March 31,
2010			2009
(in thousands)
$	(88	)	$	328

Other expense for the three months ended March 31, 2010 was $0.1 million as compared to other income for the same period in 2009 primarily due to changes in rates associated with foreign currency transactions.

Income tax expense

Three Months Ended March 31,
2010		2009
(in thousands)
$	14	$	1,092

Income tax expense decreased for the three months ended March 31, 2010, due primarily to the decrease in pre-tax income as compared to amounts in 2009. In addition, the decrease is attributable to a lower effective tax rate, which is partially due to the reversal of reserves for uncertain tax positions in 2010, as well as to changes in the composition of taxable income in relation to the applicable tax rates at our various international locations.

Liquidity and Capital Resources

We have historically funded our business through operating cash flows, proceeds from borrowings and the issuance of equity securities. During the first three months of 2010, we used cash of $6.2 million in operating activities. The primary uses of operating cash flows resulted primarily from increases in accounts receivable and royalties receivable due to timing of cash collections and a decrease in accounts payables due to the timing of customer payments.

During the first three months of 2010, we used $20.1 million in investing activities, resulting primarily from the use of $18.5 million for the acquisition of Excelsyn in February 2010, along with $1.9 million for the acquisition of property and equipment.

Working capital was $132.8 million at March 31, 2010 as compared to $149.7 million as of December 31, 2009. This decrease is primarily the result of the use of cash and cash equivalents on our acquisition of Excelsyn. There have been no significant changes in future maturities on our long-term debt since December 31, 2009.

We currently have a revolving line of credit in the amount of $45.0 million which has a maturity date in June 2013. The line of credit bears interest at a variable rate based on our Company’s leverage ratio. As of March 31, 2010, the balance outstanding on the line of credit was $9.7 million, bearing interest at a rate of 1.31%. The credit facility contains certain financial covenants, including a maximum leverage ratio, a minimum required operating cash flow coverage ratio, a minimum earnings before interest and taxes to interest ratio and a minimum current ratio. Other covenants include limits on asset disposals and the payment of dividends. As of March 31, 2010 and 2009, we were in compliance with all of the covenants under the credit facility.

The disclosure of payments we have committed to make under our contractual obligations is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” under Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no material changes to our contractual obligations since December 31, 2009. As of March 31, 2010, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

We continue to pursue the expansion of our operations through internal growth and strategic acquisitions. In February 2010, the Company acquired Excelsyn Ltd. a chemical development and large scale manufacturing services company in North Wales, UK. Under the terms of the agreement, AMRI has purchased all of the outstanding shares of Excelsyn for $18.5 million in cash, which was funded from existing cash and cash equivalents. We expect that additional expansion activities will be funded from existing cash and cash equivalents, cash flow from operations and/or the issuance of debt or equity securities and borrowings. Future acquisitions, if any, could be funded with cash on hand, cash from operations, borrowings under our credit facility and/or the issuance of equity or debt securities. There can be no assurance that attractive acquisition opportunities will be available to us or will be available at prices and upon such other terms that are attractive to us. We regularly evaluate potential acquisitions of other businesses, products and product lines and may hold discussions regarding such potential acquisitions. As a general rule, we will publicly announce such acquisitions only after a definitive agreement has been signed. In addition, in order to meet our long-term liquidity needs or consummate future acquisitions, we may incur additional indebtedness or issue additional equity or debt securities, subject to market and other conditions. There can be no assurance that such additional financing will be available on terms acceptable to us or at all. The failure to raise the funds necessary to finance our future cash requirements or consummate future acquisitions could adversely affect our ability to pursue our strategy and could negatively affect our operations in future periods.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, goodwill, long-lived assets, pension and postretirement benefit plans, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We refer to the policies and estimates set forth in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no material changes or modifications to the policies since December 31, 2009.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes with respect to the information on Quantitative and Qualitative Disclosures about Market Risk appearing in Part II, Item 7A to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As required by rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the Company’s last fiscal quarter our management conducted an evaluation with the participation of our Chief Executive Officer and Chief Financial Officer regarding the effectiveness of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the Company’s last fiscal quarter, our disclosure controls and procedures were effective in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. We intend to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In addition to existing lawsuits we have previously filed related to Allegra patent infringement, on March 19, 2010, the Company and sanofi-aventis U.S. LLC filed a motion for a preliminary injunction seeking to enjoin Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. from commercial distribution of a d-24 product. Please refer to Part 1 – Note 12 for further details and history on this litigation.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 6. Exhibits

Exhibit
Number		Description

2.1		Agreement, dated February 17, 2010, by and among the Company and the shareholders of Excelsyn Limited, for the sale and purchase of Excelsyn Limited and its subsidiary, Excelsyn Molecular Development Limited.

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ALBANY MOLECULAR RESEARCH, INC.

Date: May 7, 2010	By:	/s/ Mark T. Frost
		Mark T. Frost
		Senior Vice President, Administration, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)

Three Months Ended March 31,

(in thousands)