UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
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o |
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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: 001-34263
Impax
Laboratories, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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65-0403311 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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30831 Huntwood Avenue, Hayward, CA
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94544 |
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(Address of principal executive offices)
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(Zip Code) |
(510) 476-2000
(
Registrants telephone number, including area code)
Not Applicable
(
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 þ 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 o No o
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 the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o |
Accelerated
filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
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 þ
As of
November 1, 2010, there were 64,242,134 shares of the registrants common stock outstanding.
Impax Laboratories, Inc.
INDEX
Page 2 of 83
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Impax Laboratories, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
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September 30, |
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December 31, |
|
|
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2010 |
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2009 |
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|
(unaudited) |
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|
|
ASSETS |
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Current assets: |
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|
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|
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|
Cash and cash equivalents |
|
$ |
165,772 |
|
|
$ |
31,770 |
|
Short-term investments |
|
|
192,579 |
|
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|
58,599 |
|
Accounts receivable, net |
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|
95,567 |
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|
185,854 |
|
Inventory, net |
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|
42,036 |
|
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|
49,130 |
|
Current portion of deferred product manufacturing costs-alliance agreements |
|
|
3,006 |
|
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|
11,624 |
|
Current portion of deferred income taxes |
|
|
37,114 |
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|
32,286 |
|
Prepaid expenses and other current assets |
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|
2,958 |
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|
4,748 |
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|
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|
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Total current assets |
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539,032 |
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|
374,011 |
|
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|
|
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|
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Property, plant and equipment, net |
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|
103,066 |
|
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|
101,650 |
|
Deferred product manufacturing costs-alliance agreements |
|
|
8,231 |
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|
96,619 |
|
Deferred income taxes, net |
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|
1,396 |
|
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|
48,544 |
|
Other assets |
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|
25,587 |
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|
12,358 |
|
Goodwill |
|
|
27,574 |
|
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|
27,574 |
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|
|
|
|
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Total assets |
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$ |
704,886 |
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|
$ |
660,756 |
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|
|
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|
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|
LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
19,156 |
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$ |
23,295 |
|
Accrued expenses |
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|
82,083 |
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|
62,055 |
|
Accrued income taxes payable |
|
|
32,942 |
|
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|
31,627 |
|
Accrued profit sharing and royalty expenses |
|
|
15,235 |
|
|
|
53,695 |
|
Current portion of deferred revenue-alliance agreements |
|
|
19,438 |
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|
33,196 |
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|
|
|
|
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Total current liabilities |
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|
168,854 |
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|
203,868 |
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Deferred revenue-alliance agreements |
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36,773 |
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|
224,522 |
|
Other liabilities |
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13,645 |
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|
10,139 |
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Total liabilities |
|
$ |
219,272 |
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$ |
438,529 |
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Commitments and contingencies (Note 8) |
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Stockholders equity: |
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|
Preferred Stock, $0.01 par value, 2,000,000 shares authorized,
0 shares outstanding at September 30, 2010 and December 31, 2009 |
|
$ |
|
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|
$ |
|
|
Common stock, $0.01 par value, 90,000,000 shares authorized and
63,800,776 and 62,210,089 shares issued at September 30, 2010
and December 31, 2009, respectively |
|
|
638 |
|
|
|
622 |
|
Additional paid-in capital |
|
|
247,764 |
|
|
|
223,239 |
|
Treasury stock 243,729 shares |
|
|
(2,157 |
) |
|
|
(2,157 |
) |
Accumulated other comprehensive income (loss) |
|
|
366 |
|
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|
(524 |
) |
Retained earnings |
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|
238,824 |
|
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|
828 |
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|
485,435 |
|
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222,008 |
|
Noncontrolling interest |
|
|
179 |
|
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|
219 |
|
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|
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Total stockholders equity |
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|
485,614 |
|
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|
222,227 |
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Total liabilities and stockholders equity |
|
$ |
704,886 |
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$ |
660,756 |
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|
The accompanying notes are an integral part of these interim consolidated financial statements.
Page 3 of 83
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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|
(unaudited) |
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|
(unaudited) |
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(unaudited) |
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|
(unaudited) |
|
Revenues: |
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Global Product sales, net |
|
$ |
91,051 |
|
|
$ |
46,636 |
|
|
$ |
537,794 |
|
|
$ |
123,144 |
|
Private Label Product sales |
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|
528 |
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|
1,752 |
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|
1,539 |
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|
5,269 |
|
Rx Partner |
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|
202,800 |
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|
8,328 |
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|
213,504 |
|
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|
30,183 |
|
OTC Partner |
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|
2,365 |
|
|
|
1,769 |
|
|
|
6,439 |
|
|
|
5,255 |
|
Research Partner |
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|
3,714 |
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|
2,962 |
|
|
|
10,593 |
|
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|
8,406 |
|
Promotional Partner |
|
|
3,535 |
|
|
|
3,499 |
|
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|
10,538 |
|
|
|
10,077 |
|
Other |
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|
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11 |
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Total revenues |
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|
303,993 |
|
|
|
64,946 |
|
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|
780,407 |
|
|
|
182,275 |
|
|
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|
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|
|
|
|
|
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|
Cost of revenues |
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|
143,122 |
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|
28,055 |
|
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|
291,589 |
|
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|
81,589 |
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|
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|
|
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Gross profit |
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|
160,871 |
|
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|
36,891 |
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|
|
488,818 |
|
|
|
100,686 |
|
|
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Operating expenses: |
|
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|
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|
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Research and development |
|
|
23,846 |
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|
15,243 |
|
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|
63,264 |
|
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|
46,744 |
|
Patent litigation |
|
|
1,033 |
|
|
|
1,647 |
|
|
|
4,786 |
|
|
|
4,058 |
|
Litigation settlement |
|
|
|
|
|
|
818 |
|
|
|
|
|
|
|
1,674 |
|
Selling, general and administrative |
|
|
12,632 |
|
|
|
9,020 |
|
|
|
37,136 |
|
|
|
29,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
37,511 |
|
|
|
26,728 |
|
|
|
105,186 |
|
|
|
82,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
123,360 |
|
|
|
10,163 |
|
|
|
383,632 |
|
|
|
18,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net |
|
|
(91 |
) |
|
|
(6 |
) |
|
|
(134 |
) |
|
|
52 |
|
Interest income |
|
|
405 |
|
|
|
180 |
|
|
|
680 |
|
|
|
636 |
|
Interest expense |
|
|
(38 |
) |
|
|
(185 |
) |
|
|
(108 |
) |
|
|
(735 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
123,636 |
|
|
|
10,152 |
|
|
|
384,070 |
|
|
|
18,237 |
|
Provision for income taxes |
|
|
48,501 |
|
|
|
3,495 |
|
|
|
146,114 |
|
|
|
6,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before noncontrolling interest |
|
|
75,135 |
|
|
|
6,657 |
|
|
|
237,956 |
|
|
|
11,864 |
|
Add back loss attributable to
noncontrolling interest |
|
|
28 |
|
|
|
28 |
|
|
|
40 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
75,163 |
|
|
$ |
6,685 |
|
|
$ |
237,996 |
|
|
$ |
11,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.20 |
|
|
$ |
0.11 |
|
|
$ |
3.85 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.15 |
|
|
$ |
0.11 |
|
|
$ |
3.65 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
62,435,116 |
|
|
|
60,559,064 |
|
|
|
61,778,465 |
|
|
|
60,130,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
65,470,341 |
|
|
|
61,247,700 |
|
|
|
65,171,055 |
|
|
|
60,667,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
Page 4 of 83
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
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|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
237,996 |
|
|
$ |
11,917 |
|
Adjustments to reconcile net income to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
9,066 |
|
|
|
7,806 |
|
Amortization of 3.5% Debentures discount and deferred financing costs |
|
|
|
|
|
|
301 |
|
Amortization of Credit Agreement deferred financing costs |
|
|
25 |
|
|
|
50 |
|
Accretion of interest income on short-term investments |
|
|
(374 |
) |
|
|
(424 |
) |
Deferred income taxes (benefit) |
|
|
46,657 |
|
|
|
(9,430 |
) |
Provision for uncertain tax positions |
|
|
35 |
|
|
|
695 |
|
Tax benefit related to the exercise of employee stock options |
|
|
(4,337 |
) |
|
|
|
|
Deferred revenue-Alliance Agreements |
|
|
22,947 |
|
|
|
36,388 |
|
Deferred product manufacturing costs-Alliance Agreements |
|
|
(9,739 |
) |
|
|
(20,853 |
) |
Recognition of deferred revenue-Alliance Agreements |
|
|
(224,454 |
) |
|
|
(43,844 |
) |
Amortization of deferred product manufacturing costs-Alliance Agreements |
|
|
106,746 |
|
|
|
29,750 |
|
Accrued profit sharing and royalty expense |
|
|
86,985 |
|
|
|
523 |
|
Payments of profit sharing and royalty expense |
|
|
(125,445 |
) |
|
|
(455 |
) |
Payments of exclusivity period fees |
|
|
|
|
|
|
(6,000 |
) |
Payments of accrued litigation settlements |
|
|
(5,865 |
) |
|
|
(8,037 |
) |
Share-based compensation expense |
|
|
7,706 |
|
|
|
5,179 |
|
Bad debt expense |
|
|
215 |
|
|
|
131 |
|
Changes in certain assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
90,072 |
|
|
|
(18,368 |
) |
Inventory |
|
|
7,094 |
|
|
|
(6,606 |
) |
Prepaid expenses and other assets |
|
|
(11,225 |
) |
|
|
1,346 |
|
Accounts payable, accrued expenses and income taxes payable |
|
|
22,349 |
|
|
|
14,824 |
|
Other liabilities |
|
|
3,431 |
|
|
|
2,740 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
259,885 |
|
|
$ |
(2,367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of short-term investments |
|
|
(306,784 |
) |
|
|
(49,563 |
) |
Maturities of short-term investments |
|
|
173,178 |
|
|
|
47,748 |
|
Purchases of property, plant and equipment |
|
|
(10,541 |
) |
|
|
(8,405 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
$ |
(144,147 |
) |
|
$ |
(10,220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
|
|
|
|
|
(12,887 |
) |
Tax benefit related to the exercise of employee stock options |
|
|
4,337 |
|
|
|
|
|
Proceeds from exercise of stock options and ESPP |
|
|
13,927 |
|
|
|
3,776 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
$ |
18,264 |
|
|
$ |
(9,111 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
134,002 |
|
|
$ |
(21,698 |
) |
Cash and cash equivalents, beginning of period |
|
$ |
31,770 |
|
|
$ |
69,275 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
165,772 |
|
|
$ |
47,577 |
|
|
|
|
|
|
|
|
Page 5 of 83
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
(in $000s) |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
108 |
|
|
$ |
597 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
98,201 |
|
|
$ |
187 |
|
|
|
|
|
|
|
|
Accrued vendor invoices of approximately $4,022,000 and $1,391,000 at September 30, 2010 and
September 30, 2009, respectively, are excluded from the purchase of property, plant, and equipment
and the change in accounts payable and accrued expenses.
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
Page 6 of 83
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Impax Laboratories,
Inc. (Impax or the Company), have been prepared based upon United States Securities and
Exchange Commission (SEC) rules permitting reduced disclosure for interim periods, and include
all adjustments necessary for a fair presentation of statements of operations, statements of cash
flows, and financial condition for the interim periods shown, including normal recurring accruals
and other items. While certain information and disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP) have been condensed or omitted pursuant to SEC rules and regulations, the
Company believes the disclosures are adequate to make the information presented not misleading.
The unaudited interim consolidated financial statements of the Company include the accounts of
the operating parent company, Impax Laboratories, Inc., its wholly-owned subsidiary, Impax
Laboratories (Taiwan) Inc., and an equity investment in Prohealth Biotech, Inc. (Prohealth), in
which the Company held a 58.11% majority ownership interest at September 30, 2010. All significant
intercompany accounts and transactions have been eliminated.
The unaudited results of operations and cash flows for the interim period are not necessarily
indicative of the results of the Companys operations for any other interim period or for the full
year ending December 31, 2010.
The unaudited interim consolidated financial statements and footnotes should be read in
conjunction with the consolidated financial statements and footnotes included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC, wherein a
more complete discussion of significant accounting policies and certain other information can be
found.
The preparation of financial statements in conformity with GAAP requires the use of estimates
and assumptions, based on complex judgments considered reasonable, and affect the reported amounts
of assets and liabilities and disclosure of contingent assets and contingent liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant judgments are employed in estimates used in
determining values of tangible and intangible assets, legal contingencies, tax assets and tax
liabilities, fair value of share-based compensation of equity incentive awards issued to employees
and directors, and estimates used in applying the Companys revenue recognition policy including
those related to accrued chargebacks, rebates, product returns, Medicare, Medicaid, and other
government rebate programs, shelf-stock adjustments, and the timing and amount of deferred and
recognized revenue and deferred and amortized manufacturing costs under the Companys several
alliance and collaboration agreements. Actual results may differ from estimated results. Certain
prior year amounts have been reclassified to conform to the current year presentation.
In the normal course of business, the Company is subject to loss contingencies, such as legal
proceedings and claims arising out of its business, covering a wide range of matters, including,
among others, patent litigation, and product and clinical trial liability. In accordance with
Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 450,
Contingencies, the Company records accrued loss contingencies when it is probable a liability has
been incurred and the amount of loss can be reasonably estimated. The Company, in accordance with
FASB ASC Topic 450, does not recognize gain contingencies until realized.
Page 7 of 83
2. REVENUE RECOGNITION
The Company recognizes revenue when the earnings process is complete, which under SEC Staff
Accounting Bulletin No. 104, Topic No. 13, Revenue Recognition (SAB 104), is when revenue is
realized or realizable and earned, and, additionally: there is persuasive evidence a revenue
arrangement exists; delivery of goods or services has occurred; the sales price is fixed or
determinable, and collectibility is reasonably assured.
The Company accounts for revenue arrangements with multiple deliverables in accordance with
FASB ASC Topic 605, revenue recognition for arrangements with multiple elements, which addresses
the determination of whether an arrangement involving multiple deliverables contains more than one
unit of accounting. A delivered item within an arrangement is considered a separate unit of
accounting only if both of the following criteria are met, including: the delivered item has value
to the customer on a stand alone basis; and, if the arrangement includes a general right of return
relative to the delivered item, delivery or performance of the undelivered item is considered
probable and substantially in the control of the vendor. Under FASB ASC Topic 605, if the fair
value of any undelivered element cannot be objectively or reliably determined, then separate
accounting for the individual deliverables is not appropriate. Revenue recognition for arrangements
with multiple deliverables constituting a single unit of accounting is recognizable generally over
the greater of the term of the arrangement or the expected period of performance, either on a
straight-line basis or on a proportional performance method.
Global Product sales, net:
The Global Product sales, net line item of the statement of operations, includes revenue
recognized related to shipments of pharmaceutical products to the Companys customers, primarily
drug wholesalers and retail chains. Gross sales revenue is recognized at the time title and risk of
loss passes to the customer generally when product is received by the customer. Included in
Global Product revenue are deductions from the gross sales price, including deductions related to
estimates for chargebacks, rebates, returns, shelf-stock, and other pricing adjustments. The
Company records an estimate for these deductions in the same period when revenue is recognized. A
summary of each of these deductions is as follows:
Chargebacks The Companys chargeback is the difference between the Companys invoice price
to a wholesaler and the final price paid by the wholesaler. The final price paid by the wholesaler
can be lower than the Companys invoice price based upon the customer to whom the wholesaler sells
the Companys products. The chargeback generally takes the form of a credit against the invoiced
gross sales amount charged to the wholesaler. A provision for chargeback deductions is estimated
and recorded in the same period the revenue is recognized based upon the terms of the various
chargeback arrangements in effect at the time of product shipment. The Company monitors actual
chargebacks granted and compares them to the estimated provision for chargebacks to assess the
reasonableness of the chargebacks reserve at each balance sheet date on a quarterly basis.
Rebates The Company maintains various rebate programs with its Global products customers.
The rebate programs are integral to the Companys effort to maintain a competitive position in its
marketplace, as well as to promote greater product sales along with customer loyalty. The rebates
generally take the form of a credit against the invoiced gross sales amount charged to a customer
for products shipped. A provision for rebate deductions is estimated and recorded in the same
period when revenue is recognized based upon the terms of the various rebate programs in effect at
the time of product shipment. The Company monitors actual rebates granted and compares them to the
estimated provision for rebates to assess the reasonableness of the rebates reserve at each balance
sheet date on a quarterly basis.
Page 8 of 83
2. REVENUE RECOGNITION (continued)
Returns The Company allows its customers to return product (i) if approved by authorized
personnel in writing or by telephone with the lot number and expiration date accompanying any
request and (ii) if such products are returned within six months prior to or until twelve months
following, the products expiration date. The Company estimates a provision for product returns as
a percentage of gross sales based upon historical experience of Global product sales. The sales
return reserve is estimated using a historical lag period which is the time between when the
product is sold and when it is ultimately returned, as determined from the Companys system
generated lag period report and return rates, adjusted by estimates of the future return rates
based on various assumptions, which may include changes to internal policies and procedures,
changes in business practices, and commercial terms with customers, competitive position of each
product, amount of inventory in the wholesaler supply chain, the introduction of new products, and
changes in market sales information. The Company considers other factors when estimating its
current period returns provision, including significant market changes which may impact future
expected returns, and actual product returns. The Company monitors actual returns on a quarterly
basis and may record specific provisions for returns it believes are not covered by historical
percentages.
Medicaid Rebate As required by law, the Company provides a rebate on drugs dispensed under
the Medicaid program. The Company determines its estimated Medicaid rebate accrual primarily based
on historical experience of claims submitted by the various states and any new information
regarding changes in the Medicaid program which may impact the Companys estimate of Medicaid
rebates. In determining the appropriate accrual amount, the Company considers historical payment
rates and processing lag for outstanding claims and payments. The Medicaid rebate accrual for the
nine months ended September 30, 2010 includes the effect of the increase in the Medicaid rebate
rates, which were effective on a retroactive basis to January 1, 2010, resulting from the March
2010 enactment into law of the Patient Protection and Affordable Care Act and the Health Care and
Education Affordability Reconciliation Act (the Acts). The change in the Medicaid rebate rates
resulting from the Acts did not have a material impact on the Companys results of operations. The
Company records estimates for Medicaid rebates as a deduction from gross sales, with corresponding
adjustments to accrued liabilities.
Shelf-Stock Adjustment The Company will occasionally reduce the selling price of certain
products. The Company may issue a credit against the sales amount to customers based upon their
remaining inventory of the product in question, provided the customer continues to make future
purchases of product from the Company. This type of customer credit is referred to as a shelf-stock
adjustment, which is the difference between the sales price and the revised lower sales price,
multiplied by an estimate of the number of product units on hand at a given date. Decreases in
selling prices are discretionary decisions made by the Company in response to market conditions,
including estimated launch dates of competing products and estimated declines in market price.
Cash Discounts The Company offers cash discounts to its customers, generally 2% of the sales
price, as an incentive for paying within invoice terms, which generally range from 30 to 90 days.
An estimate of cash discounts is recorded in the same period when revenue is recognized.
Page 9 of 83
2. REVENUE RECOGNITION (continued)
Private Label Product sales:
The Private Label Product sales line item of the statement of operations includes revenue
recognized related to shipments of generic pharmaceutical products to customers who sell the
product to third parties under their own label (i.e. these products are not sold under the
Companys label). Sales revenue is recognized at the time title and risk of loss passes to the
customer generally when product is received by the customer. Revenue received from Private
Label Product sales is not subject to deductions for chargebacks, rebates, product returns, and
other pricing adjustments. Additionally, Private Label Product sales do not have upfront,
milestone, or lump-sum payments and do not contain multiple deliverables under FASB ASC Topic 605.
Rx Partner and OTC Partner:
The Rx Partner and OTC Partner line items of the statement of operations include revenue
recognized under alliance agreements between the Company and other unrelated third-party
pharmaceutical companies. The Company has entered into these alliance agreements to develop
marketing and /or distribution relationships with its partners to fully leverage its technology
platform.
The Rx Partners and OTC Partners alliance agreements obligate the Company to deliver multiple
goods and/or services over extended periods. Such deliverables include manufactured pharmaceutical
products, exclusive and semi-exclusive marketing rights, distribution licenses, and research and
development services, among others. In exchange for these deliverables, the Company receives
payments from its alliance agreement partners for product shipments, and may also receive royalty,
profit sharing, and/or upfront or periodic milestone payments. Revenue received from the alliance
agreement partners for product shipments under these agreements is not subject to deductions for
chargebacks, rebates, product returns, and other pricing adjustments. Royalty and profit sharing
amounts the Company receives under these agreements are calculated by the respective alliance
agreement partner, with such royalty and profit share amounts generally based upon estimates of net
product sales or gross profit which include estimates of deductions for chargebacks, rebates,
product returns, and other adjustments the alliance agreement partners may negotiate with their
customers. The Company records the alliance agreement partners adjustments to such estimated
amounts in the period the alliance agreement partner reports the amounts to the Company.
The Company applied the updated guidance of ASC 605-25 Multiple Element Arrangements to the
Strategic Alliance Agreement with Teva (Teva Agreement) during the three months ended September
30, 2010 see Note 11 Alliance and Collaboration Agreements for a detailed discussion of the
application of the updated guidance to the Teva Agreement. Rx Partner revenue is related to the
Teva Agreement. All consideration received under the Teva Agreement is contingent, and therefore
can not be allocated to the deliverables. The Company looks to the underlying delivery of goods
and /or services which give rise to the payment of consideration under the Teva Agreement to
determine the appropriate revenue recognition. Consideration received as a result of research and
development-related activities performed under the Teva Agreement are initially deferred and
recorded as a liability captioned Deferred revenue-alliance agreements. The Company recognizes
the deferred revenue on a straight-line basis over the Companys expected period of performance of
such services. Consideration received as a result of the manufacture and delivery of products under
the Teva Agreement is recognized at the time title and risk of loss passes to the customer
generally when product is received by Teva. The Company recognizes profit share as current period
revenue when earned.
Page 10 of 83
OTC Partner revenue is related to the Companys alliance agreements with Merck (formerly
Shering-Plough) and Pfizer (formerly Wyeth) with respect to supply of over-the-counter
pharmaceutical products and related research and development services. The Company initially
defers all revenue earned under its OTC Partners alliance agreements. The deferred revenue is
recorded as a liability captioned Deferred revenue alliance agreements. The Company also
defers its direct product manufacturing costs to the extent such costs are reimbursable by the OTC
Partners. These deferred product manufacturing costs are recorded as an asset captioned Deferred
product manufacturing costs alliance agreements. The product manufacturing costs in excess of
amounts reimbursable by the OTC Partners are recognized as current period cost of revenue. The
Company recognizes revenue as OTC Partner revenue and amortizes deferred product manufacturing
costs as cost of revenues as the Company fulfills its contractual obligations. Revenue is
recognized and associated costs are amortized over the respective alliance agreements term of the
arrangement or the Companys expected period of performance, using a modified proportional
performance method. Under the modified proportional performance method of revenue recognition
utilized by the Company, the amount recognized in the period of initial recognition is based upon
the number of years elapsed under the respective alliance agreement relative to the estimated total
length of the recognition period. Under this method, the amount of revenue recognized in the year
of initial recognition is determined by multiplying the total amount realized by a fraction, the
numerator of which is the then current year of the alliance agreement and the denominator of which
is the total estimated life of the alliance agreement. The amount recognized during each remaining
year is an equal pro rata amount. Finally, cumulative revenue recognized is limited to the extent
of cash collected and /or the fair value received. The result of the Companys modified
proportional performance method is a greater portion of the revenue is recognized in the initial
period with the remaining balance being recognized ratably over either the remaining life of the
arrangement or the Companys expected period of performance of each respective alliance agreement.
Research Partner:
The Research Partner line item of the statement of operations includes revenue recognized
under development agreements with other unrelated third-party pharmaceutical companies. The
development agreements generally obligate the Company to provide research and development services
over multiple periods. In exchange for this service, the Company received upfront payments upon
signing of each development agreement and is eligible to receive contingent milestone payments,
based upon the achievement of contractually specified events. Additionally, the Company may also
receive royalty payments from the sale, if any, of a successfully developed and commercialized
product under one of these development agreements. Revenue received from the provision of research
and development services, including the upfront payment and the contingent milestone payments, if
any, will be deferred and recognized on a straight line basis over the expected period of
performance of the research and development services. Royalty fee income, if any, will be
recognized by the Company as current period revenue when earned. The Company determined these
agreements do not include multiple deliverables under FASB ASC Topic 605.
Promotional Partner:
The Promotional Partner line item of the statement of operations includes revenue recognized
under promotional services agreements with other unrelated third-party pharmaceutical companies.
The promotional services agreements obligate the Company to provide physician detailing sales calls
to promote its partners branded drug products over multiple periods. In exchange for this
service, the Company has received fixed fees generally based on either the number of sales force
representatives utilized in providing the services, or the number of sales calls made (up to
contractual maximum amounts). The Company recognizes revenue from providing physician detailing
services as those services are provided and as performance obligations are met and contingent
payments, if any, at the time when they are earned. The Company determined these agreements do not
include multiple deliverables under FASB ASC Topic 605.
Shipping and Handling Fees and Costs
Shipping and handling fees related to sales transactions are recorded as selling expense
Page 11 of 83
3. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2009, the FASB approved an update to the accounting standard related to
multiple-element revenue arrangements currently within the scope of FASB ASC Topic 605-25. The
updated ASC 605-25 provides principles and guidance to be used to determine whether a revenue
arrangement has multiple deliverables, and if so, how those deliverables should be separated. If
multiple deliverables exist, the updated standard requires revenue received under the arrangement
to be allocated using the estimated selling price of the deliverables if vendor-specific objective
evidence or third-party evidence of selling price is not available. The updated accounting
standard is effective for revenue arrangements entered into or materially modified in fiscal years
beginning on, or after June 15, 2010, with early application permitted. The Company adopted the
updated guidance of ASC 605-25 in the three months ended September 30, 2010. As required, the
Company applied the updated guidance of ASC 605-25 retrospectively from the beginning of the
Companys fiscal year of adoption as of January 1, 2010. Accordingly, the updated guidance of ASC
605-25 will apply to all multiple-element revenue arrangements entered into or materially modified
from January 1, 2010 forward. The application of the updated guidance did not have any impact on
the Companys revenue recognition during the three and six months ended June 30, 2010. The
updated guidance of ASC 605-25 was applied to the Teva Agreement during the three months ended September 30, 2010. For a discussion of the
impact of FASB ASC Topic 605-25 on the Teva Agreement, see Part I: Financial Information Item
1. Financial Statements Footnote 11, Alliance and Collaboration Agreements Strategic Alliance
Agreement with Teva.
In January 2010, the FASB issued Accounting Standards Update No. 2010-02, Consolidation (Topic
810): Accounting and Reporting for Decreases in Ownership of a Subsidiary a Scope Clarification.
This update provides amendments to Subtopic 810-10, and related guidance within US GAAP, to
clarify the scope of the decrease in ownership provisions. For those entities that have already
adopted Statement 160, the amendments are effective at the beginning of the first interim or annual
reporting period ending on or after December 15, 2009. The amendments should be applied
retrospectively to the first period that an entity adopted Statement 160. Upon becoming effective
this update did not have an impact on the Companys consolidated financial statements.
In March 2010, the FASB issued Accounting Standards Update No. 2010-17, Revenue
Recognition-Milestone Method of Revenue Recognition (Topic 605), which addresses accounting for
arrangements in which a vendor satisfies its performance obligations over time, with all or a
portion of the consideration contingent on future events, referred to as milestones. The
Milestone Method of Revenue Recognition is limited to arrangements which involve research or
development activities. A milestone is defined as an event for which, at the date the arrangement
is entered into, there is substantive uncertainty whether the event will be achieved, and the
achievement of the event is based in whole or in part on either the vendors performance or a
specific outcome resulting from the vendors performance. In addition, the achievement of the event
would result in additional payments being due to the vendor. The Milestone Method of Revenue
Recognition allows a vendor to adopt an accounting policy to recognize arrangement consideration
that is contingent on the achievement of a substantive milestone in its entirety in the period the
milestone is achieved. The Milestone Method of Revenue Recognition is effective on a prospective
basis, with an option for retrospective application for milestones achieved in fiscal years and
interim periods within those fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. If an entity elects early application in a period that is not the first reporting period
of its fiscal year, then the guidance must be applied retrospectively from the beginning of that
fiscal year. The Company will determine the impact of the new accounting standard as it achieves
milestones, and earns payments under either new or existing revenue arrangements.
Page 12 of 83
4. INVESTMENTS
Investments consist of commercial paper, corporate bonds, and medium-term notes, government
enterprise obligations, and /or certificates of deposit. The Companys policy is to invest in only
high quality AAA-rated or investment-grade securities. Investments in debt securities are
accounted for as held-to-maturity and are recorded at amortized cost, which approximates fair
value, based upon observable market values. The Company has historically held all investments in
debt securities until maturity, and has the ability and intent to continue to do so. All of the
Companys investments have remaining contractual maturities of less than 12 months and are
classified as short-term. Upon maturity the Company uses a specific identification method.
A summary of short-term investments as of September 30, 2010 and December 31, 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
(in $000s) |
|
Amortized |
|
|
Unrecognized |
|
|
Unrecognized |
|
|
Fair |
|
September 30, 2010 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Commercial paper |
|
$ |
106,656 |
|
|
$ |
47 |
|
|
$ |
(8 |
) |
|
$ |
106,695 |
|
Government sponsored
enterprise obligations |
|
|
75,994 |
|
|
|
75 |
|
|
|
|
|
|
|
76,069 |
|
Corporate bonds |
|
|
9,688 |
|
|
|
12 |
|
|
|
|
|
|
|
9,700 |
|
Certificates of deposit |
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
192,579 |
|
|
$ |
134 |
|
|
$ |
(8 |
) |
|
$ |
192,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
(in $000s) |
|
Amortized |
|
|
Unrecognized |
|
|
Unrecognized |
|
|
Fair |
|
December 31, 2009 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Commercial paper |
|
$ |
13,387 |
|
|
$ |
4 |
|
|
$ |
(1 |
) |
|
$ |
13,390 |
|
Government sponsored
enterprise obligations |
|
|
41,953 |
|
|
|
32 |
|
|
|
(1 |
) |
|
|
41,984 |
|
Corporate bonds |
|
|
3,021 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
3,021 |
|
Certificates of deposit |
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
58,599 |
|
|
$ |
37 |
|
|
$ |
(3 |
) |
|
$ |
58,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 13 of 83
5. ACCOUNTS RECEIVABLE
The composition of accounts receivable, net is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(in $000s) |
|
2010 |
|
|
2009 |
|
Gross accounts receivable |
|
$ |
138,128 |
|
|
$ |
254,094 |
|
Less: Chargeback reserve |
|
|
(17,298 |
) |
|
|
(21,448 |
) |
Less: Rebate reserve |
|
|
(16,993 |
) |
|
|
(37,781 |
) |
Less: Other deductions |
|
|
(8,270 |
) |
|
|
(9,011 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
95,567 |
|
|
$ |
185,854 |
|
|
|
|
|
|
|
|
A roll forward of the chargeback and rebate reserves activity for the nine months ended
September 30, 2010 and the year ended December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
(in $000s) |
|
September 30, |
|
|
December 31, |
|
Chargeback reserve |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
21,448 |
|
|
$ |
4,056 |
|
Provision recorded during the period |
|
|
141,653 |
|
|
|
126,105 |
|
Credits issued during the period |
|
|
(145,803 |
) |
|
|
(108,713 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
17,298 |
|
|
$ |
21,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
September 30, |
|
|
December 31, |
|
Rebate reserve |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
37,781 |
|
|
$ |
4,800 |
|
Provision recorded during the period |
|
|
73,397 |
|
|
|
72,620 |
|
Credits issued during the period |
|
|
(94,185 |
) |
|
|
(39,639 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
16,993 |
|
|
$ |
37,781 |
|
|
|
|
|
|
|
|
Other deductions include allowance for uncollectible amounts and cash discounts. The Company
maintains an allowance for uncollectible amounts for estimated losses resulting from amounts deemed
to be uncollectible from its customers, with such allowances for specific amounts on certain
accounts. The Company recorded an allowance for uncollectible amounts of $566,000 and $372,000 at
September 30, 2010 and December 31, 2009, respectively.
Page 14 of 83
6. INVENTORY
Inventory, net at September 30, 2010 and December 31, 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(in $000s) |
|
2010 |
|
|
2009 |
|
Raw materials |
|
$ |
30,789 |
|
|
$ |
30,758 |
|
Work in process |
|
|
3,064 |
|
|
|
2,768 |
|
Finished goods |
|
|
15,828 |
|
|
|
17,051 |
|
|
|
|
|
|
|
|
Total inventory, net |
|
$ |
49,680 |
|
|
$ |
50,577 |
|
|
|
|
|
|
|
|
|
|
Less: Non-current inventory, net |
|
|
(7,644 |
) |
|
|
(1,447 |
) |
|
|
|
|
|
|
|
Total inventory-current, net |
|
$ |
42,036 |
|
|
$ |
49,130 |
|
|
|
|
|
|
|
|
The balance of inventory carrying value reserves were $5,274,000 and $4,646,000 at September
30, 2010 and December 31, 2009, respectively.
To the extent inventory is not scheduled to be utilized in the manufacturing process and/or
sold within twelve months of the balance sheet date, it is included as a component of other
non-current assets. Amounts classified as non-current inventory consist of raw materials, net of
valuation reserves. Raw materials generally have a shelf life of approximately three to five
years, while finished goods generally have a shelf life of approximately two years.
When the Company concludes United States Food and Drug Administration (FDA) approval is
expected within approximately six months, the Company will generally begin to schedule
manufacturing process validation studies as required by FDA to demonstrate the production process
can be scaled up to manufacture commercial batches. Consistent with industry practice, the Company
may build quantities of pre-launch inventories of certain products pending required final FDA
approval and/or resolution of patent infringement litigation, when, in the Companys assessment,
such action is appropriate to increase the commercial opportunity, FDA approval is expected in the
near term, and/or the litigation will be resolved in the Companys favor.
The Company recognizes pre-launch inventories at the lower of its cost or the expected net
selling price. Cost is determined using a standard cost method, which approximates actual cost, and
assumes a FIFO flow of goods. Costs of unapproved products are the same as approved products and
include materials, labor, quality control, and production overhead. The carrying value of
unapproved inventory, less reserves, was approximately $1,958,000 and $8,702,000 at September 30,
2010 and December 31, 2009, respectively.
The capitalization of unapproved pre-launch inventory involves risks, including, among other
items, FDA approval of product may not occur; approvals may require additional or different testing
and/or specifications than used for unapproved inventory, and, in cases where the unapproved
inventory is for a product subject to litigation, the litigation may not be resolved or settled in
favor of the Company. If any of these risks were to materialize and the launch of the unapproved
product delayed or prevented, then the net carrying value of unapproved inventory may be partially
or fully reserved. Generally, the selling price of a generic pharmaceutical product is at discount
from the corresponding brand product selling price. Typically, a generic drug is easily substituted
for the corresponding brand product, and once a generic product is approved, the pre-launch
inventory is typically sold within the next three months. If the market prices become lower than
the product inventory carrying costs, then the pre-launch inventory value is reduced to such lower
market value. If the inventory produced exceeds the estimated market acceptance of the generic
product and becomes short-dated, a carrying value reserve will be recorded. In all cases, the
carrying value of the Companys pre-launch product inventory is lower than the respective estimated
net selling prices.
Page 15 of 83
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(in $000s) |
|
2010 |
|
|
2009 |
|
Land |
|
$ |
2,270 |
|
|
$ |
2,270 |
|
Buildings and improvements |
|
|
81,093 |
|
|
|
77,778 |
|
Equipment |
|
|
65,938 |
|
|
|
59,612 |
|
Office furniture and equipment |
|
|
8,118 |
|
|
|
7,425 |
|
Construction-in-progress |
|
|
4,867 |
|
|
|
4,880 |
|
|
|
|
|
|
|
|
Property, plant and equipment, gross |
|
$ |
162,286 |
|
|
$ |
151,965 |
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation |
|
|
(59,220 |
) |
|
|
(50,315 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
103,066 |
|
|
$ |
101,650 |
|
|
|
|
|
|
|
|
Depreciation expense was $2,998,000 and $2,614,000 for the three months ended September 30,
2010 and 2009, respectively, and $9,066,000 and $7,806,000 for the nine months ended September 30,
2010 and 2009, respectively.
Page 16 of 83
8. ACCRUED EXPENSES
The following table sets forth the Companys accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
(in $000s) |
|
2010 |
|
|
2009 |
|
Payroll-related expenses |
|
$ |
15,235 |
|
|
$ |
15,274 |
|
Product returns |
|
|
39,478 |
|
|
|
22,114 |
|
Shelf stock adjustments |
|
|
614 |
|
|
|
225 |
|
Medicaid rebates |
|
|
14,913 |
|
|
|
9,759 |
|
Physician detailing sales force fees |
|
|
2,330 |
|
|
|
2,449 |
|
Legal and professional fees |
|
|
4,651 |
|
|
|
3,660 |
|
Litigation settlements |
|
|
|
|
|
|
5,865 |
|
Other |
|
|
4,862 |
|
|
|
2,709 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
82,083 |
|
|
$ |
62,055 |
|
|
|
|
|
|
|
|
Accrued Litigation Settlement Expenses
In January 2010, the Company entered into an agreement to settle a suit related to the
Companys Lipram UL products. Under the terms of this agreement, the Company agreed to reimburse
the plaintiff for litigation costs, which was paid by the Company in January 2010. The Company
recorded an accrued expense for this payment in the year ended December 31, 2009, along with
corresponding incurred legal and professional fees, as litigation settlement expense in the
consolidated statement of operations.
On January 28, 2009, the Company entered into an agreement settling the securities class
actions pending in the United States District Court for the Northern District of California. Under
the terms of the settlement, plaintiffs agreed to dismiss the actions with prejudice, and
defendants, including the Company, without admitting the allegations or any liability, agreed to
pay the plaintiff class $9.0 million, of which the Company paid approximately $3.4 million in
January 2009, with the balance paid by the Companys directors and officers liability insurance
carriers. The Company recorded an accrued expense for its portion of the settlement payment, in
the year ended December 31, 2008.
Taiwan Facility Construction
The Company has constructed a facility in Jhunan Taiwan, R.O.C., currently utilized for
manufacturing, research and development, warehouse, and administrative space. In conjunction with
the construction of this facility, as of September 30, 2010, the Company entered into several
contracts aggregating approximately $16,653,000, of which approximately $1,144,000 of remaining
obligations are included in the other line in the table above. The Company cumulatively
capitalized interest expense of $596,000 in conjunction with the construction of the Taiwan
facility.
Page 17 of 83
8. ACCRUED EXPENSES (continued)
Product Returns
The Company maintains a product return policy to allow customers to return product within
specified guidelines. At the time of sale, the Company estimates a provision for product returns
based upon historical experience for sales made through its Global Products sales channel. Sales
of product under the Private Label, the Rx Partner, and the OTC Partners alliance agreements
generally are not subject to returns. A roll forward of the product return reserve for the nine
months ended September 30, 2010 and the year ended December 31, 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
Product Return Reserve |
|
2010 |
|
|
2009 |
|
(in $000s) |
|
|
|
|
|
|
Beginning balance |
|
$ |
22,114 |
|
|
$ |
13,675 |
|
Provision related to sales recorded in the period |
|
|
20,340 |
|
|
|
11,847 |
|
Credits issued during the period |
|
|
(2,976 |
) |
|
|
(3,408 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
39,478 |
|
|
$ |
22,114 |
|
|
|
|
|
|
|
|
Purchase Order Commitments
As of September 30, 2010, the Company had approximately $23,387,000 of open purchase order
commitments, primarily for raw materials. The terms of these purchase order commitments are less
than one year in duration.
Page 18 of 83
9. INCOME TAXES
The Company calculates its interim income tax provision in accordance with FASB ASC Topics 270
and 740. At the end of each interim period, the Company makes an estimate of the annual expected
effective tax rate and applies the estimated effective rate to its ordinary year-to-date taxable
earnings or loss. In addition, the effect of changes in enacted tax laws, rates, or tax status is
recognized in the interim period in which such change occurs.
The computation of the annual estimated effective tax rate at each interim period requires
certain estimates and assumptions including, but not limited to, the expected operating income for
the year, projections of the proportion of income (or loss) earned and taxed in United States, and
the various state and local tax jurisdictions, as well as tax jurisdictions outside the United
States, along with permanent and temporary differences, and the likelihood of recovering deferred
tax assets generated in the current year. The accounting estimates used to compute the provision
for income taxes may change as new events occur, more experience is acquired or additional
information is obtained. The computation of the annual estimated effective tax rate includes
modifications, which were projected for the year, for share-based compensation, the domestic
manufacturing deduction, and state research and development credits, among others.
During the nine months ended September 30, 2010, the Company recorded a tax provision of
$146,114,000 for United States domestic income taxes and for foreign income taxes. The nine months
ended September 30, 2010 tax provision also included an accrual for uncertain tax positions of
$35,000. In the nine months ended September 30, 2009, the Company recorded a tax provision of
$6,373,000 for United States domestic income taxes and for foreign income taxes. The nine months
ended September 30, 2009 tax provision also included an accrual for uncertain tax positions of
$676,000. The increase in the tax provision was driven by higher income before taxes in the nine
months ended September 30, 2010. The tax provision for the nine months ended September 30, 2010
does not include the effect of the federal research and development tax credit which expired on
December 31, 2009, and as of the September 30, 2010 balance sheet date, has not been reinstated.
The tax provision for the nine months ended September 30, 2009 included the effect of the federal
research and development tax credit.
Page 19 of 83
10. REVOLVING LINE OF CREDIT
The Company has a $35,000,000 revolving credit facility under a credit agreement with Wells
Fargo Bank, N.A. (Credit Agreement), with a January 31, 2011 expiration date, effective with a
sixth amendment to the Credit Agreement executed in September 2010. The revolving credit facility,
intended for working capital and general corporate purposes, is collateralized by eligible accounts
receivable, inventory, and machinery and equipment, subject to limitations and other terms. There
were no amounts outstanding under the revolving credit facility as of September 30, 2010 and
December 31, 2009, respectively.
The interest rate for the revolving credit facility is set at either the prime rate plus a
margin ranging from 0.25% to 0.75% or LIBOR plus a margin ranging from 2.25% to 3.0% based upon
certain terms and conditions. The Company is required to pay an unused line fee of 50 basis points
per annum and a servicing fee of $1,500 during any month in which no revolver loans are
outstanding. During the nine months ended September 30, 2010 and 2009, the Company paid unused
line fees of $133,000 and $128,000, respectively.
The Credit Agreement contains various financial covenants, the most significant of which
include a fixed charge coverage ratio and a capital expenditure limitation. The fixed charge
coverage ratio, applicable only for periods during which the Companys net cash position is less
than $50.0 million, requires EBITDA less cash paid for taxes, dividends, and certain capital
expenditures, to be not less than 1.25 to 1.00 as compared to scheduled principal payments coming
due in the next 12 months plus cash interest paid during the applicable period. The Company is
limited to capital expenditures of no more than $25.0 million for each calendar year. The Credit
Agreement also provides for certain information reporting covenants, including a requirement to
provide certain periodic financial information. At September 30, 2010, the Company was in
compliance with the various financial and information reporting covenants contained in the Credit
Agreement.
Page 20 of 83
11. ALLIANCE AND COLLABORATION AGREEMENTS
License and Distribution Agreement with Shire
In January 2006, the Company entered into a License and Distribution Agreement with an affiliate of
Shire Laboratories, Inc. (Shire License and Distribution Agreement), under which the Company
received a non-exclusive license to market and sell an authorized generic of Shires Adderall XR®
product (AG Product) subject to certain conditions, but in any event by no later than January 1,
2010. The Company commenced sales of the AG Product in October 2009. Under the terms of the Shire
License and Distribution Agreement, Shire is responsible for manufacturing the AG Product, and the
Company is responsible for marketing and sales of the AG Product. The Company is required to pay a
profit share to Shire on sales of the AG Product, of which the Company accrued a profit share
payable to Shire of $86,755,000 and $0 on sales of the AG Product during the nine months ended
September 30, 2010 and 2009, respectively, with a corresponding charge included in the cost of
revenues line on the consolidated statement of operations.
Page 21 of 83
11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)
Strategic Alliance Agreement with Teva
The Company entered into a Strategic Alliance Agreement with Teva in June 2001 (Teva
Agreement). The Teva Agreement commits the Company to develop and manufacture, and Teva to
distribute, ten (10) specified controlled release generic pharmaceutical products (generic
products), each for a 10-year period. The Company identified the following deliverables under the
Teva Agreement: (i) the manufacture and delivery of generic products; (ii) the provision of
research and development activities (including regulatory services) related to each product; and
(iii) market exclusivity associated with the products.
In July 2010, the Teva Agreement was amended to terminate the provisions of the Teva Agreement
with respect to the Omeprazole 10mg, 20mg and 40mg products. Additionally, the Company agreed to
pay to Teva a profit share on future sales of the fexofenadine HCI/psuedoephedrine product, if any,
but in no event will such profit share payments exceed an aggregate amount of $3,000,000.
As the July 2010 amendment materially modified the Teva Agreement, the Company elected to
apply the updated guidance of FASB ASC 605-25 Multiple Element Arrangements (ASC 605-25) to the
amended Teva Agreement beginning in the three months ended September 30, 2010.
There are two criteria under the updated guidance of ASC 605-25 for determining if
deliverables shall be considered separate units of accounting, including: (i) the deliverable has
value to the customer on a standalone basis, and (ii) if the arrangement has a general right of
return relative to delivered items, delivery or performance of the undelivered items is considered
probable and substantially in the control of the vendor. The Company evaluated the deliverables of
the amended Teva Agreement under ASC 605-25 and determined there are two units of accounting,
including: a combined unit consisting of research and development activities plus market
exclusivity, and the manufacture and delivery of 10 products (i.e. contract manufacturing). The
market exclusivity deliverable does not meet the first criteria for separation as it does not have
standalone value to Teva. As the products contemplated by the Teva Agreement were to be developed
by the Company, the market exclusivity has no value to Teva without the research and development
services needed to complete the products. The contract manufacturing deliverable has standalone
value to Teva as it is able to resell the delivered items (i.e. finished product) to third-parties.
The consideration received by the Company from Teva under the Teva Agreement is contingent
upon future performance, as such the Company was unable to allocate any of the consideration
received to delivered items, and therefore the Company looked to the underlying services which gave
rise to the payment of consideration by Teva to determine the appropriate recognition of revenue as
follows:
|
|
|
Research and development related activities (the Combined Unit) Consideration received as a result of research and
development related activities performed under the Teva Agreement will be deferred and recognized on the straight-line
method over the Companys expected period of performance of the research and development related services, which is
estimated to be from July 2001 (following the June 2001 commencement of the Teva Agreement) to October 2014 (with FDA approval of the
ANDA for the final product under the Teva Agreement). |
|
|
|
|
Manufacture and delivery of 10 products Consideration received as a result of the manufacture and delivery of 10
products under the Teva Agreement will be recognized under the Companys revenue recognition policy, as proscribed by SAB
104, as follows: |
|
|
|
Product shipments The Company will account for the shipment of products under the Teva Agreement as current period
revenue in accordance with its revenue recognition policy applicable to its Global products. |
|
|
|
|
Profit share The Company will recognize profit share, if any, as current period revenue when earned. |
|
|
|
Gain on the repurchase of Company stock This represents additional profit share revenue resulting from the successful
December 2006 commercial sale of a Tier 2 or Tier 3 product, and was recognized as revenue in the period earned. |
Page 22 of 83
The Company applied the updated guidance of ASC 605-25 to the Teva Agreement on a prospective
basis beginning in the quarter ended September 30, 2010. In the three months and nine months ended
September 30, 2010, the application of the updated guidance of ASC 605-25 had the effect of
increasing Rx Partner revenue by $196,440,000, and increasing cost of revenues by $95,426,000, and
correspondingly, basic earnings per share increased by approximately $0.98 and $1.01 for the three
and nine months ended September 30, 2010, respectively. The increase in Rx Partner revenue as a
result of applying the updated guidance of ASC 605-25 in the three months ended September 30,
2010, represents the recognition of previously deferred revenue which would otherwise have been
recognized, under the previous accounting standards, over the remaining life of the Teva Agreement,
using a modified proportional performance method. Under the previous accounting standards, in the three and nine months
ended September 30, 2010, Rx Partner revenue would have been $5,922,000 and $16,627,000, respectively, cost of
revenues would have been $47,998,000 and $196,466,000, respectively, and basic earnings per share would have
been $0.21 and $2.85, respectively.
The Company previously determined, under the previous accounting standards, no single
deliverable represented a separate unit of accounting as there was not sufficient objective and
reliable evidence of the fair value of any single deliverable. As such, under the previous
accounting standards, the Company was required to account for the entirety of the Teva Agreement as
a single unit of accounting, resulting in the Company previously deferring revenue earned and
product manufacturing costs incurred under the Teva Agreement and then recognizing such deferred
revenue and amortizing such deferred manufacturing costs over the estimated life of the Teva
Agreement utilizing a modified proportional performance method.
Page 23 of 83
The following tables show the additions to and deductions from the deferred revenue and
deferred product manufacturing costs under the Teva Agreement:
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
Ended |
|
|
Inception |
|
(in $000s) |
|
September 30, |
|
|
Through |
|
Deferred revenue |
|
2010 |
|
|
Dec 31, 2009 |
|
Beginning balance |
|
$ |
202,032 |
|
|
$ |
|
|
Additions: |
|
|
|
|
|
|
|
|
Product-related and cost sharing |
|
|
10,084 |
|
|
|
417,269 |
|
Exclusivity charges |
|
|
|
|
|
|
(50,600 |
) |
All other |
|
|
|
|
|
|
12,527 |
|
|
|
|
|
|
|
|
Total additions |
|
$ |
10,084 |
|
|
$ |
379,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
Amount recognized |
|
|
(10,978 |
) |
|
|
(177,164 |
) |
Accounting adjustment |
|
|
(196,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue |
|
$ |
4,698 |
|
|
$ |
202,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
(in $000s) |
|
Ended |
|
|
Inception |
|
Deferred product |
|
September 30, |
|
|
Through |
|
manufacturing costs |
|
2010 |
|
|
Dec 31, 2009 |
|
Beginning balance |
|
$ |
94,040 |
|
|
$ |
|
|
Additions |
|
|
7,416 |
|
|
|
175,565 |
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
Amount recognized |
|
|
(6,030 |
) |
|
|
(81,525 |
) |
Accounting adjustment |
|
|
(95,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs |
|
$ |
|
|
|
$ |
94,040 |
|
|
|
|
|
|
|
|
Page 24 of 83
11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)
OTC Partners Alliance Agreements
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the OTC Agreements:
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
Ended |
|
|
Inception |
|
(in $000s) |
|
September 30 |
|
|
Through |
|
Deferred revenue |
|
2010 |
|
|
Dec 31, 2009 |
|
Beginning balance |
|
$ |
16,162 |
|
|
$ |
|
|
Additions: |
|
|
|
|
|
|
|
|
Upfront fees and milestone payments |
|
|
|
|
|
|
8,436 |
|
Cost-sharing and other |
|
|
|
|
|
|
1,642 |
|
Product-related deferrals |
|
|
2,863 |
|
|
|
83,826 |
|
|
|
|
|
|
|
|
Total additions |
|
$ |
2,863 |
|
|
$ |
93,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount recognized |
|
|
(6,438 |
) |
|
|
(77,742 |
) |
|
|
|
|
|
|
|
Total deferred revenue |
|
$ |
12,587 |
|
|
$ |
16,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
(in $000s) |
|
Ended |
|
|
Inception |
|
Deferred product |
|
September 30, |
|
|
Through |
|
manufacturing costs |
|
2010 |
|
|
Dec 31, 2009 |
|
Beginning balance |
|
$ |
14,203 |
|
|
$ |
|
|
Additions |
|
|
2,323 |
|
|
|
77,870 |
|
Less: amount recognized |
|
|
(5,289 |
) |
|
|
(63,667 |
) |
|
|
|
|
|
|
|
Total deferred product
manufacturing costs |
|
$ |
11,237 |
|
|
$ |
14,203 |
|
|
|
|
|
|
|
|
Page 25 of 83
11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)
Joint Development Agreement with Medicis Pharmaceutical Corporation
The Joint Development Agreement provides for the Company and Medicis to collaborate in the
development of a total of five dermatology products, including four of the Companys generic
products and one branded advanced form of Mediciss SOLODYN® product. Under the provisions of The
Joint Development Agreement the Company received a $40,000,000 upfront payment, paid by Medicis in
December 2008. The Company has also received an aggregate $12,000,000 in milestone payments
composed of two $5,000,000 milestone payments, paid by Medicis in March 2009 and September 2009,
and a $2,000,000 milestone payment received in December 2009. The Company has the potential to
receive up to an additional $11,000,000 of contingent milestone payments upon achievement of
certain contractually specified clinical and regulatory milestones, as well as the potential to
receive royalty payments from sales, if any, by Medicis of its advanced form SOLODYN® brand
product. Finally, to the extent the Company commercializes any of its four generic dermatology
products covered by the Joint Development Agreement, the Company will pay to Medicis a 50% gross
profit share on sales, if any, of such products.
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the Joint Development Agreement with Medicis:
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
Ended |
|
|
Inception |
|
(in $000s) |
|
September 30, |
|
|
Through |
|
Deferred revenue |
|
2010 |
|
|
Dec 31, 2009 |
|
Beginning balance |
|
$ |
39,487 |
|
|
$ |
|
|
Additions: |
|
|
|
|
|
|
|
|
Upfront fees and milestone payments |
|
|
|
|
|
|
52,000 |
|
Product-related deferrals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions |
|
$ |
|
|
|
$ |
52,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount recognized |
|
|
(10,153 |
) |
|
|
(12,513 |
) |
|
|
|
|
|
|
|
Total deferred revenue |
|
$ |
29,334 |
|
|
$ |
39,487 |
|
|
|
|
|
|
|
|
Page 26 of 83
11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)
Development and Co-Promotion Agreement with Endo Pharmaceuticals Inc.
In June 2010, the Company and Endo Pharmaceuticals, Inc. (Endo) entered into a Development
and Co-Promotion Agreement (Endo Agreement) under which the Company and Endo have agreed to
collaborate in the development and commercialization of a next-generation advanced form of the
Companys lead branded product candidate (Endo Agreement Product). Under the provisions of the
Endo Agreement, in June 2010, Endo paid to the Company a $10,000,000 up-front payment. The Company
has the potential to receive up to an additional
$30,000,000 of contingent payments upon achievement of certain specified clinical and regulatory
milestones. Upon commercialization of the Endo Agreement Product in the United States, Endo will
have the right to co-promote such product to non-neurologists, which will require the Company to
pay Endo a co-promotion service fee of up to 100% of the gross profits attributable to
prescriptions for the Endo Agreement Product which are written by the non-neurologists.
The $10,000,000 up-front payment is being recognized as revenue on a straight-line basis over
a period of 91 months, which is the Companys estimated expected period of performance of the Endo
Agreement Product research and development activities, commencing with the June 2010 effective date
of the Endo Agreement and ending in December 2017, the estimated date of FDA approval of the
Companys NDA. The FDA approval of the Endo Agreement Product NDA represents the end of the
Companys expected period of performance, as the Company will have no further contractual
obligation to perform research and development activities under the Endo Agreement, and therefore
the earnings process will be completed. Deferred revenue is recorded as a liability captioned
Deferred revenue-alliance agreement. Revenue recognized under the Endo Agreement is reported on
the consolidated statement of operations, in the line item captioned Research Partner. The Company
determined the straight-line method aligns revenue recognition with performance as the level of
research and development activities performed under the Endo Agreement are expected to be performed
on a ratable basis over the Companys estimated expected period of performance.
Upon FDA approval of the Companys Endo Agreement Product NDA, the Company will have the right
(but not the obligation) to begin manufacture and sale of such product. The Company will sell its
manufactured branded product to customers in the ordinary course of business through its Impax
Pharmaceuticals Division. The Company will account for the sale of the product covered by the Endo
Agreement as current period revenue. The co-promotion service fee paid to Endo, as described above,
if any, will be accounted for as a current period selling expense as incurred.
Page 27 of 83
11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)
Co-Promotion Agreement with Pfizer
In March 2010, the Company and Pfizer, Inc. (Pfizer) entered into the First Amendment to the
Co-Promotion Agreement (originally entered into with Wyeth, now a wholly owned subsidiary of
Pfizer) (Pfizer Co-Promotion Agreement). Under the terms of the Pfizer Co-Promotion Agreement,
effective April 1, 2010, the Company provides physician detailing sales call services for Pfizers
Lyrica® product to neurologists. The Company receives a fixed fee, effective January 1, 2010,
subject to annual cost adjustment, for providing such physician detailing sales calls within a
contractually defined range of an aggregate number of physician detailing sales calls rendered,
determined on a quarterly basis. There is no opportunity for the Company to earn incentive fees
under the terms of the Pfizer Co-Promotion Agreement. Pfizer is responsible for providing sales
training to the Companys physician detailing sales force personnel. Pfizer owns the product and
is responsible for all pricing and marketing literature as well as product manufacture and
fulfillment. The Company recognizes the physician detailing sales force fee revenue as the related
services are performed and the performance obligations are met. The Company recognized $3,535,000
and $3,499,000 in the three months ended September 30, 2010 and 2009, respectively, and $10,538,000
and $3,499,000 in the nine months ended September 30, 2010 and 2009, respectively, under the Pfizer
Co-Promotion Agreement, with such amounts presented in the captioned line item Promotional
Partner revenue on the consolidated statement of operations.
As noted above, the Company previously entered into a three year Co-Promotion Agreement with
Wyeth, an unrelated third-party pharmaceutical company, prior to Wyeth becoming a wholly-owned
subsidiary of Pfizer, under which the Company performed physician detailing sales calls for the
Wyeth Pristiq® product to neurologists, with such services commencing on July 1, 2009, and ending
in connection with the Pfizer Co-Promotion Agreement described above. Wyeth paid the Company a
service fee, subject to an annual cost adjustment, for each physician detailing sales call. During
the term of the (former Wyeth) Co-Promotion Agreement, the Company was required to complete a
minimum and maximum number of physician detailing sales calls. Wyeth was responsible for providing
sales training to the Companys sales force. Wyeth owned the product and was responsible for all
pricing and marketing literature as well as product manufacture and fulfillment. The Company
recognized service fee revenue as the related physician detailing sales call services were
performed and the performance obligations were met. The Company did not earn any incentive fee
revenue under the terms of the (former Wyeth) Co-Promotion Agreement.
Promotional Services Agreement with Shire
In January 2006, the Company entered into a three year Promotional Services Agreement with an
affiliate of Shire Laboratories, Inc. (Shire Co-Promotion Agreement), under which the Company was
engaged to perform physician detailing sales calls services in support of Shires Carbatrol®
product, from July 1, 2006 to June 30, 2009. The Company recognized $0 in sales force fee revenue
in each of the three months ended September 30, 2010 and 2009, and $0 and $6,508,000 in sales force
fee revenue for the nine months ended September 30, 2010 and 2009, respectively, under the
(expired) Shire Co-Promotion Agreement, with such amounts presented in the captioned line item
Promotional Partner under revenues on the consolidated statement of operations.
Page 28 of 83
12. SHARE-BASED COMPENSATION
The Company recognizes the fair value of each stock option and restricted share over its
vesting period. Stock options and restricted stock awards are granted under the Companys Amended
and Restated 2002 Equity Incentive Plan (2002 Plan) and generally vest over a three or four year
period and have a term of ten years.
Total share-based compensation expense recognized in the consolidated statement of operations
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended: |
|
|
Nine Months Ended: |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
(in $000s) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing expenses |
|
$ |
482 |
|
|
$ |
409 |
|
|
$ |
1,841 |
|
|
$ |
1,145 |
|
Research and development |
|
|
797 |
|
|
|
655 |
|
|
|
2,535 |
|
|
|
1,906 |
|
Selling, general & administrative |
|
|
1,194 |
|
|
|
922 |
|
|
|
3,330 |
|
|
|
2,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,473 |
|
|
$ |
1,986 |
|
|
$ |
7,706 |
|
|
$ |
5,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of Shares |
|
|
Exercise Price |
|
|
|
Under Option |
|
|
per Share |
|
Outstanding at December 31, 2009 |
|
|
8,229,818 |
|
|
$ |
9.87 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
349,000 |
|
|
$ |
20.06 |
|
Options exercised |
|
|
(1,481,766 |
) |
|
$ |
8.75 |
|
Options forfeited |
|
|
(122,342 |
) |
|
$ |
9.55 |
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010 |
|
|
6,974,710 |
|
|
$ |
10.63 |
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2010 |
|
|
6,918,474 |
|
|
$ |
10.64 |
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2010 |
|
|
3,923,311 |
|
|
$ |
11.55 |
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of each stock option award on the grant date using the
Black-Scholes Merton option-pricing model, wherein: expected volatility is based solely on
historical volatility of the Companys common stock over the period commensurate with the expected
term of the stock options. The expected term calculation is based on the simplified method
described in SAB No. 107, Share-Based Payment and SAB No. 110, Share-Based Payment, as the Company
has limited historical experience of option exercise activity. The risk-free interest rate is
based on the U.S. Treasury yield in effect at the time of grant for an instrument with a maturity
that is commensurate with the expected term of the stock options. The dividend yield of zero is
based on the fact that the Company has never paid cash dividends on its common stock, and has no
present intention to pay cash dividends.
A summary of the Companys non-vested restricted stock awards is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
Restricted |
|
Number of Restricted |
|
|
Grant-Date |
|
Stock Awards |
|
Stock Awards |
|
|
Fair Value |
|
Non-vested at December 31, 2009 |
|
|
1,152,923 |
|
|
$ |
7.72 |
|
Granted |
|
|
167,800 |
|
|
$ |
18.65 |
|
Vested |
|
|
(234,219 |
) |
|
$ |
7.67 |
|
Forfeited |
|
|
(45,161 |
) |
|
$ |
8.95 |
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2010 |
|
|
1,041,343 |
|
|
$ |
9.44 |
|
|
|
|
|
|
|
|
|
The Company grants restricted stock awards to certain eligible employees and directors as a
component of its long-term incentive compensation program. The restricted stock award grants are
made in accordance with the Companys 2002 Plan, and typically specify the restricted stock awards
underlying shares of common stock are not issued until they vest. The restricted stock awards
generally vest ratably over a three or four year period from the date of grant.
Page 29 of 83
12. SHARE-BASED COMPENSATION (continued)
As of September 30, 2010, the Company had total unrecognized share-based compensation expense,
net of estimated forfeitures, of $21,079,000 related to all of its share-based awards, which will
be recognized over a weighted average period of 2.06 years. The intrinsic value of stock options
exercised during the nine months ended September 30, 2010 and 2009 was $14,172,000 and $2,970,000,
respectively. The total fair value of restricted stock awards which vested during the nine months
ended September 30, 2010 and 2009 was $1,796,000 and $389,000, respectively. In May 2010, the
Companys stockholders approved an increase of 2,000,000 in the number of shares available for
issuance of equity incentive awards including stock options, restricted stock awards and stock
appreciation rights under the Companys 2002 Plan. As of September 30, 2010, the Company had
3,114,817 shares of common stock available for issuance of stock options, restricted stock awards
or stock appreciation rights.
Page 30 of 83
13. STOCKHOLDERS EQUITY
Preferred Stock
Pursuant to its certificate of incorporation, the Company is authorized to issue 2,000,000
shares, $0.01 par value per share, blank check preferred stock, which enables the Board of
Directors, from time to time, to create one or more new series of preferred stock. Each series of
preferred stock issued can have the rights, preferences, privileges and restrictions designated by
the Board of Directors. The issuance of any new series of preferred stock could affect, among
other things, the dividend, voting, and liquidation rights of the Companys common stock. During
the nine months ended September 30, 2010 and 2009, the Company did not issue any preferred stock.
Common Stock
The Companys Certificate of Incorporation, as amended, authorizes the Company to issue
90,000,000 shares of common stock with $0.01 par value.
Shareholders Rights Plan
On January 20, 2009, the Board of Directors approved the adoption of a shareholder rights plan
and declared a dividend of one preferred share purchase right for each outstanding share of common
stock of the Company. Under certain circumstances, if a person or group acquires, or announces its
intention to acquire, beneficial ownership of 20% or more of the Companys outstanding common
stock, each holder of such right (other than the third party triggering such exercise), would be
able to purchase, upon exercise of the right at a $15 exercise price, subject to adjustment, the
number of shares of the Companys common stock having a market value of two times the exercise
price of the right. Subject to certain exceptions, if the Company is consolidated with, or merged
into, another entity and the Company is not the surviving entity in such transaction or shares of
the Companys outstanding common stock are exchanged for securities of any other person, cash or
any other property, or more than 50% of the Companys assets or earning power is sold or
transferred, then each holder of the rights would be able to purchase, upon the exercise of the
right at a $15 exercise price, subject to adjustment, the number of shares of common stock of the
third party acquirer having a market value of two times the exercise price of the right. The rights
expire on January 20, 2012, unless extended by the Board of Directors. In connection with the
shareholder rights plan, the Board of Directors designated 100,000 shares of series A junior
participating preferred stock.
Page 31 of 83
14. EARNINGS PER SHARE
The companys earnings per share (EPS) includes basic net income per share, computed by
dividing net income (as presented on the consolidated statement of operations), by the
weighted-average number of common shares outstanding for the period, along with diluted earnings
per share, computed by dividing net income by the weighted-average number of common shares adjusted
for the dilutive effect of common stock equivalents outstanding during the period. A
reconciliation of basic and diluted net income per common share for the three and nine months ended
September 30, 2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended: |
|
|
Nine Months Ended: |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
(in $000s except per share amounts) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
75,163 |
|
|
$ |
6,685 |
|
|
$ |
237,996 |
|
|
$ |
11,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding |
|
|
62,435,116 |
|
|
|
60,559,064 |
|
|
|
61,778,465 |
|
|
|
60,130,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive options and common
stock purchase warrants |
|
|
3,035,225 |
|
|
|
688,636 |
|
|
|
3,392,590 |
|
|
|
536,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average
common shares outstanding |
|
|
65,470,341 |
|
|
|
61,247,700 |
|
|
|
65,171,055 |
|
|
|
60,667,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
1.20 |
|
|
$ |
0.11 |
|
|
$ |
3.85 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
1.15 |
|
|
$ |
0.11 |
|
|
$ |
3.65 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2010 and 2009, the Company excluded 1,123,516 and
5,859,308, respectively and for the nine months ended September 30, 2010 and 2009, the Company
excluded 1,121,991 and 7,133,607, respectively, of stock options from the computation of diluted
net income per common share as the effect of these options would have been anti-dilutive.
15. COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended: |
|
|
Nine Months Ended: |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
(in $000s) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
75,163 |
|
|
$ |
6,685 |
|
|
$ |
237,996 |
|
|
$ |
11,917 |
|
Currency translation adjustments |
|
|
(127 |
) |
|
|
351 |
|
|
|
890 |
|
|
|
380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
75,036 |
|
|
|
7,036 |
|
|
|
238,886 |
|
|
|
12,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to
the noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable
to Impax Laboratories, Inc. |
|
$ |
75,036 |
|
|
$ |
7,036 |
|
|
$ |
238,886 |
|
|
$ |
12,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 32 of 83
16. SEGMENT INFORMATION
The Company has two reportable segments, the Global Pharmaceuticals Division (Global
Division) and the Impax Pharmaceuticals Division (Impax Division). The Company currently
markets and sells its Global Division products within the continental United States of America and
the Commonwealth of Puerto Rico.
The Global Division develops, manufactures, sells, and distributes generic pharmaceutical
products, primarily through the following sales channels: the Global Products sales channel, for
sales of generic prescription products, directly to wholesalers, large retail drug chains, and
others; the Private Label Product sales channel, for generic pharmaceutical over-the-counter and
prescription products sold to unrelated third-party customers, who in-turn sell the products to
third-parties under their own label; the Rx Partner sales channel, for generic prescription
products sold through unrelated third-party pharmaceutical entities under their own label pursuant
to alliance agreements; and the OTC Partner sales channel, for over-the-counter products sold
through unrelated third-party pharmaceutical entities under their own label pursuant to alliance
agreements. The Company also generates revenue in its Global Division from research and
development services provided under a joint development agreement with another unrelated
third-party pharmaceutical company, and reports such revenue under the caption Research Partner
revenue on the consolidated statement of operations.
The Impax Division is engaged in the development of proprietary branded pharmaceutical
products through improvements to already-approved pharmaceutical products to address central
nervous system (CNS) disorders. The Impax Division is also engaged in product co-promotion through
a direct sales force focused on promoting to physicians, primarily in the CNS community,
pharmaceutical products developed by other unrelated third-party pharmaceutical entities. The
Company also generates revenue in its Impax Division from research and development services
provided under a development and license agreement with another unrelated third-party
pharmaceutical company, and reports such revenue under the caption Research Partner revenue on
the consolidated statement of operations.
The Companys chief operating decision maker evaluates the financial performance of the
Companys segments based upon segment income (loss) before income taxes. Items below income (loss)
from operations are not reported by segment, except litigation settlements, since they are excluded
from the measure of segment profitability reviewed by the Companys chief operating decision maker.
Additionally, general and administrative expenses, certain selling expenses, certain litigation
settlements, and non-operating income and expenses are included in Corporate and Other. The
Company does not report balance sheet information by segment since it is not reviewed by the
Companys chief operating decision maker. The accounting policies for the Companys segments are
the same as those described above in the discussion of Revenue Recognition and in the Summary of
Significant Accounting Policies in the Companys Form 10-K for the year ended December 31, 2009.
The Company has no inter-segment revenue.
Page 33 of 83
16. SEGMENT INFORMATION (continued)
The tables below present segment information reconciled to total Company consolidated
financial results, with segment operating income or loss including gross profit less direct
research and development expenses, and direct selling expenses as well as any litigation
settlements, to the extent specifically identified by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
Global |
|
|
Impax |
|
|
Corporate |
|
|
Total |
|
Three Months Ended September 30, 2010 |
|
Division |
|
|
Division |
|
|
and Other |
|
|
Company |
|
Revenue, net |
|
$ |
300,128 |
|
|
$ |
3,865 |
|
|
$ |
|
|
|
$ |
303,993 |
|
Cost of revenue |
|
|
140,279 |
|
|
|
2,843 |
|
|
|
|
|
|
|
143,122 |
|
Research and development |
|
|
12,819 |
|
|
|
11,027 |
|
|
|
|
|
|
|
23,846 |
|
Patent Litigation |
|
|
1,033 |
|
|
|
|
|
|
|
|
|
|
|
1,033 |
|
Income (loss) before provision for income taxes |
|
$ |
141,870 |
|
|
$ |
(10,935 |
) |
|
$ |
(7,299 |
) |
|
$ |
123,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
Global |
|
|
Impax |
|
|
Corporate |
|
|
Total |
|
Three Months Ended September 30, 2009 |
|
Division |
|
|
Division |
|
|
and Other |
|
|
Company |
|
Revenue, net |
|
$ |
61,447 |
|
|
$ |
3,499 |
|
|
$ |
|
|
|
$ |
64,946 |
|
Cost of revenue |
|
|
25,098 |
|
|
|
2,957 |
|
|
|
|
|
|
|
28,055 |
|
Research and development |
|
|
8,909 |
|
|
|
6,337 |
|
|
|
|
|
|
|
15,243 |
|
Patent Litigation |
|
|
1,647 |
|
|
|
|
|
|
|
|
|
|
|
1,647 |
|
Income (loss) before provision for income taxes |
|
$ |
23,232 |
|
|
$ |
(6,553 |
) |
|
$ |
(6,527 |
) |
|
$ |
10,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
Global |
|
|
Impax |
|
|
Corporate |
|
|
Total |
|
Nine Months Ended September 30, 2010 |
|
Division |
|
|
Division |
|
|
and Other |
|
|
Company |
|
Revenue, net |
|
$ |
769,429 |
|
|
$ |
10,978 |
|
|
$ |
|
|
|
$ |
780,407 |
|
Cost of revenue |
|
|
282,309 |
|
|
|
9,280 |
|
|
|
|
|
|
|
291,589 |
|
Research and development |
|
|
32,608 |
|
|
|
30,656 |
|
|
|
|
|
|
|
63,264 |
|
Patent Litigation |
|
|
4,786 |
|
|
|
|
|
|
|
|
|
|
|
4,786 |
|
Income (loss) before provision for income taxes |
|
$ |
438,577 |
|
|
$ |
(31,436 |
) |
|
$ |
(23,071 |
) |
|
$ |
384,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
Global |
|
|
Impax |
|
|
Corporate |
|
|
Total |
|
Nine Months Ended September 30, 2009 |
|
Division |
|
|
Division |
|
|
and Other |
|
|
Company |
|
Revenue, net |
|
$ |
172,268 |
|
|
$ |
10,007 |
|
|
$ |
|
|
|
$ |
182,275 |
|
Cost of revenue |
|
|
72,339 |
|
|
|
9,250 |
|
|
|
|
|
|
|
81,589 |
|
Research and development |
|
|
28,761 |
|
|
|
17,983 |
|
|
|
|
|
|
|
46,744 |
|
Patent Litigation |
|
|
4,058 |
|
|
|
|
|
|
|
|
|
|
|
4,058 |
|
Income (loss) before provision for income taxes |
|
$ |
59,482 |
|
|
$ |
(19,754 |
) |
|
$ |
(21,493 |
) |
|
$ |
18,237 |
|
Page 34 of 83
17. LEGAL AND REGULATORY MATTERS
Patent Litigation
There is substantial litigation in the pharmaceutical, biological, and biotechnology
industries with respect to the manufacture, use, and sale of new products which are the subject of
conflicting patent and intellectual property claims. One or more patents typically cover most of
the brand name products for which the Company is developing generic versions.
Under federal law, when a drug developer files an ANDA for a generic drug, seeking approval
before expiration of a patent, which has been listed with the FDA as covering the brand name
product, the developer must certify its product will not infringe the listed patent(s) and/or the
listed patent is invalid or unenforceable (commonly referred to as a Paragraph IV certification).
Notices of such certification must be provided to the patent holder, who may file a suit for
patent infringement within 45 days of the patent holders receipt of such notice. If the patent
holder files suit within the 45 day period, the FDA can review and tentatively approve the ANDA,
but is prevented from granting final marketing approval of the product until a final judgment in
the action has been rendered in favor of the generic, or 30 months from the date the notice was
received, whichever is sooner. Lawsuits have been filed against the Company in connection the
Companys Paragraph IV certifications.
Should a patent holder commence a lawsuit with respect to an alleged patent infringement by
the Company, the uncertainties inherent in patent litigation make the outcome of such litigation
difficult to predict. The delay in obtaining FDA approval to market the Companys product
candidates as a result of litigation, as well as the expense of such litigation, whether or not the
Company is ultimately successful, could have a material adverse effect on the Companys results of
operations and financial position. In addition, there can be no assurance any patent litigation
will be resolved prior to the end of the 30-month period. As a result, even if the FDA were to
approve a product upon expiration of the 30-month period, the Company may elect to not commence
marketing the product if patent litigation is still pending.
Further, under the Teva Agreement, the Company and Teva have agreed to share in fees and costs
related to patent infringement litigation associated with the generic pharmaceutical products
covered by the Teva Agreement. With respect to the six products with ANDAs already filed with the
FDA at the time the Teva Agreement was signed, Teva is required to pay 50% of the fees and costs in
excess of $7,000,000; with respect to two of the products with ANDAs filed since the Teva Agreement
was signed, Teva is required to pay 45% of the fees and costs; and with respect to the remaining
two products, Teva is required to pay 50% of the fees and costs. The Company is responsible for
the remaining fees and costs relating to the generic pharmaceutical products covered by the Teva
Agreement.
The Company is responsible for all of the patent litigation fees and costs associated with
current and future products not covered by the Teva Agreement. The Company records as expense the
costs of patent litigation as incurred.
Although the outcome and costs of the asserted and unasserted claims is difficult to predict,
the Company does not expect the ultimate liability, if any, for such matters to have a material
adverse effect on its financial condition, results of operations, or cash flows.
Page 35 of 83
17. LEGAL AND REGULATORY MATTERS (continued)
Patent Infringement Litigation
AstraZeneca AD et al. v. Impax Laboratories, Inc. (Omeprazole)
In litigation commenced against the Company in the U.S. District Court for the District of
Delaware in May 2000, AstraZeneca AB alleged the Companys submission of an ANDA seeking FDA
permission to market Omeprazole Delayed Release Capsules, 10mg, 20mg and 40mg, constituted
infringement of AstraZenecas U.S. patents relating to its Prilosec® product and sought an order
enjoining the Company from marketing its product until expiration of the patents. The case, along
with several similar suits against other manufacturers of generic versions of Prilosec®, was
subsequently transferred to the U.S. District Court for the Southern District of New York. In
September 2004, following expiration of the 30-month stay, the FDA approved the Companys ANDA, and
the Company and its alliance agreement partner, Teva, commenced commercial sales of the Companys
product. In January 2005, AstraZeneca added claims of willful infringement, for damages, and for
enhanced damages on the basis of this commercial launch. Claims for damages were subsequently
dropped from the suit against the Company, but were included in a separate suit filed against Teva.
In May 2007, the court found the product infringed two of AstraZenecas patents and these patents
were not invalid. The court ordered FDA approval of the Companys ANDA be converted to a tentative
approval, with a final approval date not before October 20, 2007, the expiration date of the
relevant pediatric exclusivity period. In August 2008, the U.S. Court of Appeals for the Federal
Circuit affirmed the lower courts decision of infringement and validity. In January, 2010,
AstraZeneca, Teva and the Company entered into a settlement agreement and the suits against both
Teva and the Company were dismissed.
Aventis Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc.
(Fexofenadine/Pseudoephedrine)
The Company is a defendant in an action brought in March 2002 by Aventis Pharmaceuticals Inc.
and others in the U.S. District Court for the District of New Jersey alleging the Companys
proposed Fexofenadine and Pseudoephedrine Hydrochloride tablets, generic to Allegra-D®, infringe
seven Aventis patents and seeking an injunction preventing the Company from marketing the products
until expiration of the patents. The case has since been consolidated with similar actions brought
by Aventis against five other manufacturers (including generics to both Allegra® and Allegra-D®).
In March 2004, Aventis and AMR Technology, Inc. filed a complaint and first amended complaint
against the Company and one of the other defendants alleging infringement of two additional
patents, owned by AMR and licensed to Aventis, relating to a synthetic process for making the
active pharmaceutical ingredient, Fexofenadine Hydrochloride and intermediates in the synthetic
process. The Company believes it has defenses to the claims based on non-infringement and
invalidity.
In June 2004, the court granted the Companys motion for summary judgment of non-infringement
with respect to two of the patents. The Company will have the opportunity to file additional
summary judgment motions in the future and to assert both non-infringement and invalidity of the
remaining patents (if necessary) at trial. No trial date has yet been set. In September 2005, Teva
launched its Fexofenadine tablet products (generic to Allegra®), and Aventis and AMR moved for a
preliminary injunction to bar Tevas sales based on four of the patents in suit, which patents are
common to the Allegra® and Allegra-D® litigations. The district court denied Aventiss motion in
January 2006, finding Aventis did not establish a likelihood of success on the merits, which
decision was affirmed on appeal. Discovery is proceeding. No trial date has been set.
Page 36 of 83
17. LEGAL AND REGULATORY MATTERS (continued)
Endo
Pharmaceuticals, Inc., et al. v. Impax Laboratories, Inc. (Oxymorphone)
In
November 2007, Endo Pharmaceuticals, Inc. and Penwest Pharmaceuticals Co. (together, Endo)
filed suit against the Company in the U.S. District Court for the District of Delaware, requesting
a declaration of the Companys Paragraph IV Notices with respect to the Companys ANDA for
Oxymorphone Hydrochloride Extended Release Tablets 5 mg, 10 mg, 20 mg and 40 mg, generic to Opana®
ER, are null and void and, in the alternative, alleging patent infringement in connection with the
filing of such ANDA. Endo subsequently dismissed its request for declaratory relief and in
December 2007 filed another patent infringement suit relating to the same ANDA. In July 2008, Endo
asserted additional infringement claims with respect to the Companys amended ANDA, which added
7.5mg, 15mg and 30mg strengths of the product. The cases were subsequently transferred to the U.S.
District Court for the District of New Jersey. The Company filed an answer and counterclaims.
Discovery was completed. The court issued its Markman decision and final pretrial orders in March
2010. The Company and Endo entered into a Settlement and License Agreement, and this matter was
dismissed, on June 15, 2010.
Pfizer Inc., et aI. v. Impax Laboratories, Inc. (Tolterodine)
In March 2008, Pfizer Inc., Pharmacia & Upjohn Company LLC, and Pfizer Health AB
(collectively, Pfizer) filed a complaint against the Company in the U.S. District Court for the
Southern District of New York, alleging the Companys filing of an ANDA relating to Tolterodine
Tartrate Extended Release Capsules, 4 mg, generic to Detrol® LA, infringes three Pfizer patents.
The Company filed an answer and counterclaims seeking declaratory judgment of non-infringement,
invalidity, or unenforceability with respect to the patents in suit. In April 2008, the case was
transferred to the U.S. District Court for the District of New Jersey. On September 3, 2008, an
amended complaint was filed alleging infringement based on the Companys ANDA amendment adding a
2mg strength. For one of the patents-in-suit, U.S. Patent No. 5,382,600, expiring on September 25,
2012 with pediatric exclusivity, the Company agreed by stipulation to be bound by the decision in
Pfizer Inc. et al. v. Teva Pharmaceuticals USA, Inc., Case No. 04-1418 (D. N.J.). After the Pfizer
court conducted a bench trial, it found the 600 patent not invalid on January 20, 2010, and that
decision is on appeal to the U.S. Court of Appeals for the Federal Circuit. Discovery is
proceeding in the Companys case, and no trial date has been set.
Boehringer Ingelheim Pharmaceuticals, et al. v. Impax Laboratories, Inc. (Tamsulosin)
In July 2008, Boehringer Ingelheim Pharmaceuticals Inc. and Astellas Pharma Inc. (together,
Astellas) filed a complaint against the Company in the U.S. District Court for the Northern
District of California, alleging patent infringement in connection with the filing of the Company
ANDA relating to Tamsulosin Hydrochloride Capsules, 0.4 mg, generic to Flomax®. After filing its
answer and counterclaim, the Company filed a motion for summary judgment of patent invalidity. The
District Court conducted hearings on claim construction in May 2009, and summary judgment in June
2009. In October 2009, the parties announced they had entered a settlement agreement allowing the
Company to launch its product no later than March 2, 2010. A stipulated consent judgment was
entered by the Court and the case was dismissed.
Page 37 of 83
17. LEGAL AND REGULATORY MATTERS (continued)
Purdue Pharma Products L.P., et al. v. Impax Laboratories, Inc. (Tramadol)
In August 2008, Purdue Pharma Products L.P., Napp Pharmaceutical Group LTD., Biovail
Laboratories International, SRL, and Ortho-McNeil-Janssen Pharmaceuticals, Inc. (collectively,
Purdue) filed suit against the Company in the U.S. District Court for the District of Delaware,
alleging patent infringement for the filing of the Companys ANDA relating to Tramadol
Hydrochloride Extended Release Tablets, 100 mg, generic to 100mg Ultram® ER. In November 2008,
Purdue asserted additional infringement claims with respect to the Companys amended ANDA, which
added 200 mg and 300 mg strengths of the product. The Company filed answers and counterclaims to
those complaints. In August 2009, one of the patents-in-suit, U.S. Patent No. 6,254,887, was found
invalid in another ANDA case relating to Ultram® ER, Purdue Pharma Products L.P. et al, v. Par
Pharmaceutical, Inc. et al., Case No. 07-255 (D. Del.) (Par action) The Par action is now on
appeal to the U. S. Court of Appeals for the Federal Circuit. On November 16, 2009, the Company
and Purdue agreed by stipulation to stay the case until the earlier of the following two events:
(a) the Federal Circuit issues a mandate in the Par action or that action is otherwise disposed of,
or (b) an undisclosed event. The Federal Circuit affirmed the decision of invalidity in the Par
action on June 3, 2010. On September 2, 2010, this matter was dismissed with prejudice.
Eli Lilly and Company v. Impax Laboratories, Inc. (Duloxetine)
In November 2008, Eli Lilly and Company filed suit against the Company in the U.S. District
Court for the Southern District of Indiana, alleging patent infringement for the filing of the
Companys ANDA relating to Duloxetine Hydrochloride Delayed Release Capsules, 20 mg, 30 mg, and 60
mg, generic to Cymbalta®. In February 2009, the parties agreed to be bound by the final judgment
concerning infringement, validity and enforceability of the patent at issue in cases brought by Eli
Lilly and Company against other generic drug manufacturers that have filed ANDAs relating to this
product and proceedings in this case were stayed.
Warner Chilcott, Ltd. et.al. v. Impax Laboratories, Inc. (Doxycycline Hyclate)
In December 2008, Warner Chilcott Limited and Mayne Pharma International Pty. Ltd. (together,
Warner Chilcott) filed suit against the Company in the U.S. District Court for the District of
New Jersey, alleging patent infringement for the filing of the Companys ANDA relating to
Doxycycline Hyclate Delayed Release Tablets, 75 mg and 100 mg, generic to Doryx®. The Company filed
an answer and counterclaim. Thereafter, in March 2009, Warner Chilcott filed another lawsuit in the
same jurisdiction, alleging patent infringement for the filing of the Companys ANDA for the 150 mg
strength. Discovery is proceeding, fact discovery closes on December 17, 2010, and no trial date
has been set.
Eurand, Inc., et al. v. Impax Laboratories, Inc. (Cyclobenzaprine)
In January 2009, Eurand, Inc., Cephalon, Inc., and Anesta AG (collectively, Cephalon) filed
suit against the Company in the U.S. District Court for the District of Delaware, alleging patent
infringement for the filing of the Companys ANDA relating to Cyclobenzaprine Hydrochloride
Extended Release Capsules, 15 mg and 30 mg, generic to Amrix®. The Company has filed an answer and
counterclaim. This matter was settled and dismissed on October 11, 2010.
Genzyme Corp. v. Impax Laboratories, Inc. (Sevelamer Hydrochloride)
In March 2009, Genzyme Corporation filed suit against the Company in the U.S. District Court
for the District of Maryland, alleging patent infringement for the filing of the Companys ANDA
relating to Sevelamer Hydrochloride Tablets, 400 mg and 800 mg, generic to Renagel®. The Company
has filed an answer and counterclaim. Fact discovery closes on December 3, 2010, the Markman
hearing is set for January 21, 2011, and trial is scheduled for September 27, 2012.
Page 38 of 83
17. LEGAL AND REGULATORY MATTERS (continued)
Genzyme Corp. v. Impax Laboratories, Inc. (Sevelamer Carbonate)
In April 2009, Genzyme Corporation filed suit against the Company in the U.S. District Court
for the District of Maryland, alleging patent infringement for the filing of the Companys ANDA
relating to Sevelamer Carbonate Tablets, 800 mg, generic to Renvela®. The Company has filed an
answer and counterclaim. Fact discovery closes on December 3, 2010, the Markman hearing is set for
January 21, 2011, and trial is scheduled for September 27, 2012.
The Research Foundation of State University of New York et al. v. Impax Laboratories, Inc.
(Doxycycline Monohydrate)
In September 2009, The Research Foundation of State University of New York; New York
University; Galderma Laboratories Inc.; and Galderma Laboratories, L.P. (collectively, Galderma)
filed suit against the Company in the U.S. District Court for the District of Delaware alleging
patent infringement for the filing of the Companys ANDA relating to Doxycycline Monohydrate
Delayed-Release Capsules, 40 mg, generic to Oracea®. The Company filed an answer and counterclaim.
In October 2009, the parties agreed to be bound by the final judgment concerning infringement,
validity and enforceability of the patent at issue in cases brought by Galderma against another
generic drug manufacturer that has filed an ANDA relating to this product and proceedings in this
case were stayed. In June 2010, Galderma moved for a preliminary injunction to bar sales by the
other generic manufacturer based on two of the patents in suit, which motion was granted by the
magistrate judge in a decision finding Galderma had shown a likelihood of success on the merits.
In July, 2010 the generic manufacturer filed a motion for reargument of Galdermas motion for
preliminary injunction and temporary restraining order. The motion is pending.
Elan Pharma International Ltd. and Fournier Laboratories Ireland Ltd. v. Impax Laboratories,
Inc. Abbott Laboratories and Laboratoires Fournier S.A. v. Impax Laboratories, Inc.
(Fenofibrate)
In October 2009, Elan Pharma International Ltd. with Fournier Laboratories Ireland Ltd. and
Abbott Laboratories with Laboratories Fournier S.A. filed separate suits against the Company in the
U.S. District Court for the District of New Jersey alleging patent infringement for the filing of
the Companys ANDA relating to Fenofibrate Tablets, 48 mg and 145 mg, generic to Tricor®. The
Company has filed an answer and counterclaim. In September 2010, the Court vacated the schedule
and ordered a stay in the two matters related to the Company.
Daiichi Sankyo, Inc. et al. v. Impax Laboratories, Inc. (Colesevelam)
In January 2010, Daiichi Sankyo, Inc. and Genzyme Corporation (together, Genzyme) filed suit
against the Company in the U.S. District Court for the District of Delaware alleging patent
infringement for the filing of the Companys ANDA relating to Colesevelam Hydrochloride Tablets,
625 mg, generic to Welchol®. The Company has filed an answer and counterclaim. Fact discovery
closes June 30, 2011, and no trial date has been scheduled.
Abbott Laboratories, et al. v. Impax Laboratories, Inc. (Choline Fenofibrate)
In March 2010, Abbott Laboratories and Fournier Laboratories Ireland Ltd. (together, Abbott)
filed suit against the Company in the U.S District Court for the District of New Jersey alleging
patent infringement for the filing of the Companys ANDA related to Choline Fenofibrate Delayed
Release Capsules, 45 mg and 135 mg, generic of Trilipix®. The Company has filed an answer.
Discovery is proceeding, fact discovery closes February 4, 2011, and no trial date has been
scheduled.
Shionogi Pharma, Inc. and LifeCycle Pharma A/S v. Impax Laboratories, Inc. (Fenofibrate)
In April 2010, Shionogi Pharma, Inc. and LifeCycle Pharma A/S filed suit against the Company
in the U.S. District Court for the District of Delaware alleging patent infringement for the filing
of the Companys ANDA relating to Fenofibrate Tablets, 40 and 120 mg, generic to Fenoglide®. The
Company has filed its answer.
Page 39 of 83
17. LEGAL AND REGULATORY MATTERS (continued)
Genzyme Corp. v. Impax Laboratories, Inc. (Sevelamer Carbonate Powder)
In July 2010, Genzyme Corporation filed suit against the Company in the U.S. District Court
for the District of Maryland, alleging patent infringement for the filing of the Companys ANDA
relating to Sevelamer Carbonate Powder, 2.4 g and 0.8 g packets, generic to Renvela® powder. The
Company has filed an answer and counterclaim. Fact discovery closes on December 3, 2010, the
Markman hearing is set for January 21, 2011, and trial is scheduled for September 27, 2012.
Schering Corporation, et al. v. Impax Laboratories, Inc. (Ezetimibe/Simvastatin)
In August 2010, Schering Corporation and MSP Singapore Company LLC filed suit against the
Company in the U.S. District Court for the District of New Jersey alleging patent infringement for
the filing of the Companys ANDA relating to Ezetimibe/Simvastatin Tablets, 10 mg/80 mg, generic to
Vytorin ®. The Company has filed an answer and counterclaim.
Page 40 of 83
Other Litigation Related to Our Business
Axcan Scandipharm Inc. v. Ethex Corp, et al. (Lipram UL)
In May 2007, Axcan Scandipharm Inc., a manufacturer of the Ultrase® line of pancreatic enzyme
products, brought suit against the Company in the U.S. District Court for the District of
Minnesota, alleging the Company engaged in false advertising, unfair competition, and unfair trade
practices under federal and Minnesota law in connection with the marketing and sale of the
Companys now-discontinued Lipram UL products. The suit seeks actual and consequential damages,
including lost profits, treble damages, attorneys fees, injunctive relief and declaratory
judgments to prohibit the substitution of Lipram UL for prescriptions of Ultrase®. The District
Court granted in part and denied in part the Companys motion to dismiss the complaint, as well as
the motion of co-defendants Ethex Corp. and KV Pharmaceutical Co., holding any claim of false
advertising pre-dating June 1, 2001, is barred by the statute of limitations. On January 5, 2010,
the parties settled the case and the case was subsequently dismissed with prejudice.
Budeprion XL Litigation
In June 2009, the Company was named a co-defendant in class action lawsuits filed in California
state court in an action titled Kelly v. Teva Pharmaceuticals Indus. Ltd, et al., No. BC414812
(Calif. Superior Crt. L.A. County). Subsequently, additional class action lawsuits were filed in
Louisiana (Morgan v. Teva Pharmaceuticals Indus. Ltd, et al., No. 673880 (24th Dist Crt., Jefferson
Parish, LA.)), North Carolina (Weber v. Teva Pharmaceuticals Indus., Ltd., et al., No. 07
CV5002556, (N.C. Superior Crt., Hanover County)), Pennsylvania (Rosenfeld v. Teva Pharmaceuticals
USA, Inc.. et al., No. 2:09-CV-2811 (E.D. Pa.)), Florida (Henchenski and Vogel v. Teva
Pharmaceuticals Industries Ltd., et al., No. 2:09-CV-470-FLM-29SPC (M.D. Fla.)), Texas (Anderson v.
Teva Pharmaceuticals Indus., Ltd., et al., No. 3-09CV1200-M (N.D. Tex.)), Oklahoma (Brown et al. v.
Teva Pharmaceuticals Inds., Ltd., et al., No. 09-cv-649-TCK-PJC (N.D. OK)), Ohio (Latvala et al. v.
Teva Pharmaceuticals Inds., Ltd., et al., No. 2:09-cv-795 (S.D. OH)), Alabama (Jordan v. Teva
Pharmaceuticals Indus. Ltd et al., No. CV09-709 (Ala. Cir. Crt. Baldwin County)), and Washington
(Leighty v. Teva Pharmaceuticals Indus. Ltd et al., No. CV09-01640 (W. D. Wa.)). All of the
complaints involve Budeprion XL, a generic version of Wellbutrin XL® that is manufactured by the
Company and marketed by Teva, and allege that, contrary to representations of Teva, Budeprion XL is
less effective in treating depression, and more likely to cause dangerous side effects, than
Wellbutrin XL. The actions are brought on behalf of purchasers of Budeprion XL and assert claims
such as unfair competition, unfair trade practices and negligent misrepresentation under state law.
Each lawsuit seeks damages in an unspecified amount consisting of the cost of Budeprion XL paid by
class members, as well as any applicable penalties imposed by state law, and disclaims damages for
personal injury. The state court cases have been removed to federal court, and a petition for
multidistrict litigation to consolidate the cases in federal court has been granted. These cases
and any subsequently filed cases will be heard under the consolidated action entitled In re:
Budeprion XL Marketing Sales Practices, and Products Liability Litigation, MDL No. 2107, in the
United States District Court for the Eastern District of Pennsylvania. The Company filed a motion
to dismiss and a motion to certify that order for interlocutory appeal, both of which were denied.
Discovery is proceeding, and no trial date has been scheduled.
Impax Laboratories, Inc. v. Shire LLC and Shire Laboratories, Inc. (generic Adderall XR)
On November 1, 2010, the Company filed suit against Shire LLC and Shire Laboratories, Inc.
(collectively Shire) in the Supreme Court of the State of New York, alleging breach of contract
and other related claims due to Shires failure to fill the Companys orders for the generic
Adderall XR product as required by the parties Settlement Agreement and License and Distribution
Agreement, signed in January 2006. In addition, the Company has filed a motion for a preliminary
injunction and a temporary restraining order seeking to require Shire to fill product orders placed
by the Company.
Page 41 of 83
18. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)
Selected (unaudited) financial information for the quarterly period noted is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Quarters Ended: |
|
(in $000s except per share amounts) |
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Global Product sales, gross |
|
$ |
425,986 |
|
|
$ |
224,318 |
|
|
$ |
167,759 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks |
|
|
56,168 |
|
|
|
49,420 |
|
|
|
36,065 |
|
Rebates |
|
|
29,425 |
|
|
|
16,739 |
|
|
|
21,630 |
|
Product Returns |
|
|
7,400 |
|
|
|
4,596 |
|
|
|
8,344 |
|
Other credits |
|
|
23,888 |
|
|
|
15,925 |
|
|
|
10,669 |
|
|
|
|
|
|
|
|
|
|
|
Global Product sales, net |
|
|
309,105 |
|
|
|
137,638 |
|
|
|
91,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Label Product sales |
|
|
672 |
|
|
|
339 |
|
|
|
528 |
|
Rx Partner |
|
|
4,903 |
|
|
|
5,802 |
|
|
|
202,799 |
|
OTC Partner |
|
|
1,765 |
|
|
|
2,309 |
|
|
|
2,365 |
|
Research Partner |
|
|
3,385 |
|
|
|
3,494 |
|
|
|
3,714 |
|
Promotional Partner |
|
|
3,503 |
|
|
|
3,500 |
|
|
|
3,535 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
323,333 |
|
|
|
153,082 |
|
|
|
303,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
243,757 |
|
|
|
84,190 |
|
|
|
160,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
131,485 |
|
|
$ |
31,348 |
|
|
$ |
75,163 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic) |
|
$ |
2.16 |
|
|
$ |
0.51 |
|
|
$ |
1.20 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share (diluted) |
|
$ |
2.06 |
|
|
$ |
0.48 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average: |
|
|
|
|
|
|
|
|
|
|
|
|
common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
61,008,015 |
|
|
|
61,876,599 |
|
|
|
62,435,116 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
63,865,678 |
|
|
|
65,538,805 |
|
|
|
65,470,341 |
|
|
|
|
|
|
|
|
|
|
|
Quarterly computations of (unaudited) net income per share amounts are made independently for
each quarterly reporting period, and the sum of the per share amounts for the quarterly reporting
periods may not equal the per share amounts for the year-to-date reporting period.
Page 42 of 83
18. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited) (continued)
Selected (unaudited) financial information for the quarterly period noted is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Quarters Ended: |
|
(in $000s except per share amounts) |
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Global Product sales, gross |
|
$ |
78,696 |
|
|
$ |
81,764 |
|
|
$ |
82,514 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks |
|
|
22,638 |
|
|
|
24,844 |
|
|
|
21,265 |
|
Rebates |
|
|
10,819 |
|
|
|
13,425 |
|
|
|
9,411 |
|
Product Returns |
|
|
3,256 |
|
|
|
3,100 |
|
|
|
2,030 |
|
Other credits |
|
|
2,862 |
|
|
|
3,008 |
|
|
|
3,172 |
|
|
|
|
|
|
|
|
|
|
|
Global Product sales, net |
|
|
39,121 |
|
|
|
37,387 |
|
|
|
46,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Label Product sales |
|
|
1,297 |
|
|
|
2,220 |
|
|
|
1,752 |
|
Rx Partner |
|
|
10,736 |
|
|
|
11,119 |
|
|
|
8,328 |
|
OTC Partner |
|
|
1,858 |
|
|
|
1,628 |
|
|
|
1,769 |
|
Research Partner |
|
|
2,611 |
|
|
|
2,833 |
|
|
|
2,962 |
|
Promotional Partner |
|
|
3,284 |
|
|
|
3,224 |
|
|
|
3,499 |
|
Other |
|
|
6 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
58,913 |
|
|
|
58,416 |
|
|
|
64,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
32,663 |
|
|
|
31,132 |
|
|
|
36,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,219 |
|
|
$ |
3,013 |
|
|
$ |
6,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic) |
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share (diluted) |
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
|
|
|
|
|
|
|
|
|
common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
59,711,133 |
|
|
|
60,112,308 |
|
|
|
60,559,064 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
60,222,215 |
|
|
|
60,552,344 |
|
|
|
61,247,700 |
|
|
|
|
|
|
|
|
|
|
|
Quarterly computations of (unaudited) net income per share amounts are made independently for
each quarterly reporting period, and the sum of the per share amounts for the quarterly reporting
periods may not equal the per share amounts for the year-to-date reporting period.
Page 43 of 83
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION |
The following discussion and analysis, as well as other sections in this Quarterly Report on
Form 10-Q, should be read in conjunction with the unaudited interim consolidated financial
statements and related notes to the unaudited interim consolidated financial statements included
elsewhere herein.
Statements included in this Quarterly Report on Form 10-Q not related to present or historical
conditions are forward-looking statements. Additional oral or written forward-looking statements
may be made by us from time to time. Such forward-looking statements involve risks and
uncertainties which could cause results or outcomes to differ materially from those expressed in
the forward-looking statements. Forward-looking statements may include statements relating to our
plans, strategies, objectives, expectations and intentions. Words such as believes, forecasts,
intends, possible, estimates, anticipates, and plans and similar expressions are intended
to identify forward-looking statements. Our ability to predict results or the effect of events on
our operating results is inherently uncertain. Forward-looking statements involve a number of
risks, uncertainties and other factors that could cause actual results to differ materially from
those discussed in this Quarterly Report on Form 10-Q. Such risks and uncertainties include the
effect of current economic conditions on our industry, business, financial position, results of
operations and market value of our common stock, our ability to maintain an effective system of
internal control over financial reporting, fluctuations in our revenues and operating income,
reductions or loss of business with any significant customer, the impact of competitive pricing and
products and regulatory actions on our products, our ability to sustain profitability and positive
cash flows, our ability to maintain sufficient capital to fund our operations, any delays or
unanticipated expenses in connection with the operation of our Taiwan facility, our ability to
successfully develop and commercialize pharmaceutical products, the uncertainty of patent
litigation, consumer acceptance and demand for new pharmaceutical products, the difficulty of
predicting Food and Drug Administration (FDA) filings and approvals, our inexperience in
conducting clinical trials and submitting new drug applications, our reliance on key alliance,
collaboration, license and distribution agreements, the availability of raw materials, our ability to comply with legal and
regulatory requirements governing the healthcare industry, the regulatory environment, exposure to
product liability claims, and other risks described in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009 and in our Quarterly Report on Form 10-Q for the fiscal
quarters ended March 31, 2010, and June 30, 2010. You should not place undue reliance on
forward-looking statements. Such statements speak only as to the date on which they are made, and
we undertake no obligation to update publicly or revise any forward-looking statement, regardless
of future developments or availability of new information.
Page 44 of 83
Overview
We are a technology based, specialty pharmaceutical company applying formulation and
development expertise, as well as our drug delivery technology, to the development, manufacture and
marketing of controlled-release and niche generics, in addition to the development of branded
products. As of November 1, 2010, we manufactured and marketed 93 generic pharmaceuticals, which
represent dosage variations of 29 different pharmaceutical compounds through our own Global
Pharmaceuticals division; another 16 of our generic pharmaceuticals representing dosage variations
of 4 different pharmaceutical compounds are marketed by our alliance agreement partners. We have 38
applications pending at the FDA, including 4 tentatively approved by FDA, and 58 other products in
various stages of development for which applications have not yet been filed.
In the generic pharmaceuticals market, we focus our efforts on controlled-release generic
versions of selected brand-name pharmaceuticals covering a broad range of therapeutic areas and
having technically challenging drug-delivery mechanisms or limited competition. We employ our
technologies and formulation expertise to develop generic products that will reproduce the
brand-name products physiological characteristics but not infringe any valid patents relating to
the brand-name product. We generally focus on brand-name products as to which the patents covering
the active pharmaceutical ingredient have expired or are near expiration, and we employ our
proprietary formulation expertise to develop controlled-release technologies that do not infringe
patents covering the brand-name products controlled-release technologies.
We are also developing specialty generic pharmaceuticals that we believe present one or more
barriers to entry by competitors, such as difficulty in raw materials sourcing, complex formulation
or development characteristics or special handling requirements. In the brand-name pharmaceuticals
market, we are developing products for the treatment of central nervous system (CNS) disorders.
Our brand-name product portfolio consists of development-stage projects to which we are applying
our formulation and development expertise to develop differentiated, modified, or
controlled-release versions of currently marketed (either in the U.S. or outside the U.S.) drug
substances. We intend to expand our brand-name products portfolio primarily through internal
development and also through licensing and acquisition.
Page 45 of 83
We operate in two segments, referred to as the Global Pharmaceuticals Division (Global
Division) and the Impax Pharmaceuticals Division (Impax Division).
The Global Division develops, manufactures, sells, and distributes generic pharmaceutical
products through four sales channels: the Global Products sales channel, for generic
pharmaceutical prescription (Rx) products we sell directly to wholesalers, large retail drug
chains, and others; the Private Label Products sales channel, for generic pharmaceutical and
over-the-counter (OTC) prescription products we sell to unrelated third-party customers who
in-turn sell the product to third parties under their own label, the Rx Partner sales channel,
for generic prescription products sold through unrelated third-party pharmaceutical entities under
their own label pursuant to alliance agreements; and the OTC Partner sales channel, for sales of
generic pharmaceutical OTC products sold through unrelated third-party pharmaceutical entities
under their own label pursuant to alliance agreements. We also generate revenue in the Global
Division from research and development services provided under a joint development agreement with
another unrelated third-party pharmaceutical company, and report such revenue under the caption
Research partner revenue on the consolidated statement of operations.
The Impax Division is engaged in the development of proprietary brand pharmaceutical
products through improvements to already approved pharmaceutical products to address central
nervous system (CNS) disorders. The Impax Division is also engaged in the provision of
co-promotion services (referred to as physician detailing sales calls) of products developed by
unrelated third-party pharmaceutical entities through our direct sales force to physicians in the
CNS community. We also generate revenue in the Impax Division from research and development
services provided under a development and license agreement with another unrelated third-party
pharmaceutical company, and report such revenue under the caption Research Partner revenue on the
consolidated statement of operations.
Our total revenues for the three and nine months ended September 30, 2010 and 2009 were
predominantly derived from our Global Division. See Part I: Financial Information Item 1:
Financial Statements Note 16 to the unaudited interim consolidated financial statements for
financial information about our segments for the three and nine months ended September 30, 2010 and
2009. We sell our Global Division products within the continental United States of America and the
Commonwealth of Puerto Rico. We have no sales in foreign countries.
We have entered into several alliance, collaboration or license and distribution agreements
with respect to certain of our products and services and may enter into similar agreements in the
future. These agreements may require us to relinquish rights to certain of our technologies or
product candidates, or to grant licenses on terms which ultimately may prove to be unfavorable to
us. Relationships with alliance partners may also include risks due to incomplete marketplace
information, inventories, and commercial strategies of our partners, and our agreements may be the
subject of contractual disputes. If we, or our partners, are not successful in commercializing the
products covered by the agreements, such commercial failure could adversely affect our business.
Under one of our license and distribution agreements we are dependent on another pharmaceutical
company to supply us with product we market and sell, and we may enter into similar agreements in
the future. Any delay or interruption in the supply of product under such agreements could curtail
or delay our product shipments and adversely affect our revenues, as well as jeopardize our
relationships with our customers.
Global product sales, net. We recognize revenue from direct sales in accordance with SEC
Staff Accounting Bulletin No. 104, Topic 13, Revenue Recognition (SAB 104). Revenue from direct
product sales is recognized at the time title and risk of loss pass to customers. Accrued
provisions for estimated chargebacks, rebates, product returns, and other pricing adjustments are
provided for in the period the related sales are recorded.
Private Label Sales. We recognize revenue from direct sales in accordance with SAB 104.
Revenue from direct product sales is recognized at the time title and risk of loss pass to
customers. Revenue received from Private Label product sales is not subject to deductions for
chargebacks, rebates, product returns, and other pricing adjustments. Additionally, Private Label
product sales do not have upfront, milestone, or lump-sum payments and do not contain multiple
deliverables under Financial Accounting Standards Board (FASB) Accounting Standards Codification
TM (ASC or the Codification) Topic 605.
Page 46 of 83
Rx Partner and OTC Partner. Each of our alliance agreements involves multiple deliverables in
the form of products, services and/or licenses over extended periods. FASB ASC Topic 605-25
supplemented SAB 104 for accounting for such multiple-element revenue arrangements. With respect to
our multiple-element revenue arrangements, we determine whether any or all of the elements of the
arrangement should be separated into individual units of accounting under FASB ASC Topic 605-25. If
separation into individual units of accounting is appropriate, we recognize revenue for each
deliverable when the revenue recognition criteria specified by SAB 104 are achieved for the
deliverable. If separation is not appropriate, we recognize revenue (and related direct
manufacturing costs) over the estimated life of the agreement or the Companys estimated expected
period of performance using either the straight-line method or a modified proportional performance
method. Under the modified proportional performance method, the amount recognized in the period of
initial recognition is based upon the number of years elapsed under the agreement relative to the
estimated total recognition period of the particular agreement. The amount of revenue recognized
in the year of initial recognition is thus determined by multiplying the total amount realized by a
fraction, the numerator of which is the then current year of the agreement and the denominator of
which is the total number of years estimated to be the recognition period. The remaining balance
of the amount realized is then recognized in equal amounts in each of the succeeding years of the
recognition period. Thus, for example, with respect to profit share or royalty payments reported
by an alliance agreement partner during the third year of an agreement with an estimated
recognition period of 15 years, 3 / 15 of the amount reported is recognized in the year reported
and 1/15 of the amount is recognized during each of the remaining 12 years. A fuller description
of our analysis under FASB ASC Topic 605 and the modified proportional performance method is set
forth in Part I: Financial Information Item 1: Financial Statements Note 2.
As noted above, our alliance agreements obligate us to deliver multiple goods and /or services
over extended periods. Such deliverables include manufactured pharmaceutical products, exclusive
and semi-exclusive marketing rights, distribution licenses, and research and development services.
In exchange for these deliverables, we receive payments from our alliance agreement partners for
product shipments, and may also receive royalty, profit sharing, and /or upfront or periodic
milestone payments. Revenue received from the alliance agreement partners for product shipments
under these agreements is generally not subject to deductions for chargebacks, rebates, returns,
shelf-stock adjustments, and other pricing adjustments. Royalty and profit sharing amounts we
receive under these agreements are calculated by the respective alliance agreement partner, with
such royalty and profit share amounts generally based upon estimates of net product sales or gross
profit which include estimates of deductions for chargebacks, rebates, returns, shelf stock
adjustments and other adjustments the alliance agreement partners may negotiate with their
customers. We record the alliance agreement partners adjustments to such estimated amounts in the
period the alliance agreement partner reports the amounts to us.
Page 47 of 83
Research Partner. We have entered into development agreements with other unrelated
third-party pharmaceutical companies under which we are collaborating in the development of five
dermatological products, including four generic products and one branded dermatological product,
and one branded CNS product. Under each of the development agreements, we received an upfront fee
with the potential to receive additional milestone payments upon completion of contractually
specified clinical and regulatory milestones. Additionally, we may also receive royalty payments
from the sale, if any, of a successfully developed and commercialized branded product under one of
the development agreements. Revenue received from the provision of research and development
services, including the upfront payment and the contingent milestone payments, if any, will be
deferred and recognized on a straight line basis over the expected period of performance of the
research and development services. Royalty fee income, if any, will be recognized by us as current
period revenue when earned. We determined these agreements do not include multiple deliverables
under FASB ASC Topic 605.
Promotional Partner. We have entered into promotional services agreements with other
unrelated third-party pharmaceutical companies under which we provide physician detailing sales
calls services to promote certain of those companies branded drug products. In exchange for our
services we receive service fees. We recognize revenue from provision of physician detailing sales
calls as such services are rendered and the performance obligations are met and from contingent
payments, if any, at the time they are earned.
Impact of Economic Conditions
The global economy has been undergoing a period of significant volatility which has led, to
among other impacts, diminished credit availability, declines in consumer confidence, and increases
in unemployment rates. There remains a high degree of caution about the stability of the U. S.
economy due to the ongoing domestic and global financial markets conditions, and there can be no
assurances further deterioration in the financial markets will not occur. These economic
conditions have resulted in, and could lead to further, reduced consumer spending related to
healthcare in general and pharmaceutical products in particular. While generic drugs present a
cost-effective alternative to higher-priced branded products, our sales and those of our alliance
agreement and collaboration partners could be negatively affected if patients forego obtaining
healthcare. In addition, reduced consumer spending may force our competitors and us to decrease
prices.
In addition, we have exposure to many different industries and counterparties, including our
partners under our alliance, research, and promotional services agreements, suppliers of raw
chemical materials, drug wholesalers and other customers, who may be financially or operationally
unstable or may become unstable in the current and /or future economic environment. Any such
instability may affect these parties ability to fulfill their respective contractual obligations
to us or cause them to limit or place burdensome conditions upon future transactions with us.
Page 48 of 83
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America (GAAP) and the rules and regulations
of the United States Securities & Exchange Commission (SEC) require the use of estimates and
assumptions, based on complex judgments considered reasonable, and affect the reported amounts of
assets and liabilities and disclosure of contingent assets and contingent liabilities at the date
of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. The most significant judgments are employed in estimates used in determining
values of tangible and intangible assets, legal contingencies, tax assets and tax liabilities, fair
value of share-based compensation of equity incentive awards issued to employees and directors, and
estimates used in applying the Companys revenue recognition policy including those related to
accrued chargebacks, rebates, product returns, Medicare, Medicaid, and other government rebate
programs, shelf-stock adjustments, and the timing and amount of deferred and recognized revenue and
deferred and amortized manufacturing costs under the Companys several alliance and collaboration
agreements. Actual results may differ from estimated results. Certain prior year amounts have
been reclassified to conform to the current year presentation.
Although we believe our estimates and assumptions are reasonable when made, they are based
upon information available to us at the time they are made. We periodically review the factors
having an influence on our estimates and, if necessary, adjust such estimates. Although
historically our estimates have generally been reasonably accurate, due to the risks and
uncertainties involved in our business and evolving market conditions, and given the subjective
element of the estimates made, actual results may differ from estimated results. This possibility
may be greater than normal during times of pronounced economic volatility.
Consistent with industry practice, we record an accrued provision for estimated deductions for
chargebacks, rebates, product returns, Medicare, Medicaid, and other government rebate programs,
shelf-stock adjustments, and other pricing adjustments, in the same period when revenue is
recognized. The objective of recording provisions for such deductions at the time of sale is to
provide a reasonable estimate of the aggregate amount we expect to ultimately credit our customers.
Since arrangements giving rise to the various sales credits are typically time driven (i.e.
particular promotions entitling customers who make purchases of our products during a specific
period of time, to certain levels of rebates or chargebacks), these deductions represent important
reductions of the amounts those customers would otherwise owe us for their purchases of those
products. Customers typically process their claims for deductions in a reasonably timely manner,
usually within the established payment terms. We monitor actual credit memos issued to our
customers and compare such actual amounts to the estimated provisions, in the aggregate, for each
deduction category to assess the reasonableness of the various reserves at each quarterly balance
sheet date. Differences between our estimated provisions and actual credits issued have not been
significant, and are accounted for in the current period as a change in estimate in accordance with
GAAP. We do not have the ability to specifically link any particular sales credit to an exact sales
transaction and since there have been no material differences, we believe our systems and
procedures are adequate for managing our business. An event such as the failure to report a
particular promotion could result in a significant difference between the estimated amount accrued
and the actual amount claimed by the customer, and, while there have been none to date, we would
evaluate the particular events and factors giving rise to any such significant difference in
determining the appropriate accounting.
Page 49 of 83
Chargebacks. We have agreements establishing contract prices for certain products with
certain indirect customers, such as managed care organizations, hospitals, and government agencies
who purchase our products from drug wholesalers. The contract prices are lower than the prices the
customer would otherwise pay to the wholesaler, and the difference is referred to as a chargeback,
which generally takes the form of a credit issued by us to reduce the gross sales amount we
invoiced to our wholesaler customer. An accrued provision for chargeback deductions is estimated
and recorded at the time we ship the products to our wholesaler customers. The primary factors we
consider when estimating the accrued provision for chargebacks are the average historical
chargeback credits given, the mix of products shipped, and the amount of inventory on hand at the
three major drug wholesalers with whom we do business. We monitor aggregate actual chargebacks
granted and compare them to the estimated accrued provision for chargebacks to assess the
reasonableness of the chargeback reserve at each quarterly balance sheet date.
The following table is a roll-forward of the activity in the chargeback reserve for the nine
months ended September 30, 2010 and the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
(in $000s) |
|
September 30, |
|
|
December 31, |
|
Chargeback reserve |
|
2010 |
|
|
2009 |
|
Beginning balance |
|
$ |
21,448 |
|
|
$ |
4,056 |
|
Provision recorded during the period |
|
|
141,653 |
|
|
|
126,105 |
|
Credits issued during the period |
|
|
(145,803 |
) |
|
|
(108,713 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
17,298 |
|
|
$ |
21,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as a percent of gross Global Product sales |
|
|
17 |
% |
|
|
24 |
% |
|
|
|
|
|
|
|
The decrease in the accrued provision for estimated chargebacks as a percent of gross Global
Product sales, principally resulted from our tamsulosin product and our authorized generic Adderall
XR products, both of which generally resulted in higher gross Global Product sales and carried a
lower average chargeback credit amount, relative to our other products sold through our Global
Divisions Global Products sales channel, resulting in a lower overall aggregate average
chargebacks as a percentage of gross Global Product Sales during the nine months ended September
30, 2010. We commenced sales of our tamsulosin product on March 2, 2010 and had contractual market
exclusivity for this generic product for the succeeding eight weeks, during which we were able to
achieve high market-share penetration. Our tamsulosin product sales after the end of the
contractual exclusivity period, have not remained at this level, as additional competing generic
versions of the product entered the market in late April 2010, and have resulted in both price
erosion and reduction of our market-share. (See Results of Operations below for additional
discussion.)
Page 50 of 83
Rebates. In an effort to maintain a competitive position in the marketplace and to
promote sales and customer loyalty, we maintain various rebate programs with our customers to whom
we market our products through our Global Division Global Products sales channel. The rebates
generally take the form of a credit memo to reduce the invoiced gross sales amount charged to a
customer for products shipped. An accrued provision for rebate deductions is estimated and recorded
at the time of product shipment. The accrued provision for rebates is based upon historical
experience of aggregate credits issued compared with payments made, the historical relationship of
rebates as a percentage of total Global Product sales, gross, and the contract terms and conditions
of the various rebate programs in effect at the time of shipment. We monitor aggregate actual
rebates granted and compare them to the estimated accrued provision for rebates to assess the
reasonableness of the rebate reserve at each quarterly balance sheet date.
The following table is a roll-forward of the activity in the rebate reserve for the nine
months ended September 30, 2010 and the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
(in $000s) |
|
September 30, |
|
|
December 31, |
|
Rebate reserve |
|
2010 |
|
|
2009 |
|
Beginning balance |
|
$ |
37,781 |
|
|
$ |
4,800 |
|
Provision recorded during the period |
|
|
73,397 |
|
|
|
72,620 |
|
Credits issued during the period |
|
|
(94,185 |
) |
|
|
(39,639 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
16,993 |
|
|
$ |
37,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as a percent of gross Global Product sales |
|
|
9 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
The decrease in the accrued provision for estimated rebates as a percent of gross Global
Product sales, principally resulted from our tamsulosin product and our authorized generic Adderall
XR products, both of which generally resulted in higher gross Global Product sales and carried a
lower rebate credit amount, relative to our other products sold through our Global Divisions
Global Products sales channel, resulting in a lower overall aggregate average rebate as a
percentage of gross Global Product sales during the nine months ended September 30, 2010. We
commenced sales of our tamsulosin product on March 2, 2010 and had contractual market exclusivity
for this generic product for the succeeding eight weeks, during which we were able to achieve high
market-share penetration. Our tamsulosin product sales after the end of the contractual
exclusivity period, have not remained at this level, as additional competing generic versions of
the product entered the market in late April 2010, and have resulted in both price erosion and
reduction of our market-share. (See Results of Operations below for additional discussion.)
Page 51 of 83
Returns. We allow our customers to return product (i) if approved by authorized personnel in
writing or by telephone with the lot number and expiration date accompanying any request and (ii)
if such products are returned within six months prior to, or until 12 months following, the
products expiration date. We estimate a provision for product returns as a percentage of gross
sales based upon historical experience of Global Division Global Product sales. The product return
reserve is estimated using a historical lag period (the time between the month of sale and the
month of return) and return rates, adjusted by estimates of the future return rates based on
various assumptions, which may include changes to internal policies and procedures, changes in
business practices, and commercial terms with customers, competitive position of each product,
amount of inventory in the wholesaler supply chain, and the introduction of new products. We also
consider other factors, including significant market changes which may impact future expected
returns, and actual product returns and may record additional provisions for specific product
returns we believe are not covered by the historical rates. We monitor aggregate actual product
returns on a quarterly basis and may record specific provisions for product returns we believe are
not covered by historical percentages.
The following table is a roll-forward of the activity in the product returns reserve for nine
months ended September 30, 2010 and the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
(in $000s) |
|
September 30, |
|
|
December 31, |
|
Product Returns Reserve |
|
2010 |
|
|
2009 |
|
Beginning balance |
|
$ |
22,114 |
|
|
$ |
13,675 |
|
Provision related to
sales recorded in the period |
|
|
20,340 |
|
|
|
11,847 |
|
Credits issued during the period |
|
|
(2,976 |
) |
|
|
(3,408 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
39,478 |
|
|
$ |
22,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as a percent of gross Global Product sales |
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
The period over period change in the provision for returns, as a percent of gross Global
Product sales was de minimis.
Page 52 of 83
Medicaid Rebate. As required by law, we provide a rebate payment on drugs dispensed under the
Medicaid program. We determine our estimate of the accrued Medicaid rebate reserve primarily based
on historical experience of claims submitted by the various states and any new information
regarding changes in the Medicaid program which may impact our estimate of Medicaid rebates. In
determining the appropriate accrual amount, we consider historical payment rates and processing lag
for outstanding claims and payments. We record estimates for Medicaid payments as a deduction from
gross sales, with corresponding adjustments to accrued liabilities. The accrual for Medicaid
payments totaled $14.9 million and $9.8 million as of September 30, 2010 and December 31, 2009,
respectively. The estimated accrued Medicaid rebate reserve increased significantly as a result of
the launch of our mixed amphetamine salts products in October 2009, as well as the launch of our
tamsulosin product in March 2010. As our mixed amphetamine salts products are authorized generics
to the related brand product, Medicaid rebate payments are calculated under the regulations
applicable to branded products. The Medicaid rebate accrual for the three and nine months ended
September 30, 2010 includes the effect of the increase in the Medicaid Rebate rates, which were
effective on a retroactive basis to January 1, 2010, resulting from the March 2010 enactment into
law of the Patient Protection and Affordable Care Act and the Health Care and Education
Reconciliation Act (the Acts). The change in the Medicaid Rebate rates resulting from the Acts
did not have a material impact on our results of operations. Historically, differences between our
estimated and actual payments made have not been significant.
Shelf-Stock Adjustments. When, based on competitive market conditions, we may reduce the
ultimate net selling price of a product by issuing a so-called shelf-stock adjustment credit to a
customer, the amount of which is typically agreed upon by us and our customer by reference to an
estimate of the amount of a specific product held by the customer, as an inducement for our
customer to continue to purchase future additional quantities of our product. The primary factors
we consider when estimating an accrued shelf-stock adjustment reserve include the per-unit credit
amount and an estimate of the level of inventory held by the customer. The accrued shelf-stock
adjustment totaled $0.6 million and $0.2 million as of September 30, 2010 and December 31, 2009,
respectively. Differences between our estimated and actual credits issued for shelf stock
adjustments have not been significant.
Allowance for Uncollectible Amounts. We maintain allowances for uncollectible amounts for
estimated losses resulting from amounts we deem to be uncollectible from our customers. These
allowances are for specific amounts on certain accounts. The allowance for uncollectible amounts
totaled $0.6 million and $0.4 million at September 30, 2010 and December 31, 2009, respectively.
Page 53 of 83
Estimated Lives of Alliance Agreements. The revenue we receive under our alliance agreements
is not subject to adjustment for estimated chargebacks, rebates, product returns and other pricing
adjustments as such adjustments are included in the amounts we receive from our alliance partners.
However, because we recognize revenue we receive under our alliance agreements, which is required
to be deferred, over the estimated life of the related agreement or our expected performance
utilizing either the straight-line method or a modified proportional performance method, we are
required to estimate the recognition period under each such agreement in order to determine the
amount of revenue to be recognized in the current period. Sometimes this estimate is based solely
on the fixed term of the particular alliance agreement. In other cases the estimate may be based on
more subjective factors as noted in the following paragraphs. While changes to the estimated
recognition periods have been infrequent, such changes, should they occur, may have a significant
impact on our financial statements.
As an illustration, with the application of the updated generally accepted accounting
principles promulgated by FASB ASC 605-25, to the Teva Agreement beginning in the quarter ended
September 30, 2010, our estimated expected period of performance to provide research and
development services under the Teva Agreement is now estimated to be a 160 month period, starting
in July 2001 (following the June 2001 effective date of the Teva Agreement) and
ending in October 2014 (with the estimated date of FDA approval of the final product covered
by the Teva Agreement). The FDA approval of the final product under the Teva Agreement represents
the end of our expected period of performance as we will have no further contractual obligation to
perform research and development services under the Teva Agreement and, therefore, the earnings
process for consideration received from the provision of research and development services will be
complete. In accordance with our accounting policy, the change in the recognition period for the
Teva Agreement was applied prospectively, as an adjustment in the period of change in the quarter
ended September 30, 2010. If we determine our estimated timing of FDA approval of the final
product under the Teva Agreement requires further adjustment, then we would adjust the recognition
period under the Teva Agreement on a prospective basis, resulting in a change to the periodic
revenue recognized under the Teva Agreement. For additional information on the accounting afforded
the Teva Agreement, see Part I: Financial Information Item 1. Financial Statements 11.
Alliance and Collaboration Agreements Strategic Alliance Agreement with Teva.
Additionally, for example, our expected period of performance to provide research and
development services under the Joint Development Agreement with Medicis is estimated to be a 48
month period, starting in December 2008 (i.e. when the $40.0 million upfront payment was received)
and ending in November 2012 (i.e. upon FDA approval of the fifth and final submission). The FDA
approval of the final submission under the Joint Development Agreement represents the end of our
estimated expected period of performance, as we will have no further contractual obligation to
perform research and development services under the Joint Development Agreement, and therefore the
earnings process will be complete. If the timing of FDA approval for the final submission under
the Joint Development Agreement is different from our estimate, the revenue recognition period will
change on a prospective basis at the time such event occurs. While no such change in the estimated
life of the Medicis Joint Development Agreement has occurred to date, if we were to conclude
significantly more time will be required to obtain FDA approval, then we would increase our
estimate of the revenue recognition period under the Joint Development Agreement, resulting in
reduced revenue recognition (and related amortized costs, if any) in current and future periods.
Page 54 of 83
Third-Party Research and Development Agreements. In addition to our own research and
development resources, we may use unrelated third-party vendors, including universities and
independent research companies, to assist in our research and development activities. These
vendors provide a range of research and development services to us, including clinical and
bio-equivalency studies. We generally sign agreements with these vendors which establish the terms
of each study performed by them, including, among other things, the technical specifications of the
study, the payment schedule, and timing of work to be performed. Payments are generally earned by
third-party researchers either upon the achievement of a milestone, or on a pre-determined date, as
specified in each study agreement. We account for third-party research and development expenses as
they are incurred according to the terms and conditions of the respective agreement for each study
performed, with an accrued expense at each balance sheet date for estimated fees and charges
incurred by us, but not yet billed to us. We monitor aggregate actual payments and compare them to
the estimated provisions to assess the reasonableness of the accrued expense balance at each
quarterly balance sheet date. Differences between our estimated and actual payments made have been
de minims.
Share-Based Compensation. We recognize the fair value of each stock option and restricted
stock award over its respective vesting period. Stock options and restricted stock awards granted
under the Amended and Restated 2002 Equity Incentive Plan (the 2002 Plan) generally vest over a
three or four year period and have a term of ten years. We estimate the fair value of each stock
option on its grant date using the Black-Scholes Merton option-pricing model, wherein: expected
volatility is based solely on historical volatility of our common stock over the period
commensurate with the expected term of the stock options. The expected term calculation is based
on the simplified method described in SAB No. 107, Share-Based Payment and SAB No. 110,
Share-Based Payment. The risk-free interest rate is based on the U.S. Treasury yield in effect at
the time of grant for an instrument with a maturity commensurate with the expected term of the
stock options. The dividend yield is zero as we have never paid cash dividends on our common
stock, and have no present intention to pay cash dividends.
Income Taxes. We are subject to United States federal, state and local income taxes and
Taiwan, R.O.C. income taxes. We create a deferred tax asset, or a deferred tax liability, when we
have temporary differences between the results for GAAP financial reporting purposes and tax
reporting purposes. The computation of the annual estimated effective tax rate at each interim
period requires us to exercise judgment to make certain estimates and assumptions including, but
not limited to, the expected operating income for the year, projections of the proportion of income
(or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences, and the
likelihood of recovering deferred tax assets generated in the current year. The accounting
estimates used to compute the provision for income taxes may change as new events occur, more
experience is acquired or additional information is obtained. The computation of our annual
estimated effective tax rate includes modifications, which were projected for the year, for share
based compensation, the domestic manufacturing deduction, and state research and development
credits, among others. The tax provision for the three and nine months ended September 30, 2010
does not include the effect of the federal research and development tax credit as such tax credit
expired on December 31, 2009, and has not been reinstated for 2010. The tax provision for the
three and nine months ended September 30, 2009 included the effect of the federal research and
development tax credit.
Fair Value of Financial Instruments. Our cash and cash equivalents include a portfolio of
high-quality credit securities, including U.S. Government sponsored entity securities, treasury
bills, corporate bonds, short-term commercial paper, and /or high rated money market funds. Our
entire portfolio matures in less than one year. The carrying value of the portfolio approximated
the market value at September 30, 2010. Our deferred compensation liability is carried at fair
value, based upon observable market values. We had no debt outstanding as of September 30, 2010.
Our only remaining debt instrument at September 30, 2010 was the revolving credit
facility with Wells Fargo Bank, N.A., which would be subject to variable interest rates and principal payments should we decide
to borrow against it.
Contingencies. In the normal course of business, we are subject to loss contingencies, such
as legal proceedings and claims arising out of our business, covering a wide range of matters,
including, among others, patent litigation, shareholder lawsuits, and product and clinical trial
liability. In accordance with FASB ASC Topic 450 Contingencies, we record accrued loss
contingencies when it is probable a liability will be incurred and the amount of loss can be
reasonably estimated and we do not recognize gain contingencies until realized.
Page 55 of 83
Goodwill
In accordance with FASB ASC Topic 350, Goodwill and Other Intangibles, goodwill
is subject to an annual assessment for impairment by applying a fair-value-based test, and not
periodic amortization. Under FASB ASC Topic 350, if the fair value of the reporting unit exceeds
the reporting units carrying value, including goodwill, then goodwill is considered not impaired,
making further analysis not required. We consider each of our Global Division and Impax Division
operating segments to be a reporting unit, as this is the lowest level for each of which discrete
financial information is available. We attribute the entire carrying amount of goodwill to the
Global Division. We concluded the carrying value of goodwill was not impaired as of December 31,
2009, as the fair value of the Global Division exceeded its carrying value at such date. We perform
our annual goodwill impairment test in the fourth quarter of each year. We estimate the fair value
of the Global Division using a discounted cash flow model for both the reporting unit and the
enterprise, as well as earnings and revenue multiples per common share outstanding for enterprise
fair value. In addition, on a quarterly basis, we perform a review of our business operations to
determine whether events or changes in circumstances have occurred which may have a material
adverse effect on the estimated fair value of the reporting unit, and thus indicate a potential
impairment of the goodwill carrying value. If such events or changes in circumstances were deemed
to have occurred, we would perform an interim impairment analysis, which may include the
preparation of a discounted cash flow model, or consultation with one or more valuation
specialists, to analyze the impact, if any, on our assessment of the reporting units fair value.
We have not to date deemed there to be any significant adverse changes in the legal, regulatory, or
business environment in which we conduct our operations.
Page 56 of 83
Results of Operations
Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
Overview:
The following table sets forth summarized, consolidated total Company results of operations
for the three months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
Increase/ |
|
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
(in $000s) |
|
(unaudited) |
|
|
(unaudited) |
|
|
$ |
|
|
% |
|
Total revenues |
|
$ |
303,993 |
|
|
$ |
64,946 |
|
|
$ |
239,047 |
|
|
|
368 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
160,871 |
|
|
|
36,891 |
|
|
|
123,980 |
|
|
|
336 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
123,360 |
|
|
|
10,163 |
|
|
|
113,197 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
123,636 |
|
|
|
10,152 |
|
|
|
113,484 |
|
|
nm |
|
Provision for income taxes |
|
|
48,501 |
|
|
|
3,495 |
|
|
|
45,006 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,135 |
|
|
|
6,657 |
|
|
|
68,478 |
|
|
nm |
|
Non-controlling interest |
|
|
28 |
|
|
|
28 |
|
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
75,163 |
|
|
$ |
6,685 |
|
|
$ |
68,478 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
Net income for the three months ended September 30, 2010 was $75.2 million, an increase of
$68.5 million as compared to $6.7 million for the three months ended September 30, 2009, primarily
attributable to an adjustment to the accounting for the Teva Agreement. For additional information
regarding the accounting afforded the Teva Agreement, see Part I: Financial Information Item 2.
Managements Discussion and Analysis of Results of Operations and Financial Condition Overview
Critical Accounting Estimates Estimated Lives of Alliance Agreements. The adjustment to the
accounting for the Teva Agreement resulted in an increase of approximately $61.4 million to net
income in the current quarter, (i.e. tax effected at the periodic effective tax rate for the three
months ended September 30, 2010). Net income, in the current quarter, before the adjustment to the
accounting for the Teva Agreement would have been approximately $13.8 million, an increase of $7.1
million, or 107% from the prior year period, resulting principally from increased Global Product
sales, net, resulting in increased gross profit, partially offset by higher total operating
expenses and an increase in the provision for income taxes. As discussed throughout this section,
we earned significant revenues and gross profit from sales of our authorized generic Adderall XR,
and fenofibrate products during the three months ended September 30, 2010. With respect to our
authorized generic Adderall XR products, we are dependent on another unrelated third-party
pharmaceutical company to supply us with such products we market and sell through our Global
Division. Any delay or interruption in the supply of our authorized generic Adderall XR products
from the unrelated third-party pharmaceutical company could curtail or delay our product shipments
and adversely affect our revenues, as well as jeopardize our relationships with our customers.
Any significant diminution of our authorized generic Adderall XR and fenofibrate
product sales revenue and /or gross profit due to competition and /or product supply or any other
reasons in future periods may materially and adversely affect our results of operations in such
periods.
Page 57 of 83
Global Division
The following table sets forth results of operations for the Global Division for the three
months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
Increase/ |
|
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
(in $000s) |
|
(unaudited) |
|
|
(unaudited) |
|
|
$ |
|
|
% |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Product sales, net |
|
$ |
91,051 |
|
|
$ |
46,636 |
|
|
$ |
44,415 |
|
|
|
95 |
% |
Private Label Product sales |
|
|
528 |
|
|
|
1,752 |
|
|
|
(1,224 |
) |
|
|
(70 |
)% |
Rx Partner |
|
|
202,800 |
|
|
|
8,328 |
|
|
|
194,472 |
|
|
nm |
OTC Partner |
|
|
2,365 |
|
|
|
1,769 |
|
|
|
596 |
|
|
|
34 |
% |
Research Partner |
|
|
3,384 |
|
|
|
2,962 |
|
|
|
422 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
300,128 |
|
|
|
61,447 |
|
|
|
238,681 |
|
|
|
388 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
140,279 |
|
|
|
25,098 |
|
|
|
115,181 |
|
|
|
459 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
159,849 |
|
|
|
36,349 |
|
|
|
123,500 |
|
|
|
340 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
12,819 |
|
|
|
8,909 |
|
|
|
3,910 |
|
|
|
44 |
% |
Patent litigation |
|
|
1,033 |
|
|
|
1,647 |
|
|
|
(614 |
) |
|
|
(37 |
)% |
Selling, general and administrative |
|
|
4,127 |
|
|
|
2,561 |
|
|
|
1,566 |
|
|
|
61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
17,979 |
|
|
|
13,117 |
|
|
|
4,862 |
|
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
141,870 |
|
|
$ |
23,232 |
|
|
$ |
118,638 |
|
|
|
511 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm not meaningful
Revenues
Total revenues for the Global Division for the three months ended September 30, 2010, were
$300.1 million, an increase of 388% over the same period in 2009.
Global Product sales, net, were $91.1 million, an increase of 95% over the same period in 2009
primarily as a result of sales of our authorized generic Adderall XR, and fenofibrate products. We
commenced sales of our authorized generic Adderall XR products, indicated for the treatment of
attention deficit hyperactivity disorder, in October 2009, and thus had no sales of these products
in the prior-year period. The increase in sales of our fenofibrate products, a
cholesterol-lowering drug, resulted from a continued increase in demand for generic versions of
cholesterol-lowering drugs in general.
Private Label Product sales were $0.5 million, a decrease of 70% primarily due to lower demand
for our generic loratadine /pseudoephedrine products.
Rx Partner revenues were $202.8 million, an increase over the prior year period attributable
to an adjustment to revenue recognition under the Teva Agreement. For additional information
regarding revenue recognition applied to the Teva Agreement, see Part I: Financial Information
Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
Overview Critical Accounting Estimates Estimated Lives of Alliance Agreements. The
adjustment to revenue recognition for the Teva Agreement resulted in an increase in Rx Partner
revenue of $196.4 million in the quarter ended September 30, 2010. Such adjustment represents the
recognition of previously deferred revenue which otherwise would have been recognized, under the
previous accounting standards, over the remaining life of the Teva Agreement, using the modified
proportional performance method. The Rx Partner revenues before the adjustment to revenue
recognition for the Teva Agreement were $6.4 million for the three months ended September 30, 2010,
a decrease of $1.9 million, or 23% from the prior year period primarily attributable to reduced
sales of our generic Wellbutrin® XL 300mg. The reduction of revenue for generic Wellbutrin® XL
300mg resulted from increased marketplace competition.
Page 58 of 83
OTC Partner revenues were $2.4 million, an increase of $0.6 million primarily attributable to
royalty payments received from Merck (formerly Schering-Plough) on their sales of Claritin-D®
12-hour Extended Release Tablets. There were no such royalty payments received from Merck (formerly
Schering-Plough) in the prior year period.
Research Partner revenues were $3.4 million, an increase of $0.4 million, primarily driven by
revenue recognition related to three milestone payments aggregating $12.0 million, received at
various times during 2009, including $5.0 million in May 2009, $5.0 million received in September
2009, and $2.0 million received in December 2009.
Cost of Revenues
Cost of revenues was $140.3 million for the three months ended September 30, 2010, an increase
of $115.2 over the prior year period, of which $95.4 million was related to the adjustment to
amortization of deferred manufacturing costs (corresponding to the adjustment to revenue
recognition) under the Teva Agreement. Before the adjustment to the recognition of deferred
manufacturing costs under the Teva Agreement, cost of revenues were $44.9 million, up 79% primarily
related to the higher sales of our authorized generic Adderall XR, and fenofibrate products.
Gross Profit
Gross profit for the three months ended September 30, 2010 was $159.8 million, or
approximately 53% of total revenues, as compared to $36.3 million or 59% of total revenue in the
same period of the prior year. Gross profit in our Global Division, before the adjustment to the
accounting for the Teva Agreement, was $58.8 million, up $22.5 million primarily due to higher
sales of our authorized generic Adderall XR and fenofibrate products, as discussed above.
Research and Development Expenses
Total research and development expenses for the three months ended September 30, 2010 were
$12.8 million, an increase of 44%, as compared to the same period of the prior year. Generic
research and development expense increased $2.0 million due to higher spending on bio-equivalency
study costs, $0.9 million on active pharmaceutical ingredient used for research purposes, and $0.5
million related to higher employee compensation costs.
Patent Litigation Expenses
Patent litigation expenses for the three months ended September 30, 2010 and 2009 were $1.0
million and $1.6 million, respectively, a decrease of $0.6 million principally resulting from the
settlement of two matters in the first half of 2010 which were active during the three months ended
September 30, 2009.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2010
were $4.1 million, a 61% increase, generally attributable to overall higher sales levels period
over period, and including $0.3 million in increased product freight charges, $0.3 million in
higher sales personnel incentive compensation, and $1.1 million of higher marketing expenses.
Page 59 of 83
Impax Division
The following table sets forth results of operations for the Impax Division for the three
months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended, |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
Increase/ |
|
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
(in $000s) |
|
(unaudited) |
|
|
(unaudited) |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promotional Partner revenue |
|
$ |
3,535 |
|
|
$ |
3,499 |
|
|
|
36 |
|
|
|
1 |
% |
Research Partner revenue |
|
|
330 |
|
|
|
|
|
|
|
330 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
3,865 |
|
|
|
3,499 |
|
|
|
366 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
2,843 |
|
|
|
2,957 |
|
|
|
(114 |
) |
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,022 |
|
|
|
542 |
|
|
|
480 |
|
|
|
89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
11,027 |
|
|
|
6,334 |
|
|
|
4,693 |
|
|
|
74 |
% |
Selling, general and administrative |
|
|
930 |
|
|
|
761 |
|
|
|
169 |
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
11,957 |
|
|
|
7,095 |
|
|
|
4,862 |
|
|
|
69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(10,935 |
) |
|
$ |
(6,553 |
) |
|
|
(4,382 |
) |
|
|
(67 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Total revenues were $3.9 million for the three months ended September 30, 2010, an increase of
10% compared to the same period in the prior year, principally related to $0.3 million of Research
Partner revenue resulting from the Development and Co-Promotion Agreement with Endo
Pharmaceuticals, Inc, which was entered into in June 2010, and accordingly, there were no similar
revenues in the prior year period. In addition, physician detailing services under our
Co-Promotion Agreement with Pfizer commenced on July 1, 2009 (these services were initially
provided under the former Co-Promotion Agreement with Wyeth, which is now a wholly-owned subsidiary
of Pfizer). The Promotional Partner revenue in the three months ended September 30, 2009, was
earned under the terms of the previous Promotional Services Agreement with Shire, which expired on
June 30, 2009.
Cost of Revenues
Cost of revenues was $2.8 million for the three months ended September 30, 2010, with nominal
change from the same period in 2009.
Gross Profit
Gross profit for the three months ended September 30, 2010 was $1.0 million, an increase of
$0.5 million attributed primarily to the higher Promotional Partner revenues (as described above).
Research and Development Expenses
Total research and development expenses for the three months ended September 30, 2010 were
$11.0 million, an increase of 74%, as compared to $6.3 million in the prior year period, with the
$4.7 million increase principally driven by research and development expenses related to our
branded product initiatives, including increases of $4.1 million for clinical trial studies and
$0.2 million for R&D active pharmaceutical ingredient.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $0.9 million in the current period, as compared
to $0.8 million in the prior period, with the increase primarily related higher employee
compensation expense.
Page 60 of 83
Corporate and other
The following table sets forth Corporate general and administrative expenses, as well as other
items of income and expense presented below income from operations for the three months ended
September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
Increase/ |
|
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
(in $000s) |
|
(unaudited) |
|
|
(unaudited) |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation settlement |
|
$ |
|
|
|
$ |
818 |
|
|
|
(818 |
) |
|
|
(100 |
)% |
General and administrative expenses |
|
|
7,575 |
|
|
|
5,698 |
|
|
|
1,877 |
|
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
7,575 |
|
|
|
6,516 |
|
|
|
1,059 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(7,575 |
) |
|
|
(6,516 |
) |
|
|
(1,059 |
) |
|
|
(16 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
(91 |
) |
|
|
(6 |
) |
|
|
(85 |
) |
|
nm |
|
Interest income |
|
|
405 |
|
|
|
180 |
|
|
|
225 |
|
|
|
125 |
% |
Interest expense |
|
|
(38 |
) |
|
|
(185 |
) |
|
|
147 |
|
|
|
79 |
% |
Provision for income taxes |
|
$ |
48,501 |
|
|
$ |
3,495 |
|
|
|
45,006 |
|
|
nm |
|
nm not meaningful
Litigation settlement
The $0.8 million of litigation settlement expense for the three months ended September 30,
2009 included legal and other professional fee expenses incurred by us in defense of a suit related
to our (previously marketed) Lipram UL products which we settled in January 2010, and accordingly
there were no similar amounts in the current year period.
General and Administrative Expenses
General and administrative expenses for the three months ended September 30, 2010 were $7.6
million, a $1.9 million increase over the prior period, principally driven by an increase in
compensation-related expenses of $0.6 million, higher insurance costs related to increasing levels
of business activity of $0.3 million and an increase in systems implementation and integration
expenses of $0.3 million. In addition, the prior year period included a $0.7 million reduction in
general and administrative expense related to the August 2009 repayment-in-full of a subordinated
promissory note, which did not repeat in the current year period.
Other income (expense), net
Other income (expense), net was minimal for the three months ended September 30, 2010 and
2009, and contained no individually-significant items.
Interest Income
Interest income in the three months ended September 30, 2010 was $0.4 million, with the period
over period increase of $0.2 million resulting from higher average balances of cash and cash
equivalents and short-term investments, partially offset by lower overall interest income rates.
Interest Expense
Interest expense in the three months ended September 30, 2010 declined $0.1 million to $0.04
million, compared to the prior year period due to the absence of interest bearing debt.
Page 61 of 83
Income Taxes
During the three months ended September 30, 2010, we recorded a tax provision of $48.5 million
for United States domestic, federal and state income taxes and for income taxes in jurisdictions
outside the United States. Included in the tax provision for the three months ended September 30,
2010 is an accrual for uncertain tax positions of $0.01 million. In the three months ended
September 30, 2009, we recorded a tax provision of $3.5 million for United States domestic federal
and state income taxes and for income taxes in jurisdictions outside the United States. Included
in the tax provision for the three months ended September 30, 2009 is an accrual for uncertain tax
positions of $0.2 million. The tax provision for the three months ended September 30, 2010 does
not include the effect of the federal research and development tax credit which expired on December
31, 2009, and as of the September 30, 2010 balance sheet date had not been reinstated for 2010.
The tax provision for the three months ended September 30, 2009 included the effect of the federal
research and development tax credit. The effective tax rate of 39% for the three months ended
September 30, 2010 was higher than the effective tax rate of 34% for the three months ended
September 30, 2009, resulting principally from the absence of the federal research and development
tax credit in the current year period.
Page 62 of 83
Results of Operations
Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
Overview:
The following table sets forth summarized, consolidated total Company results of operations
for the nine months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
Increase/ |
|
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
(in $000s) |
|
(unaudited) |
|
|
(unaudited) |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
780,407 |
|
|
$ |
182,275 |
|
|
$ |
598,132 |
|
|
|
328 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
488,818 |
|
|
|
100,686 |
|
|
|
388,132 |
|
|
|
385 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
383,632 |
|
|
|
18,284 |
|
|
|
365,348 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
384,070 |
|
|
|
18,237 |
|
|
|
365,833 |
|
|
nm |
|
Provision for income taxes |
|
|
146,114 |
|
|
|
6,373 |
|
|
|
139,741 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237,956 |
|
|
|
11,864 |
|
|
|
226,092 |
|
|
nm |
|
Non-controlling interest |
|
|
40 |
|
|
|
53 |
|
|
|
(13 |
) |
|
|
(25 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
237,996 |
|
|
$ |
11,917 |
|
|
$ |
226,079 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm not meaningful
Net Income
Net income for the nine months ended September 30, 2010 was $238.0 million, an increase of
$226.1 million as compared to $11.9 million for the nine months ended September 30, 2009, primarily
attributable to an adjustment to the accounting for the Teva Agreement. For additional information
on the accounting afforded the Teva Agreement, see Part I: Financial Information Item 2.
Managements Discussion and Analysis of Results of Operations and Financial Condition Overview
Critical Accounting Estimates Estimated Lives of Alliance Agreements. The adjustment to the
accounting for the Teva Agreement resulted in an increase of approximately $62.6 million to net
income in the current year period (i.e. tax effected at the periodic effective tax rate for the
nine months ended September 30, 2010). Net income, in the current year period, before the
adjustment to the accounting for the Teva Agreement would have been approximately $175.4 million,
an increase of $163.5 million from the prior year period, resulting principally from increased
Global Product sales, net, resulting in increase in gross profit, partially offset by higher total
operating expenses and an increase in the provision for income taxes. As discussed throughout this
section, we earned significant revenues and gross profit from sales of our tamsulosin, authorized
generic Adderall XR, and fenofibrate products during the nine months ended September 30, 2010.
With respect to our authorized generic Adderall XR products, we are dependent on another unrelated
third-party pharmaceutical company to supply us with such products we market and sell through our
Global Division. Any delay or interruption in the supply of our authorized generic Adderall XR
products from the unrelated third-party pharmaceutical company could curtail or delay our product
shipments and adversely affect our revenues, as well as jeopardize our relationships with our
customers. Any significant diminution of our authorized generic Adderrall XR and
fenofibrate product sales revenue and /or gross profit due to competition and /or product supply or
any other reasons in future periods may materially and adversely affect our results of operations
in such periods.
Page 63 of 83
Global Division
The following table sets forth results of operations for the Global Division for the nine
months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
Increase/ |
|
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
(in $000s) |
|
(unaudited) |
|
|
(unaudited) |
|
|
$ |
|
|
% |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Product sales, net |
|
$ |
537,794 |
|
|
$ |
123,144 |
|
|
$ |
414,650 |
|
|
|
337 |
% |
Private Label Product sales |
|
|
1,539 |
|
|
|
5,269 |
|
|
|
(3,730 |
) |
|
|
(71 |
)% |
Rx Partner |
|
|
213,504 |
|
|
|
30,183 |
|
|
|
183,321 |
|
|
|
607 |
% |
OTC Partner |
|
|
6,439 |
|
|
|
5,255 |
|
|
|
1,184 |
|
|
|
23 |
% |
Research Partner |
|
|
10,153 |
|
|
|
8,406 |
|
|
|
1,747 |
|
|
|
21 |
% |
Other |
|
|
|
|
|
|
11 |
|
|
|
(11 |
) |
|
|
(100 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
769,429 |
|
|
|
172,268 |
|
|
|
597,161 |
|
|
|
347 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
282,309 |
|
|
|
72,339 |
|
|
|
209,970 |
|
|
|
290 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
487,120 |
|
|
|
99,929 |
|
|
|
387,191 |
|
|
|
387 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
32,608 |
|
|
|
28,761 |
|
|
|
3,847 |
|
|
|
13 |
% |
Patent litigation |
|
|
4,786 |
|
|
|
4,058 |
|
|
|
728 |
|
|
|
18 |
% |
Selling, general and administrative |
|
|
11,149 |
|
|
|
7,628 |
|
|
|
3,521 |
|
|
|
46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
48,543 |
|
|
|
40,447 |
|
|
|
8,096 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
438,577 |
|
|
$ |
59,482 |
|
|
$ |
379,095 |
|
|
|
637 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Total revenues for the Global Division for the nine months ended September 30, 2010, were
$769.4 million, an increase of 347% over the same period in 2009.
Global Product sales, net, were $537.8 million, an increase of 337% over the same period in
2009 primarily as a result of sales of our tamsulosin, authorized generic Adderall XR, and
fenofibrate products. Of the $414.7 million increase, $207.4 million resulted from sales of
tamsulosin, our generic version of Flomax®, a drug used to improve symptoms associated with an
enlarged prostate. We commenced sales of our tamsulosin product on March 2, 2010 and had
contractual market exclusivity for this generic product for the succeeding eight week period,
during which we were able to achieve high market-share penetration. Our future tamsulosin product
sales, however, have not remained at this level, as additional competing generic versions of the
product entered the market in late April 2010, at the conclusion of our contractual exclusivity
period, and have resulted in both price erosion and reduction of our market share. We commenced
sales of our authorized generic Adderall XR products, indicated for the treatment of attention
deficit hyperactivity disorder, in October 2009, and thus had no sales of these products in the
prior-year period. The increase in sales of our fenofibrate products a cholesterol-lowering drug,
resulted from a continued increase in demand for generic versions of cholesterol-lowering drugs in
general.
Private Label Product sales were $1.5 million, a decrease of 71%, primarily due to lower
demand for our generic loratadine /pseudoephedrine products.
Page 64 of 83
Rx Partner revenues were $213.5 million, an increase over the prior year period attributable
to an adjustment to the revenue recognition under the Teva Agreement. For additional information
on the accounting afforded the Teva Agreement, see Part I: Financial Information Item 2.
Managements Discussion and Analysis of Results of Operations and Financial Condition Overview
Critical Accounting Estimates Estimated Lives of Alliance Agreements. The adjustment to
revenue recognition for the Teva Agreement resulted in an increase of $196.4 million in the nine
months ended September 30, 2010. Such adjustment represents the recognition of previously deferred
revenue which otherwise would have been recognized, under the previous accounting standards, over
the remaining life of the Teva Agreement, using the modified proportional performance method. The
Rx Partner revenues before the adjustment to the revenue recognition for the Teva Agreement were
$17.1 million in the current year period, representing a decrease of $13.1 million, or 44% from the
prior year period, primarily attributable to reduced sales of our generic Wellbutrin® XL 300mg.
The reduction of revenue for generic Wellbutrin® XL 300mg resulted from increased marketplace
competition.
OTC Partner revenues were $6.4 million, an increase of $1.2 million, primarily attributable to
royalty payments received from Merck (formerly Schering-Plough) on their sales of Claritin-D ®
12-hour Extended Release Tablets; there were no such royalty payments received from Merck (formerly
Schering-Plough) in the prior year period.
Research Partner revenues were $10.2 million, an increase of $1.7 million, primarily driven by
revenue recognition related to three milestone payments aggregating $12.0 million, received at
various times during 2009, including $5.0 million in May 2009, $5.0 million received in September
2009, and $2.0 million received in December 2009.
Cost of Revenues
Cost of revenues was $282.3 million for the nine months ended September 30, 2010, an increase
of $210.0 million over the prior year period, of which $95.4 million was related to the adjustment
to the amortization of deferred manufacturing costs (corresponding to the adjustment to revenue
recognition) under the Teva Agreement. Before the adjustment to the recognition of deferred
manufacturing costs under the Teva Agreement, cost of revenues were $186.9 million, up 158%
primarily related to the higher sales of our tamsulosin, authorized generic Adderall XR, and
fenofibrate products.
Gross Profit
Gross profit for the nine months ended September 30, 2010 was $487.1 million, or approximately
63% of total revenues, as compared to $99.9 million or 58% of total revenue in the same period of
the prior year. Gross profit in our Global Division, before the adjustment to the accounting for
the Teva Agreement, was $386.1 million, up $286.2 million primarily due to higher sales of our
tamsulosin product, which accounted for $190.3 million of the period over period increase. Also
contributing to the increase were higher sales of our authorized generic Adderall XR and
fenofibrate products, as discussed above.
Research and Development Expenses
Total research and development expenses for the nine months ended September 30, 2010 were
$32.6 million, an increase of 13% as compared to the same period of the prior year. Generic
research and development expense increased $2.1 million due to higher spending on bio-equivalency
study costs, $0.8 million on active pharmaceutical ingredient used in research related activities,
and $0.5 million of higher outside development costs, partially offset by lower levels of other
development-related expenses.
Page 65 of 83
Patent Litigation Expenses
Patent litigation expenses for the nine months ended September 30, 2010 and 2009 were $4.8
million and $4.1 million, respectively, an increase of $0.7 million principally resulting from
higher overall expenses in the current year period as a result of increased activity related to two
matters which were settled in the first six months of 2010.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 30, 2010 were
$11.1 million, a 46% increase generally attributable to overall higher sales levels
period-over-period, and including $1.1 million in increased product freight expenses, $0.9 million
of higher marketing expenses, and $0.6 million of post-approval product clinical study costs (of
which such clinical study costs were not present in the prior year period).
Page 66 of 83
Impax Division
The following table sets forth results of operations for the Impax Division for the nine
months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended, |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
Increase/ |
|
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
(in $000s) |
|
(unaudited) |
|
|
(unaudited) |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promotional Partner revenue |
|
$ |
10,538 |
|
|
$ |
10,007 |
|
|
|
531 |
|
|
|
5 |
% |
Research Partner revenue |
|
|
440 |
|
|
|
|
|
|
|
440 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
10,978 |
|
|
|
10,007 |
|
|
|
971 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
9,280 |
|
|
|
9,250 |
|
|
|
30 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,698 |
|
|
|
757 |
|
|
|
941 |
|
|
|
124 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
30,656 |
|
|
|
17,983 |
|
|
|
12,673 |
|
|
|
70 |
% |
Selling, general and administrative |
|
|
2,478 |
|
|
|
2,528 |
|
|
|
(50 |
) |
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
33,134 |
|
|
|
20,511 |
|
|
|
12,623 |
|
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(31,436 |
) |
|
$ |
(19,754 |
) |
|
|
(11,682 |
) |
|
|
(59 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm not meaningful
Revenues
Total revenues were $11.0 million for the nine months ended September 30, 2010, an increase of
10% compared to the same period in the prior year, principally related to the commencement of
physician detailing services under our Co-Promotion Agreement with Pfizer which commenced on July
1, 2009 (these services were initially under the former Co-Promotion Agreement with Wyeth, which is
now a wholly-owned subsidiary of Pfizer). The Promotional Partner revenue earned by us during the
first six month of 2009 was earned under the terms of the previous Promotional Services Agreement
with Shire, which expired on June 30, 2009. In addition, we recognized $0.4 million of Research
Partner revenue related to a Development and Co-Promotion Agreement with Endo Pharmaceuticals, Inc.
which was entered into in June 2010, and accordingly, there were no similar revenues in the prior
year period.
Cost of Revenues
Cost of revenues was $9.3 million for the nine months ended September 30, 2010, with no
individually significant changes from the same period in 2009.
Gross Profit
Gross profit for the nine months ended September 30, 2010 was $1.7 million, an increase of
$0.9 million attributed primarily to the higher Promotional Partner revenues (as described above).
Research and Development Expenses
Total research and development expenses for the nine months ended September 30, 2010 were
$30.7 million, an increase of 70%, as compared to $18.0 million in the prior year period, with the
$12.7 million increase principally driven by research and development expenses related to our
branded product initiatives, including increases of $10.6 million for clinical trial studies, $1.5
million on employee compensation, $0.4 million on active pharmaceutical ingredient used in research
related activities, and $0.2 million on PK studies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.5 million, with no individually
significant changes from the same period in 2009.
Page 67 of 83
Corporate and other
The following table sets forth Corporate general and administrative expenses, as well as other
items of income and expense presented below income from operations for the nine months ended
September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
Increase/ |
|
|
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
(in $000s) |
|
(unaudited) |
|
|
(unaudited) |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation settlement |
|
$ |
|
|
|
$ |
1,674 |
|
|
|
(1,674 |
) |
|
|
(100 |
)% |
General and administrative expenses |
|
|
23,509 |
|
|
|
19,770 |
|
|
|
3,739 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
23,509 |
|
|
|
21,444 |
|
|
|
2,065 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(23,509 |
) |
|
|
(21,444 |
) |
|
|
(2,065 |
) |
|
|
(10 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
(134 |
) |
|
|
52 |
|
|
|
(186 |
) |
|
|
(358) |
% |
Interest income |
|
|
680 |
|
|
|
636 |
|
|
|
44 |
|
|
|
7 |
% |
Interest expense |
|
|
(108 |
) |
|
|
(735 |
) |
|
|
627 |
|
|
|
85 |
% |
Provision for income taxes |
|
$ |
146,114 |
|
|
$ |
6,373 |
|
|
|
139,741 |
|
|
nm |
|
nm not meaningful
Litigation settlement
The $1.7 million of Litigation settlement expense for the nine months ended September 30, 2009
included legal and other professional fee expenses incurred by us in defense of a suit related to
our (previously marketed) Lipram UL products which we settled in January 2010, and accordingly
there were no similar amounts in the current year period.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30, 2010 were $23.5
million, a 19% increase attributable principally to an increase in compensation-related expenses of
$1.9 million, higher insurance costs related to increasing levels of business activity of $0.7
million, and an increase in system implementation and integration expenses of $0.4 million. In
addition, in the prior year period there was a $0.7 million reduction in general and administrative
expenses related to the August 2009 repayment-in-full of a subordinated promissory note, which did
not repeat in the current year period.
Other income (expense), net
Other income (expense), net was minimal for the nine months ended September 30, 2010 and 2009,
and contained no individually-significant items.
Interest Income
Interest income in the nine months ended September 30, 2010 was $0.7 million, a 7% increase as
compared to the prior year period due primarily to higher average balances of cash and cash
equivalents and short-term investments partially offset by lower overall interest rates.
Interest Expense
Interest expense in the nine months ended September 30, 2010 declined $0.6 million to $0.1
million, compared to the prior year period due to the absence of interest bearing debt resulting
from the repurchase, on the contractual June 15, 2009 prepayment option date, of the $12.75 million
remaining outstanding balance of our 3.5% convertible senior subordinated debentures, otherwise due
in June 2012.
Page 68 of 83
Income Taxes
During the nine months ended September 30, 2010, we recorded a tax provision of $146.1 million
for United States domestic federal and state income taxes and for income taxes in jurisdictions
outside the United States. Included in the tax provision for the nine months ended September 30,
2010 is an accrual for uncertain tax positions of $0.04 million. In the nine months ended
September 30, 2009, we recorded a tax provision of $6.4 million for United States domestic federal
and state income taxes and for income taxes in jurisdictions outside the United States. Included
in the tax provision for the nine months ended September 30, 2009 is an accrual for uncertain tax
positions of $0.7 million. The tax provision for the nine months ended September 30, 2010 does not
include the effect of the federal research and development tax credit which expired on December 31,
2009, and to-date has not been reinstated for 2010. The tax provision for the nine months ended
September 30, 2009 included the effect of the federal research and development tax credit. The tax
provision for the nine months ended September 30, 2009 also included the effect of the reversal of
a valuation allowance on the deferred tax asset related to net operating losses at our wholly-owned
subsidiary Impax Laboratories (Taiwan), Inc. We reversed the valuation allowance related to these
net operating losses as a result of retroactive changes in Taiwan tax law published in the second
quarter of 2009. The effective tax rate of 38% for the nine months ended September 30, 2010 was
higher than the effective tax rate of 35% for the nine months ended September 30, 2009, resulting
principally from the absence of the federal research and development tax credit in the current year
period and the reversal of the valuation allowance in the prior year period described above.
Page 69 of 83
Liquidity and Capital Resources
We have historically funded our operations with the proceeds from the sale of debt and equity
securities, and more recently, with cash from operations. Currently, our principal source of
liquidity is cash from operations, consisting of the proceeds from the sales of our products and
provision of services.
We expect to incur significant operating expenses, including expanded research and development
activities and patent litigation expenses, for the foreseeable future. We estimate research and
development expenses will be approximately $85.0 million and patent litigation expenses will be
approximately $8.0 million for the 12 months ending December 31, 2010. We also anticipate
incurring capital expenditures of approximately $20.0 million during the 12 months ending December
31, 2010, principally for continued improvements and expansion of our research and development and
manufacturing facilities in the State of California, our packaging and distribution facilities in
the Commonwealth of Pennsylvania, and our facility in Jhunan Taiwan, R.O.C. In addition, we are
generally required to make cash expenditures to manufacture and /or acquire finished product
inventory in advance of selling the finished product to our customers and collecting payment for
such product sales, which may result in a significant use of cash.
We believe our existing cash and cash equivalents and short-term investment balances, together
with cash expected to be generated from operations, and our bank revolving line of credit, will be
sufficient to meet our financing requirements through the next 12 months. We may, however, seek
additional financing through alliance, collaboration, and /or licensing agreements, as well as from
the equity and /or debt capital markets to fund the planned capital expenditures, our research and
development plans, potential acquisitions, and potential revenue shortfalls due to delays in new
product introductions.
Cash and Cash Equivalents
At September 30, 2010, we had $165.8 million in cash and cash equivalents, an increase of
$134.0 million as compared to December 31, 2009. As more fully discussed below, the increase in
cash and cash equivalents during the nine months ended September 30, 2010 was primarily driven by
$259.9 million of cash provided by operations, which included a decrease in accounts receivable, as
well as an increase in accounts payable and accrued expenses to be paid in subsequent periods. The
increase in cash was also impacted by $13.9 million received from the exercise of stock options and
employee stock purchase plan contributions, while being offset by net purchases of short term
investments of $133.6 million and $10.5 million of
purchases of property, plant and equipment,
during the nine month period ended September 30, 2010.
Cash Flows
Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009.
Net cash provided by operating activities for the nine months ended September 30, 2010 was
$259.9 million, an increase of $262.3 million as compared to the prior year period $2.4 million net
cash used in operating activities.
The period-over-period increase in net cash provided by operating activities resulted
principally from a higher net income, a decrease in accounts receivable, and an increase in
accounts payable and accrued expenses. The decrease in accounts receivable to $95.6 million at
September 30, 2010, resulted in a $90.1 million source of cash, compared to the same period in the
prior year when accounts receivable resulted in a $18.4 million use of cash flows. In addition,
higher levels of accounts payable and accrued expenses resulted in a period-over-period increase of
$7.5 million in cash flows. The decreased level of accounts receivable at September 30, 2010 was
primarily the result of the collection of amounts owed by our customers related to product sales
from the launch of our tamsulosin product in March 2010, and of our authorized generic Adderall XR
products (launched in October 2009). We commenced sales of our tamsulosin product on March 2, 2010
and had contractual market exclusivity for this generic product for the succeeding eight week
period, during which we were able to achieve high market-share penetration. Our future tamsulosin
product sales, however, will not remain at this level, as additional competing generic versions of
the product entered the market in late April 2010 at the conclusion of the contractual exclusivity
period, and have resulted in both price erosion and reduction of our market-share. (See Results of
Operations above for additional discussion.)
Page 70 of 83
Net cash used by investing activities for the nine months ended September 30, 2010, amounted
to $144.1 million, an increase of $133.9 million as compared to the prior year period $10.2 million
use of cash flows in investing activities, with the change due to a period-over-period $131.8
million net increase in the purchase of short-term investments, and $2.1 million in higher
expenditures on property, plant and equipment. Net purchases of short-term investments during the
nine months ended September 30, 2010 resulted in a $133.6 million use of cash flows, as compared to
a $1.8 million use of cash flows from net purchases of short-term investments during the same
period in the prior year. Purchases of property, plant and equipment for the nine months ended
September 30, 2010 amounted to $10.5 million as compared to $8.4 million for the prior year period.
We expect continued investment in facilities, equipment, and information technology projects
supporting our quality initiatives to ensure we have appropriate levels of technology
infrastructure to manage and grow our global business.
Net cash provided by financing activities for the nine months ended September 30, 2010 was
approximately $18.3 million, representing an increase of $27.4 million as compared to the prior
year period $9.1 million of net cash used in financing activities. The period-over-period increase
in net cash provided by financing activities was primarily due to an increase in cash proceeds
received from the exercise of stock options and contributions to the employee stock purchase plan
(ESPP) of $13.9 million for the nine months ended September 30, 2010, as compared to $3.8 million
received in the prior year period. In addition, on the contractual June 15, 2009 prepayment option
date, at the request of the holders, we repurchased the remaining $12.75 million principal amount
of the 3.5% Debentures at 100% of face value, plus accrued interest resulting in a net use of cash
in financing activities in the prior year period.
Page 71 of 83
Outstanding Debt Obligations
Senior
Lenders; Well Fargo Bank
We have a $35.0 million revolving credit facility under a credit agreement with Wells Fargo
Bank, N.A. (Credit Agreement), with a January 31, 2011 expiration date. The revolving credit
facility, intended for working capital and general corporate purposes, is collateralized by
eligible accounts receivable, inventory, and machinery and equipment, subject to limitations and
other terms. There were no amounts outstanding under the revolving credit facility as of September
30, 2010 and December 31, 2009, respectively.
The interest rate for the revolving credit facility is either the prime rate plus a margin
ranging from 0.25% to 0.75% or LIBOR plus a margin ranging from 2.25% to 3.0% based upon certain
terms and conditions. We are required to pay an unused line fee of 50 basis points per annum and a
servicing fee of $1,500 during any month in which no revolver loans are outstanding. During the
nine months ended September 30, 2010 and 2009, we paid unused line fees of $133,000 and $128,000,
respectively.
The Credit Agreement contains various financial covenants, the most significant of which
include a fixed charge coverage ratio and a capital expenditure limitation. The fixed charge
coverage ratio, applicable only for periods during which our net cash position is less than $50.0
million, requires EBITDA less cash paid for taxes, dividends, and certain capital expenditures to
be not less than 1.25 to 1.00 as compared to scheduled principal payments coming due in the next 12
months plus cash interest paid during the applicable period. We are limited to capital
expenditures of no more than $25.0 million for each calendar year. The Credit Agreement also
provides for certain information reporting covenants, including a requirement to provide certain
periodic financial information. At September 30, 2010, we were in compliance with the various
financial and information reporting covenants contained in the Credit Agreement.
Page 72 of 83
Recent Accounting Pronouncements
In September 2009, the FASB approved an update to the accounting standard related to
multiple-deliverable revenue arrangements currently within the scope of FASB ASC Topic 605. The
updated accounting standard provides principles and guidance to be used to determine whether a
revenue arrangement has multiple deliverables, and if so, how those deliverables should be
separated. If multiple deliverables exist, the updated standard requires revenue received under
the arrangement to be allocated using the estimated selling price of the deliverables if
vendor-specific objective evidence or third-party evidence of selling price is not available. The
updated accounting standard is effective for revenue arrangements entered into or materially
modified in fiscal years beginning on, or after June 15, 2010, with early application permitted.
We adopted the updated guidance of ASC 605-25 in the three months ended September 30, 2010. As
required, we applied the updated guidance of ASC 605-25 retrospectively from the beginning of
our fiscal year of adoption, as of January 1, 2010. Accordingly, the updated guidance of ASC
605-25 will apply to all multiple-element revenue agreements entered into or materially modified by
us from January 1, 2010 forward. The application of the updated guidance did not have any impact
on our revenue recognition during the three and six months ended June 30, 2010. The updated
guidance of ASC 605-25 was applied to the Teva
Agreement during the three months ended September 30, 2010. For a discussion of the impact of
FASB ASC Topic 605-25 on the Teva Agreement, see Part I: Financial Information Item 1.
Financial Statements 11. Alliance and Collaboration Agreements Strategic Alliance Agreement
with Teva.
In January 2010, the FASB issued Accounting Standards Update No. 2010-02, Consolidation (Topic
810): Accounting and Reporting for Decreases in Ownership of a Subsidiary a Scope Clarification.
This update provides amendments to Subtopic 810-10, and related guidance within US GAAP, to
clarify the scope of the decrease in ownership provisions. For those entities that have already
adopted Statement 160, the amendments are effective at the beginning of the first interim or annual
reporting period ending on or after December 15, 2009. The amendments should be applied
retrospectively to the first period that an entity adopted Statement 160. Upon becoming effective
this update did not have an impact on our consolidated financial statements.
In March 2010, the FASB approved the Milestone Method of Revenue Recognition, which
addresses accounting for arrangements in which a vendor satisfies its performance obligations over
time, with all or a portion of the consideration contingent on future events, referred to as
milestones. The Milestone Method of Revenue Recognition is limited to arrangements which involve
research or development activities. A milestone is defined as an event for which, at the date the
arrangement is entered into, there is substantive uncertainty whether the event will be achieved,
and the achievement of the event is based in whole or in part on either the vendors performance or
a specific outcome resulting from the vendors performance. In addition, the achievement of the
event would result in additional payments being due to the vendor. The Milestone Method of Revenue
Recognition allows a vendor to adopt an accounting policy to recognize arrangement consideration
that is contingent on the achievement of a substantive milestone in its entirety in the period the
milestone is achieved. The Milestone Method of Revenue Recognition is effective on a prospective
basis, with an option for retrospective application, for milestones achieved in fiscal years and
interim periods within those fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. If an entity elects early application in a period that is not the first reporting period
of its fiscal year, then the guidance must be applied retrospectively from the beginning of that
fiscal year. We will determine the impact of the new accounting standard as we achieve milestones,
and earn payments under either new or existing revenue arrangements.
Page 73 of 83
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the quantitative and qualitative disclosures about market
risk set forth in our Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Exchange Act) that are designed to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to the Companys management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
The Companys management, with the participation of the Companys Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon
that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act,
were effective as of September 30, 2010.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2010, there were no changes in the Companys internal
control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.
Page 74 of 83
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Patent Infringement Litigation
Purdue Pharma Products L.P., et al. v. Impax Laboratories, Inc. (Tramadol)
In August 2008, Purdue Pharma Products L.P., Napp Pharmaceutical Group LTD., Biovail
Laboratories International, SRL, and Ortho-McNeil-Janssen Pharmaceuticals, Inc. (collectively,
Purdue) filed suit against us in the U.S. District Court for the District of Delaware, alleging
patent infringement for the filing of our ANDA relating to Tramadol Hydrochloride Extended Release
Tablets, 100 mg, generic to 100mg Ultram® ER. In November 2008, Purdue asserted additional
infringement claims with respect to our amended ANDA, which added 200 mg and 300 mg strengths of
the product. We filed answers and counterclaims to those complaints. In August 2009, one of the
patents-in-suit, U.S. Patent No. 6,254,887, was found invalid in another ANDA case relating to
Ultram® ER, Purdue Pharma Products L.P. et al, v. Par Pharmaceutical, Inc. et al., Case No. 07-255
(D. Del.) (Par action) The Par action is now on appeal to the U. S. Court of Appeals for the
Federal Circuit. On November 16, 2009, we and Purdue agreed by stipulation to stay the case until
the earlier of the following two events: (a) the Federal Circuit issues a mandate in the Par
action or that action is otherwise disposed of, or (b) an undisclosed event. The Federal Circuit
affirmed the decision of invalidity in the Par action on June 3, 2010. On September 2, 2010, this
matter was dismissed with prejudice.
Warner Chilcott, Ltd. et.al. v. Impax Laboratories, Inc. (Doxycycline Hyclate)
In December 2008, Warner Chilcott Limited and Mayne Pharma International Pty. Ltd. (together,
Warner Chilcott) filed suit against us in the U.S. District Court for the District of New Jersey,
alleging patent infringement for the filing of our ANDA relating to Doxycycline Hyclate Delayed
Release Tablets, 75 mg and 100 mg, generic to Doryx®. We have filed an answer and counterclaim.
Thereafter, in March 2009, Warner Chilcott filed another lawsuit in the same jurisdiction, alleging
patent infringement for the filing of our ANDA for the 150 mg strength. Discovery is proceeding,
fact discovery closes on December 17, 2010, and no trial date has been set.
Eurand, Inc., et al. v. Impax Laboratories, Inc. (Cyclobenzaprine)
In January 2009, Eurand, Inc., Cephalon, Inc., and Anesta AG (collectively, Cephalon) filed
suit against us in the U.S. District Court for the District of Delaware, alleging patent
infringement for the filing of our ANDA relating to Cyclobenzaprine Hydrochloride Extended Release
Capsules, 15 mg and 30 mg, generic to Amrix®. We have filed an answer and counterclaim. This matter
was settled and dismissed on October 11, 2010.
The Research Foundation of State University of New York et al. v. Impax Laboratories, Inc.
(Doxycycline Monohydrate)
In September 2009, The Research Foundation of State University of New York; New York
University; Galderma Laboratories Inc.; and Galderma Laboratories, L.P. (collectively, Galderma)
filed suit against us in the U.S. District Court for the District of Delaware alleging patent
infringement for the filing of our ANDA relating to Doxycycline Monohydrate Delayed-Release
Capsules, 40 mg, generic to Oracea®. We filed an answer and counterclaim. In October 2009, the
parties agreed to be bound by the final judgment concerning infringement, validity and
enforceability of the patent at issue in cases brought by Galderma against another generic drug
manufacturer that has filed an ANDA relating to this product and proceedings in this case were
stayed. In June 2010, Galderma moved for a preliminary injunction to bar sales by the other
generic manufacturer based on two of the patents in suit, which motion was granted by the
magistrate judge in a decision finding Galderma had shown a likelihood of success on the merits.
In July, 2010 the generic manufacturer filed a motion for reargument of Galdermas motion for
preliminary injunction and temporary restraining order. The motion is pending.
Page 75 of 83
Elan Pharma International Ltd. and Fournier Laboratories Ireland Ltd. v. Impax Laboratories,
Inc. and Abbott Laboratories and Laboratories Fournier S.A. v. Impax Laboratories, Inc.
(Fenofibrate)
In October 2009, Elan Pharma International Ltd. with Fournier Laboratories Ireland Ltd. and
Abbott Laboratories with Laboratories Fournier S.A. filed separate suits against us in the U.S.
District Court for the District of New Jersey alleging patent infringement for the filing of our
ANDA relating to Fenofibrate Tablets, 48 mg and 145 mg, generic to Tricor®. We have filed an answer
and counterclaim. In September 2010, the Court vacated the schedule and ordered a stay in each
matter.
Abbott Laboratories, et al. v. Impax Laboratories, Inc. (Choline Fenofibrate)
In March 2010, Abbott Laboratories and Fournier Laboratories Ireland Ltd. (together, Abbott)
filed suit against us in the U.S District Court for the District of New Jersey alleging patent
infringement for the filing of our ANDA related to Choline Fenofibrate Delayed Release Capsules, 45
mg and 135 mg, generic of Trilipix®. We have filed an answer. Discovery is proceeding, fact
discovery closes February 4, 2011, and no trial date has been scheduled.
Genzyme Corp. v. Impax Laboratories, Inc. (Sevelamer Carbonate Powder)
In July 2010, Genzyme Corporation filed suit against us in the U.S. District Court for the
District of Maryland, alleging patent infringement for the filing of our ANDA relating to Sevelamer
Carbonate Powder, 2.4 g and 0.8 g packets, generic to Renvela® powder. We have filed an answer and
counterclaim. Fact discovery closes on December 3, 2010, the Markman hearing is set for January
21, 2011, and trial is scheduled for September 27, 2012.
Schering Corporation, et al. v. Impax Laboratories, Inc. (Ezetimibe/Simvastatin)
In August 2010, Schering Corporation and MSP Singapore Company LLC filed suit against us in
the U.S. District Court for the District of New Jersey alleging patent infringement for the filing
of our ANDA relating to Ezetimibe/Simvastatin Tablets, 10 mg/80 mg, generic to Vytorin ®. We have
filed an answer and counterclaim.
Page 76 of 83
Other Litigation Related to Our Business
Impax Laboratories, Inc. v. Shire LLC and Shire Laboratories, Inc. (generic Adderall XR)
On November 1, 2010, we filed suit against Shire LLC and Shire Laboratories, Inc.
(collectively Shire) in the Supreme Court of the State of New York, alleging breach of contract
and other related claims due to Shires failure to fill our orders for the generic Adderall XR
product as required by the parties Settlement Agreement and License and Distribution Agreement,
signed in January 2006. In addition, we have filed a motion for a preliminary injunction and a
temporary restraining order seeking to require Shire to fill product orders placed by us.
Page 77 of 83
ITEM 1A. RISK FACTORS
During the quarter ended September 30, 2010, there were no material changes to the risk
factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and
in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2010 and June 30,
2010. Please carefully consider the information set forth in this Quarterly Report on Form 10-Q
and the risk factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K
for the year ended December 31, 2009, and in Part II, Item 1A. Risk Factors in our Quarterly
Reports on Form 10-Q for the fiscal quarters ended March 31, 2010 and June 30, 2010, which could
materially affect our business, financial condition or future results. The risks described in our
Annual Report on Form 10-K, and in our Quarterly Reports on Form 10-Q, are not the only risks we
face. 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.
Page 78 of 83
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regarding the purchases of our equity securities by
us during the quarter ended September 30, 2010.
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|
|
|
|
|
|
|
|
Maximum Number (or |
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|
|
|
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|
|
Total Number of |
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Approximate Dollar |
|
|
|
|
|
|
|
|
Shares (or Units) |
|
Value) of Shares |
|
|
|
|
|
|
|
|
Purchased as Part |
|
(or Units) that May |
|
|
Total Number of |
|
|
|
|
|
of Publicly |
|
Yet Be Purchased |
|
|
Shares (or Units) |
|
Average Price Paid |
|
|
Announced Plans or |
|
Under the Plans or |
Period |
|
Purchased(1) |
|
Per Share (or Unit) |
|
|
Programs |
|
Programs |
July 1, 2010 to
July 31, 2010
|
|
311 shares of
common stock
|
|
|
$17.90 |
|
|
|
|
|
|
August 1, 2010 to
August 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
September 1, 2010
to September 30,
2010
|
|
4,955 shares of
common stock
|
|
|
$16.22 |
|
|
|
|
|
|
|
|
(1) |
|
Represents shares of our common stock we accepted during the indicated periods as a tax
withholding from certain of our employees in connection with the vesting of shares of
restricted stock pursuant to the terms of our 2002 Plan. |
Page 79 of 83
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
Not Applicable.
Page 80 of 83
ITEM 6. EXHIBITS
|
|
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Exhibit No. |
|
Description of Document |
10.1
|
|
Fifth Amendment to Amended and Restated Loan and Security
Agreement, dated as of June 30, 2010, by and among the Company
and Wells Fargo Bank, National Association, successor by
merger to Wachovia Bank, National Association. (1) |
10.2
|
|
Sixth Amendment to Amended and Restated Loan and Security
Agreement, dated as of September 30, 2010, by and among the
Company and Wells Fargo Bank, National Association, successor
by merger to Wachovia Bank, National Association. |
11.1
|
|
Statement re computation of per share earnings (incorporated
by reference to Note 14 to the Notes to the unaudited interim
Consolidated Financial Statements in this Quarterly Report on
Form 10-Q). |
31.1
|
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Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2
|
|
Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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. |
|
|
|
(1) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2010. |
Page 81 of 83
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.
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Date: November 4, 2010 |
Impax Laboratories, Inc.
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By: |
/s/ Larry Hsu, Ph.D.
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Name: |
Larry Hsu, Ph.D. |
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Title: |
President and Chief Executive Officer
(Principal Executive Officer) |
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By: |
/s/ Arthur A. Koch, Jr.
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Name: |
Arthur A. Koch Jr. |
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Title: |
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer) |
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Page 82 of 83
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Description of Document |
10.1
|
|
Fifth Amendment to Amended and Restated Loan and Security
Agreement, dated as of June 30, 2010, by and among the Company
and Wells Fargo Bank, National Association, successor by
merger to Wachovia Bank, National Association. (1) |
10.2
|
|
Sixth Amendment to Amended and Restated Loan and Security
Agreement, dated as of September 30, 2010, by and among the
Company and Wells Fargo Bank, National Association, successor
by merger to Wachovia Bank, National Association. |
11.1
|
|
Statement re computation of per share earnings (incorporated
by reference to Note 14 to the Notes to the unaudited interim
Consolidated Financial Statements in this Quarterly Report on
Form 10-Q). |
31.1
|
|
Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2
|
|
Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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. |
|
|
|
(1) |
|
Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2010. |
Page 83 of 83