UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A
(Amendment
No. 5)
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
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
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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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
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Registrants telephone number, including area code:
(510) 476-2000
Copies to:
Michael Joseph, Esquire
Blank Rome LLP
600 New Hampshire Avenue, NW
Washington, DC 20037
Telephone: (202) 772-5959
Facsimile: (202) 772-5960
Securities to be registered pursuant to Section 12(b) of the Act:
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Title of each class to be so registered
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Name of each exchange on which
each class is to be registered
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None
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None
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of class)
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):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller Reporting
Company
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TABLE OF CONTENTS
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1
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1
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1
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3
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17
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38
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61
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62
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66
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69
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112
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114
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118
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120
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121
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124
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126
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126
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126
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Exhibit 3.1
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Explanatory Note
Our common stock was registered under Section 12(g) of the Securities Exchange Act of 1934
(the Exchange Act) until May 23, 2008, when the Securities and Exchange Commission (the SEC),
in a proceeding commenced in December 2006, revoked such registration because of our failure to
file the quarterly and annual reports required by Section 13 of the Exchange Act subsequent to our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. See SEC Release No.
34-57864 (Admin. Proc. File No. 3-12519). Our failure to file those reports stemmed from our
inability to determine the appropriate revenue recognition policy with respect to transactions
under a multi-faceted alliance agreement. Our efforts to complete that process, including
consultation with our auditors, our outside subject-matter experts and the SECs Office of the
Chief Accountant (OCA), were ongoing from early 2005 until July 24, 2007, when the consultation
process came to a close with OCA indicating it would not object to our proposed method to account
for our alliance agreements with multiple deliverables. Thereafter, our efforts and those of our
independent registered public accountants to complete their examination of our financial statements
for each of the four years ended December 31, 2007 were ongoing until the completion of such
examination on October 10, 2008.
Forward-Looking Statements
Statements included in this registration statement that do not relate to present or historical
conditions are forward-looking statements. Additional oral or written forward-looking statements
may be made by Impax Laboratories, Inc. (we, us, our, the Company or Impax) from time to
time. Such forward-looking statements involve risks and uncertainties that 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 registration statement. Such risks and uncertainties include our ability to
timely file periodic reports required by the Exchange Act, our ability to maintain an effective
system of internal control over financial reporting, 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 construction 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 impact of
competitive products and pricing, 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 agreements, the availability of raw materials, the
regulatory environment, exposure to product liability claims, fluctuations in operating results
and other risks described in Item 1A. Risk Factors below. You
should not place undue reliance on forward-looking statements. Forward-looking 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 whether new information becomes available,
future developments occur or otherwise.
Recent Developments
In August 2008, Charles Hsiao, Ph.D., our Chairman and a Director since December 1999, died.
Dr. Hsiao co-led our research and development activities until January 1, 2004, when he became our
non-executive chairman and took charge of exploratory research activities at a newly established
laboratory in Pleasanton, California. Dr. Hsiao was a co-founder of our predecessor, Impax
Pharmaceuticals, Inc., in 1994, and served as our Co-Chief Executive Officer from 1999 to 2003. In
1986, he was one of three co-founders of IVAX Corporation, which, by 1994, when he left the
Vice-Chairman position at IVAX, had become the worlds largest generic pharmaceutical company.
1
On August 1, 2008, David S. Doll, who until then had been our Executive Vice President,
Commercial Operations, resigned. We entered into a separation agreement with Mr. Doll, under which
we paid him severance benefits consisting of cash and shares of our common stock. Subsequently, we
entered into a one-year consulting agreement, under which we issued to Mr. Doll additional shares
of common stock and agreed to pay an hourly rate for services provided. Both agreements with Mr.
Doll are more fully described under Item 6. Executive Compensation Narrative Disclosure to
Summary Compensation and Grants of Plan-Based Awards Tables Agreements with Our Named Executive
Officers Employment Agreement with David S. Doll.
In November 2008, we entered into an
agreement under which we expect to receive $ 25 million, payable on December 12, 2008, in settlement of our antitrust claim against Abbott Laboratories and Fournier Industrie et Sante.
In November
2008, we also entered into agreements with Medicis Pharmaceutical Corporation settling patent
infringement litigation involving our generic versions of SOLODYN
®
45mg, 90mg, and 135mg products.
Medicis granted us a license to market our generic versions of the product upon the occurrence of
certain conditions, but in any event not later than November 2011. We may be required to pay
Medicis a royalty based on our sales of the generic product. Separately, we also entered into a
joint development agreement with Medicis providing for the parties to collaborate in the development
of five dermatology products, including an advanced form SOLODYN
®
product. Under the joint development agreement, Medicis will pay us an upfront fee of $ 40 million
in December 2008, plus up to $ 23 million upon completion of specified clinical and regulatory
milestones. To the extent the products are commercialized, Medicis will pay us royalties based
on its sales of the advanced form SOLODYN product and we will share equally with Medicis in the
profits on the sales of the four additional products.
We have received approximately 265 consumer complaints regarding the performance of our
generic version of Wellbutrin XL
®
in the 300 mg strength, which has represented a
significant source of our revenue since Teva began distributing it in December 2006. We understand
that the complaints emanate principally from a scientific debate whether there is a therapeutic
difference between our product and the branded product. In April 2008, the FDA published a report
entitled
Review of Therapeutic Equivalence Generic Bupropion XL 300 mg and Wellbutrin XL 300 mg,
in which it concluded, ...The FDA considers the generic form of bupropion XL 300 mg ...
bioequivalent and therapeutically equivalent to (interchangeable with) Wellbutrin XL 300 mg...
The full report is available at http://www.fda.gov/cder/drug/infopage/bupropion/TE_ review.htm. In September 2008, an FDA spokeswoman stated that the agency would look into
conducting a further study to test the product in patients that have reported problems with it.
2
Item 1. Business
Our Business
We are a technology-based, specialty pharmaceutical company focused on the development and
commercialization of bioequivalent and brand-name pharmaceuticals, utilizing our controlled-release
and other in-house development and formulation expertise. Bioequivalent pharmaceuticals, commonly
referred to as generics, are the pharmaceutical and therapeutic equivalents of brand-name drug
products and are usually marketed under their established nonproprietary drug names rather than by
a brand name. Brand-name products are generally protected by patents or regulatory exclusivities,
which provide for a period of market exclusivity during which they are sold with little or no
competition. Brand-name products may continue to have a significant presence in the market even
after the expiration of the patent protection period as a result of consumer and physician loyalty.
Bioequivalent pharmaceuticals contain the same active ingredient and are of the same route of
administration, dosage form, strength and indication(s) as brand-name pharmaceuticals already
approved for use in the United States by the FDA.
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, or 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 drug substances. We intend to expand our
brand-name products portfolio primarily through internal development and also through licensing and
acquisition.
To obtain FDA approval for a new drug product, a prospective manufacturer must submit a new
drug application (NDA) containing the results of clinical studies supporting the products safety
and efficacy. The Drug Price Competition and Patent Term Restoration Act of 1984, commonly known
as the Hatch-Waxman amendments, established an abbreviated new drug application (ANDA) for
obtaining FDA approval of generic versions of certain drugs. An ANDA is similar to a NDA except
that the applicant is not required to conduct and submit to the FDA clinical studies to demonstrate
the safety and effectiveness of the drug. Instead, for drugs that contain the same active
ingredient and are of the same route of administration, dosage form, strength and indication(s) as
drugs already approved for use in the United States, the FDA ordinarily requires only
bioavailability data demonstrating the generic formulation is bioequivalent to the previously
approved reference listed drug, indicating that the rate of absorption and the levels of
concentration of the generic drug in the body do not show a significant difference from those of
the previously approved reference listed drug product. The FDA currently takes approximately 18-19
months on average to approve an ANDA following the date of its first submission. See
Regulation.
If we intend to market our product before patent expiration and believe our product will not
infringe the innovators patents or that such patents are invalid or unenforceable, we are required
to so certify in our filing of an ANDA and to send a notice thereof to the patent holder once our
filing is accepted. If the patent holder responds with a timely suit against us to enforce the
patent, the FDA is required to withhold its approval of our ANDA for up to 30 months. See
Regulation. Filings made under the Hatch-Waxman amendments often result in the initiation of
litigation by the patent holder. See Item 8. Legal Proceedings.
3
We operate in two segments, referred to as the Global Pharmaceuticals Division (Global
Division) and the Impax Pharmaceutical Division (Impax Division). The Global Division
develops, manufactures, sells, and distributes generic pharmaceutical products through three 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 RX Partner
sales channel, for generic prescription products sold through unrelated third-party pharmaceutical
entities pursuant to alliance agreements; and the OTC Partner sales channel, for sales of generic
pharmaceutical over-the-counter (OTC) products sold through unrelated third-party pharmaceutical
entities pursuant to alliance agreements. Our Impax Division is engaged in the development of
proprietary brand pharmaceutical products through improvements to already approved pharmaceutical
products to address CNS disorders. The Impax Division is also engaged in the co-promotion of
products developed by unrelated third-party pharmaceutical entities through a direct sales force
focused on marketing to physicians(referred to as physician detailing sales calls), primarily in
the CNS community. Our total revenues for the nine months ended September 30, 2008 and the fiscal
year ended December 31, 2007 were predominantly derived from our Global Division. See Item 15.
Financial Statements and Exhibits Note 18 to Consolidated Financial Statements, and Note
12 to Interim Consolidated Financial Statements for financial information about our segments for
the fiscal years ended December 31, 2007, 2006 and 2005, respectively, and nine months ended
September 30, 2008. We sell our products within the continental United States and the Commonwealth
of Puerto Rico. We do not operate and have no sales in foreign countries.
We market generic pharmaceutical prescription and over-the-counter products through our Global
Division and intend to market our branded pharmaceutical products through our Impax Division.
Additionally, when strategically appropriate, we enter into alliance agreements to fully leverage
our technology platform. As of November 26, 2008, we marketed 70 generic pharmaceuticals
representing dosage variations of 25 different pharmaceutical compounds through our Global
Pharmaceuticals division and another 15 products representing dosage variations of five different
pharmaceutical compounds through our alliance agreements partners.
The following summarizes our generic pharmaceutical product development activities to date:
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52 ANDAs approved by the FDA, which include generic versions of brand-name
pharmaceuticals such as Brethine®, Florinef®, Minocin®, Claritin-D® 12-hour, Claritin-D®
24-hour, Wellbutrin SR®, OxyContin® and Prilosec®.
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23 applications pending at the FDA, including four tentatively approved (
i.e.
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satisfying substantive FDA requirements but remaining subject to statutory pre-approval
restrictions), that address approximately $11.0 billion in recent 12-month U.S. product
sales.
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76 products pending FDA review or in various stages of development for which
applications have not yet been filed.
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In addition, we have one branded pharmaceutical product for which we have recently completed a
Phase III clinical study, a second for which we have filed an Investigational New Drug (IND)
application to allow us to begin clinical studies, and four others in early exploratory phase.
Unless otherwise indicated, all product sales data and U.S. market size data in this
registration statement are based on information obtained from Wolters Kluwer Health, an unrelated
third-party provider of prescription market data. We did not independently engage Wolters Kluwer
Health to provide this information.
We were incorporated in the State of Delaware in 1995. Our corporate headquarters are located
at 30831 Huntwood Avenue, Hayward, California 94544. We were formerly known as Global
Pharmaceutical Corporation until December 14, 1999, when Impax Pharmaceuticals, Inc., a privately
held drug delivery company, merged into Global Pharmaceutical Corporation, which changed its name
to Impax Laboratories, Inc. in connection with the merger. We treated the merger as the
recapitalization of Impax Pharmaceuticals, Inc., with Impax Pharmaceuticals, Inc. deemed the
acquirer of Global Pharmaceutical Corporation, and such transaction was deemed a reverse
acquisition for accounting purposes.
4
Controlled-Release Technology
Controlled-release drug-delivery technologies are designed to release drug dosages at specific
times and in specific locations in the body and generally provide more consistent and appropriate
drug levels in the bloodstream than immediate-release dosage forms. The controlled-release
pharmaceuticals may improve drug efficacy, ensure
greater patient compliance with the treatment regimen, reduce side effects or increase drug
stability and be more patient friendly by reducing the number of times a drug must be taken.
We have developed a number of different controlled-release delivery technologies that can be
utilized with a variety of oral dosage forms and drugs. We believe that these technologies are
flexible and can be applied to develop a variety of pharmaceutical products, both generic and
branded. Our technologies utilize a variety of polymers and other materials to encapsulate or
entrap the active pharmaceutical ingredients and to release them at varying rates or at
predetermined locations in the gastrointestinal tract.
5
Our Products
Generic Pharmaceuticals
The following table lists our 47 products, representing 52 ANDAs that have been approved by
the FDA:
6
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Product
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Generic of
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2004 or Earlier
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Pentoxifyline 400mg Tablets
(1)
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Trental
®
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Orphenadrine 100mg Tablets
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Norflex
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Omeprazole 10mg, 20mg Capsules
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Prilosec
®
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Minocycline 50mg, 75mg, 100mg Capsules
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Minocin
®
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Sotalol 80mg, 120mg
(1)
, 160mg
(1)
, 240mg
(1)
Tablets
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Betapace
®
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Terbutaline 2.5mg, 5mg Tablets
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Brethin
®
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Fludrocortisone 0.1mg Tablets
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Florinef
®
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Rimantadine 100mg Tablets
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Flumadine
®
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Riluzole 50mg Tablets
(1)
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Rilutek
®
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Pyridostigmine 60mg Tablets
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Mestinon
®
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Chloroquine 250 mg Tablets
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Aralen
®
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Chloroquine 500mg Tablets
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Aralen
®
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Flavoxate 100mg Tablets
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Urispas
®
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Loratadine Orally Disintegrating Tablets, 10mg
(1)
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Claritin Reditab
®
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Fenofibrate 67mg, 134mg, 200mg Capsules
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Tricor
®
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Loratadine and Pseudoephedrine Sulfate 5 /12mg ER Tablets
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Claritin-D 12-hr
®
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Methitest (Methyltestosterone) 10mg, 25mg
(1)
Tablets
(2 separate ANDAs)
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Android
®
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Bupropion Hydrochloride 100mg & 150mg ER Tablets
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Wellbutrin SR
®
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Bupropion Hydrochloride 150mg ER Tablets
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Zyban
®
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Loratadine and Pseudoephedrine Sulfate 10/240mg ER Tablets
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Claritin-D
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24-Hour
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Demeclocycline Hydrochloride 150mg and 300mg Tablets
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Declomycin
®
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Carbidopa/Levodopa 25/100 & 50/200mg ER Tablets
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SinemetCR
®
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Midodrine Hydrochloride 2.5mg, 5mg and 10mg Tablets
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Proamatine
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Metformin HCl 500mg ER Tablets
(1)
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Glucophage XR
®
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Oxycodone Hydrochloride 80mg ER Tablets
(1)
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OxyContin
®
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Bupropion Hydrochloride 200mg ER Tablets
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Wellbutrin SR
®
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2005
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Dantrolene Sodium 25, 50 and 100mg Capsules
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Dantrium
®
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Anagrelide Hydrochloride 0.5 and 1.0mg Capsules
(1)
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Agrylin
®
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Carprofen 25, 75 and 100mg Caplets (a veterinary product)
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Rimadyl
®
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Metformin HCI 750mg ER Tablets
(1)
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Glucophage XR
®
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Oxycodone Hydrochloride 10, 20 and 40mg Tablets
(1)
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OxyContin
®
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2006
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Pilocarpine Hydrochloride 5 and 7.5mg Tablets
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Salagen
®
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Colestipol Hydrochloride 5g Packet and 5g Scoopful
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Colestid
®
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Colestipol Hydrochloride 1g Tablets
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Colestid
®
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Bethanechol Chloride 5, 10, 25 and 50mg Tablets
(4 separate ANDAs)
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Urecholine
®
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Oxybutynin Chloride 15mg ER Tablets
(2)
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Ditropan XL
®
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Bupropion Hydrochloride 300mg ER Tablets
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Wellbutrin XL
®
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7
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2007
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Nadolol /Bendroflumethiazide 40/5 and 80/5mg Tablets
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Corzide
®
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Oxybutynin Chloride 5 and 10mg ER Tablets
(2)
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Ditropan XL
®
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Alprazolam 0.5, 1, 2 and 3mg ER Tablets
(1)
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Xanax XR
®
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Gemfibrozil 600mg Tab
(1)
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Lopid
®
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Dipyridamole 25, 50, 75mg Tab USP
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Persantine
®
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Baclofen 10 and 20mg Tab (2 separate ANDAs)
(1)
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Baclofen
®
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2008
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Primidone 50, 250mg Tab
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Mysoline
®
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Promethazine 12.5, 25, 50mg Tab (2 separate ANDAs)
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Phenergan
®
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Fenofibrate 54, 160mg Tab
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Lofibra
®
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Benzphetamine 50mg Tab
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Didrex
®
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(1)
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Not currently marketed.
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(2)
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Product filed under same ANDA.
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As of November 21, 2008, we had 23 products pending at the FDA, of which 13 products, representing
13 ANDAs, had been publicly identified. The following table lists our 13 publicly identified
products pending at the FDA:
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Product
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Generic of
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Omeprazole 40 mg
(1)
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Prilosec
®
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Bupropion XL 150
(1)
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WellbutrinXL
®
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Divalproex Sodium 250, 500 mg ER Tablets
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Depakote ER
®
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Fexofenadine Hydrochloride and Pseudoephedrine Hydrochloride 60/120mg ER Tablets
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Allegra-D
®
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Minocycline ERT 45, 90, 135
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Solodyn
®
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Methylphenidate 18, 27, 36, 54 mg ER
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Concerta
®
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Oxymorphone 5, 7.5, 10, 15, 20, 30, 40 mg ER Tablets
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Opana ER
®
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Amphetamine 5, 10, 15, 20, 25, 30 mg ER
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Adderall XR
®
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Tamsulosin 0.4 mg ER Capsules
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Flomax
®
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Tolterodine Tartrate 2, 4 mg ER Capsules
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Detrol LA
®
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Tramadol 100, 200, 300 mg ER Tablets
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Ultram ER
®
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Venlafaxine HCl 37.5, 75 and 150 mg ER Capsules
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Effexor XR
®
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Duloxetine HCI 20, 30, and 60 mg DR Capsules
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Cymbalta
®
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(1)
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Product is an additional strength of a product included under a previously
approved ANDA.
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Brand-Name Pharmaceuticals
In the brand-name pharmaceuticals market, we have thus far focused our efforts on the
development of products for the treatment of CNS disorders, which include Alzheimers disease,
attention deficit hyperactivity, depression, epilepsy, migraines, multiple sclerosis, Parkinsons
disease, and schizophrenia. We estimate there are approximately 11,000 neurologists, of which,
historically, a concentrated number are responsible for writing the majority of neurological CNS
prescriptions. CNS is the largest therapeutic category in the United States with 2007 sales of
$65.9 billion, or 21% of the $321.0 billion U.S. drug market. CNS drug sales grew 9.5% in 2007,
compared with a sales growth of 6.5% for the entire industry. Our strategy is to build this
portfolio primarily through internal development and through licensing and acquisition. We intend
to utilize our formulation and development expertise as well as our drug delivery technologies in
the formulation of drug substances no longer protected by patents as differentiated, modified, or
controlled-release pharmaceutical products that we will market as brand-name products.
While we have not yet commercialized a brand-name product and have withdrawn our only NDA
filed to date, we have recently completed a Phase III clinical study of one product intended to
treat spasticity in patients with multiple sclerosis. We have also recently filed our third IND
application, which will allow us to begin clinical studies of another CNS product, and are in the
early exploratory phase with respect to four other CNS products.
8
Competition
The pharmaceutical industry is highly competitive and is affected by new technologies, new
developments, government regulations, health care legislation, availability of financing, and other
factors. Many of our competitors have longer operating histories and substantially greater
financial, research and development, marketing, and other resources than we have. We compete with
numerous other companies that currently operate, or intend to operate, in the pharmaceutical
industry, including companies that are engaged in the development of controlled-release drug
delivery technologies and products, and other manufacturers that may decide to undertake
development of such products. Our principal competitors are Barr Pharmaceuticals Inc., Sandoz,
Inc., Mylan, Inc., Ranbaxy Laboratories Limited, Teva Pharmaceutical Industries, Ltd. (Teva) and
Watson Pharmaceuticals, Inc.
Due to our focus on relatively hard-to-replicate controlled-release products, however,
competition in the generic pharmaceutical market is sometimes limited to those competitors who
possess the appropriate drug delivery technology. The principal competitive factors in the generic
pharmaceutical market are:
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the ability to introduce generic versions of products promptly after a patent
expires;
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price;
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product quality;
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customer service (including maintenance of inventories for timely delivery);
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breadth of product line; and
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the ability to identify and market niche products.
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In the brand-name pharmaceutical market, we are not marketing our products. However, if we
obtain the FDA approval for, and start marketing, our own CNS brand-name pharmaceuticals, we expect
that competition will be limited to large pharmaceutical companies, other drug delivery companies,
and other specialty pharmaceutical companies that have focused on CNS disorders.
Sales and Marketing
We market and sell our generic pharmaceutical prescription drug products within the
continental United States of America and the Commonwealth of Puerto Rico. We derive a substantial
portion of our revenue from sales to a limited number of customers. The customer base for our
products consists primarily of drug wholesalers, warehousing chain drug stores, mass merchandisers,
and mail-order pharmacies. We market our products both directly, through our Global Division, and
indirectly through our Rx Partner and OTC Partner alliance
agreements, as described below. Our five major customers, DAVA, McKesson, Teva, Cardinal Health and Amerisource-Bergen, accounted
for 70% and 80% of revenue for the nine months ended September 30, 2008 and the year ended December
31, 2007, respectively. These five customers individually accounted for 18%, 17%, 14%, 11% and
10%, respectively, of our revenue for the nine months ended September 30, 2008 and 37%, 14%, 13%,
11% and 6%, respectively, of our revenue for the year ended December 31, 2007. We have long-term contracts
only with Teva and DAVA. A reduction in or loss of business with any one of these customers, or
any failure of a customer to pay us on a timely basis, would adversely affect our business.
9
Rx Partner and OTC Partner Alliance Agreements
We currently have alliance agreements with Teva, DAVA, Wyeth, and Schering-Plough Corporation,
or their affiliates. On a combined basis, the alliance agreements with Teva and DAVA are
referred to as Rx Partners, and the alliance agreements with Wyeth and Schering-Plough are
referred to as OTC Partners. Under each of these Rx Partners and OTC Partners alliance
agreements, our partner distributes a specified product or products developed and manufactured by
us, and we either receive payment on delivery of the product, share in the resulting profits, or
receive royalty or other payments from our partners. The revenue recognized and the percentage of
revenue for each of the periods noted, for the Rx Partner and OTC Partners alliance
agreements, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Revenue and % Revenue
|
|
($ in thousands)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Teva Agreement
|
|
$
|
42,480
|
|
|
|
13
|
%
|
|
$
|
33,910
|
|
|
|
19
|
%
|
|
$
|
12,547
|
|
|
|
7
|
%
|
Dava Agreement
|
|
|
118,634
|
|
|
|
37
|
%
|
|
|
2,899
|
|
|
|
2
|
%
|
|
|
83
|
|
|
|
|
%
|
Sub-Total: Rx Partners
|
|
$
|
161,114
|
|
|
|
50
|
%
|
|
$
|
36,809
|
|
|
|
21
|
%
|
|
$
|
12,630
|
|
|
|
7
|
%
|
OTC Partners
|
|
$
|
11,866
|
|
|
|
4
|
%
|
|
$
|
13,782
|
|
|
|
8
|
%
|
|
$
|
10,451
|
|
|
|
6
|
%
|
Rx Partners Alliance Agreements
Teva Agreement
We entered into the Strategic Alliance Agreement with Teva in June 2001 (Teva Agreement).
The Teva Agreement is our most significant alliance agreement, and it covers generic versions of
the following 11 controlled-release generic pharmaceutical branded and over-the-counter products
and a 12th product we have not yet publicly identified, as follows:
|
|
|
Prilosec
®
10mg, 20mg and 40mg delayed released capsules
|
|
|
|
|
Wellbutrin SR
®
100mg and 150mg extended release tablets
|
|
|
|
|
Zyban
®
150mg extended release tablets
|
|
|
|
|
Claritin-D
®
12-hour 120 mg 12-hour extended release tablets
|
|
|
|
|
Claritin-D
®
24-hour 240mg 24-hour extended release tablets
|
|
|
|
|
Claritin Reditabs
®
10mg orally disintegrating tablets
|
|
|
|
|
Ditropan XL
®
5mg, 10mg and 15mg extended release tablets
|
|
|
|
|
Glucophage XR
®
500mg extended release tablets
|
|
|
|
|
Allegra D
®
60mg/120mg extended release tablets
|
|
|
|
|
Concerta
®
18mg, 27mg, 36mg and 54mg extended release tablets
|
|
|
|
|
Wellbutrin XL
®
150mg and 300mg extended release tablets
|
The 12 covered products under the Teva Agreement represent 22 different product /strength
combinations, of which 13 have been approved by the FDA and are currently being marketed, 7 are
awaiting FDA approval and 2 are under development. With the exception of Glucophage
XR
®
, which Teva elected to develop and manufacture itself, and Wellbutrin XL
®
150mg, for which product rights have been returned to us, and the Claritin
®
products
noted above, we manufacture and supply each of these products to Teva. Teva pays us a fixed
percentage of defined profits on its sales of products, except for the Claritin
®
products noted above, and reimburses us for our manufacturing costs, for a term of 10 years from
the initial commercialization of each product. Additionally, under the Teva Agreement, we share
with Teva the profits (up to a maximum of 50%) from the sale of the generic pharmaceutical
over-the-counter versions of the Claritin
®
products noted above, sold through our OTC
Partners alliance agreements.
10
The Teva Agreement also included a number of additional obligations, terms, and conditions.
Under the Teva Agreement, Teva provided us with an interest-bearing advance deposit payable of $22
million for the purchase of exclusive marketing rights to the 12 products, contingent upon our
achievement of specified product-development milestones. To the extent the milestones were not
met, we were required to repay the advance deposit, except to the extent Teva elected to purchase
market exclusivity for particular products in exchange for forgiveness of specified amounts of the
deposit. Ultimately, none of the milestones were met by us, and Teva elected to purchase market
exclusivity for two of the products, forgiving $6 million of the advance deposit payable. We also
had the option to repay the remaining $16 million of the advance deposit payable in shares of our
common stock and did so in 2003 and 2004 with approximately 1.05 million shares of our common
stock. Also pursuant to the Teva Agreement, Teva in 2001 and 2002 purchased approximately 1.46
million of our common shares for $15 million. The Teva Agreement gave us the right to repurchase
one-sixth of the shares for nominal consideration upon the first commercial sale of specified
products, which we achieved and exercised in 2006. These and other provisions of the Teva
Agreement are discussed in detail in Item 15. Financial Statements and Exhibits Note 13 to
Consolidated Financial Statements.
Our remaining obligations under the Teva Agreement are to complete development of the covered
products still under development, continue our efforts to obtain FDA approval of those not yet
approved, and manufacture and supply the approved products to Teva. Our obligation to manufacture
and supply each product extends for 10 years following the commercialization of the product.
DAVA Agreement
In November 2005, we entered into an alliance agreement with DAVA related to the exclusive
supply and distribution of 10mg, 20mg, 40mg and 80mg strengths of our generic pharmaceutical of the
branded OxyContin
®
product (DAVA Agreement). The DAVA Agreement originally provided
for DAVAs payment of an appointment fee in installments over five years, specified acquisition
prices for the various strengths of the product, and a specified share of the net profits resulting
from DAVAs sales of the product. We amended the DAVA Agreement in February 2007 to eliminate
future installments of the appointment fee in exchange for an increased share of the net profits.
As a result of the May 2007 settlement of litigation brought by the OxyContin
®
patent
holder, distribution of our product for the foreseeable future terminated in early 2008, and can
resume only upon expiration of the last OxyContin
®
patent in 2013 or certain other
events. As a result, the DAVA agreement, while not terminated, imposes no obligations on either
party for the foreseeable future. Our revenue under the DAVA Agreement, net of deferred product
manufacturing costs recognized, was $38,674,000 for the six and nine months ended June 30 and
September 30, 2008, and $92,949,000, $1,754,000 and $26,000 for the years ended December 31, 2007,
2006 and 2005, respectively.
11
OTC Partners Alliance Agreements
We have an exclusive development, license and supply agreement with Wyeth relating to our
generic Claritin-D
®
12-hour extended release product. Under the agreement, which was
entered into in 2002 and included an upfront payment and product-development milestone payments, we
receive quarterly royalty payments consisting of a percentage (less than 10%) of Wyeths sales.
Wyeth launched the 12-hour product in May 2003 as its OTC Alavert D-12 Hour
®
. The Wyeth
agreement terminates in April 2018.
We also entered into a non-exclusive licensing, contract manufacturing and supply agreement
with Schering-Plough relating to our generic Claritin-D
®
12-hour extended release
product in 2002. Under this agreement, which included an upfront payment and milestone payments by
Schering-Plough, Schering-Plough purchases the product from us at a fixed price. Schering-Plough
launched our product as its Claritin-D
®
12-hour in March 2003. After our product supply
obligations to Schering-Plough end, which is expected in the first quarter of 2009, Schering-Plough
is expected to manufacture the product. The Schering-Plough agreement terminates two years after
our product supply obligations conclude. During this two year period, Schering-Plough will pay us
a royalty fee consisting of an amount (less than $50) per thousand tablets of their product sold.
The upfront payments and potential milestone payments provided for by these agreements,
together with the upfront and milestone payments received under each, are as follows:
(unaudited)
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront and
|
|
|
|
|
|
|
|
|
|
|
Aggregate Potential
|
|
Milestone Payments
|
OTC Partner
|
|
Initial Date
|
|
Upfront Payment
|
|
Milestone Payments
|
|
Received
|
Schering-Plough
|
|
June 2002
|
|
$
|
2,250
|
|
|
$
|
2,250
|
|
|
$
|
4,500
|
|
Wyeth Consumer
Healthcare
|
|
June 2002
|
|
$
|
350
|
|
|
$
|
4,050
|
|
|
$
|
2,000
|
|
Promotional Services Agreements
Shire Co-Promotion Agreement
In 2006, we entered into a promotional services agreement with Shire Laboratories, Inc. (the
Shire Agreement) under which we provide promotional services, consisting of physician detail
sales calls, to promote a Shire branded CNS product. In exchange for our services, we receive fees
based on the number of sales force members providing the services and are eligible to receive
contingent payments based on the number of prescriptions filled for the product. We began
providing services under the agreement in July 2006 and will continue to do so through mid-2009.
The revenue recognized and the percentage of total revenue for the periods noted, under the Shire
Agreement, were $9,666,000 or 6.0% for the nine months ended September 30, 2008 and $12,759,000 or
5.0%, $6,434,000 or 5.0%, and $0 or 0.0%, for the years ended December 31, 2007, 2006, and 2005,
respectively.
Wyeth Co-Promotion Agreement
In 2008, we entered into a co-promotion agreement with Wyeth under which we will provide
promotional services for a Wyeth branded CNS product beginning in mid-2009. We will receive a fee
for each face-to-face product presentation and will also be eligible to receive incentive fees
based on the number of annual prescriptions filled for the CNS product. The agreement terminates
three years from the initiation of our services.
12
Manufacturing
We manufacture our finished dosage form products at our Hayward, California facility and use
our larger and lower-operating-cost Philadelphia, Pennsylvania facility to package, warehouse and
distribute the products. We began full-scale manufacturing in the Hayward facility in June 2002
and believe we have sufficient capacity to produce new products in the immediate future. During
the quarter ended September 30, 2008, we were using about 68% of the facilitys estimated annual
production capacity of up to approximately 1.5 billion tablets and capsules.
In the second half of 2007, we began construction of a new manufacturing facility in Taiwan at
an estimated cost of $25.0 million. We expect construction of the facility, which will have an
annual production capacity of approximately 450 million tablets and capsules, to be completed in
2009, equipment to be installed, validated and approved by the FDA during 2009, and product
shipment to begin in early 2010.
Based on existing demand and expected increased demand due to anticipated new product
approvals, we expect the Hayward facility to be fully utilized by the fourth quarter of 2012 if the
additional capacity of the Taiwan facility is not available by that time, as currently expected.
We maintain an inventory of our products in connection with our obligations under alliance
agreements. In addition, for products pending approval, we may produce batches of inventory to be
used in anticipation of the launch of the products. In the event that FDA approval is denied or
delayed, we could be exposed to the risk of this inventory becoming obsolete.
Raw Materials
The active chemical raw materials, essential to our business, are generally readily available
from multiple sources in the U.S. and throughout the world. Certain raw materials used in the
manufacture of our products are, however, available from limited sources and, in some cases, a
single source. Although we have not experienced any material delays in receipt of raw materials to
date, any curtailment in the availability of such raw materials could result in production or other
delays and, in the case of products for which only one raw material supplier exists or has been
approved by the FDA, could result in material loss of sales with consequent adverse effects on our
business and results of operations. Also, because raw material sources for pharmaceutical products
must generally be identified and approved by regulatory authorities, changes in raw material
suppliers may result in production delays, higher raw material costs, and loss of sales and
customers. We obtain a portion of our raw materials from foreign suppliers, and our arrangements
with such suppliers are subject to, among other risks, FDA approval, governmental clearances,
export duties, political instability, and restrictions on the transfers of funds.
Those of our raw materials that are available from a limited number of suppliers are
Bendroflumethiazide, Chloroquine, Colestipol, Digoxin, Flavoxate, Methyltestosterone, Nadolol,
Orphenadrine, Terbutaline and Klucel, all of which are active pharmaceutical ingredients except
Klucel, which is an excipient used in several product formulations. The manufacturers of two of
these products, Formosa Laboratories, Ltd. and a division of Ashland, Inc., are sole-source
suppliers. While none of the active ingredients is individually significant to our business, the
excipient, while not covered by a supply agreement, is utilized in a number of significant products, it is manufactured for a number of
industrial applications and supplies have been readily available. Only one of the active ingredients is covered by a long-term supply agreement and, while we have experienced occasional interruptions in
supplies, none has had a material effect on our operations.
Any inability to obtain raw materials on a timely basis, or any significant price increases
not passed on to customers, could have a material adverse effect on us. We may experience delays
from the lack of raw material availability in the future, which could have a material adverse
effect on us.
13
Quality Control
In connection with the manufacture of drugs, the FDA requires testing procedures to monitor
the quality of the product, as well as the consistency of its formulation. We maintain a quality
control laboratory that performs, among other things, analytical tests and measurements required to
control and release raw materials, in-process materials, and finished products, and to routinely
test marketed products to ensure they remain within specifications.
Quality monitoring and testing programs and procedures have been established by us in our
effort to assure that all critical activities associated with the production, control, and
distribution of our drug products will be carefully controlled and evaluated throughout the
process. By following a series of systematically organized steps and procedures, we seek to assure
that established quality standards will be achieved and built into the product.
Our policy is to continually seek to meet the highest quality standards, with the goal of
thereby assuring the quality, purity, safety and efficacy of each of our drug products. We believe
that adherence to high operational quality standards will also promote more efficient utilization
of personnel, materials and production capacity.
Research and Development
We conduct most of our research and development activities at our facilities in Hayward,
California, with a staff of approximately 162. In addition, we have outsourced a number of
research and development projects to offshore laboratories.
We spent approximately $43.7 million, $40.0 million, $29.6 million and $26.1 million on
research and development activities during the nine months ended September 30, 2008 and the fiscal
years ended December 31, 2007, 2006 and 2005, respectively.
Regulation
The manufacturing and distribution of pharmaceutical products are subject to extensive
regulation by the federal government, primarily through the FDA and the Drug Enforcement
Administration (DEA), and to a lesser extent by state and local governments. The Food, Drug, and
Cosmetic Act (FFDCA), Controlled Substances Act and other federal statutes and regulations govern
or influence the manufacture, labeling, testing, storage, record-keeping, approval, advertising and
promotion of our products. Facilities used in the manufacture, packaging, labeling and repackaging
of pharmaceutical products must be registered with the FDA and are subject to FDA inspection to
ensure that drug products are manufactured in accordance with current Good Manufacturing Practices.
Noncompliance with applicable requirements can result in product recalls, seizure of products,
injunctions, suspension of production, refusal of the government to enter into supply contracts or
to approve drug applications, civil penalties and criminal fines, and disgorgement of profits.
FDA approval is required before any new drug may be marketed, including new formulations,
strengths, dosage forms and generic versions of previously approved drugs. Generally, the
following two types of applications are used to obtain FDA approval of a new drug:
New Drug Application (NDA)
. For a drug product containing an active ingredient not previously
approved by the FDA, a prospective manufacturer must submit a complete application containing the
results of clinical studies supporting the drug products safety and efficacy. An Investigational
New Drug (IND) application must be submitted before the clinical studies may begin, and the
required clinical studies can take two to five years or more to complete. An NDA is also required
for a drug with a previously approved active ingredient if the drug will be used to treat an
indication for which the drug was not previously approved or if the dosage form, strength or method
of delivery is changed.
14
Abbreviated New Drug Application (ANDA)
. For a generic version of an approved druga drug
product that contains the same active ingredient as a drug previously approved by the FDA and is in
the same dosage form and strength, utilizes the same method of delivery and will be used to treat
the same indications as the approved productthe FDA ordinarily requires only an abbreviated
application that need not include clinical studies demonstrating safety and efficacy. An ANDA
requires only bioavailability data demonstrating that the generic formulation is bioequivalent to
the previously approved reference listed drug, indicating that the rate of absorption and levels
of concentration of the generic drug in the body do not show a significant difference from those of
the reference listed drug. The FDA currently takes an average of approximately 18-19 months, to
approve an ANDA.
Under the Hatch-Waxman Act, which established the procedures for obtaining approval of generic
drugs, an ANDA filer must make certain patent certifications that can result in significant delays
in obtaining FDA approval. If the applicant intends to challenge the validity or enforceability of
an existing patent covering the reference listed drug or asserts that its drug does not infringe
such patent, the applicant files a so-called Paragraph IV certification and notifies the patent
holder that it has done so, explaining the basis for its belief that the patent is not infringed or
is invalid or unenforceable. If the patent holder initiates a patent infringement suit within 45
days after receipt of the Paragraph IV Certification, the FDA is automatically prevented from
approving an ANDA until the earlier of 30 months after the date the Paragraph IV Certification is
given to the patent holder, expiration of the patents involved in the certification, or when the
infringement case is decided in our favor. In addition, the first company to file an ANDA for a
given drug containing a Paragraph IV certification can be awarded 180 days of market exclusivity
following approval of its ANDA, during which the FDA may not approve any other ANDAs for that drug
product.
During any period in which the FDA is required to withhold its approval of an ANDA due to a
statutorily imposed non-approval period, the FDA may grant tentative approval to an applicants
ANDA. A tentative approval reflects the FDAs preliminary determination that a generic product
satisfies the substantive requirements for approval, subject to the expiration of all statutorily
imposed non-approval periods. A tentative approval does not allow the applicant to market the
generic drug product.
The Hatch-Waxman Act contains additional provisions that can delay the launch of generic
products. A five-year marketing exclusivity period is provided for new chemical compounds, and a
three-year marketing exclusivity period is provided for approved applications containing new
clinical investigations essential to an approval, such as a new indication for use, or new delivery
technologies, or new dosage forms. The three-year marketing exclusivity period applies to, among
other things, the development of a novel drug delivery system, as well as a new use. In addition,
companies can obtain six additional months of exclusivity if they perform pediatric studies of a
reference listed drug product. The marketing exclusivity provisions apply to both patented and
non-patented drug products. The Act also provides for patent term extensions to compensate for
patent protection lost due to time taken in conducting FDA required clinical studies and during FDA
review of NDAs. In addition, by virtue of the Uruguay Round Agreements Act of 1994 that ratified
the General Agreement on Tariffs and Trade, known as GATT, certain brand-name drug patent terms
have been extended to 20 years from the date of filing of the pertinent patent application (which
can be longer than the former patent term of 17 years from date of issuance).
The Generic Drug Enforcement Act of 1992 establishes penalties for wrongdoing in connection
with the development or submission of an ANDA. In general, FDA is authorized to temporarily bar
companies, or temporarily or permanently bar individuals, from submitting or assisting in the
submission of an ANDA, and to temporarily deny approval and suspend applications to market generic
drugs under certain circumstances. In addition to debarment, FDA has numerous discretionary
disciplinary powers, including the authority to withdraw approval of an ANDA or to approve an ANDA
under certain circumstances and to suspend the distribution of all drugs approved or developed in
connection with certain wrongful conduct.
We are subject to the Maximum Allowable Cost Regulations, which limit reimbursements for
certain generic prescription drugs under Medicare, Medicaid, and other programs to the lowest price
at which these drugs are generally available. In many instances, only generic prescription drugs
fall within the regulations limits. Generally, the pricing and promotion of, method of
reimbursement and fixing of reimbursement levels for, and the reporting to federal and state
agencies relating to drug products is under active review by federal, state and local governmental
entities, as well as by private third-party reimbursers and individuals under whistleblower
statutes. At present, the Justice Department and U.S. Attorneys Offices and State Attorneys
General have initiated investigations, reviews, and litigation into industry-wide pharmaceutical
pricing and promotional practices, and whistleblowers have filed qui
15
tam suits. We cannot predict
the results of those reviews, investigations, and litigation, or their impact on our business.
Virtually every state, as well as the District of Columbia, has enacted legislation permitting
the substitution of equivalent generic prescription drugs for brand-name drugs where authorized or
not prohibited by the prescribing physician, and some states mandate generic substitution in
Medicaid programs.
In addition, numerous state and federal requirements exist for a variety of controlled
substances, such as narcotics, that may be part of our product formulations. The DEA, which has
authority similar to the FDAs and may also pursue monetary penalties, and other federal and state
regulatory agencies have far-reaching authority.
The State of California requires that any manufacturer, wholesaler, retailer or other entity
in California that sells, transfers or otherwise furnishes certain so-called precursor substances
must have a permit issued by the California Department of Justice, Bureau of Narcotic Enforcement.
The substances covered by this requirement include ephedrine, pseudoephedrine, norpseudoephedrine,
and phenylpropanolamine, among others. The Bureau has authority to issue, suspend and revoke
precursor permits, and a permit may be denied, revoked or suspended for various reasons, including
(i) failure to maintain effective controls against diversion of precursors to unauthorized persons
or entities; (ii) failure to comply with the Health and Safety Code provisions relating to
precursor substances, or any regulations adopted thereunder; (iii) commission of any act which
would demonstrate actual or potential unfitness to hold a permit in light of the public safety and
welfare, which act is substantially related to the qualifications, functions or duties of the
permit holder; or (iv) if any individual owner, manager, agent, representative or employee of the
permit applicant/permit holder willfully violates any federal, state or local criminal statute,
rule, or ordinance relating to the manufacture, maintenance, disposal, sale, transfer or furnishing
of any precursor substances.
Environmental Laws
We are subject to comprehensive federal, state and local environmental laws and regulations
that govern, among other things, air polluting emissions, waste water discharges, solid and
hazardous waste disposal, and the remediation of contamination associated with current or past
generation handling and disposal activities, including the past practices of corporations as to
which we are the successor. We are subject periodically to environmental compliance reviews by
various environmental regulatory agencies.
Employees
As of October 31, 2008, we had 765 full-time employees, of which 360 were in operations, 162
in research and development, 144 in the quality area, 69 in legal and administration, and 30 in
sales and marketing. None of our employees are subject to collective bargaining agreements with
labor unions, and we believe our employee relations are good.
16
Item 1A. Risk Factors.
An investment in our common stock involves a high degree of risk. In deciding whether to
invest in our common stock, you should consider carefully the following risk factors, as well as
the other information included in this registration statement. The materialization of any of these
risks could have a material adverse effect on our business, financial position and results of
operations. This registration statement contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to these differences include
those discussed in this Risk Factors section. See Forward-Looking Statements on page 1 of this
registration statement.
Risks Related to Our Business
The SEC previously revoked the registration of our common stock due to our failure to file periodic
reports required by the Exchange Act. If we fail to timely file these reports in the future,
public information about us would become more limited and the SEC could again seek to deregister
our common stock, which could negatively impact our business and
liquidity, significantly reduce the liquidity of
our common stock and prevent investors from buying or selling our common stock in the public
market.
On May 23, 2008, the SEC revoked the registration of our common stock pursuant to Section
12(j) of the Exchange Act based upon our failure to file quarterly and annual reports required by
the Exchange Act subsequent to our Quarterly Report on Form 10-Q for the quarter ended September
30, 2004. Our failure to file these periodic reports was the result of our inability to determine
the appropriate accounting treatment for transactions under the Teva Agreement. As a result of
this deregistration, public trading in our common stock ceased as of May 23, 2008.
Once this registration statement becomes effective, we will again be required to file periodic
reports with the SEC. Although we have resolved the accounting issues presented by the Teva
Agreement, there can be no assurance that we will not be delinquent in the filing of these periodic
reports in the future. If we are unable to timely file our periodic reports, the SEC could again
commence proceedings to suspend or revoke the registration of our common stock. The SEC could also
seek to impose a trading halt in our common stock for up to 10 trading days if it believes the
public interest and the protection of investors requires it. Our failure to file periodic reports
would also substantially limit the amount of financial and other information about us that would be
available to our stockholders and investors, which could make it more difficult for investors to
trade our stock or ascertain the price for our stock.
If our common stock is ultimately deregistered again, brokers, dealers and other market
participants would be prohibited from buying or selling, making a market in, or publishing
quotations or otherwise effecting transactions with respect to our common stock. As a result,
public trading of our common stock would again cease. This could have an adverse effect on our
business and
liquidity, significantly reduce the liquidity of our common stock and limit the ability of our
stockholders to buy or sell our common stock.
If we fail to maintain an effective system of internal control over financial reporting, we may not
be able to accurately report our financial results, timely file our periodic reports, maintain our
reporting status or prevent fraud.
The existence of material weaknesses in our internal control over financial reporting may
affect our ability to obtain audited financial information and comply with applicable SEC reporting
requirements. We identified five material weaknesses in our internal control over financial
reporting during 2004 relating to: (i) the Teva Agreement; (ii) our financial close and reporting
process relating to our inability to file the required periodic financial reports with the SEC
within the prescribed time periods from 2005 through the third quarter of 2008; (iii) our billing
controls for non-electronic data interchange orders; (iv) our inventory valuation procedures; and
(v) our reserve for shelf-stock adjustments. In addition, we restated our financial statements for
the fiscal year ended December 31, 2003 to give effect to the restatement of accounting for the
Teva Agreement, certain alliance agreements, common stock purchase warrants issued in May 2003,
stock-based compensation, accrued legal fee operating expense, and accrued interest expense for the
fiscal year ended December 31, 2003.
17
While we believe the internal control material weaknesses discussed above have been
remediated, there can be no assurance our independent registered public accounting firm will agree
with our assessment that all material weaknesses have been remediated and may identify additional
internal control material weaknesses in the future. The existence of internal control material
weaknesses may result in current and potential stockholders and alliance agreements partners
losing confidence in our financial reporting, which could harm our business, the market price of
our common stock, and our ability to retain our current alliance agreements partners, and to
obtain new alliance agreement partners.
The existence of material weaknesses in our internal control over financial reporting may also
affect our ability to timely file periodic reports under the Exchange Act. In May 2008, the SEC
revoked the registration of our common stock pursuant to Section 12(j) of the Exchange Act based
upon our failure to file the quarterly and annual reports required by the Exchange Act subsequent
to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. Our failure to file
these reports was the result of our inability to determine the appropriate accounting treatment for
transactions under the Teva Agreement.
Although we remedied the accounting issues presented by the Teva Agreement and do not believe
a similar accounting problem is likely to recur, an internal control material weakness may develop
in the future and affect our ability to timely file our periodic reports. The inability to timely
file periodic reports under the Exchange Act could result in the SEC again revoking the
registration of our common stock, which would prohibit us from listing or having our stock quoted
on any public market, including the OTC Bulletin Board® and Pink Sheets®. This would have an
adverse effect on our business and stock price by limiting the publicly available information
regarding us and greatly reducing the ability of our stockholders to sell or trade our common
stock.
We have experienced operating losses and negative cash flow from operations and our future
profitability is uncertain.
We recorded net income of $9.6 million and $125.9 million for the nine months ended September
30, 2008 and year ended December 31, 2007, respectively. Although 2007 was our first profitable
year and we continued to record net income for the first nine months of 2008, we recorded net
losses of $12.0 million and $5.8 million for the years ended December 31, 2006 and 2005,
respectively. We do not know whether our business will continue to be profitable or generate
positive cash flow, and our ability to remain profitable or obtain positive cash flow is uncertain.
As of September 30, 2008, our accumulated deficit was $50.6 million, and we had outstanding
indebtedness in an aggregate principal amount of $21.0 million. Through the date hereof, we have
repurchased $62.25 million principal amount of our 3.5% convertible senior subordinated debentures
(3.5% Debentures), constituting a part of such indebtedness. To remain operational, we must,
among other things:
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obtain FDA approval of our products;
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successfully launch new products;
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prevail in patent infringement litigation in which we are involved;
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continue to generate or obtain sufficient capital on acceptable terms to fund our
operations; and
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comply with the many complex governmental regulations that deal with virtually every
aspect of our business activities.
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Our limited capital may make it difficult for us to repay indebtedness, or require us to modify our
business operations and plans by spending less money on research and development programs,
developing fewer products, and filing fewer drug applications with the FDA.
Prior to 2005, our cash used in operations exceeded cash generated from operations in each
period since our inception. At September 30, 2008, we had outstanding indebtedness of
approximately $21.0 million, which bears interest at rates ranging from 3.1% to 6.0% annually. In
August and September 2008, we repurchased in the aggregate face value $62.25 million principal
amount of our 3.5% Debentures constituting a part of such indebtedness. For the quarter ended
September 30, 2008 and the year ended December 31, 2007, we paid interest on our indebtedness of
approximately $2.6 million and $4.6 million, respectively. Additionally, as of
18
September 30, 2008, we had an accumulated stockholders deficit of approximately $50.6 million. We may not
be able to maintain adequate capital at any given time or from time to time in the future, which
could result in less money being spent on research and development programs, fewer products being
developed or at a slower pace, and fewer drug applications being filed with the FDA.
If Wachovia or its successor is unable to perform its obligations under our credit agreement or if
we are unable to obtain a new credit facility upon the expiration of our credit agreement with
Wachovia, there can be no assurance that we will be able to obtain a new credit agreement with
another bank or group of lenders on favorable terms or at all.
In December 2005, we entered into a new three year credit agreement with Wachovia, which was
amended in October 2008, replacing the previous loan and security agreement and providing for a $35
million revolving credit facility intended for working capital and general corporate purposes.
There was no amount outstanding under the revolving credit facility as of September 30, 2008 and
December 31, 2007, 2006 and 2005, respectively. Our credit agreement with Wachovia, as amended,
terminates on December 31, 2008. If we are unable to negotiate an extension to the credit
agreement on similar terms, there can be no assurance that we would be able to obtain a new credit
agreement with another bank or group of lenders on favorable terms or at all. In addition, on
October 3, 2008, Wachovia announced its agreement to be acquired by Wells Fargo. If Wachovia, or
its successor, is not able to perform its obligations under the credit agreement, we would have no
borrowing capacity under our credit facility.
Any delays or unanticipated expenses in connection with the construction of our Taiwan facility
could have a material adverse effect on our results of operations, liquidity and financial
condition.
In the second half of 2007, we began construction of a new manufacturing facility in Taiwan at
an estimated cost of $25.0 million, of which we spent approximately $13.1 million, in the
aggregate, in 2008 and 2007. We estimate that the new facility will have an annual production
capacity of approximately 450 million tablets and capsules. We expect construction of the facility
to be completed in 2009, equipment to be installed, validated and approved by the FDA during 2009,
and product shipment to begin in early 2010.
While we have thus far not suffered any material delays, increases in estimated expenses or
other material setbacks associated with the construction of the manufacturing facility, no
assurance can be given that we will timely complete the construction of the facility or that its
construction costs will not exceed any amounts budgeted by us. During any delays in development,
changing market conditions could render projections relating to our investment in the new facility
inaccurate or unreliable. There can also be no assurance that the facility will be approved by the
FDA within the time frame we expect, or at all. In addition, there can be no assurance that the
facility will become operational as anticipated or ultimately result in profitable operations. If
the facility has not become operational by the fourth quarter of 2012, we will, based upon current
projections, reach full production capacity at our Hayward, California manufacturing facility. If
our manufacturing capacity were to be exceeded by our production requirements, we could lose
customers and market share to competing products, and otherwise suffer adverse affects to our
results of operations, liquidity and financial condition.
19
Our continued growth is dependent on our ability to continue to successfully introduce new products
to the market.
Sales of a limited number of our products often represent a significant portion of our
revenues in a given period. Revenue from newly launched products that we are the first to market
is typically relatively high during the period immediately following launch and can be expected
generally to decline over time. Revenue from generic drugs in general can also be expected to
decline over time. Our continued growth is therefore dependent upon our ability to continue to
successfully introduce new products. We currently have 23 applications pending at the FDA for
generic versions of brand-name pharmaceuticals. The FDA and the regulatory authorities may not
approve our products submitted to them or our other products under development. Additionally, we
may not successfully complete our development efforts. Even if the FDA approves our products, we
may not be able to market them if we do not prevail in the patent infringement litigation in which
we are involved. Our future results of operations will depend significantly upon our ability to
develop, receive FDA approval for, and market new pharmaceutical products or otherwise acquire new
products.
20
We are routinely subject to patent litigation that can delay or prevent our commercialization of
products, force us to incur substantial expense to defend, and expose us to substantial liability.
Brand-name pharmaceutical manufacturers routinely bring patent infringement litigation against
ANDA applicants seeking FDA approval to manufacture and market generic forms of their branded
products. Likewise, patent holders may bring patent infringement suits against companies that are
currently marketing and selling their approved generic products. Patent infringement litigation
involves many complex technical and legal issues and its outcome is often difficult to predict, and
the risk involved in doing so can be substantial, because the remedies available to the owner of a
patent in the event of an unfavorable outcome include damages measured by the profits lost by the
patent owner rather than the profits earned by the infringer. Such litigation usually involves
significant expense and can delay or prevent introduction or sale of our products.
We are involved in nine patent infringement suits involving the following products: (i)
Omeprazole Delayed Release Capsules, 10 mg, 20 mg and 40 mg (generic to Prilosec®); (ii)
Fexofenadine/Pseudoephedrine Tablets (generic to Allegra® and Allegra-D®); (iii) Riluzole Tablets
50mg (generic to Rilutek®); (iv) Oxymorphone HCl Extended Release (ER) Tablets 5 mg, 7.5 mg, 10
mg, 15 mg, 20 mg, 30 mg, 40 mg (generic to Opana® ER); (v) Minocycline Hydrochloride Extended
Release Tablets 45mg, 90mg, 135mg (generic to Solodyn®); (vi) Tolterodine Tartrate ER Capsules, 2
mg and 4 mg (generic to Detrol LA®); (vii) Tamsulosin Hydrochloride Capsules, 0.4 mg (generic to
Flomax®); (viii) Tramadol Hydrochloride ER Tablets 100 mg and 200 mg (generic to Ultram® ER) and
(ix) Duloxetine Hydrochloride DR Capsules, 20 mg, 30 mg, and 60 mg (generic to Cymbalta®). Through
the nine months ended September 30, 2008, we had incurred costs of approximately $1,635,000 in
connection with our participation in these matters, which are in varying stages of litigation. If
any of these patent litigation matters are resolved unfavorably, we or any collaborative partners
may be enjoined from manufacturing or selling the product that is the subject of such litigation
without a license from the other party. In addition, if we decide to market and sell products
prior to the resolution of patent infringement suits, we could be held liable for lost profits if
we are found to have infringed a valid patent, or liable for treble damages if we are found to have
willfully infringed a valid patent. As a result, any patent litigation could have a material
adverse effect on our results of operations, financial condition and growth prospects, although it
is not possible to quantify the liability we could incur if any of these suits are decided against
us.
Our ability to develop or license, or otherwise acquire, and introduce new products on a timely
basis in relation to our competitors product introductions, all of which is subject to numerous
uncertainties.
Product development is inherently risky, especially for new drugs for which safety and
efficacy have not been established and the market is not yet proven. Likewise, product licensing
involves inherent risks including uncertainties due to matters that may affect the achievement of
milestones, as well as the possibility of contractual disagreements with regard to terms such as
license scope or termination rights. The development and commercialization process, particularly
with regard to new drugs, also requires substantial time, effort and financial resources. The
process of obtaining FDA approval to manufacture and market new and generic pharmaceutical products
is rigorous, time consuming, costly and largely unpredictable. We, or a partner, may not be
successful in obtaining FDA approval or in commercializing any of the products that we are
developing or licensing.
21
Our approved products may not achieve expected levels of market acceptance.
Even if we are able to obtain regulatory approvals for our new products, the success of those
products is dependent upon market acceptance. Levels of market acceptance for our new products
could be affected by several factors, including:
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the availability of alternative products from our competitors;
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the prices of our products relative to those of our competitors;
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the timing of our market entry;
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the ability to market our products effectively at the retail level; and
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the acceptance of our products by government and private formularies.
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Some of these factors are not within our control, and our products may not achieve expected levels
of market acceptance. Additionally, continuing and increasingly sophisticated studies of the
proper utilization, safety and efficacy of pharmaceutical products are being conducted by the
industry, government agencies and others can call into question the utilization, safety and
efficacy of previously marketed products. In some cases, studies have resulted, and may in the
future result, in the discontinuance of product marketing or other risk management programs such as
the need for a patient registry.
We expend a significant amount of resources on research and development efforts and may not lead to
successful product introductions.
We conduct research and development primarily to enable us to manufacture and market
pharmaceuticals in accordance with FDA regulations. We spent approximately $43.7 million, $40.0
million, $29.6 million and $26.1 million on research and development activities during the nine
months ended September 30, 2008 and the fiscal years ended December 31, 2007, 2006 and 2005,
respectively. We are required to obtain FDA approval before marketing our drug products. The FDA
approval process is costly and time consuming. Typically, research expenses related to the
development of innovative compounds and the filing of NDAs are significantly greater than those
expenses associated with ANDAs. As we continue to develop new products, our research expenses will
likely increase. Because of the inherent risk associated with research and development efforts in
our industry, particularly with respect to new drugs, our research and development expenditures may
not result in the successful introduction of FDA-approved new bioequivalent pharmaceuticals.
Our bioequivalence studies, other clinical studies and/or other data may not result in FDA
approval to market our new drug products. While we believe that the FDAs ANDA procedures will
apply to our bioequivalent versions of controlled-release drugs, these drugs may not be suitable
for, or approved as part of, these abbreviated applications. In addition, even if our drug
products are suitable for FDA approval by filing an ANDA, the abbreviated applications are costly
and time consuming to complete. After we submit an NDA or ANDA, the FDA may require that we
conduct additional studies, and as a result, we may be unable to reasonably determine the total
research and development costs to develop a particular product. Also, for products pending
approval, we may obtain raw materials or produce batches of inventory to be used in anticipation of
the products launch. In the event that FDA approval is denied or delayed, we could be exposed to
the risk of this inventory becoming obsolete. Finally, we cannot be certain that any investment
made in developing products or product-delivery technologies will be recovered, even if we are
successful in commercialization. To the extent that we expend significant resources on research
and development efforts and are not able, ultimately, to introduce successful new products or new
delivery technologies as a result of those efforts, we will be unable to recover those
expenditures.
22
The time necessary to develop generic drugs may adversely affect whether, and the extent to which,
we receive a return on our capital.
We begin our development activities for a new generic drug product several years in advance of
the patent expiration date of the brand-name drug equivalent. The development process, including
drug formulation, testing, and FDA review and approval, often takes three or more years. This
process requires that we expend considerable capital to pursue activities that do not yield an
immediate or near-term return. Also, because of the significant time necessary to develop a
product, the actual market for a product at the time it is available for sale may be significantly
less than the originally projected market for the product. If this were to occur, our potential
return on our investment in developing the product, if approved for marketing by the FDA, would be
adversely affected and we may never receive a return on our investment in the product. It is also
possible for the manufacturer of the brand-name product for which we are developing a generic drug
to obtain approvals from the FDA to switch the brand-name drug from the prescription market to the
over-the-counter market. If this were to occur, we would be prohibited from marketing our product
other than as an over-the-counter drug, in which case revenues could be substantially less than we
anticipated.
We face intense competition from both brand-name and generic manufacturers.
The pharmaceutical industry is highly competitive and many of our competitors have longer
operating histories and substantially greater financial, research and development, marketing, and
other resources than we have. In addition, pharmaceutical manufacturers customer base consists of
an increasingly limited number of large pharmaceutical wholesalers, chain drug stores that
warehouse products, mass merchandisers, mail-order pharmacies. Our competitors may be able to
develop products and delivery technologies competitive with or more effective or less expensive
than our own for many reasons, including that they may have:
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proprietary processes or delivery systems;
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larger research and development and marketing staffs;
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larger production capabilities in a particular therapeutic area;
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more experience in preclinical testing and human clinical trials;
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more experience in obtaining required regulatory approvals, including FDA approval;
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more products; or
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more experience in developing new drugs and financial resources, particularly with
regard to brand manufacturers.
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The FDA approval process often results in the FDA granting final approval to a number of ANDAs
for a given product at the time a patent claim for a corresponding brand product or other market
exclusivity expires. This often forces us to face immediate competition when we introduce a
generic product into the market. As competition from other manufacturers intensifies, selling
prices and gross profit margins often decline, which has been our experience with our existing
products. Moreover, with respect to products for which we file a Paragraph IV certification, if we are
not the first ANDA filer challenging a listed patent for a product, we are at a significant
disadvantage to the competitor that first filed an ANDA for that product containing such a
challenge, which is awarded 180 days of market exclusivity for the product. With respect to our 12 products pending FDA approval for which we have filed Paragraph IV
certifications, we believe: (i) unrelated third parties are the first to file with respect
to products with which our eight
products can be expected to compete; (ii) we are
the first to file for two products; and (iii) we share first to file
status with other filers for two products.
Accordingly, the level
of market share, revenue and gross profit attributable to a particular generic product that we
develop is generally related to the number of competitors in that products market and the timing
of that products regulatory approval and launch, in relation to competing approvals and launches.
Although there is no assurance, we strive to develop and introduce new products in a timely and
cost-effective manner to be competitive in our industry. See Item 1. Business Regulation.
Additionally, ANDA approvals often continue to be granted for a given product subsequent to the
initial launch of the generic product. These circumstances generally result in significantly lower
prices and reduced margins for generic products compared to brand products. New generic market
entrants generally cause continued price and margin erosion over the generic product life cycle.
23
In addition to the competition we face from other generic manufacturers, our competition from
brand-name manufacturers involves intensive efforts to thwart generic competition, including sales
of their branded products as authorized generics, obtaining new patents on drugs whose original
patent protection is about to expire, filing patent-infringement suits that automatically delay FDA
approval of generics, filing citizen petitions contesting FDA approvals of generics on alleged
health and safety grounds, developing next generation versions of products that reduce demand for
generic versions we are developing, changing product claims and labeling, and marketing as
over-the-counter branded products about to face generic competition.
Our principal competitors are Barr Pharmaceuticals Inc., Sandoz, Inc., Mylan, Inc., Ranbaxy
Laboratories Limited, Teva and Watson Pharmaceuticals, Inc.
Approvals for our new drug products may be delayed or become more difficult to obtain if the FDA
institutes changes to its approval requirements.
Some abbreviated application procedures for controlled-release drugs and other products,
including those related to our ANDA filings, are or may become, the subject of petitions filed by
brand-name drug manufacturers seeking changes from the FDA in the approval requirements for
particular drugs as part of their strategy to thwart generic competition. We cannot predict
whether the FDA will make any changes to its abbreviated application requirements as a result of
these petitions, or the effect that any changes may have on us. Any changes in FDA regulations may
make it more difficult for us to file ANDAs or obtain approval of our ANDAs and generate revenues
and thus may materially harm our business and financial results.
Our inexperience in conducting clinical trials and submitting New Drug Applications could result in
delays or failure in development and commercialization of our own branded products, which could
have a material adverse effect on our results of operations, liquidity, and financial condition.
With respect to products that we develop that are not generic equivalents of existing
brand-name drugs and thus do not qualify for the FDAs abbreviated application procedures, we must
demonstrate through clinical trials that these products are safe and effective for use. We have
only limited experience in conducting and supervising clinical trials. The process of completing
clinical trials and preparing an NDA may take several years and requires substantial resources.
Our studies and filings may not result in FDA approval to market our new drug products and, if the
FDA grants approval, we cannot predict the timing of any approval. There are substantial filing
fees for NDAs that are not refundable if FDA approval is not obtained.
There is no assurance that our expenses related to NDAs and clinical trials will lead to the
development of brand-name drugs that will generate revenues in the near future. Delays or failure
in the development and commercialization of our own branded products could have a material adverse
effect on our results of operations, liquidity and financial condition.
24
The risks and uncertainties inherent in conducting clinical trials could delay or prevent the
development and commercialization of our own branded products, which could have a material adverse
effect on our results of operations, liquidity, financial condition, and growth prospects.
There are a number of risks and uncertainties associated with clinical trials. The results of
clinical trials may not be indicative of results that would be obtained from large-scale testing.
Clinical trials are often conducted with patients having advanced stages of disease and, as a
result, during the course of treatment these patients can die or suffer adverse medical effects for
reasons that may not be related to the pharmaceutical agents being tested, but which nevertheless
affect the clinical trial results. In addition, side effects experienced by the patients may cause
delay of approval or limited profile of an approved product. Moreover, our clinical trials may not
demonstrate sufficient safety and efficacy to obtain FDA approval.
Failure can occur at any time during the clinical trial process and, in addition, the results
from early clinical trials may not be predictive of results obtained in later and larger clinical
trials, and product candidates in later clinical trials may fail to show the desired safety or
efficacy despite having progressed successfully through earlier clinical testing. A number of
companies in the pharmaceutical industry, including us, have suffered significant setbacks in
clinical trials, even in advanced clinical trials after showing positive results in earlier
clinical trials. For example, we had sought to develop a product containing carbidopa/levodopa for
the treatment of Parkinsons Disease. Following completion of the clinical trials and submission
of the NDA, the NDA was not approved due to the FDAs concerns over product nomenclature and the
potential for medication errors. In the future, the completion of clinical trials for our product
candidates may be delayed or halted for many reasons, including:
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delays in patient enrollment, and variability in the number and types of patients
available for clinical trials;
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regulators or institutional review boards may not allow us to commence or continue a
clinical trial;
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our inability, or the inability of our partners, to manufacture or obtain from third
parties materials sufficient to complete our clinical trials;
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delays or failure in reaching agreement on acceptable clinical trial contracts or
clinical trial protocols with prospective clinical trial sites;
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risks associated with trial design, which may result in a failure of the trial to
show statistically significant results even if the product candidate is effective;
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difficulty in maintaining contact with patients after treatment commences, resulting
in incomplete data;
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poor effectiveness of product candidates during clinical trials;
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safety issues, including adverse events associated with product candidates;
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the failure of patients to complete clinical trials due to adverse side effects,
dissatisfaction with the product candidate, or other reasons;
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governmental or regulatory delays or changes in regulatory requirements, policy and
guidelines; and
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varying interpretation of data by the FDA or foreign regulatory agencies.
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In addition, our product candidates could be subject to competition for clinical study sites
and patients from other therapies under development which may delay the enrollment in or initiation
of our clinical trials. Many of these companies have more significant resources than we do.
25
The FDA or foreign regulatory authorities may require us to conduct unanticipated additional
clinical trials, which could result in additional expense and delays in bringing our product
candidates to market. Any failure or delay in completing clinical trials for our product
candidates would prevent or delay the commercialization of our product candidates. There is no
assurance our expenses related to clinical trials will lead to the development of brand-name drugs
which will generate revenues in the near future. Delays or failure in the development and
commercialization of our own branded products could have a material adverse effect on our results
of operations, liquidity, financial condition, and our growth prospects.
26
We rely on third parties to conduct clinical trials for our product candidates, and if they do not
properly and successfully perform their legal and regulatory obligations, as well as their
contractual obligations to us, we may not be able to obtain regulatory approvals for our product
candidates.
We design the clinical trials for our product candidates, but rely on contract research
organizations and other third parties to assist us in managing, monitoring and otherwise carrying
out these trials, including with respect to site selection, contract negotiation and data
management. We do not control these third parties and, as a result, they may not treat our
clinical studies as their highest priority, or in the manner in which we would prefer, which could
result in delays.
Although we rely on third parties to conduct our clinical trials, we are responsible for
confirming that each of our clinical trials is conducted in accordance with our general
investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us to
comply with regulations and standards, commonly referred to as good clinical practices, for
conducting, recording and reporting the results of clinical trials to ensure that the data and
results are credible and accurate and that the trial participants are adequately protected. Our
reliance on third parties does not relieve us of these responsibilities and requirements. The FDA
enforces good clinical practices through periodic inspections of trial sponsors, principal
investigators and trial sites. If we, our contract research organizations or our study sites fail
to comply with applicable good clinical practices, the clinical data generated in our clinical
trials may be deemed unreliable and the FDA may require us to perform additional clinical trials
before approving our marketing applications. We cannot assure you that, upon inspection, the FDA
will determine that any of our clinical trials comply with good clinical practices. In addition,
our clinical trials must be conducted with product manufactured under the FDAs current Good
Manufacturing Practices, or cGMP, regulations. Our failure, or the failure of our contract
manufacturers if any are involved in the process, to comply with these regulations may require us
to repeat clinical trials, which would delay the regulatory approval process.
If third parties do not successfully carry out their duties under their agreements with us, if
the quality or accuracy of the data they obtain is compromised due to failure to adhere to our
clinical protocols or regulatory requirements, or if they otherwise fail to comply with clinical
trial protocols or meet expected deadlines, our clinical trials may not meet regulatory
requirements. If our clinical trials do not meet regulatory requirements or if these third parties
need to be replaced, our clinical trials may be extended, delayed, suspended or terminated. If any
of these events occur, we may not be able to obtain regulatory approval of our product candidates.
A substantial portion of our total revenues is derived from sales to a limited number of customers.
We derive a substantial portion of our revenue from sales to a limited number of customers.
Our five major customers, DAVA, McKesson, Teva, Cardinal Health and Amerisource-Bergen, accounted
for 70% and 80% of revenue for the nine months ended September 30, 2008 and the year ended December
31, 2007, respectively. These five customers individually accounted for 18%, 17%, 14%, 11% and
10%, respectively, of our revenue for the nine months ended September 30, 2008 and 37%, 14%, 13%,
11% and 6%, respectively, of our revenue for the year ended December 31, 2007.
27
We have long-term contracts
only with Teva and DAVA. See Item 1. Business Rx Partner
and OTC Partner Alliance Agreements Rx Partners Alliance
Agreements for a discussion of our agreements with Teva and
DAVA. A reduction in or loss of business with any one of these customers, or
any failure of a customer to pay us on a timely basis, would adversely affect our business.
28
We are dependent on a small number of suppliers for our raw materials that we use to manufacture
our products.
We typically purchase the ingredients, other materials and supplies that we use in the
manufacturing of our products, as well as certain finished products, from a small number of foreign
and domestic suppliers. The FDA requires identification of raw material suppliers in applications
for approval of drug products. If raw materials were unavailable from a specified supplier or the
supplier was not in compliance with FDA or other applicable requirements, the FDA approval of a new
supplier could delay the manufacture of the drug involved. As a result, there is no guarantee we
will always have timely and sufficient access to a required raw material or other product. In
addition, some materials used in our products are currently available from only one supplier or a
limited number of suppliers. Generally, we would need as much as 18 months to find and qualify a
new sole-source supplier. If we receive less than one years termination notice from a sole-source
supplier that it intends to cease supplying raw materials, it could result in disruption of our
ability to produce the drug involved. Further, a significant portion of our raw materials may be
available only from foreign sources. Foreign sources can be subject to the special risks of doing
business abroad, including:
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greater possibility for disruption due to transportation or communication problems;
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the relative instability of some foreign governments and economies;
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interim price volatility based on labor unrest, materials or equipment shortages,
export duties, restrictions on the transfer of funds, or fluctuations in currency
exchange rates; and
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uncertainty regarding recourse to a dependable legal system for the enforcement of
contracts and other rights.
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Those of our raw materials that are available from a limited number of suppliers are
Bendroflumethiazide, Chloroquine, Colestipol, Digoxin, Flavoxate, Methyltestosterone, Nadolol,
Orphenadrine, Terbutaline and Klucel, all of which are active pharmaceutical ingredients except
Klucel, which is an excipient used in several product formulations. The manufacturers of two of
these products, Formosa Laboratories, Ltd. and a division of Ashland, Inc., are sole-source
suppliers. While none of the active ingredients is individually significant to our business, the
excipient, while not covered by a supply agreement, is utilized in a number of significant products, it is manufactured for a number of
industrial applications and supplies have been readily available. Only one of the active ingredients is covered by a long-term supply agreement and, while we have experienced occasional interruptions in
supplies, none has had a material effect on our operations.
Any inability to obtain raw materials on a timely basis, or any significant price increases
which cannot be passed on to customers, could have a material adverse effect on us.
Many third-party suppliers are subject to governmental regulation and, accordingly, we are
dependent on the regulatory compliance of these third parties. We also depend on the strength,
enforceability and terms of our various contracts with these third-party suppliers.
We depend on qualified scientific and technical employees, and our limited resources may make it
more difficult to attract and retain these personnel.
Because of the specialized scientific nature of our business, we are highly dependent upon our
ability to continue to attract and retain qualified scientific and technical personnel. Except for
the recent death of Dr. Hsiao, our former chairman of the board of directors, who co-led our
research and development activities until 2004 and thereafter took charge of exploratory research
activities, we have to date not experienced, or become aware of pending, significant losses of
scientific or technical personnel and have retained sufficient personnel to assume Dr. Hsiaos
scientific responsibilities. Loss of the services of, or failure to recruit, key scientific and
technical personnel, however, would be significantly detrimental to our product-development
programs. As a result of our small size and limited financial and other resources, it may be
difficult for us to attract and retain qualified officers and qualified scientific and technical
personnel.
We maintain an employment agreement with our chief executive officer, Dr. Hsu, which was
entered into in December 1999. All of our other key personnel are employed on an at-will basis
with no formal
29
employment agreements. We purchase a life insurance policy as an employee benefit
for Dr. Hsu, but do not maintain Key Man life insurance on any executives.
We may be adversely affected by alliance agreements or licensing arrangements we make with other
companies.
We have entered into several alliance agreements or license agreements with respect to certain
of our products and may enter into similar agreements in the future. These arrangements may
require us to relinquish rights to certain of our technologies or product candidates, or to grant
licenses on terms that ultimately may prove to be unfavorable to us, either of which could reduce
the value of our common stock. Relationships with alliance agreements partners may include risks
due to incomplete information regarding the marketplace, inventories, and commercial strategies of
our alliance agreements partners, and our alliance agreements and /or other licensing agreements
may be the subject of contractual disputes. If we or our alliance agreements partners are not
successful in commercializing the alliance agreements product(s), such commercial failure could
adversely affect our business.
We are subject to significant costs and uncertainties related to compliance with the extensive
regulations that govern the manufacturing, labeling, distribution, and promotion of pharmaceutical
products as well as environmental, safety and health regulations.
The manufacturing, distribution, processing, formulation, packaging, labeling and advertising
of our products are subject to extensive regulation by federal agencies, including the FDA, the
Drug Enforcement Administration (DEA), the Federal Trade Commission (FTC), the Consumer Product
Safety Commission and the Environmental Protection Agency (EPA), among others. We are also subject
to state and local laws, regulations and agencies in California, Pennsylvania and elsewhere.
Compliance with these regulations requires substantial expenditures of time, money and effort in
such areas as production and quality control to ensure full technical compliance. Failure to
comply with FDA and other governmental regulations can result in fines, disgorgement, unanticipated
compliance expenditures, recall or seizure of products, total or partial suspension of production
or distribution, suspension of the FDAs review of NDAs or ANDAs, enforcement actions, injunctions
and criminal prosecution.
We cannot accurately predict the outcome or timing of future expenditures that we may be
required to make in order to comply with the federal, state, and local environmental, safety, and
health laws and regulations that are applicable to our operations and facilities. We are also
subject to potential liability for the remediation of contamination associated with both present
and past hazardous waste generation, handling, and disposal activities. We are subject
periodically to environmental compliance reviews by environmental, safety, and health regulatory
agencies. Environmental laws have changed in recent years and we may become subject to stricter
environmental standards in the future and face larger capital expenditures in order to comply with
environmental laws.
We may experience reductions in the levels of reimbursement for pharmaceutical products by
governmental authorities, HMOs or other third-party payers. Any such reductions could have a
material adverse effect on our business, financial position and results of operations.
Various governmental authorities and private health insurers and other organizations, such as
HMOs, provide reimbursement to consumers for the cost of certain pharmaceutical products. Demand
for our products depends in part on the extent to which such reimbursement is available. In
addition, third-party payors are attempting to control costs by limiting the level of reimbursement
for medical products, including pharmaceuticals, and increasingly challenge the pricing of these
products which may adversely affect the pricing of our products. Moreover, health care reform has
been, and is expected to continue to be, an area of national and state focus, which could result in
the adoption of measures that could adversely affect the pricing of pharmaceuticals or the amount
of reimbursement available from third-party payers for our products.
30
Reporting and payment obligations under the Medicaid rebate program and other government programs
are complex, and failure to comply could result in sanctions and penalties or we could be required
to reimburse the government for underpayments, which could have a material adverse affect on our
business.
Medicaid and other government reporting and payment obligations are highly complex and
somewhat ambiguous. State attorneys general and the U.S. Department of Justice have brought suits
or instituted investigations against a number of other pharmaceutical companies for failure to
comply with Medicaid and other government reporting obligations. Our methodologies for making
these calculations are complex and the judgments involved require us to make subjective decisions,
such that these calculations are subject to the risk of errors. Government agencies may impose
civil or criminal sanctions, including fines, penalties and possible exclusion from federal health
care programs, including Medicaid and Medicare. Any such penalties or sanctions could have a
material adverse effect on our business.
Legislative or regulatory programs that may influence prices of prescription drugs could have a
material adverse effect on our business.
Current or future federal or state laws and regulations may influence the prices of drugs and,
therefore, could adversely affect the prices that we receive for our products. Programs in
existence in certain states seek to set prices of all drugs sold within those states through the
regulation and administration of the sale of prescription drugs. Expansion of these programs, in
particular, state Medicaid programs, or changes required in the way in which Medicaid rebates are
calculated under such programs, could adversely affect the price we receive for our products and
could have a material adverse effect on our business, financial position and results of operations.
Decreases in health care reimbursements could limit our ability to sell our products or decrease
our revenues.
We depend on our intellectual property, and our future success is dependent on our ability to
protect our intellectual property and not infringe on the rights of others.
We believe intellectual property protection is important to our business and that our future
success will depend, in part, on our ability to maintain trade secret protection and operate
without infringing on the rights of others. We cannot assure you that:
|
|
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any of our future processes or products will be patentable;
|
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|
|
|
our processes or products will not infringe upon the patents of third parties; or
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we will have the resources to defend against charges of patent infringement by third
parties or to protect our own rights against infringement by third parties.
|
We rely on trade secrets and proprietary knowledge related to our products and technology
which we generally seek to protect by confidentiality and non-disclosure agreements with employees,
consultants, licensees and pharmaceutical companies. If these agreements are breached, we may not
have adequate remedies for any breach, and our trade secrets may otherwise become known by our
competitors.
We are subject to potential product liability claims that can result in substantial litigation
costs and liability.
The design, development and manufacture of pharmaceutical products involve an inherent risk of
product liability claims and associated adverse publicity. Product liability insurance coverage is
expensive, difficult to obtain, and may not be available in the future on acceptable terms, or at
all. Although we currently carry $80.0 million of such insurance, we believe that no reasonable
amount of insurance can fully protect against all such risks because of the potential liability
inherent in the business of producing pharmaceutical products for human consumption.
31
We face risks relating to our goodwill and intangibles.
At September 30, 2008, our goodwill, originally generated as a result of the December 1999
merger of Global Pharmaceuticals Corporation and Impax Pharmaceuticals, Inc., was approximately
$27.6 million, or approximately 5.9% of our total assets. We may never realize the value of our
goodwill and intangibles. We will continue to evaluate, on a regular basis, whether events or
circumstances have occurred to indicate all, or a portion, of the carrying amount of goodwill may
no longer be recoverable, in which case an impairment charge to earnings would become necessary.
Although as of December 31, 2007, the carrying value of goodwill was not impaired based on our
assessment performed in accordance with GAAP, any such future determination requiring the write-off
of a significant portion of carrying value of goodwill could have a material adverse effect on our
financial condition or results of operations.
Our revenues and operating income could fluctuate significantly.
Our revenues and operating results may vary significantly from quarter to quarter as well as
in comparison to the corresponding quarter of the preceding year. Variations may result from,
among other factors:
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the timing of FDA approvals we receive;
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|
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|
the timing of process validation for particular generic drug products;
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|
the timing of product launches;
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|
|
|
the introduction of new products by others that render our products obsolete or
noncompetitive;
|
|
|
|
|
the ability to maintain selling prices and gross margins on our products;
|
|
|
|
|
the outcome of our patent infringement litigation; and
|
|
|
|
|
the addition or loss of customers.
|
For example, when we settled our patent infringement litigation relating to our generic
version of OxyContin and agreed to terminate sales of our product in early 2008, we revised our
estimate of the remaining life of the related DAVA Agreement and adjusted the period of revenue
recognition and product manufacturing cost amortization under the DAVA Agreement from 10 years to
27 months (i.e. November 2005 through January 2008). The change in the revenue recognition period
for the DAVA Agreement had the effect of increasing income from operations for the year ended
December 31, 2007 by $73,226,000 and basic earnings per share by $1.25. In addition, our revenue
under the DAVA Agreement, net of deferred product manufacturing costs recognized, was $38,674,000
for the nine months ended September 30, 2008 and $92,949,000 for the year ended December 31, 2007.
The loss of such revenue materially affected our results of operations for the nine months ended September 30, 2008 and may have a material adverse effect on our future results of operations.
32
If we are unable to manage our growth, our business will suffer.
We have experienced rapid growth in the past several years and anticipate continued rapid
expansion in the future. The number of ANDAs pending approval at the FDA has increased from 11 at
June 30, 2001 to 23 at November 21, 2008. This growth has required us to expand, upgrade, and
improve our administrative, operational, and management systems, internal controls and resources.
We anticipate additional growth in connection with the expansion of our manufacturing operations,
development of our brand-name products, and our marketing and sales efforts for the products we
develop. Although we cannot assure you that we will, in fact, grow as we expect, if we fail to
manage growth effectively or to develop a successful marketing approach, our business and financial
results will be materially harmed.
There are inherent uncertainties involved in estimates, judgments and assumptions used in the
preparation of financial statements in accordance with GAAP. Any future changes in estimates,
judgments and assumptions used or necessary revisions to prior estimates, judgments or assumptions
could lead to a restatement of our results.
The consolidated and condensed consolidated financial statements included in this registration
statement are prepared in accordance with GAAP. This involves making estimates, judgments and
assumptions that affect reported amounts of assets (including intangible assets), liabilities,
revenues, expenses (including acquired in process research and development) and income. Estimates,
judgments and assumptions are inherently subject to change in the future and any necessary
revisions to prior estimates, judgments or assumptions could lead to a restatement. Any such
changes could result in corresponding changes to the amounts of assets (including goodwill and
other intangible assets), liabilities, revenues, expenses (including acquired in process research
and development) and income.
Terrorist attacks and other acts of violence or war may adversely affect our business.
Terrorist attacks at or nearby our facilities in Hayward, California or Philadelphia,
Pennsylvania, or the construction site of our manufacturing facility in Taiwan may negatively
affect our operations or delay the completion of our facility in Taiwan. While we do not believe
that we are more susceptible to such attacks than other companies, such attacks could directly
affect our physical facilities or those of our suppliers or customers. Furthermore, such attacks
may make the transportation of our products more difficult and more expensive, and ultimately
affect our sales.
We carry insurance coverage on our facilities of types and in amounts that we believe are in
line with coverage customarily obtained by owners of similar properties. We continue to monitor
the state of the insurance market in general and the scope and cost of coverage for acts of
terrorism in particular, but we cannot anticipate what coverage will be available on commercially
reasonable terms in future policy years. Currently, we do not carry terrorism insurance coverage.
If we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital
invested in the damaged facilities, as well as the anticipated future net sales from those
facilities.
33
Because of the location of our manufacturing and research and development facilities, our
operations could be interrupted by an earthquake.
Our corporate headquarters, manufacturing operations in California, and research and
development activities related to process technologies are located near major earthquake fault
lines. Although we have other facilities, we produce a substantial portion of our products at our
California facility. A disruption at these California facilities due to an earthquake or other
natural disaster, even on a short-term basis, could impair our ability to produce and ship products
to the market on a timely basis. In addition, we could experience a destruction of facilities
which would be costly to rebuild, or loss of life, all of which could materially adversely affect
our business and results of operations.
While we presently carry $40.0 million of dedicated California earthquake coverage, which we
believe is appropriate in light of the risks, the amount of our earthquake insurance coverage may
not be sufficient to cover losses from earthquakes. We may discontinue some or all of this
insurance coverage in the future if the cost of premiums exceeds the value of the coverage
discounted for the risk of loss. If we experience a loss which is uninsured or which exceeds
policy limits, we could lose the capital invested in the damaged facilities, as well as the
anticipated future net sales from those facilities.
We are a defendant in securities litigation that exposes us to liability and could result in the
diversion of managements attention from our business.
We and current and former members of our senior management are defendants in a consolidated
class action brought on behalf of purchasers of our common stock between May 5 and November 3, 2004
alleging that, based upon the restatement of our financial results for the first two quarters of
2004, we filed false and misleading financial statements for those two quarters, thereby
artificially inflating the market value of our stock. The action is now in the discovery phase.
Our remaining insurance coverage is approximately $5 million. While the plaintiffs complaint does
not specify the amount of damages they seek, and while we believe the action is without merit and
that the class of plaintiffs represented has incurred no damages, the amount sought will likely be
in the tens of millions of dollars. The pendency of this action could result in a significant
diversion of managements time and attention from the management of our business, and any expense
and any recovery in this action in excess of our insurance coverage could adversely affect our
financial results.
34
Risks Related to Our Stock
There is currently no market for our common stock.
Because we were unable to file our periodic reports with the SEC subsequent to our quarterly
report for the third quarter of 2004, our common stock was delisted by The NASDAQ Stock Market in
August 2005. From that time through December 29, 2006, the stock was quoted in the Pink
Sheets
®
, to which dealers submitted daily bid and asked prices for the stock. On
December 29, 2006, the SEC suspended all trading in the stock through January 16, 2007 and
instituted an administrative proceeding to determine whether, in light of our reporting
delinquency, to suspend or revoke the registration of our common stock under Section 12 of the
Exchange Act. Beginning January 17, 2007, our stock was again quoted in the Pink
Sheets
®
, but from that time forward dealers were permitted to publish quotations only on
behalf of customers that represented such customers indications of interest and did not involve
dealers solicitation of such interest. On May 23, 2008, the SEC revoked the registration of our
stock, and since that time brokers and dealers have been prohibited from effecting transactions in
our stock.
We expect that our stock will again be quoted in the Pink Sheets
®
following the
effectiveness of this registration statement. While we intend to apply for relisting of our stock
on The NASDAQ Stock Market once unrestricted trading in the stock is again permitted, there is no
assurance that, and we cannot predict when, the stock will again trade on The NASDAQ Stock Market
or any other exchange.
Our stockholders may sustain future dilution in ownership as a result of the terms of some of our
outstanding securities or future issuances of securities.
We may need to raise additional capital in the future to fund our operations and planned
expansion. To the extent we raise additional capital by issuing equity securities or securities
convertible into or exchangeable for equity securities, ownership dilution to our stockholders will
result. As of October 31, 2008, there were outstanding: $12.8 million of our 3.5% Debentures
convertible into 616,240 shares of common stock, subject to adjustment, and there were also
outstanding options to purchase an additional 8,926,238 shares, of which 6,929,990 are exercisable,
and 395,824 shares of unvested restricted stock under our long-term incentive compensation program.
To the extent that these options are exercised, debentures converted and shares of restricted
stock issued, stockholders ownership interest in our common stock will be diluted.
35
If shares of our common stock are listed or quoted on a public market, our stock price is likely to
be volatile.
The stock market has, from time to time, experienced significant price and volume fluctuations
that may be unrelated to the operating performance of particular companies. In addition, the
market price of our common stock, like the stock price of many publicly traded specialty
pharmaceutical companies, will likely be volatile. For example, the sale price of our stock during
the fiscal years ended December 31, 2007 and 2006 ranged from a high of $12.40 during the quarter
ended September 30, 2007 to a low of $4.25 during the quarter ended September 30, 2006. At
present, our stock is not traded on any exchange or quoted on any other public market.
Prices of our common stock may be influenced by many factors, including:
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our ability to maintain compliance with SEC reporting requirements;
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our ability to relist our common stock on The NASDAQ Stock Market or another exchange, and
maintain such listing;
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investor perception of us;
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analyst recommendations;
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|
market conditions relating to specialty pharmaceutical companies;
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|
announcements of new products by us or our competitors;
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|
publicity regarding actual or potential development relating to products under development
by us or our competitors;
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|
developments, disputes or litigation concerning patent or proprietary rights;
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|
delays in the development or approval of our product candidates;
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|
regulatory developments;
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|
period to period fluctuations in our financial results and those of our competitors;
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future sales of substantial amounts of common stock by stockholders; and
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economic and other external factors.
|
36
We may in the future issue shares of preferred stock which could adversely affect the rights of
holders of our common stock and the value of our common stock.
Our board of directors has the authority to issue up to 2,000,000 shares of our preferred
stock and to determine the price, rights, preferences, and privileges of those shares without any
further vote or action by the stockholders. Although we have no preferred stock outstanding,
preferred stock issued in the future could adversely affect the rights and interests of holders of
common stock by:
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exercising voting, redemption, and conversion rights to the detriment of the holders
of common stock;
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|
receiving preferences over the holders of common stock regarding our assets in the
event of our dissolution or liquidation;
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delaying, deferring, or preventing a change in control of our company, even when
holders of common stock may desire to effect such a transaction;
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|
discouraging bids for our common stock at a premium over the market price of the
common stock; and
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otherwise adversely affecting the market price of the common stock.
|
We do not pay dividends on our common stock and do not anticipate doing so in the foreseeable
future.
We have not paid any cash dividends on our common stock and we do not plan to pay any cash
dividends in the foreseeable future. We plan to retain any earnings for the operation and
expansion of our business. As a Delaware corporation, we may not declare or pay a dividend on our
capital stock if the amount paid exceeds an amount equal to the surplus, which represents the
excess of our net assets over paid-in-capital or, if there is no surplus, our net profits for the
current or immediately preceding fiscal year. In addition, our loan agreement prohibits the
payment of dividends without the lenders consent. As we do not intend to declare dividends on our
common stock in the foreseeable future, any gains on your investment will result from an increase
in our stock price, which may or may not occur.
37
Item 2. Financial Information.
Selected Financial Data
The following selected consolidated financial data should be read together with our
consolidated financial statements and accompanying notes and Managements Discussion and Analysis
of Financial Condition and Results of Operations appearing elsewhere in this registration
statement. The selected consolidated financial data in this section are not intended to replace
our consolidated financial statements and the accompanying notes. Our historical results are not
necessarily indicative of our future results.
The selected consolidated financial data set forth below are derived from our consolidated
financial statements. The consolidated statements of operations data for the years ended December
31, 2007, 2006 and 2005 and the consolidated balance sheet data as of December 31, 2007, 2006 and
2005 are derived from our audited consolidated financial statements included elsewhere in this
registration statement. The consolidated statement of operations data for the nine months ended
September 30, 2008 and September 30, 2007 and the consolidated balance sheet data as of September
30, 2008 have been derived from our unaudited interim consolidated financial statements and related
notes appearing elsewhere in this registration statement. The unaudited consolidated financial
statements have been prepared on a basis consistent with our audited consolidated financial
statements contained in this registration statement and include, in the opinion of management, all
adjustments necessary for the fair presentation of our financial position and results of operations
for these periods.
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|
|
|
|
|
|
|
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Nine Months Ended
|
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September 30,
|
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Fiscal Year Ended December 31,
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|
Statements of Operations Data:
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003(1)
|
|
(in thousands, except per share data)
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
165,376
|
|
|
$
|
206,286
|
|
|
$
|
273,753
|
|
|
$
|
135,246
|
|
|
$
|
112,400
|
|
|
$
|
91,086
|
|
|
$
|
47,091
|
|
Research and development
|
|
|
43,653
|
|
|
|
26,454
|
|
|
|
39,992
|
|
|
|
29,635
|
|
|
|
26,095
|
|
|
|
23,069
|
|
|
|
14,575
|
|
Total operating expenses
|
|
|
85,149
|
|
|
|
62,694
|
|
|
|
89,590
|
|
|
|
74,245
|
|
|
|
59,588
|
|
|
|
76,301
|
|
|
|
29,060
|
|
Income (loss) from operations
|
|
|
13,849
|
|
|
|
69,313
|
|
|
|
76,507
|
|
|
|
(11,247
|
)
|
|
|
(5,623
|
)
|
|
|
(46,551
|
)
|
|
|
(17,621
|
)
|
Net income (loss)
|
|
|
9,642
|
|
|
|
119,424
|
|
|
|
125,925
|
|
|
|
(12,044
|
)
|
|
|
(5,780
|
)
|
|
|
(48,825
|
)
|
|
|
(25,176
|
)
|
Net income (loss) per share basic
|
|
$
|
0.16
|
|
|
$
|
2.03
|
|
|
$
|
2.14
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
(0.49
|
)
|
Net income (loss) per share diluted
|
|
$
|
0.16
|
|
|
$
|
1.95
|
|
|
$
|
2.06
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
September 30,
|
|
|
As of December 31,
|
|
Balance Sheet Data:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003(1)
|
|
(in thousands)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
81,152
|
|
|
$
|
143,496
|
|
|
$
|
29,834
|
|
|
$
|
56,081
|
|
|
$
|
79,039
|
|
|
$
|
15,920
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Working capital
|
|
|
97,911
|
|
|
|
110,107
|
|
|
|
81,919
|
|
|
|
55,796
|
|
|
|
76,151
|
|
|
|
12,816
|
|
Total assets
|
|
|
465,588
|
|
|
|
516,459
|
|
|
|
343,888
|
|
|
|
260,285
|
|
|
|
259,077
|
|
|
|
142,972
|
|
Advance deposit payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,983
|
|
Long term debt
|
|
|
6,442
|
|
|
|
20,510
|
|
|
|
89,603
|
|
|
|
80,285
|
|
|
|
102,047
|
|
|
|
8,852
|
|
Mandatorily redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
Accumulated deficit
|
|
|
50,648
|
|
|
|
60,290
|
|
|
|
186,215
|
|
|
|
174,171
|
|
|
|
168,390
|
|
|
|
119,565
|
|
Total stockholders equity (deficit)
|
|
$
|
150,633
|
|
|
$
|
134,167
|
|
|
$
|
(3,976
|
)
|
|
$
|
8,886
|
|
|
$
|
14,246
|
|
|
$
|
47,608
|
|
|
|
|
(1)
|
|
Amounts give effect to the restatement of accounting for the Teva Agreement, the OTC
Agreements, common stock purchase warrants issued in May 2003, stock-based compensation,
accrued legal fee operating expense, and accrued interest expense.
|
38
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis, as well as other sections in this registration
statement, should be read in conjunction with the Consolidated Financial Statements and related
Notes to Consolidated Financial Statements included elsewhere herein. All references to fiscal
years mean the relevant 12-month period ended December 31.
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 26, 2008, we manufactured and marketed 70 generic pharmaceuticals, which
represent dosage variations of 25 different pharmaceutical compounds through our own Global
Pharmaceuticals division; another 15 of our generic pharmaceuticals representing dosage variations
of four different pharmaceutical compounds are marketed by our strategic partners. We have 23
applications pending at the FDA, including four that have been tentatively approved, and 53 other
products in various stages of development for which applications have not yet been filed.
We sell our products both directly to drug wholesalers and through alliance agreements with
other unrelated third-party pharmaceutical companies. In our Global Division, the three principal
revenue components are Global Product Sales, net, representing revenue received from sales of the
products we sell directly, Rx Partner, representing revenue received from sales of prescription
drugs through our Rx Partners, and OTC Partner, representing revenue received from sales of
over-the-counter (OTC) drugs sold by our OTC Partners. A fourth revenue component since 2006,
within our Impax Division, is the Promotional Partner, which represents revenue we receive for
physician detailing sales calls services promoting the products of other pharmaceutical companies.
Global Product Sales, net.
We recognize revenue from direct sales in accordance with SEC
Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements
(SAB 101), as
revised by Staff Accounting Bulletin No. 104,
Revenue Recognition
(SAB 104). Revenue from direct
product sales is recognized at the time title and risk of loss pass to customers. Provisions for
estimated discounts, rebates, chargebacks, returns and other adjustments are provided for in the
period the related sales are recorded.
Rx Partner and OTC Partner
. Each of our alliance agreements involves multiple deliverables in
the form of products, services or licenses over extended periods. Emerging Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21) supplemented SAB 104 for
accounting for such multiple-deliverable arrangements. With respect to our multiple-deliverable
arrangements, we determine whether any or all of the elements of the arrangement should be
separated into individual units of accounting under EITF 00-21. If separation into individual
units of accounting is appropriate, we recognize revenue for each deliverable when the revenue
recognition criteria specified by SAB 101 and SAB 104 are achieved for that deliverable. If
separation is not appropriate, we recognize revenue (and related direct manufacturing costs) over
the estimated life of the agreement utilizing a modified proportional performance method. Under
this method the amount recognized in the period of initial recognition is based upon the number of
years that have elapsed under the agreement relative to the estimated life 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 estimated agreement
years. The balance of the amount realized is recognized in equal amounts in each of the remaining
years. Thus, for example, with respect to profit share or royalty payment reported by a strategic
partner during the third year of an agreement with an estimated life of 18 years, 3/18 of the
amount reported is recognized in the year reported and 1/18 of the amount is recognized during each
of the remaining 15 years. A fuller description of our analysis under EITF 00-21 and the modified
proportional performance method is set forth in Item 15. Financial Statements and Exhibits
Note 2 to Consolidated Financial Statements.
Promotional Partner.
We have entered into promotional services agreements with other
pharmaceutical companies under which we provide physician detail sales calls to promote certain of
those companies branded drug products. In exchange for our services we receive fixed sales force
fees and are eligible for contingent payments based upon the number of prescriptions filled for the
product. We recognize revenue from sales force fees
39
as the services are provided and the performance obligations are met and from contingent payments
at the time they are earned.
Critical Accounting Estimates
The preparation of our financial statements requires the use of estimates and assumptions,
based on complex judgments considered reasonable when made, affecting the reported amounts of
assets and liabilities and disclosure of contingent assets and contingent liabilities at the date
of the 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
common stock purchase warrants, fair value of share-based compensation expense, and estimates used
in applying our revenue recognition policy, particularly those related to deductions from gross
Global Product Sales for chargebacks, rebates, returns, shelf-stock adjustments, Medicaid payments,
and those related to the recognition periods under our alliance agreements.
Although we believe that 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 that influence our estimates and, if necessary, adjust them. 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 market volatility
or turmoil.
Consistent with industry practice, we record estimated deductions for chargebacks,
rebates, returns, shelf-stock, 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
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 promptly, 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 amount accrued and the 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.
Chargebacks
. We have agreements establishing contract prices for certain products with
certain indirect customers, such as managed care organizations, hospitals and government agencies,
that 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. A provision for chargeback deductions is estimated and
recorded at the time we ship the products to the wholesalers. The primary factors we consider when
estimating the 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 which we do business. We monitor aggregate actual chargebacks granted and compare them to the
estimated provision for chargebacks to assess the reasonableness of the chargebacks reserve at each
quarterly balance sheet date.
The following table is a rollforward of the activity in the chargeback reserve for the nine
months ended September 30, 2008 and each of the three years ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
September 30
|
|
|
December 31,
|
|
Chargeback reserve
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,977
|
|
|
$
|
4,401
|
|
|
$
|
4,438
|
|
|
$
|
2,933
|
|
Provision recorded during the period
|
|
|
34,036
|
|
|
|
33,972
|
|
|
|
26,664
|
|
|
|
24,439
|
|
Credits issued during the period
|
|
|
(32,951
|
)
|
|
|
(35,396
|
)
|
|
|
(26,701
|
)
|
|
|
(22,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,062
|
|
|
$
|
2,977
|
|
|
$
|
4,401
|
|
|
$
|
4,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as a percent of
Global product sales, gross
|
|
|
27
|
%
|
|
|
23
|
%
|
|
|
21
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in the provision for chargebacks from 2005 through September 2008 was the result
of increasing price competition for generic drugs sold through our Global Divisions Global
Products sales channel. Reductions in the selling prices of our generic products sold through this
channel frequently take the form of a larger chargeback credit issued to a wholesaler. As pricing
competition increases, the difference between the contract prices we negotiate with indirect
customers and the wholesaler prices will increase, thereby resulting in larger chargebacks.
40
Rebates
. We maintain various rebate programs with our Global Division Global Products sales
channel customers in an effort to maintain a competitive position in the marketplace and to promote
sales and customer loyalty. The rebates generally take the form of a credit memo to reduce the
invoiced gross sales amount charged to a customer for products shipped. A provision for rebate
deductions is estimated and recorded at the time of product shipment. The 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 provision for rebates to
assess the reasonableness of the rebates reserve at each quarterly balance sheet date.
The following table is a rollforward of the activity in the rebate reserve for the nine months
ended September 30, 2008 and each of the three years December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
September 30
|
|
|
December 31,
|
|
Rebate reserve
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,603
|
|
|
$
|
3,124
|
|
|
$
|
5,391
|
|
|
$
|
3,382
|
|
Provision recorded during the period
|
|
|
13,554
|
|
|
|
15,968
|
|
|
|
13,856
|
|
|
|
14,679
|
|
Credits issued during the period
|
|
|
(12,456
|
)
|
|
|
(15,489
|
)
|
|
|
(16,123
|
)
|
|
|
(12,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,701
|
|
|
$
|
3,603
|
|
|
$
|
3,124
|
|
|
$
|
5,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as a percent of
Global product sales, gross
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for rebates, as a percent of Global product sales, gross, has been consistent
for the nine months ended September 30, 2008 and each of the three years ended December 31, 2007.
Our historical experience for aggregate rebates paid has been more consistent than experience for
other sales deductions because the terms of the various rebate programs we offer to our customers
are less susceptible to market forces (in the aggregate), and the terms and conditions of the
various rebate
41
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 sales 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, the introduction of new products, and changes
in market sales information. We also consider other factors, including levels of inventory in the
distribution channel, significant market changes which may impact future expected returns, and
actual product returns and may record additional provisions for specific returns we believe are not
covered by the historical rates. We monitor aggregate actual returns on a quarterly basis and may
record specific provisions for returns we believe are not covered by historical percentages.
The following table is a rollforward of the activity in the accrued product returns for the
nine months ended September 30, 2008 and each of the three years ended December 31, 2007, 2006 and
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
September 30
|
|
|
December 31,
|
|
Accrued product returns
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
14,261
|
|
|
$
|
12,903
|
|
|
$
|
10,625
|
|
|
$
|
6,939
|
|
Provision related to
sales recorded in the period
|
|
|
3,805
|
|
|
|
5,459
|
|
|
|
7,220
|
|
|
|
5,534
|
|
Credits recorded in the period
|
|
|
(5,011
|
)
|
|
|
(4,101
|
)
|
|
|
(4,942
|
)
|
|
|
(1,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
13,055
|
|
|
$
|
14,261
|
|
|
$
|
12,903
|
|
|
$
|
10,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as a percent of
Global product sales, gross
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
6
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2006 we experienced a higher level of returns related to our generic drug products that
are not bioequivalent (sometimes referred to as non-AB-rated) to the associated brand drug,
driving the increase in the provision for returns recorded in that year. Sales of our non-AB-rated
products declined 29% from 2006 to 2007 as a result of increased competition and our decision to
begin to discontinue the sale of non-AB-rated products, thereby having less impact on the overall
returns percentage in 2007, and continuing through 2008. In addition, the increase in the return
percentage rate during 2006 was affected by a decline from 2005 to 2006 in sales of our generic
Wellbutrin® SR 200mg tablets, which have a relatively low return rate.
42
Medicaid.
As required by law, we provide a rebate payment on drugs dispensed under the
Medicaid program. We determine our estimate of 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 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 $579,000 as of September 30, 2008 and $566,000, $421,000 and $2,862,000 as of December 31, 2007, 2006 and 2005,
respectively. The Medicare Part D prescription drug benefit, which went into effect on January 1,
2006, had the effect of lowering our overall aggregate Medicaid payments and, as a result, the
Medicaid payments reserve was reduced by $2.1 million in 2006. After the January 1, 2006
transition from Medicaid to Medicare Part D, Medicaid payments have been less than 0.5% of Global
product sales, gross. Differences between our estimated and actual payments made have been de minimis.
Shelf Stock Adjustments.
When, based on market conditions, we reduce the selling price of a
product, we may choose to issue a shelf stock adjustment credit to customers, the amount of which
is typically derived from the level of a specific product held by the customer, who agrees to
continue to purchase the product from us. Such a credit is referred to as a shelf-stock
adjustment, which is the difference between the invoiced gross sales price and the revised lower
gross sales price, multiplied by an estimate of the number of product units in the customers
inventory. The primary factors we consider when estimating a reserve for a shelf stock adjustment
include the per unit credit amount and an estimate of the level of inventory held by the customer.
The accrued reserve for shelf stock adjustments totaled $509,000 as of September 30, 2008 and $384,000, $382,000 and $544,000 as of December
31, 2007, 2006 and 2005 respectively. Differences between our estimated and actual credits issued
for shelf stock adjustments have been de minimis.
Estimated Lives of Alliance Agreements.
The revenue we receive under our alliance
agreements is not subject to adjustment for estimated discounts, rebates, chargebacks,
returns and similar adjustments, as such adjustments have already been reflected in
the amounts we receive from our alliance partners. However, because we
recognize the revenue we receive under our alliance agreements over the estimated life of
the related agreement or our expected performance utilizing 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.
The term of the Teva Agreement, for example, is 10 years following the launch of the
twelfth product subject to the agreement. Since product launch is dependent upon FDA
approval of the product, we are required to estimate when that approval is likely to occur
in order to estimate the life of the Teva Agreement. We currently estimate its life to be
18 years, based upon the June 2001 inception of the agreement and our estimate that the
twelfth product will be approved by the FDA in 2009. If the timing of FDA approval for
the last product is different from our estimate, the revenue recognition and product
manufacturing amortization period will change on a prospective basis at the time such
event occurs. While no such change in the estimated life of the Teva Agreement has
occurred to date, if we were to conclude that significantly more time will be required to
obtain such approval, then we would increase our estimate of the recognition period under
the agreement, resulting in a lesser amount of revenue and related costs in current and
future periods.
We have changed our estimate of the life of the DAVA Agreement, resulting in the recognition
of a substantially greater portion of the revenue thereunder in 2007 and 2008 than we would have
recognized under our original estimate. When we entered into the DAVA Agreement in November 2005,
we estimated its life at 10 years, which was the fixed term of the agreement, and began recognizing
revenue thereunder over 10 years. In March 2007, however, in connection with the settlement of a
patent infringement lawsuit against us we agreed to stop manufacturing and selling the product
covered by the DAVA Agreement in January 2008. While the settlement permits us to resume
manufacture and sale of the product in 2013 or earlier under certain circumstances and the DAVA
Agreement will remain effective through November 2015, we concluded that if any of the contingent
events occur to permit us to resume sales of the product, the same events will result in such a
highly competitive generic marketplace to make it unlikely we will find it economically favorable
to devote manufacturing resources to the resumption of sales of our product. As a result, we
concluded the economic life of the DAVA Agreement, and therefore our expected period of
performance, ended in January 2008. Accordingly, on the March 30, 2007 effective date of the
patent litigation settlement, we adjusted the
period of revenue recognition and product manufacturing costs amortization under the DAVA
Agreement from 10 years to 27 months (i.e. November 2005 through January 2008). As the terms of
the patent litigation settlement did not exist and could not have been known when the life of the
DAVA Agreement was originally estimated, the change in the recognition period has been applied
prospectively as an adjustment in the period of change. The change in the revenue recognition
period for the DAVA Agreement had the effect of increasing revenue recognized under the DAVA
Agreement by $21.2 million and $ 93.9 million for the nine months ended September 30, 2008 and
the year ended December 31, 2007, respectively.
Third-Party Research and Development Agreements.
We use 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
bioequivalent 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 accrual provided for operating expense incurred but not yet billed to us at each
balance sheet date. 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 minimis.
Share-Based Compensation
. We account for stock-based employee compensation arrangements in
accordance with provisions of SFAS 123(R),
Share-Based Payment
, which we adopted on January 1, 2006
using the modified prospective method. Under this method, compensation expense is recognized on a
straight-line basis over the remaining vesting period of any outstanding unvested options at the
adoption date and any new options granted after the adoption date. Prior periods are not restated
under this method. Prior to adoption of SFAS 123(R), we recognized compensation expense related to
stock options in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees. Under APB 25, compensation cost for stock options, if any, was
measured as the excess of the quoted market price of the common stock at the date of grant over the
amount an employee must pay to acquire the stock.
Income Taxes
. We are subject to U.S. federal, state and local income taxes. We create a
deferred tax asset when we have temporary differences between the results for financial reporting
purposes and tax reporting purposes. Prior to June 30, 2007, we recorded a valuation allowance for
all of our deferred tax assets since up and until that time, it was more likely than not that we
would be unable to realize those assets primarily due to our history of operating losses. At June
30, 2007, due primarily to the successful sales of generic
OxyContin® under a license,
we determined that it would be more likely than not that we would be able to realize these assets
and the valuation reserve was removed. This resulted in the recognition of a substantial tax
benefit in the second quarter of 2007. We have determined that these assets remain realizable
primarily due to the amount of taxable income which has been or we expect will be generated to
utilize these amounts.
43
Fair Value of Financial Instruments.
The carrying values of the Companys cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses
approximate their fair values due to their short-term nature. The Company estimates the fair value
of its fixed-rate long-term debt to be $12,272,000 at September 30, 2008 and $69,938,000,
$73,313,000 and $72,375,000 at December 31, 2007, 2006 and 2005, respectively.
Contingencies
. 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, shareholder lawsuits, and product
liability. In accordance with SFAS No. 5,
Accounting for Contingencies
, the Company records
accruals for such loss contingencies when it is probable a liability will be incurred and the
amount of loss can be reasonably estimated. The Company, in accordance with SFAS No. 5, does not
recognize gain contingencies until realized. A discussion of contingencies is included in Notes 13
and 14 to Consolidated Financial Statements.
Goodwill
. In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No.
142), rather than recording periodic amortization, goodwill is subject to an annual assessment for
impairment by applying a fair-value-based test. According to SFAS No. 142, 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 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 perform our annual goodwill impairment test in the fourth
quarter of each year. In addition, on a quarterly basis, we review our business operations to
determine whether events or changes in circumstances have occurred that could 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.
Allowance for Doubtful Accounts
. We maintain allowances for doubtful accounts for estimated
losses resulting from amounts deemed to be uncollectible from our customers; these allowances are
for specific amounts on certain accounts.
44
Results of Operations
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Total Revenues
Total revenues for the nine months ended September 30, 2008, were $165.4 million, a decrease
of 20% over the same period in 2007. Global product sales, net, were $70.8 million, an increase of
9% primarily due to sales of our fenofibrate products, the generic versions of Lofibra® capsules, a
cholesterol-lowering drug, of which ours was the only generic version in a market experiencing
increasing demand for drugs of this type. Rx Partner revenues were $72.1 million, down, more than
41%, primarily attributable to reduced sales of generic OxyContin® (including the absence in the
current years period of a $74.7 million increase in revenue recognized under the DAVA Agreement
during the nine months ended September 30, 2007, related to the change in the recognition period
resulting from the 2007 settlement of patent litigation) and our generic Wellbutrin® XL 300mg. As
it relates to the generic Wellbutrin® XL 300mg product, our customers inventories were relatively
full during the first quarter of 2007, resulting from the significant quantity purchases related to
the products launch in December 2006. Under a litigation settlement agreement, our generic
OxyContin® product was one of only two generic versions of OxyContin® in the marketplace during the
second and fourth quarters of 2007 and in January 2008, when we ceased further sales of this
product. The cessation of the sale of our generic version of OxyContin®, and the lower revenue in the
nine months ended September 30, 2008 as compared to the same period in 2007, has materially
affected the Rx Partner revenues for the nine months ended September 30, 2008 (as discussed above),
and the loss of this revenue may materially affect our Rx Partners revenue (and therefore our total
revenue) and resulting gross profit in the future. OTC Partner revenues were $12.7 million, an increase of 45%, primarily attributable to
higher demand for seasonal allergy products. Promotional Partner revenues were $9.7 million with
nominal change to the same period in 2007.
Cost of Revenues
Cost of revenues was $66.4 million for the nine months ended September 30, 2008, a decrease of
11% primarily due to reduced amortization of deferred manufacturing costs with the completion of
sales of generic OxyContin® in 2008. The nine months ended September 30, 2007, included a $12.4
million increase in the amortization of deferred product costs under the DAVA Agreement related to
the change in the amortization period.
Gross Profit
Gross profit for the nine months ended September 30, 2008 was $99.0 million or approximately
60% of total revenues, as compared to 64% of total revenue in the prior period. The decrease in
profit margin was due principally to sales of our generic versions of Oxycontin® during the first
nine months of 2008. The nine months ended September 30, 2007 included a $62.2 million increase in
gross profit under the DAVA Agreement related to the change in the recognition period. The cessation of the sale of our generic version of OxyContin® has materially affected the
gross profit for the nine months ended September 30, 2008 (as discussed above), and may materially
affect our gross profit in the future.
Research and Development Expenses
Total research and development expenses for the nine months ended September 30, 2008 were
$43.7 million, an increase of 65%. Generic project activity increased $11.2 million primarily due
to increased spending on bioequivalence studies of $4.1 million, and
additional research personnel of $2.8 million, related to seven new and 25 pending ANDA filings,
higher non-litigation related patent activities and opinion related
expenses of $1.2 million due to higher
patent research and application activity. Expenses related to our brand product
pipeline increased $6.0 million primarily related to higher
spending on additional research personnel.
Patent Litigation Expenses
Patent litigation expenses for the nine months ended September 30, 2008 and 2007 were $4.8
million and $8.3 million, respectively, a decrease of $3.5 million, principally related to lower overall operating expenses related to legal fees resulting from the conclusion of
two litigation matters during 2008.
45
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 30, 2008 were
$36.7 million, a 31% increase attributable to an increase in
professional fees of $2.8 million related to the
examination and review of our financial statements for the years 2004 through the current period of
2008, as well as the preparation of this registration statement, $2.3
million increase in salary and benefits-related expenses primarily
driven by the addition of several executive
level personnel, $1.4 million in severance expense related to the
separation of a former employee, and $1.2 million in higher consulting
expenses associated with strategic and operational management analyses.
Interest Income
Interest income was $0.5 million higher for the nine months ended September 30, 2008,
primarily due to higher average cash balances.
Interest Expense
Interest expense was $0.7 million lower for the nine months ended September 30, 2008, due to
reduced amounts of average debt outstanding, including the Cathay Bank term loans which were
paid-in full during May 2008 and the repurchase of our 3.5% Debentures.
Income Taxes
In the nine months ended September 30, 2008, our tax provision was $6.6 million for
federal and state income taxes. In the nine months ended September 30, 2007, we recorded a benefit
of $52.3 million which included the reversal of the deferred tax asset valuation allowance of $
81.5 million offset by an accrual of $6.0 million for uncertain tax positions. The total
amount of unrecognized tax benefits was $6.2 million as of September 30, 2008. The tax
provision for the nine months ended September 30, 2008, does not include the potential effect of
the federal research and development tax credit, as the law related to this credit expired on
December 31, 2007, and was not reinstated until after the September 30, 2008 balance sheet date.
Net Income
Net income for the nine months ended September 30, 2008 was $9.6 million as compared to net
income of $119.4 million in 2007, primarily due to the factors described above.
46
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Total Revenues
Total revenues for 2007 were $273.8 million, an increase of 102% over 2006, driven primarily
by Rx Partner and Global Product sales.
Global product sales, net were $88.0 million, an increase of 13% primarily due to the launch
of our generic version of Colestid® tablets and increased sales of our fenofibrate product, the
generic version of Lofibra® capsules, a cholesterol-lowering drug of which ours was the only
generic version in a market of increasing demand for drugs of this type. These increases were
partially offset by lower sales of the generic versions of Brethine® and Minocin® due to increasing
price competition.
Rx Partner revenues were $161.1 million up more than 300%, primarily attributable to sales of
our generic version of OxyContin®. Under a patent litigation settlement agreement, our product was
one of only two generic version of OxyContin® in the marketplace during the second and fourth
quarters of 2007 and in January 2008, when we ceased further sales of this product. As a result,
we concluded the economic life of the DAVA Agreement, and therefore our expected period of
performance, would end in January 2008. Accordingly, on March 30, 2007, the effective date of the
settlement, we adjusted the period of amortization for revenue recognition and product
manufacturing costs under the DAVA Agreement from 10 years to 27 months (
i.e.
November 2005 through
January 2008). The change in the revenue recognition period for the DAVA Agreement had the effect
of increasing revenue recognized under the DAVA Agreement by $93.9 million for the year ended
December 31, 2007. Additionally, higher sales of our new generic versions of Ditropan® XL 5 mg, 10
mg and 15 mg tablets and Wellbutrin® XL 300 mg were partially offset by a decline in sales of
generic Wellbutrin® SR 100mg & 150mg tablets, and generic Prilosec® 10 mg and 20 mg capsules due to
a declining market which contributed to both lower volume and pricing as competitors sought to
maintain or grow market share.
Revenues under the Teva Agreement increased to $42.5 million, as compared to $33.9 million in
2006, an increase of over 25%, primarily due to generic Wellbutrin® XL 300 mg, sales of which did
not begin until December 2006.
OTC Partner revenues declined $1.9 million to $11.9 million due to lower demand.
Promotional Partner revenues were $12.8 million in 2007, double that of 2006 due to the fact
that we did not begin providing promotional services until mid-2006.
Cost of Revenues
Cost of revenues was $107.7 million in 2007, an increase of 49% primarily as a result of the
increases in product sales as described above, including an increase of $20.7 million for the
amortization of deferred product manufacturing costs under the DAVA Agreement, related to the
change in the amortization period. This amount includes the of cost of products sold under our
Teva Agreement in the amount of $20.7 million, an increase of $7.8 million from 2006, primarily due
to the launch of our 300 mg generic version of Wellbutrin® XL. It also includes $10.8 million of
costs associated with the Promotional Partner revenues.
Gross Profit
Gross profit for 2007 was $166.1 million (including $73.2 million under the DAVA Agreement
related to the change in the recognition period), or approximately 61% of total revenues, compared
with $63.0 million, or 47% of total revenue in 2006. Of the total increase of 14 percentage
points, nine percentage points resulted from the relatively high margins associated with sales of
generic OxyContin® and the balance resulted from operational efficiencies.
47
Research and Development Expenses
Total research and development expenses for 2007 were $40.0 million, an increase of 35%.
Generic project activity increased to $31.2 million, a 28% increase primarily due to increased
spending on bioequivalent studies related to submission of 13 new ANDA filings in 2007 as compared
to seven filings in 2006. Investments in our brand product pipeline in 2007 were $8.8 million, an
increase of 66% related to higher spending on clinical trials.
Patent Litigation Expenses
Patent litigation expenses for the years ended December 31, 2007 and 2006 were $10.0 million
and $9.7 million, respectively, an increase of $0.3 million, due to higher expenses related to our
generic Effexor XR® litigation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2007 were $39.6 million, a 22% increase,
primarily driven by $1.7 million in professional fees related to legal, accounting, and audit
services and $3.9 million in incentive compensation
Litigation Settlement and Related Expenses
There were no material litigation settlement expenses in 2007, as compared with $2.6 million
for interest expense and legal fees related to a litigation settlement in 2006 of a suit brought
against us in 2003 by Solvay Pharmaceuticals, Inc.
Interest Income
Interest Income was $2.5 million higher in 2007, primarily due to higher cash balances as a
result of the increase in net sales.
Interest Expense
Interest expense was $0.3 million higher in 2007, due to higher amounts of average debt
outstanding.
Income Taxes
Income tax benefit for 2007 was $48.8 million with an effective tax rate of 35% before the
change in valuation allowance. There was a nominal income tax expense in 2006 as we reported a
loss from operations.
Net Income (Loss)
Net income for 2007 was $125.9 million as compared to a net loss of $12.0 million in 2006,
primarily due to the factors described above.
48
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Total Revenues
Total revenues for the year ended December 31, 2006 were $135.2 million, up 20% driven by Rx
Partner, OTC Partner, and Promotional Partner revenues, partially offset by a decline in Global
product sales, net.
Global product sales, net declined $11.1 million or 12% due primarily to the exclusion of
sales of generic OxyContin®, which we sold directly and reported as Global product sales, net in
2005 but sold through a marketing partner and thus reported as Rx Partner revenues in 2006, and to
lower sales of generic Wellbutrin® SR in 2006 due to fewer stocking orders following the
launch on December 22, 2004. These reductions were partially offset by the launch of our
fenofibrate products, the generic Lofibra® 67 mg, 134 mg, and 200 mg capsules, which
were introduced in the first quarter of 2006 and full-year sales of generic Rimadyl® 25
mg, 75 mg and 100 mg tablets, a veterinary product launched in the second quarter of 2005.
Rx Partner revenues increased to $36.8 million or more than 191%, attributable to the
inclusion of, and increases in, the net sales of generic OxyContin® in this category
during 2006. The increase in the sales of generic OxyContin® is due to full year sales
of the 80mg strength, which was launched in March of 2005, and the additional 10mg, 20mg and 40mg
strengths, which were launched in December 2005.
Revenues under the alliance agreement with Teva increased to $33.9 million in 2006, an
increase of over 170%, primarily due to revenues associated with the launch of the generic versions
of Ditropan® in the 15mg strength and Wellbutrin® XL in the 300mg strength during the fourth
quarter of 2006. In addition, an increase in revenue of generic Prilosec® was offset by lower
sales of generic Wellbutrin® SR 100mg and 150mg product principally due to substitution of the
Wellbutrin XL 300mg strength.
OTC Partner revenues were $13.8 million, or 32% over 2006, due to increased demand for our
generic version of Claritin-D®. The $6.4 million of Promotional Partner revenues in
2006 was received under an arrangement that did not begin until mid-2006.
Cost of Revenues
Cost of revenues was $72.2 million, an increase of 24% primarily due to higher product sales
described above. This amount includes the cost of products sold under our Teva Agreement in the
amount of $12.9 million, a significant increase from $3.3 million in 2005 primarily due to the
launches of generic versions of Ditropan® XL and Wellbutrin® XL 300mg in the fourth quarter of
2006. The amount also includes $5.6 million of cost associated with the Promotional Partner
revenues.
Gross Profit
Gross Profit for 2006 was $63.0 million, or approximately 47% of total revenues, an increase
of 17% over 2005 primarily due to the introduction of the generic versions of
OxyContin®, Wellbutrin® XL and Ditropan® XL in 2006. Combined,
these products added approximately 25% to total gross profit at favorable margins while improving
operational efficiencies.
Research and Development Expenses
Research and development expenses for 2006 were $29.6 million, an increase of 14%. Additional
expenses for our generic research and development projects were primarily the result of purchases
of active pharmaceutical ingredients associated with new product investigations, legal costs of
investigating existing and proposed intellectual property, higher depreciation expenses and higher
costs of clinical studies. Expenses related to our brand product projects increased due to higher
spending on research staff of $1.0 million and increased clinical study expenses of $0.5 million.
49
Patent Litigation Expenses
Patent litigation expenses for the years ended December 31, 2006 and 2005 were $9.7 million
and $7.7 million, respectively, an increase of $2.0 million, primarily attributable to the receipt
of $1.8 million in 2005 in connection with a litigation reimbursement.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2006 were $32.4 million, an increase of 26%
primarily due to higher salary and related expenses associated with new hires, a cash-based
employee retention program for 2006 and regular increases in employee compensation.
Litigation Settlement and Related Expenses
While we incurred expenses of $2.6 million in connection with the settlement of a litigation
matter in 2006, there were no material litigation settlements or related expenses in 2005.
Interest Income
Interest Income was $0.2 million higher in 2006, due to higher average cash and short-term
investment balances during 2006.
Interest Expense
Interest expense was $2.5 million lower in 2006, due to the absence of higher interest expense
in 2005 related to the write-off of deferred financing costs associated with the repayment of the
Companys 1.25% Convertible Senior Subordinated Debentures due 2024 (1.25% Debentures) and
reduced average levels of debt outstanding resulting from the repayment of certain bank loans in
June 2005.
Income Taxes
In 2005 and 2006 there was no current federal or state income tax expense due to the
utilization of federal and state net operating loss carry forwards, except for one state in which
there was a statutory limitation on the maximum annual utilization of net operating loss carry
forwards to reduce current tax expense. As a result, a current state tax liability of $0.1 million
and $0.2 million was recorded in 2005 and 2006 respectively.
Net Loss
The net loss for 2006 was $12.0 million as compared to a net loss of $5.8 million in 2005.
50
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 primary source of
liquidity is cash from operations, consisting of the proceeds from the sales of our products. We
expect to incur significant operating expenses, including expanded research and development
activities and patent litigation expenses, for the foreseeable future. We also anticipate
incurring capital expenditures of $20 million to $28 million during the next twelve months,
primarily for our plant capacity expansion in Taiwan. We believe our existing cash and cash
equivalent and short-term investment balances, together with cash generated from operations, and
our bank revolving line of credit, will be sufficient to meet our financing requirements through
the next twelve months. We may, however, seek additional financing through alliance agreements or
the equity or debt capital markets to fund the planned capital expenditures, and to fund our
research and development plans, and potential revenue shortfalls due to delays in new product
introductions.
Cash and Cash Equivalents
At September 30, 2008, we had $25.9 million in cash and cash equivalents, a decrease of $31.3
million as compared to September 30, 2007. At December 31, 2007, we had $37.5 million in cash and
cash equivalents, an increase of $31.1 million as compared to December 31, 2006. At December 31,
2006, we had $6.4 million in cash and cash equivalents, a decrease of $49.5 million as compared to
December 31, 2005.
Cash Flows
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
.
Net cash provided by operating activities for the nine months ended September 30, 2008 was
$21.4 million, a decrease of $94.4 million from the prior year period.
The decrease in net cash provided by operating activities, among other items noted below,
resulted from a $109.8 million reduction in net income, of which such amount was $9.6 million for
the nine months ended September 30, 2008 as compared to $119.4 for the same period in the prior
year. Additionally, the change in revenue deferrals of $113.6 million, less the change in deferred
product manufacturing cost of $16.4 million, resulted in a $97.2 million net decrease of deferrals
related to our alliance agreements, offset by a $39.1 million increase in revenue recognized in excess of
product manufacturing costs amortized under our alliance agreements. The net decrease of deferrals
related to our alliance agreements was principally due to lower sales of our generic OxyContin® and
generic Wellbutrin XL® products, marketed under the Companys Rx Partners alliance agreements,
including the DAVA Agreement and the Teva Agreement, respectively.
Additionally, the absence of certain items in the current period as compared to the prior
period include an $81.5 million reversal of the valuation allowance on deferred tax assets, a $10.5
million deduction for the tax benefit related to the exercise of employee stock options (which for
the nine months ended September 30, 2007, was classified as a source of cash flows from financing
activities under GAAP), offset by a $6.0 million provision for uncertain tax positions.
Other items impacting the change in net cash provided by operating activities include lower
aggregate exclusivity period fee payments of $9.0 million in the nine months ended September 30,
2008 as compared to $15.5 million in the same period of the prior year, a $4.1 million increase in
share-based compensation, a $13.9 million decrease in accounts payable and accrued expenses,
including $23.6 million accrued taxes payable absent from the current year period but included in
the prior year period, a decrease of $6.7 million in deferred tax assets, resulting principally
from a lower deferred tax benefit corresponding to the lower net deferrals related to our alliance
agreements noted above, and an aggregate increase of $10.7 million in inventory, prepaid expenses,
and other assets, offset by a $8.6 million decrease in accounts receivable balances.
51
Net cash provided by investing activities for the nine months ended September 30, 2008,
amounted to $32.1 million, an increase of $107.6 million as compared to the prior year period, with
the change primarily due to $112.8 million net liquidations of short-term investments (related to
the repurchase of the Companys 3.5% Debentures see the discussion of net cash used in financing
activities below). Capital expenditures for the nine months ended September 30, 2008 amounted to
$20.9 million as compared to $15.7 million for the prior year period. The 2008 capital
expenditures includes $13.1 million of a total estimated investment of $25.0 million for our new
Taiwan manufacturing facility, which is expected to be completed in 2009. In addition, 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. We estimate research and development and patent litigation expenses to
be approximately $75.0 million and $12.0 million, respectively, for the next 12 months.
Net cash used in financing activities for the nine months ended September 30, 2008 was
approximately $65.0 million, primarily related to $65.2 million used for the repayment of long-term
debt. In this regard, during August and September 2008, at the request of the holders, the Company
made aggregate cash payments of $59.9 million to repurchase, at a discount, an aggregate of $62.25
million in principal face value of our 3.5% Debentures. Proceeds to fund the repurchase of the
3.5% Debentures were generated from the liquidation of our short-term investments. The remaining
$12.75 million principal amount of the 3.5% Debentures are subject to repurchase by us at 100% of
the face value on June 15, 2009 at the option of the holders. Additionally, during the current
period, aggregate payments of $5.2 million (which includes $5.1 million in early repayments,
without penalty) were made for our Cathay Bank term loans, resulting in the repayment in full of
both the term loans. Net cash provided by financing activities for the nine months ended September
30, 2007 was approximately $10.5 million, principally resulting from the $10.5 million tax benefit
related to the exercise of employee stock options.
52
Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006.
Net cash provided by operating activities for the year ended December 31, 2007 was $119.0
million, an increase of $124.8 million from the prior year period. This increase was primarily
attributable to net income generated by the business principally due to sales of generic OxyContin®
and net deferred revenue from Rx Partners of approximately $55.4 million. In addition, $18.2
million in payments to Teva as exclusivity fees regarding the launch of generic
Wellbutrin® XL 300mg was partially offset by a $9.9 million increase in cash receipts
from trade accounts receivables, lower inventories of $6.5 million and other working capital items.
Net cash used in investing activities were purchases of short-term investments, net of sales
of $98.3 million, an increase of $54.6 million as compared to the prior period. This reflects our
decision to invest the excess portion of our cash balances into higher-yielding short term
investments. Our capital expenditures for the twelve months ended December 31, 2007 were $18.8
million as compared to $21.5 million for the same period in 2006. The 2007 expenditures included
$0.4 million as part of our total estimated investment of $25.0 million for our new Taiwan
manufacturing facility which is expected to be completed in 2009.
Net cash used by financing activities for the year ended December 31, 2007 was approximately
$10.3 million, principally resulting from the $10.5 million tax benefit related to the exercise of
employee stock options, and $0.1 million net proceeds from exercise of stock options and warrants
and purchases under the ESPP, offset by $0.3 million used for repayment of long-term debt. Cash
flows from financing activities for the year ended December 31, 2006, consisted of $0.1 million net
proceeds from exercise of stock options and warrants and purchases under the ESPP, fully offset by
$0.1 million used for repayment of long-term debt.
Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
.
Net cash used by operating activities for the year ended December 31, 2006 was $5.8 million, a
decrease of $26.9 million from the prior year period. This decrease was primarily attributable to
net deferred revenue from Rx Partners of approximately $50.2 million offset by $14.4 million in
payments to Teva as exclusivity fees regarding the launch of generic Wellbutrin® XL 300mg, payment
of a $12.0 million litigation settlement, a $24.7 million increase in trade accounts receivables
and other working capital items.
Net cash used in investing activities were purchases of short-term investments, net of sales
of $43.7 million, an increase of $79.1 million as compared to the prior period. Our capital
expenditures for the twelve months ended December 31, 2006 were $21.5 million as compared to $14.8
million for the same period in 2005.
Cash flows from financing activities for the year ended December 31, 2006, consisted of $0.1
million net proceeds from exercise of stock options and warrants and purchases under the ESPP,
fully offset by $0.1 million used for repayment of long-term debt. Cash flows used in financing
activities for the year ended December 31, 2005 amounted to $29.7 million, principally consisting
of $95.0 million used for repurchase of the 1.25% Debentures, offset by proceeds of $74.9 million
from the issuance of the 3.5% Debentures, along with the payment of $2.5 million used for the
payment of deferred financing fees associated with the 3.5% Debentures, $5.0 million used for the
repayment of the revolving line of credit, and $2.6 million used to repay long-term debt.
53
Outstanding Debt Obligations
Senior Lenders; Wachovia Bank
In December 2005, we entered into a new three year credit agreement with Wachovia, replacing
the previous loan and security agreement and providing for a $35 million revolving credit facility
intended for working capital and general corporate purposes. There was no amount outstanding under
the revolving credit facility as of September 30, 2008 and December 31, 2007, 2006 and 2005,
respectively. The revolving credit facility is collateralized by eligible accounts receivable,
inventory, and machinery and equipment, subject to limitations and other terms. The interest rate
for the revolving credit facility is either the prime rate, or LIBOR plus a margin ranging from
1.5% to 2.25% based upon terms and conditions, at our option.
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 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 were limited to
capital expenditures of no more than $50,000,000 for the period from January 1, 2005 through
December 31, 2006 and no more than $25,000,000 for the period from January 1, 2007 through December
31, 2007. We are limited to capital expenditures of no more than $34,000,000 for the period from
January 1, 2008 to December 31, 2008. At September 30, 2008 and December 31, 2007, we were in
compliance with the financial covenants contained in the credit agreement.
The credit agreement also provides for certain information reporting covenants, including a
requirement to file certain periodic financial information. On October 14, 2008, we entered into
an amendment to the credit agreement with Wachovia in which Wachovia waived our failure to timely
deliver annual and interim financial statements required by the credit agreement as well as our
noncompliance with the fixed charge coverage ratio at June 30, 2006. In addition, we agreed to an
increase in the unused line fee from 25 basis points per annum to 50 basis points per annum.
During the nine months ended September 30, 2008 and the year ended December 31, 2007, we paid
$67,976 and $87,500, respectively, as unused line fee to Wachovia.
Our credit agreement with Wachovia, as amended, terminates on December 31, 2008. If we are
unable to negotiate an extension to the credit agreement on similar terms, there can be no
assurance that we would be able to obtain a new credit agreement with another bank or group of
lenders on favorable terms or at all. In addition, on October 3, 2008, Wachovia announced its
agreement to be acquired by Wells Fargo. If Wachovia, or its successor, is not able to perform its
obligations under the credit agreement, we would have no borrowing capacity under our credit
facility.
54
3.5% Debentures
In June 2005, we completed a private placement of $75 million of 3.5% Debentures. The 3.5%
Debentures are our senior subordinated, unsecured obligations that mature on June 15, 2012 and may
not be redeemed by us prior to maturity. Holders also have the right to require us to repurchase
all or any portion of the 3.5% Debentures on June 15, 2009. We used the net proceeds from the sale
of the 3.5% Debentures together with existing cash to repay our $95.0 million 1.25% Convertible
Senior Subordinated Debentures due 2024 (1.25% Debentures), which, together with accrued interest
thereon, had become due and payable following our default under the terms of the indenture
governing such 1.25% Debentures. Our default under the 1.25% Debentures resulted from our failure
to file our 2004 annual report on Form 10-K, which constituted a breach of a covenant of the
indenture governing the 1.25% Debentures.
The 3.5% Debentures rank pari passu with our accounts payable and other liabilities and are
subordinate to certain senior indebtedness, including our credit agreement with Wachovia. The
indenture governing the 3.5% Debentures limits the aggregate amount of our indebtedness ranking
senior to or pari passu with the 3.5% Debentures to the greater of (i) $50 million or (ii) as of
any date, four times our EBITDA for the immediately preceding 12-month period for which public
financial information is available. The 3.5% Debentures are convertible into shares of our common
stock at an initial conversion price of $20.69 per share.
Under a related registration rights agreement, we agreed to file a registration statement
covering the 3.5% Debentures and shares of common stock issuable upon the conversion of such
debentures. Because we did not meet the deadlines set forth in the registration rights agreement,
we are required to pay liquidated damages, at an annual rate of 0.5% of the aggregate principal
amount of the 3.5% debentures, until the registration statement becomes effective. We paid
$601,000 in liquidated damages through December 15, 2007 and have not made any additional payments,
which payments are being accrued.
In August and September 2008, at the request of the holders, we repurchased at a discount, an
aggregate face value of $62.25 million principal amount of the 3.5% Debentures, paying $60.3
million including $433,000 of accrued interest. Proceeds to fund the repurchase of the 3.5%
Debentures were generated from the liquidation of our short-term investments. The remaining $12.75
million principal amount of the 3.5% Debentures are subject to repurchase by us at 100% of the face
value on June 15, 2009 at the option of the holders.
Solvay Promissory Note
In June, 2006, we issued a subordinated promissory note in the amount of $11.0 million related
to the settlement of litigation brought by Solvay Pharmaceuticals, Inc. (Solvay), bearing
interest at 6.0% per annum, with 24 quarterly principal and interest installment payments of
$549,165 commencing March 2007 through December 2012. The Solvay promissory note becomes
immediately due and payable upon the occurrence of a default in any payment due, a change in
control of us, voluntary or involuntary bankruptcy proceeding by or against us and failure to
maintain working capital less than 150% of the remaining unpaid balance of the promissory note. As
of September 30, 2008, none of the four events noted above occurred.
55
Commitments and Contractual Obligations
Our contractual obligations as of December 31, 2007 were as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
More Than
|
($ in thousands)
|
|
Total
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facilities and Long Term Debt(a)
|
|
$
|
89,744
|
|
|
$
|
69,234
|
|
|
$
|
16,399
|
|
|
$
|
4,111
|
|
|
$
|
|
|
Interest Expense Payable Long-Term Debt
|
|
$
|
4,167
|
|
|
$
|
2,886
|
|
|
$
|
999
|
|
|
$
|
282
|
|
|
$
|
|
|
Open Purchase Order Commitments
|
|
|
12,013
|
|
|
|
12,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease (b)
|
|
|
5,987
|
|
|
|
1,278
|
|
|
|
1,957
|
|
|
|
1,274
|
|
|
|
1,478
|
|
Construction Contracts (c)
|
|
|
422
|
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
112,333
|
|
|
$
|
85,833
|
|
|
$
|
19,355
|
|
|
$
|
5,667
|
|
|
$
|
1,478
|
|
|
|
|
(a)
|
|
Represents the principal portion of payments of debt obligations, including: (i) $75
million 3.5% Debentures due on June 15, 2012, interest paid semi-annually, starting December
15, 2005; (ii) 8.17% loan payable to Cathay Bank in 83 monthly principal and interest
installment payments of $19,540 commencing June 28, 2001, through May 27, 2008 with a balance
of $2,208,843 due on June 28, 2008; (iii) 7.5% loan payable to Cathay Bank in 83 monthly
principal and interest installment payments of $24,629 commencing November 14, 2001, through
October 13, 2008 with a balance of $2,917,598 due on November 14, 2008; (iv) 6.0% note
payable to Solvay in 24 quarterly principal and interest installment payments of $549,165
commencing March 2007 through December 2012; and (v) Vendor financing agreement related to
software licenses with interest at 3.10% in 2 monthly installments of $0 and 34 monthly
principal and interest installments of $12,871 commencing December 2006 through November
2009.
|
|
|
|
During August and September 2008, at the request of the holders, the Company repurchased, at a
discount, an aggregate of $62.25 million in principal face value of our 3.5% Debentures. The
remaining $12.75 million principal amount of the 3.5% Debentures are subject to repurchase by
us at 100% of the face value on June 15, 2009 at the option of the holders.
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|
The 8.17% Cathay Bank loan was collateralized by land, building and building improvements in
our headquarters and research facility in Hayward, California. The 7.50% Cathay Bank loan was
collateralized by land, building and building improvements in our manufacturing facility in
Hayward, California. In May 2008, we prepaid, without penalty, all of our indebtedness under
the term loans with Cathay Bank in an aggregate amount of $5,159,000, including accrued
interest through the date of the prepayment.
|
|
(b)
|
|
We lease office, warehouse, and laboratory facilities under non-cancelable operating leases
through January 2015. We also lease certain equipment under various non-cancelable operating
leases with various expiration dates through 2012.
|
|
(c)
|
|
Construction contracts are related to our currently under-construction facility in Taiwan,
R.O.C., which is intended to be utilized for manufacturing, research and development,
warehouse, and administrative space. The construction phase of this project is expected to
be completed and equipment to be installed, validated, and approved by FDA in 2009, and
product shipments to begin in early 2010. In conjunction with the construction of our Taiwan
facility, we have entered into several contracts, amounting to an aggregate of approximately
$853,000 as of December 31, 2007 and $16,539,000 as of September 30, 2008. As of December
31, 2007, we had remaining commitments under these contracts of approximately $422,000 and
$4,580,000 as of September 30, 2008.
|
|
|
|
The amounts shown above exclude uncertain tax positions as determined under FIN 48 as we
cannot predict if or when such amounts, if any, will be paid or payable to the taxing
authorities.
|
56
Off Balance-Sheet Arrangements
We have not entered into any off-balance arrangements other than $500,000 in letters of credit
entered into in the ordinary course of business.
Recent Accounting Pronouncements
In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108 (SAB 108),
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements. SAB 108 was issued in order to eliminate the diversity of practice
surrounding how public companies quantify financial statement misstatements. Traditionally, there
have been two widely-recognized methods for quantifying the effects of financial statement
misstatements: the rollover method and the iron curtain method. The rollover method focuses
primarily on the impact of a misstatement on the income statementincluding the reversing effect
of prior year misstatementsbut its use can lead to the accumulation of misstatements in the
balance sheet. The iron curtain method, on the other hand, focuses primarily on the effect of
correcting the period-end balance sheet with less emphasis on the reversing effects of prior year
errors on the income statement. The staff believes registrants must quantify the impact of
correcting all misstatements, including both the carryover and reversing effects of prior year
misstatements, on the current year financial statements. The staff believes that this can be
accomplished by quantifying an error under both the rollover and iron curtain approaches as
described above and by evaluating the error measured under each approach. Thus, a registrants
financial statements would require adjustment when either approach results in quantifying a
misstatement that is material, after considering all relevant quantitative and qualitative factors.
SAB 108 is effective for any report for an interim period of the first fiscal year ending after
November 15, 2006. Our SAB 108 analysis did not result in an adjustment to our consolidated
financial statements for the effective periods.
In September 2006, the FASB issued SFAS No. 157 (SFAS 157) Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. With respect to financial assets and liabilities SFAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The effective date of SFAS 157, with respect to non-financial
assets and liabilities, was deferred by FASB Staff Position FAS 157-2 and is effective for
financial statements issued for fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years. The adoption of SFAS 157 did not have a significant impact on our
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for
Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115,
providing companies with an option to choose, at specific election dates, to measure eligible
financial assets and liabilities at fair value that are not otherwise required to be measured at
fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007, early
adoption is allowed. We have not elected to use the fair value option of SFAS 159, and therefore
do not expect SFAS 159 to have an impact on our consolidated financial statements.
In June 2007, the EITF reached a final consensus on EITF Issue No. 07-3 (EITF 07-3),
Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities. EITF 07-3, which is effective for fiscal years beginning after
December 15, 2007, requires non-refundable advance payments for future research and development
activities to be capitalized until the goods have been delivered or related services have been
performed. Adoption is on a prospective basis and could impact the timing of expense recognition
for agreements entered into after December 31, 2007. We do not expect the adoption of EITF 07-3 to
have a significant impact on our consolidated financial statements.
In November 2007, the EITF reached a final consensus on EITF Issue No. 07-1 (EITF 07-1)
Accounting for Collaborative Arrangements Related to the Development and Commercialization of
Intellectual Property. EITF 07-1 is focused on how the parties to a collaborative agreement
should account for costs incurred and revenue generated on sales to third parties, how sharing
payments pursuant to a collaborative agreement should be presented in the income statement and
certain related disclosure questions. EITF 07-1 is effective for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. Adoption is on a retrospective
basis to all prior periods presented for all collaborative arrangements existing as of the
effective date. We are currently evaluating the impact of EITF 07-1 adoption on our consolidated
financial statements.
57
In December 2007, the FASB issued SFAS 141 (Revised 2007) (SFAS 141(R)), Business
Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting
for acquisitions, but requires a number of changes, including changes in the way assets and
liabilities are recognized in the purchase accounting. It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R is effective for us beginning January 1, 2009
and will apply prospectively to business combinations completed on or after that date. The effect of SFAS 141 (R) on our
consolidated financial statements will be dependent on the nature and terms of any business
combinations that occur after its effective date.
In December 2007, the FASB issued SFAS No. 160 (SFAS 160), Non-controlling Interests in
Consolidated Financial Statements. SFAS 160 clarifies that a non-controlling (minority) interest
in a subsidiary is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements, and establishes a single method of accounting for
changes in a parents ownership interest in a subsidiary that do not result in deconsolidation.
SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing
minority interests. All other requirements of SFAS 160 shall be applied prospectively. SFAS 160
is effective for fiscal years beginning on or after December 15, 2008. We do not expect the
adoption of SFAS 160 to have a significant impact on our consolidated financial statements unless a
future transaction results in a non-controlling interest in a subsidiary.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful
Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.
The FSP is intended to improve the consistency between the useful life of a recognized intangible
asset under Statement 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS 141(R) and other U.S. generally accepted accounting principles. The new
standard is effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. We are currently evaluating the impact of FSP FAS 142-3
adoption on our consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position APB 14-1 (FSP APB 14-1), Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 specifies that issuers of such instruments should separately account
for the liability and equity components in a manner that will reflect the entitys nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. This FASB staff position is
effective for financial statements issued for fiscal years beginning after December 31, 2008. We
are currently evaluating the impact of FSP APB 14-1 on our consolidated financial statements.
Quantitative and Qualitative Disclosures about Market Risk
Our cash and cash equivalents include a portfolio of high credit quality securities, including
U.S. Government securities, treasury bills, short-term commercial paper, and high-rated money
market funds. Our entire portfolio matures in less than one year. The carrying value of the
portfolio approximates the market value at December 31, 2007. Our debt instruments at December 31,
2007, are subject to fixed and variable interest rates and principal payments. We estimate the
fair value of our fixed-rate long-term debt to be $12,272,000 at September 30, 2008, and
$69,938,000, $73,313,000 and $72,375,000 at December 31, 2007, 2006, and 2005, respectively. While
changes in market interest rates may affect the fair value of our fixed and variable rate long-term
debt, we believe the effect, if any, of reasonably possible near-term changes in the fair value of
such debt on our financial statements will not be material.
We do not use derivative financial instruments and have no material foreign exchange or
commodity price risks.
58
Item 3. Properties.
Our primary properties consist of a 35,000 sq. ft. corporate headquarters and research and
development center and 50,000 sq. ft. manufacturing facility, both located in Hayward, CA, a
113,000 sq. ft. packaging, warehousing and distribution center in Philadelphia, PA, all of which
are owned by us, and a leased 44,000 sq. ft. facility in New Britain, PA housing sales, marketing
and administration personnel and providing additional warehouse space. In addition, we own a
19,000 sq. ft. office building containing additional administrative and laboratory facilities in
Hayward and lease six additional buildings aggregating 92,000 sq. ft. in Hayward, Pleasanton, and
Fremont, CA utilized for additional research and development, administrative services and equipment
storage. We also have currently under construction a 100,000 sq. ft. manufacturing facility in
Taiwan. We expect construction of the facility, which will have an annual production capacity of
approximately 450 million tablets and capsules, to be completed and equipment to be installed,
validated, and approved by the FDA in 2009, and product shipments to begin in early 2010.
In our various facilities we maintain an extensive equipment base that includes new or
recently reconditioned equipment for the manufacturing and packaging of compressed tablets, coated
tablets, and capsules. The manufacturing and research and development equipment includes mixers
and blenders for capsules and tablets, automated capsule fillers, tablet presses, particle
reduction, sifting equipment, and tablet coaters. The packaging equipment includes fillers,
cottoners, cappers, and labelers. We also maintain two well-equipped, modern laboratories used to
perform all the required physical and chemical testing of our products. We also maintain a broad
variety of material handling and cleaning, maintenance, and support equipment. We own
substantially all of our manufacturing equipment and believe it is well maintained and suitable for
its requirements.
We maintain property and casualty and business interruption insurance in amounts we believe
are sufficient and consistent with practices for companies of comparable size and business.
59
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of October 31, 2008 (except as otherwise noted
in the footnotes) regarding the beneficial ownership of our common stock by: (i) each person known
by us to beneficially own more than five percent of our outstanding common stock; (ii) each
director; (iii) each executive officer named in the Summary Compensation Table for the fiscal year
ended December 31, 2007; and (iv) all of our directors and executive officers as a group. As of
October 31, 2008, 59,218,938 shares of our common stock were outstanding. Except as otherwise
indicated, to our knowledge, the beneficial owners of shares of common stock listed below have sole
voting and investment power with respect to such shares.
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned (1)
|
|
|
|
Common Stock
|
|
|
|
Amount and Nature
|
|
|
|
|
|
|
of Beneficial
|
|
|
|
|
Name and Address of Beneficial Owner
|
|
Ownership
|
|
|
Percent of Class
|
|
Leslie Z. Benet, Ph.D. (2)
|
|
|
30,600
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Robert L. Burr (3)
|
|
|
52,207
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
David S. Doll (4)
|
|
|
174,779
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Nigel Fleming, Ph.D. (5)
|
|
|
39,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Charles V. Hildenbrand (6)
|
|
|
61,459
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Charles Hsiao, Ph.D. (7)
|
|
|
4,104,456
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
Larry Hsu, Ph.D. (8)
|
|
|
2,735,521
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
Arthur A. Koch, Jr. (9)
|
|
|
50,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Michael Markbreiter (10)
|
|
|
31,500
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Michael Nestor
|
|
|
2,575
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Oh Kim Sun (11)
|
|
|
43,179
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Peter R. Terreri (12)
|
|
|
37,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (10 persons) (13)
|
|
|
7,362,276
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
Jacob Gottlieb (14)
|
|
|
5,294,428
|
|
|
|
8.9
|
|
Visium Asset Management, LLC (14)
|
|
|
5,294,428
|
|
|
|
8.9
|
|
Visium Balanced Fund, LP
|
|
|
973,910
|
|
|
|
|
|
Visium Long Bias Fund, LP
|
|
|
531,117
|
|
|
|
|
|
Visium Balanced Offshore Fund, Ltd.
|
|
|
1,958,007
|
|
|
|
|
|
Visium Long Bias Offshore Fund, Ltd.
|
|
|
1,587,367
|
|
|
|
|
|
Atlas Master Fund, Ltd.
|
|
|
244,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Visium Capital Management, LLC
|
|
|
1,505,027
|
|
|
|
|
|
Visium Balanced Fund, LP
|
|
|
973,910
|
|
|
|
|
|
Visium Long Bias Fund, LP
|
|
|
531,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gabe Hoffman (15)
|
|
|
3,129,349
|
|
|
|
5.3
|
|
60
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned (1)
|
|
|
|
Common Stock
|
|
|
|
Amount and Nature
|
|
|
|
|
|
|
of Beneficial
|
|
|
|
|
Name and Address of Beneficial Owner
|
|
Ownership
|
|
|
Percent of Class
|
|
Candens Capital, LLC
|
|
|
1,594,638
|
|
|
|
|
|
Accipiter Life Sciences Fund, LP
|
|
|
708,108
|
|
|
|
|
|
Accipiter Life Sciences Fund II, LP
|
|
|
413,477
|
|
|
|
|
|
Accipiter Life Sciences Fund II (QP), LP
|
|
|
473,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accipiter Capital Management, LLC
|
|
|
1,534,711
|
|
|
|
|
|
Accipiter Life Sciences Fund (Offshore), Ltd.
|
|
|
712,137
|
|
|
|
|
|
Accipiter Life Science Fund II (Offshore), Ltd.
|
|
|
822,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laurie A. Miller, Esquire (16)
3542 Oak Knoll Drive
Redwood City, CA 94062
|
|
|
3,949,264
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
Pequot Capital Management, Inc. (17)
|
|
|
6,330,300
|
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
Wellington Management Company, LLP (18)
|
|
|
7,967,761
|
|
|
|
13.5
|
|
|
|
|
*
|
|
Less than one percent
|
|
(1)
|
|
Beneficial ownership is determined in accordance with the rules of the SEC and includes
voting or investment power with respect to shares of our common stock. Shares of common stock
currently exercisable or exercisable within 60 days of October 31, 2008 are deemed to be
outstanding for computing the beneficial ownership and percentage of beneficial ownership of
the person holding such securities, but are not deemed to be outstanding for computing the
percentage of beneficial ownership of any other person. The address for all our directors and
executive officers is c/o Impax Laboratories, Inc., 30831 Huntwood Avenue, Hayward, CA 94544.
|
|
(2)
|
|
Represents 3,000 shares of common stock held by Mr. Benet directly, 600 shares of common
stock held by The Benet Family Trust, as to which Mr. Benet has sole voting and investment
power, and options to purchase 27,000 shares of common stock, which may be exercised within 60
days of October 31, 2008.
|
|
(3)
|
|
Represents 29,150 shares of common stock held by Mr. Burr directly, 6,057 shares of common
stock held by Robert L. Burr IRA account, as to which Mr. Burr has sole voting and investment
power, and options to purchase 17,000 shares of common stock, which may be exercised within 60
days of October 31, 2008.
|
|
(4)
|
|
Represents 2,279 shares of common stock held by Mr. Doll directly and options to purchase
172,500 of common stock, which may be exercised within 60 days of October 31, 2008. Mr. Doll
resigned as our Executive Vice President, Commercial Operations in August 2008, and his
options to purchase 172,500 shares of common stock were terminated in connection with his
resignation.
|
|
(5)
|
|
Represents 12,000 shares of common stock held by Mr. Fleming directly and options to purchase
27,000 shares of common stock, which may be exercised within 60 days of October 31, 2008.
|
|
(6)
|
|
Represents options to purchase 61,459 shares of common stock, which may be exercised within
60 days of October 31, 2008.
|
|
(7)
|
|
Dr. Hsiao died in August 2008. As of the date of this table, represents 3,471 shares of
common stock held by Dr. Hsiao directly, 3,531,605 shares of common stock held by Charles &
Pamela Hsiao TTEES 2004 Hsiao Family Trust, as to which Dr. Hsiao has sole voting and
investment power, and options to purchase 569,380 shares of common stock, which may be
exercised within 60 days of October 31, 2008. Excludes 2,601,924 shares of common stock held
by Chiin Hsiao Children Irrevocable Trust, as to which Dr. Hsiao does not have voting or
investment power.
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61
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|
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(8)
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|
Represents 2,383,771 shares of common stock held by Mr. Hsu directly, options to purchase
225,000 shares of common stock held by Mr. Hsu and options to
purchase 126,750 shares of
common stock held by Mr. Hsus spouse, which may be exercised within 60 days of October 31,
2008. Excludes 1,254,320 shares of common stock held by Hsu Children Irrevocable Trust, as to
which Mr. Hsu does not have voting or investment power.
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(9)
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|
Represents options to purchase 50,000 shares of common stock, which may be exercised within
60 days of October 31, 2008.
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|
(10)
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|
Represents options to purchase 31,500 shares of common stock, which may be exercised within
60 days of October 31, 2008.
|
|
(11)
|
|
Represents 16,679 shares of common stock held by Mr. Oh directly and options to purchase
26,500 shares of common stock, which may be exercised within 60 days of October 31, 2008.
|
|
(12)
|
|
Represents options to purchase 37,000 shares of common stock, which may be exercised within
60 days of October 31, 2008.
|
|
(13)
|
|
Includes options to purchase 1,371,089 shares of common stock, which may be exercised within
60 days of October 31, 2008.
|
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(14)
|
|
Based solely on Schedule 13G/A filed with the SEC on October 23, 2007 by Jacob Gottlieb,
Visium Balanced Fund, LP (referred to as VBF), Visium Long Bias Fund, LP (referred to as
VLBF), Visium Balanced Offshore Fund, Ltd. (referred to as VBFO), Visium Long Bias Offshore
Fund, Ltd. (referred to as VLBFO), Visium Capital Management, LLC (referred to as VCM), Visium
Asset Management, LLC (referred to as VAM) and Atlas Master Fund, Ltd. (referred to as AMF).
Jacob Gottlieb, by virtue of his position as the principal of VAM and the sole managing member
of VCM, may be deemed to beneficially own 5,294,428 shares of common stock. VCM, by virtue of
its position as general partner to each of VBF and VLBF, may be deemed to beneficially own
1,505,027 shares of common stock, over which VCM has shared voting and investment power. VAM,
by virtue of its position as investment advisor to each of VBF, VLBF, VBFO, and VLBFO as well
as managing an account for AMF, may be deemed to beneficially own 5,294,428 shares of common
stock. Each of VBF, VLBF, VBFO, VLBFO and AMF has shared voting and investment power over the
number of shares beneficially owned by it, as indicated in the table. The principle business
address of VBF, VLBF, VCM and VAM is 950 Third Avenue, New York, NY 10022, the principle
business address of VBFO and VLBFO is P.O. Box 2681 GT, Century Yard, 4
th
Floor,
Cricket Square, Hutchins Drive, Grand Cayman, Cayman Islands, British West Indies, and the
principal business address of AMF is Walker House, P.O. Box 908 GT, George Town, Grand Cayman,
Cayman Islands, British West Indies.
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(15)
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|
Based solely on Schedule 13G filed with the SEC on February 1, 2008 by Gabe Hoffman,
Accipiter Life Sciences Fund, LP (referred to as ALSF), Accipiter Life Sciences Fund
(Offshore), Ltd. (referred to as Offshore), Accipiter Life Sciences Fund II, LP (referred to
as ALSF II), Accipiter Life Sciences Fund II (Offshore), Ltd. (referred to as Offshore II),
Accipiter Life Sciences Fund II (QP), LP (referred to as QP II), Accipiter Capital Management,
LLC (referred to as Management), and Candens Capital, LLC (referred to as Candens). Because
Mr. Hoffman is the managing member of Candens, which in turn is the general partner of ALSF,
ALSF II and QP II, and because Mr. Hoffman is the managing member of Management, which in turn
is the investment manager of Offshore and Offshore II, Mr. Hoffman, Candens and Management, as
applicable, may be deemed to be the beneficial owners of all shares of common stock held by
ALSF, ALSF II, Offshore, Offshore II and QP II. Each of Mr. Hoffman, Candens and Management
has shared voting and investment power over the number of shares beneficially owned by such
person, as indicated in the table. The principal business address of the foregoing reporting
persons is 399 Park Avenue, 38
th
Floor, New York, NY 10022.
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(16)
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Represents 2,601,924 shares of common stock held by Chiin Hsiao Children Irrevocable Trust
and 1,254,320 shares of common stock held by Hsu Children Irrevocable Trust, as to which
Laurie A. Miller, Esq., serves as trustee. Also includes options to purchase 10,007 shares of
common stock and an outstanding March 2004 Call Option that is exercisable into 5,000 shares
of common stock, which may be exercised within 60 days of October 31, 2008.
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62
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(17)
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|
Based solely on Schedule 13G/A filed with the SEC on February 12, 2008 by Pequot Capital
Management, Inc. (referred to as Pequot). Pequot, in its capacity as investment advisor, may
be deemed to beneficially own 6,330,300 shares of common stock which are held by clients of
Pequot, of which Pequot has sole voting power over 5,534,300 shares of common stock and sole
investment power over 6,330,300 shares of common stock. The principal business address of
Pequot is 500 Nyala Farm Road, Westport, CT 06880.
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(18)
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Based solely on Schedule 13G/A filed with the SEC on February 14, 2008 by Wellington
Management Company, LLP (referred to as Wellington). Wellington, in its capacity as
investment advisor, may be deemed to beneficially own 7,967,761 shares of common stock, which
are held of record by clients of Wellington, of which Wellington has shared voting power over
6,732,046 shares of common stock and shared investment power over 7,863,161 shares of common
stock. The principal business address of Wellington is 75 State Street, Boston, MA 02109.
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63
Item 5. Directors and Executive Officers.
Directors
Our Board of Directors is currently comprised of seven members. Each director holds office
for a term of one year and until his successor has been elected and shall have qualified or until
the directors earlier death, resignation or removal. Dr. Charles Hsiao had been our chairman and
director since December 14, 1999 until his death in August 2008. Dr. Hsiao was a co-founder of our
predecessor, Impax Pharmaceuticals, Inc., in 1994, and served as our Co-Chief Executive Officer
from 1999 to 2003.
The current members of our Board of Directors, their ages as of October 31, 2008, and the year
in which each became a director are as follows:
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Name
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Age
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Director since
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Positions with Impax
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Leslie Z. Benet, Ph.D.
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71
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2001
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Director
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Robert L. Burr
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57
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2001
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Director
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Nigel Ten Fleming, Ph.D.
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54
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1999
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Director
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Larry Hsu, Ph.D.
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59
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1999
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President, Chief Executive Officer and Director
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Michael Markbreiter
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46
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1997
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Director
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Oh Kim Sun
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60
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1999
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Director
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Peter R. Terreri
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51
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2003
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Director
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On
December 4, 2008, Mr. Burr was elected as Chairman of our Board of
Directors.
Set forth below is the business experience of the members of our Board of Directors for the
past five years and the names of other public companies in which such persons hold directorships.
Leslie Z. Benet, Ph.D. has been a Professor since 1969 of, and has also served as Chairman of,
the Department of Biopharmaceutical Sciences, University of California, San Francisco. Dr. Benet
has since 1995 been Chairman, President or Chief Executive Officer of AvMax Inc., a
biopharmaceutical company. He received his A.B. (English), B.S. (Pharmacy), and M.S. from the
University of Michigan, and his Ph.D. from the University of California. Dr. Benet has received
six honorary doctorates: Uppsala University, Sweden (Pharm.D., 1987); Leiden University, The
Netherlands (Ph.D., 1995); University of Illinois at Chicago (D.Sc., 1997); Philadelphia College of
Pharmacy and Science (D.Sc., 1997); Long Island University (D.Sc., 1999); and University of Athens
(Ph.D., 2005). Dr. Benets research interests, more than 470 publications, and 11 patents are in
the areas of pharmacokinetics, biopharmaceutics, drug delivery, and pharmacodynamics. He is listed
among the 250 most highly cited pharmacologists worldwide. In 1985, Dr. Benet served as President
of the APhA Academy of Pharmaceutical Sciences. During 1986, Dr. Benet was a founder and first
President of the American Association of Pharmaceutical Scientists (AAPS). In 1987, Dr. Benet was
elected to membership in the Institute of Medicine (IOM) of the National Academy of Sciences. Dr.
Benet has received the highest scientific awards of AAPS (1989 and 2000), Rho Chi (1990), American
Association of Colleges of Pharmacy (1991), American Society for Clinical Pharmacology and
Therapeutics (1995), American Pharmaceutical Association (2000), International Pharmaceutical
Federation (2001) and in 2004 received the Pharmaceutical Sciences World Congress Research
Achievement Award and the Controlled Release Society Career Achievement in Oral Drug Delivery
Award. Dr. Benet formerly served as Chair of the FDA Expert Panel on Individual Bioequivalence and
the FDA Center for Biologics Peer Review Committee, and as a member of the FDA Science Board and
the Generic Drugs Advisory Committee. Dr. Benet presently serves as a member of the IOM Forum on
Drug Discovery, Development and Translation.
Robert L. Burr is a partner of Fleming US Discovery Partners, L.P., a private equity sponsor
affiliated with J.P. Morgan Chase & Co. Mr. Burr was employed by J.P. Morgan Chase & Co. and
associated entities from 1995 to May 2008, at which time he resigned his position as Managing
Partner of the Fleming US Discovery III Funds. From 1992 to 1995, Mr. Burr was head of Private
Equity at the investment banking firm of Kidder, Peabody & Co., Inc. Prior to that time, Mr. Burr
served as the Managing General Partner of Morgan Stanley Ventures and General Partner of Morgan
Stanley Venture Capital Fund I, L.L.P. and was a corporate lending officer with Citibank, N.A. Mr.
Burr received an MBA from Columbia University and a BA from Stanford University.
64
Nigel Ten Fleming, Ph.D. is Chairman and Chief Executive Officer of Minerva Healthcare, an
emerging specialty pharmaceutical company. He previously founded Athena Diagnostics, a
neurological diagnostics reference laboratory, serving variously as Chairman, CEO and Vice
President of Business Development prior to the companys
1995 sale to Athena Neurosciences /Elan Pharmaceuticals. Dr. Fleming has also served on the
boards of directors of Examplar, a subsidiary of Transgenic Sciences Inc. that developed the first
transgenic Alzheimers mouse model, and Genmedica, an oral insulin company based in Barcelona. He
has also consulted for, and served in various leadership roles at a number of early-stage
biotechnology companies, including Gamera Biosciences, Neurocal, Nephros, TheraMed Partners and
Plant Cell Technologies. Dr. Fleming obtained his Ph.D. in Clinical Biochemistry from the
University of Cambridge in England and was a lecturer at Harvard Medical School for a number of
years.
Larry Hsu, Ph.D. has been our President and Chief Executive Officer since October 1, 2006.
Prior to holding these positions, Dr. Hsu served as President and Chief Operating Officer beginning
in 1999. Dr. Hsu co-founded Impax Pharmaceuticals, Inc. in 1994 and served as its President, Chief
Operating Officer and a member of the Board of Directors from its inception until its merger with
the Company. From 1980 to 1995, Dr. Hsu worked at Abbott Laboratories, where, during his last four
years, he served as Director of Product Development in charge of formulation development, process
engineering, clinical lot manufacturing and production technical support of all dosage forms,
managing a staff of approximately 250 people. Dr. Hsu obtained his Ph.D. in pharmaceutics from the
University of Michigan.
Michael Markbreiter has been a portfolio manager for Sofaer Capital, a global hedge fund,
since December 2000. From August 1995 to December 1998, Mr. Markbreiter was a portfolio manager
for private equity investments for Kingdon Capital Management Corp., a New York hedge fund. In
April 1994 he co-founded Ram Investment Corp., a venture capital company. From March 1993 to
January 1994, Mr. Markbreiter was an analyst at Alliance Capital Management Corp. From July 1983
to September 1989, Mr. Markbreiter was an Executive Editor for Arts of Asia magazine. Mr.
Markbreiter graduated from Cambridge University with a degree in Engineering.
Oh Kim Sun has been employed by the Chemical Company of Malaysia Berhad (CCM), a Malaysian
corporation whose stock is listed on the Bursa Malaysia Berhad, since 1983 and served as Executive
Director from 1983 through October 2003. Currently, Mr. Oh is a member of the Board of Directors
of Nikko Electronics Berhad, Pharmaniaga Berhad, UEM Land Holdings Berhad and Faber Group Berhad,
all of which are listed on the Bursa Malaysia Berhad. Mr. Oh is also a director of various other
companies in Kuala Lumpur. Mr. Oh is also a member of The Malaysian Institute of Certified Public
Accountants.
Peter R. Terreri has over 20 years of experience primarily in generic pharmaceuticals with a
specialized expertise in finance. Mr. Terreri is President and Chief Executive Officer of CGM,
Inc., a manufacturing company that he owns and operates. He previously served as Senior Vice
President and Chief Financial Officer of Teva Pharmaceuticals USA from 1985 through 2000, where he
actively participated in the growth of the company from a $20 million local generic pharmaceutical
company into a global leader in generic pharmaceuticals. As an active member of senior management,
he was involved in all facets of the decision-making process at Teva Pharmaceuticals USA, including
structuring and negotiating company and product acquisitions, participating in multiple public
financings and securing several licensing deals and a substantial credit line. In addition to his
role as Chief Financial Officer, Mr. Terreri contributed to many areas related to the companys
success outside of finance, including product development selection, facility utilization, business
development, strategic planning, and implementing integration plans for the companys acquisitions.
He also supervised areas such as operations, sales and marketing, and information technology
during his tenure.
65
Executive Officers
Set forth below are the names of our executive officers who are not also directors, their ages
as of October 31, 2008, their offices in Impax and their principal occupations or employment for
the past five years. David S. Doll was our Executive Vice President, Commercial Operations until
his resignation in August 2008.
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Name
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Age
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Positions with Impax
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Arthur A. Koch, Jr.
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55
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Senior Vice President, Finance, and Chief Financial Officer
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Charles V. Hildenbrand
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57
|
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Senior Vice President, Operations
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Michael J. Nestor
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56
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President, Impax Pharmaceutical Division
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Arthur A. Koch, Jr. has served as our Senior Vice President, Finance, and Chief Financial
Officer since March 2005. Prior to joining Impax, Mr. Koch was employed by Strategic Diagnostics
Inc., a company which develops, manufactures and markets immunoassay-based diagnostic test kits.
While at Strategic Diagnostics Inc., Mr. Koch served as Chief Operating Officer for six years,
interim Chief Executive Officer for five months and Chief Financial Officer and Vice President for
five years. In addition, Mr. Koch has previously held Chief Financial Officer positions at
Paracelsian Inc., IBAH Inc., Liberty Fish Company, and Premier Solutions Ltd. Mr. Koch holds a
Bachelor of Business Administration from Temple University and has been a Certified Public
Accountant since 1977.
Charles V. Hildenbrand is our Senior Vice President, Operations, a position he has held since
he joined Impax in August 2004. From 1996 until September 2004, Mr. Hildenbrand worked for PF
Laboratories, Inc. as Plant Manager until 2001 and then as Executive Director of Engineering and
Technical Services until his departure from the company. From 1983 until 1996, Mr. Hildenbrand
worked at Lederle Laboratories/Wyeth as Section Head of Biochemical Production, Manager of Filing
and Packaging, and Production Director of Consumer Health Products. Mr. Hildenbrand holds a B.S.
in Chemical Engineering from Villanova University and an MBA from Lehigh University.
Michael J. Nestor joined us in March 2008 as the President of our branded products division,
Impax Division. Before joining us he was Chief Operating Officer of Piedmont Pharmaceuticals a
specialty pharmaceutical company. Prior to Piedmont, Mr. Nestor was CEO of NanoBio, a startup
biopharmaceutical company, prior to which he was employed by Alpharma, initially as President of
its generic pharmaceutical business and later as President of its branded pharmaceutical business.
Before this he was President, International business at Banner Inc, a global contract manufacturing
concern. Mr. Nestor spent 16 years at Lederle Laboratories / Wyeth holding increasing positions of
responsibility including Vice President, Cardiovascular business, Vice President / General Manager
of Lederle-Praxis Biologics, and Vice President of Wyeth-Lederle Vaccines and Pediatrics. Mr.
Nestor has experience in a number of pharmaceutical therapeutic areas including vaccines,
anti-infectives, dermatologics, CNS, generics, and analgesics. Mr. Nestor has a Bachelor of
Business Administration degree from Middle Tennessee State University and a MBA from Pepperdine
University.
66
Item 6. Executive Compensation.
Compensation Discussion and Analysis
The following discussion provides an analysis of our compensation program for the executive
officers named in the Summary Compensation Table beginning on page 57 of this registration
statement and discusses the material factors involved in our decisions regarding the compensation
of our named executive officers. The executive officers named in the table include Charles Hsiao,
Ph.D., who was our Chairman until his death in August 2008, and David S. Doll, who was our
Executive Vice President until his resignation in August 2008. The following discussion
cross-references those specific tabular and narrative disclosures that appear following this
subsection where appropriate. You should read this Compensation Discussion and Analysis in
conjunction with such tabular and narrative disclosures.
Compensation Philosophy and Objectives
At its core, our executive compensation program recognizes that our success is dependent upon
our ability to attract, motivate and retain the highly talented individuals we need to achieve our
business results. The program reflects the following key principles:
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We seek to align the interests of our named executive officers and stockholders
. We
believe that equity compensation is an excellent way to encourage our executive officers
to act in the best interests of our stockholders. Historically, we have provided our
named executive officers with equity awards (primarily in the form of stock options) as
part of their overall compensation package to encourage equity ownership and to place
their interests in line with those of our stockholders. We did not use this component
as to any of our named executive officers during 2007, however, as our compensation
committee determined (as it had done in 2006 and, as to certain named executive
officers, in 2005) that our delinquency in filing our periodic reports with the SEC made
it inappropriate to grant equity awards to our named executive officers. Our
compensation committee may consider granting equity awards to our named executive
officers in 2008.
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To attract, motivate and retain the best talent we can obtain, our compensation
should be competitive.
We strongly believe that our future success rests with our
people, including our executive officers. To be successful, we must be able to attract,
motivate and retain quality executive officers. We realize that compensation is a key
tool to achieve this objective; thus, one facet of our compensation program is to
provide our named executive officers pay amounts and components that are competitive
with those of other companies in our industry.
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Our compensation program should encourage and reward positive performance.
Our
executive compensation program is designed to promote and reward positive performance.
In doing so, we consider both the individual performance of each named executive
officer, as well as the overall performance of our business. Positive performance on
the part of our management and our company will permit our named executive officers to
be eligible to receive incentive compensation. On the other hand, when an individual
executive does not meet stated objectives or our business is facing financial or other
challenges, this incentive compensation may be appropriately reduced or eliminated.
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Compensation should encourage teamwork and executive cohesion.
While individual
performance is carefully reviewed and considered, we have also maintained a philosophy
of pay equity. This means that we aim to provide similar compensation for our named
executive officers who perform similar functions or who are at similar executive levels.
We believe that following a plan of pay equity discourages internal comparison of
compensation packages among executives and fosters teamwork and cohesion.
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Our compensation program should balance our short- and long-term financial and
operational goals.
We generally strive to achieve a balance between achievement of both
short- and long-term goals through the use of both salary and annual cash incentives and
equity-based incentives. Our management
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67
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incentive program primarily rewards short-term
performance by paying out base salary and annual cash incentive awards based on
performance over a period of approximately one fiscal year. Equity-based awards are
generally designed to reward long-term financial performance. As noted, although
long-term equity
awards were not granted in 2007 (or in 2006 or, as to certain named executive officers, in
2005), we may consider resumption of equity compensation in 2008.
|
Generally, we do not believe that gains realized from prior compensation, such as stock option
exercises, or compensation to be received upon a future termination of employment or a change in
control, should be considered in setting elements of compensation in any given year. Reducing or
limiting compensation because of prior gains would unfairly penalize the executive for quality past
performance and may ultimately reduce an executives motivation to continue to perform at high
levels. Tying current compensation to past gains may also serve to make the executives
compensation package less competitive. Moreover, severance and change-in-control compensation is
intended to achieve purposes unrelated to rewarding executives for positive performance and
aligning their compensation to increases in stockholder value.
Our Compensation Decision Making Process
In general, as to most items of compensation, the chief executive officer annually evaluates
each named executive officer, other than himself and our chairman, and recommends each component of
compensation for all of those named executive officers. Compensation not covered by the chief
executive officers evaluation includes benefits and other compensation mandated or determined by
reference to an existing employment or similar agreement.
As to the compensation of our chief executive officer and our chairman, the compensation
committee discusses and creates a proposal as to the amount of and changes to their compensation.
The compensation committee also evaluates the proposals provided by the chief executive officer as
to the compensation of our other named executive officers. The compensation committee then submits
its recommendations regarding the compensation of our named executive officers to the board of
directors for final approval.
Role of Compensation Consultants
While we had not historically engaged a compensation consultant to advise us with respect to
our compensation of named executive officers, beginning with our evaluation of the cash incentive
compensation for 2007 we retained the services of Radford Surveys + Consulting, a business unit of
AON, to assist in our evaluation of such compensation. Radford provided us with a survey of
comprehensive executive and director compensation data and related information at over 500
companies operating in the life sciences industry and employing more than 500 employees. Companies
included in this survey operated in the following areas of the life sciences industry:
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research of molecular and genetic techniques;
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research and manufacture of molecular or genetic materials;
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research, development and manufacture of drugs and drug delivery methods; and
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clinical research.
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We believe that these data provide appropriate guidelines for our compensation committee and chief
executive officer to compare proposed pay levels for our named executive officers against those
paid by other companies in the life sciences industry.
During 2007, our compensation decision makers used a portion of the Radford data as a
yardstick to assess the amount of base salary we proposed to pay our named executive officers,
except as to David S. Doll, who was then our Executive Vice President and whose base salary
increases were established by our employment agreement with him during his employment with us.
Treating those of the 500 surveyed companies with the highest compensation as being in the 99th
percentile, it was the sense of the board of directors and compensation committee during 2007 that
our base salary should be comparable with those of companies between the 25th and 50th percentiles
of the Radford compensation survey data. The purpose of using these data was to assist the
decision makers in assessing whether their proposed compensation was competitive as compared to
other companies in the life sciences industry. The decision makers considered these data only as a
guidepost to their evaluation of proposed compensation amounts, and there was no mandate that any
actual compensation paid must fall within any
68
set range. Thus, the decision makers had discretion
to consider whether compensation paid should fall within or outside this range, and in some
instances they found it appropriate to set compensation at a level lower or higher than this range.
Our board of directors believed that using the Radford data in this manner was essential to
establishing an appropriate but competitive compensation structure, given our overall performance
and the challenges we faced during 2007. Our board of directors reviews this process each year and
in future years may
determine to measure executive compensation by reference to data of companies in a different
percentile range if our performance criteria or results, as viewed by reference to our yearly
budget, change significantly, or it may choose to implement a different process altogether.
In 2007, our compensation committee asked Radford to review the compensation committees
proposed cash incentive payment calculation methodology and payouts, and total cash delivery, to
Dr. Hsu, our President and Chief Executive Officer; Mr. Doll; Mr. Koch, our Senior Vice President,
Finance and Chief Financial Officer; and Mr. Hildenbrand, our Senior Vice President, Operations.
The compensation committee also asked Radford to review the performance evaluations and criteria
established for each of these named executive officers to determine whether they were consistent
with general market practice in content and approach. The compensation committee used the results
of Radfords reviews to confirm its preliminary view that its proposed compensation amounts and
mechanisms were both competitive and consistent with general market practice.
Components of Our Executive Compensation Program
Overview of Elements of Compensation
Total compensation for our named executive officers is comprised of the following elements:
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base salary;
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annual cash incentive awards;
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options and other equity-based awards (although we did not grant any of these awards
to our named executive officers in 2007 or, as to certain of them, in 2005 and 2006);
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non-qualified deferred compensation plan contributions;
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401(k) retirement plan contributions;
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post-employment and change-in-control benefits, including severance protection; and
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other benefits and perquisites.
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With respect to each of these elements, we provide the following discussion and
analysis:
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a description of the element;
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the objectives of each element;
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the specific performance that each element is designed to reward, if any;
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why we choose to pay each element;
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how we determine the amount of each element; and
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how each element and our decisions regarding that element fit into our overall
compensation objectives and affect decisions regarding those elements.
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69
Base Salary
Base salary is paid to all employees, including our named executive officers, to provide them
with a degree of financial certainty and a source of fixed compensation to meet their day-to-day
living and other needs. We believe that our base salaries are set competitively, as compared to
other companies in our industry, and thus that they also serve to attract and retain talented
executives. In 2007 Radford confirmed this belief with respect to four of our named executive
officers, including our chief executive officer.
We generally set an initial base salary range for a particular level of our executives (for
example, all officers with the title of Senior or Executive Vice President) and then apply that
range to all executives who are at that level. In establishing these base salary ranges, we
consider:
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the individual experience, education, skills and value of the position to us and our
operations;
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the particular needs of our company for an executive at the level being considered;
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our desire to promote a cohesive management team among executives of that level by
establishing internal pay equity; and
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proposed salaries for executives in similar positions in other companies in our
industry, as reflected in the Radford compensation survey data, applying the procedure
described above in
Compensation Overview Role of Compensation Consultants.
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Once the base salary range is established for a particular executive level, we then determine
the amount of salary that a specific executive officer will receive. For new hires or promotions
to a particular executive level, we consider:
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the individual experience, education and skills of the particular executive;
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for promotion candidates, the executives prior performance and length of service
with us;
|
|
|
|
|
the salaries of other executives at that level, if any; and
|
|
|
|
|
other special circumstances that may apply to the particular executive.
|
We believe that, generally, the salary levels we set for our named executive officers are
less, and in some cases significantly less, than competitive compensation for an executive who:
|
|
|
is fully experienced and educated as required by the position;
|
|
|
|
|
is a strong performer and strong leader who makes solid contributions; and
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|
|
possesses a full skill set for his or her position and applies those skills
successfully.
|
Increases in base salary are used to reward executives for their positive performance in the
preceding year and to ensure that their salaries remain competitive. In 2007, our compensation
committee used a comprehensive evaluation process to determine increases in the base salary for our
chief executive officer and our chairman. In this process, the compensation committee first
informally evaluates the performance of the chief executive officer and the chairman during the
year based upon their respective periodic reports to and meetings with the board of directors. The
compensation committee also receives periodic reports from other members of management to assist it
in determining the chief executive officers and the chairmans overall effectiveness. The
compensation committee also examines a series of objective criteria tied to our performance, which
includes, among other things:
|
|
|
the development of company-wide strategies and goals;
|
|
|
|
|
achieving or exceeding revenue and profit goals outlined in our budgets; and
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|
|
improvements in employee growth and turnover rates.
|
The compensation committee believes that this evaluative process allows it to obtain a
complete and overall picture of the chief executive officers and chairmans effectiveness during
the year. The use of these objective criteria also ensures that salary adjustments reflect
positive performance that can be tied to measurable increases in
70
stockholder value. For 2007, we
did not increase Dr. Hsiaos or Dr. Hsus base salary. We believe that this decision
appropriately promoted the alignment between the interests of our executive officers and
stockholders while we sought to regain compliance with our public reporting requirements.
As of September 1, 2006, increases in Mr. Dolls base salary through September 1, 2009 were
fixed by the terms of his employment agreement with us. See Narrative Disclosure to Summary
Compensation and Grants of Plan-Based Awards Tables Agreements with Our Named Executive Officers
Employment Agreement with David S. Doll. Mr. Doll was our only named executive officer whose
base salary increases were fixed in this manner. The principal reason for fixing his increases was
our hope that, because the employment agreement effectively provided Mr. Doll with the security of
guaranteed increases in base salary regardless of company performance or market conditions, we
would be more likely to retain Mr. Dolls services over the full term of his employment agreement.
In return, Mr. Doll gave up the right to receive salary increases that would be directly tied to
his or our performance, which may ultimately have been higher (but could have been lower) than the
guaranteed increases under his employment agreement.
In determining the amount of each annual salary increase to be specified in Mr. Dolls
agreement, we compared proposed increases with the Radford survey data. Based upon information
available when the employment agreement was being prepared, the salary increases incorporated into
the agreement fell between the 50th and 75th percentiles of the Radford data. While these
increases were higher than those given by the companies with which our executive salaries are
generally comparable, the compensation committee believed that a higher compensation level was
warranted in Mr. Dolls case, as pharmaceutical sales and marketing executives with Mr. Dolls
experience are in relatively high demand. The committee also believed that providing Mr. Doll with
a higher relative level of salary increases was warranted because his expected performance in
developing new relationships with alliance agreement partners would significantly enhance our
financial performance and results of operations and, in turn, lead to increases in stockholder
value.
As for our other named executive officers, base salary adjustments are evaluated and proposed
by the chief executive officer, whose proposals are reviewed by the compensation committee. At the
beginning of each year, a set of objectives is prepared for, and discussed with, each such named
executive officer. These objectives are tailored to each individual executive and are based upon
his or her job responsibilities and on certain of our results of business and financial performance
that reflect directly upon the executives duties. These objectives might include, for example:
|
|
|
achieving objective operating or financial metrics associated with the executives
role, such as sales, product development milestones and activity levels, operating
efficiency and product reliability;
|
|
|
|
|
developing and implementing particular policies, procedures and systems necessary for
the smooth and proper operation or function of the particular business unit; and
|
|
|
|
|
hiring and retaining appropriate personnel to support specific business units.
|
For 2007, we established these objectives to reflect our compensation philosophy of using pay
to encourage and reward our named executive officers positive performance, as the achievement of
the goals directly impacts whether base salaries are increased and the amount of any such increase.
Some of the objectives established in 2007 required the executive to have met specific operating
metrics, such as achieving increases in operating efficiency or submitting to the FDA a stated
number of ANDAs. These objectives were consistent with our philosophy of aligning the interests of
our executives with those of our stockholders, because we believe the achievement of these goals
had a direct or indirect impact on our results of operations, financial performance or
profitability.
The criteria we established to determine the increases in base salary of our named executive
officers are the same as those we use to determine their respective annual cash incentive awards
(for the purposes of the increases in base salary, the compensation committee determined that the
individual goals of Dr. Hsu and Dr. Hsiao were similar). See Annual Cash Incentive Awards
below for a description of the types of individual and corporate performance goals, the achievement
of which we evaluate to determine the named executive officers salary increase.
71
In addition to the information provided by these evaluations, in an effort to maintain pay
equity, the chief executive officer generally developed in 2007 base salary increases for these
other named executive officers consistently among executives serving in similar capacities and with
similar levels of responsibility. The amount of a named executive officers base salary may also
serve as a reference point for determining the amount of his or her other compensation elements.
For example, in 2007, the potential maximum annual cash incentive award for each executive was
derived from a percentage of the executives base salary.
For 2007, we increased Mr. Kochs and Mr. Hildenbrands base salary to reward them for their
achievement in substantial part of stated performance goals during the year. Specific performance
goal and achievement information for each of these named executive officers is provided below in
Annual Cash Incentive Awards.
We also found these increased base salaries appropriate and competitive, not only based on our
review of the overall performance evaluations for each of Mr. Koch and Mr. Hildenbrand, but also in
light of our overall corporate and financial performance in 2007. We also considered and analyzed
these increases in the context of their overall total compensation package to confirm that their
total compensation was competitive with that of life sciences companies in the 25th to 50th
percentile level of the Radford survey. These efforts support our compensation objective of
providing competitive compensation to attract, motivate and retain top executive talent.
Annual Cash Incentive Awards
Through annual cash incentive awards, we provide our named executive officers with an
increased cash compensation opportunity and reward them for attaining short-term, rather than
long-term, individual and corporate goals. We believe that a meaningful amount of executive
compensation should be variable and contingent on individual and corporate performance.
Establishing executive compensation that is rewarded upon the achievement of these
performance-based criteria, discussed in more detail below, supports our goal of providing
incentives to our executives who dedicate their full efforts toward achieving our performance
objectives, which in turn makes our business successful and contributes to increases in stockholder
value in the short-term. Generally, our named executive officers who have been in their position
during the year are eligible to receive these cash incentive awards. While our 1999 employment
agreements with Drs. Hsiao and Hsu provide that their annual cash incentive payments will be equal,
at the time of Dr. Hsiaos appointment as non-executive Chairman in 2004 his agreement was orally
modified to provide that only his annual cash incentive target would be the same as Dr. Hsus, with
any actual award being based upon his and Dr. Hsus respective individual performance. Because Dr.
Hsiaos role was changing from an executive to a non-executive position, the compensation committee
determined to forego any cash incentive award to Dr. Hsiao for 2006 and 2007 and to consider a
future cash incentive award to him based upon a cumulative three-year review of his performance at
the end of 2008.
Annual cash incentive awards are generally calculated based upon two primary variables: a
percentage of base salary and performance goals that must be achieved to earn the award. In an
effort to maintain pay parity, executives at the same job level and with similar degrees of
responsibility will generally be assigned the same percentage of base salary.
With the exception of Mr. Dolls annual cash incentive award percentage, which beginning in
September 2006 was set at a target of 75% of his annual base salary in his employment agreement,
the compensation committee evaluates and establishes base salary percentages for our named
executive officers as part of the yearly compensation process. The establishment of a fixed cash
incentive award percentage for Mr. Doll, which in 2007 was not provided for our other named
executive officers, was consistent with our philosophy of seeking to attract, motivate and retain
Mr. Doll for the term of the employment agreement and our belief at that time that Mr. Dolls
successful performance would contribute directly to our stockholder value during such term.
Although the compensation committee employs its discretion in setting these percentages, its
decisions in 2007 were generally guided by the overall objectives to maintain pay parity among
executives with similar titles and responsibilities and to provide competitive compensation that is
generally compatible with that provided by companies between the 25th and 50th percentiles of
Radfords peer group. Thus, the compensation committee sets these base salary percentages on a
position-by-position basis each year. For 2007, the annual award target
72
percentage for each of our
named executive officers (other than Dr. Hsiao) was set at 75% of base salary, consistent with and
in furtherance of the compensation objectives and philosophies described above. Once set, the
compensation committee has the discretion to pay at above or below these percentage targets
depending on our overall financial and operational performance and individual performance. The
actual payments it established for 2007 were below the percentage targets.
To determine whether or how much cash incentive compensation is to be received, each named
executive officer is also evaluated against specified performance goals that are designed to ensure
that payment of annual incentive compensation is tied to measurable positive performance and
increases in stockholder value.
During the first quarter of 2007, the board of directors and the compensation committee
established individual goals for the chief executive officer. With respect to each other named
executive officer, during the first quarter of 2007 the chief executive officer developed with each
executive specific individual performance goals and a set of corporate or company-wide goals.
Individual goals were customized to the applicable executive and reflected the responsibilities and
duties that we believe the executive should fulfill in connection with his or her particular
position. Corporate goals reflected company performance as a whole and included criteria based on
the companys achievement of particular performance targets, such as revenue and net income. The
establishment of individual and corporate goals in 2007 was tied to and consistent with our
compensation philosophy, as described above in Base Salary.
With the exception of the chief executive officer, in 2007 individual goals comprised
two-thirds of the total possible cash incentive compensation. Our chief executive officers cash
incentive award is generally determined based entirely upon individual goals, as our compensation
committee believes it is important to have our chief executive officers cash compensation be
determined by reference to the special contributions this officer can make to our overall growth
and development. In 2007, we preferred to emphasize individual goals because we believed it was
important to provide short-term, cash rewards to our named executive officers for performance that
meets and exceeds what is expected of them. Used this way, our cash compensation program in 2007
rewarded demonstration of the types of performance, and the presence of executive skill sets, that
in our experience are directly attributable to our growth and an increase in value to our
stockholders.
73
The following table provides the individual performance goals used to determine cash incentive
compensation in 2007, and our determination as to the achievement in 2007 of those goals, for each
named executive officer who participated in the cash incentive program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Salary
|
|
|
|
% of Salary
|
Officer
|
|
Objectives
|
|
(Target)
|
|
Results/Accomplishments
|
|
(Obtained)
|
|
Larry Hsu
|
|
Regain compliance with SEC reporting obligations
|
|
|
15
|
%
|
|
Compliance not regained, but several significant
milestones attained, including the advice of the
SECs Office of the Chief Accountant of our method of
revenue recognition.
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meet or exceed revenue and profit targets
|
|
|
25
|
%
|
|
Revenue and net profit targets were exceeded.
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Establish company long-term goals, strategy and
planning for 2007-2010
|
|
|
10
|
%
|
|
Accomplished.
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Submit a specified number of ANDAs
|
|
|
10
|
%
|
|
Accomplished.
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Review employee compensation program and
improve turnover rate
|
|
|
5
|
%
|
|
Accomplished. Turnover rate reduced.
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Respond timely to FDA deficiency items to
achieve early 2008 approval
|
|
|
10
|
%
|
|
Timely response to all deficiency items and requests,
but FDA approval not received.
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur A. Koch, Jr.
|
|
Regain compliance with SEC reporting obligations
|
|
|
20
|
%
|
|
Effort exceeded expectations, but compliance not
regained.
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Participate and support 2007 compensation plans
|
|
|
2
|
%
|
|
Accomplished.
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Develop leadership and supervisory skills
training for direct reports
|
|
|
2
|
%
|
|
Worked closely with direct reports to instill
leadership skills. Outside training effected where
necessary.
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Formalize succession plan
|
|
|
2
|
%
|
|
Worked to develop plan. Not complete.
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enhance IT service levels to identify
bottlenecks and develop efficiencies to support
growth
|
|
|
5
|
%
|
|
Accomplished.
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Define system requirements for financial
general ledger systems to support new methods
of revenue recognition by year-end 2007
|
|
|
5
|
%
|
|
Accomplished.
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perform monthly analyses of budget variances at
the operating department level
|
|
|
5
|
%
|
|
Accomplished.
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintain coordination with sales and marketing
to ensure highest level of internal and
external customer support and provide national
account managers with support on any
development affecting their accounts by way of
sales operations
|
|
|
5
|
%
|
|
Efforts were made to meet all objectives. Further
attention is required.
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seek additional funding for branded products
|
|
|
4
|
%
|
|
A funding strategy was developed. The funding
decision was deferred.
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David S. Doll
|
|
If approved by management, successfully launch
certain new products and achieve budget
objectives
|
|
|
15
|
%
|
|
Successfully launched each new product approved by
management. Certain budgeted goals not met.
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Develop relationships and maximize certain
opportunities with our alliance agreement
partners
|
|
|
10
|
%
|
|
The majority of these goals were met.
|
|
|
6.7
|
%
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Salary
|
|
|
|
% of Salary
|
Officer
|
|
Objectives
|
|
(Target)
|
|
Results/Accomplishments
|
|
(Obtained)
|
|
|
|
Develop and implement a marketing plan and
configure sales force for certain branded
products, and submit a specified number of
ANDAs
|
|
|
10
|
%
|
|
Accomplished.
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Work with management to seek off-balance
funding for brand operations by end of fiscal
2007
(ii) Achieve formulation or technology
in-license for at least 5 products
(iii) Work with management to develop strategic
acquisition opportunities
(iv) Develop and implement a strategy for
future business development
|
|
|
10
|
%
|
|
(i) Not accomplished.
(ii) Formulation or technology in-licensing completed
for 2 products.
(iii) Accomplished.
(iv) Accomplished.
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Develop and implement policies and procedures
within sales and marketing area for
Sarbanes-Oxley Act of 2002 compliance purposes
|
|
|
5
|
%
|
|
Accomplished.
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles V.
Hildenbrand
|
|
Achieve customer service level goals with
respect to shipping products within 2 days
after receipt of order
|
|
8% (2%/qtr)
|
|
Accomplished in two quarters.
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Achieve incident rate level goals
|
|
4% (1%/qtr)
|
|
Accomplished.
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Achieve cost of rejected batch rate goals
|
|
4% (1%/qtr)
|
|
Accomplished.
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass all regulatory inspections, close all open
major internal audit items of record as of
January 1, 2007 and avoid recalls due to good
manufacturing practice compliance or product
defect
|
|
|
4
|
%
|
|
Accomplished but for minimal recalls due to stability
failures.
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold below target
|
|
8%
(2%/qtr)
|
|
Accomplished.
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Achieve an increase in operating efficiency
above target by October 30, 2007
|
|
|
4
|
%
|
|
Efficiency improved, but goal not met.
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construct and qualify expansion of selected
manufacturing facility by June 30, 2007
|
|
|
5
|
%
|
|
Accomplished on July 5, 2007.
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provide timely support to Taiwan manufacturing
facility
|
|
|
3
|
%
|
|
Accomplished.
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Achieve pharmacovigilance report approval
within 2 months of initiation of manufacturing
per product per strength
|
|
|
3
|
%
|
|
Accomplished in significant majority of opportunities.
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hire a Director/Sr. Director/VP of
manufacturing department
|
|
|
2
|
%
|
|
Accomplished.
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer Colestipol tablet to a contract
manufacturing organization and initiate routine
manufacturing by September 30, 2007
|
|
|
3
|
%
|
|
Transfer not yet completed.
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Submit a specified number of ANDAs
|
|
|
2
|
%
|
|
Accomplished.
|
|
|
2
|
%
|
Except with respect to the chairman (who did not receive any cash incentive compensation in
2007) and the chief executive officer, in 2007, corporate performance goals represented one-third
of the total weight in determining the named executive officers annual cash incentive awards,
which we believe was appropriate to reflect our philosophy that executive performance must benefit
our company in ways that can be objectively measured and quantified.
75
For 2007, our corporate performance goals were comprised of the following: (i) an internal revenue target based on revenues adjusted for certain deferrals
under Staff Accounting Bulletin No. 104 and (ii) an internal profit target based on the metric
calculated by deducting our expenses determined in accordance with GAAP from the internal revenues
described in (i) above. Because we
defer a substantial portion of the revenue realized under our alliance agreements, we do not
believe our results determined in accordance with GAAP provide as accurate a measure of our
executives annual contribution to corporate performance as
non-GAAP financial measures
that reflect the flows of the products subject to these agreements to drug wholesalers and other
ultimate customers as reported to us by our marketing partners.
The 2007 corporate performance goals were recommended by our chief executive officer and set
by the compensation committee based on their assessment of current and anticipated market and other
conditions affecting our business and the goals. In the view of the compensation committee, payout
on these performance goals in 2007 required substantial achievement by each named executive
officer. Because our 2007 revenue-based and profit-based performance goals were ultimately
achieved at these targets, all named executive officers received a cash incentive award payout
based upon the achievement of such performance. The use of identical performance goals tied to
substantive increases in the revenue- and profit-based criteria for all of our named executive
officers supports our stated compensation philosophies of rewarding named executive officers for
positive performance, aligning the interests of our executives with those of our stockholders and
maintaining executive cohesion and teamwork through the implementation of similar pay structures
for our executives.
For 2008, corporate performance goals have been set in a similar manner as those in 2007. As
a result, these goals were set by the compensation committee so that they are reasonably likely,
but by no means certain, of being attained. Our continued use of these corporate performance goals
in 2008 with respect to our named executive officers is tied to the compensation objectives
described above.
All performance goals are disclosed to and discussed with each executive at the beginning of
the year. An executive must generally be actively employed by us on the payment date to receive an
annual cash incentive award. Each set of performance goals counts for a portion of the total
potential bonus that may be received, and items constituting individual performance goals are
individually weighted. The portion of the bonus based on overall corporate performance is earned
in full if the goals are met. Payouts of cash incentive awards are determined in part by the
compensation committees or chief executive officers determination as to whether such goals were
achieved in whole or in part. See Summary Compensation Table and Grants of Plan-Based
Awards During Fiscal Year Ended December 31, 2007 for the amounts related to actual cash incentive
awards paid out by us and the target annual cash incentive awards for 2007 performance.
Equity Awards
We maintain the Impax Laboratories, Inc. 2002 Amended and Restated Equity Incentive Plan for
the purpose of granting stock options and other equity-based awards, such as stock appreciation
rights (commonly known as SARs) and stock bonus awards (also known as restricted stock awards), to
our employees, including our named executive officers. We have historically granted to our named
executive officers only stock options, including incentive stock options and non-qualified stock
options, under the 2002 plan. During 2007 (as well as 2006 and 2005 as to certain named executive
officers) we did not grant any equity awards to any of our named executive officers. In 2007, our
compensation committee believed that it was inappropriate to grant equity awards to our named
executive officers (except with respect to the awards granted under Mr. Dolls employment
agreement) while we were in the process of regaining compliance with our public reporting
requirements. We may consider making awards of stock options or other equity incentive awards to
our named executive officers in 2008.
Option awards produce value to our named executive officers only if the price of our stock
appreciates, and then only to the extent of the excess of our stock price over the exercise price
of the option. Our stock options are granted with an exercise price equal to the fair market value
on the date of grant to avoid providing any immediate benefit to the named executive officer upon
grant. Option awards also link the interests of our executives to our stockholders in that the
exercise of an option would result in the executive being issued shares of our common stock.
Because they generally vest incrementally over time, options create an incentive for named
executive officers to continue their employment with us for extended periods after the initial
grant.
76
We have established procedures for granting equity awards to all of our eligible employees,
including our named executive officers. Each year we establish a stock option or stock bonus award
amount (the equity compensation award) for each level of responsibility within our organization,
subject to approval by the compensation committee. In arriving at the option component of the
equity compensation award, we use a number of factors, including the grant date fair value of the
option as determined by SFAS No. 123R and the percentage of total shares outstanding that each
option would represent if exercised in full. Grants are made in the following three ways:
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New hires and promotions
. During the first week of the third month of each calendar
quarter we grant an equity compensation award to any employee who was hired or promoted
during the preceding quarter (the grant to promoted employees being made only to the
extent necessary to make their equity compensation award comparable to those made to
others at the new level of responsibility).
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Annual grants
. During the second two weeks of each October we make a grant equal to
half the current applicable equity compensation award to each eligible employee.
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Special grants
. During the final week of each June and December, we make special
awards for exemplary individual performance to employees selected by the chief executive
officer from a pool of candidates recommended by senior management.
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The board of directors or compensation committee, however, retains discretion, in appropriate
circumstances, to provide a different amount of equity awards for both the new hire/promotion and
the annual grants. We might, for example, increase the number of options above the specified
amount if needed to retain an executive who would, upon leaving his current position, be required
to forfeit a substantial unvested option or restricted stock position. We have not, and in the
future do not intend to, time the award of any equity-based compensation to coincide with the
release of favorable or unfavorable information about us.
Our equity awards are issued as long-term compensation that generally vest over a period of
four years. This is consistent with our philosophy of linking the financial interests of our named
executive officers to that of stockholders. The long-term compensation balances the short-term
compensation paid in the form of base salary and annual incentive awards. We strive to keep option
grants at the same level as our cash and incentive compensation,
i.e.
, between the 25th and 50th
percentiles of companies included in the Radford survey.
For all of our equity awards, we establish the amount to be awarded to each of our named
executive officers based upon the level of each position. As part of our goal of maintaining pay
parity wherever possible, we tend to grant the same or similar amounts of options to executives
with similar titles and levels of responsibility. Grants of awards under the 2002 plan must be
approved by the board of directors or a committee (or subcommittee) consisting of two or more
outside directors. For all named executive officers, except our chief executive officer and
chairman, option amounts and terms are generally proposed by our chief executive officer, subject
to ultimate approval by the board of directors or compensation committee. Option grants to our
chief executive officer and chairman are determined solely by the board of directors or
compensation committee.
In our September 2006 employment agreement with Mr. Doll, we agreed to grant him two awards of
options and stock bonuses, subject in each case to approval by our stockholders of an amendment to
our 2002 plan to provide enough shares of common stock to permit the issuance of these awards. For
a discussion of these provisions, see Narrative Disclosure to Summary Compensation and Grants
of Plan-Based Awards Tables Agreements with Our Named Executive Officers Employment Agreement
with David S. Doll.
Unlike options, stock bonus awards provide value to our named executive officers immediately
upon grant and increase in value based upon increases in the market price for our common stock.
Also, unlike base salary and annual cash incentive awards, stock bonus awards are designed to serve
as compensation to reward long-term performance, as the awards do not fully vest until a period of
seven years has elapsed. The vesting period of these stock bonus awards is substantially longer
than the options we agreed to grant to Mr. Doll, which were subject to a four-year vesting period.
As a result, the equity compensation to be awarded to Mr. Doll would effectively reward him for his
performance over a substantially longer time frame than the option awards.
Prior to agreeing to issue these awards, we had not issued stock bonus awards to any of our
named executive officers, and, while we reserve the right to do so in the future, we presently do
not have any intention to issue other stock bonus awards to our named executive officers. We also
agreed to issue these awards even though
77
we have generally suspended the granting of equity awards
to our executive officers and did not otherwise make such grants in 2007, as discussed above. We
decided to take a different approach to equity awards under Mr. Dolls employment agreement
primarily for the following reasons:
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First, we determined that the executive having responsibility for our sales and
marketing functions is a valuable asset to our company. Mr. Dolls overall industry and
sales experience allowed him to take on an increased amount of responsibility in his
position, including business and product development and the growth of vital strategic
relationships and alliance agreements partnerships.
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Second, we recognized that there is significant competition in our industry for
employees with Mr. Dolls experience. We also became aware that many of our competitors
have been increasingly using stock bonuses as an inducement to attract, retain and
motive their key employees. As a result, we believed that stock bonus awards would need
to be a key element in any compensation package we offered Mr. Doll.
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Third, we believed that a central component of our ability to retain Mr. Doll as a
key member of our management team was providing him with direct and tangible equity
ownership in our company, which we could only do through stock bonus awards.
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We believe that our decision to grant these options and stock bonus awards to Mr. Doll as part
of his employment agreement was consistent with many aspects of our overall compensation
philosophy, including:
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Aligning Mr. Dolls interests with those of our stockholders and rewarding him for
positive performance
we chose equity-based compensation to provide Mr. Doll with an
economic benefit that increased in value only if our share price increased, thus
aligning his interests with those of our stockholders. Also, because we believed that
Mr. Dolls contributions would have a direct positive impact on our operating and
financial success, it was our view that increases in value of these equity-based awards
stemming from our financial performance would reward him for efforts that generated
direct or indirect increases in stockholder value.
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Retaining and motivating Mr. Dolls employment with us
we chose to grant equity
awards with long-term vesting periods in an effort to retain his employment over an
extended period of time. We also believed that the grant of equity awards that
increased in value over time as our operating performance continued to improve would
serve to encourage him to maintain positive performance with us in future years.
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Balancing long-term and short-term performance goals
because Mr. Dolls equity
awards were to vest over a period of four and seven years, we believed that they served
to counterbalance his base salary and cash incentive awards, which rewarded him for his
achievement of short-term performance goals.
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We agreed with Mr. Doll that if our stockholders did not approve the issuance of the equity
awards contemplated in that agreement, he would be entitled to receive the economic benefits of
such awards, as determined by the compensation committee. In doing so, we wanted to provide Mr.
Doll with the economic equivalent of these awards and not penalize him if for some reason our
stockholders did not approve the amendments to the 2002 plan to permit their issuance. We also
agreed that, upon exercise of his options, we would reimburse Mr. Doll for the difference, if any,
between the exercise price he ultimately pays (which will be equal to the fair market value of our
common stock on the date the options are deemed granted under SFAS No. 123R) and the exercise price
he would have paid had the options been granted on the date of the employment agreement. We wanted
to prevent Mr. Doll from suffering any economic loss or hardship upon exercising the options
because the 2002 plan did not, on the date of the employment agreement, have sufficient shares to
permit the award of his options.
401(k) Plan and Non-Qualified Deferred Compensation Plan Contributions
Retirement plans, in general, are designed to provide executives with financial security after
their employment has terminated and, through the incremental vesting of our matching contributions
to such plans over time, provide a retentive element to the overall pay package. Our named
executive officers are eligible to participate in the Impax 401(k) Profit Sharing Plan, which
allows them to contribute a portion of their base salary and bonus to support their financial needs
upon retirement. For 2007, we also contributed to each participants account an
78
amount equal to 50% of the amount contributed by the named executive officer, with our contribution not to exceed
3% of the participants annual total compensation. Our matching contributions to the 401(k) plan
vest depending on the number of years the named executive officer has worked at our company, with
all matching contributions vesting after the third year of service at the company. Amounts
contributed to the 401(k) plan are invested in one or more investment fund options. Participants
generally do not pay U.S. federal income tax on contributions to or earnings in the 401(k) plan
until the participant makes withdrawals from his or her plan account.
Our named executive officers also are eligible to participate in the Impax Laboratories, Inc.
Executive Non-Qualified Deferred Compensation Plan, restated effective January 1, 2005. See
Non-Qualified Deferred Compensation During Fiscal Year Ended December 31, 2007 and Narrative
Disclosure to Non-Qualified Deferred Compensation Table. For 2007, we made a matching
contribution for each participant equal to 50% of the participants contribution, not to exceed 5%
of the participants base pay and bonus per year. A participants account is notionally invested
in one or more investment funds and the value of the account is determined with respect such
investment allocations. We retain the discretion to reduce the level of matching contributions or
eliminate them altogether, but we have not chosen to do so.
These benefits are offered to provide financial security and peace of mind for our executives,
and are consistent with our goal of attracting and retaining our executives. Because we do not
provide either a qualified or a non-qualified defined benefit pension plan (often referred to as a
SERP), we believe that the overall retirement plan benefits for our named executive officers are
modest as compared to other public companies of our size. We also believe these contributions
represent standard benefits that executive-level employees of public companies commonly receive.
For these reasons, we do not take these matching contributions into consideration when setting
other aspects of compensation for our executive officers.
Employment Agreement with David S. Doll
Stemming from the March 2006 decision of Barry R. Edwards to retire as our Chief Executive
Officer, Mr. Edwards and Dr. Hsu decided that Mr. Doll, who was at the time our Senior Vice
President, Sales and Marketing, would continue to play a key role as a part of our senior
management team. Prior to this time, Mr. Doll did not have an employment agreement with us.
As part of the succession-planning process, we believed it was important to retain continuity
in the executive commercial development function, given the importance of that role and its direct
impact upon our future success. To retain Mr. Dolls services and to provide him with a level of
employment security, we offered Mr. Doll the possibility of entering into an employment agreement
with us, which he accepted. In the months that followed, we discussed with Mr. Doll the framework
for an employment agreement, with Mr. Edwards and Dr. Hsu leading these discussions for us. On
September 1, 2006, after discussions between the parties had been successfully concluded, we
entered into a three-year employment agreement with Mr. Doll, pursuant to which he was promoted to
the position of Executive Vice President, Commercial Operations.
Post-Employment and Change-in-Control Benefits
We entered into employment agreements with each of Dr. Hsiao and Dr. Hsu in 1999 and with Mr.
Doll in 2006. See Narrative Disclosure to Summary Compensation and Grants of Plan-Based Awards
Tables Agreements with Our Named Executive Officers for a summary of certain material terms of
such agreements.
As part of these employment agreements, we provide certain benefits upon:
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a termination of employment due to the executives death or disability;
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a termination of employment by us other than for cause, as defined in the employment
agreement; or
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a termination of employment by the executive for good reason, as defined in the
employment agreement, including upon a change in control.
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In the case of each employment agreement, the terms of these arrangements were set through the
course of arms-length negotiations with each of the named executive officers. As part of these
negotiations, the compensation committee analyzed the terms of the same or similar arrangements for
comparable executives
79
employed by other companies in the Radford survey. This approach was used by
the compensation committee in setting the amounts payable and the triggering events under the
arrangements.
Severance payments include a cash payment that is generally based upon the salary and annual
incentive payment history of the named executive officer at issue. Severance benefits may also
include the accelerated vesting of our matching contributions under the non-qualified deferred
compensation plan, the accelerated vesting of stock options and stock bonus awards, and the
extension of the exercisability of an award. We may also agree to gross up the amount of the
executives severance payment to account for the executives excess parachute payment excise tax
liability. The amount of this gross-up payment may be influenced by the value of options and stock
bonus awards that vest on an accelerated basis.
Generally speaking, we provide severance to our executives to give them financial peace of
mind in the event they suffer an involuntary termination other than for cause. We believe that the
risk or possibility of an involuntary termination or change in control creates uncertainty for
named executive officers regarding their continued employment with us. These scenarios may
include, among other things, a termination of employment or a change in an executives job
location, position or duties, whether on an individual basis or due to an overall reduction in or
change to our workforce, or a change in other members of senior management resulting from a change
in control event. As a result, our severance benefits are linked to our compensation philosophy of
encouraging the long-term retention of our executives.
Severance benefits for a change in control are paid pursuant to a single trigger; that is,
they are earned regardless of whether the executive has been terminated or demoted or has otherwise
experienced any diminution in compensation or duties. We believe that a single trigger gives our
executives a modest level of financial security and peace of mind in the event that we experience a
change in control, regardless of whether the executive has suffered or will suffer any specific
adverse employment circumstance.
We believe that all of our severance and termination-related benefits are typical of those
received by other executives in our industry in both structure and amount. See Potential
Payments upon Termination or Change in Control for a summary of these severance and change in
control provisions, the amount of potential payments that our named executive officers might
receive and the method by which these benefit levels were determined.
Other Benefits and Perquisites
Our named executive officers participate in a wide array of benefit plans that are available
to all of our salaried employees generally, including medical, dental, life and long-term
disability insurance plans. Most of these benefits provide financial security and peace of mind
for employees and executives and are generally viewed as a standard part of basic employee benefits
within our industry. We generally do not provide to our named executive officers any material
compensation in the form of perquisites.
Tax and Accounting Treatment of Compensation
Section 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, currently limits
the deductibility for U.S. federal income tax purposes of certain compensation paid in any year by
a publicly held corporation to its chief executive officer and any other employee whose
compensation is required to be reported to stockholders by reason of being among the three most
highly compensated officers. As a result of Section 162(m), we cannot deduct for U.S. federal
income tax purposes any compensation paid to any of these employees in an amount over $1 million
unless the compensation is performance-based compensation as defined under Section 162(m).
Amounts we pay as base salary and annual cash incentive compensation do not qualify for the
performance-based compensation exception. Although we intend that options and other awards
issued under our 2002 plan not be subject to the $1 million limitation in reliance upon this
exception, compliance with the performance-based compensation exception is subject to a number of
very technical requirements. Although the deductibility of compensation we have paid to executive
officers has not been impacted by Section 162(m) in 2007, there can be no assurance that we will be
able to comply with all of these requirements in the future.
80
Section 280G
Under Section 280G of the Code, a 20% excise tax is imposed upon named executive officers and
other executive officers or employees who receive an excess parachute payment upon a change in
control. An excess parachute payment is deemed to be received to the extent that such a
change-in-control payment exceeds an amount approximating three times the employees average annual
compensation, determined by a five-year average. A company also loses its tax deduction for any
excess parachute payments made.
We attempt to structure our severance packages so that they do not trigger an excess parachute
payment (or a corresponding loss of our tax deduction), but there is no guarantee that the
severance arrangements we have entered into will not require such a payment if and when they are
triggered. Our employment agreements typically do not require us to reimburse an executive officer
for the amount of any excise tax owed as a result of an excess parachute payment, although we may
voluntarily agree to provide such a reimbursement to an executive officer in appropriate
circumstances.
81
Section 409A
Section 409A of the Code provides for the payment of additional taxes by our directors,
officers and employees with respect to various deferred compensation arrangements we maintain,
including:
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employment and severance agreements between us and our officers;
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our non-qualified deferred compensation plan; and
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other compensation arrangements we enter into with our directors, officers and
employees.
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Generally, however, Section 409A of the Code does not apply to incentive stock options and
nonqualified stock options that are granted at fair market value if no deferral is provided beyond
exercise. Section 409A also does not apply to our stock bonus awards. In the event that a
deferred compensation arrangement fails to comply with Section 409A in form or operation, an
officer, director or employee may become subject to:
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the imposition of U.S. federal income tax, and potentially state and local income
tax, on all amounts deferred in the tax year in which the amounts are deferred (or, if
later, in the tax year when the receipt of the benefits is no longer subject to a
substantial risk of forfeiture);
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a penalty tax of 20% of the includable amount (in addition to the regular income tax
at ordinary income rates); and
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interest at the underpayment rate plus 1 percent from the time the amount was first
deferred (or, if later, the tax year when the benefits are no longer subject to a
substantial risk of forfeiture) until the time the amount is included in income.
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Deferred compensation arrangements may, in some cases, be amended to avoid the adverse tax
consequences of Section 409A. Such amendments must be made no later than December 31, 2008. We
are in the process of evaluating our deferred compensation plans, employment and severance
agreements and other compensation arrangements covered by Section 409A. We intend to make
appropriate changes to comply with the requirements of Section 409A and the accompanying
regulations to ensure that there are no adverse tax consequences for our directors, officers and
employees. We may be required to renegotiate some or all of these agreements or arrangements with
our directors and executive officers or to make changes to our deferred compensation plan, to bring
them into compliance with Section 409A.
SFAS No. 123R
Accounting rules and pronouncements govern how we value option and stock bonus awards that we
make and when those awards are to be recognized as compensation expense on our consolidated
financial statements. Under SFAS No. 123R, we calculate the full grant date fair value of awards
using a variety of assumptions. This calculation is performed for accounting purposes, as an
executive officer might never realize any value from the award. This may happen, for example, when
the value of a share of stock on which the executive holds an option falls below the exercise price
of the option and remains below the exercise price, rendering the option worthless to the
executive. SFAS No. 123R also requires that companies recognize the compensation cost of a stock
option or stock bonus award proportionately over the period that an employee is required to render
service in exchange for a share-based payment.
In the Summary Compensation Table on page 57, the dollar amounts shown in the Option Awards
column represent the compensation expense recognized by us in 2007 for awards made prior to 2007.
These amounts do not necessarily represent the value received by an executive officer during 2007.
To date, the SFAS No. 123R expense has not been a significant factor in setting or changing our
equity compensation grant practices.
82
Summary Compensation Table
The following table sets forth information relating to all compensation awarded to, earned by
or paid to the following individuals for all services rendered in all capacities to us during each
of the fiscal years ended December 31, 2007 and December 31, 2006:
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all individuals serving as our principal executive officer;
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our principal financial officer; and
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our two most highly compensated executive officers in the fiscal year ended December
31, 2007 whose total compensation exceeded $100,000.
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Non-Equity
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Incentive
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Option
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Plan
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All Other
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Name and
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Salary
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Awards ($)
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Compensation
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Compensation
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Total
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Principal Position
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Year
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($)
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(1)
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($) (2)
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($) (3)
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($)
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Charles Hsiao, Ph.D.
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2007
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$
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375,000
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$
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6,976
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$
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$
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37,662
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(4)
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$
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419,638
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Chairman (principal
executive officer)
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2006
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394,231
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49,014
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56,325
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(4)
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499,570
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Larry Hsu, Ph.D.
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2007
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375,000
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6,976
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243,750
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63,292
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(5)
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689,018
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President and Chief
Executive Officer
(principal
executive officer)
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2006
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394,231
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49,014
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253,125
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54,128
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(5)
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750,498
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Arthur A. Koch, Jr.
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2007
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243,472
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167,500
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34,713
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(6)
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445,685
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Senior Vice
President, Finance
and Chief Financial
Officer (principal
financial officer)
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2006
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230,937
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143,902
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27,250
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(6)
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402,089
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David S. Doll
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2007
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324,250
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2,790
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216,745
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38,544
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(7)
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582,239
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Executive Vice
President,
Commercial
Operations
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2006
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288,315
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18,053
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197,650
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28,595
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(7)
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532,613
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Charles V.
Hildenbrand
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2007
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219,801
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143,430
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31,483
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(8)
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394,714
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SVP-Operations
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2006
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204,148
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|
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124,189
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25,943
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(8)
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354,280
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(1)
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Represents the dollar amount of share-based compensation expense recognized for financial
statement reporting purposes for the fiscal years ended December 31, 2007, 2006 and 2005, as
applicable, in accordance with SFAS No. 123R based on assumptions set forth in Note 15 to the
consolidated financial statements included in this registration statement and disregarding the
estimate of forfeitures related to service-based vesting conditions. These dollar amounts
relate to awards granted prior to 2007 and 2006, as applicable.
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(2)
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Represents annual cash incentive awards paid in 2008 for 2007 performance and paid in 2007
for 2006 performance.
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(3)
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In 2007, we paid matching contributions on amounts deferred by our named executive officers
to our non-qualified deferred compensation plan and 401(k) plan from their respective 2007
salaries and cash incentive awards paid in 2007 with respect to 2006 performance. Our
matching contributions for 2006 relate to amounts deferred by our
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named executive officers to
our qualified deferred compensation plan and 401(k) plan from their respective 2006 salaries
and cash incentive awards paid in 2006 with respect to 2005 and 2004 performance.
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(4)
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Represents the following: (i) our matching contribution of $18,750 and $41,833 under our
non-qualified deferred compensation plan, with respect to the fiscal years ended December 31,
2007 and 2006, respectively; (ii) our matching contributions of $13,577 and $10,211 under our
401(k) plan, with respect to the fiscal years ended December 31, 2007 and 2006, respectively;
and (iii) our medical, life insurance and long-term disability insurance premium payments
during the fiscal years ended December 31, 2007 and 2006, respectively, of $5,335 and
$4,281, in the aggregate, respectively.
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(5)
|
|
Represents the following: (i) our matching contribution of $31,406 and $41,350 under our
non-qualified deferred compensation plan, with respect to the fiscal years ended December 31,
2007 and 2006, respectively; (ii) our matching contributions of $10,655 and $9,922 under our
401(k) plan, with respect to the fiscal years ended December 31, 2007 and 2006, respectively;
and (iii) our medical, life insurance and long-term disability insurance premium payments
during the fiscal years ended December 31, 2007 and 2006, respectively, of $21,231 and
$2,856 in the aggregate, respectively.
|
|
(6)
|
|
Represents the following: (i) our matching contribution of $19,369 and $14,371 under our
non-qualified deferred compensation plan, with respect to the fiscal years ended December 31,
2007 and 2006, respectively; (ii) our matching contributions of $7,991 and $5,766 under our
401(k) plan, with respect to the fiscal years ended December 31, 2007 and 2006, respectively;
and (iii) our medical, life insurance and long-term disability insurance premium payments
during the fiscal years ended December 31, 2007 and 2006, respectively, of $7,353 and
$7,113, in the aggregate, respectively.
|
|
(7)
|
|
Represents the following: (i) our matching contribution of $26,095 and $18,504 under our
non-qualified deferred compensation plan, with respect to the fiscal years ended December 31,
2007 and 2006, respectively; (ii) our matching contributions of $7,518 and $7,500 under our
401(k) plan, with respect to the fiscal years ended December 31, 2007 and 2006, respectively;
and (iii) our medical, life insurance and long-term disability insurance premium payments
during the fiscal years ended December 31, 2007 and 2006, respectively, of $4,931 and
$2,591, in the aggregate, respectively.
|
|
(8)
|
|
Represents the following: (i) our matching contribution of $6,880 and $3,184 under our
non-qualified deferred compensation plan, with respect to the fiscal years ended December 31,
2007 and 2006, respectively; (ii) our matching contributions of $10,235 and $8,391 under our
401(k) plan, with respect to the fiscal years ended December 31, 2007 and 2006, respectively;
and (iii) our medical, life insurance and long-term disability insurance premium payments
during the fiscal years ended December 31, 2007 and 2006, respectively, of $14,368 and
$14,368, in the aggregate, respectively.
|
84
Grants of Plan-Based Awards During Fiscal Year Ended December 31, 2007
The following table sets forth information regarding grants of non-equity incentive plan
awards to our named executive officers during the fiscal year ended December 31, 2007. We did not
grant any equity awards to our named executive officers during 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Possible Payouts
|
|
|
|
|
|
|
|
|
Under Non-Equity Incentive
|
|
|
|
|
|
|
|
|
Plan Awards
|
|
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
Name
|
|
($)(1)
|
|
($)(2)
|
|
($)(1)
|
Charles Hsiao, Ph.D.
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Larry Hsu, Ph.D.
|
|
|
|
|
|
|
281,250
|
|
|
|
|
|
Arthur A. Koch, Jr.
|
|
|
|
|
|
|
182,604
|
|
|
|
|
|
David S. Doll
|
|
|
|
|
|
|
243,188
|
|
|
|
|
|
Charles V. Hildenbrand
|
|
|
|
|
|
|
164,851
|
|
|
|
|
|
|
|
|
(1)
|
|
We do not establish threshold or maximum amounts, as such terms are used in this table under
the applicable SEC rules, in connection with our non-equity incentive plan awards.
|
|
(2)
|
|
This amount represents a maximum award of 75% of the named executive officers base salary
earned during the fiscal year ended December 31, 2007. The compensation committee retains its
discretion to establish base salary percentages, which were set at 75% for all named executive
officers for 2007. Once set, the compensation committee has the discretion to pay at above or
below these percentage targets depending on our overall financial and operational performance
and individual performance. See Compensation Discussion and Analysis Components of Our
Executive Compensation Program Annual Cash Incentive Awards for a discussion of
performance goals that the named executive officers should achieve to earn the awards.
|
85
Narrative Disclosure to Summary Compensation and Grants of Plan-Based Awards Tables
Agreements with Our Named Executive Officers
During the fiscal year ended December 31, 2007, we had employment agreements with Drs. Hsiao
and Hsu and Mr. Doll. The following is the description of certain material terms of these
agreements. This description is intended as a summary only and is qualified in its entirety by
reference to the complete text of the employment agreements, which are filed as exhibits to this
registration statement.
Employment Agreements with Charles Hsiao and Larry Hsu
At the closing of the merger of Global Pharmaceutical Corporation and Impax Pharmaceuticals,
Inc., effective December 14, 1999, we entered into employment agreements with Dr. Hsiao and Dr.
Hsu. In January 2004, we amended Dr. Hsiaos employment agreement.
Each of the employment agreements contains substantially similar terms. The employment
agreements contain initial three-year terms that automatically renew for successive one-year
periods unless terminated by either party at least six months prior to the expiration of the
initial term or any renewal term.
Pursuant to the employment agreements, base salary for each executive was initially set at
$175,000 per year, subject to discretionary increases in accordance with our normal procedures and
policies. We also agreed to provide Drs. Hsiao and Hsu with additional compensation, including:
|
|
|
a bonus, based on criteria established by our board of directors;
|
|
|
|
|
full health, dental, vision and disability insurance, as well as life insurance and
any other benefits customarily offered to our senior executive officers;
|
|
|
|
|
four weeks of paid vacation time annually; and
|
|
|
|
|
the reimbursement of all out-of-pocket expenses related to job performance.
|
The employment agreements contain customary non-competition, non-interference, non-disclosure
and assignment of inventions provisions.
Each of Drs. Hsiao and Hsus employment agreements contains provisions that provide them with
benefits upon termination or a change in control. See Potential Payments upon Termination or
Change in Control. Dr. Hsiao died in August 2008.
Employment Agreement with David S. Doll
Our September 1, 2006 employment agreement with Mr. Doll, our Executive Vice President,
Commercial Operations, provided for an initial three-year term, which automatically renews for
successive one-year periods unless terminated by either party at least 60 days prior to the
expiration of the initial term or any renewal term. The agreement set Mr. Dolls initial annual
base salary at $295,000 and provided for increases to $335,000 beginning February 1, 2007 and
$395,000 beginning February 1, 2008. The maximum amount of Mr. Dolls cash incentive award was set
at 75% of his base salary. Under the employment agreement, he was to be evaluated for eligibility
to receive this award under the same procedures we have implemented for our other named executive
officers. See Compensation Discussion and Analysis Components of Our Executive Compensation
Program Annual Cash Incentive Awards.
Mr. Doll was entitled to receive a number of paid vacation days in each calendar year as
determined by us from time to time for our senior executive officers. Unused vacation days could
not be accrued, carried over or otherwise converted into compensation. We also agreed to provide
Mr. Doll with any fringe benefits available to our senior executive officers and such other fringe
benefits as our board of directors or the compensation committee may deem appropriate, as well as
to reimburse him for all out-of-pocket expenses related to his job performance.
86
Under his employment agreement, Mr. Doll received, subject to stockholder approval, an option
under our 2002 plan to purchase 30,000 shares of common stock, which option vested in four equal
annual increments
beginning on the first anniversary of the date of grant. He was also eligible to receive on
September 1, 2008, subject to stockholder approval, a second option to purchase 30,000 shares of
common stock, which option would also vest in four equal annual increments beginning on the first
anniversary of the date of grant. These options were to have an exercise price equal to the fair
market value of our common stock on the date our stockholders approve amendments to our 2002 plan
to permit the issuance of the options to Mr. Doll. To the extent that the fair market value of the
common stock on the date the option is approved was higher than the value of our stock on the date
of the employment agreement, we agreed to credit the amount of such excess to Mr. Doll upon his
exercise of the option.
Mr. Doll also received, subject to stockholder approval, a stock bonus award under our 2002
plan of 30,000 shares of common stock, which award vested in seven equal annual increments. He was
also eligible to receive on September 1, 2008, subject to stockholder approval, a second stock
bonus grant of 30,000 shares of common stock also vesting in seven equal annual increments. In
order to enable Mr. Doll to satisfy the minimum withholding tax obligations with respect to the
vesting of the stock bonus awards, we would withhold from the stock bonus awards that vest each
year a number of shares having a fair market value equal to the amount required to be withheld. If
stockholder approval permitting the grant of these options and stock bonuses was not obtained prior
to the expiration or termination of the employment agreement or a change in control, Mr. Doll would
be entitled to receive the economic benefits of all such awards, as reasonably determined by our
compensation committee.
Under the employment agreement, Mr. Doll was subject to non-disclosure, non-disparagement, and
intellectual-property-assignment provisions and was, and for one year after termination of the
agreement would continue to be, prohibited from soliciting our current or former customers,
contractors, subcontractors, vendors or suppliers to cease doing business with us, and from
soliciting our employees to leave their employment with us. In addition, Mr. Doll agreed to
indemnify us from any liability that arises due to his failure to comply with these covenants.
Mr. Dolls employment agreement also contained termination, severance and change in control
provisions. See Potential Payments upon Termination or Change in Control.
We entered into a separation agreement with Mr. Doll, dated July 30, 2008, under which he
resigned his position effective August 1, 2008, the September 1, 2006 employment agreement was
terminated and Mr. Dolls rights with respect to the options to purchase 60,000 shares and the
stock bonus awards granted and to be granted under the employment agreement, as well as his rights
under fully vested options to purchase 172,500 shares of common stock separately held by Mr. Doll,
were terminated. Under the separation agreement we agreed to pay Mr. Doll separation benefits
consisting of $620,000 and 94,705 shares of our common stock. The agreement also subjects Mr. Doll
to non-disclosure and non-disparagement provisions and prohibits him from soliciting our employees
to leave their employment with us. We and Mr. Doll also executed mutual releases of any claim each
might have against the other arising out of Mr. Dolls employment.
In addition, we entered into a one-year consulting agreement with Mr. Doll effective September
4, 2008, under which, Mr. Doll agreed to provide us with certain litigation-related services upon
our request. Pursuant to the consulting agreement, Mr. Doll was granted 9,836 shares of our common
stock, and we agreed to compensate Mr. Doll at the rate of $275 per hour for his services. The
consulting agreement also subjects Mr. Doll to certain disclosure, assignment of intellectual
property, and confidentiality requirements. We may terminate the consulting agreement for no
reason upon 45-days written notice to Mr. Doll. Mr. Doll may terminate the consulting agreement
only in the event of our material breach of the agreement which has not been cured within 45 days
notice of such breach.
87
Comparison of Salary and Bonus to Total Compensation Paid
The table below sets forth the amount of salary and annual cash incentive award for each named
executive officer as a percentage of total compensation paid with respect to 2006 and 2007.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
Payments as
|
|
|
|
|
|
|
Salary as
|
|
Percentage of
|
|
|
|
|
|
|
Percentage of
|
|
Total
|
|
|
|
|
|
|
Total
|
|
Compensation
|
Name
|
|
Year
|
|
Compensation (%)
|
|
(%)
|
Charles Hsiao, Ph.D.
|
|
|
2007
|
|
|
|
89
|
|
|
|
|
(1)
|
|
|
|
2006
|
|
|
|
79
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry Hsu, Ph.D.
|
|
|
2007
|
|
|
|
54
|
|
|
|
35
|
|
|
|
|
2006
|
|
|
|
53
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur A. Koch, Jr.
|
|
|
2007
|
|
|
|
55
|
|
|
|
38
|
|
|
|
|
2006
|
|
|
|
57
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David S. Doll
|
|
|
2007
|
|
|
|
56
|
|
|
|
37
|
|
|
|
|
2006
|
|
|
|
54
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles V. Hildenbrand
|
|
|
2007
|
|
|
|
56
|
|
|
|
36
|
|
|
|
|
2006
|
|
|
|
58
|
|
|
|
35
|
|
|
|
|
(1)
|
|
Because Dr. Hsiaos role was changing from an executive to a non-executive position,
the compensation committee determined to forego any cash incentive award to Dr. Hsiao for
2006 and 2007 and to consider a future cash incentive award to him based upon a cumulative
three-year review of his performance at the end of 2008.
|
88
Outstanding Equity Awards at December 31, 2007
The following table sets forth the information regarding the outstanding option awards for our
named executive officers at December 31, 2007. There were no outstanding stock awards at December
31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Number
|
|
|
|
|
|
|
of
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
Underlying
|
|
|
|
|
|
|
Unexercised
|
|
Option
|
|
|
|
|
Options
|
|
Exercise
|
|
Option
|
|
|
(#)
|
|
Price
|
|
Expiration
|
Name
|
|
Exercisable (1)
|
|
($)
|
|
Date
|
Charles Hsiao, Ph.D.
|
|
|
333,580
|
|
|
$
|
0.82
|
|
|
|
02/01/2009
|
|
|
|
|
60,800
|
|
|
|
5.00
|
|
|
|
12/22/2010
|
|
|
|
|
100,000
|
|
|
|
6.72
|
|
|
|
03/08/2012
|
|
|
|
|
75,000
|
|
|
|
3.04
|
|
|
|
03/10/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry Hsu, Ph.D.
|
|
|
50,000
|
|
|
|
5.00
|
|
|
|
12/22/2010
|
|
|
|
|
100,000
|
|
|
|
6.72
|
|
|
|
03/08/2012
|
|
|
|
|
75,000
|
|
|
|
3.04
|
|
|
|
03/10/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur A. Koch, Jr.
|
|
|
50,000
|
|
|
|
17.13
|
|
|
|
02/22/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David S. Doll
|
|
|
45,000
|
|
|
|
6.81
|
|
|
|
01/19/2011
|
|
|
|
|
40,000
|
|
|
|
11.11
|
|
|
|
09/24/2011
|
|
|
|
|
30,000
|
|
|
|
6.72
|
|
|
|
03/08/2012
|
|
|
|
|
30,000
|
|
|
|
3.04
|
|
|
|
03/10/2013
|
|
|
|
|
27,500
|
|
|
|
9.85
|
|
|
|
09/21/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles V. Hildenbrand
|
|
|
50,000
|
|
|
|
14.55
|
|
|
|
08/30/2014
|
|
|
|
|
11,459
|
|
|
|
9.85
|
|
|
|
09/21/2015
|
|
|
|
|
(1)
|
|
All options vest in four equal annual installments beginning on the first anniversary of the
date of grant.
|
On
June 6, 2008, in connection with his hiring, we granted Michael
Nestor, President, Impax Pharmaceutical Division, an option to
purchase 75,000 shares of our common stocks at an exercise price per share
of $8.53. The option expires on June 6, 2018 and
vests in four equal annual installments beginning on the first anniversary of the
date of grant.
89
Non-Qualified Deferred Compensation During Fiscal Year Ended December 31, 2007
The following table sets forth the benefits received by our named executive officers under our
non-qualified deferred compensation plan during the fiscal year ended December 31, 2007 as well as
the aggregate non-qualified deferred compensation balances at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
Executive
|
|
Registrant
|
|
Aggregate
|
|
Aggregate
|
|
Balance at
|
|
|
Contributions in
|
|
Contributions in
|
|
Earnings
|
|
Withdrawals/
|
|
December 31,
|
|
|
2007
|
|
2007
|
|
in 2007
|
|
Distributions
|
|
2007
|
Name
|
|
($) (1)
|
|
($) (2)
|
|
($)
|
|
($)
|
|
($) (3)
|
Charles Hsiao, Ph.D.
|
|
$
|
37,500
|
|
|
$
|
18,750
|
|
|
$
|
21,956
|
|
|
|
|
|
|
$
|
470,082
|
|
Larry Hsu, Ph.D.
|
|
|
62,813
|
|
|
|
31,406
|
|
|
|
11,628
|
|
|
|
|
|
|
|
464,081
|
|
Arthur A. Koch, Jr
|
|
|
38,737
|
|
|
|
19,369
|
|
|
|
4,102
|
|
|
|
|
|
|
|
138,139
|
|
David S. Doll
|
|
|
52,190
|
|
|
|
26,095
|
|
|
|
9,179
|
|
|
|
|
|
|
|
329,735
|
|
Charles V. Hildenbrand
|
|
|
13,760
|
|
|
|
6,880
|
|
|
|
(3,772
|
)
|
|
|
|
|
|
|
42,263
|
|
|
|
|
(1)
|
|
Represents amounts deferred by each named executive officer to our non-qualified deferred
compensation plan and reported in the Summary Compensation Table above under Salary for 2007
and Non-Equity Incentive Plan Compensation for 2006, relating to cash incentive awards paid
in 2007 for 2006 performance, as follows:
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity Incentive Plan
|
|
|
2007 Salary Contributions
|
|
Contributions for 2006
|
Name
|
|
($)
|
|
Performance ($)
|
Charles Hsiao, Ph.D.
|
|
$
|
37,500
|
|
|
$
|
|
(1)
|
Larry Hsu, Ph.D.
|
|
|
37,500
|
|
|
|
25,313
|
|
Arthur A. Koch, Jr
|
|
|
24,347
|
|
|
|
14,390
|
|
David S. Doll
|
|
|
32,425
|
|
|
|
19,765
|
|
Charles V. Hildenbrand
|
|
|
8,792
|
|
|
|
4,968
|
|
|
|
|
(1)
|
|
Because Dr. Hsiaos role was changing from an executive to a non-executive
position, the compensation committee determined to forego any cash incentive award to Dr.
Hsiao for 2006 and 2007 and to consider a future cash incentive award to him based upon a
cumulative three-year review of his performance at the end of 2008.
|
|
|
|
Amounts deferred by named executive officers to our non-qualified deferred compensation plan
from their respective cash incentive awards paid in 2008 for 2007 performance and our
matching contributions related to such deferred compensation made in 2008 will be included in
the next years Non-Qualified Deferred Compensation table. Such amounts deferred by our
named executive officers are included in the cash incentive awards reported under Non-Equity
Incentive Plan Compensation for 2007 in the Summary Compensation Table above.
|
|
(2)
|
|
These amounts are reported under All Other Compensation in the Summary Compensation Table
above.
|
|
(3)
|
|
Of the amounts shown, the following were included in the Summary Compensation Table for 2006
and represent the amounts deferred by each named executive officer from the salary earned and
paid in 2006: Dr. Hsiao $39,423, Dr. Hsu $39,423, Mr. Koch $23,094, Mr. Doll
$28,831, and Mr. Hildenbrand $4,777. Our matching contributions relating to 2006 salary
payments and cash incentive awards paid in 2006 for 2005 and 2004 performance were reported in
All Other Compensation for 2006 in the Summary Compensation Table above. For information
regarding named executive officers deferrals from their respective cash incentive awards
earned for 2006 performance, see footnote 1 above.
|
91
Narrative Disclosure to Non-Qualified Deferred Compensation Table
Our non-qualified deferred compensation plan permits highly-compensated individuals to receive
a similar level of benefits (in terms of the overall percentage of their income eligible for tax
deferral and employer matching contributions) as are available to employees with lower levels of
income. Participants in this plan may defer up to 10% of the participants base salary and bonus
payable in a given year. Participants may also credit their plan accounts with any excess
deferrals that are to be returned to the participant from our 401(k) plan due to the application of
the tax codes participation and discrimination standards. We make a matching contribution for
each participant equal to 50% of the participants contribution, not to exceed 5% of the
participants base pay and bonus. A participants account is notionally invested in one or more
investment funds and the value of the account is determined with respect to such investment
allocations. We have the ability to reduce the level of matching contribution or eliminate it
altogether, but we have not chosen to do so. Participants are fully vested in their contributions
when made. Our matching contributions vest depending on the number of years of service, with
participants being fully vested after five years of service. No contributions are forfeited as a
result of a separation due to death, disability, termination of the plan or a change in control.
Benefits attributable to a participant may be valued as if they were invested in one or more
investment funds (as set forth in the non-qualified deferred compensation plan), as directed by
participants in writing. Participants may change their selection of investment funds from time to
time in writing in accordance with the procedure established by the plan administrator. Changes
will take effect as soon as administratively practicable. If a participant does not select an
investment fund, the participant will be deemed to have selected the Alliance Money Market fund.
The portion of a participants benefit account valued by reference to the investment funds
will be valued daily based upon the performance of the investment funds selected by the
participant. The valuation will reflect the net asset value per share of the designated investment
funds, as determined by the plan administrator. The plan administrator may establish uniform rules
limiting a participants eligibility to allocate contributions to an account based on health,
income, or such other factors as the administrator may deem appropriate. The plan administrator
has not as yet established rules limiting the allocation of plan contributions.
If a participant terminates his or her employment, or an eligible consultant ceases to render
service to us, for any reason, including death, we will pay the participant an amount equal to the
value of the vested balance credited to the participants plan account. If the participant has
died, the balance of that account will be paid to one or more beneficiaries designated by the
participant. See Potential Payments upon Termination or Change in Control Description of
Applicable Termination and Change-in-Control Provisions Non-Qualified Deferred Compensation
Plan for a description of the form of payouts, withdrawals and other distributions under our
non-qualified deferred compensation plan.
A participant must select the form and commencement date of the payment of retirement benefits
prior to the initial allocation of contributions to the participants plan account. The
participant and the plan administrator may, by mutual agreement, change the participants initial
selection of the form of distribution, provided that:
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the election is made at least one year prior to the participants retirement;
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the election does not have the effect of accelerating any payment; and
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if the election delays the commencement date of any payment, the delayed commencement
date is at least five years after the original commencement date.
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Notwithstanding the foregoing limitations, with respect to the balance of a participants plan
account that has vested as of January 1, 2005 (and any earnings attributable to such amounts), and
upon mutual agreement between the participant and the plan administrator, the participant may amend
the form of distribution to be paid in a lump sum or any other form approved by the administrator.
A participant may also request a distribution of the participants account balance prior to
termination of employment if necessary to alleviate an unforeseeable emergency, which is defined
as severe financial hardship resulting from:
92
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an illness or accident of the participant, the participants spouse or a dependent of
the participant;
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loss of the participants property due to a casualty; or
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any other similar extraordinary and unforeseeable circumstances arising as a result
of events beyond the control of the participant.
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The determination of whether a participant qualifies for an unforeseeable emergency
distribution will be subject to Section 409A of the Code and the regulations promulgated
thereunder.
Benefits are payable as they become due, irrespective of any actual investments we may make to
meet our obligations. However, participants will have no greater right to our assets than that of
an unsecured creditor. We must withhold or cause to be withheld all appropriate taxes, to the
extent that a withholding obligation exists, with respect to deferral contributions or benefit
payments under the non-qualified deferred compensation plan. Upon termination from employment, we
will also deduct any amount then owed by a participant to us from the participants benefit
payments.
93
Director Compensation for Fiscal Year Ended December 31, 2007
The following table sets forth information regarding the compensation of our non-employee
directors during the fiscal year ended December 31, 2007. We did not recognize any dollar amounts
for financial statement reporting purposes for the fiscal year ended December 31, 2007 in
accordance with SFAS No. 123R because all equity awards granted to directors vested prior to 2007.
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Fees Earned
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All Other
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or Paid in Cash
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Compensation
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Total
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Name
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($)(
1
)
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($)
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($)
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Leslie Z. Benet, Ph.D.
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$
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33,000
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$
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33,000
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Robert L. Burr
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33,000
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33,000
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Nigel Ten Fleming, Ph.D.
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33,000
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33,000
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Michael Markbreiter
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33,000
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|
|
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33,000
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Oh Kim Sun
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33,000
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33,000
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Peter R. Terreri
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|
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43,000
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43,000
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(1)
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Represents $25,000 annual retainer fee and $8,000 fee for the attendance of the board
meetings. In addition, fees paid to Mr. Terreri include $10,000 payable to him in his
capacity as the Chairman of the Audit Committee of our board of directors. Each of our
non-employee directors attended 100% of the meetings.
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Narrative Disclosure to Director Compensation Table
Members of our board of directors who are our employees, including Dr. Hsiao, do not receive
any compensation for their services as our directors. In the fiscal year ended December 31, 2007,
each of our non-employee directors received an annual retainer of $25,000, payable in quarterly
installments, and a $2,000 fee for each regularly scheduled board meeting that such director
attended. During the fiscal year ended December 31, 2007, non-employee directors were reimbursed
for out-of-pocket expenses incurred in attending board and committee meetings.
In addition to the foregoing, we paid the following additional director fees in the fiscal
year ended December 31, 2007: (i) an annual retainer of $10,000 per year, payable in quarterly
installments, to the Chairman of the Audit Committee.
No equity awards were granted to our directors during the fiscal year ended December 31, 2007.
94
Description of Equity Compensation Plans
The following description of the material terms of the 2002 and 1999 plans is intended as a
summary only and is qualified in its entirety by reference to the complete text of the 2002 and
1999 plans, which are filed as exhibits to this registration statement.
Our stockholders originally approved the 2002 plan in May 2002, and our board of directors
approved the amended and restated 2002 plan on August 23, 2007. Among other changes, the board of
directors increased the maximum number of shares of common stock issuable under the 2002 plan from
4,000,000 to 7,900,000. Also, the board of directors increased the maximum number of shares
issuable under the 2002 plan to any single participant from 300,000 shares to 50% of the total
shares authorized for issuance under the 2002 plan. Because our stockholders will not be able to
approve these changes to the 2002 plan by August 23, 2008, we will not be able to continue to make
grants of incentive stock options, known as ISOs, under the 2002 plan absent further amendment of
the plan by the board and stockholder approval of such amendments within one year.
Our stockholders adopted the 1999 plan in connection with the merger of Global Pharmaceutical
Corporation with Impax Pharmaceuticals, Inc. effective December 14, 1999. In October 2000, our
stockholders approved an increase in the number of shares of common stock authorized for issuance
under the plan from 2,400,000 to 5,000,000. Except for the differences noted below in the summary
of the 1999 plan, the material terms of the 1999 plan are substantially similar to those of the
2002 plan.
2002 Plan
General Information
The 2002 plan authorizes the grant of ISOs, non-statutory stock options, SARs, and stock bonus
awards, to our officers, employees, directors and consultants, or those of our affiliates. We may
also, from time to time, assume outstanding awards granted by another company by either granting an
award under the 2002 plan in replacement of the award we assumed or by treating the assumed award
as if it had been granted under the 2002 plan.
Under the 2002 plan as initially adopted we could issue up to 4,000,000 shares of our common
stock. Because we had reached that limit, our board of directors approved amendments to the 2002
plan to increase the limit (i) to 6,500,000 shares on August 23, 2007 and (ii) to 7,900,000 shares
on August 20, 2008, all of which potentially may be issued pursuant to the grant of ISOs. In order
for options covered by the additional 2,500,000 shares to qualify as ISOs, our stockholders would
have been required to approve this change by August 23, 2008. As we were unable to obtain
stockholder approval by that date, the options we have granted since August 23, 2007 do not qualify
as ISOs, and options we may grant in the future will also not qualify as ISOs unless our board of
directors further amends the plan and our stockholders approve such amendments within one year
thereafter.
Adjustments
Our board of directors may adjust the maximum number of shares available under the plan
without stockholder approval to give effect to any stock split, stock dividend, combination,
recapitalization, or similar transaction with respect to our common stock. Shares subject to
awards under the 2002 plan that are cancelled, expired, terminated, forfeited or withheld to
satisfy the applicable purchase price or tax withholding obligations are again available for
issuance under the 2002 plan.
Under the 2002 plan as presently in effect, and subject to adjustments to reflect stock
dividends and other changes in our common stock, the maximum number of shares of common stock with
respect to which stock options or SARs may be granted during any calendar year to any employee may
not exceed 300,000 shares. Our board of directors has approved an amendment to the 2002 plan to
increase this limit to 50% of the total number of shares of common stock authorized for issuance
under the 2002 plan with respect to grants to any director, officer, employee or consultant.
95
Shares of common stock available for issuance under the 2002 plan may be authorized and
unissued, held by us in our treasury or otherwise acquired for the purposes of the 2002 plan.
Administration
Except for awards granted to our non-employee directors and the power to amend or terminate
the plan, our board of directors may delegate its authority under the 2002 plan to a committee.
This committee must consist of at least two directors who are non-employee directors under
Exchange Act Rule 16b-3 and outside directors under Section 162(m) of the Code. However, if the
committee does not meet either of these requirements, the validity of awards granted or actions
taken under the 2002 plan will not be affected. The board of directors may also delegate
nondiscretionary administrative duties to one or more of our employees. We have chosen to exercise
this delegation of authority to the fullest extent permitted by the plan.
Subject to the terms of the 2002 plan, the board of directors and, except for awards granted
to our non-employee directors, the committee, can grant awards under the 2002 plan and determine
the recipients and terms of those awards. They can accelerate or amend the terms of the 2002 plan
or any award issued under the 2002 plan. They also can interpret the provisions of the 2002 plan
and related award agreements, and generally otherwise administer the 2002 plan.
Options
Terms and Conditions of Options.
Under the 2002 plan, the board of directors or the committee
can grant stock options that are intended to qualify as ISOs. To be an ISO, the option must meet,
and continue to meet, all of the requirements of the Code with respect to ISOs. Any other stock
options granted under the 2002 plan are non-statutory stock options. ISOs may only be granted to
our employees or to employees of our 50%-or-greater-owned subsidiaries. Also, under the Code, the
fair market value (as of the date of grant) of the shares underlying ISOs exercisable by a single
holder for the first time during any calendar year may not exceed $100,000.
When we grant an ISO under the 2002 plan, the exercise price must be at least equal to the
fair market value of a share of our common stock on the date of grant. For a grant of an ISO to an
employee who owns more than 10% of the total combined voting power of all classes of our stock or
stock of any of our subsidiaries, the exercise price must be at least 110% of the fair market value
of a share of the common stock on the date of grant. When we grant a non-statutory stock option
under the 2002 plan, it must have an exercise price of at least $.01 per share.
All options will expire no later than ten years after the date of grant, unless terminated
earlier, except that an ISO granted to a 10% or greater stockholder must expire no later than five
years after the date of grant.
Vesting and Exercise of Options.
The board of directors or the committee may establish
conditions and restrictions on the vesting or exercise of an option, or on the issuance of common
stock in connection with the exercise of an option. Once a holder of a vested and exercisable
option has satisfied any applicable tax withholding requirements, the option may be exercised by
sending us a notice specifying the number of shares to be purchased and payment of the exercise
price for those shares. The holder must pay the exercise price in cash, unless we have agreed to
accept another form of payment.
Rights as a Stockholder.
The holder of an option does not have any rights as a stockholder
with respect to shares covered by an option until the shares are issued upon the exercise of the
option.
Transferability of Options.
Holders may not generally transfer or assign options granted
under the 2002 plan, except for transfers by will or the laws of descent and distribution. Options
cannot be levied against, attached or taken by similar process. Further, the option holder is the
only person who can exercise the option during the holders lifetime. On or after the time of
grant, the board of directors or committee may permit transfers of a non-statutory stock option in
whole or in part and may determine the recipients, circumstances and conditions of the transfer.
However, these conditions must be consistent with the limitations on the transferability of options
imposed by a Form S-8 registration statement, or any successor form.
Option Repurchases
. The board of directors may offer to repurchase any option from a holder
on terms determined by the board.
96
Stock Appreciation Rights
The board of directors or committee may award SARs. A SAR entitles the holder to receive,
upon exercise of the award, an amount equal to the appreciation in the fair market value of our
common stock between the date of grant and the date of exercise. We may agree to pay this
appreciation in cash, our common stock or a combination of both.
We may award SARs under the 2002 plan in conjunction with an option, creating a tandem SAR,
or award a SAR that is independent of any option. We may award a tandem SAR that includes a
non-statutory stock option at or after the time we grant the non-statutory stock option. If we
wish to award a tandem SAR that includes an ISO, we can only do so at the time the ISO is granted.
A holder of a tandem SAR can only exercise the SAR when the related option may be exercised.
If a holder exercises a tandem SAR, that exercise serves to cancel the related option to the extent
the SAR is exercised. Likewise, if a holder exercises the related option, the exercise will cancel
the same portion of the SAR. A holder may exercise a tandem SAR only when the fair market value of
our common stock exceeds the exercise price of the option. The board of directors or committee may
impose additional service or vesting conditions, or any other rules or procedures, in connection
with the exercise of a SAR.
When a holder exercises a SAR, the holder will receive cash or shares of our common stock, as
specified in the SAR award agreement, equal to the product of:
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the number of shares covered by the exercise; and
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the difference between:
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the fair market value of a share of our common stock on the date of exercise; and
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the fair market value of a share of our common stock on the date of grant.
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A holder cannot transfer a SAR during the holders lifetime. Upon death of a holder, a SAR
may be transferred to a beneficiary designated by the holder. If no designated beneficiary exists,
the SAR may be transferred under the holders will or by the laws of descent and distribution. A
tandem SAR must be transferred with the underlying option.
Stock Bonus Awards
The board of directors or the committee may grant stock bonus awards in consideration for past
or future services rendered to us or our affiliates. Shares subject to stock bonus awards may, but
need not, be subject to a vesting schedule. The holder may transfer these shares only to the
extent described in the award agreement, so long as shares remain subject to the terms of that
agreement.
Effect of Termination of Employment or Service
For the description of the effect of termination of employment or service on options and SARs
issued under the 2002 plan, see Potential Payments Upon Termination or Change in Control.
Generally, a holder must forfeit any unvested shares of common stock covered by a stock bonus award
upon his or her termination of employment or service with us or our affiliates. An award agreement
may provide for different effects upon termination of employment or service. We may make changes
to these provisions after the date of grant if the change does not reduce any rights of a holder.
97
Adjustments Upon Changes in Our Common Stock
We will make adjustments to options granted under the 2002 plan as described below.
Capitalization.
If we make any change in our common stock without receiving payment for the
change, we will adjust appropriately the terms of the 2002 plan and each award issued under the
2002 plan. These adjustments may affect:
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the class of securities subject to the 2002 plan or any award;
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the maximum number of securities subject to the 2002 plan;
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the maximum number of securities that may be awarded to any employee under the 2002
plan; and
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the number of securities and exercise price of any award granted under the 2002 plan.
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Examples of events that may require us to make these changes include:
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mergers and consolidations;
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reincorporations and reorganizations;
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recapitalizations;
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dividends in stock or other property (other than cash), including liquidating
dividends;
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stock splits or divisions;
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reverse stock splits or combinations;
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exchanges of shares;
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changes in our corporate structure; and
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other changes to our common stock in which we do not receive payment for the change.
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Dissolution or Liquidation.
If we dissolve or liquidate, awards outstanding under the 2002
plan will terminate if not exercised immediately prior to or at the same time as the dissolution or
liquidation.
Amendment and Termination of 2002 Plan
The board of directors may generally amend or terminate the 2002 plan or any related award
agreement at any time, although a holder must consent to any amendment or termination that
adversely affects his or her rights. Our stockholders must approve any amendment that would
increase the number of shares of common stock for which awards may be granted under the 2002 plan
(in the aggregate or on an individual basis) or modify the class of employees eligible to receive
awards under the 2002 plan. We may make amendments in connection with any of the events described
in Adjustments Upon Changes in Our Common Stock without stockholder approval.
98
Effective Date of 2002 Plan
The 2002 plan originally took effect in May 2002. Our board of directors adopted the amended
and restated 2002 plan effective August 23, 2007. However, certain proposed amendments to the 2002
plan are subject to stockholder approval. To the extent our stockholders do not approve these
amendments by August 23, 2008, we will be unable to continue to grant ISOs under the 2002 plan.
1999 Plan
Number of Shares and Adjustments
Under the 1999 plan, we may issue up to 5,000,000 shares of our common stock. Our board of
directors may adjust this maximum number without stockholder approval to give effect to any stock
split, stock dividend, combination, recapitalization, or similar transaction with respect to our
common stock. Shares subject to awards under the 1999 plan that are cancelled, expired,
terminated, forfeited or withheld to satisfy the applicable purchase price or tax withholding
obligations shall again be available for issuance under the 1999 plan.
Under the 1999 plan, and subject to adjustments to reflect stock dividends and other changes
in our common stock, the maximum number of shares of common stock with respect to which stock
options or SARs may be granted during any calendar year to any employee may not exceed 300,000
shares.
Non-Employee Director Automatic Stock Option Awards
While the 1999 plan provides for the annual grant of options to purchase 2,000 shares of
common stock to each of our non-employee directors, we have not granted options to our non-employee
directors during 2005, 2006 or 2007. (Nor have we granted options to our non-employee directors
during those years under our 2002 plan, under which we had until 2005 granted each of them options
to purchase 5,500 shares annually). Non-employee directors become eligible for such options after
one year of service in that capacity. The options authorized are exercisable for 10 years, have an
exercise price equal to the fair market value of the common stock on the date of grant, and
generally vest in three equal increments over the three years following the grant. Upon
termination of service, unvested options expire and vested options may be exercised for 90 days
thereafter, except when termination is the result of death or disability, in which case the vested
options may be exercised within one year.
99
Potential Payments upon Termination or Change in Control
Description of Applicable Termination and Change-in-Control Provisions
Upon termination of his employment or upon a change in control, each of our named executive
officers may be entitled to receive from us payments and benefits under the following agreements
and plans:
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employment agreements with Dr. Hsiao, Dr. Hsu and Mr. Doll;
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our 1999 Equity Incentive Plan and the 2002 plan; and
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our deferred compensation plan.
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Employment Agreements with Drs. Hsiao and Hsu
We have entered into employment agreements with each of Drs. Hsiao and Hsu. Dr. Hsiao died in
August 2008.
Each employment agreement specifies our obligations to such executive officer upon termination
of his employment under various circumstances. With respect to the termination of the employment
of Drs. Hsiao and Hsu, each executives employment agreement may be terminated by either party on
30 days written notice, and by us at any time, for cause.
Under the terms of the employment agreements, cause means:
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a material breach of a provision relating to proprietary information, assignment of
inventions, non-interference, non-disclosure and non-competition;
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a material breach of any other provision not remedied within 30 days of such breach;
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any act of fraud or embezzlement against us; or
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any indictment for a felony or other crime that would cause injury to our reputation.
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Under the terms of these employment agreements, good reason means:
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the assignment of duties or reduction in duties inconsistent with Dr. Hsiaos or Dr.
Hsus employment position;
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the material reduction in salary or benefits not agreed to by Dr. Hsiao or Dr. Hsu;
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a relocation requiring Dr. Hsiao or Dr. Hsu to commute more than 50 miles; or
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a change in control.
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Under the terms of these employment agreements, a change in control is defined as:
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the acquisition by any person or entity of ownership or control of more than 50% of
our voting power;
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a sale or disposition of assets totaling more than 50% of our value;
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a merger or reorganization in which our stockholders, immediately prior to the
merger, do not own a least 51% of our voting power after the merger;
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any transaction where our stockholders, immediately prior to the transaction, do not
own at least 51% of our voting power after the transaction; or
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any other transaction that our board of directors determines would materially alter
our structure, ownership or control.
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100
The table below sets forth the benefits that each of Drs. Hsiao and Hsu would be entitled to
receive under his employment agreement should his employment terminate under the following
specified circumstances.
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Termination Circumstance
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Employment Agreement Benefit
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Death or disability
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Lump sum cash payment by us of
accrued and unpaid salary and benefits
through date of termination, including
accrued but unused vacation time
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Payment by us, in accordance
with our payment policy, of the lesser
of:
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an amount in cash equal to the
executives salary and benefits for
six months after the date of death or
disability; or
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the entire amount in cash of
remaining salary due and payable, from
the date of death or disability to the
scheduled expiration of the employment
agreement
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Payment of a portion of any
quarterly or annual bonus otherwise
payable to the executive, prorated to
reflect any early termination of the
employment agreement relative to the
performance period of the bonus
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Maintenance of the executives
health, dental, vision and disability
insurance at our cost for 18 months
after the date of disability or until
the executive accepts other employment
that provides health insurance
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In the case of death, payment
by the life insurance carrier of a
death benefit of $1,000,000 to the
executives beneficiary under a policy
selected by the executive
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In the case of disability,
payment by the disability insurance
carrier of up to $250,000 in salary
replacement benefits
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Termination by us for cause or by
the executive without good reason
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Wages and benefits accrued to date or
as provided by applicable law
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Termination by us without cause or
by the executive for good reason
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Lump sum cash payment by us of
accrued and unpaid base salary and
benefits through date of termination,
including accrued but unused vacation
time
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Payment by us, in accordance
with our payment policy, of the lesser
of:
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an amount in cash equal to the
executives salary and benefits for
six months after the date of
termination; or
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the entire amount in cash of
remaining salary due and payable, from
the date of termination to the
scheduled expiration of the employment
agreement
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Maintenance of the executives
health, dental, vision and disability
insurance at our cost for 18 months
after the date of termination or until
the executive accepts other employment
that provides health insurance
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In general, disability means any physical or mental illness that renders the executive
incapable of substantially performing his duties under the agreement for a period of three
consecutive months or six months in any 12-month period, as determined by a physician or
psychiatrist, as applicable, selected by us.
101
Employment Agreement with Mr. Doll
Our employment agreement with Mr. Doll, until its termination on August 1, 2008, could have
been terminated:
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by either party upon 30 days written notice;
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by us, at any time, for cause or upon Mr. Dolls death or disability; and
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by Mr. Doll, upon 30 days written notice, for good reason.
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Under the terms of Mr. Dolls employment agreement, cause meant:
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any act of fraud or theft against us, or any indictment for, conviction for, guilty
plea to, or plea of nolo contendere to, a felony or misdemeanor;
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while carrying out his duties under the employment agreement, any act constituting
gross neglect or willful misconduct that results, in either case, in material economic
harm to us;
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a material breach of the provisions of the employment agreement or any fiduciary duty
or duty of loyalty owed to us;
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any conduct, which in our sole discretion, tends to bring us public disgrace or
disrepute;
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any act of neglect or refusal to perform duties or responsibilities as properly
directed by our President, Chief Executive Officer or board of directors;
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any act or omission resulting in or intended to result in direct personal gain to Mr.
Doll at our expense; or
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any disclosure of our trade secrets or other confidential and proprietary
information.
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Under the terms of Mr. Dolls employment agreement, disability meant any physical or mental
illness, disability or incapacity which prevented Mr. Doll from performing the essential functions
of his job, with or without reasonable accommodations, for a period of 150 consecutive days or more
or for an aggregate of 180 days during any period of 12 consecutive months. Under the terms of Mr.
Dolls employment agreement, good reason meant:
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the assignment of duties inconsistent with his employment position;
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a relocation to an office located more than 25 miles from his current place of
employment;
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any material breach by us of a material term or provision contained in the employment
agreement, which breach is not cured within 30 days following our receipt of written
notice of such breach; or
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a change in control.
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Under the terms of Mr. Dolls employment agreement, a change in control was defined as:
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the occurrence of any actual or potential change in control that would, if known to
our management, be required to be reported by us on Form 8-K;
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|
|
|
the acquisition or receipt, in any manner, by any person or any group of persons
acting in concert, of direct or indirect beneficial ownership of 51% or more of all
securities having the right to vote for the election of our directors, except for
acquisitions by us, our affiliates or any of our or our affiliates employee benefit
plans;
|
|
|
|
|
a change in the constituency of our board of directors with the result that its
members prior to the change no longer constitute at least a majority of our board of
directors;
|
|
|
|
|
a merger or reorganization in which our stockholders, immediately prior to the
merger, do not own a least 51% of our voting power after the merger;
|
102
|
|
|
our complete liquidation or dissolution;
|
|
|
|
|
a sale, exchange or other disposition or transfer of all or substantially all of our
business or assets, other than pursuant to a spin-off, or comparable transaction, to an
entity controlled by us or our existing stockholders immediately prior to such transfer;
|
|
|
|
|
any event that would constitute a change in control under our non-qualified
deferred compensation plan.
|
The table below sets forth the benefits that Mr. Doll would have been entitled to receive
under his employment agreement if his employment had terminated under the following specified
circumstances.
|
|
|
Termination Circumstance
|
|
Employment Agreement Benefit
|
|
|
|
Death or disability
|
|
Payment by us in cash of
earned and unpaid base salary and
accrued benefits up to the date of
death or disability, less deductions
and amounts owed to us
|
|
|
|
|
|
All unvested stock options
awarded under the agreement will fully
vest
|
|
|
|
|
|
All unvested stock bonus
awards under the agreement will fully
vest
|
|
|
|
Termination by us for cause or by
Mr. Doll without good reason,
other than within 18 months of a
change in his direct reporting
|
|
Payment by us in cash of earned and
unpaid base salary and accrued
benefits up to the date of
termination, less deductions and
amounts owed to us
|
|
|
|
Termination by Mr. Doll without
good reason within 18 months of a
change in his direct reporting
|
|
Payment by us in cash of
earned and unpaid base salary and
accrued benefits up to the date of
termination, less deductions and
amounts owed to us
|
|
|
|
|
|
All unvested stock option and
stock bonus awards, whether or not
granted under the agreement, will
fully vest
|
|
|
|
Termination by us without cause or
by Mr. Doll for good reason
|
|
A lump sum cash payment by us
equal to the greater of:
|
|
|
|
|
|
one year of base salary then in
effect plus the average of Mr. Dolls
bonus for the previous two years; or
|
|
|
|
|
|
base salary then in effect for the
remainder of the initial term
|
|
|
|
|
|
All unvested stock options
awarded under the agreement will fully
vest
|
|
|
|
|
|
All unvested stock bonus
awards under the agreement will fully
vest
|
103
Stock Incentive Plans and Award Agreements
The table below sets forth the benefits that each executive holding awards granted under our
1999 and 2002 plans would be entitled to receive should his employment terminate under the
following specified circumstances. These rights and benefits may be amended or modified as
otherwise determined by our board of directors at the time that a grant or award is made or, if the
executives rights are not reduced, thereafter.
|
|
|
Termination Circumstance
|
|
Stock Incentive Plan Benefit
|
|
|
|
Death or disability
|
|
The vested portion of any stock option
as of the date of death or disability
may be exercised within one year from
the date of death or disability, but
in no event after the stated
expiration of the option.
|
|
|
|
Termination other than death,
disability or for cause (1)
|
|
The vested portion of any stock option
as of the date of termination may be
exercised within 30 days from the date
of termination, but in no event after
the stated expiration of the option.
|
|
|
|
(1)
|
|
Under the 1999 and 2002 plans, cause is defined as under an applicable employment or
consulting agreement. If there is no such agreement or no such definition in an agreement,
cause is defined to mean dishonesty, fraud, insubordination, willful misconduct, refusal to
perform services or materially unsatisfactory performance of duties.
|
Under each of our 1999 and 2002 plans, if, in the event of a change in control, the
surviving corporation refuses to assume or to substitute with similar awards the outstanding awards
granted under these plans, then all such outstanding awards will become immediately exercisable.
The award will terminate if it is not exercised at or prior to the event constituting the change in
control.
For these purposes, a change in control means:
|
|
|
a sale of all or substantially all of our assets;
|
|
|
|
|
a merger or consolidation in which we are not the surviving corporation; or
|
|
|
|
|
a reverse merger in which we are the surviving corporation but the shares of our
common stock outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or otherwise.
|
104
The table below sets forth the benefits that each executive holding awards granted under our
1999 and 2002 plans would receive under the terms of our standard agreements we have entered into
in connection with awards granted under these plans.
|
|
|
Termination Circumstance
|
|
Award Agreement Benefit
|
|
|
|
Death
|
|
If the executive dies while
employed with us or within three
months after termination of
employment, the options may be
exercised within one year after
date of death, but in no event
after the stated expiration of the
option.
|
|
|
|
Disability
|
|
The vested portion of an option as
of the date of disability may be
exercised within one year, but in
no event after the stated
expiration of the option.
|
|
|
|
Termination other than death,
disability or for cause (1)
|
|
The vested portion of any stock
option as of the date of
termination may be exercised within
three months after the date of
termination, but in no event after
the stated expiration of the
option.
|
|
|
|
(1)
|
|
Under the 1999 and 2002 award agreements, cause is defined as under an applicable
employment or consulting agreement. If there is no such agreement or no such definition in an
agreement, cause is defined to mean dishonesty, fraud, insubordination, willful misconduct,
refusal to perform services or materially unsatisfactory performance of duties.
|
105
Non-Qualified Deferred Compensation Plan
Under our non-qualified deferred compensation plan, in the event of the termination of an
executives employment with us, our board of directors may determine to cause the benefits
attributable to our matching contributions in the executives plan account to be fully vested. In
addition, matching contribution benefits may not be forfeited in the event of the termination of
the deferred compensation plan, the executives death or disability, or a change in control.
Payment of benefits under the deferred compensation plan to our named executive officers will
be made:
|
|
|
upon disability, in monthly installments payable over a fixed period of five, ten or
15 years, as selected by the executive;
|
|
|
|
|
upon retirement, not earlier than the sixth month following the named executive
officers retirement;
|
|
|
|
|
for any other reason, as follows:
|
|
|
|
unless the named executive officer selects otherwise, the vested
balance of the executives account as of January 1, 2005, and any earnings
attributable thereto, would be paid in a lump sum within 90 days of attaining age
65; and
|
|
|
|
|
the remaining balance of the executives account would be paid no
earlier than the sixth month following the executives separation from service.
|
In general, disability is defined as an illness or injury which completely prevents the
executive from performing his or her occupation or which otherwise entitles the executive to
receive long-term disability benefits under a plan or program for such benefits sponsored by us,
and the participant is expected to be separated from service for a period of at least twelve months
as a direct result of such illness or injury and has no reasonable prospect of returning to service
with us, all as determined by the plan administrator. Retirement means any termination of
employment, other than for death or disability, after attaining age 65, or attaining age 55 if the
executive has been credited with five years of service under the deferred compensation plan.
In general, a change in control means:
|
|
|
a change in ownership in which a person, group or entity acquires more than 50% of
the total fair market value or total voting power of our stock;
|
|
|
|
|
a change in effective control in which:
|
|
|
|
a person, group or entity acquires (in a 12-month period) ownership
of stock with 35% or more of the total voting power of our stock; or
|
|
|
|
|
a majority of our board of directors is replaced in a 12-month
period by directors whose appointment or election was not endorsed by a majority
of our board of directors before their appointment or election; or
|
|
|
|
a change in ownership of a substantial portion of our assets in which a person group
or entity acquires 40% or more of the gross fair market value of our assets.
|
Potential Payment and Benefits to be Received Upon a Change-in-Control
106
Employment Agreements
The receipt of payments and benefits by Drs. Hsiao and Hsu under their employment agreements
is conditioned upon their complying with customary non-competition, non-interference,
non-disclosure and assignment of inventions provisions. The non-competition provisions expire 12
months after the termination of each employment agreement. The non-interference provisions expire
two years after the termination of each employment agreement. The non-disclosure provisions are of
infinite duration. Each of Drs. Hsiao and Hsu is required to assign to us any ideas, inventions or
other proprietary information (and related intellectual property rights) he creates or develops
during the term of his employment.
The table below includes a description and the amount of estimated payments and benefits that
would be provided by us (or our successor) to Drs. Hsiao and Hsu under each employment agreement,
assuming that a termination circumstance occurred as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Amount of
|
|
|
|
|
Termination Payment/Benefit to
|
Potential Termination
|
|
Termination
|
|
Charles Hsiao,
|
|
Larry Hsu,
|
Payment or Benefit
|
|
Circumstance
|
|
Ph.D.
|
|
Ph.D.
|
Payment of all accrued
and unpaid salary through
the termination date (1)
|
|
All
|
|
$
|
7,212
|
|
|
$
|
7,212
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of all accrued
and unpaid benefits
(including accrued but
unused vacation time)
through the termination
date (2)
|
|
All
|
|
|
28,846
|
|
|
|
28,846
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash severance payment (3)
|
|
Death, disability,
termination by us
without cause or
termination by the
executive for good
reason
|
|
|
187,500
|
|
|
|
187,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued participation
in our health, dental,
vision and disability
insurance (4)
|
|
Disability,
termination by us
without cause or
termination by the
executive for good
reason
|
|
|
2,164
|
|
|
|
2,164
|
|
|
|
|
|
|
|
|
|
|
|
|
Prorated portion of any
quarterly or annual bonus
otherwise payable (5)
|
|
Death or disability
|
|
|
|
|
|
|
121,875
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from required
life insurance policy
|
|
Death
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of salary
replacement benefits from
required disability
insurance policy
|
|
Disability
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
(1)
|
|
Because our executives are paid weekly, we have assumed that the amount of accrued but unpaid
salary is equal to one weeks worth of 2007 salary.
|
|
(2)
|
|
Vacation time accrued but not taken for each executive was assumed to equal four weeks, which
is the maximum amount of vacation time available to each executive as of December 31, 2007.
|
|
(3)
|
|
We have assumed this amount to be equal to the value of each executives salary and the cost
of each executives benefits for a period of six months.
|
|
(4)
|
|
This amount represents the cost to us to provide the executive with the same coverage he
would have had on a non-employee basis on December 31, 2007 under all of the referenced plans
as they existed on that date, for a period of 18 months. We have assumed that the executive
does not obtain other employment during this time period.
|
107
|
|
|
(5)
|
|
We have assumed that the executive earned in full his annual cash incentive award for 2007
performance paid in 2008. In view of his change to a non-executive position, Dr. Hsiao did
not receive an annual cash incentive award in 2007.
|
The receipt of payments and benefits to Mr. Doll under his employment agreement was
conditioned upon his compliance with customary non-solicitation, non-disparagement, non-disclosure
and assignment of inventions provisions. The non-solicitation provisions expired one year after
the termination of the employment agreement. The non-disparagement and non-disclosure provisions
were of infinite duration. Mr. Doll was required to execute any documentation necessary to confirm
our ownership of any ideas or creations he conceives or develops during his employment with us,
could not be in breach of any other provision in the employment agreement and was required to
provide a general release of all claims relating to his employment and termination.
Mr. Doll did not hold any unvested options at December 31, 2007, and thus the potential
benefit of accelerating the vesting of the unvested portion of stock options was not applicable to
Mr. Doll at December 31, 2007. The table below includes a description and the amount of estimated
payments and benefits that would have been provided by us (or our successor) to Mr. Doll assuming
that a termination circumstance occurred as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Amount of
|
|
|
|
|
Termination
|
|
|
Termination
|
|
Payment/Benefit
|
Potential Termination Payment or Benefit
|
|
Circumstance
|
|
to David Doll
|
Payment of all accrued and unpaid
salary through the termination date (1)
|
|
All, except
termination by us
without cause or by
Mr. Doll for good
reason
|
|
$
|
6,236
|
|
|
|
|
|
|
|
|
Payment of all accrued and unpaid
benefits through the termination date
(2)
|
|
All, except
termination by us
without cause or by
Mr. Doll for good
reason
|
|
|
1,871
|
|
|
|
|
|
|
|
|
Lump sum cash severance payment (3)
|
|
Termination by us
without cause or
termination by Mr.
Doll for good
reason
|
|
|
558,333
|
|
|
|
|
(1)
|
|
Because our executives are paid weekly, we have assumed that the amount of
accrued but unpaid salary is equal to one weeks worth of salary, and that there are no
deductions for amounts owed to us.
|
|
(2)
|
|
Represents health plan payments.
|
|
(3)
|
|
This amount equals the total amount of salary that Mr. Doll would have received
from January 1, 2008 to August 31, 2009, the end of the initial term of the employment
agreement, at a base salary of $335,000 for the entirety of such period.
|
Stock Incentive Plans
None of our named executive officers held any unvested options at December 31, 2007, and thus
the potential benefit of accelerating the vesting of the unvested portion of stock options was not
applicable to them at December 31, 2007. In addition, the extension of the exercise period of
options held by our named executive officers would not provide them with any potential benefit
because the closing price per share of our common stock after December 31, 2007 did not exceed the
exercise price per share of $11.10 on December 31, 2007. As a result, our named executive officers
would not realize the value of any potential benefits that each executive might be entitled to
receive from us (or our successor) under the 1999 and 2002 plans (and related award agreements)
assuming the change of control or termination of employment occurred as of December 31, 2007.
108
Non-Qualified Deferred Compensation Plan
The table below provides an estimate of the value of the potential benefits attributable to
the unvested portion of the matching contributions made by us pursuant to the deferred compensation
plan that each executive might be entitled to receive upon the termination of the executives
employment, assuming that termination occurred on December 31, 2007.
|
|
|
|
|
Arthur A. Koch, Jr.
|
|
Charles V. Hildenbrand
|
|
|
|
|
|
$25,321(1)
|
|
$
|
5,409
|
(1)
|
|
|
|
(1)
|
|
Assumes that our board of directors approves the immediate vesting of 100% of the
benefits attributable to the matching contributions made by us pursuant to the
non-qualified deferred compensation plan upon a termination of the executives employment
with us.
|
Compensation Committee Interlocks and Insider Participation
Drs. Benet and Fleming and Mr. Burr served as members of our compensation committee during the
fiscal year ended December 31, 2007, Mr. Burr serving as chairman. None of them was a current or
former officer or employee or engaged in certain related transactions with us required to be
disclosed by SEC regulations. Additionally, there were no compensation committee interlocks
during the fiscal year ended December 31, 2007, which generally means that none of our executive
officers served as a director or member of the compensation committee of any other entity that had
an executive officer serving as a member of our board of directors or compensation committee.
109
Item 7. Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Persons
Ann Hsu, Ph.D., wife of Larry Hsu, is employed as our Vice President of Clinical Affairs at an
annual salary of $284,524. Dr. Ann Hsu holds options to purchase
160,500 shares of our common stocks in the aggregate. The exercise
price of these options ranges between $7.10 and $14.90 per share, and
expiration dates of these options range between May 7, 2012 and November 15, 2017.
Dr. Ann Hsu is also entitled to customary benefits awarded to our
employees.
Review, Approval or Ratification of Transactions with Related Persons
We have adopted written policies and procedures regarding related-party transactions. Our
policy covers any transaction, arrangement or relationship or any series of similar transactions,
arrangements or relationships in which we or any of our subsidiaries was, is or will be a
participant and the amount involved exceeds $120,000, and in which any related party had, has or
will have a direct or indirect interest. Under this policy, the Audit Committee must approve all
related party transactions between us or one of our subsidiaries and a director, nominee for
director, executive officer, five percent shareholder, certain related entities or immediate family
members of a director, executive officer or five percent shareholder that would be required to be
disclosed in our proxy statements. The policy also authorizes the Chairperson of the Audit
Committee to approve, or reject, proposed related party transactions in those instances in which it
is not practicable or desirable for us to wait until the next Audit Committee meeting.
Director Independence
Board of Directors
Our Board of Directors has determined that the following directors, constituting a majority of
the members of our Board of Directors, are independent based on the independence criteria contained
in the listing requirements of The NASDAQ Stock Market: Leslie Z. Benet, Ph.D., Robert L. Burr,
Nigel Fleming, Ph.D., Michael Markbreiter, Oh Kim Sun and Peter R. Terreri. However, we are not
currently subject to these listing requirements.
Committees of the Board
Our Board of Directors has established an Audit Committee, a Compensation Committee and a
Nominating Committee.
Audit Committee
. Our Board of Directors has appointed a standing Audit Committee consisting
of Peter R. Terreri, Chairman, and Messrs. Robert L. Burr, Michael Markbreiter and Oh Kim Sun. Our
Board of Directors and the Nominating Committee have determined that each member of the Audit
Committee is independent, as defined in the Marketplace Rules of The NASDAQ Stock Market and Rule
10A-3 of the Exchange Act. In addition, our Board of Directors and the Nominating Committee have
determined that Peter R. Terreri, Audit Committee Chairman, qualifies as an audit committee
financial expert as defined under Item 407 of Regulation S-K.
The Audit Committee is governed by a written charter approved by our Board of Directors, which
is posted on our website (www.impaxlabs.com) and accessible via the Investor Relations page. The
principal purpose of the Audit Committee is to oversee our accounting and financial reporting
processes and the audit of our financial statements. The Audit Committee is directly responsible
for the appointment, compensation, retention and oversight of the firm selected to be engaged as
our independent public accountants, and pre-approves the engagement of the independent public
accountants for all non-audit activities permitted under the Sarbanes-Oxley Act of 2002. In
addition, the Audit Committee establishes procedures for the receipt, retention and treatment of
complaints we receive regarding accounting, internal accounting controls or auditing matters, and
the confidential, anonymous submissions by our employees of concerns regarding questionable
accounting or auditing matters.
Compensation Committee
. Our Board of Directors has appointed a standing Compensation
Committee currently consisting of Robert L. Burr, Chairman, and Messrs. Leslie Z. Benet, Ph.D. and
Nigel Fleming, Ph.D. Our Board of Directors has determined that each member of the Compensation
Committee is independent, as defined in the Marketplace Rules of The NASDAQ Stock Market. Our
Board of Directors has adopted a written Compensation
110
Committee Charter, which is posted on our Web
site (www.impaxlabs.com) and accessible via the Investor Relations page. The principal duties of
the Compensation Committee are to formulate, evaluate and approve the compensation of our executive
officers and the oversight of all compensation programs involving the issuance of our stock and
other equity securities. The Chief Executive Officer makes recommendations concerning executive
compensation to the Committee, and the Committee has used the consulting services of Radford in
arriving at executive compensation. The Committee does not address director compensation, which is
set by the Board of Directors.
Nominating Committee
. Our Board of Directors has appointed a standing Nominating Committee
currently consisting of Nigel Fleming, Ph.D., Chairman, and Messrs. Leslie Z. Benet, Ph.D. and
Robert L. Burr. Our Board of Directors and Nominating Committee have determined that each member
of the Nominating Committee is independent, as defined in the Marketplace Rules of The NASDAQ Stock
Market.
The Nominating Committee is governed by a written charter approved by our Board of Directors,
which is posted on our website (www.impaxlabs.com) and accessible via the Investor Relations page.
The principal purposes of the Nominating Committee are to develop and recommend to our Board of
Directors certain corporate governance policies, establish criteria for selecting new directors and
identify, screen and recruit new directors. The Nominating Committee is also responsible for
selecting and recommending individuals to serve as members of our Board of Directors and
recommending directors for committee membership to our Board of Directors.
111
Item 8. Legal Proceedings.
Patent-Infringement Litigation
AstraZeneca AB et al. v. Impax Laboratories (Omeprazole)
In litigation commenced against us in the U.S. District Court for the District of Delaware in
May 2000, AstraZeneca AB alleged that our 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 us from
marketing our product until expiration of its 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 our ANDA and
we and our alliance agreement partner, Teva, commenced commercial sales of our 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 that our product infringed two of AstraZenecas patents and that these patents were not
invalid. The court ordered that FDA approval of our 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. If Teva is not ultimately
successful in establishing invalidity or non-infringement in the separate suit against Teva, the
court may award monetary damages associated with Tevas commercial sale of our omeprazole products.
Under our Teva Agreement, we would be responsible for monetary damages awarded against Teva up to
a specified level, beyond which, monetary damages would be Tevas responsibility.
Aventis Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc.
(Fexofenadine/Pseudoephedrine)
We are 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 that our proposed
Fexofenadine and Pseudoephedrine hydrochloride tablets, generic to Allegra-D
®
,
infringe
seven Aventis patents and seeking an injunction preventing us 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 us 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 that
synthetic process. We believe that we have defenses to the claims based on non-infringement and
invalidity.
In June 2004, the court granted our motion for summary judgment of non-infringement with
respect to two of the patents and, in May 2005, granted summary judgment of invalidity with respect
to a third patent. We 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 that Aventis did not establish a likelihood of success on the merits, which decision was
affirmed on appeal.
112
Impax Laboratories, Inc. v. Aventis Pharmaceuticals, Inc. (Riluzole)
In June 2002, we filed a suit against Aventis Pharmaceuticals, Inc. in the U.S. District Court
for the District of Delaware, seeking a declaration that our filing of an ANDA for Riluzole 50mg
tablets, generic to Rilutek
®
, for treatment of patients with amyotrophic lateral
scleroses (ALS) did not infringe claims of Aventiss patent relating to the drug and a declaration
that its patent is invalid. Aventis filed counterclaims for infringement, and, in December 2002,
the district court granted Aventis motion for a preliminary injunction enjoining us from marketing
any pharmaceutical product or compound containing Riluzole for the treatment of ALS.
In September 2004, the district court found Aventiss patent not invalid and infringed by our
proposed product. In November 2006, the Court of Appeals for the Federal Circuit vacated the
district courts finding that the patent was not invalid and remanded for further findings on that
issue, and, in June 2007, the district court again found that Aventiss patent is not invalid. In
October 2008, the Court of Appeals for the Federal Circuit affirmed the district court decision.
The court is expected to enter a permanent injunction enjoining us from marketing Riluzole 50mg
tablets for the treatment of ALS until the expiration of Aventiss patent in June 2013.
Endo Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc. (Oxymorphone)
In November 2007, Endo Pharmaceuticals Inc. and Penwest Pharmaceuticals Co. (collectively,
Endo) filed suit against us in the U.S. District Court for the District of Delaware, requesting a
declaration that our Paragraph IV Notices with respect to our 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
that 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 our amended ANDA, which added 7.5mg, 15mg and 30mg
strengths of the product. We have filed an answer and counterclaims. Discovery is in the early
stages, and no trial date has been set.
Impax Laboratories, Inc. v. Medicis Pharmaceutical Corp. (Minocycline)
In January 2008, we filed a complaint against Medicis Pharmaceutical Corp. in the U.S.
District Court for the Northern District of California, seeking a declaratory judgment that our
filing of an ANDA relating to Minocycline Hydrochloride Extended Release Tablets 45 mg, 90 mg, and
135 mg, a generic to Solodyn
®
, did not infringe any valid claim of U.S. Patent No.
5,908,838. Medicis filed a motion to dismiss the complaint for lack of subject matter
jurisdiction. On April 16, 2008, the District Court granted Medicis motion to dismiss, and
judgment was entered on April 22, 2008. We have filed a notice of appeal to the United States
Court of Appeals for the Federal Circuit and the parties have completed briefing the appeal. A
hearing for the appeal is set for January 2009.
113
Pfizer Inc., et al. v. Impax Laboratories, Inc. (Tolterodine)
In March 2008, Pfizer Inc., Pharmacia & Upjohn Company LLC and Pfizer Health AB (collectively
Pfizer) filed a complaint against us in the U.S. District Court for the Southern District of New
York, alleging that our filing of an ANDA relating to Tolterodine Tartrate Extended Released
Capsules, 4 mg, generic to Detrol LA
®
, infringes three Pfizer patents. We have filed an
answer and counterclaims seeking declaratory judgment of non-infringement, invalidity or
unenforceability with respect to the patents at 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 our ANDA amendment adding a 2mg strength. Discovery is in
the early stages, and no trial date has been set.
Boehringer Ingelheim Pharmaceuticals, et al. v. Impax Laboratories (Tamsulosin)
In July 2008, Boehringer Ingelheim Pharmaceuticals Inc. and Astellas Pharma Inc. (Collectively
Astellas) filed a complaint against us in the U.S. District Court for the Northern District of
California, alleging that our filing of an ANDA relating to Tamsulosin Hydrochloride Capsules, 0.4
mg, generic to Flomax
®
, infringes Astellas patent. After filing our answer and
counterclaim, we filed a motion for summary judgment of patent invalidity. The District Court
scheduled a hearing on claim construction for May 2008 and summary judgment for June 2008.
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. We have filed an answer and counterclaims
seeking declaratory judgment of patent non-infringement and invalidity. 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 have filed an answer and counterclaims. Discovery is in the
early stages, and no trial date has been set.
Eli Lilly and Company vs. Impax Laboratories, Inc. (Duloxetine)
In November 2008, Eli Lilly and Company filed suit against us in the United States District
Court for the Southern District of Indiana, alleging patent infringement for the filing of our ANDA
relating to Duloxetine Hydrochloride Delayed Release Capsules, 20 mg, 30 mg, and 60 mg, generic to
Cymbalta
®
. We are preparing our answer to the complaint.
114
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 us in the U.S. District Court for the District of
Minnesota, alleging that we engaged in false advertising, unfair competition, and unfair trade
practices under federal and Minnesota law in connection with the marketing and sale of our
now-discontinued Lipram-UL products. The suit seeks actual and consequential damages, including
lost profits, treble damages, attorneys fees, injunctive relief and declaratory judgments that
would prohibit the substitution of Lipram-UL for prescriptions of Ultrase
®
. The Court
granted in part and denied in part our motion to dismiss the complaint, as well as that of
co-defendants Ethex Corp. and KV Pharmaceutical Co., holding that any claim of false advertising
pre-dating June 1, 2001, is barred by the statute of limitations. We have answered the complaint,
and discovery is proceeding.
Securities Litigation
We, our CEO and several former officers and directors are also defendants in several class
actions filed in the United States District Court for the Northern District of California, all of
which have since been consolidated into a single action. These actions, brought on behalf of all
purchasers of our stock between May 5 and November 3, 2004, seek unspecified damages and allege
that Impax and the individual defendants, in violation of the antifraud provisions of the federal
securities laws, artificially inflated the market price of the stock during this period by filing
false financial statements for the first and second quarters of 2004, based upon the subsequent
restatement of its results for those periods. The court twice granted our motions to dismiss the
complaint, both times with leave to amend, but denied our motion to dismiss the fourth amended
complaint as well as two motions for reconsideration. The case is now in the discovery phase.
Insurance
Product liability claims by customers constitute a risk to all pharmaceutical manufacturers.
At October 31, 2008, we carried $80 million of product liability insurance for our own manufactured
products. This insurance may not be adequate to cover any product liability claims to which we may
become subject.
115
Item 9. Market Price of and Dividends on the Registrants Common Equity and Related Stockholder
Matters.
Stock Price
Our common stock was traded on The NASDAQ Stock Market under the symbol IPXL until August 8,
2005, when it was delisted due to our failure to file our Annual Report on Form 10-K for the fiscal
year ended December 31, 2004 and Quarterly Report on Form 10-Q for the quarter ended March 31,
2005. Our failure to file these periodic reports violated NASDAQ Marketplace Rule 4310(c)(14),
compliance with which was required for continued listing on The NASDAQ Stock Market.
From August 8, 2005 until December 29, 2006, our common stock was quoted on the Pink
Sheets
®
operated by Pink OTC Markets Inc. under the symbol IPXL.PK. On December 29,
2006, the SEC suspended all trading in the stock through January 16, 2007 and instituted an
administrative proceeding to determine whether, in light of our reporting delinquency, to suspend
or revoke the registration of our common stock under Section 12 of the Exchange Act. Beginning
January 17, 2007, our stock was again quoted in the Pink Sheets
®
, but from that time
forward dealers were permitted to publish quotations only on behalf of customers that represent
such customers indications of interest and do not involve dealers solicitation of such interest.
On May 23, 2008, our registration of the stock under Section 12 of the Exchange Act was revoked and
brokers and dealers since that date have been prohibited from effecting transactions in our stock.
The following table sets forth the high and low sales prices for the common stock as reported
by Pink OTC Markets Inc. for the periods indicated below. These prices reflect inter-dealer
quotations, without retail mark-up, mark-down or commission.
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Price Range Per Share
|
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High
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Low
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|
|
|
|
|
|
|
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Year Ending December 31, 2008
|
|
|
|
|
|
|
|
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First Quarter
|
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$
|
11.40
|
|
|
$
|
6.50
|
|
Second Quarter (through May 23, 2008)
|
|
$
|
9.55
|
|
|
$
|
8.00
|
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|
|
|
|
|
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Year Ended December 31, 2007
|
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|
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First Quarter
|
|
$
|
10.76
|
|
|
$
|
8.30
|
|
Second Quarter
|
|
$
|
12.00
|
|
|
$
|
4.55
|
|
Third Quarter
|
|
$
|
12.40
|
|
|
$
|
8.00
|
|
Fourth Quarter
|
|
$
|
12.15
|
|
|
$
|
9.45
|
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|
|
|
|
|
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Year Ended December 31, 2006
|
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First Quarter
|
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$
|
11.75
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|
|
$
|
8.76
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Second Quarter
|
|
$
|
10.50
|
|
|
$
|
6.25
|
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Third Quarter
|
|
$
|
7.20
|
|
|
$
|
4.25
|
|
Fourth Quarter
|
|
$
|
9.90
|
|
|
$
|
5.90
|
|
116
Holders
As of October 31, 2008, there were approximately 129 holders of record of our common stock,
solely based upon the count our transfer agent provided us as of that date and this number does not
include:
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any beneficial owners of common stock whose shares are held in the names of various
dealers, clearing agencies, banks, brokers and other fiduciaries, or
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broker-dealers or other participants who hold or clear shares directly or indirectly
through the Depository Trust Company, or its nominee, Cede & Co.
|
As of October 31, 2008, 8,926,238 shares of our common stock were subject to outstanding
options to purchase our common stock, and 616,240 shares of common stock were issuable upon the
conversion of our 3.5% Debentures.
Generally, securities acquired from us or from our affiliates pursuant to exemptions from
registration under the Securities Act of 1933 (the Securities Act) are deemed to be restricted
securities, as such term is defined in Rule 144 promulgated under the Securities Act. Such
restricted securities can only be sold or otherwise transferred pursuant to an effective
registration statement or pursuant to an available exemption from registration under the Securities
Act or under Rule 144 when such rule becomes available to our security holders.
We have agreed to register under the Securities Act shares of common stock issuable upon the
conversion of our 3.5% Debentures for resale by certain of our security holders. However, at
present we are not publicly offering, and we do not presently propose to publicly offer, any shares
of common stock, except for shares that may in the future be offered pursuant to an employee
benefit plan.
Dividends
We have never paid cash dividends on our common stock and have no present plans to do so in
the foreseeable future. Our current policy is to retain all earnings, if any, for use in the
operation of our business. The payment of future cash dividends, if any, will be at the discretion
of the Board of Directors and will be dependent upon the Companys earnings, financial condition,
capital requirements and other factors as the Board of Directors may deem relevant. Our loan
agreements prohibit the payment of dividends without the consent of the other party to the
agreements.
117
Equity Compensation Plans
The following table details information regarding our existing equity compensation plans as of
December 31, 2007.
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Number of securities
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remaining available for
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future issuance under
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Number of Securities to
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Weighted average
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equity compensation
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be issued upon exercise
|
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exercise price of
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plans (excluding
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of outstanding options,
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outstanding options,
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securities reflected in
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warrants and rights
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warrants and rights
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column (a))
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Plan Category
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(a)
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(b)
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(c)
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Equity compensation
plans approved by
security holders
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6,697,761
|
|
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$
|
9.90
|
|
|
|
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|
Equity compensation
plans not approved
by security holders
|
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2,350,000
|
(1)
|
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$
|
9.90
|
|
|
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135,000
|
|
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|
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Total:
|
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9,047,761
|
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|
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|
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135,000
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(1)
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Represents options issued pursuant to equity compensation plans approved by
security holders, but in excess of the number of shares authorized by such approval. See Note 15
to our consolidated audited financial statements for information concerning our equity compensation
plans.
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Item 10. Recent Sales of Unregistered Securities.
On June 27, 2005, we issued $75.0 million principal amount of 3.5% Debentures to a qualified
institutional buyer. The 3.5% Debentures were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act. The 3.5% Debentures are convertible into our
common stock at an initial conversion price of $20.69 per share. They are not convertible prior to
June 15, 2011, however, unless certain contingencies occur, including the closing price of the
common stock having exceeded 120% of the conversion price for at least 20 trading days during the
30 consecutive trading days ending on the last trading day of the immediately preceding fiscal
quarter. Upon conversion, the value (the conversion value) of the cash and shares of common
stock, if any, to be received by a holder converting $1,000 principal amount of the 3.5% Debentures
will be determined by multiplying the applicable conversion rate by the 20-day average closing
price of the common stock beginning on the second trading day immediately following the day on
which the 3.5% Debentures are submitted for conversion. The conversion value will be payable as
follows: (1) an amount in cash (the principal return) equal to the lesser of (a) the conversion
value and (b) $1,000, and (2) to the extent the conversion value exceeds $1,000, a number of shares
of common stock with a value equal to the difference between the conversion value and the principal
return or a cash payment, at our option. In addition, if a holder elects to convert the 3.5%
Debentures within a period of 30 trading days after the effective date of a fundamental change
transactiongenerally a transaction constituting a change of control of Impax, as defined by the
Indenturethe holder will be entitled to receive a make-whole premium consisting of additional
shares of common stock (or, if we so elect, the same consideration offered in connection with the
fundamental change).
Since January 1, 2005, we sold an aggregate of 24,398 shares of our common stock to 51 persons
pursuant to our Employee Stock Purchase Plan; and an aggregate of 245,317 shares of our common
stock to 88 persons pursuant to the exercise of stock options. In connection with David Dolls
resignation, we granted 94,705 shares of our common stock, of which we issued 65,744 shares, after
withholding 28,961 shares for income taxes, to David and Kathrine Doll. In addition, we issued
9,836 shares of our common stock to David Doll pursuant to the consulting agreement between our
company and David Doll. With respect to the foregoing, we relied upon the exemption provided by
Section 4(2) of the Securities Act.
118
Item 11. Description of Registrants Securities to be Registered.
This section of the registration statement provides a description of the material terms of our
certificate of incorporation and by-laws. The following description is intended as a summary only
and is qualified in its entirety by reference to the complete text of our certificate of
incorporation and our bylaws, which are filed as exhibits to this registration statement. We urge
you to read the full text of these documents.
Capital Stock
Pursuant to our certificate of incorporation, we are authorized to issue up to 90,000,000
shares of common stock, $0.01 par value per share, and 2,000,000 shares of preferred stock, $0.01
par value per share. As of October 31, 2008, there were outstanding 59,218,938 shares of common
stock, $12.75 million of senior subordinated debentures convertible into 616,240 shares of common
stock, options to purchase 8,926,238 shares of common stock, 395,824 unvested restricted shares of
common stock, and no shares of preferred stock. All shares of common stock are nonassessable.
The rights, preferences and privileges of holders of common stock will be subject to, and may
be adversely affected by, the rights of the holders of a series of preferred stock to be issued in
the future. Further, the rights, preferences and privileges of the holders of common stock may be
diluted to the extent holders of options or convertible debentures exercise their respective rights
to exercise options or convert debentures into shares of our common stock.
Common Stock
Voting Rights
Holders of common stock are entitled to one vote for each share held on all matters submitted
to a vote of stockholders and do not have cumulative voting rights. Except as otherwise required
by applicable law and subject to the voting rights of the holders of any outstanding shares of
preferred stock, the approval of all matters brought before our stockholders, except the election
of directors, requires the affirmative vote of the holders of a majority of the voting power of the
shares of common stock that are present in person or represented by proxy. The election of
directors is decided by plurality vote.
Dividend Rights
Subject to any preferential or other rights of holders of preferred stock then outstanding,
the board of directors may declare and pay a dividend on outstanding shares of common stock out of
the funds legally available for the payment of dividends. Our stockholders are entitled to share
equally, in accordance with the number of shares of common stock held by each holder, in any
dividend declared by our board of directors, whether payable in cash, property, or securities of
the company.
Right to Receive Liquidation Distributions
Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of our
company, after payment to all our creditors of the full amounts to which they are entitled and
subject to any preferential or other rights of the holders of preferred stock, the holders of
common stock are entitled to share ratably, in accordance with the number of shares of common stock
held by each holder, in our remaining assets available for distribution among our stockholders,
whether capital, surplus or earnings. For this purpose, neither a consolidation or a merger of our
company with or into any other corporation, nor the sale, lease, exchange or transfer by our
company of all or any part of our assets, nor the reduction of our capital stock, constitutes a
liquidation, dissolution or winding-up of our company.
Preemptive, Redemption and Other Rights
Holders of our common stock generally have no preemptive, subscription, redemption or
conversion rights and no sinking fund provisions are applicable to the outstanding shares of our
common stock.
119
Preferred Stock
Pursuant to the terms of our certificate of incorporation, our board of directors is
authorized to issue, without stockholder approval, up to 2,000,000 shares of preferred stock in one
or more series. Our board of directors may from time to time authorize the issuance of one or more
series of preferred stock without stockholder approval. Subject to the provisions of our
certificate of incorporation and limitations prescribed by law, our board of directors is
authorized to adopt resolutions to, among other things, issue shares of preferred stock in one or
more series, establish the number of shares constituting a series, and provide designations,
preferences, and relative, participating, optional or other special rights, and any qualifications,
limitation or restrictions on shares of our preferred stock, including, but not limited to, voting
rights, dividend rights, terms of redemption, conversion rights and liquidation preferences, in
each case without any action or vote by our stockholders. The board of directors is authorized to
increase (but not above the total number of authorized shares of preferred stock) or decrease (but
not below the number of shares then outstanding) the number of shares of capital stock of any
series of preferred stock.
Amendment of By-laws
Pursuant to Article VII of our bylaws, our bylaws may be amended or repealed or new bylaws may
be adopted by the affirmative vote of a majority of the board of directors at any regular or
special meeting of the board of directors. If any bylaw regulating an impending election of
directors is adopted, amended or repealed by the board of directors, the notice of the next meeting
of the stockholders to elect the directors shall set forth the bylaw so adopted, amended, or
repealed, together with a precise statement of the changes made. Bylaws adopted by the board of
directors may be amended or repealed by our stockholders.
Anti-Takeover Provisions
Our certificate of incorporation and bylaws contain certain provisions, as described below,
that may discourage potential acquisition proposals and could delay or prevent a change in control.
These provisions are intended to enhance the likelihood of continuity and stability in the
composition of the board of directors and in the policies formulated by the board of directors and
to discourage certain types of transactions that may involve an actual or threatened change of
control. In addition, these provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal and discourage certain tactics that may be used in proxy fights. The
protective nature of these provisions, however, may also delay, deter or prevent a tender offer or
takeover attempt that a stockholder might consider to be in its best interest. Such provisions
also may have the effect of preventing changes in our management.
Preferred Stock
Our future issuance of preferred stock could adversely affect the rights of our common
stockholders by, among other things:
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restricting the payment of dividends on our common stock;
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diluting the voting power of our common stock;
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reducing the amount of assets remaining for payment to holders of shares in the
event of a liquidation of assets; or
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delaying or preventing a change in control without further action by the
stockholders.
|
Calling of Special Meeting of Stockholders
Our bylaws provide that, unless otherwise prescribed by statute, special meetings of
stockholders may be called by the chairman of the board, the Chief Executive Officer or by
resolution of the board of directors. Our Chief Executive Officer or Secretary upon the written
request of not less than 10% in interest of the stockholder entitled to vote must call the special
meeting of our stockholders.
120
No Cumulative Voting
Our certificate of incorporation and bylaws do not grant stockholders the right to cumulate
votes in the election of directors.
Removal of Directors; Vacancies
Pursuant to our bylaws and subject to any written agreement among all of the stockholders, any
director or the entire board of directors may be removed either for or without cause at any time by
the affirmative vote of the holders of a majority of the shares entitled to vote for the election
of directors at any annual or special meeting called for that purpose. Subject to any written
agreement among all of the stockholders, any vacancies thus created may be filled at such meeting
by an affirmative vote of a majority of the stockholders entitled to vote or, if such vacancies are
not so filled, by the directors pursuant to a majority vote of such directors, provided that they
do not attempt to fill such vacancy by re-electing the director whose removal created such vacancy.
Limitations of Liability and Indemnification of Officers and Directors
Our certificate of incorporation and bylaws eliminate the personal liability of our directors
to the fullest extent permitted by section 102(b)(7) of the Delaware General Corporation Law
(DGCL) and require us to indemnify all persons whom we have the power to indemnify to the fullest
extent permitted under Section 145 of the DGCL. See Item 12. Indemnification of Directors and
Officers for a detailed description of the limitations of liability and indemnification of our
officers and directors.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is StockTrans Inc., 44 W. Lancaster
Avenue, Ardmore, PA 19003.
121
Item 12. Indemnification of Directors and Officers.
This section of the registration statement provides a description of the material terms of
Sections 145 and 102(b)(7) of the DGCL, our certificate of incorporation and our bylaws related to
the indemnification of our directors and officers and the limitation of personal liability of our
directors. The following description is intended as a summary only and is qualified in its
entirety by reference to the complete text of the foregoing sections of the DGCL as well as our
certificate of incorporation and bylaws. We urge you to read the full text of these documents.
Indemnification Provisions
Section 145 of DGCL
Section 145(a) of the DGCL provides that a Delaware corporation may indemnify any person who
was or is, or is threatened to be made, a party to any threatened, pending or completed action,
suit or proceeding, referred to as the action, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation described below) by
reason of the fact that such person:
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is or was a director, officer, employee or agent of such corporation; or
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is or was serving at the request of such corporation as a director, officer, employee
or agent of another corporation or other enterprise.
|
A corporation may indemnify such person against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in
connection with such action if the person:
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acted in good faith and in a manner such person reasonably believed to be in, or not
opposed to, the best interests of the corporation; and
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|
with respect to any criminal action or proceeding, had no reasonable cause to believe
the persons conduct was unlawful.
|
Section 145(b) of the DGCL provides that a Delaware corporation may indemnify any person who
was or is, or is threatened to be made, a party to any action by or in the right of the corporation
to procure a judgment in its favor due to the fact that such person acted in any of the capacities
set forth above against expenses (including attorneys fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action if the person acted in good
faith and in a manner such person reasonably believed to be in, or not opposed to, the best
interests of the corporation. However, a corporation may not indemnify such person in respect of
any claim, issue or matter as to which such person is adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court in which such action
was brought determines that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to indemnity for such
expenses the Court of Chancery or such other court deems proper.
Section 145(c) of the DGCL further provides that, to the extent that an officer or director of
a Delaware corporation has been successful on the merits or otherwise in the defense of any action
referred to above, or in the defense of any claim, issue or matter related to such action, the
corporation must indemnify such person against the expenses (including attorneys fees) actually
and reasonably incurred by such person in connection with such defense.
Pursuant to Section 145(e), a Delaware corporation may, in advance of the final disposition of
any civil, criminal, administrative or investigative action, pay the expenses (including attorneys
fees) incurred by any officer or director in defending any such action, provided that the officer
or director undertakes to repay such amount if it is ultimately determined that such person is not
entitled to the corporations indemnification.
122
The indemnification and advancement of expenses provided by Section 145 of the DGCL is not
exclusive of any other rights to which a person may be entitled under any corporations bylaw,
agreement, vote of stockholders or
disinterested directors or otherwise. Furthermore, Section 145(g) of the DGCL authorizes a
Delaware corporation to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another corporation or other
enterprise against any liability asserted against such person and incurred by such person in any
such capacity or arising out of such persons status as such, whether or not the corporation would
have the power to indemnify such person against such liability under Section 145 of the DGCL.
Certificate of Incorporation and Bylaws
Our certificate of incorporation provides that we shall, to the fullest extent permitted by
Section 145 of the DGCL, indemnify all persons who we have the power to indemnify under Section 145
of DGCL against all expenses, liabilities or other matters covered by such Section 145.
In addition, subject to certain conditions described below, our bylaws require us to indemnify
any person entitled to indemnification under Section 145 of the DGCL to the fullest extent
permitted by applicable law against all liability and loss suffered and expenses (including
attorneys fees) reasonably incurred by such person. We are required to indemnify a person in
connection with a proceeding initiated by that person only if our board of directors authorized
such proceeding.
Our bylaws provide that any amount that a person who was or is serving at our request as a
director, officer, employee or agent of another corporation or other entity may collect as
indemnification from such other entity reduces our obligation to indemnify such person.
Our bylaws require us to pay expenses (including attorneys fees) incurred in defending any
proceeding in advance of the final disposition of such proceeding upon receipt of an undertaking by
the director or officer to repay all amounts advanced if it is ultimately determined that such
person is not entitled to our indemnification.
Our bylaws provide that our board of directors may authorize us to maintain insurance on
behalf of any person entitled to indemnification under Section 145 of the DGCL against any
liability incurred by such person, whether or not we would have the power to indemnify such person
against such liability under the provisions of Article IX of the bylaws or the DGCL. Consistent
with the provisions of Section 145 of the DGCL and our bylaws, we maintain directors and officers
liability insurance for the benefit of our company and our stockholders in the amount of
$10,000,000.
The indemnification rights provided by our certificate of incorporation and bylaws are not
exclusive of any other rights to which those indemnified may have under any statute, certificate of
incorporation, bylaws, agreement, vote of stockholders or disinterested directors or otherwise, as
applicable.
Any repeal or modification of the foregoing provisions of Article IX of our bylaws will not
adversely affect any right or protection under such Article IX of any person in respect of any
matters occurring prior to the time of such repeal or modification.
123
Limitation of Personal Liability
Section 102(b)(7) of the DGCL provides that a Delaware corporation may include in its
certificate of incorporation a provision eliminating or limiting personal liability of its
directors to the corporation or its stockholders for monetary damages for breach of a directors
fiduciary duty. However, no such provision may eliminate or limit the liability of a director for:
(i) any breach of the directors duty of loyalty to the corporation or its stockholders; (ii) acts
or omissions not in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) unlawful payment of a dividend or unlawful stock purchase or redemption as set forth in
Section 174 of the DGCL; or (iv) any transaction from which the director derived an improper
personal benefit.
Our certificate of incorporation eliminates the personal liability of our directors to the
fullest extent permitted by section 102(b)(7) of the DGCL and provides that no amendment or repeal
of Section ELEVENTH applies to the liability of any of our directors for any acts or omissions of
such director occurring prior to the effective date of such amendment or repeal. In addition, our
bylaws provide that no director will be personally liable to us or our stockholders for monetary
damages for breach of the directors fiduciary duty consistent with Section 102(b)(7) of the DGCL.
Item 13. Financial Statements and Supplementary Data.
The financial statements required to be included in this Registration Statement appear at the
end of the Registration Statement beginning on page F-1.
Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
On November 9, 2006, we engaged Grant Thornton LLP (Grant Thornton) as our independent
accountant. The decision to engage Grant Thornton as our independent accountant was made and
approved by our Audit Committee.
During the fiscal years ended December 31, 2003 and 2004 and through November 9, 2006, we had
not consulted with Grant Thornton regarding (i) either the application of accounting principles to
a specified transaction, either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements; or (ii) any matter that was either the subject of a
disagreement (as that term is described in Item 304 (a)(1)(iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K), or a reportable event (as that term is described in
Item 304(a)(1)(v) of Regulation S-K).
Item 15. Financial Statements and Exhibits.
(a) Financial Statements
The financial statements required to be included in this Registration Statement appear
beginning on page F-1 below.
124
(b)
Exhibits
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
|
3.1
|
|
Restated Certificate of Incorporation, dated August 30, 2004.
|
|
|
|
3.2
|
|
By-Laws. +
|
|
|
|
4.1
|
|
Specimen of Common Stock Certificate. +
|
|
|
|
4.2
|
|
Form of Debenture (incorporated by reference to Exhibit A to the
Indenture, dated as of June 27, 2005, between the Company and HSBC Bank
USA, National Association, as Trustee, listed on Exhibit 4.3).
|
|
|
|
4.3
|
|
Indenture, dated as of June 27, 2005, between the Company and HSBC Bank
USA, National Association, as Trustee. +
|
|
|
|
4.4
|
|
Supplemental Indenture, dated as of July 6, 2005, between the Company and
HSBC Bank USA, National Association, as Trustee. +
|
|
|
|
4.5
|
|
Registration Rights Agreement, dated as of June 27, 2005, between the
Company and the Initial Purchasers named therein. +
|
|
|
|
4.6
|
|
Promissory Note dated June 7, 2006, issued by the Company to Solvay
Pharmaceuticals, Inc. +
|
|
|
|
10.1
|
|
Amended and Restated Loan and Security Agreement, dated as of December 15,
2005, between the Company and Wachovia Bank, National Association. +
|
|
|
|
10.1.1
|
|
First Amendment, dated October 14, 2008, to Amended and Restated Loan and
Security Agreement, dated December 15, 2005, between the Company and
Wachovia Bank, National Association. +
|
|
|
|
10.2
|
|
Purchase Agreement, dated June 26, 2005, between the Company and the
Purchasers named therein. +
|
|
|
|
10.3
|
|
1995 Stock Incentive Plan.* +
|
|
|
|
10.4
|
|
1999 Equity Incentive Plan.* +
|
|
|
|
10.5
|
|
2001 Non-Qualified Employee Stock Purchase Plan.* +
|
|
|
|
10.6
|
|
Amended and Restated 2002 Equity Incentive Plan (Corrected).* +
|
|
|
|
10.7
|
|
Executive Non-Qualified Deferred Compensation Plan, restated effective
January 1, 2005.* +
|
|
|
|
10.8
|
|
Employment Agreement, dated as of December 14, 1999, between the Company
and Charles Hsiao, Ph.D.* +
|
|
|
|
10.9
|
|
Employment Agreement, dated as of December 14, 1999, between the Company
and Larry Hsu, Ph.D.* +
|
|
|
|
10.10
|
|
Employment Agreement, dated as of September 1, 2006, between the Company
and David S. Doll.* +
|
|
|
|
10.11
|
|
Separation Agreement and General Release, dated July 30, 2008, between the
Company and David S. Doll.* +
|
|
|
|
10.12
|
|
Consulting Agreement, effective as of September 4, 2008, between the
Company and David S. Doll.* +
|
|
|
|
10.13
|
|
Strategic Alliance Agreement, dated June 27, 2001, between the Company and
Teva Pharmaceuticals Curacao N.V.** +
|
|
|
|
10.13.1
|
|
Letter Amendment, dated October 8, 2003, to Strategic Alliance Agreement,
dated June 27, 2001, between the Company and Teva Pharmaceuticals Curacao
N.V.** +
|
|
|
|
10.13.2
|
|
Letter Agreement, dated March 24, 2005, between the Company and Teva
Pharmaceuticals Curacao N.V.** +
|
|
|
|
10.13.3
|
|
Letter Amendment, dated March 24, 2005 and effective January 1, 2005, to
Strategic Alliance Agreement, dated June 27, 2001, between the Company and
Teva Pharmaceuticals Curacao N.V.** +
|
|
|
|
10.13.4
|
|
Amendment, dated January 24, 2006, to Strategic Alliance Agreement, dated
June 27, 2001, between the Company and Teva Pharmaceuticals Curacao N.V.**
+
|
|
|
|
10.13.5
|
|
Amendment, dated February 9, 2007, to Strategic Alliance Agreement, dated
June 27, 2001, between the Company and Teva Pharmaceuticals Curacao N.V.**
+
|
|
|
|
10.14
|
|
Development, License and Supply Agreement, dated as of June 18, 2002,
between the Company and Wyeth, acting through its Wyeth Consumer
Healthcare Division.** +
|
125
|
|
|
Exhibit No.
|
|
Description of Document
|
10.14.1
|
|
Amendment, dated as of July 9, 2004, to Development, License and Supply
Agreement, dated as of June 18, 2002, between the Company and Wyeth,
acting through its Wyeth Consumer Healthcare Division. +
|
|
|
|
10.14.2
|
|
Amendment, dated as of February 14, 2005, to Development, License and
Supply Agreement, dated as of June 18, 2002, between the Company and
Wyeth, acting through its Wyeth Consumer Healthcare Division. +
|
|
|
|
10.15
|
|
Licensing, Contract Manufacturing and Supply Agreement, dated as of June
18, 2002, between the Company and Schering Corporation.** +
|
|
|
|
10.15.1
|
|
Amendment No. 3, effective as of July 23, 2004, to Licensing, Contract
Manufacturing and Supply Agreement, dated as of June 18, 2002, between the
Company and Schering Corporation.** +
|
|
|
|
10.15.2
|
|
Amendment No. 4, effective as of December 15, 2006, to Licensing, Contract
Manufacturing and Supply Agreement, dated as of June 18, 2002, between the
Company and Schering Corporation.** +
|
|
|
|
10.16
|
|
Supply and Distribution Agreement, dated as of November 3, 2005, between
the Company and DAVA Pharmaceuticals, Inc.** +
|
|
|
|
10.16.1
|
|
Amendment No. 2, dated February 6, 2007, to Supply and Distribution
Agreement, dated November 3, 2005, between the Company and DAVA
Pharmaceuticals, Inc.** +
|
|
|
|
10.17
|
|
Patent License Agreement, dated as of March 30, 2007, by and among Purdue
Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals L.P. and
the Company.** +
|
|
|
|
10.18
|
|
Supplemental License Agreement, dated as of March 30, 2007, by and among
Purdue Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals
L.P. and the Company.** +
|
|
|
|
10.19
|
|
Sublicense Agreement, effective as of March 30, 2007, between the Company
and DAVA Pharmaceuticals, Inc.** +
|
|
|
|
10.20
|
|
Promotional Services Agreement, dated as of January 19, 2006, between the
Company and Shire US Inc.** +
|
|
|
|
10.21
|
|
Co-promotion Agreement, dated as of July 16, 2008, between the Company and
Wyeth, acting through its Wyeth Pharmaceuticals Division.** +
|
|
|
|
10.22
|
|
Joint Development Agreement, dated as of November 26, 2008, between the
Company and Medicis Pharmaceutical Corporation.** +
|
|
|
|
11.1
|
|
Statement re computation of per share earnings (incorporated by reference
to Note 17 to the Notes to the Consolidated Financial Statements and Note
11 to (Unaudited) Interim Consolidated Financial Statements included in
this registration statement).
|
|
|
|
21.1
|
|
Subsidiaries of the registrant. +
|
|
|
|
*
|
|
Management contract, compensatory plan or arrangement.
|
|
**
|
|
Confidential treatment requested for certain portions of this exhibit pursuant to Rule
24b-2 under the Exchange Act, which portions are omitted and filed separately with the SEC.
|
|
+
|
|
Previously filed.
|
126
Impax Laboratories, Inc.
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
F-8
|
|
|
|
|
|
|
|
|
F-65
|
|
|
|
|
|
|
|
|
F-66
|
|
|
|
|
|
|
|
|
F-67
|
|
|
|
|
|
|
|
|
F-68
|
|
|
|
|
|
|
|
|
F-70
|
|
|
|
|
|
|
|
|
S-1
|
|
Page F-1 of F-93
Impax Laboratories, Inc.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Impax Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of Impax Laboratories, Inc. and
Subsidiaries (a California corporation), (the Company) as of December 31, 2007, 2006 and 2005 and
the related consolidated statements of operations, changes in stockholders equity (deficit),
comprehensive income (loss) and cash flows for each of the three years in the period ended December
31, 2007. Our audits of the basic consolidated financial statements included the financial
statement schedule listed in the index appearing under Item 15. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Impax Laboratories, Inc. and Subsidiaries as of
December 31, 2007, 2006 and 2005, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Notes 2, 10 and 15 to the consolidated financial statements, the Company has
adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
in 2007 and FASB No.
123(R),
Share-Based Payment
in 2006.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
October 10, 2008
Page F-2 of F-93
Impax Laboratories, Inc.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,462
|
|
|
$
|
6,399
|
|
|
$
|
55,877
|
|
Short-term investments
|
|
|
106,034
|
|
|
|
23,435
|
|
|
|
204
|
|
Accounts receivable, net
|
|
|
51,503
|
|
|
|
61,921
|
|
|
|
30,528
|
|
Inventory, net
|
|
|
27,568
|
|
|
|
34,111
|
|
|
|
33,265
|
|
Current portion of deferred product
manufacturing costs-alliance agreements
|
|
|
11,923
|
|
|
|
14,378
|
|
|
|
6,511
|
|
Current portion of deferred income taxes
|
|
|
27,376
|
|
|
|
409
|
|
|
|
918
|
|
Deferred charge-exclusivity period fee
|
|
|
|
|
|
|
38,133
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
8,592
|
|
|
|
1,888
|
|
|
|
1,578
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
270,458
|
|
|
|
180,674
|
|
|
|
128,881
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
81,223
|
|
|
|
69,402
|
|
|
|
55,251
|
|
Deferred product manufacturing costs-alliance agreements
|
|
|
82,474
|
|
|
|
58,587
|
|
|
|
38,772
|
|
Deferred income taxes, net
|
|
|
47,937
|
|
|
|
425
|
|
|
|
|
|
Other assets
|
|
|
6,793
|
|
|
|
7,226
|
|
|
|
9,807
|
|
Goodwill
|
|
|
27,574
|
|
|
|
27,574
|
|
|
|
27,574
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
516,459
|
|
|
$
|
343,888
|
|
|
$
|
260,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY/ (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
69,234
|
|
|
$
|
1,827
|
|
|
$
|
111
|
|
Accounts payable
|
|
|
16,898
|
|
|
|
14,550
|
|
|
|
12,643
|
|
Accrued expenses
|
|
|
35,838
|
|
|
|
30,213
|
|
|
|
48,289
|
|
Current portion of deferred revenue-alliance agreements
|
|
|
26,381
|
|
|
|
33,965
|
|
|
|
12,042
|
|
Current portion of accrued exclusivity period fee payments due
|
|
|
12,000
|
|
|
|
18,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
160,351
|
|
|
|
98,755
|
|
|
|
73,085
|
|
|
|
|
|
|
|
|
|
|
|
3.5% Convertible senior subordinated debentures
|
|
|
12,750
|
|
|
|
75,000
|
|
|
|
75,000
|
|
Long-term debt
|
|
|
7,760
|
|
|
|
14,603
|
|
|
|
5,285
|
|
Fair value of common stock purchase warrants
|
|
|
2,285
|
|
|
|
2,313
|
|
|
|
3,977
|
|
Deferred revenue-alliance agreements
|
|
|
181,720
|
|
|
|
144,086
|
|
|
|
91,292
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
454
|
|
Accrued exclusivity period fee payments due
|
|
|
6,000
|
|
|
|
9,000
|
|
|
|
|
|
Other liabilities
|
|
|
11,426
|
|
|
|
4,107
|
|
|
|
2,306
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
382,292
|
|
|
$
|
347,864
|
|
|
$
|
251,399
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 19 and 20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity/ (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock, $ 0.01 par value, 2,000,000 shares authorized,
none outstanding at December 31, 2007, 2006, and 2005
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Common stock, $ 0.01 par value, 90,000,000 shares authorized
and 58,822,548, 58,785,199, and 58,976,992 issued and outstanding
at December 31, 2007, 2006, and 2005, respectively
|
|
|
591
|
|
|
|
590
|
|
|
|
590
|
|
Additional paid-in capital
|
|
|
196,049
|
|
|
|
183,809
|
|
|
|
182,467
|
|
Treasury stock-acquired as a result of achievement
of milestone under the Teva Agreement, 243,729 shares at
December 31, 2007 and 2006
|
|
|
(2,157
|
)
|
|
|
(2,157
|
)
|
|
|
|
|
Accumulated other comprehensive (loss)
|
|
|
(26
|
)
|
|
|
(3
|
)
|
|
|
|
|
Accumulated deficit
|
|
|
(60,290
|
)
|
|
|
(186,215
|
)
|
|
|
(174,171
|
)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
$
|
134,167
|
|
|
$
|
(3,976
|
)
|
|
$
|
8,886
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$
|
516,459
|
|
|
$
|
343,888
|
|
|
$
|
260,285
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-3 of F-93
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
$
|
87,978
|
|
|
$
|
78,201
|
|
|
$
|
89,291
|
|
Rx Partner
|
|
|
161,114
|
|
|
|
36,809
|
|
|
|
12,630
|
|
OTC Partner
|
|
|
11,866
|
|
|
|
13,782
|
|
|
|
10,451
|
|
Promotional Partner
|
|
|
12,759
|
|
|
|
6,434
|
|
|
|
|
|
Other
|
|
|
36
|
|
|
|
20
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
273,753
|
|
|
|
135,246
|
|
|
|
112,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
107,656
|
|
|
|
72,248
|
|
|
|
58,435
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
166,097
|
|
|
|
62,998
|
|
|
|
53,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
39,992
|
|
|
|
29,635
|
|
|
|
26,095
|
|
Patent litigation
|
|
|
10,025
|
|
|
|
9,693
|
|
|
|
7,734
|
|
Litigation settlement
|
|
|
|
|
|
|
2,556
|
|
|
|
|
|
Selling, general and administrative
|
|
|
39,573
|
|
|
|
32,361
|
|
|
|
25,759
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
89,590
|
|
|
|
74,245
|
|
|
|
59,588
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
76,507
|
|
|
|
(11,247
|
)
|
|
|
(5,623
|
)
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of common stock purchase warrants
|
|
|
(110
|
)
|
|
|
1,098
|
|
|
|
4,502
|
|
Other income (expense), net
|
|
|
73
|
|
|
|
(192
|
)
|
|
|
(149
|
)
|
Interest income
|
|
|
4,751
|
|
|
|
2,233
|
|
|
|
1,993
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,113
|
)
|
|
|
(3,796
|
)
|
|
|
(6,314
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
77,108
|
|
|
|
(11,904
|
)
|
|
|
(5,591
|
)
|
Benefit (provision) for income taxes
|
|
|
48,817
|
|
|
|
(140
|
)
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
125,925
|
|
|
$
|
(12,044
|
)
|
|
$
|
(5,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.14
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.06
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,810,452
|
|
|
|
58,996,365
|
|
|
|
58,955,664
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
61,217,470
|
|
|
|
58,996,365
|
|
|
|
58,955,664
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-4 of F-93
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY/ (DEFICIT)
AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/ (LOSS)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
(dollars and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
Stockholders Equity (Deficit)
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Loss
|
|
|
Total
|
|
Balance at December 31, 2004
|
|
|
58,898
|
|
|
$
|
589
|
|
|
$
|
182,048
|
|
|
$
|
|
|
|
$
|
(168,391
|
)
|
|
$
|
|
|
|
$
|
14,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and sale of
common stock under ESPP
|
|
|
79
|
|
|
|
1
|
|
|
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
420
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,780
|
)
|
|
|
|
|
|
|
(5,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
58,977
|
|
|
$
|
590
|
|
|
$
|
182,467
|
|
|
$
|
|
|
|
$
|
(174,171
|
)
|
|
$
|
|
|
|
$
|
8,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock purchase
warrants, stock options, and sale of
common stock under ESPP
|
|
|
52
|
|
|
|
|
|
|
|
659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
659
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
683
|
|
Achievement of milestone under the
Teva Agreement
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,157
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,157
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,044
|
)
|
|
|
|
|
|
|
(12,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
58,785
|
|
|
$
|
590
|
|
|
$
|
183,809
|
|
|
$
|
(2,157
|
)
|
|
$
|
(186,215
|
)
|
|
$
|
(3
|
)
|
|
$
|
(3,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock purchase
warrants, stock options, and sale of
common stock under ESPP
|
|
|
37
|
|
|
|
1
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,513
|
|
Tax benefit related to
exercise of employee stock options
|
|
|
|
|
|
|
|
|
|
|
10,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,477
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(23
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,925
|
|
|
|
|
|
|
|
125,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
58,822
|
|
|
$
|
591
|
|
|
$
|
196,049
|
|
|
$
|
(2,157
|
)
|
|
$
|
(60,290
|
)
|
|
$
|
(26
|
)
|
|
$
|
134,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Comprehensive Income/ (Loss)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net income (loss)
|
|
$
|
125,925
|
|
|
$
|
(12,044
|
)
|
|
$
|
(5,780
|
)
|
Cumulative translation adjustments
|
|
|
(23
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
125,902
|
|
|
$
|
(12,047
|
)
|
|
$
|
(5,780
|
)
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-5 of F-93
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
125,925
|
|
|
$
|
(12,044
|
)
|
|
$
|
(5,780
|
)
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,612
|
|
|
|
7,307
|
|
|
|
5,416
|
|
Bad debt expense
|
|
|
550
|
|
|
|
|
|
|
|
|
|
Tax benefit on reversal of valuation allowance on deferred tax asset
|
|
|
(81,485
|
)
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
17,483
|
|
|
|
|
|
|
|
|
|
Tax benefit related to exercise of employee stock options
|
|
|
(10,477
|
)
|
|
|
|
|
|
|
|
|
Provision for uncertain tax positions
|
|
|
6,118
|
|
|
|
|
|
|
|
|
|
Deferred revenue Rx Partners
|
|
|
234,816
|
|
|
|
115,391
|
|
|
|
40,550
|
|
Deferred product manufacturing costs Rx Partners
|
|
|
(64,681
|
)
|
|
|
(42,431
|
)
|
|
|
(10,139
|
)
|
Deferred revenue recognized Rx Partners
|
|
|
(161,114
|
)
|
|
|
(36,809
|
)
|
|
|
(12,630
|
)
|
Amortization deferred product manufacturing costs Rx Partners
|
|
|
46,363
|
|
|
|
14,006
|
|
|
|
3,372
|
|
Deferred revenue OTC Partners
|
|
|
15,359
|
|
|
|
11,215
|
|
|
|
8,039
|
|
Deferred product manufacturing costs OTC Partners
|
|
|
(13,014
|
)
|
|
|
(11,678
|
)
|
|
|
(6,560
|
)
|
Deferred revenue recognized OTC Partners
|
|
|
(11,866
|
)
|
|
|
(13,782
|
)
|
|
|
(10,451
|
)
|
Amortization deferred product manufacturing costs OTC Partners
|
|
|
9,900
|
|
|
|
12,421
|
|
|
|
7,293
|
|
Payments on exclusivity period fee
|
|
|
(18,200
|
)
|
|
|
(14,400
|
)
|
|
|
|
|
Payments on accrued litigation settlements
|
|
|
(2,573
|
)
|
|
|
(12,000
|
)
|
|
|
|
|
Accrued litigation settlement expense
|
|
|
|
|
|
|
2,556
|
|
|
|
|
|
Share-based compensation expense
|
|
|
1,514
|
|
|
|
683
|
|
|
|
|
|
Accretion of interest income on short-term investments
|
|
|
(3,147
|
)
|
|
|
(1,004
|
)
|
|
|
(363
|
)
|
Change in fair value of common stock purchase warrants
|
|
|
110
|
|
|
|
(1,098
|
)
|
|
|
(4,502
|
)
|
Write-off remaining balance of unamortized deferred financing fees
|
|
|
|
|
|
|
|
|
|
|
2,835
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
9,868
|
|
|
|
(31,393
|
)
|
|
|
(6,677
|
)
|
Inventory
|
|
|
6,543
|
|
|
|
(846
|
)
|
|
|
(3,043
|
)
|
Prepaid expenses and other assets
|
|
|
(6,325
|
)
|
|
|
1,960
|
|
|
|
1,115
|
|
Accounts payable and accrued expenses
|
|
|
7,546
|
|
|
|
4,372
|
|
|
|
11,768
|
|
Other liabilities
|
|
|
1,189
|
|
|
|
1,814
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
119,014
|
|
|
$
|
(5,760
|
)
|
|
$
|
21,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
$
|
(244,119
|
)
|
|
$
|
(57,530
|
)
|
|
$
|
(7,086
|
)
|
Maturities of short-term investments
|
|
|
164,667
|
|
|
|
35,302
|
|
|
|
57,217
|
|
Purchases of property, plant and equipment
|
|
|
(18,836
|
)
|
|
|
(21,475
|
)
|
|
|
(14,764
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(98,288
|
)
|
|
$
|
(43,703
|
)
|
|
$
|
35,367
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Repayments) under revolving line of credit, net
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(5,000
|
)
|
Repayment of long-term debt
|
|
|
(253
|
)
|
|
|
(108
|
)
|
|
|
(2,570
|
)
|
Proceeds from issuance of 3.5% convertible debentures
|
|
|
|
|
|
|
|
|
|
|
74,900
|
|
Repayment of 1.25% convertible debentures
|
|
|
|
|
|
|
|
|
|
|
(95,000
|
)
|
Payment of deferred financing fees
|
|
|
|
|
|
|
|
|
|
|
(2,461
|
)
|
Tax benefit related to exercise of employee stock options
|
|
|
10,477
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercises and purchases under ESPP
|
|
|
113
|
|
|
|
93
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
$
|
10,337
|
|
|
$
|
(15
|
)
|
|
$
|
(29,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
31,063
|
|
|
$
|
(49,478
|
)
|
|
$
|
26,809
|
|
Cash and cash equivalents, beginning of the year
|
|
$
|
6,399
|
|
|
$
|
55,877
|
|
|
$
|
29,068
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
37,462
|
|
|
$
|
6,399
|
|
|
$
|
55,877
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-6 of F-93
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
(in $000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash paid for interest
|
|
$
|
4,556
|
|
|
$
|
3,409
|
|
|
$
|
2,544
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
14,106
|
|
|
$
|
500
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2007, the Company issued 9,388 shares of common stock as the result of a cashless
exercise of common stock purchase warrants.
In February 2006, the Company issued 35,243 shares of common stock as the result of a cashless
exercise of common stock purchase warrants.
Unpaid
vendor invoices of approximately $ 2,150,000, $ 722,000 and $
1,189,000 which are accrued as of December 31,
2007, 2006 and 2005, 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 consolidated financial statements.
Page F-7 of F-93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007, 2006, 2005
1. THE COMPANY
Impax Laboratories, Inc. (Impax or the Company) is a technology-based, specialty pharmaceutical
company. The Company has two reportable segments, referred to as the Global Pharmaceuticals
Division (Global Division) and the Impax Pharmaceutical Division (Impax Division) . The
Global Division develops, manufactures, sells, and distributes generic pharmaceutical products.
The Impax Division is engaged in the process of developing branded pharmaceutical products.
The Companys Global Division develops, formulates, manufactures, and sells controlled-release and
specialty generic pharmaceutical products, through three sales channels, including: Global, which
includes direct sales of generic prescription (Rx) products to wholesalers, large retail drug
chains, and others; Rx Partners, which include the sale of generic prescription (Rx) products
through unrelated third-party pharmaceutical entities pursuant to alliance agreements; and, OTC
Partners, which include the sale of generic over-the-counter (OTC) products through unrelated
third-party pharmaceutical entities pursuant to alliance agreements.
The Company marketed a total of sixty-five generic pharmaceutical products as of June 30, 2008,
which represented dosage variations of twenty-four different pharmaceutical compounds marketed
under the Companys own Global label; plus a total of twelve generic prescription
pharmaceuticals, representing dosage variations of three different pharmaceutical compounds sold to
other unrelated third-party pharmaceutical entities pursuant to the Rx Partner Alliance Agreements;
and two generic over-the-counter (OTC) products of a single compound sold to other unrelated
third-party pharmaceutical entities pursuant to the OTC Partner Alliance Agreements.
The Company has nineteen applications for approval of new generic products under review by the U.S.
Food and Drug Administration (FDA), four of which have been tentatively approved, and
approximately fifty additional generic products in various stages of research and development, for
which applications have not yet been filed.
The Companys 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 co-promotion through a
direct sales force focused on marketing to physicians, primarily in the CNS community,
pharmaceutical products developed by other unrelated third-party pharmaceutical entities
In the State of California (CA), the Company utilizes a combination of owned and leased
facilities located in Hayward, CA, including a research and development center, a manufacturing
facility, an office building used as the Companys corporate headquarters for management,
manufacturing support staff, and administrative personnel. Additionally, the Company leases four
other facilities in Hayward, CA, Pleasanton, CA, and Fremont, CA utilized for additional research
and development, administrative services, and equipment storage. In the Commonwealth of
Pennsylvania (PA), the Company owns a packaging, warehousing, and distribution center located in
Philadelphia, PA, as well as a leased facility in New Britain, PA used for sales and marketing,
finance, and administration personnel, as well as providing additional warehouse space. Outside
the Unites States of America (USA), in Taiwan, R.O.C., the Company currently has under
construction a facility to eventually be utilized for manufacturing, research and development,
warehouse, and administrative space, which is expected to be operational in 2010.
The Company was formerly known as Global Pharmaceutical Corporation until December 14, 1999, when
Impax Pharmaceuticals, Inc., a privately held drug delivery company, was merged into the Company
and its name was changed to Impax Laboratories, Inc. The merger was treated as the
recapitalization of Impax Pharmaceuticals, Inc., with Impax Pharmaceuticals, Inc. deemed the
acquirer of Global Pharmaceutical Corporation, with such transaction deemed a reverse acquisition
for accounting purposes.
Page F-8 of F-93
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America (GAAP) requires the use of estimates and assumptions, based on
complex judgments considered reasonable, affect the reported amounts of assets and liabilities and
disclosure of contingent assets and contingent liabilities at the date of the 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 stock purchase warrants, fair
value of share-based compensation awards issued to employees, and estimates used in applying the
Companys revenue recognition policy including those related to sales rebates, chargebacks and
shelf stock adjustments, Medicare and Medicaid, and sales returns accruals, and recognition periods
related to alliance agreements. Actual results may differ from estimated results.
Principles of Consolidation
The 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), of which the Company holds a 60%
majority ownership interest. All significant intercompany accounts and transactions have been
eliminated.
On July 1, 2006, the Company acquired 150,000 shares of the outstanding common stock, representing
60% of total shares outstanding, of Prohealth, a privately-held company organized under the laws of
Taiwan, R.O.C., for cash consideration of $ 599,000. The Company acquired Prohealth to provide
additional research and development capacity. The results of Prohealths operations have been
included in the consolidated financial statements since the date of acquisition.
Cash and Cash Equivalents
The Company considers all short-term investments with maturity of three months or less at the date
of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which
approximates fair value. The Company is potentially subject to financial instrument concentration
of credit risk through its cash and cash equivalents. The Company maintains cash and cash
equivalents with several major financial institutions. Such amounts frequently exceed Federal
Deposit Insurance Corporation (FDIC) limits.
Short-Term Investments
Short-term investments represent investments in fixed rate financial instruments with maturities of
greater than three months but less than twelve months at the time of purchase. The Companys
short-term investments are held in U.S. Treasury securities and high grade commercial paper, which
are not insured by the FDIC. They are stated at amortized cost, which approximates fair value.
Fair Value of Financial Instruments
The carrying values of the Companys cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued expenses approximate their fair values due to their
short-term nature. The Company estimates the fair value of its fixed-rate long-term debt to be
$ 69,938,000, $ 73,313,000 and $ 72,375,000 at December 31, 2007, 2006 and 2005, respectively.
Contingencies
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, shareholder lawsuits, and product liability. In accordance with
SFAS No. 5, Accounting for Contingencies, the Company records accruals for such loss contingencies
when it is probable a liability will be incurred and the amount of loss can be reasonably
estimated. The Company, in accordance with SFAS No. 5, does not recognize gain contingencies until
realized. A discussion of contingencies is included in Note 13, Commitments and Contingencies
and Note 14, Legal and Regulatory Matters.
Page F-9 of F-93
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from amounts
deemed to be uncollectible from its customers; these allowances are for specific amounts on certain
accounts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are
cash, cash equivalents, short-term investments, and accounts receivable. The Company limits its
credit risk associated with cash, cash equivalents and short-term investments by placing its
investments with high quality money market funds, corporate debt, short-term commercial paper and
in securities backed by the U.S. Government. The Company limits its credit risk with respect to
accounts receivable by performing credit evaluations when deemed necessary. The Company does not
require collateral to secure amounts owed to it by its customers.
The following tables present the percentage of total accounts receivable and gross sales
represented by the Companys five largest customers as of and for the years ended December 31,
2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Accounts Receivable
|
|
2007
|
|
2006
|
|
2005
|
Customer #1
|
|
|
26.1
|
%
|
|
|
45.5
|
%
|
|
|
15.1
|
%
|
Customer #2
|
|
|
15.8
|
%
|
|
|
11.2
|
%
|
|
|
29.4
|
%
|
Customer #3
|
|
|
19.1
|
%
|
|
|
13.5
|
%
|
|
|
19.2
|
%
|
Customer #4
|
|
|
8.7
|
%
|
|
|
7.1
|
%
|
|
|
9.2
|
%
|
Customer #5
|
|
|
8.4
|
%
|
|
|
5.0
|
%
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
Total-Five largest customers
|
|
|
78.1
|
%
|
|
|
82.3
|
%
|
|
|
84.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Gross Sales
|
|
2007
|
|
2006
|
|
2005
|
Customer #1
|
|
|
13.2
|
%
|
|
|
19.0
|
%
|
|
|
7.4
|
%
|
Customer #2
|
|
|
10.7
|
%
|
|
|
18.5
|
%
|
|
|
28.1
|
%
|
Customer #3
|
|
|
13.7
|
%
|
|
|
17.9
|
%
|
|
|
15.9
|
%
|
Customer #4
|
|
|
5.7
|
%
|
|
|
8.7
|
%
|
|
|
7.8
|
%
|
Customer #5
|
|
|
36.9
|
%
|
|
|
|
|
|
|
|
|
Customer #6
|
|
|
|
|
|
|
5.7
|
%
|
|
|
|
|
Customer #7
|
|
|
|
|
|
|
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
Total-Five largest customers
|
|
|
80.2
|
%
|
|
|
69.8
|
%
|
|
|
65.3
|
%
|
|
|
|
|
|
|
|
During the years ended December 31, 2007, 2006 and 2005, the Companys top ten products accounted
for 68%, 67% and 74%, respectively, of Global product sales, net.
Page F-10 of F-93
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using a standard cost
method, and the cost flow assumption is first-in, first-out (FIFO) flow of goods. Standard costs
are revised annually, and significant variances between actual costs and standard costs are
apportioned to inventory and cost of goods sold based upon inventory turnover. Costs include
materials, labor, quality control, and production overhead. Inventory is adjusted for short-dated,
unmarketable inventory equal to the difference between the cost of inventory and the estimated
value based upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by the Company, additional inventory write-downs
may be required. Consistent with industry practice, the Company may build pre-launch inventories
of certain Abbreviated New Drug Application (ANDA) related products which are pending required FDA approval and/or resolution of
patent infringement litigation, when, in the Companys assessment, such action is appropriate to
increase the commercial opportunity, and FDA approval is expected in the near term, and /or the
litigation will be resolved in the Companys favor.
In November 2004, the FASB issued SFAS No. 151 (SFAS 151), Inventory Costs, an amendment of ARB
No. 43, Chapter 4. SFAS No. 151 clarifies abnormal inventory costs, such as costs of idle
facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be
recognized as current period costs. The provisions of SFAS No. 151 were effective for the fiscal
year ended December 31, 2006. The adoption of SFAS 151 did not have an impact on the Companys
financial position, results of operations or cash flows, as the Company already accounted for
abnormal inventory costs as a current period charge.
The Company is dependent on a small number of suppliers for its raw materials, and any delay or
unavailability of raw materials can materially adversely affect its ability to produce products.
The Company believes it has, and will continue to have, adequate and dependable sources for the
supply of raw materials and components for its manufacturing requirements. All of the Companys
manufacturing facilities are located in northern California, and significant adverse events
affecting this geographical area could have a material adverse effect on the Companys ability to
produce products.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Maintenance and repairs are charged to expense
as incurred and costs of improvements and renewals are capitalized. Costs incurred in connection
with the construction or major renovation of facilities, including interest directly related to
such projects, are capitalized as construction in progress. Depreciation is recognized using the
straight-line method based on the estimated useful lives of the related assets, which are 40 years
for buildings, 15 years for building improvements, 7-10 years for equipment, and 3-5 years for
office furniture and equipment. Land and construction-in-progress are not depreciated.
Page F-11 of F-93
Goodwill
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS No. 142), rather
than recording periodic amortization, goodwill is subject to an annual assessment for impairment by
applying a fair-value-based test. According to SFAS No. 142, 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.
The Company considers the Global Division and the Impax Division operating segments to each be a
reporting unit as this is the lowest level for which discrete financial information is available.
The Company attributes the entire carrying amount of goodwill to the Global Division.
The Company concluded the carrying value of goodwill was not impaired as of December 31, 2007,
2006, and 2005. The Company performs its annual goodwill impairment test in the fourth quarter of
each year. In addition, on a quarterly basis, the Company performs a review of its business
operations to determine if events or changes in circumstances have occurred which could 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, the Company 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, in the Companys assessment of the reporting units
fair value. The Company has not to-date deemed there to be any significant adverse changes in the
legal, regulatory, or general economic environment in which the Company conducts its business
operations.
Page F-12 of F-93
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
, is when revenue is realized or
realizable and earned and 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
Emerging Issues Task Force Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple
Elements
(EITF 00-21), 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 all of the following criteria are
met:
|
-
|
|
the delivered item has value to the customer on a stand-alone basis;
|
|
|
-
|
|
there is objective and reliable evidence of the fair value of the undelivered item; 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 EITF 00-21, 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, on a straight-line basis or on a modified proportional performance method.
Page F-13 of F-93
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:
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 12 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 an
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 return
provision, including levels of inventory in the distribution channel, 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.
Rebates and Chargebacks
The Company maintains various rebate programs with its Global 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.
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.
Page F-14 of F-93
Shelf-Stock Adjustments
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.
Medicaid
As required by law, the Company provides a rebate on drugs dispensed under the Medicaid
program. The Company determines its estimate of 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
Company records estimates for Medicaid rebates as a deduction from gross sales, with
corresponding adjustments to accrued liabilities.
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 F-15 of F-93
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 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 Partner and OTC Partner 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. 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 under these agreements are not subject to deductions for chargebacks, rebates, returns,
shelf-stock adjustments, and other pricing adjustments.
The Company initially defers all revenue earned under its Rx Partners and 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 Rx Partners and 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 Rx Partners
or OTC Partners are recognized as current period cost of revenue.
The Company recognizes such deferred revenue as either Rx Partner revenue or OTC Partner revenue
under the respective alliance agreement, and amortizes deferred product manufacturing costs as cost
of revenues as the Company fulfills its contractual obligations. Revenue is recognized over the
respective alliance agreements term of the arrangement or the Companys expected period of
performance, using a modified proportional performance method, which results in a greater portion
of the revenue being recognized in the period of initial recognition and 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 agreements.
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 is recognized only to the extent of cash
collected and /or the fair value received. The Companys judgment is this modified proportional
performance method better aligns revenue recognition with performance under a long-term arrangement
as compared to a straight-line method.
Page F-16 of F-93
Promotional Partner:
The Promotional Partner revenues line item of the statement of operations includes revenue
recognized under promotional services agreement with another pharmaceutical company. The
promotional services agreement obligates the Company to provide physician detailing sales calls to
promote its partners branded drug product over multiple periods. In exchange for this service,
the Company receives a fixed fee based on the number of sales force representatives utilized in
providing the services (up to a maximum number of sales force representatives and an annual maximum
payment amount per sales force representative). The Company is also eligible to receive contingent
payments based upon the number of prescriptions filled for its partners product above a
contractual minimum threshold. Additionally, the Company may be required to refund portions of the
sales force fees, if it fails to perform a minimum number of physician detail calls during
specified periods.
The Company recognizes revenue from sales force fees as the services are provided and the
performance obligations are met, and contingent payments at the time when they are earned. The
Company would record a charge, as a reduction to Promotional Partner revenue, for periods in which
a refund liability had been incurred. The Company determined this agreement does not include
multiple deliverables under EITF No. 00-21.
Page F-17 of F-93
Shipping and Handling Fees and Costs
Shipping and handling fees related to sales transactions are recorded as selling expense.
Research and Development
Research and development activities are expensed as incurred and consist of self-funded research
and development costs and costs associated with work performed by other participants under
collaborative research and development agreements.
Derivatives
The Company does not engage in hedging transactions for trading or speculative purposes or to hedge
exposure to currency or interest rate fluctuations. From time to time, the Company does engage in
transactions that result in embedded derivatives (e.g. Convertible Debt). In accordance with SFAS
No. 133 (SFAS 133) and related pronouncements, the Company records the embedded derivative at
fair value on the balance sheet and records any related gains or losses in current earnings in the
statement of operations.
Income Taxes
The Company provides for income taxes using the asset and liability method as required by SFAS No.
109, Accounting for Income Taxes (SFAS 109)
.
This approach recognizes the amount of federal,
state, and local taxes payable or refundable for the current year, as well as deferred tax assets
and liabilities for the future tax consequences of events recognized in the consolidated financial
statements and income tax returns. Deferred income tax assets and liabilities are adjusted to
recognize the effects of changes in tax laws or enacted tax rates in the period during which they
are signed into law. Under SFAS 109, a valuation allowance is required when it is
more-likely-than-not all or some portion of the deferred tax assets will not be realized through
generating sufficient future taxable income.
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in a companys financial statements in accordance with SFAS 109. In this regard, SFAS
109 does not prescribe a recognition threshold or measurement attribute for the financial statement
recognition and measurement of a tax position taken in a tax return. FIN 48 clarifies the
application of SFAS 109 by defining the criterion an individual tax position must meet for any part
of the benefit of the tax position to be recognized in financial statements prepared in conformity
with generally accepted accounting principles. Under FIN 48, the Company may recognize the tax
benefit from an uncertain tax position only if it is more-likely-than-not the tax position will be
sustained on examination by the taxing authorities, based solely on the technical merits of the tax
position. The tax benefits recognized in the financial statements from such a tax position should
be measured based on the largest benefit having a greater than fifty percent likelihood of being
realized upon ultimate settlement with the tax authority. Additionally, FIN 48 also provides
guidance on measurement, de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. In accordance with the disclosure requirements of FIN
48, the Companys policy on income statement classification of interest and penalties related to
income tax obligations is to include such items as part of total interest expense and other
expense, respectively.
Share-Based Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with
provisions of SFAS 123(R), Share-Based Payment, which it adopted on January 1, 2006 using the
modified prospective method. Under this method, compensation expense is recognized on a
straight-line basis over the remaining vesting period of any outstanding unvested options at the
adoption date and any new options granted after the adoption date. Prior periods are not restated
under this method. Prior to adoption of SFAS 123(R), the Company recognized compensation expense
related to its stock options in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Under APB 25, compensation cost for stock options, if
any, was measured as the excess of the quoted market price of the common stock at the date of grant
over the amount an employee must pay to acquire the stock.
Page F-18 of F-93
Earnings (loss) per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average
number of common shares outstanding for the period. Diluted earnings (loss) per share is computed
by dividing net income (loss) by the weighted-average number of common shares adjusted for the
dilutive effect of common stock equivalents outstanding during the period.
Other Comprehensive Income (Loss)
The Company follows the provisions of SFAS No. 130, Reporting Comprehensive Income. This
Statement establishes standards for the reporting and display of comprehensive income and its
components. Comprehensive income is defined to include all changes in equity during a period
except those resulting from investments by owners and distributions to owners. From inception
through June 30, 2006, the Company has not had transactions that are required to be reported in
other comprehensive income. Effective with the acquisition of Prohealth Biotech Inc. (see Note 2),
the Company recorded foreign currency translation gains/losses, which are reported as other
comprehensive income (loss). Foreign currency translation losses for 2007 and 2006 were $ 23,000 and
$ 3,000, respectively.
Deferred Financing Costs
The Company capitalizes direct costs incurred with obtaining debt financing, which are included in
Other assets on the balance sheet. Deferred financing costs, including costs incurred in obtaining
debt financing, are amortized over the term of the underlying debt on a straight-line basis, which
approximates the effective interest method. For the years ended December 31, 2007, 2006 and 2005,
the Company charged $ 468,000, $ 466,000 and $ 693,000, respectively, to interest expense as
amortization of deferred financing costs.
Page F-19 of F-93
3. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Securities and Exchange Commission (the SEC) Staff issued Staff Accounting
Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB 108 was issued in order to eliminate the
diversity of practice surrounding how public companies quantify financial statement misstatements.
Traditionally, there have been two widely-recognized methods for quantifying the effects of
financial statement misstatements: the rollover method and the iron curtain method. The
rollover method focuses primarily on the impact of a misstatement on the income statementincluding
the reversing effect of prior year misstatementsbut its use can lead to the accumulation of
misstatements in the balance sheet. The iron curtain method, on the other hand, focuses primarily
on the effect of correcting the period-end balance sheet with less emphasis on the reversing
effects of prior year errors on the income statement. The staff believes registrants must quantify
the impact of correcting all misstatements, including both the carryover and reversing effects of
prior year misstatements, on the current year financial statements. The staff believes that this
can be accomplished by quantifying an error under both the rollover and iron curtain approaches as
described above and by evaluating the error measured under each approach. Thus, a registrants
financial statements would require adjustment when either approach results in quantifying a
misstatement that is material, after considering all relevant quantitative and qualitative factors.
SAB 108 is effective for any report for an interim period of the first fiscal year ending after
November 15, 2006. The Companys SAB 108 analysis did not result in an adjustment to its
consolidated financial statements for the effective periods.
In September 2006, the FASB issued SFAS No. 157 (SFAS 157) Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. With respect to financial assets and liabilities SFAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The effective date of SFAS 157, with respect to non-financial
assets and liabilities, was deferred by FASB Staff Position FAS 157-2 and is effective for
financial statements issued for fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years. The adoption of SFAS 157 did not have a significant impact on the
Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for Financial
Assets and Financial Liabilities
Including an amendment of FASB Statement No. 115, providing
companies with an option to choose, at specific election dates, to measure eligible financial
assets and liabilities at fair value that are not otherwise required to be measured at fair value.
SFAS 159 is effective for fiscal years beginning after November 15, 2007, early adoption is
allowed. The Company has not elected to use the fair value option of SFAS 159, and does not expect
SFAS 159 to have an impact on its consolidated financial statements.
In June 2007, the EITF reached a final consensus on EITF Issue No. 07-3 (EITF 07-3), Accounting
for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities. EITF 07-3, which is effective for fiscal years beginning after December
15, 2007, requires non-refundable advance payments for future research and development activities
to be capitalized until the goods have been delivered or related services have been performed.
Adoption is on a prospective basis and could impact the timing of expense recognition for
agreements entered into after December 31, 2007. The adoption of EITF 07-3 did not have a
significant impact on the Companys consolidated financial statements.
In November 2007, the EITF reached a final consensus on EITF Issue No. 07-1 (EITF 07-1)
Accounting for Collaborative Arrangements Related to the Development and Commercialization of
Intellectual Property. EITF 07-1 is focused on how the parties to a collaborative agreement should
account for costs incurred and revenue generated on sales to third parties, how sharing payments
pursuant to a collaborative agreement should be presented in the income statement and certain
related disclosure questions. EITF 07-1 is effective for fiscal years beginning after December 15,
2008 and interim periods within those fiscal years. Adoption is on a retrospective basis to all
prior periods presented for all collaborative arrangements existing as of the effective date. The
Company is currently evaluating the impact of EITF 07-1 adoption on the Companys consolidated
financial statements.
Page F-20 of F-93
In December 2007, the FASB issued SFAS 141 (Revised 2007) (SFAS 141(R)), Business Combinations,
which replaces SFAS No 141. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way assets and liabilities
are recognized in purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of in-process research
and development at fair value, and requires the expensing of acquisition-related costs as incurred.
SFAS No. 141R is effective for the Company beginning January 1, 2009 and will apply prospectively
to business combinations completed on or after this date. The effect of SFAS 141 (R) on the
Companys consolidated financial statements will be dependent on the nature and terms of any
business combinations to occur after the effective date.
In December 2007, the FASB issued SFAS No. 160 (SFAS 160), Non-controlling Interests in
Consolidated Financial Statements. SFAS 160 clarifies that a non-controlling (minority) interest
in a subsidiary is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements, and establishes a single method of accounting for
changes in a parents ownership interest in a subsidiary that do not result in deconsolidation.
SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing
minority interests. All other requirements of SFAS 160 shall be applied prospectively. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008. The Company does not expect
the adoption of SFAS 160 to have a significant impact on the Companys consolidated financial
statements unless a future transaction results in a non-controlling interest in a subsidiary.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161). The new standard is intended to help investors better understand how
derivative instruments and hedging activities affect an entitys financial position, financial
performance and cash flows through enhanced disclosure requirements. The new standard is effective
for financial statements issued for fiscal years and interim periods beginning after November 15,
2008, with early adoption encouraged. The Company does not expect the adoption of SFAS 161 to have
a significant impact on the Companys consolidated financial statements as the Company does not
currently have any derivatives within the scope of SFAS 161.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life
of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The FSP is
intended to improve the consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair value of the asset
under SFAS 141(R) and other U.S. generally accepted accounting principles. The new standard is
effective for financial statements issued for fiscal years and interim periods beginning after
December 15, 2008. The Company is currently evaluating the impact of FSP FAS 142-3 adoption on the
Companys consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162 (SFAS No. 162), The Hierarchy of Generally Accepted
Accounting Principles. This statement identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). The effective date of SFAS No. 162 is November 15, 2008,
which is 60 days following the SECs approval on September 16, 2008 of the Public Company
Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.
In May 2008, the FASB issued FASB Staff Position APB 14-1 (FSP APB 14-1), Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 specifies that issuers of such instruments should separately account
for the liability and equity components in a manner that will reflect the entitys nonconvertible
debt borrowing rate when interest cost is recognized in subsequent periods. This FASB staff
position is effective for financial statements issued for fiscal years beginning after December 31,
2008. The Company is currently evaluating the impact of FSP APB 14-1 on the Companys consolidated
financial statements.
Page F-21 of F-93
4. INVESTMENTS
Investments consist of commercial paper, corporate bonds and medium-term notes, government agency
obligations and 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. The Company has historically held all
investments in debt securities until maturity, and the Company has the ability and intent to
continue to hold all investments in debt securities until maturity. All of the Companys
investments have remaining contractual maturities of less than twelve months and are classified as
short-term. Upon sale the Company uses a specific identification method.
A summary of Short-term investments as of December 31, 2007, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(in $ 000s)
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
December 31, 2007
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Commercial paper
|
|
$
|
94,107
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
94,107
|
|
Government agency obligations
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
Corporate bonds
|
|
|
3,202
|
|
|
|
5
|
|
|
|
(8
|
)
|
|
|
3,199
|
|
Asset-backed securities
|
|
|
1,503
|
|
|
|
|
|
|
|
(64
|
)
|
|
|
1,439
|
|
Certificates of deposit
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
106,034
|
|
|
$
|
5
|
|
|
$
|
(72
|
)
|
|
$
|
105,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(in $ 000s)
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
December 31, 2006
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Commercial paper
|
|
$
|
14,611
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,611
|
|
Corporate bonds
|
|
|
6,535
|
|
|
|
2
|
|
|
|
(10
|
)
|
|
|
6,527
|
|
Certificates of deposit
|
|
|
2,289
|
|
|
|
|
|
|
|
|
|
|
|
2,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
23,435
|
|
|
$
|
2
|
|
|
$
|
(10
|
)
|
|
$
|
23,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(in $ 000s)
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
December 31, 2005
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Certificate of deposit
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
204
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page F-22 of F-93
5. ACCOUNTS RECEIVABLE
The details of accounts receivable, net are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Gross accounts receivable
|
|
$
|
60,272
|
|
|
$
|
70,975
|
|
|
$
|
41,922
|
|
Less: Rebate reserve
|
|
|
(3,603
|
)
|
|
|
(3,124
|
)
|
|
|
(5,391
|
)
|
Less: Chargeback reserve
|
|
|
(2,977
|
)
|
|
|
(4,401
|
)
|
|
|
(4,438
|
)
|
Less: Other deductions
|
|
|
(2,189
|
)
|
|
|
(1,529
|
)
|
|
|
(1,565
|
)
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
51,503
|
|
|
$
|
61,921
|
|
|
$
|
30,528
|
|
|
|
|
|
|
|
|
|
|
|
Other deductions include allowance for disputed items, doubtful accounts, and cash discounts.
A roll forward of the chargeback and rebate reserve activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $ 000s)
|
|
For the Year Ended December 31,
|
|
Chargeback reserve
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning balance
|
|
$
|
4,401
|
|
|
$
|
4,438
|
|
|
$
|
2,933
|
|
Provision recorded during the period
|
|
|
33,972
|
|
|
|
26,664
|
|
|
|
24,439
|
|
Credits issued during the period
|
|
|
(35,396
|
)
|
|
|
(26,701
|
)
|
|
|
(22,934
|
)
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,977
|
|
|
$
|
4,401
|
|
|
$
|
4,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( in $ 000s)
|
|
For the Year Ended December 31,
|
|
Rebate reserve
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning balance
|
|
$
|
3,124
|
|
|
$
|
5,391
|
|
|
$
|
3,382
|
|
Provision recorded during the period
|
|
|
15,968
|
|
|
|
13,856
|
|
|
|
14,679
|
|
Credits issued during the period
|
|
|
(15,489
|
)
|
|
|
(16,123
|
)
|
|
|
(12,670
|
)
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,603
|
|
|
$
|
3,124
|
|
|
$
|
5,391
|
|
|
|
|
|
|
|
|
|
|
|
Page F-23 of F-93
6. INVENTORY
At December 31, 2007, 2006 and 2005, inventory, net of carrying value reserves, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Raw materials
|
|
$
|
15,005
|
|
|
$
|
21,228
|
|
|
$
|
24,359
|
|
Work in process
|
|
|
1,827
|
|
|
|
1,922
|
|
|
|
2,092
|
|
Finished goods
|
|
|
11,373
|
|
|
|
11,692
|
|
|
|
9,017
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory, net
|
|
$
|
28,205
|
|
|
$
|
34,842
|
|
|
$
|
35,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Non-current inventory, net
|
|
|
(637
|
)
|
|
|
(731
|
)
|
|
|
(2,203
|
)
|
|
|
|
|
|
|
|
|
|
|
Total inventory-current, net
|
|
$
|
27,568
|
|
|
$
|
34,111
|
|
|
$
|
33,265
|
|
|
|
|
|
|
|
|
|
|
|
The Company had recorded inventory reserves of $ 3,148,000, $ 2,919,000 and $ 5,776,000; as of
December 31, 2007, 2006 and 2005, 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 products generally have a shelf life of approximately twenty-four months.
When the Company concludes FDA approval is expected within approximately six months, the Company
will generally begin to schedule process validation studies as required by the FDA to demonstrate
the production process can be scaled up to manufacture commercial batches. Consistent with
industry practice, the Company may build pre-launch inventories of certain ANDA related products
which are pending required 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 amount expected to be
probable of recovery through sale. Cost is determined using a standard cost method, and assumes a
first-in, first-out (FIFO) flow of goods. Costs of unapproved products are similar to the approved
products and include materials, labor, quality control, and production overhead. The net carrying
value of unapproved inventory is approximately $ 63,000, $ 521,000, and $ 549,000 at December 31,
2007, 2006, and 2005, respectively.
The capitalization of unapproved pre-launch inventory involve risks, including: (i) FDA approval of
product may not occur; (ii) approvals may require additional or different testing / specifications
than what was used for unapproved inventory, and (iii) 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 is
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 a discount from the
corresponding brand product selling price which is currently marketed. 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 first three months. If the market prices
become lower than the historical product costs, the pre-launch inventory value is reduced to
such lower market prices. 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 pre-launch products have inventory costs lower than their related net selling prices.
Page F-24 of F-93
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Land
|
|
$
|
2,270
|
|
|
$
|
2,270
|
|
|
$
|
2,270
|
|
Buildings and improvements
|
|
|
51,287
|
|
|
|
38,828
|
|
|
|
27,190
|
|
Equipment
|
|
|
44,001
|
|
|
|
39,819
|
|
|
|
28,413
|
|
Office furniture and equipment
|
|
|
5,332
|
|
|
|
4,855
|
|
|
|
3,004
|
|
Construction-in-progress
|
|
|
10,323
|
|
|
|
8,170
|
|
|
|
12,129
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, gross
|
|
|
113,213
|
|
|
|
93,942
|
|
|
|
73,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(31,990
|
)
|
|
|
(24,540
|
)
|
|
|
(17,755
|
)
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
81,223
|
|
|
$
|
69,402
|
|
|
$
|
55,251
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $ 8,144,000, $ 6,841,000 and $ 4,723, 000 for the years ended December 31,
2007, 2006 and 2005, respectively.
Page F-25 of F-93
8. ACCRUED EXPENSES
The following table sets forth the Companys Accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $000's)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Payroll-related expenses
|
|
$
|
9,983
|
|
|
$
|
6,560
|
|
|
$
|
4,366
|
|
Product returns
|
|
|
14,261
|
|
|
|
12,903
|
|
|
|
10,625
|
|
Shelf stock price protection
|
|
|
384
|
|
|
|
382
|
|
|
|
544
|
|
Medicaid rebates
|
|
|
566
|
|
|
|
421
|
|
|
|
2,862
|
|
Royalty expense
|
|
|
551
|
|
|
|
573
|
|
|
|
652
|
|
Physician detailing sales force fees
|
|
|
2,096
|
|
|
|
1,500
|
|
|
|
|
|
Legal and professional fees
|
|
|
3,382
|
|
|
|
2,781
|
|
|
|
3,619
|
|
Litigation settlements
|
|
|
1,555
|
|
|
|
3,083
|
|
|
|
24,251
|
|
Other
|
|
|
3,060
|
|
|
|
2,010
|
|
|
|
1,370
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
35,838
|
|
|
$
|
30,213
|
|
|
$
|
48,289
|
|
|
|
|
|
|
|
|
|
|
|
Included in accrued payroll-related expenses is $ 26,000, $ 495,000, and $ 0 at December 31, 2007, 2006
and 2005, respectively, related to post-employment severance-related charges. Included in other
accruals at December 31, 2007, 2006 and 2005 are state income taxes payable amounting to
$ 1,638,000, $ 377,000 and $ 248,000, respectively.
As
described more fully in Note 2, the Company maintains a return
policy to allow customers to
return product within specified guidelines. The Company estimates a provision for product returns
as a percentage of gross sales based upon historical experience for sales made through its Global
Products sales channel. Sales of product under the OTC Partner and RX Partner alliance agreements generally
are not subject to returns.
A
reconciliation of the Companys product returns reserve activity is as follows for the years
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning balance
|
|
$
|
12,903
|
|
|
$
|
10,625
|
|
|
$
|
6,939
|
|
Provision related to
sales recorded in the period
|
|
|
5,459
|
|
|
|
7,220
|
|
|
|
5,534
|
|
Credits recorded in the period
|
|
|
(4,101
|
)
|
|
|
(4,942
|
)
|
|
|
(1,848
|
)
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
14,261
|
|
|
$
|
12,903
|
|
|
$
|
10,625
|
|
|
|
|
|
|
|
|
|
|
|
Page F-26 of F-93
9. FAIR VALUE OF COMMON STOCK PURCHASE WARRANTS
Common Stock Purchase Warrants
In connection with a 2003 private financing, the Company issued 878,815 common stock purchase
warrants, which entitled the owner to purchase one share of the Companys common stock at an
exercise price of $ 7.41 per share.
During 2007, 2006, and 2005, common stock purchase warrants for 36,616, 100,000, and 0 shares of
the Companys common stock, respectively, were exercised. At December 31, 2007, the 604,887 common
stock purchase warrants outstanding were fully exercised in 2008 prior to their expiration date of
May 7, 2008, or five years from the date of their initial issuance.
Consistent with the guidance in Emerging Issues Task Force Issue No. 00-19,
Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock
,
(EITF 00-19), the common stock purchase warrants were classified as liabilities, as there were
certain conditions attached to the warrants which may require cash settlement. Accordingly, the
common stock purchase warrants were accounted for at fair value and changes in fair value were
recognized as a component of other income at each quarter-end period over the life of the
respective common stock purchase warrants. The common stock purchase warrants are also considered
derivatives consistent with the guidance in SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133).
The Company used a Black-Scholes pricing model to value the common stock purchase warrants, with
the key valuation assumptions being the terms of the common stock purchase warrant and the actual
price of the Companys common stock at each quarter-end period, as well as, a volatility rate
calculated based on changes in the price of the Companys common stock and a risk-free interest
rate corresponding to the rate on Treasury securities with a time-frame approximately the same as
the common stock purchase warrants remaining time to expiration as of each valuation date. During
the three years ended December 31, 2007, the estimated fair value of the common stock purchase
warrants ranged from a high of $ 11.45 per share on March 31, 2005 to a low of $ 1.62 on June 30,
2006. At December 31, 2007, each common stock purchase warrant was valued at $ 3.78 and the total
value of the common stock purchase warrant liability was approximately $ 2.3 million. The following
table summarizes the number of outstanding common stock purchase warrants and the corresponding
estimated fair value of the common stock purchase warrant liability at each December 31, year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Total
|
|
|
|
Purchase
|
|
|
Purchase
|
|
|
Reported
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Liability
|
|
|
|
Outstanding
|
|
|
Value
|
|
|
Liability Value
|
|
Ending balance December 31, 2004
|
|
|
741,503
|
|
|
$
|
11.43
|
|
|
$
|
8,479,000
|
|
Warrants exercised in 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2005
|
|
|
741,503
|
|
|
$
|
5.36
|
|
|
$
|
3,977,000
|
|
Warrants exercised in 2006
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2006
|
|
|
641,503
|
|
|
$
|
3.60
|
|
|
$
|
2,313,000
|
|
Warrants exercised in 2007
|
|
|
(36,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2007
|
|
|
604,887
|
|
|
$
|
3.78
|
|
|
$
|
2,285,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As noted above, the estimated fair value of the common stock purchase warrants at each balance
sheet date was determined using a Black-Scholes pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Volatility (range)
|
|
|
24.2 46.4
|
%
|
|
|
48.7 57.6
|
%
|
|
|
58.3 80.0
|
%
|
Risk-free interest rate (range)
|
|
|
3.4 4.9
|
%
|
|
|
4.7 5.2
|
%
|
|
|
3.6 4.4
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The expected life of the common stock purchase warrants was estimated as the time-to-expiration at
each balance sheet date.
Page F-27 of F-93
10. INCOME TAXES
The Company is subject to U.S. federal, state and local income taxes. The provision for (benefit
from) income taxes on earnings is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal taxes
|
|
$
|
8,383
|
|
|
$
|
320
|
|
|
$
|
405
|
|
State taxes
|
|
|
6,802
|
|
|
|
190
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax provision
|
|
|
15,185
|
|
|
|
510
|
|
|
|
653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal taxes
|
|
$
|
17,830
|
|
|
$
|
(4,971
|
)
|
|
$
|
(5,309
|
)
|
Federal taxes-change in valuation allowance
|
|
|
(66,783
|
)
|
|
|
4,651
|
|
|
|
4,904
|
|
State taxes
|
|
|
(347
|
)
|
|
|
(2,391
|
)
|
|
|
480
|
|
State taxes-change in valuation allowance
|
|
|
(14,702
|
)
|
|
|
2,341
|
|
|
|
(539
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax benefit
|
|
|
(64,002
|
)
|
|
|
(370
|
)
|
|
|
(464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) provision for income taxes
|
|
$
|
(48,817
|
)
|
|
$
|
140
|
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the difference between the federal income taxes at federal statutory rates and
actual income taxes on income (loss) before income taxes, which includes federal, state, and
other income taxes, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
77,108
|
|
|
|
|
|
|
$
|
(11,904
|
)
|
|
|
|
|
|
$
|
(5,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision (benefit) at
federal statutory rate
|
|
|
26,988
|
|
|
|
35.0
|
%
|
|
|
(4,047
|
)
|
|
|
34.0
|
%
|
|
|
(1,901
|
)
|
|
|
34.0
|
%
|
|
Increase (decrease) in tax rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes
(net of federal benefit)
|
|
|
2,886
|
|
|
|
3.8
|
%
|
|
|
(1,699
|
)
|
|
|
(14.3
|
)%
|
|
|
245
|
|
|
|
4.4
|
%
|
Effect of increase in federal statutory tax rate
on deferred tax accounts
|
|
|
(1,993
|
)
|
|
|
(2.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Use of research and development credits
|
|
|
(1,306
|
)
|
|
|
(1.7
|
)%
|
|
|
(996
|
)
|
|
|
(8.4
|
)%
|
|
|
(897
|
)
|
|
|
(16.0
|
)%
|
Change in warrant fair value
|
|
|
38
|
|
|
|
0.1
|
%
|
|
|
(373
|
)
|
|
|
(3.1
|
)%
|
|
|
(1,531
|
)
|
|
|
(27.4
|
)%
|
Provision for uncertain tax positions
|
|
|
6,118
|
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(63
|
)
|
|
|
(0.1
|
)%
|
|
|
263
|
|
|
|
2.2
|
%
|
|
|
(92
|
)
|
|
|
(1.6
|
)%
|
Change in valuation allowance
|
|
|
(81,485
|
)
|
|
|
(105.7
|
)%
|
|
|
6,992
|
|
|
|
58.7
|
%
|
|
|
4,365
|
|
|
|
78.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) provision for income taxes
|
|
$
|
(48,817
|
)
|
|
|
(63.3
|
)%
|
|
$
|
140
|
|
|
|
1.2
|
%
|
|
$
|
189
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes are provided for temporary differences between the financial statement
carrying values and the tax bases of the Companys assets and liabilities. Deferred tax assets
result principally from deferred revenue related to the Rx Partners and OTC Partners alliance
agreements and the recording of certain accruals and reserves currently not deductible for tax
purposes, as well as from net operating loss carryforwards, and from tax credit carryforwards.
Deferred tax liabilities principally result from deferred product manufacturing costs related to
the Rx Partners and OTC Partners alliance agreements and the use of accelerated depreciation and
amortization methods for tax reporting purposes.
Page F-28 of F-93
The components of the Companys deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,024
|
|
|
$
|
26,989
|
|
|
$
|
33,328
|
|
Research and development credits
|
|
|
6,118
|
|
|
|
10,221
|
|
|
|
7,966
|
|
Inventory reserves
|
|
|
1,249
|
|
|
|
1,132
|
|
|
|
2,217
|
|
Accrued expenses
|
|
|
10,230
|
|
|
|
11,357
|
|
|
|
10,553
|
|
Deferred revenues
|
|
|
81,654
|
|
|
|
68,161
|
|
|
|
40,136
|
|
Accrued exclusivity period fee payments
|
|
|
7,145
|
|
|
|
|
|
|
|
|
|
Litigation settlements
|
|
|
3,345
|
|
|
|
4,368
|
|
|
|
8,932
|
|
Other
|
|
|
3,752
|
|
|
|
4,500
|
|
|
|
1,970
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
$
|
114,517
|
|
|
$
|
126,728
|
|
|
$
|
105,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax depreciation and amortization
in excess of book amounts
|
|
$
|
1,508
|
|
|
$
|
1,188
|
|
|
$
|
1,744
|
|
Deferred manufacturing costs
|
|
|
37,468
|
|
|
|
28,284
|
|
|
|
17,384
|
|
Accrued exclusivity period fee payments
|
|
|
|
|
|
|
4,238
|
|
|
|
|
|
Other
|
|
|
228
|
|
|
|
222
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
$
|
39,204
|
|
|
$
|
33,932
|
|
|
$
|
19,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
75,313
|
|
|
$
|
92,796
|
|
|
$
|
85,434
|
|
Valuation allowance
|
|
|
|
|
|
|
(91,962
|
)
|
|
|
(84,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net of valuation allowance
|
|
$
|
75,313
|
|
|
$
|
834
|
|
|
$
|
464
|
|
|
|
|
|
|
|
|
|
|
|
The breakdown between current and long-term deferred tax assets and tax liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current deferred tax assets
|
|
$
|
32,336
|
|
|
$
|
21,272
|
|
|
$
|
19,100
|
|
Current deferred tax liability
|
|
|
(4,960
|
)
|
|
|
(5,426
|
)
|
|
|
(2,740
|
)
|
Valuation Allowance
|
|
|
|
|
|
|
(15,437
|
)
|
|
|
(15,442
|
)
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax asset, net
|
|
|
27,376
|
|
|
|
409
|
|
|
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets
|
|
|
82,181
|
|
|
|
105,456
|
|
|
|
86,002
|
|
Non-current deferred tax liability
|
|
|
(34,244
|
)
|
|
|
(28,506
|
)
|
|
|
(16,928
|
)
|
Valuation Allowance
|
|
|
|
|
|
|
(76,525
|
)
|
|
|
(69,528
|
)
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax asset (liability), net
|
|
|
47,937
|
|
|
|
425
|
|
|
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net of valuation allowance
|
|
$
|
75,313
|
|
|
$
|
834
|
|
|
$
|
464
|
|
|
|
|
|
|
|
|
|
|
|
Page F-29 of F-93
The Company historically recorded a deferred tax asset valuation allowance, based upon its history
of generating net operating losses (NOLs), and therefore not having regular income tax
obligations. The Company did however, make payments for federal and state alternative minimum
taxes (AMT) in years 2006 and 2005, and while these AMT payments were recorded as deferred tax
assets, they did not have a valuation reserve, as such AMT payments have no expiration date.
During the second quarter of 2007 as a result of significant revenue earned under one of the
alliance agreements, the Company determined it was more likely-than-not its deferred tax assets
would be realized as an offset against current income tax obligations. Accordingly, at June 30,
2007, the Company reversed the deferred tax asset valuation allowance in the amount of
approximately $ 91,962,000, of which $ 10,477,000 was credited to additional paid-in capital, as the
tax benefit resulted from employee stock options which were exercised prior to January 01, 2006.
The Company had federal NOL carryforwards of $ 0, $ 75,369,000, and $ 92,048,000 as of December 31,
2007, 2006 and 2005, respectively. The Company also had state and local NOL carryforwards of
$ 15,773,000, $ 21,493,000 and $ 33,127,000 as of December 31, 2007, 2006 and 2005, respectively. The
state NOLs as of December 31, 2007 have a twenty year carryforward period, and expire between the
years 2019 and 2023, as follows:
|
|
|
|
|
(in $000s)
|
|
|
|
Year
|
|
Amount
|
|
2019
|
|
$
|
137
|
|
2020
|
|
|
4,938
|
|
2021
|
|
|
4,968
|
|
2022
|
|
|
1,955
|
|
2023
|
|
|
3,775
|
|
|
|
|
|
Total
|
|
$
|
15,773
|
|
|
|
|
|
The Company had state AMT deferred tax asset at December 31, 2007, with an indefinite carryforward
until used against regular state income taxes.
Page F-30 of F-93
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 (FIN 48), which sets out the use of a single
comprehensive model to address uncertainty in tax positions and clarifies the accounting for income
taxes by establishing the minimum recognition threshold and a measurement attribute for the
financial statement benefit of tax positions taken or expected to be taken in a tax return.
The Company adopted FIN 48 on its effective date of January 01, 2007. As of the date of adoption,
the Company had no unrecognized tax benefits for uncertain tax positions. However, during 2007,
the Company recognized a provision for an uncertain tax position related to research and
development credits reported on its 2007 federal income tax return. The uncertain tax benefit
results from the lack of documentation which existed at the time the return was filed. The Company
expects to complete the appropriate analysis and will reassess the uncertain tax position when new
information becomes available. A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
|
|
|
|
|
(in $000s)
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
|
|
Additions based on tax positions related to the current year
|
|
|
6,118
|
|
Settlements
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
6,118
|
|
|
|
|
|
The balance of unrecognized tax benefits at December 31, 2007, if ultimately recognized, will
reduce the Companys annual effective tax rate. The Company is not able to determine if there will
be any significant increase or decrease in the unrecognized tax benefits over the next 12 months.
The Company recognizes interest and penalties related to income tax matters as a part of total
interest expense and other expense, respectively. At December 31, 2007, the Company does not have
any amounts accrued for interest and penalties for uncertain tax positions as 2007 was the first
year for which the Company had an uncertain tax position.
The tax years ended December 31, 2007, 2006, 2005 and 2004 remain open to examination by the
Internal Revenue Service and Pennsylvania Department of Revenue. The tax years ended December 31,
2007, 2006, 2005, 2004 and 2003 remain open for examination by the California Franchise Tax Board.
The Company is currently under audit by the California Franchise Tax Board for the tax years ended
December 31, 2006 and 2005. The Company is currently undergoing a sales and use tax audit by the
California State Board of Equalization for the period from July 1, 2005 through June 30, 2008.
Page F-31 of F-93
11. REVOLVING LINE OF CREDIT
On October 23, 2002 the Company signed a three year, $ 25 million Loan and Security Agreement (Loan
Agreement) with Congress Financial Corporation (Congress). In December 2003, this loan
agreement was transferred from Congress to Wachovia Bank, N. A. (Wachovia).
The Loan Agreement was comprised of a revolving credit facility of up to $ 20.5 million, and a term
loan of up to $ 4.5 million. The revolving credit facility was collateralized by eligible accounts
receivable and inventory, subject to limitations and other terms. The term loan was collateralized
by machinery and equipment. In addition, a $ 10 million restricted cash account initially
established as collateral for the revolving credit facility was removed in June 2004.
The interest rate for the revolving credit facility was prime rate plus 0.75%, or Eurodollar rate
plus 2.75%, at the Companys option. The term loan had an interest rate of prime rate plus 1.5%,
or Eurodollar rate plus 4%, at the Companys option.
In June 2005, the Company repaid in full, without penalty, the remaining balances then outstanding
under the Loan Agreement with Wachovia Bank, including $ 5.0 million of the revolving credit
facility and $ 2.1 million of term loans.
In December 2005, the Company and Wachovia and Wachovia Capital Markets, LLC (together Wachovia)
entered into a new three year credit agreement (Credit Agreement), replacing the previous Loan
Agreement, to provide up to $ 35 million of borrowings under a revolving credit facility. The
purpose of the credit arrangement is to provide debt financing for ongoing working capital
requirements and other general corporate purposes.
The Credit Agreement is collateralized by eligible accounts receivable, inventory and machinery
and equipment, subject to limitations and other terms. The interest rate for the revolving credit
facility is either the prime rate, or LIBOR plus a margin ranging from 1.50% to 2.25% based upon
terms and conditions, at the Companys option.
The Credit Agreement provides for certain financial and information reporting covenants, including
a requirement to file all required reports with the SEC. Additionally, the Credit Agreement
contains various other covenants, the most significant of which include a fixed charge coverage
ratio and a capital expenditure limitation. The fixed charge coverage ratio 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 was limited to capital expenditures of no more than
$ 50,000,000 for the period from January 1, 2005 through December 31, 2007 and is limited to
$ 25,000,000 for each calendar year thereafter. Wachovia agreed to waive the reporting requirements
through the filing of this registration statement on Form 10 with the SEC. At December 31, 2007,
the Company was in compliance with all other covenants contained in the Credit Agreement. As of
December 31, 2007, there were no amounts outstanding under the Credit Agreement and, accordingly,
including the effect of the waiver, the full $ 35 million of borrowing capacity was available to the
Company.
Page F-32 of F-93
12. LONG-TERM DEBT
3.5% Convertible Senior Subordinated Debentures
On June 26, 2005, the Company sold $ 75 million of 3.5% convertible senior subordinated debentures
due 2012 (3.5% Debentures) to a qualified institutional buyer. The net proceeds from the sale of
the Debentures, together with additional funds, were used to repay the Companys $ 95.0 million in
aggregate principal amount of its 1.25% convertible senior subordinated debentures due 2024 (the
1.25% Debentures). The Company was required to repay the 1.25% Debentures, which had been issued
in April 2004, because of its failure to file its 2004 annual report on Form 10-K with the
Securities and Exchange Commission, which failure constituted a default under the indenture
governing the 1.25% Debentures.
The 3.5% Debentures are senior subordinated, unsecured obligations of the Company and rank pari
passu with the Companys accounts payable and other liabilities, and are subordinate to certain
senior indebtedness, including the Companys credit agreement with Wachovia. The Indenture
governing the 3.5% Debentures limits the aggregate amount of the Companys indebtedness ranking
senior to or pari passu with the 3.5% Debentures to the greater of (i) $ 50 million or (ii) as of
any date, four times the Companys EBITDA for the immediately preceding twelve-month period for
which public financial information is available. The 3.5% Debentures bear interest at the rate of
3.5% per annum. Interest on the Debentures is payable on June 15 and December 15 of each year,
beginning on December 15, 2005.
The 3.5% Debentures mature on June 15, 2012 and may not be redeemed by the Company prior to
maturity. Holders also have the right to require the Company to repurchase all or any part of their
3.5% Debentures on June 15, 2009 at a repurchase price equal to 100% of the principal amount of the
3.5% Debentures, plus accrued and unpaid interest and liquidated damages, if any, up to but
excluding the repurchase date.
Each 3.5% Debenture was issued at a price of $ 1,000 and is convertible into Company common stock at
an initial conversion price of $ 20.69 per share.
Under a related Registration Rights Agreement, the Company agreed to file a registration statement
covering the 3.5% Debentures no later than March 24, 2006 and to have the registration statement
declared effective by the SEC no later than June 22, 2006. As those deadlines were not met, the
Company was required to pay the holders of the 3.5% Debentures liquidated damages, initially at the
annual rate of 0.25% of the aggregate principal amount of the Debentures, and then escalating to
0.5% of such amount until the registration statement becomes effective. The Company has not
complied with these registration statement obligations and has paid $ 601,000 in liquidated damages
through December 15, 2007. Additionally, $ 15,625 was accrued at December 31, 2007 for liquidated
damages.
Prior to June 15, 2011, the 3.5% Debentures will not be convertible unless certain contingencies
occur, including the closing price of the common stock having exceeded 120% of the conversion price
for at least 20 trading days during the 30 consecutive trading days ending on the last trading day
of the immediately preceding fiscal quarter. Upon conversion, the value (the conversion value) of
the cash and shares of common stock, if any, to be received by a holder converting $ 1,000 principal
amount of the 3.5% Debentures will be determined by multiplying the applicable conversion rate by
the 20-day average closing price of the common stock beginning on the second trading day
immediately following the day on which the debentures are submitted for conversion. The conversion
value will be payable as follows: (1) an amount in cash (the principal return) equal to the
lesser of (a) the conversion value and (b) $ 1,000, and (2) to the extent the conversion value
exceeds $ 1,000, a number of shares of common stock with a value equal to the difference between the
conversion value and the principal return or cash, at the Companys option.
In addition, if a holder elects to convert 3.5% Debentures within a period of 30 trading days after
the effective date of a fundamental change transactionconsisting generally of a transaction
constituting a change of control of the Company, as defined by the Indenturethe holder will be
entitled to receive a make-whole premium consisting of additional shares of the Companys common
stock (or, if the Company so elects, the same consideration offered in connection with the
fundamental change).
Page F-33 of F-93
The following table summarizes the Companys long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
3.5% Convertible senior subordinated
debentures due on June 15, 2012
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
8.17% Term loan Cathay Bank
(1)
|
|
|
2,215
|
|
|
|
2,264
|
|
|
|
2,309
|
|
7.5% Term loan Cathay Bank
(2)
|
|
|
2,957
|
|
|
|
3,025
|
|
|
|
3,087
|
|
Subordinated promissory note
(3)
|
|
|
9,428
|
|
|
|
11,000
|
|
|
|
|
|
Vendor financing agreement
(4)
|
|
|
144
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
89,744
|
|
|
$
|
91,430
|
|
|
$
|
80,396
|
|
Less: Current portion
|
|
|
(69,234
|
)
|
|
|
(1,827
|
)
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
20,510
|
|
|
$
|
89,603
|
|
|
$
|
80,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Term loan payable at 8.17% to Cathay Bank in 83 monthly installments of $ 19,540
commencing June 28, 2001 through May 27, 2008 with a balance of $ 2,208,843 due on June 28,
2008. The 8.17% Cathay Bank loan is collateralized by land, building and building
improvements in the Companys 35,000 square foot research facility in Hayward, California .
|
|
(2)
|
|
Term loan payable at 7.5% to Cathay Bank in 83 monthly installments of $ 24,629
commencing November 14, 2001 through October 13, 2008 with a balance of $ 2,917,598 due on
November 14, 2008. The 7.5% Cathay Bank loan is collateralized by land, building and
building improvements in the Companys 50,000 square foot manufacturing facility in Hayward,
California.
|
|
|
|
In May 2008, the Company prepaid, without penalty, all of its indebtedness under both Cathay
Bank term loans in an aggregate amount of approximately $ 5,159,000, including accrued
interest.
|
|
(3)
|
|
Subordinated promissory note in the amount of $ 11.0 million related to the June
2006 settlement of litigation brought by Solvay Pharmaceuticals, Inc.(Solvay), manufacturer
of the Creon line pancreatic enzyme products. In its lawsuit, Solvay claimed the Company
engaged in false advertising, unfair competition, and unfair trade practices in connection
with the Companys marketing and sale of its now discontinued line of Lipram-CR products.
With respect to the settlement of the Solvay litigation, the Company agreed to pay $ 23
million to Solvay, with such amount recorded as litigation settlement expense in the
Companys 2004 financial statements. The settlement with Solvay included a $ 12 million
payment upon signing of the settlement agreement with the remaining $ 11 million to be paid
under the terms of the subordinated promissory note between the Company and Solvay. The
subordinated promissory note interest rate is 6.0% per annum, and requires the Company to pay
24 quarterly installments of $ 549,165, commencing in March 2007 through December 2012.
Additionally, the subordinated promissory note becomes immediately due and payable upon the
occurrence of a default in any payment due, a change in control of the Company, voluntary or
involuntary bankruptcy proceeding by or against the Company, and working capital less than
150% of the remaining unpaid balance of the subordinated promissory note. At December 31,
2007, none of these events has occurred to-date.
|
|
(4)
|
|
Vendor financing agreement related to software licenses, with interest at 3.1%
annum, and 2 monthly installments of $ 0 and 34 monthly installments of $ 12,871, commencing
December 2006 through November 2009.
|
Page F-34 of F-93
Scheduled maturities and repurchases of long-term debt as of December 31, 2007 are as follows:
|
|
|
|
|
(in $ 000s)
|
|
|
|
|
2008 (includes repurchases in the principal amount of $ 62,250, see Note 21)
|
|
$
|
69,234
|
|
2009
|
|
|
1,770
|
|
2010
|
|
|
1,879
|
|
2011
|
|
|
1,994
|
|
2012
|
|
|
14,867
|
|
Thereafter
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89,744
|
|
|
|
|
|
Page F-35 of F-93
13. ALLIANCE AGREEMENTS
Strategic Alliance Agreement with Teva (Teva Agreement)
The Company entered into a Strategic Alliance Agreement with Teva in June 2001 (the Teva
Agreement). The Teva Agreement commits the Company to develop and manufacture, and Teva to
distribute, 12 specified controlled-release generic pharmaceutical products, each for a 10-year
period. The significant rights and obligations under the Teva Agreement are as follows:
Product Development, Manufacture and Sales.
The Company is required to develop the products,
obtain FDA approval to market the products, and manufacture and deliver the products to Teva.
The product-linked revenue the Company earns under the Teva Agreement consists of Tevas
reimbursement of all of the Companys manufacturing costs plus a fixed percentage of defined
profits on Tevas sales to its customers. Manufacturing costs are direct cost of materials plus
actual direct manufacturing costs, including packaging material, not to exceed specified limits.
The Company invoices Teva for the manufacturing costs when products are shipped to Teva, and Teva
is required to pay the invoiced amount within 30 days. Teva has the exclusive right to determine
all terms and conditions of the product sales to its customers. Within 30 days of the end of
each calendar quarter, Teva is required to provide the Company with a report of its net sales and
profits during the quarter and to pay the Company its share of the profits resulting from those
sales on a quarterly basis. Net sales are Tevas gross sales less discounts, rebates,
chargebacks, returns, and other adjustments, all of which are based upon of fixed percentages,
except chargebacks, which are estimated by Teva and subject to quarterly true-up reconciliation.
Cost-Sharing:
The Teva Agreement required Teva to pay the Company $ 300,000 at the inception of
the Teva Agreement for reimbursement of regulatory expenses previously incurred, and thereafter,
to pay specified percentages of ongoing regulatory costs incurred in connection with obtaining
and maintaining FDA approval, patent infringement litigation costs, and regulatory litigation
costs.
Advance Deposit.
Teva agreed to provide the Company with a $ 22.0 million advance deposit payable
for the contingent purchase of exclusive marketing rights for the 12 products. The advance
deposit included debt-like terms to facilitate repayment to Teva to the extent the contingencies
did not occur. Specifically, the advance deposit payable accrued interest at an 8% annual rate
from the June 2001 Teva Agreement inception date, and required the Company to repay the advance
deposit payable no later than January 15, 2004. In addition, the advance deposit included the
following provisions:
|
-
|
|
Contingent Sale of Market Exclusivity
The Teva Agreement obligated
the Company to deliver and Teva to purchase the exclusive marketing
rights for four of the 12 covered products for $ 22.0 million to the
extent the Company achieved specified product-development milestones
relating to four products (the advance deposit payable). Portions of
this $ 22.0 million purchase price were assigned to milestones based on
their negotiated values at the inception of the Teva Agreement. If
some, but not all of the milestones were achieved, then exclusive
marketing rights would transfer only for those products for which the
related milestones were met. To the extent the milestones were not
achieved by January 15, 2004 and Teva had not exercised the contingent
option to purchase market exclusivity described below, the related
exclusive marketing rights would not be transferred to Teva, the
Company would be required to repay the corresponding portions of the
$ 22.0 million advance deposit payable, and Teva would retain
non-exclusive marketing rights with respect to the related products.
The milestones and related portions to be repaid were: $ 2.0 million if
tentative FDA approval for one specified product was not obtained by
June 15, 2002; $ 5.0 million if the same product was not launched by
February 15, 2003; $ 5.0 million and $ 4.0 million, respectively, if two
additional products were not launched by December 15, 2003; $ 1.0
million if tentative FDA approval of a fourth product was not received
by January 15, 2003; and $ 5.0 million if the same product was not
launched by December 15, 2003.
|
|
|
-
|
|
Contingent Option to Purchase Market Exclusivity
The Company also
granted Teva an option to purchase the exclusive marketing rights to
the four specified products to the extent the product-development
milestones were not met. Teva could exercise this right by forgiving
repayment of half of the foregoing portions of the $ 22.0 million
advance deposit payable as assigned in the Teva Agreement to the
specified product.
|
Page F-36 of F-93
|
-
|
|
The Companys Share Settlement Option
To the extent the Company
failed to achieve the milestones and Teva failed to exercise its
option to purchase market exclusivity for the four specified products
and the Company was thus required to repay the advance deposit, the
Company had the option to settle, or repay, the applicable portion of
the advance deposit either in cash or with shares of its common stock
valued at the average closing price of the stock during the 10 trading
days ending two days prior to the date of Tevas receipt of the shares
(the Designated Share Price).
|
|
|
-
|
|
Interest Forgiveness /FDA Approval Provision
Under the terms of the
Teva Agreement, when the Company received FDA approval for any three
of the 12 covered products, the entire amount of interest payable
under the advance deposit would be forgiven. The nominal amount of
the accrued interest expected to be incurred over the life of the
advance deposit was estimated not to exceed approximately $ 4.4
million.
|
Sale of Common Stock:
The Teva Agreement required Teva to purchase $ 15 million of the Companys
common stock in four equal quarterly installments beginning September 15, 2001. The number of shares purchased in each installment was determined by dividing $ 3.75 million by the Designated
Share Price. Pursuant to these provisions, the Company sold a total of 1,462,083 shares of
common stock to Teva, with the last sale occurring on June 15, 2002. The stock purchase
agreement included the following terms:
|
-
|
|
Contingent Stock Repurchase Option
. The Teva Agreement divided 11 of the
products into three categories, referred to as product tiers. The Tier 1 products were
those pending FDA approval when the Teva Agreement was entered into, whereas Tier 2 and Tier
3 products were those for which applications to FDA had not as yet been filed at the
inception of the Teva Agreement. The Teva Agreement gave the Company the option to
repurchase from Teva 243,729 shares of its common stock (one-sixth of the shares initially
sold to Teva) for $ 1.00 contingent upon Teva achieving a commercial sale of either a Tier
2 or Tier 3 product.
|
Other Provisions:
The Teva Agreement also provides for other deliverables by the Company,
consisting of research and development activities, including regulatory services.
Revenue Recognition under the Teva Agreement
:
The Company applied its accounting policy to
determine whether the multiple deliverables within the Teva Agreement should be accounted for as
separate units of accounting or as a single unit of accounting. The Company identified the
following deliverables under the Teva Agreement, including: manufacture and delivery of 12
products; research and development activities (including regulatory services) related to each
product; and market exclusivity associated with respect to the products.
The Company determined 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.
When the fair value of a deliverable can not be determined, it is not possible for the Company to
determine whether consideration provided by Teva under the Teva Agreement is in exchange for a
given deliverable. The Company thus concluded the multiple deliverables under the Teva Agreement
represents a single unit of accounting.
The Company initially defers all revenue earned under the Teva Agreement and then recognizes such
deferred revenue over the life of the Teva Agreement, estimated to be 18 years, measured from the
June 2001 inception of the Teva Agreement through 10 years following the estimated time of the last
product FDA approval. The deferred portion of the revenue is recorded as a liability captioned
Deferred revenue alliance agreements. Revenue is recognized using a modified proportional
performance method, which results in a greater portion of the revenue being recognized in the
period of initial recognition and the balance recognized ratably over the remaining life of the
agreement. This modified proportional performance method better aligns revenue recognition with
performance under a long-term arrangement as compared to a straight-line method.
The Company also defers its direct manufacturing costs reimbursable by Teva and recognizes them in
the same manner as it recognizes the related product revenue. These deferred direct manufacturing
costs are recorded as an asset captioned Deferred product manufacturing costs alliance
agreements. Manufacturing costs in excess of amounts reimbursable under the terms of the Teva
Agreement are not deferred.
Page F-37 of F-93
The elements of revenue under the Teva Agreement are summarized as follows:
|
-
|
|
Teva reimbursement of manufacturing costs;
|
|
|
-
|
|
The Companys pro rata profit share associated with Tevas sales of products to its customers;
|
|
|
-
|
|
The sale of market exclusivity for certain products;
|
|
|
-
|
|
The estimated fair value received upon the Companys exercise of the contingent stock
repurchase option upon achieving the commercial sale of a Tier 2 or 3 product;
|
|
|
-
|
|
Teva reimbursement of regulatory and litigation costs; and
|
|
|
-
|
|
The value received as a result of the forgiveness of interest on the advance deposit upon
receipt of the third FDA approval to market a product.
|
Recognition of each of the revenue elements while spread over the estimated life of the agreement,
begins upon occurrence of the following events:
|
-
|
|
Teva reimbursement of manufacturing costs at the time the Company delivers the product to Teva;
|
|
|
-
|
|
The Companys pro rata profit share at the time Teva reports the Companys respective pro rata profit share to the
Company;
|
|
|
-
|
|
The sale of market exclusivity at the time market exclusivity was delivered by Tevas exercise of its contingent option
to purchase market exclusivity;
|
|
|
-
|
|
The milestone associated with the first commercial sale of a Tier 2 or 3 product and concurrent exercise of the contingent
stock repurchase option at the time the right to exercise the option accrued;
|
|
|
-
|
|
Cost-sharing payments at the time the related costs are incurred (except for the $ 300,000 cost reimbursement payable upon
inception of the Teva Agreement, recognition of which began at such inception); and,
|
|
|
-
|
|
Forgiveness of interest at the time the Company received its third FDA approval to market a product covered by the
agreement.
|
Revenue is recognized only to the extent of cumulative cash collected from product sales and
cost-sharing payments and, with respect to forgiveness of the advance deposit and interest thereon
and exercise of the contingent stock repurchase option, the fair value received upon such
forgiveness and exercise, being greater than cumulative revenue recognized.
Under the modified proportional performance method utilized by the Company, the amounts recognized
for a given element in the period of initial recognition is based upon the number of years elapsed
prior to the respective elements event occurring under the Teva Agreement relative to the
estimated life of the Teva Agreement. 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 agreement and the denominator of which is
eighteen years i.e. the estimated life of the Teva Agreement. The amount recognized during each
remaining year is 1/18 of such amount. Thus, for example, with respect to profit share reported by
Teva during 2005 (the fourth year of the agreement), 4/18 of the amount reported is recognized
during 2005 and 1/18 of the amount is recognized during each of the remaining 14 years of the
estimated life of the Teva Agreement.
Page F-38 of F-93
Transactions Prior To 2005
The Advance Deposit
- the $ 22.0 million advance deposit relating to the Companys sale of market
exclusivity to Teva (in certain circumstances) and Tevas contingent option to purchase market
exclusivity from the Company (in other circumstances),represents Tevas prepayment of the market
exclusivity purchase price associated with these two features. The Company recorded the $ 22.0
million advance deposit as an advance deposit payable liability and accounted for at its face
amount through its ultimate settlement in January 2004.
The milestones potentially triggering Tevas purchase of market exclusivity for the $ 22.0 million
advance deposit were not met. Teva exercised its contingent option to purchase market
exclusivity for two products, including: one for $ 3.5 million in December 2003, and the other for
$ 2.5 million in January 2004. The corresponding amounts of the $ 22.0 million advance deposit
were thus extinguished at those times. Given the advance deposit was within 30 days of maturity
when Teva exercised its contingent purchase options, the fair value of the forgiven portion of
the advance deposit approximated book value and any gain or loss on the extinguishment of the
liability was immaterial. Accordingly, on the dates of exercise, the Company reclassified the
$ 3.5 million and $ 2.5 million principal amounts of the advance deposit associated with the
exercised options to deferred revenue under the Teva Agreement and such amounts are being
recognized as revenue over the life of the Teva Agreement in accordance with the modified
proportional performance method.
Share-Settlement Option
: The Company repaid the remaining $ 16.0 million of the advance deposit
payable through issuance of shares of the Companys common stock. Specifically, $ 13.5 million
was repaid, through the issuance of 888,918 shares, on September 26, 2003 and the remaining $ 2.5
million was repaid through the issuance of 160,751 shares, on January 14, 2004. The provision
enabling the Company to repay the advance deposit with shares of common stock was embedded in the
Teva Agreement.
Interest Forgiveness and FDA Approval Provision
: The Company achieved the milestone triggering
forgiveness of interest on November 21, 2002. In accordance with the Teva Agreement, the
Companys obligation to pay interest on the $ 22.0 million advance payable, including the amount
previously accrued of approximately $ 2.5 million and an imputed discount of approximately $ 1.9
million, was forgiven and the resulting $ 4.4 million was recorded as deferred revenue under the
Teva Agreement and such amounts are being recognized as revenue over the life of the Teva
Agreement in accordance with the modified proportional performance method.
Sale of Common Stock
: Under the terms of the Teva Agreement, the Company sold 1,462,083 shares
to Teva in four consecutive quarterly installments beginning in June 2001. The number of shares
sold in each quarterly installment was determined by dividing $ 3.75 million by the Designated
Share Price. The Company determined this provision met the SFAS 133 definition of an embedded
derivative. However, its value was less than $ 50,000, which the Company deemed immaterial, and
this feature of the agreement was therefore not accounted for separately as a derivative.
Page F-39 of F-93
Transactions from 2005 to 2007
Contingent Stock Repurchase Option
: The Companys option to repurchase one-sixth of the shares
it sold Teva is embedded in the agreement. When evaluated on an as if freestanding basis, the
option qualifies for a scope exception under SFAS 133 because, as a freestanding instrument, it
would be indexed to the Companys own stock and classified as equity. As a result, the
contingent stock repurchase option did not require bifurcation and separate accounting as a
derivative instrument pursuant to the provisions of SFAS 133. Rather, consistent with its
revenue-recognition policy, the Company did not begin recognizing any revenue associated with the
value received upon exercise of the contingent stock repurchase option until Teva achieved the
first commercial sale of a Tier 2 or Tier 3 product, which occurred on December 15, 2006. The
Company determined the fair value of this provision was approximately $ 2.2 million (based upon
the fair value of the Companys common stock on the date the milestone was met and the right to
exercise the option accrued), with such amount being recognize as revenue over the life of the
Teva Agreement in accordance with the modified proportional performance method.
Arrangement with Anchen:
Anchen Pharmaceuticals, Inc. received the first approval for its
generic Wellbutrin 300mg XL product in 2006. The Company entered into an agreement with Anchen
and Teva whereby Anchen selectively waived its 180 day market exclusivity in favor of the Company
and transferred to Teva, all of its rights to market the product, all in return for certain
payments by Teva (for which the Company is responsible for its proportionate share under the
profit sharing provisions of the Teva Agreement, as amended). The Company received final
approval for the product and Teva launched the product in December 2006. In February 2007,
on-going patent litigation with Biovail Laboratories International, SRL, concerning the product,
was resolved and the agreement with Anchen and Teva was amended to include, among other things,
certain additional payments to Anchen by Teva (for which the Company is responsible for its
proportionate share). The Company recorded its proportionate share of its obligations to Anchen
as an Accrued exclusivity period fee payments due and a corresponding Deferred
charge-exclusivity period fee on its balance sheet, initially at $ 41.6 million and then
increased to $ 50.6 million upon the February 2007 amendment. The deferred charge-exclusivity
period fee was amortized over the six-month exclusivity period commencing in December 2006, as a
reduction in the gross amount of revenue to be deferred for each monthly period and the accrued
exclusivity period fee payments due obligation is reduced as the Company reimburses Teva for the
Companys proportionate share of the payments made to Anchen.
Page F-40 of F-93
The following tables show the additions to and deductions from the deferred revenue and deferred
product manufacturing costs under the Teva Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
(in $000s)
|
|
For the Year Ended December 31,
|
|
|
Through
|
|
Deferred revenue
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dec 31, 2004
|
|
Beginning balance
|
|
$
|
136,157
|
|
|
$
|
78,014
|
|
|
$
|
55,749
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost-sharing
|
|
|
732
|
|
|
|
861
|
|
|
|
803
|
|
|
|
2,857
|
|
Product-related deferrals
|
|
|
133,873
|
|
|
|
92,502
|
|
|
|
34,009
|
|
|
|
55,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
134,605
|
|
|
|
93,363
|
|
|
|
34,812
|
|
|
|
58,838
|
|
Exclusivity charges
|
|
|
(47,133
|
)
|
|
|
(3,467
|
)
|
|
|
|
|
|
|
|
|
Forgiveness of advance deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
Forgiveness of interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,370
|
|
Stock repurchase
|
|
|
|
|
|
|
2,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
87,472
|
|
|
$
|
92,053
|
|
|
$
|
34,812
|
|
|
$
|
69,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of advance deposit
|
|
$
|
(333
|
)
|
|
$
|
(333
|
)
|
|
$
|
(333
|
)
|
|
$
|
(1,167
|
)
|
Forgiveness of interest
|
|
|
(243
|
)
|
|
|
(243
|
)
|
|
|
(243
|
)
|
|
|
(851
|
)
|
Stock repurchase
|
|
|
(120
|
)
|
|
|
(659
|
)
|
|
|
|
|
|
|
|
|
Cost-sharing
|
|
|
(516
|
)
|
|
|
(466
|
)
|
|
|
(360
|
)
|
|
|
(556
|
)
|
Product-related revenue
|
|
|
(41,268
|
)
|
|
|
(32,209
|
)
|
|
|
(11,611
|
)
|
|
|
(10,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(42,480
|
)
|
|
|
(33,910
|
)
|
|
|
(12,547
|
)
|
|
|
(13,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
181,149
|
|
|
$
|
136,157
|
|
|
$
|
78,014
|
|
|
$
|
55,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
Deferred product
|
|
For the Year Ended December 31,
|
|
|
Through
|
|
manufacturing costs
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dec 31, 2004
|
|
Beginning balance
|
|
$
|
49,728
|
|
|
$
|
27,059
|
|
|
$
|
23,636
|
|
|
$
|
|
|
Additions:
|
|
|
46,246
|
|
|
|
35,530
|
|
|
|
6,738
|
|
|
|
29,341
|
|
Less amounts amortized:
|
|
|
(20,678
|
)
|
|
|
(12,861
|
)
|
|
|
(3,315
|
)
|
|
|
(5,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
75,296
|
|
|
$
|
49,728
|
|
|
$
|
27,059
|
|
|
$
|
23,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule shows the expected recognition of deferred revenue and amortization of
deferred product manufacturing costs (for transactions recorded through December 31, 2007) for the
next five years and thereafter under the Teva Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
Deferred
|
|
|
Product
|
|
|
|
Revenue
|
|
|
Manufacturing Costs
|
|
(in $000s)
|
|
Recognition
|
|
|
Amortization
|
|
2008
|
|
$
|
15,753
|
|
|
$
|
6,548
|
|
2009
|
|
|
15,753
|
|
|
|
6,548
|
|
2010
|
|
|
15,753
|
|
|
|
6,548
|
|
2011
|
|
|
15,753
|
|
|
|
6,548
|
|
2012
|
|
|
15,753
|
|
|
|
6,548
|
|
Thereafter
|
|
|
102,384
|
|
|
|
42,556
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
181,149
|
|
|
$
|
75,296
|
|
|
|
|
|
|
|
|
Page F-41 of F-93
OTC Partners Alliance Agreements (OTC Agreements)
The Company is party to five OTC Partner alliance agreements with four different unrelated
third-party pharmaceutical entities marketing partners (OTC Agreements), related to the
manufacture, distribution, and marketing of an over-the-counter (OTC) pharmaceutical product.
The five OTC Agreements, whose terms range from three to fifteen years, each commit the Company to
manufacture, and the OTC Agreements marketing partner to distribute, a single specified generic
pharmaceutical product. All of the OTC Agreements obligate the Company to grant of a license to
the respective OTC Partner to market the product, and three of the OTC Agreements require the
Company to provide research and development services to complete the development of the covered
product. Revenue under these OTC Agreements consists of up-front payments upon contract signing,
reimbursement of product manufacturing costs or other agreed upon amounts when the Company delivers
the product, profit-share or royalty payments based upon the OTC Partners product sales, and, with
respect to three of the OTC Agreements, specified milestone payments are tied to further
product-development services.
As each of these OTC Agreements contain multiple deliverables the Company applied its accounting
policy to determine whether the multiple deliverables within each of the OTC Partners alliance
agreements should be accounting for as separate units of accounting or as a single unit of
accounting. The Company determined no single deliverable represented a separate unit of accounting
given there was not sufficient objective and reliable evidence of the fair value of any single
deliverable. When the fair value of a deliverable cannot be determined, it is not possible for the
Company to determine whether consideration given by an OTC Partner is in exchange for a given
deliverable. The Company concluded the multiple deliverables under each of the OTC Partner
alliance agreements represents a single unit of accounting for each agreement.
Consistent with how revenue is recognized under the Teva Agreement, all revenue under the OTC
Agreements is deferred and subsequently recognized over the life of the respective OTC Agreements
under the modified proportional performance method. Deferred revenue is recorded as a liability
captioned deferred revenue-alliance agreement. The modified proportional performance method
better aligns revenue recognition with performance under a long-term arrangement as compared to a
straight-line method. Revenue is recognized only to the extent of cumulative cash collected being
greater than cumulative revenue recognized.
The Company begins to recognize up-front payments at the inception of the respective OTC Agreement,
milestone payments at the time they are earned, reimbursement of product manufacturing costs at the
time of product shipment to the respective OTC Partners, and profit-share and royalty payments at
the time they are reported to the Company.
The Company also defers its product manufacturing costs to the extent reimbursable by the
respective OTC Partner and recognizes them in the same manner as it recognizes the related product
revenue. Additionally, under the Teva Agreement, the Company is obligated to share with Teva the
profits from the sale of the over-the-counter products sold under the OTC Agreements up to a
maximum of 50%. These deferred direct product manufacturing costs are recorded as an asset
captioned deferred product manufacturing costs-alliance agreements.
Page F-42 of F-93
A summary description of each of the OTC Partners Alliance Agreements noted above is as follows:
In December 2001, the Company entered into a License and Supply Agreement granting to Novartis
exclusive rights to market the Companys over-the-counter (OTC) Loratadine Orally Disintegrating
Tablets (generic Claritin Reditabs) for the pediatric market. Under the terms of the Novartis
agreement, the Company is responsible for developing and manufacturing the product, while Novartis
is responsible for product marketing and sale. The structure of the Novartis agreement includes
payment upon achievement of milestones and royalties paid to the Company on a quarterly basis based
on Novartis sales. Novartis launched this product in February 2004 as Triaminic AllerChews. This
agreement was terminated in May 2005 due to lower than planned sales volume.
In June 2002, the Company signed a semi-exclusive Development, License and Supply Agreement with
Wyeth relating to the Companys Loratadine and Pseudoephedrine Sulfate 5 mg/120 mg 12-hour Extended
Release Tablets and Loratadine and Pseudoephedrine Sulfate 10 mg/240 mg 24-hour Extended Release
Tablets for the OTC market under the Alavert brand. The Company is responsible for developing and
manufacturing the products, while Wyeth is responsible for product marketing and sale. The
structure of the Wyeth agreement includes payment upon achievement of milestones and royalties paid
to the Company on Wyeths sales on a quarterly basis. Wyeth launched this product in May 2003 as
Alavert D-12 Hour. In February 2005, the Wyeth agreement was partially cancelled with respect to
only the 24-hour Extended Release Product due to lower than planned sales volume.
In June 2002, the Company signed a non-exclusive Licensing, Contract Manufacturing and Supply
Agreement with Schering-Plough relating to the Companys Loratadine and Pseudoephedrine Sulfate 5
mg/120 mg 12-hour Extended Release Tablets for the OTC market under the Claritin-D 12-hour brand.
The structure of the Schering-Plough agreement included milestone payments by Schering-Plough and
an agreed upon transfer price. Shipments to Schering-Plough commenced at the end of January 2003,
and Schering-Plough launched the product as its OTC Claritin-D 12-hour in March 2003. Through a
series of amendments, the Schering-Plough agreements original three year term has been extended
to a February 2011 contract end date.
In July 2004, the Company finalized a series of two agreements with Leiner Health Products, LLC for
(1) the supply and distribution of the Loratadine Orally Disintegrating Tablets (ODT) and (2)
Loratadine and Pseudoephedrine Sulfate Extended Release Tablets 24 hour products. These products
were manufactured by the Company and marketed by Leiner as OTC store brand generic equivalents to
the branded products. Leiner commenced sale of the ODT product in November 2004. In November
2006, the Leiner agreement for the Loratadine and Pseudoephedrine Sulfate Extended Release Tablets
24 Hour product was terminated due to lower than planned sales volume.
Page F-43 of F-93
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the OTC Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
(in $000s)
|
|
For the Year Ended December 31,
|
|
|
Through
|
|
Deferred revenue
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dec 31, 2004
|
|
Beginning balance
|
|
$
|
17,098
|
|
|
$
|
19,665
|
|
|
$
|
22,077
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
84
|
|
|
|
42
|
|
|
|
442
|
|
|
|
7,868
|
|
Cost-sharing and other
|
|
|
424
|
|
|
|
158
|
|
|
|
463
|
|
|
|
597
|
|
Product-related deferrals
|
|
|
14,851
|
|
|
|
11,015
|
|
|
|
7,134
|
|
|
|
32,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
15,359
|
|
|
$
|
11,215
|
|
|
$
|
8,039
|
|
|
$
|
40,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
(315
|
)
|
|
|
(786
|
)
|
|
|
(2,379
|
)
|
|
|
(3,692
|
)
|
Cost-sharing and other
|
|
|
(312
|
)
|
|
|
(221
|
)
|
|
|
(515
|
)
|
|
|
(278
|
)
|
Product-related revenue
|
|
|
(11,239
|
)
|
|
|
(12,775
|
)
|
|
|
(7,557
|
)
|
|
|
(14,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(11,866
|
)
|
|
|
(13,782
|
)
|
|
|
(10,451
|
)
|
|
|
(18,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
20,591
|
|
|
$
|
17,098
|
|
|
$
|
19,665
|
|
|
$
|
22,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
Deferred product
|
|
For the Year Ended December 31,
|
|
|
Through
|
|
manufacturing costs
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dec 31, 2004
|
|
Beginning balance
|
|
$
|
14,137
|
|
|
$
|
14,880
|
|
|
$
|
15,613
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product-related deferrals
|
|
|
12,172
|
|
|
|
11,727
|
|
|
|
5,756
|
|
|
|
24,225
|
|
Cost-sharing and other
|
|
|
842
|
|
|
|
(49
|
)
|
|
|
804
|
|
|
|
4,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
13,014
|
|
|
$
|
11,678
|
|
|
$
|
6,560
|
|
|
$
|
28,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product-related cost
|
|
|
(9,201
|
)
|
|
|
(12,024
|
)
|
|
|
(5,980
|
)
|
|
|
(11,280
|
)
|
Cost-sharing and other
|
|
|
(699
|
)
|
|
|
(397
|
)
|
|
|
(1,313
|
)
|
|
|
(1,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount amortized
|
|
|
(9,900
|
)
|
|
|
(12,421
|
)
|
|
|
(7,293
|
)
|
|
|
(12,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
17,251
|
|
|
$
|
14,137
|
|
|
$
|
14,880
|
|
|
$
|
15,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule shows the expected recognition of deferred revenue and amortization deferred
product manufacturing costs (for transactions recorded through December 31, 2007) for the next five
years and thereafter under the OTC Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
Deferred
|
|
|
Product
|
|
|
|
Revenue
|
|
|
Manufacturing Costs
|
|
(in $000s)
|
|
Recognition
|
|
|
Amortization
|
|
2008
|
|
$
|
4,267
|
|
|
$
|
3,525
|
|
2009
|
|
|
4,129
|
|
|
|
3,423
|
|
2010
|
|
|
4,129
|
|
|
|
3,423
|
|
2011
|
|
|
1,550
|
|
|
|
1,311
|
|
2012
|
|
|
1,034
|
|
|
|
888
|
|
Thereafter
|
|
|
5,482
|
|
|
|
4,681
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,591
|
|
|
$
|
17,251
|
|
|
|
|
|
|
|
|
Page F-44 of F-93
Supply & Distribution Agreement with DAVA Pharmaceuticals, Inc. (DAVA Agreement)
On November 3, 2005, the Company entered into a ten-year Supply and Distribution Agreement with
DAVA Pharmaceuticals, Inc. (the DAVA Agreement) under which the Company appointed DAVA the
exclusive U.S. distributor of its generic version of OxyContin
®
tablets in 80mg, 40mg, 20mg, and
10mg strengths and agreed to be DAVAs exclusive supplier of the product. DAVA agreed to pay the
Company an aggregate appointment fee of $ 60.0 million and to pay the Company a mark-up on of its
fully burdened cost of manufacture for the product plus a share of the gross profits of DAVAs
sales of the product.
The DAVA Agreement required DAVA to provide the Company with monthly purchase orders covering the
succeeding three months, and the Company was required to manufacture and fulfill at least 95% of
DAVAs monthly requirements. If the Company were unable to deliver at least 90% of the monthly
requirements, and such delay continues for more than 45 days, the Company could have been liable to
DAVA for delay payments up to $ 10.0 million.
The appointment fee payment schedule was as follows: (i) $ 1.0 million upon the signing of the
agreement, (ii) $ 9.0 million paid by DAVA pro rata upon the Companys delivery of the product as
required by DAVAs initial purchase order and (iii) $ 10.0 million payable on December 31, 2006 and
on each of the succeeding four years. DAVA had the right to suspend appointment fee payments in
the event the Company was unable to meet DAVAs product requirements or satisfy other obligations
under the DAVA Agreement.
As the DAVA Agreement involved two deliverables (the product and market exclusivity), the Company
reviewed the DAVA Agreement under the provisions of EITF 00-21 and determined, because it did not
have objective and reliable evidence of the fair value of either deliverable, no single deliverable
represented a separate unit of accounting. The Company thus concluded the arrangement represents a
single unit of accounting, and it therefore accounts for all deliverables as a single unit of
accounting in accordance with EITF 00-21. As with the Teva Agreement and the OTC Agreements, the
Company initially defers all revenue under the DAVA Agreement and then recognizes revenue over the
estimated life of the DAVA Agreement. The deferred portion of the revenue is recorded as a
liability captioned Deferred revenue alliance agreements. Revenue under the DAVA Agreement is
recognized using the same modified proportional performance method used for the Teva Agreement.
The Company also defers its direct manufacturing costs to the extent reimbursable by DAVA and
recognizes them in the same manner as it recognizes the related product revenue. These deferred
direct product manufacturing costs are recorded as an asset captioned Deferred product
manufacturing costs alliance agreements.
Recognition of revenues related to the manufacturing costs begins at the time the related product
is delivered to DAVA, and recognition of the Companys pro rata profit share begins at the time
DAVA reports to the Company such amount. The Company begins to recognize appointment fee
installments when earned as the Companys related product-delivery obligation has been met and
DAVAs obligation to pay the installment becomes fixed. In this regard, the Company began
recognizing the initial $ 1.0 million appointment fee installment when paid in 2005 and the $ 9.0
million installment in 2006, as earned when the Companys related product-delivery obligations were
met. Product shipments under the agreement commenced in 2005, and the Company began recognizing
its share of the profits in the first quarter of 2006. Revenue is recognized only to the extent of
cumulative cash collected being greater than cumulative revenue recognized.
Page F-45 of F-93
During the second half of 2006, the Companys two principal competitors for sales of generic
OxyContin announced they would, as part of the settlement of patent infringement litigation with
Purdue Pharma LP (Purdue), leave the market by December 31, 2006 and some later undisclosed date,
respectively, which would result in the Companys product being the only remaining generic product
on the market and thereby substantially increasing the Companys exposure to potential liability in
a pending patent infringement suit brought against the Company by Purdue. This change in market
dynamics led to an amendment to the agreement with DAVA whereby the parties agreed to rebalancing
the risks between the parties, providing the Company certain additional flexibility with respect to
product supply, and providing the Company with a larger share of the profits. As a result, on
February 6, 2007, the parties amended the DAVA Agreement, effective November 29, 2006. The DAVA
Agreement amendment resulted in the Company receiving a greater portion of the pro rata profit
share (once a prescribed bottle delivery target was met); eliminated the remaining $ 50.0 million of
the appointment fee potentially payable by DAVA; and, reduced the price paid by DAVA for the
product to the amount of the Companys manufacturing cost. The DAVA Agreement amendment also
permits the Company to unilaterally suspend shipment of product to DAVA in exchange for a one-time
payment equal to DAVAs share of the profits for the quarterly reporting period immediately
preceding such product shipment suspension. After such product shipment suspension, DAVA has the
right to purchase a competing equivalent product from an alternative supplier.
On March 30, 2007, the Company entered into an agreement settling Purdues patent infringement suit
against the Company. Under this Purdue settlement agreement, the Company agreed to the validity of
the Purdue patents and agreed to withdraw its generic product from the market by January 2008, and
Purdue granted the Company a license permitting it to manufacture and sell its product during
specified periods between March 2007 and January 2008, and, additionally, authorized the Company to
grant a sublicense to DAVA allowing DAVA to distribute the product during the same periods. While
the Company continued to manufacture and sell the product during the authorized periods, the Purdue
settlement agreement precludes the Company from re-entering the market after January 2008 until
expiration of the last Purdue patents in 2013, or earlier under certain circumstances.
While the amended DAVA Agreement will remain effective through November 3, 2015, the Company
concluded if any of the contingent events occur to permit the Company to resume sales of the
generic product under the Purdue settlement agreement, the same events will result in such a highly
competitive generic market to make it unlikely the Company will find it economically favorable to
devote manufacturing resources to the resumption of sales of this product. As a result, the
Company concluded the economic life of the DAVA Agreement, and therefore the Companys expected
period of performance, ended in January 2008. Accordingly, on the March 30, 2007 effective date of
the Purdue settlement agreement, the Company adjusted the period of revenue recognition and product
manufacturing costs amortization under the DAVA Agreement from 10 years to 27 months (i.e. November
2005 through January 2008). As the terms of the Purdue settlement did not exist and could not have
been known when the life of the DAVA Agreement was originally estimated, the change in the
recognition period has been applied prospectively as an adjustment in the period of change. The
change in the revenue recognition period had the effect of increasing income from operations for
the year ended December 31, 2007 by $ 73,226,000 and basic earnings per share by $ 1.25.
Page F-46 of F-93
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the DAVA Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
For the Year Ended December 31,
|
|
Deferred revenue
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning balance
|
|
$
|
24,784
|
|
|
$
|
5,655
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
|
|
|
|
9,000
|
|
|
|
1,000
|
|
Product-related deferrals
|
|
|
100,211
|
|
|
|
13,028
|
|
|
|
4,738
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
|
100,211
|
|
|
|
22,028
|
|
|
|
5,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
(7,975
|
)
|
|
|
(1,150
|
)
|
|
|
(17
|
)
|
Product-related revenue
|
|
|
(110,659
|
)
|
|
|
(1,749
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(118,634
|
)
|
|
|
(2,899
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
6,361
|
|
|
$
|
24,784
|
|
|
$
|
5,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
|
|
Deferred product
|
|
For the Year Ended December 31,
|
|
manufacturing costs
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning balance
|
|
$
|
9,100
|
|
|
$
|
3,344
|
|
|
$
|
|
|
Additions:
|
|
|
18,435
|
|
|
|
6,901
|
|
|
|
3,401
|
|
Less: amount recognized:
|
|
|
(25,685
|
)
|
|
|
(1,145
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
1,850
|
|
|
$
|
9,100
|
|
|
$
|
3,344
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule shows the expected recognition of deferred revenue and amortization deferred
product manufacturing costs (for transactions recorded through December 31, 2007) for the next five
years and thereafter under the DAVA Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
Deferred
|
|
|
Product
|
|
|
|
Revenue
|
|
|
Manufacturing Costs
|
|
(in $000s)
|
|
Recognition
|
|
|
Amortization
|
|
2008
|
|
$
|
6,361
|
|
|
$
|
1,850
|
|
2009
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,361
|
|
|
$
|
1,850
|
|
|
|
|
|
|
|
|
Page F-47 of F-93
Shire Laboratories Promotional Services Agreement (Shire Agreement)
On January 19, 2006, the Company entered into a five year Promotional Services Agreement with an
affiliate of Shire Laboratories, Inc. (the Shire Agreement), under which the Company was engaged
to perform physician-detailing sales calls in support of Shires Carbatrol product. The Shire
Agreement requires Shire to pay the Company a sales-force fee of up to $ 200,000 annually for
each of as many as 66 sales force members, a gain share fee for each prescription filled in
excess of a stated minimum during each quarter, and, if filled prescriptions exceed a specified
target during the first six months of 2009, a $ 5 million bonus. In addition, if the Company fails
to perform a minimum number of sales calls during any quarter and fails to make up the shortfall by
the end of the following quarter, Shire has the right to a refund of a fixed amount per remaining
shortfall.
The Company recognizes the sales force fees as the related services are performed and the
performance obligations are met, and for gain-share fees, if and when such fees are earned. The
Company recognized $ 12,759,000 and $ 6,434,000 in sales force fee revenue for the years ended
December 31, 2007 and 2006, respectively, under the Shire Agreement, with such amounts presented
in the captioned line item Promotional Partner under revenues on the statement of operations.
The Company has not earned any gain-share fees or been required to make any shortfall
reimbursements under the Shire Agreement. Any such reimbursements in the future will be recognized
as a reduction to Promotional Partner revenue during the period in which such reimbursement
liability is incurred.
Page F-48 of F-93
14. EMPLOYEE BENEFIT PLANS
4
01(k)
Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan covering all employees. Participants are
permitted to contribute up to 25% of their eligible annual pre-tax compensation up to established
federal limits on aggregate participant contributions. The Company matches 50% of the employee
contributions up to a maximum of 3% of employee compensation. Discretionary profit-sharing
contributions made by the Company, if any, are determined annually by the Board of Directors.
Participants are 100% vested in discretionary profit-sharing and matching contributions made by the
company after 3 years of service, and are 25% and 50% vested after 1 and 2 years of service,
respectively. There were approximately $ 707,000, $ 681,000 and $ 537,000 in matching contributions
and no discretionary profit-sharing contributions made under this plan for the years ended December
31, 2007, 2006 and 2005, respectively.
Employee Stock Purchase Plan
In February 2001, the Board of Directors of the Company approved the 2001 Non-Qualified Employee
Stock Purchase Plan (ESPP). Under the ESPP, the Company registered 500,000 shares of common
stock under a Form S-8 Registration Statement. The purpose of the ESPP is to enhance employee
interest in the success and progress of the Company by encouraging employee ownership of common
stock of the Company. The ESPP provides the opportunity to purchase the Companys common stock at
a 15% discount to the market price through payroll deductions or lump-sum cash investments. During
2007, 2006 and 2005, 27,961, 8,080 and 5,723 shares of common stock were sold by the Company to its
employees under this Plan for net proceeds of approximately $
112,000, $ 56,000 and $ 67,000,
respectively.
Deferred Compensation Plan
In February 2002, the Board of Directors of the Company approved the Executive Non-Qualified
Deferred Compensation Plan (the Plan) effective August 15, 2002 covering any executive-level
employee of the Company as designated by the Board of Directors. Participants can defer up to 75%
of their base salary and quarterly sales bonus and up to 100% of their annual performance-based
bonus. The Company matches 50% of employee deferrals up to 10% of base salary and bonus
compensation. The maximum total match by the company cannot exceed 5% of total base and bonus
compensation. Participants are vested 20% each year, with 100% vesting after 5 years of service.
There were approximately $ 332,000, $ 417,000 and $ 311,000 in matching contributions under the Plan
for the years ended December 31, 2007, 2006 and 2005, respectively.
The deferred compensation liability is a non-current liability recorded at the fair value of the
amount owed to the deferred compensation plan participants, with changes in the fair value of such
amounts recognized as a compensation expense in the statement of operations. The Company invests
amounts contributed by the deferred compensation plan participants and the associated Company
matching contributions in company-owned life insurance (COLI) policies, of which the cash
surrender value is included in the caption line item Other assets on the consolidated balance
sheet.
The Plan has a cash surrender value of $ 3,482,000 and a deferred compensation liability of
$ 5,162,000 as of December 31, 2007.
Page F-49 of F-93
15. SHARE-BASED COMPENSATION:
Prior to January 1, 2006, the Company recognized stock-based compensation expense in accordance
with the provisions of APB 25 and related interpretations. Under APB 25, if the exercise price of
options granted was equal to the fair value of the underlying shares of common stock on the date of
grant, compensation expense was not recognized.
On January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective method.
Under this method, the Company recognizes share-based compensation expense for all outstanding
options not fully vested as of the adoption date and for all share-based compensations awards,
classified as equity, granted or modified after the adoption date based on the fair value of the
awards on the grant date, net of estimated forfeitures. Accordingly, prior periods have not been
restated.
1995 Stock Incentive Plan
In 1995, the Companys Board of Directors adopted the 1995 Stock Incentive Plan (the 1995 Plan).
Under the 1995 Plan, 61,100, 66,100, and 66,250 stock options were outstanding at December 31,
2007, 2006 and 2005, respectively.
1996 Stock Option Plan
In September 1996, the Company adopted the 1996 Stock Option Plan (the 1996 Plan). The 1996 Plan
provides for the granting of stock options to employees and consultants of the Company. Stock
options granted under the 1996 Plan may be either incentive stock options or non-qualified stock
options. Incentive stock options may be granted only to Company employees (including officers and
directors who are also employees). Non-qualified stock options may be granted to Company employees
and consultants. The Company has reserved 500,000 shares of Common Stock for issuance under the
1996 Plan. Under the 1996 Plan, 196,166, 206,173, and 206,173 stock options were outstanding at
December 31, 2007, 2006 and 2005, respectively.
1999 Pre-Merger Plan
In April 1999, the Company adopted the 1999 Equity Incentive Plan (the 1999 Pre-Merger Plan).
The 1999 Pre-Merger Plan reserves for issuance of 1,000,000 shares of common stock for issuance
pursuant to stock option grants and stock grants. Under the 1999 Pre-Merger Plan, 412,488 stock
options were outstanding at December 31, 2007, 2006 and 2005.
Impax Laboratories, Inc. 1999 Equity Incentive Plan
The Companys 1999 Equity Incentive Plan was adopted by the Companys Board of Directors in
December 1999. In October 2000, the Companys stockholders approved an increase in the aggregate
number of shares of common stock to be issued pursuant to the Companys 1999 Equity Incentive Plan
from 2,400,000 to 5,000,000 shares. Under the 1999 Equity Incentive Plan, 2,724,229, 2,623,388,
and 2,616,951 stock options were outstanding at December 31, 2007, 2006 and 2005, respectively.
Impax Laboratories, Inc. 2002 Equity Incentive Plan
The 2002 Equity Incentive Plan was adopted by the Companys Stockholders in May 2002. The
aggregate number of shares of common stock for issuance pursuant to stock option grants and
restricted stock awards was increased by the Companys Board of Directors from 4,000,000 shares to
6,500,000 shares during 2007. Under the 2002 Equity Incentive Plan, stock options outstanding were
5,653,778, and 3,830,022 and 3,850,439 at December 31, 2007, 2006 and 2005, respectively, and
restricted stock awards outstanding were 270,341 at December 31, 2007 and 0 at December 31, 2006
and 2005.
Page F-50 of F-93
The stock option activity for all of the Companys equity compensation plans noted above, is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
Number of Shares
|
|
Price
|
Stock Options
|
|
Under Option
|
|
per Share
|
Outstanding at December 31, 2004
|
|
|
6,017,394
|
|
|
$
|
9.94
|
|
Options granted
|
|
|
1,508,543
|
|
|
$
|
11.20
|
|
Options exercised
|
|
|
(74,449
|
)
|
|
$
|
5.08
|
|
Options forfeited
|
|
|
(299,187
|
)
|
|
$
|
14.72
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
7,152,301
|
|
|
$
|
10.06
|
|
Options granted
|
|
|
291,000
|
|
|
$
|
6.85
|
|
Options exercised
|
|
|
(8,613
|
)
|
|
$
|
4.21
|
|
Options forfeited
|
|
|
(296,517
|
)
|
|
$
|
21.38
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
7,138,171
|
|
|
$
|
9.46
|
|
Options granted
|
|
|
1,991,678
|
|
|
$
|
11.34
|
|
Options exercised
|
|
|
(20,719
|
)
|
|
$
|
2.28
|
|
Options forfeited
|
|
|
(61,369
|
)
|
|
$
|
8.38
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
9,047,761
|
|
|
$
|
9.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2007
|
|
|
8,862,927
|
|
|
$
|
9.87
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2007
|
|
|
6,884,983
|
|
|
$
|
9.57
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, stock options outstanding, vested and expected to vest, and exercisable
had average remaining contractual lives of 6.98 years, 6.92 years, and 5.99 years, respectively.
Also, as of December 31, 2007, stock options outstanding, vested and expected to vest, and
exercisable each had aggregate intrinsic values of $ 25,994,000, $ 25,991,000, and $ 25,028,000,
respectively.
The Company grants restricted stock to certain eligible employees as a component of its long-term
incentive compensation program. The restricted stock award grants are made in accordance with the
Companys 2002 Equity Incentive Plan, as amended and restated, and typically specify, shares of
restricted stock are not issued until they vest. The restricted stock awards vest ratably over a
four year period from the date of grant. A summary of the non-vested restricted stock awards is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Non-Vested
|
|
Weighted
|
|
|
Restricted
|
|
Average
|
|
|
Stock
|
|
Grant Date
|
Restricted Stock Awards
|
|
Awards
|
|
Fair Value
|
Non-vested at December 31, 2006
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
272,678
|
|
|
$
|
11.45
|
|
Vested
|
|
|
|
|
|
$
|
|
|
Forfeited
|
|
|
(2,337
|
)
|
|
$
|
11.48
|
|
Non-vested at December 31, 2007
|
|
|
270,341
|
|
|
$
|
11.45
|
|
As of December 31, 2007, the Company had 442,074 shares available for issuance of either stock
options or restricted stock awards, including 422,939 shares from the 2002 Equity Incentive Plan
and 19,135 from the 1999 Equity Incentive Plan.
Page F-51 of F-93
As of December 31, 2007, the Company had total unrecognized share-based compensation expense, net
of estimated forfeitures, of $ 15,751,000 related to all of its share-based awards, which will be
recognized over a weighted average period of 3.5 years. The intrinsic value of options exercised
during the years ended December 31, 2007 and 2006 was $ 178,000 and $ 42,000, respectively. The
total fair value of restricted shares which vested during the years ended December 31, 2007 and
2006 was $ 0.
The Company estimated the fair value of each stock option award on the grant date using the
Black-Scholes Merton option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Volatility (range)
|
|
|
67.7%-75.2
|
%
|
|
|
76.2%-76.3
|
%
|
|
|
74.9%-78.2
|
%
|
Volatility (weighted average)
|
|
|
69.9
|
%
|
|
|
76.3
|
%
|
|
|
75.7
|
%
|
Risk-free interest rate (weighted average)
|
|
|
4.0
|
%
|
|
|
4.7
|
%
|
|
|
4.1
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
6.07
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Weighted average grant date fair value per option
|
|
$
|
7.43
|
|
|
$
|
4.91
|
|
|
$
|
7.83
|
|
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. 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 we have never paid cash
dividends on our common stock, and we have no present intention to pay cash dividends. Options
granted under each of the above plans vest from three to five years and have a term of ten years.
The Companys shares of common stock traded on the Pink Sheets beginning in August 2005 through
December 31, 2007. The Companys assessment is there was sufficient trading volume and liquidity
in the Companys shares to support the calculation of a reasonable estimate of the fair value of
employee stock options granted during this period.
As a result of the adoption of SFAS 123(R), the amount of share-based compensation expense
recognized by the Company is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
(in $000s)
|
|
2007
|
|
|
2006
|
|
Cost of revenues
|
|
$
|
418
|
|
|
$
|
168
|
|
Research and development
|
|
|
563
|
|
|
|
236
|
|
Selling, general and administrative
|
|
|
532
|
|
|
|
279
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,513
|
|
|
$
|
683
|
|
|
|
|
|
|
|
|
The after tax impact of recognizing the share-based compensation expense related to SFAS 123R on
basic and diluted earnings per common share was $ 0.02 and $ 0.01 for the years ended December 31,
2007 and 2006, respectively. The adoption of SFAS No. 123(R) had no effect on our cash flows from
operations or cash flows from financing activities. The Company has not recognized any tax
benefits during 2007, 2006 or 2005 related to share-based compensation costs because options issued
by the Company have been designated incentive stock options and there have been no disqualifying
dispositions of options exercised.
The Companys policy is to issue new shares to satisfy stock option exercises and share unit
conversions pursuant to restricted share awards. There were no modifications to any stock options
during the years ended December 31, 2007, 2006 or 2005.
Page F-52 of F-93
The pro forma effect of recognizing the estimated fair value of share-based employee compensation
for the year ended December 31, 2005, had the Company applied the fair value provisions of SFAS No.
123(R) is as follows:
|
|
|
|
|
(in $000s, except per share amounts)
|
|
2005
|
|
Net loss as reported
|
|
$
|
(5,780
|
)
|
Add: Stock-based employee compensation included
in reported net loss net of related tax effects
|
|
|
|
|
|
|
|
|
|
Deduct: Total share-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
|
|
|
(36,271
|
)
|
|
|
|
|
|
|
|
|
|
Net loss pro forma
|
|
$
|
(42,051
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
Basic as reported
|
|
$
|
(0.10
|
)
|
|
|
|
|
Basic pro forma
|
|
$
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
(0.10
|
)
|
|
|
|
|
Diluted pro forma
|
|
$
|
(0.71
|
)
|
|
|
|
|
On December 1, 2005, the Company accelerated the vesting of all outstanding employee stock options
having an exercise price less than the closing market price of the Companys common stock on this
date. The acceleration resulted in the vesting of 2,672,980 employee stock options having an
estimated fair value of $ 25,306,000 which would have been recognized as share-based compensation
expense in future periods under the provisions of SFAS No. 123(R).
Page F-53 of F-93
16. STOCKHOLDERS EQUITY/ (DEFICIT)
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 of
the Company, 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 Companys 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 2007, 2006 and 2005, 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.
Page F-54 of F-93
17. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net earnings by the weighted average common
shares outstanding for the period. Diluted earnings per share is computed by dividing net income
(loss) by the weighted average common shares outstanding adjusted for the dilutive effect of stock
options, restricted stock awards, stock purchase warrants, and convertible debt, excluding
anti-dilutive shares.
A reconciliation of basic and diluted earnings per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in $000s except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
$
|
125,925
|
|
|
$
|
(12,044
|
)
|
|
$
|
(5,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
|
58,810,452
|
|
|
|
58,996,365
|
|
|
|
58,955,664
|
|
Effect of dilutive options and
and common stock purchase warrants
|
|
|
2,407,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average
common shares outstanding
|
|
|
61,217,470
|
|
|
|
58,996,365
|
|
|
|
58,955,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
2.14
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
2.06
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
The following stock options and convertible debt were excluded from the computation of diluted net
income (loss) per common share as their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in $000s except per share amounts)
|
|
2007
|
|
2006
|
|
2005
|
Stock options
|
|
|
1,986,978
|
|
|
|
3,601,285
|
|
|
|
1,887,025
|
|
Assumed conversion of 1.25% debentures
|
|
|
|
|
|
|
|
|
|
|
1,691,594
|
|
In November 2004, the EITF reached consensus on Issue 04-8, The Effect of Contingently Convertible
Instruments on Diluted Earnings per Share (EITF 04-08) This Issue requires the inclusion of
convertible shares for contingently convertible instruments in the calculation of diluted EPS
regardless of whether the market price contingency has been met, if the effect is dilutive. The
Issue is effective for periods ending after December 15, 2004 and requires the restatement of
previously reported EPS. The Company followed the guidance in EITF 04-08, however, the 3.5%
Debentures have nonetheless not been included in diluted EPS because the principal amount of the
debentures must be settled in cash, and since the Companys share price is less than the conversion
price for all periods presented, there is no dilutive impact of a conversion premium. The 1.25%
Debentures are included in diluted EPS, because of a share-settlement requirement, for periods in
which their inclusion would be dilutive.
Page F-55 of F-93
18. SEGMENT INFORMATION
The Company has two reportable segments, referred to as the Global Pharmaceuticals Division
(Global Division) and the Impax Pharmaceutical Division (Impax Division). The Company
currently markets and sells product within the continental United States and the Commonwealth of
Puerto Rico
The Global Division develops, manufactures, sells, and distributes generic pharmaceutical products,
through three sales channels, including: the Global sales channel, for sales of generic
prescription (Rx) products, directly to wholesalers, large retail drug chains, and others; the
RX Partner sales channel, for generic prescription (Rx) products sold through unrelated
third-party pharmaceutical entities pursuant to alliance agreements; and, the OTC Partner sales
channel, for over-the-counter (OTC) products sold through unrelated third-party pharmaceutical
entities pursuant to alliance agreements.
The Companys 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 co-promotion through a
direct sales force focused on marketing to physicians, primarily in the CNS community,
pharmaceutical products developed by other unrelated third-party pharmaceutical entities
The Companys chief operating decision maker evaluates the financial performance of the Companys
segments based upon segment income or (loss) before income taxes. Items below income 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. Accounting policies for the Companys segments are the
same as those described above in the Summary of Significant Accounting Policies. The Company has
no inter-segment revenue.
The tables below present segment information reconciled to total Company 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
|
Year Ended December 31, 2007
|
|
Division
|
|
Division
|
|
and Other
|
|
Company
|
Revenues, net
|
|
$
|
260,994
|
|
|
$
|
12,759
|
|
|
$
|
|
|
|
$
|
273,753
|
|
Cost of revenues
|
|
|
96,829
|
|
|
|
10,827
|
|
|
|
|
|
|
|
107,656
|
|
Research and development
|
|
|
31,170
|
|
|
|
8,822
|
|
|
|
|
|
|
|
39,992
|
|
Patent Litigation
|
|
|
10,025
|
|
|
|
|
|
|
|
|
|
|
|
10,025
|
|
Income (loss) before income taxes
|
|
$
|
118,964
|
|
|
$
|
(8,585
|
)
|
|
$
|
(33,271
|
)
|
|
$
|
77,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
Impax
|
|
Corporate
|
|
Total
|
Year Ended December 31, 2006
|
|
Division
|
|
Division
|
|
and Other
|
|
Company
|
Revenues, net
|
|
$
|
128,812
|
|
|
$
|
6,434
|
|
|
$
|
|
|
|
$
|
135,246
|
|
Cost of revenues
|
|
|
66,675
|
|
|
|
5,573
|
|
|
|
|
|
|
|
72,248
|
|
Research and development
|
|
|
24,362
|
|
|
|
5,273
|
|
|
|
|
|
|
|
29,635
|
|
Patent Litigation
|
|
|
9,693
|
|
|
|
|
|
|
|
|
|
|
|
9,693
|
|
Income (loss) before income taxes
|
|
$
|
25,781
|
|
|
$
|
(6,208
|
)
|
|
$
|
(31,477
|
)
|
|
$
|
(11,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
Impax
|
|
Corporate
|
|
Total
|
Year Ended December 31, 2005
|
|
Division
|
|
Division
|
|
and Other
|
|
Company
|
Revenues, net
|
|
$
|
112,400
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
112,400
|
|
Cost of revenues
|
|
|
58,435
|
|
|
|
|
|
|
|
|
|
|
|
58,435
|
|
Research and development
|
|
|
22,384
|
|
|
|
3,711
|
|
|
|
|
|
|
|
26,095
|
|
Patent Litigation
|
|
|
7,734
|
|
|
|
|
|
|
|
|
|
|
|
7,734
|
|
Income (loss) before income taxes
|
|
$
|
19,992
|
|
|
$
|
(3,711
|
)
|
|
$
|
(21,872
|
)
|
|
$
|
(5,591
|
)
|
Page F-56 of F-93
19. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, warehouse and laboratory facilities under non-cancelable operating
leases through January 2015. Rent expense for the years ended December 31, 2007, 2006 and 2005 was
$ 1,251,000, $ 970,000 and $ 927,000, respectively. The Company recognizes rent expense on a
straight-line basis over the lease period.
The Company also leases certain equipment under various non-cancelable operating leases with
various expiration dates through 2012. Future minimum lease payments under the non-cancelable
operating leases are as follows:
|
|
|
|
|
|
|
Year Ended
|
|
(in $000s)
|
|
December 31,
|
|
2008
|
|
$
|
1,278
|
|
2009
|
|
|
1,091
|
|
2010
|
|
|
866
|
|
2011
|
|
|
657
|
|
2012
|
|
|
617
|
|
Thereafter
|
|
|
1,478
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
5,987
|
|
|
|
|
|
Purchase Order Commitments
The Company had approximately $ 12,013,000 of open purchase order commitments, primarily for raw
materials, as of December 31, 2007.
Taiwan Facility Construction
The Company currently has under construction a facility in Taiwan, R.O.C., which is intended to be
utilized for manufacturing, research and development, warehouse, and administrative space, and to
be operational in 2010.
In conjunction with the construction of this facility, the Company has entered into several
contracts, amounting to an aggregate of approximately $ 853,000 as of December 31, 2007 and
$ 16,519,000 as of June 30, 2008. As of December 31, 2007 and June 30, 2008, the Company had
remaining commitments under these contracts of approximately $ 422,000 and $ 8,552,000, respectively.
Page F-57 of F-93
20. 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 rights. One or more patents typically cover most of the
brand-name controlled-release 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 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
filings.
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 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 twelve products covered by the Teva
Agreement, including: (i) for the six products with ANDAs already filed with the FDA at the time
the Teva Agreement was signed, Teva will pay 50% of the fees and costs in excess of $ 7.0 million;
(ii) for three of the products with ANDAs filed since the Teva Agreement was signed, Teva will pay
45% of the fees and costs; and, (iii) for the remaining three products, Teva will pay 50% of the
fees and costs. The Company is responsible for the remaining fees and costs for these twelve
products not otherwise the responsibility of Teva.
The Company is responsible for all of the patent litigation fees and costs associated with current
and future products not otherwise under 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
because of the uncertainties inherent in patent litigation, 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 F-58 of F-93
AstraZeneca AB et al. v. Impax Laboratories (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 the Companys product until expiration of its 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 commenced commercial sales of the product under the terms and conditions of the
Teva Agreement. 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. On May 30, 2007, the court found the Companys 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. On August 20, 2008,
the U.S. Court of Appeals for the Federal Circuit affirmed the lower court decision of infringement
and validity. The Company has filed a petition for rehearing en banc with the Federal Circuit. If
the Company or Teva are not ultimately successful in establishing invalidity or non-infringement,
either in the present suit or the separate suit against Teva, the court may also award monetary
damages associated with Tevas commercial sale of the Companys omeprazole products. Under the
Teva Agreement, the Company would be responsible for monetary damages awarded against Teva up to a
specified level, beyond which, monetary damages would be Tevas responsibility.
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 (No. 02-CV-1322) 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 asserts defenses to the claims based on non-infringement and
invalidity. In June 2004, the court granted the Company motion for summary judgment of
non-infringement with respect to two of the patents and, in May 2005, granted summary judgment of
invalidity with respect to a third patent. 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.
Page F-59 of F-93
Impax Laboratories, Inc. v. Aventis Pharmaceuticals, Inc. (Riluzole)
In June 2002, the Company filed a suit against Aventis Pharmaceuticals, Inc. in the U.S. District
Court for the District of Delaware, seeking a declaration the Companys filing of an ANDA for
Riluzole 50mg tablets, generic to Rilutek®, for treatment of patients with amyotrophic lateral
scleroses (ALS) did not infringe claims of Aventiss patent relating to the drug and a declaration
Aventis patent is invalid. Aventis filed counterclaims for infringement, and, in December 2002,
the district court granted Aventis motion for a preliminary injunction enjoining the Company from
marketing any pharmaceutical product or compound containing Riluzole for the treatment of ALS. In
September 2004, the district court found Aventis patent not invalid and infringed by the Companys
proposed product. In November 2006 the Court of Appeals for the Federal Circuit vacated the
district courts finding Aventis patent was not invalid and remanded for further findings on this
issue, and, in June 2007, the district court again found Aventis patent is not invalid. In
October 2008, the Court of Appeals for the Federal Circuit affirmed the district court decision.
The Company is evaluating its options following this appellate decision. There is a substantial
likelihood the court will enter a permanent injunction enjoining the Company from marketing
Riluzole 50mg tablets for the treatment of ALS until the expiration of Aventis patent in June
2013.
Abbott Laboratories v. Impax Laboratories, Inc. (Fenofibrate)
The Company was a defendant in patent-infringement litigation commenced in January 2003 by Abbott
Laboratories (Abbott) and Fournier Industrie et Sante (Fournier) in the U.S. District Court
for the District of Delaware relating to Company ANDAs for Fenofibrate Tablets, 160mg and 54mg,
generic to TriCor®. In March 2005 the Company asserted antitrust counterclaims. By agreement
between the parties, in July 2005 the court entered an order dismissing the patent-infringement
claims, under which Abbott and Fournier agreed to reimburse the Company for legal fee expense, and
leaving the Companys antitrust counterclaim intact.
On July 27, 2005, the court held a status conference with all counsel involved in the antitrust
litigations, and indicated the courts intention to put these matters on a complex litigation
track. On May 26, 2006, the court denied Abbott and Fourniers motion to dismiss the antitrust
counterclaims. On April 3, 2008, the Court issued an order bifurcating and staying damages issues,
and setting a schedule for trial of liability issues. A jury trial is scheduled to begin the week
of November 10, 2008.
Endo Pharm. Inc. and Penwest Pharm. Co. v. Impax Laboratories, Inc. (Oxymorphone)
In November 2007, Endo Pharmaceuticals Inc. and Penwest Pharmaceuticals Co. (collectively, Endo)
filed suit against the Company in the U.S. District Court for the District of Delaware, requesting
a declaration the Companys Paragraph IV Notices with respect to the Companys ANDA for Oxymorphone
HCl Extended Release Tablets, generic to Opana ER®, are null and void and, in the alternative,
alleging patent infringement in connection with the filing of that 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 the plaintiffs asserted additional infringement
claims with respect to the Companys amended ANDA, which added 7.5mg, 15mg and 30mg strengths of
the product. The Company has filed an answer and counterclaims. Discovery is in the early stages,
and no trial date has been set.
Impax Laboratories, Inc. v. Medicis Pharmaceutical Corp. (Minocycline)
In January 2008, the Company filed a complaint against Medicis Pharmaceutical Corp. in the U.S.
District Court for the Northern District of California, seeking a declaratory judgment the
Companys filing of its ANDA relating to minocycline hydrochloride extended release tablets, a
generic version of Medicis Solodyn® product, did not infringe any valid claim of U.S. Patent No.
5,908,838. Medicis filed a motion to dismiss the complaint for lack of subject matter
jurisdiction. On April 16, 2008, the District Court granted Medicis motion to dismiss, and
judgment was entered on April 22, 2008. The Company has filed a notice of appeal to the United
States Court of Appeals for the Federal Circuit. Briefing for the appeal is currently scheduled
for the third and fourth quarter of 2008.
Page F-60 of F-93
Pfizer Inc., et al. 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 released capsules, 4 mg, generic to Detrol LA®, infringes three Pfizer patents. The
Company has filed an answer and counterclaims seeking declaratory judgment of non-infringement,
invalidity and/or unenforceability with respect to the patents at suit. In April 2008, the case
was transferred to the U.S. District Court for the District of New Jersey. On September 3, 2008, a
second complaint was filed alleging infringement based on the Companys ANDA amendment adding the
2mg strength. Discovery is in the early stages, and no trial date has been set
Boehringer Ingelheim Pharmaceuticals, et al. v. Impax Laboratories (Tamsulosin)
In July 2008 Boehringer Ingelheim Pharmaceuticals Inc. and Astellas Pharma Inc. filed a complaint
against the Company in the U.S. District Court for the Northern District of California, alleging
the Companys filing of its ANDA relating to tamsulosin hydrochloride capsules, 0.4 mg, generic to
Flomax®, infringes plaintiffs patent. After filing its answer and counterclaim, the Company filed
a summary judgment motion for patent invalidity. The summary judgment hearing is scheduled for
November 2008.
Purdue Pharma Products L.P, et al. v. Impax Laboratories (Tramadol)
In August 2008, Purdue Pharma Products L.P., Napp Pharmaceutical Group LTD., Biovail Laboratories
International, SRL, and Ortho-McNeil-Janssen-Pharmaceuticals, Inc., filed suit against the Company
in the U.S. District Court for the District of Delaware, alleging patent infringement for the
filing of its ANDA relating to tramadol hydrochloride extended-release tablets, 100 mg, generic to
Ultram® ER.
Other Litigation Related to the Companys 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 Court
granted in part and denied in part a Company motion to dismiss the complaint, as well as the
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. The Company has answered the
complaint, and discovery is proceeding.
Securities Litigation
The Company, four of its Directors, and two former officers, are defendants in several class
actions filed in the United States District Court for the Northern District of California, all of
which have since been consolidated as case No. 04- 4808-JW. These actions, brought on behalf of
all purchasers of shares of Company common stock between May 5 and November 3, 2004, allege the
Company and the individual defendants, in violation of the antifraud provisions of the federal
securities laws, artificially inflated the market price of the stock during this period by filing
false financial statements for the first and second quarters of 2004, based upon the Companys
subsequent restatement of its results for those periods. The court twice granted the Company
motions to dismiss the complaint, both times with leave to amend, but denied the Companys motion
to dismiss a fourth amended complaint as well as two motions for reconsideration. The case is now
in discovery phase. In August 2008, the Company filed a petition for a writ of mandamus asking the
U.S. Court of Appeals for the Ninth Circuit to direct the district court to dismiss the complaint.
Page F-61 of F-93
21. SUBSEQUENT EVENTS
The
following events occurred after December 31, 2007 through and
including October 10, 2008:
|
|
In January 2008, the Company announced it received a non-approvable letter from the U.S.
Food and Drug Administration (FDA) concerning its new drug application (NDA) and subsequent
submissions for Vadova(R) (carbidopa /levodopa extended release) tablets. The FDAs action was
primarily based on unresolved issues relating to product nomenclature and its belief of a
likelihood of medication errors resulting from confusion of Vadova with other marketed forms
of carbidopa /levodopa. On April 14, 2008, the Company announced it would cease work on the
current formulation of this product.
|
|
|
|
On May 23, 2008, the Securities and Exchange Commission issued an order to revoke the
registration statement covering the Companys common shares and, accordingly, public trading
in such common shares ceased immediately. It is the Companys intention to effect the
registration of the shares of the Companys common stock by filing this Form 10.
|
|
|
|
During the period January 2008 to their expiration date in May 2008, all remaining
outstanding common stock purchase warrants were exercised in several cashless exercise
transactions, resulting in the issuance of 106,642 shares of the Companys common stock. The
Company has no other common stock purchase warrants outstanding.
|
|
|
|
In July 2008, the Company entered into an employment separation agreement with a former
employee, which provided for the following: the former employee resigned from the Company
effective August 1, 2008; the former employees September 1, 2006 employment agreement between
the Company and the former employee was terminated; and, the former employees rights with
respect to employee stock options to purchase 60,000 shares of Company common stock and the
60,000 restricted shares of Company common stock granted and to be granted under the former
employees employment agreement, as well as the rights under fully vested options to purchase
172,500 shares of the Companys common stock separately held by the former employee, were
terminated. Under the separation agreement, the Company agreed to make separation payments to
the former employee consisting of a single $ 620,000 cash payment and 94,705 shares of the
Companys common stock. The separation agreement also subjects the former employee to
non-disclosure and non-disparagement provisions and prohibits the former employee from
soliciting Company employees to leave the Companys employment. The Company and the former
employee also executed mutual releases of any claim each might have against the other arising
out of the former employees employment.
|
|
|
|
|
In August and September 2008, the Company repurchased at a discount an aggregate of
$ 62,250,000 face-value principal amount of its 3.5% Convertible Senior Subordinated Debentures
at the request of the holders. The Company paid $ 59,916,000, plus accrued interest of
$ 433,000, for the repurchased 3.5% Debentures. Proceeds to fund the repurchase of the
debentures were generated from the liquidation of the Companys short-term investments. The
remaining $ 12,750,000 principal amount of the 3.5% Debentures is subject to repurchase by the
Company at 100% of the principal amount on June 15, 2009, at the option of the debenture
holders.
|
|
|
|
|
In June 2008, the Company entered into an agreement with Wyeth settling a lawsuit alleging
patent infringement related to a Company ANDA for generic versions of Effexor XR 37.5mg and
75mg and 150mg capsules. Under the terms of the settlement, Wyeth granted to the Company a
license permitting the Company to launch its generic capsule formulation of the Effexor XR
products on or after June 1, 2011, subject to earlier launch in limited circumstances, but in
no event earlier than January 1, 2011. The Company will pay Wyeth a royalty on sales of this
generic product. The parties have also entered into a co-promotion agreement under which the
Company will provide physician detailing services, for a product to be named by Wyeth, in
exchange for a fee for each physician detail service performed.
|
Page F-62 of F-93
22. SUPPLEMENTARY FINANCIAL INFORMATION
(unaudited)
Selected (unaudited) quarterly financial information for the year 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter Ended:
|
|
(in
$000s except share and per share amounts)
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, gross
|
|
$
|
32,478
|
|
|
$
|
33,880
|
|
|
$
|
42,289
|
|
|
$
|
39,852
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks
|
|
|
7,202
|
|
|
|
7,419
|
|
|
|
10,559
|
|
|
|
8,792
|
|
Rebates
|
|
|
3,375
|
|
|
|
3,520
|
|
|
|
4,306
|
|
|
|
4,767
|
|
Returns
|
|
|
968
|
|
|
|
1,291
|
|
|
|
1,639
|
|
|
|
1,565
|
|
Other credits
|
|
|
1,174
|
|
|
|
1,336
|
|
|
|
1,191
|
|
|
|
1,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
|
19,759
|
|
|
|
20,314
|
|
|
|
24,594
|
|
|
|
23,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RX Partner
|
|
|
8,278
|
|
|
|
33,296
|
|
|
|
81,634
|
|
|
|
37,906
|
|
OTC Partner
|
|
|
2,408
|
|
|
|
2,305
|
|
|
|
4,081
|
|
|
|
3,072
|
|
Promotional Partner
|
|
|
3,201
|
|
|
|
3,279
|
|
|
|
3,104
|
|
|
|
3,175
|
|
Other
|
|
|
17
|
|
|
|
9
|
|
|
|
7
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
33,663
|
|
|
|
59,203
|
|
|
|
113,420
|
|
|
|
67,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,677
|
|
|
|
30,902
|
|
|
|
87,428
|
|
|
|
34,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,770
|
)
|
|
$
|
83,792
|
|
|
$
|
43,402
|
|
|
$
|
6,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
(0.13
|
)
|
|
$
|
1.42
|
|
|
$
|
0.74
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (diluted)
|
|
$
|
(0.13
|
)
|
|
$
|
1.37
|
|
|
$
|
0.71
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,794,020
|
|
|
|
58,807,656
|
|
|
|
58,818,971
|
|
|
|
58,821,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
58,794,020
|
|
|
|
61,193,296
|
|
|
|
61,293,615
|
|
|
|
61,301,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly computations of (unaudited) net income (loss) 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 full year.
Included in the (unaudited) quarterly financial information shown above are the following
transactions, summarized as follows:
-
|
|
As more fully discussed elsewhere in this registration statement, the
settlement of a patent infringement lawsuit resulted in the Company
being granted a license permitting it to manufacture and sell its
oxycodone product (under the terms of the DAVA Agreement), resulting
in the Companys determination to shorten the revenue recognition
time-period of the DAVA Agreement. The license authorized the Company
to sell a fixed amount of its product (under a sub-license granted to
DAVA) through June 2007. The increased amount of revenue recognized
in the third quarter of 2007, resulted from these product sales over
the resulting revised shorter recognition period.
|
|
-
|
|
As more fully discussed elsewhere in this registration statement, at
June 30, 2007, the Company reversed the valuation allowance on the
deferred tax asset, resulting in a significant tax benefit for the
second quarter of 2007.
|
Page F-63 of F-93
22. SUPPLEMENTARY FINANCIAL INFORMATION (
unaudited
), continued
Selected (unaudited) quarterly financial information for the year 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Quarter Ended:
|
|
(in $000s except share and per share amounts)
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, gross
|
|
$
|
25,949
|
|
|
$
|
35,449
|
|
|
$
|
32,308
|
|
|
$
|
34,287
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks
|
|
|
3,955
|
|
|
|
7,844
|
|
|
|
6,691
|
|
|
|
8,174
|
|
Rebates
|
|
|
2,806
|
|
|
|
3,834
|
|
|
|
3,494
|
|
|
|
3,722
|
|
Returns
|
|
|
3,115
|
|
|
|
1,436
|
|
|
|
1,613
|
|
|
|
1,056
|
|
Other credits
|
|
|
1,459
|
|
|
|
1,247
|
|
|
|
1,565
|
|
|
|
(2,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
|
14,614
|
|
|
|
21,088
|
|
|
|
18,945
|
|
|
|
23,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RX Partner
|
|
|
5,059
|
|
|
|
5,631
|
|
|
|
5,990
|
|
|
|
20,129
|
|
OTC Partner
|
|
|
2,632
|
|
|
|
3,025
|
|
|
|
3,389
|
|
|
|
4,736
|
|
Promotional Partner
|
|
|
|
|
|
|
|
|
|
|
3,207
|
|
|
|
3,227
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
22,305
|
|
|
|
29,744
|
|
|
|
31,546
|
|
|
|
51,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,985
|
|
|
|
10,545
|
|
|
|
14,536
|
|
|
|
31,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,468
|
)
|
|
$
|
(9,722
|
)
|
|
$
|
(3,259
|
)
|
|
$
|
11,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (diluted)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,996,087
|
|
|
|
59,022,528
|
|
|
|
59,024,504
|
|
|
|
58,972,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
58,996,087
|
|
|
|
59,022,528
|
|
|
|
59,024,504
|
|
|
|
60,369,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly computations of net income (loss) 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 full year.
Included in the (unaudited) quarterly financial information shown above is the following
transaction, summarized as follows:
-
|
|
The Company launched its bupropion 300mg extended release product upon
FDA approval of the Companys ANDA in December 2006. The Companys
launch and sales of this product (under the terms of the Teva
Agreement) were made pursuant to an exclusivity transfer and selective
waiver agreement, resulting in the Company being entitled to a six
month period of market exclusivity through June 2008 (see Agreement
with Anchen above).
|
Page F-64 of F-93
Impax Laboratories, Inc.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
25,883
|
|
|
$
|
37,462
|
|
Short-term investments
|
|
|
55,269
|
|
|
|
106,034
|
|
Accounts receivable, net
|
|
|
37,846
|
|
|
|
51,503
|
|
Inventory, net
|
|
|
30,628
|
|
|
|
27,568
|
|
Current portion of deferred product manufacturing costs-alliance agreements
|
|
|
12,844
|
|
|
|
11,923
|
|
Current portion of deferred income taxes
|
|
|
22,350
|
|
|
|
27,376
|
|
Prepaid expenses and other assets
|
|
|
11,505
|
|
|
|
8,592
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
196,325
|
|
|
|
270,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
93,677
|
|
|
|
81,223
|
|
Deferred product manufacturing costs-alliance agreements
|
|
|
91,506
|
|
|
|
82,474
|
|
Deferred income taxes, net
|
|
|
47,137
|
|
|
|
47,937
|
|
Other assets
|
|
|
9,369
|
|
|
|
6,793
|
|
Goodwill
|
|
|
27,574
|
|
|
|
27,574
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
465,588
|
|
|
$
|
516,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
14,528
|
|
|
$
|
69,234
|
|
Accounts payable
|
|
|
15,120
|
|
|
|
16,898
|
|
Accrued expenses
|
|
|
35,450
|
|
|
|
35,838
|
|
Current portion of deferred revenue-alliance agreements
|
|
|
24,316
|
|
|
|
26,381
|
|
Current portion of accrued exclusivity period fee payments due
|
|
|
9,000
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
98,414
|
|
|
|
160,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5% Convertible senior subordinated debentures
|
|
|
|
|
|
|
12,750
|
|
Long-term debt
|
|
|
6,442
|
|
|
|
7,760
|
|
Fair value of common stock purchase warrants
|
|
|
|
|
|
|
2,285
|
|
Deferred revenue-alliance agreements
|
|
|
196,560
|
|
|
|
181,720
|
|
Accrued exclusivity period fee payments due
|
|
|
|
|
|
|
6,000
|
|
Other liabilities
|
|
|
13,539
|
|
|
|
11,426
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
314,955
|
|
|
$
|
382,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.01 par value, 2,000,000 shares authorized,
none outstanding at September 30, 2008 and December 31, 2007
|
|
$
|
|
|
|
$
|
|
|
Common stock, $0.01 par value, 90,000,000 shares authorized,
59,218,937 and 58,822,548 shares issued and outstanding
at September 30, 2008 and December 31, 2007, respectively
|
|
|
595
|
|
|
|
591
|
|
Additional paid-in capital
|
|
|
203,528
|
|
|
|
196,049
|
|
Treasury stock-acquired resulting from achievement of milestone under
the Teva Agreement, 243,729 shares at September 30, 2008
and December 31, 2007
|
|
|
(2,157
|
)
|
|
|
(2,157
|
)
|
Accumulated other comprehensive loss
|
|
|
(685
|
)
|
|
|
(26
|
)
|
Accumulated deficit
|
|
|
(50,648
|
)
|
|
|
(60,290
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
150,633
|
|
|
$
|
134,167
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
465,588
|
|
|
$
|
516,459
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-65 of F-93
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
$
|
70,791
|
|
|
$
|
64,667
|
|
Rx Partner
|
|
|
72,099
|
|
|
|
123,208
|
|
OTC Partner
|
|
|
12,739
|
|
|
|
8,794
|
|
Promotional Partner
|
|
|
9,728
|
|
|
|
9,584
|
|
Other
|
|
|
19
|
|
|
|
33
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
165,376
|
|
|
|
206,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
66,378
|
|
|
|
74,279
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
98,998
|
|
|
|
132,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
43,653
|
|
|
|
26,454
|
|
Patent litigation
|
|
|
4,827
|
|
|
|
8,344
|
|
Selling, general and administrative
|
|
|
36,669
|
|
|
|
27,896
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
85,149
|
|
|
|
62,694
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
13,849
|
|
|
|
69,313
|
|
|
|
|
|
|
|
|
Change in fair value of common stock purchase warrants
|
|
|
59
|
|
|
|
(514
|
)
|
Gain on repurchase of 3.5% debentures
|
|
|
1,319
|
|
|
|
|
|
Other income (expense), net
|
|
|
150
|
|
|
|
(1,316
|
)
|
Interest income
|
|
|
3,282
|
|
|
|
2,786
|
|
Interest expense
|
|
|
(2,403
|
)
|
|
|
(3,098
|
)
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
16,256
|
|
|
|
67,171
|
|
(Provision) benefit for income taxes
|
|
|
(6,614
|
)
|
|
|
52,253
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,642
|
|
|
$
|
119,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.16
|
|
|
$
|
1.95
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,993,633
|
|
|
|
58,806,974
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
60,813,707
|
|
|
|
61,265,898
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-66 of F-93
Impax Laboratories, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(dollars and shares in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accum-
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
ulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Loss
|
|
|
Total
|
|
Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
58,822
|
|
|
$
|
591
|
|
|
$
|
196,049
|
|
|
$
|
(2,157
|
)
|
|
$
|
(60,290
|
)
|
|
$
|
(26
|
)
|
|
$
|
134,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock
purchase warrants, stock options,
and sale of stock under ESPP
|
|
|
321
|
|
|
|
3
|
|
|
|
2,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,381
|
|
Issuance of common stock
|
|
|
76
|
|
|
|
1
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
644
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,458
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(659
|
)
|
|
|
(659
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,642
|
|
|
|
|
|
|
|
9,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
59,219
|
|
|
$
|
595
|
|
|
$
|
203,528
|
|
|
$
|
(2,157
|
)
|
|
$
|
(50,648
|
)
|
|
$
|
(685
|
)
|
|
$
|
150,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,642
|
|
|
$
|
119,424
|
|
Currency translation adjustments
|
|
|
(659
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
8,983
|
|
|
$
|
119,411
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-67 of F-93
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,642
|
|
|
$
|
119,424
|
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,078
|
|
|
|
5,914
|
|
Tax benefit on reversal of valuation allowance on deferred tax asset
|
|
|
|
|
|
|
(81,485
|
)
|
Deferred income taxes
|
|
|
3,774
|
|
|
|
10,445
|
|
Tax benefit related to exercise of employee stock options
|
|
|
|
|
|
|
(10,477
|
)
|
Provision for uncertain tax positions
|
|
|
|
|
|
|
5,963
|
|
Gain on repurchase of 3.5% debentures
|
|
|
(1,319
|
)
|
|
|
|
|
Deferred revenue Rx Partners
|
|
|
82,774
|
|
|
|
199,300
|
|
Deferred product manufacturing costs Rx Partners
|
|
|
(25,405
|
)
|
|
|
(45,312
|
)
|
Deferred revenue recognized Rx Partners
|
|
|
(72,099
|
)
|
|
|
(123,208
|
)
|
Amortization deferred product manufacturing costs Rx Partners
|
|
|
17,153
|
|
|
|
29,840
|
|
Deferred revenue OTC Partners
|
|
|
13,901
|
|
|
|
12,023
|
|
Deferred product manufacturing costs OTC Partners
|
|
|
(13,760
|
)
|
|
|
(10,209
|
)
|
Deferred revenue recognized OTC Partners
|
|
|
(12,739
|
)
|
|
|
(8,794
|
)
|
Amortization deferred product manufacturing costs OTC Partners
|
|
|
12,059
|
|
|
|
7,327
|
|
Deferred revenue Promotional Partners
|
|
|
1,000
|
|
|
|
|
|
Deferred revenue recognized Promotional Partners
|
|
|
(62
|
)
|
|
|
|
|
Payments on exclusivity period fee
|
|
|
(9,000
|
)
|
|
|
(15,450
|
)
|
Payments on accrued litigation settlements
|
|
|
(1,648
|
)
|
|
|
(2,024
|
)
|
Share-based compensation expense
|
|
|
4,458
|
|
|
|
381
|
|
Fair value of shares issued under separation agreement
|
|
|
561
|
|
|
|
|
|
Accretion of interest income on short-term investments
|
|
|
(2,160
|
)
|
|
|
(1,814
|
)
|
Change in fair value of stock purchase warrants
|
|
|
(59
|
)
|
|
|
376
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
13,657
|
|
|
|
5,043
|
|
Inventory
|
|
|
(3,060
|
)
|
|
|
1,593
|
|
Prepaid expenses and other assets
|
|
|
(6,200
|
)
|
|
|
(144
|
)
|
Accounts payable and accrued expenses
|
|
|
753
|
|
|
|
14,613
|
|
Other liabilities
|
|
|
2,113
|
|
|
|
2,440
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
21,412
|
|
|
$
|
115,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
$
|
(195,218
|
)
|
|
$
|
(160,606
|
)
|
Maturities of short-term investments
|
|
|
248,143
|
|
|
|
100,775
|
|
Purchases of property, plant and equipment
|
|
|
(20,873
|
)
|
|
|
(15,704
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
$
|
32,052
|
|
|
$
|
(75,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(65,198
|
)
|
|
|
(186
|
)
|
Tax benefit related to exercise of employee stock options
|
|
|
|
|
|
|
10,477
|
|
Proceeds from exercise of stock options and
purchases under the ESPP
|
|
|
155
|
|
|
|
224
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(65,043
|
)
|
|
$
|
10,515
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(11,579
|
)
|
|
$
|
50,745
|
|
Cash and cash equivalents, beginning of period
|
|
$
|
37,462
|
|
|
$
|
6,399
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
25,883
|
|
|
$
|
57,144
|
|
|
|
|
|
|
|
|
Page F-68 of F-93
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
Cash paid for interest
|
|
$
|
2,558
|
|
|
$
|
2,765
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
5,387
|
|
|
$
|
446
|
|
|
|
|
|
|
|
|
In January 2007 and May 2008, the Company issued 9,388 and 106,642, shares of common stock,
respectively, as the result of a cashless exercise of common stock purchase warrants.
Unpaid vendor invoices of approximately $1,691,000 and $775,000 which are accrued as of September
30, 2008 and 2007, 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 consolidated financial statements.
Page F-69 of F-93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the
United States of America for complete financial statements. In the opinion of management, the accompanying interim financial statements include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Companys financial position, results of operations, and cash flows for the periods presented.
The unaudited interim consolidated financial statements include the accounts of the operating parent company, Impax Laboratories, Inc., its wholly-owned subsidiary, Impax Laboratories (Taiwan) Inc., and a 58.68% equity investment in Prohealth Biotech, Inc., located in Taiwan, R.O.C. All significant intercompany accounts and transactions have been eliminated.
The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included herein, as of December 31, 2007, 2006 and 2005 and for each of the three years ended December 31, 2007, 2006 and 2005. The results of operations for the nine month period ended September 30, 2008 are not necessarily indicative of the results of the Companys operations
for any other interim period or for the entire year ending December 31, 2008.
Page F-70 of F-93
2. INVESTMENTS
Investments consist of commercial paper, corporate bonds and medium-term notes, government agency
obligations and certificates of deposit. The Companys policy is to invest in only high quality
AAA-rate or investment-grade securities. Investments in debt securities are accounted for as
held-to-maturity and are recorded at amortized cost. The Company has historically held all
investments in debt securities until maturity, and the Company has the ability and intent to
continue to hold all investments in debt securities until maturity. All of the Companys
investments have remaining contractual maturities of less than twelve months and are classified as
short-term. Upon sale the Company uses a specific identification method.
A summary of Short-term investments as of September 30, 2008 and December 31, 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(in $000s)
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
September 30, 2008 (unaudited)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Commercial paper
|
|
$
|
14,865
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,865
|
|
Government agency obligations
|
|
|
28,632
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
28,624
|
|
Corporate bonds
|
|
|
10,893
|
|
|
|
|
|
|
|
(47
|
)
|
|
|
10,846
|
|
Asset-backed securities
|
|
|
649
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
635
|
|
Certificates of deposit
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
55,269
|
|
|
$
|
|
|
|
$
|
(69
|
)
|
|
$
|
55,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(in $000s)
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
December 31, 2007
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Commercial paper
|
|
$
|
94,107
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
94,107
|
|
Government agency obligations
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
Corporate bonds
|
|
|
3,202
|
|
|
|
5
|
|
|
|
(8
|
)
|
|
|
3,199
|
|
Asset-backed securities
|
|
|
1,503
|
|
|
|
|
|
|
|
(64
|
)
|
|
|
1,439
|
|
Certificates of deposit
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
106,034
|
|
|
$
|
5
|
|
|
$
|
(72
|
)
|
|
$
|
105,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page F-71 of F-93
3. ACCOUNTS RECEIVABLE
The details of Accounts receivable, net are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
Gross accounts receivable
|
|
$
|
48,614
|
|
|
$
|
60,272
|
|
Less: Rebate reserve
|
|
|
(4,701
|
)
|
|
|
(3,603
|
)
|
Less: Chargeback reserve
|
|
|
(4,062
|
)
|
|
|
(2,977
|
)
|
Less: Other deductions
|
|
|
(2,005
|
)
|
|
|
(2,189
|
)
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
37,846
|
|
|
$
|
51,503
|
|
|
|
|
|
|
|
|
Other deductions include allowance for disputed items, doubtful accounts, and cash discounts.
A roll forward of the chargeback and rebate reserve activity for the nine months ended September
30, 2008 and the year ended December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
September 30,
|
|
|
December 31
|
|
Chargeback reserve
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,977
|
|
|
$
|
4,401
|
|
Provision recorded during the period
|
|
|
34,036
|
|
|
|
33,972
|
|
Credits issued during the period
|
|
|
(32,951
|
)
|
|
|
(35,396
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,062
|
|
|
$
|
2,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
September 30,
|
|
|
December 31
|
|
Rebate reserve
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,603
|
|
|
$
|
3,124
|
|
Provision recorded during the period
|
|
|
13,554
|
|
|
|
15,968
|
|
Credits issued during the period
|
|
|
(12,456
|
)
|
|
|
(15,489
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,701
|
|
|
$
|
3,603
|
|
|
|
|
|
|
|
|
As of
September 30, 2008, the Companys top five customers accounted for 20%, 18%, 18%, 17% and 5% of Gross accounts receivable.
The
Companys top five customers accounted for 18%, 17%, 14%, 11%
and 10% of revenue for the nine months ended September 30, 2008.
Page F-72 of F-93
4. INVENTORY
Inventory, net at September 30, 2008 and December 31, 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
Raw materials
|
|
$
|
14,228
|
|
|
$
|
15,005
|
|
Work in process
|
|
|
1,286
|
|
|
|
1,827
|
|
Finished goods
|
|
|
17,597
|
|
|
|
11,373
|
|
|
|
|
|
|
|
|
Total inventory, net
|
|
$
|
33,111
|
|
|
$
|
28,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Non-current, net
|
|
|
(2,483
|
)
|
|
|
(637
|
)
|
|
|
|
|
|
|
|
inventory Current, net
|
|
$
|
30,628
|
|
|
$
|
27,568
|
|
|
|
|
|
|
|
|
The preceding inventory amounts are net of inventory reserves of $3,430,000 and $3,148,000 at
September 30, 2008 and December 31, 2007, respectively.
Page F-73 of F-93
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
Land
|
|
$
|
2,270
|
|
|
$
|
2,270
|
|
Buildings and improvements
|
|
|
54,310
|
|
|
|
51,287
|
|
Equipment
|
|
|
47,211
|
|
|
|
44,001
|
|
Office furniture and equipment
|
|
|
6,871
|
|
|
|
5,332
|
|
Construction-in-progress
|
|
|
20,606
|
|
|
|
10,323
|
|
|
|
|
|
|
|
|
Property, plant and equipment, gross
|
|
$
|
131,268
|
|
|
$
|
113,213
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(37,591
|
)
|
|
|
(31,990
|
)
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
93,677
|
|
|
$
|
81,223
|
|
|
|
|
|
|
|
|
Depreciation expense was $6,791,000 and $5,563,000 for the nine months ended September 30, 2008 and
2007, respectively.
Page F-74 of F-93
6. ACCRUED EXPENSES
The following table sets forth the Companys accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
Payroll-related expenses
|
|
$
|
11,421
|
|
|
$
|
9,983
|
|
Product returns
|
|
|
13,055
|
|
|
|
14,261
|
|
Shelf stock price protection
|
|
|
509
|
|
|
|
384
|
|
Medicaid rebates
|
|
|
579
|
|
|
|
566
|
|
Royalty expense
|
|
|
191
|
|
|
|
551
|
|
Physician detailing sales force fees
|
|
|
1,800
|
|
|
|
2,096
|
|
Legal and professional fees
|
|
|
4,723
|
|
|
|
3,382
|
|
Litigation settlements
|
|
|
1,149
|
|
|
|
1,555
|
|
Other
|
|
|
2,023
|
|
|
|
3,060
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
35,450
|
|
|
$
|
35,838
|
|
|
|
|
|
|
|
|
Included in accrued payroll-related expenses is $15,000 and $26,000 at September 30, 2008 and
December 31, 2007, respectively, related to post-employment severance-related charges. Included in
other accruals at September 30, 2008 and December 31, 2007 are state income taxes payable amounting
to $0 and $1,638,000, respectively.
A roll
forward of the companys product returns reserve activity for the nine months ended September 30, 2008 and the
year ended December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning balance
|
|
$
|
14,261
|
|
|
$
|
12,903
|
|
Provision related to
sales recorded in the period
|
|
|
3,805
|
|
|
|
5,459
|
|
Credits issued during the period
|
|
|
(5,011
|
)
|
|
|
(4,101
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
13,055
|
|
|
$
|
14,261
|
|
|
|
|
|
|
|
|
Page F-75 of 93
7. INCOME TAXES
The Company calculates its interim income tax provision in accordance with Accounting Principles
Board Opinion No. 28 (APB No. 28) and FASB Interpretation No.18 (FIN No. 18). Accordingly, at the
end of each interim period, the Company makes an estimate of the annual expected effective tax rate
and applies it to its ordinary year-to-date income (loss) before taxes. The effect of changes in
enacted tax laws, tax rates, or tax status is recognized in the interim period in which the change
occurs.
The computation of the annual expected effective tax rate at each interim period requires certain
estimates and assumptions including, but not limited to, the expected operating income (loss)
before taxes for the year, projections of the proportion of income (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 the annual effective tax rate includes
modifications, which were projected for the year, for share-based compensation expense, the
domestic manufacturing deduction, and state research and development tax credits, among others.
The effective tax rate used by the Company does not include a benefit related to the federal
research and development tax credit as the law related to this credit expired on December 31, 2007,
and was not reinstated under law until after the September 30, 2008 balance sheet date.
In the nine months ended September 30, 2008, the Company recorded a tax provision of $6,614,000,
for federal and state income taxes. In the nine months ended September 30, 2007, the Company
recorded a benefit of $52,253,000, of which, included the reversal of the deferred tax asset valuation allowance of
$81,485,000 offset by an accrual of $5,963,000 for uncertain tax positions. The total amount of
unrecognized tax benefits was $6,365,000 and $6,118,000 as of September 30, 2008 and December 31,
2007. Included in the uncertain tax positions reserve is accrued interest expense of $247,000 and
$0 as of September 30, 2008 and December 31, 2007, respectively.
Page F-76 of 93
8. LONG-TERM DEBT
The following table summarizes the Companys long-term debt:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31
,
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
3.5% Convertible senior subordinated
debentures due on June 15, 2012 (1)
|
|
$
|
12,750
|
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
8.17% Term loan Cathay Bank (2)
|
|
|
|
|
|
|
2,215
|
|
7.50% Term loan Cathay Bank (3)
|
|
|
|
|
|
|
2,957
|
|
|
|
|
|
|
|
|
|
|
Subordinated promissory note (4)
|
|
|
8,186
|
|
|
|
9,428
|
|
Software license financing (5)
|
|
|
34
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
|
20,970
|
|
|
|
89,744
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
|
(14,528
|
)
|
|
|
(69,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
6,442
|
|
|
$
|
20,510
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In August and September 2008, the Company repurchased at a discount an aggregate of
$62,250,000 face-value principal amount of its 3.5% Convertible Senior Subordinated
Debentures at the request of the holders. The Company paid $59,916,000, plus $433,000 of
accrued interest expense. Proceeds to fund the repurchase of the 3.5% Debentures were
generated from the liquidation of the Companys short-term investments. The Company recorded
a gain of $1,319,000, net of deferred finance costs of $1,015,000, on the repurchase. The
remaining $12,750,000 principal amount of the 3.5% Debentures is subject to repurchase by the
Company at 100% of the principal amount on June 15, 2009, at the option of the holders.
|
|
(2)
|
|
Term loan payable at 8.17% to Cathay Bank in 83 monthly installments of $19,540
commencing June 28, 2001 through May 27, 2008 with a balance due on June 28, 2008. The 8.17%
Cathay Bank loan was collateralized by land, building and building improvements in the
Companys 35,000 square foot headquarters and research facility in Hayward, California. This
loan was paid in full without penalty in May 2008.
|
|
(3)
|
|
Term loan payable at 7.50% to Cathay Bank in 83 monthly installments of $24,629
commencing November 14, 2001 through October 13, 2008 with a balance of $2,917,598 due on
November 14, 2008. The 7.50% Cathay Bank loan was collateralized by land, building and
building improvements in the Companys 50,000 square foot manufacturing facility in Hayward,
California. This loan was paid in full without penalty in May 2008.
|
|
(4)
|
|
Subordinated promissory note in the amount of $11,000,000 related to the June
2006 settlement of litigation brought by Solvay Pharmaceuticals, Inc. (Solvay),
manufacturer of the Creon line pancreatic enzyme products. In its lawsuit, Solvay claimed
the Company engaged in false advertising, unfair competition, and unfair trade practices in
connection with the Companys marketing and sale of its now discontinued line of Lipram-CR
products. With respect to the settlement of the Solvay litigation, the Company agreed to pay
$23,000,000 to Solvay, with such amount recorded as litigation settlement expense in the
Companys 2004 financial statements. The settlement with Solvay included a $12,000,000
payment upon signing of the settlement agreement with the remaining $11,000,000 to be paid
under the terms of the subordinated promissory note between the Company and Solvay. The
subordinated promissory note interest rate is 6.0% per annum, and requires the Company to pay
24 quarterly installments of $549,165, commencing in March 2007 through December 2012.
Additionally, the subordinated promissory note becomes immediately due and payable upon the
occurrence of a default in any payment due, a change in control of the Company, voluntary or
involuntary bankruptcy proceeding by or against the Company, and working capital less than
150% of the remaining unpaid balance of the subordinated promissory note. At September 30,
2008, none of these events has occurred to-date.
|
|
(5)
|
|
Vendor financing agreement related to software licenses, with 3.1% interest per
annum, 2 monthly installments of $0 and 34 monthly installments of $12,871, commencing
December 2006 through November 2009.
|
Page F-77 of 93
9. ALLIANCE AGREEMENTS
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
|
|
2008
|
|
|
Dec 31, 2007
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning balance
|
|
$
|
181,149
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Cost-sharing
|
|
|
525
|
|
|
|
5,253
|
|
Product-related deferrals
|
|
|
47,779
|
|
|
|
316,365
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
48,304
|
|
|
|
321,618
|
|
Exclusivity charges
|
|
|
|
|
|
|
(50,600
|
)
|
Forgiveness of advance deposit
|
|
|
|
|
|
|
6,000
|
|
Forgiveness of interest
|
|
|
|
|
|
|
4,370
|
|
Stock repurchase
|
|
|
|
|
|
|
2,157
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
48,304
|
|
|
$
|
283,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
Forgiveness of advance deposit
|
|
$
|
(249
|
)
|
|
$
|
(2,166
|
)
|
Forgiveness of interest
|
|
|
(183
|
)
|
|
|
(1,580
|
)
|
Stock repurchase
|
|
|
(90
|
)
|
|
|
(779
|
)
|
Cost-sharing
|
|
|
(430
|
)
|
|
|
(1,898
|
)
|
Product-related revenue
|
|
|
(30,316
|
)
|
|
|
(95,973
|
)
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(31,268
|
)
|
|
|
(102,396
|
)
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
198,185
|
|
|
$
|
181,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
Inception
|
|
(in $000s)
|
|
September 30
|
|
|
Through
|
|
Deferred
product manufacturing costs
|
|
2008
|
|
|
Dec 31, 2007
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning balance
|
|
$
|
75,296
|
|
|
$
|
|
|
Additions
|
|
|
25,098
|
|
|
|
117,855
|
|
Less amounts amortized
|
|
|
(14,996
|
)
|
|
|
(42,559
|
)
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
85,398
|
|
|
$
|
75,296
|
|
|
|
|
|
|
|
|
Page F-78 of 93
9. ALLIANCE AGREEMENTS (continued)
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
|
|
2008
|
|
|
Dec 31, 2007
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning balance
|
|
$
|
20,591
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
|
|
|
|
8,436
|
|
Cost-sharing and other
|
|
|
|
|
|
|
1,642
|
|
Product-related deferrals
|
|
|
13,901
|
|
|
|
65,467
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
13,901
|
|
|
$
|
75,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount recognized:
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
(228
|
)
|
|
|
(7,172
|
)
|
Cost-sharing and other
|
|
|
(84
|
)
|
|
|
(1,326
|
)
|
Product-related revenue
|
|
|
(12,427
|
)
|
|
|
(46,456
|
)
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(12,739
|
)
|
|
|
(54,954
|
)
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
21,753
|
|
|
$
|
20,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
Inception
|
|
(in $000s)
|
|
September 30,
|
|
|
Through
|
|
Deferred product manufacturing costs
|
|
2008
|
|
|
Dec 31, 2007
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning balance
|
|
$
|
17,251
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Product-related deferrals
|
|
|
13,741
|
|
|
|
53,880
|
|
Cost-sharing and other
|
|
|
19
|
|
|
|
5,974
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
13,760
|
|
|
$
|
59,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount amortized:
|
|
|
|
|
|
|
|
|
Product-related cost
|
|
|
(11,814
|
)
|
|
|
(38,484
|
)
|
Cost-sharing and other
|
|
|
(245
|
)
|
|
|
(4,119
|
)
|
|
|
|
|
|
|
|
Total amount amortized
|
|
|
(12,059
|
)
|
|
|
(42,603
|
)
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
18,952
|
|
|
$
|
17,251
|
|
|
|
|
|
|
|
|
Page F-79 of 93
9. ALLIANCE AGREEMENTS (continued)
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the
DAVA Supply and Distribution Agreement
:
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
Inception
|
|
(in $000s)
|
|
September 30,
|
|
|
Through
|
|
Deferred revenue
|
|
2008
|
|
|
Dec 31, 2007
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning balance
|
|
$
|
6,361
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
|
|
|
|
10,000
|
|
Product-related deferrals
|
|
|
34,470
|
|
|
|
117,977
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
34,470
|
|
|
$
|
127,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
(858
|
)
|
|
|
(9,142
|
)
|
Product-related revenue
|
|
|
(39,973
|
)
|
|
|
(112,474
|
)
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(40,831
|
)
|
|
|
(121,616
|
)
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
|
|
|
$
|
6,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
(in $000s)
|
|
Ended
|
|
|
Inception
|
|
Deferred product
|
|
September 30,
|
|
|
Through
|
|
manufacturing costs
|
|
2008
|
|
|
Dec 31, 2007
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning balance
|
|
$
|
1,850
|
|
|
$
|
|
|
Additions:
|
|
|
307
|
|
|
|
28,737
|
|
Less: amount amortized:
|
|
|
(2,157
|
)
|
|
|
(26,887
|
)
|
|
|
|
|
|
|
|
Total deferred product manufacturing costs
|
|
$
|
|
|
|
$
|
1,850
|
|
|
|
|
|
|
|
|
For the
nine month period ended September 30, 2008, the increased volume of sales during January
2008, which were otherwise recognizable under the performance conditions of the Companys revenue
recognition policy, would have resulted in an excess of revenues over the amount of cash collected
through the date thereof, therefore the Company further deferred the recognition of those revenues
until the cash was collected from DAVA in the second quarter of 2008.
During the nine months ended September 30, 2008, the Company recognized revenue of $40,831,000 and
amortized $2,157,000 of manufacturing costs. The revenue recognized by the Company during the nine months
ended September 30, 2008 was composed primarily of profit share earned under the agreement with
DAVA.
Page F-80 of F-93
9. ALLIANCE AGREEMENTS (continued)
On June 9, 2008 (the Signing Date), the Company entered into a Settlement and Release Agreement
(Settlement Agreement) with Wyeth. The Settlement Agreement settled pending claims and
counterclaims asserted in an existing patent infringement lawsuit between the Company and Wyeth.
The Company and Wyeth also entered into a Co-Promotion Agreement and a License Agreement (the
Wyeth Agreement).
The Settlement Agreement provided certain conditions precedent which had to occur for the
Co-Promotion Agreement and License Agreement to become effective (i.e. the Settlement
Conditions). As the Settlement Conditions were satisfied, the License Agreement and Co-Promotion
Agreement became effective on July 15, 2008 (the Settlement Date).
The key points of the Settlement Agreement, the Co-Promotion Agreement, and the License Agreement
are summarized as follows:
Settlement and Release Agreement
|
|
The settlement of outstanding claims and counter-claims between the Company and Wyeth asserted in the existing
patent infringement lawsuit as it relates to the Companys ANDA for generic venlafaxine hydrochloride
capsules;
|
|
|
|
The Company to defer its manufacture and launch of its generic venlafaxine product;
|
|
|
|
Wyeth reimbursement to the Company for certain supportable legal expenses associated with
the patent infringement lawsuit.
|
Co-Promotion Agreement
|
|
Wyeth appoints the Company, on a non-exclusive basis, to perform physician detailing sales calls services for
a Wyeth product to neurologists.
|
|
|
|
The Co-Promotion Agreement term is three years from the Initiation Date with such date being in mid-2009.
|
|
|
|
Wyeth is responsible for providing sales training to the Companys physician detailing sales force. Wyeth
owns the product and is responsible for all pricing and marketing literature as well as product manufacture.
|
|
|
|
During the Co-Promotion Agreement term, the Company is required to complete a minimum and maximum number of
physician detailing sales calls.
|
|
|
|
Wyeth will pay the Company a service fee, subject to an annual cost adjustment, during the life of the
Co-Promotion Agreement for each physician detailing sales calls.
|
|
|
|
Wyeth will pay the Company an incentive fee if the number of prescriptions written for the product exceeds
a certain threshold.
|
Page F-81 of F-93
9. ALLIANCE AGREEMENTS (continued)
License Agreement
|
|
Wyeth granted a non-exclusive Commercialization License to the Company, allowing the Company the option (but
not the obligation) to manufacture and market the Companys generic venlafaxine product in the United States.
|
|
|
|
Wyeth granted a Pre-Commercialization License to the Company allowing for the Companys generic venlafaxine
product ANDA to remain on file with FDA and to take all necessary actions to seek regulatory approval.
|
|
|
|
The (Commercialization) License Effective Date is expected to be on or about June 1, 2011.
|
|
|
|
The Company will pay Wyeth a royalty fee based on the manufacture of its generic venlafaxine product under the
Commercialization License, computed as a percentage of gross profits, as defined in the License Agreement.
|
|
|
|
The Company is solely responsible for manufacturing and marketing its generic venlafaxine product for sale
in its Global Division through the Global Products sales channel.
|
|
|
|
The Royalty Term begins with the License Effective Date and ends on the expiration of the Wyeth patents
covered by the License Agreement.
|
Page F-82 of F-93
10. SHARE-BASED COMPENSATION
Total share-based compensation expense recognized in the consolidated statement of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
(in $000s)
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Manufacturing expenses
|
|
$
|
1,191
|
|
|
$
|
78
|
|
Research and development
|
|
|
1,705
|
|
|
|
150
|
|
Selling, general & administrative
|
|
|
1,562
|
|
|
|
153
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,458
|
|
|
$
|
381
|
|
|
|
|
|
|
|
|
The following table summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
|
Under Option
|
|
|
per Share
|
|
Outstanding at December 31, 2007
|
|
|
9,047,761
|
|
|
$
|
9.90
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
448,050
|
|
|
$
|
9.07
|
|
Options exercised
|
|
|
(241,824
|
)
|
|
$
|
1.65
|
|
Options forfeited
|
|
|
(324,874
|
)
|
|
$
|
9.17
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2008 (unaudited)
|
|
|
8,929,113
|
|
|
$
|
10.11
|
|
|
|
|
|
|
|
|
Vested and
expected to vest at September 30, 2008 (unaudited)
|
|
|
8,797,828
|
|
|
$
|
10.15
|
|
|
|
|
|
|
|
|
Options
exercisable at September 30, 2008 (unaudited)
|
|
|
6,824,946
|
|
|
$
|
9.97
|
|
|
|
|
|
|
|
|
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. 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. Options granted under each of the above
plans vest from three to five years and have a term of ten years. The Companys shares of common
stock traded on the Pink Sheets beginning in August 2005 through May 2008. The Companys
assessment is there was sufficient trading volume and liquidity in the Companys shares to support
the calculation of a reasonable estimate of the fair value of employee stock options granted during
this period.
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, 2007
|
|
|
270,341
|
|
|
$
|
11.45
|
|
Granted
|
|
|
175,100
|
|
|
$
|
9.07
|
|
Vested
|
|
|
|
|
|
$
|
|
|
Forfeited
|
|
|
(13,948
|
)
|
|
$
|
11.18
|
|
|
|
|
|
|
|
|
|
Non-vested
at September 30, 2008 (unaudited)
|
|
|
431,493
|
|
|
$
|
10.52
|
|
|
|
|
|
|
|
|
|
The Company grants restricted stock to certain eligible employees as a component of its long-term
incentive compensation program. The restricted stock award grants are made in accordance with the
Companys 2002 Equity Incentive Plan, as amended and restated, and typically specify, shares of
restricted stock are not issued until they vest. The restricted stock awards vest ratably over a
four year period from the date of grant. In August 2008 the Board authorized an increase of
1,400,000 in the number of shares available for issuance of stock options and restricted stock
awards. As of September 30, 2008, the Company had 1,557,746 shares available for issuance of stock
options and restricted stock awards.
As of September 30, 2008, the Company had total unrecognized share-based compensation expense, net
of estimated forfeitures, of $14,994,000 related to all of its share-based awards, which will be
recognized over a weighted average period of 2.87 years. The intrinsic value of options exercised
during the nine months ended September 30, 2008 and 2007 was $1,739,000 and $178,000, respectively.
The total fair value of restricted shares which vested during the nine months ended September 30,
2008 and 2007 was $0.
Page F-83 of F-93
11. EARNINGS PER SHARE
Basic net income per share is computed by dividing net income by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share is 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 earnings per common share for the nine months ended September
30, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in $000s except share
|
|
2008
|
|
|
2007
|
|
and per share amounts)
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,642
|
|
|
$
|
119,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding
|
|
|
58,993,633
|
|
|
|
58,806,974
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive options and
common stock purchase warrants
|
|
|
1,820,074
|
|
|
|
2,458,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average
common shares outstanding
|
|
|
60,813,707
|
|
|
|
61,265,898
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.16
|
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.16
|
|
|
$
|
1.95
|
|
|
|
|
|
|
|
|
At September 30, 2008 and 2007, there were 5,440,101and 2,515,803 stock options, respectively,
excluded from the computation of diluted weighted average common shares outstanding, as their
inclusion would have been anti-dilutive.
Page F-84 of F-93
12. SEGMENT INFORMATION
The Company has two reportable segments, referred to as the Global Pharmaceuticals Division
(Global Division) and the Impax Pharmaceutical Division (Impax Division). The Company
currently markets and sells product within the continental United States and the Commonwealth of
Puerto Rico
The Global Division develops, manufactures, sells, and distributes generic pharmaceutical products,
through three sales channels, including: the Global sales channel, for sales of generic
prescription (Rx) products, directly to wholesalers, large retail drug chains, and others; the
RX Partner sales channel, for generic prescription (Rx) products sold through unrelated
third-party pharmaceutical entities pursuant to alliance agreements; and, the OTC Partner sales
channel, for over-the-counter (OTC) products sold through unrelated third-party pharmaceutical
entities pursuant to alliance agreements.
The Impax Division is engaged in the process of developing branded pharmaceutical products.
The Companys chief operating decision maker evaluates the financial performance of the Companys
segments based upon segment income or (loss) before the provision for income taxes. Items below
income 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. Accounting policies for the Companys
segments are the same as those described above in the Summary of Significant Accounting Policies.
The Company has no inter-segment revenue.
The tables
below present segment information reconciled to total Company 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
|
Nine Months Ended September 30, 2008 (unaudited)
|
|
Division
|
|
Division
|
|
and Other
|
|
Company
|
Revenue, net
|
|
$
|
155,648
|
|
|
$
|
9,728
|
|
|
$
|
|
|
|
$
|
165,376
|
|
Cost of revenue
|
|
|
58,046
|
|
|
|
8,332
|
|
|
|
|
|
|
|
66,378
|
|
Research and development
|
|
|
32,123
|
|
|
|
11,530
|
|
|
|
|
|
|
|
43,653
|
|
Patent Litigation
|
|
|
4,827
|
|
|
|
|
|
|
|
|
|
|
|
4,827
|
|
Income (loss) before provision for income taxes
|
|
$
|
56,250
|
|
|
$
|
(10,134
|
)
|
|
$
|
(29,860
|
)
|
|
$
|
16,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
Global
|
|
Impax
|
|
Corporate
|
|
Total
|
Nine Months Ended September 30, 2007 (unaudited)
|
|
Division
|
|
Division
|
|
and Other
|
|
Company
|
Revenue, net
|
|
$
|
196,702
|
|
|
$
|
9,584
|
|
|
$
|
|
|
|
$
|
206,286
|
|
Cost of revenue
|
|
|
66,332
|
|
|
|
7,947
|
|
|
|
|
|
|
|
74,279
|
|
Research and development
|
|
|
20,952
|
|
|
|
5,502
|
|
|
|
|
|
|
|
26,454
|
|
Patent Litigation
|
|
|
8,344
|
|
|
|
|
|
|
|
|
|
|
|
8,344
|
|
Income (loss) before provision for income taxes
|
|
$
|
98,770
|
|
|
$
|
(3,865
|
)
|
|
$
|
(27,734
|
)
|
|
$
|
67,171
|
|
Page F-85 of F-93
13. COMMITMENTS AND CONTINGENCIES
Taiwan Facility Construction
The Company currently has under construction a facility in Taiwan, R.O.C., which is intended to be
utilized for manufacturing, research and development, warehouse, and administrative space, with an
expected operational date in 2010. In conjunction with the construction of this facility, the
Company has entered into several contracts, in an aggregate amount of approximately $16,539,000,
with approximately $4,580,000 remaining commitments, at September 30, 2008.
Page F-86 of F-93
14. 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 rights. One or more patents typically cover most of the
brand-name controlled-release 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 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
filings.
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 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 twelve products covered by the Teva
Agreement, including: (i) for the six products with ANDAs already filed with the FDA at the time
the Teva Agreement was signed, Teva will pay 50% of the fees and costs in excess of $7.0 million;
(ii) for three of the products with ANDAs filed since the Teva Agreement was signed, Teva will pay
45% of the fees and costs; and, (iii) for the remaining three products, Teva will pay 50% of the
fees and costs. The Company is responsible for the remaining fees and costs for these twelve
products not otherwise the responsibility of Teva.
The Company is responsible for all of the patent litigation fees and costs associated with current
and future products not otherwise under 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
because of the uncertainties inherent in patent litigation, 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 F-87 of F-93
AstraZeneca AB et al. v. Impax Laboratories (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 the Companys product until expiration of its 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 commenced commercial sales of the product under the terms and conditions of the
Teva Agreement. 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. On May 30, 2007, the court found the Companys 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. On August 20, 2008,
the U.S. Court of Appeals for the Federal Circuit affirmed the lower court decision of infringement
and validity. If Teva is not ultimately successful in establishing invalidity or
non-infringement in the separate suit against Teva, the court may award monetary damages associated
with Tevas commercial sale of the Companys omeprazole products. Under the Teva Agreement, the
Company would be responsible for monetary damages awarded against Teva up to a specified level,
beyond which, monetary damages would be Tevas responsibility.
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 (No. 02-CV-1322) 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 asserts defenses to the claims based on non-infringement and
invalidity. In June 2004, the court granted the Company motion for summary judgment of
non-infringement with respect to two of the patents and, in May 2005, granted summary judgment of
invalidity with respect to a third patent. 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.
Impax Laboratories, Inc. v. Aventis Pharmaceuticals, Inc. (Riluzole)
In June 2002, the Company filed a suit against Aventis Pharmaceuticals, Inc. in the U.S. District
Court for the District of Delaware, seeking a declaration the Companys filing of an ANDA for
Riluzole 50mg tablets, generic to Rilutek®, for treatment of patients with amyotrophic lateral
scleroses (ALS) did not infringe claims of Aventiss patent relating to the drug and a declaration
Aventis patent is invalid. Aventis filed counterclaims for infringement, and, in December 2002,
the district court granted Aventis motion for a preliminary injunction enjoining the Company from
marketing any pharmaceutical product or compound containing Riluzole for the treatment of ALS. In
September 2004, the district court found Aventis patent not invalid and infringed by the Companys
proposed product. In November 2006 the Court of Appeals for the Federal Circuit vacated the
district courts finding Aventis patent was not invalid and remanded for further findings on this
issue, and, in June 2007, the district court again found Aventis patent is not invalid. In
October 2008, the Court of Appeals for the Federal Circuit affirmed the district court decision.
The court is expected to enter a permanent injunction enjoining the Company from marketing Riluzole
50mg tablets for the treatment of ALS until the expiration of Aventis patent in June 2013.
Page F-88 of F-93
Endo Pharm. Inc. and Penwest Pharm. Co. v. Impax Laboratories, Inc. (Oxymorphone)
In November 2007, Endo Pharmaceuticals Inc. and Penwest Pharmaceuticals Co. (collectively, Endo)
filed suit against the Company in the U.S. District Court for the District of Delaware, requesting
a declaration 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 that 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 Company has filed an answer and counterclaims. Discovery
is in the early stages, and no trial date has been set.
Impax Laboratories, Inc. v. Medicis
Pharmaceutical Corp. (Minocycline)
In January 2008, the Company filed a
complaint against Medicis Pharmaceutical Corp. in the U.S. District Court for the Northern District
of California, seeking a declaratory judgment the Companys filing of its ANDA relating to Minocycline
Hydrochloride Extended Release Tablets, 45 mg, 90 mg, and 135 mg, a generic to Solodyn
®
product,
did not infringe any valid claim of U.S. Patent No. 5,908,838. Medicis filed a motion to dismiss
the complaint for lack of subject matter jurisdiction. On April 16, 2008, the District Court
granted Medicis motion to dismiss, and judgment was entered on April 22, 2008. The Company has
filed a notice of appeal to the United States Court of Appeals for the Federal Circuit, and the
parties have completed briefing the appeal. A hearing for the appeal is set for January 2009.
Pfizer Inc., et al. 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 released capsules, 4 mg, generic to Detrol LA®, infringes three Pfizer patents. The
Company has filed an answer and counterclaims seeking declaratory judgment of non-infringement,
invalidity and/or unenforceability with respect to the patents at suit. In April 2008, the case
was transferred to the U.S. District Court for the District of New Jersey. On September 3, 2008, a
second complaint was filed alleging infringement based on the Companys ANDA amendment adding the
2mg strength. Discovery is in the early stages, and no trial date has
been set.
Boehringer Ingelheim Pharmaceuticals, et al. v. Impax Laboratories (Tamsulosin)
In July 2008 Boehringer Ingelheim Pharmaceuticals Inc. and Astellas Pharma Inc. (collectively
Astellas) filed a complaint against the Company in the U.S. District Court for the Northern
District of California, alleging the Companys filing of its ANDA relating to Tamsulosin
Hydrochloride Capsules, 0.4 mg, generic to Flomax®, infringes Astellas patent. After filing its
answer and counterclaim, the Company filed a summary judgment motion for patent invalidity. The
District Court scheduled a hearing on claim construction for May 2008 and summary judgment for June
2008.
Purdue Pharma Products L.P, et al. v. Impax Laboratories (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 its ANDA relating to Tramadol Hydrochloride Extended-Release
Tablets, 100 mg, generic to Ultram® ER. The Company has filed an answer and counterclaims seeking
declaratory judgment of patent non-infringement and invalidity. 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 has filed an answer and counterclaims. Discovery is
in the early stages, and no trial date has been set.
Eli Lilly and Company vs. Impax Laboratories, Inc. (Duloxetine)
In November 2008, Eli Lilly and Company filed suit against the Company in the United States
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®. The Company is preparing an answer to the complaint.
Page F-89 of F-93
Other Litigation Related to the Companys 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 Court
granted in part and denied in part a Company motion to dismiss the complaint, as well as the
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. The Company has answered the
complaint, and discovery is proceeding.
Securities Litigation
The Company, four of its Directors, and two former officers, are defendants in several class
actions filed in the United States District Court for the Northern District of California, all of
which have since been consolidated as case No. 04- 4808-JW. These actions, brought on behalf of
all purchasers of shares of Company common stock between May 5 and November 3, 2004, allege the
Company and the individual defendants, in violation of the antifraud provisions of the federal
securities laws, artificially inflated the market price of the stock during this period by filing
false financial statements for the first and second quarters of 2004, based upon the Companys
subsequent restatement of its results for those periods. The court twice granted the Company
motions to dismiss the complaint, both times with leave to amend, but denied the Companys motion
to dismiss a fourth amended complaint as well as two motions for reconsideration. The case is now
in discovery phase. In August 2008, the Company filed a petition for a writ of mandamus asking the
U.S. Court of Appeals for the Ninth Circuit to direct the district
court to dismiss the complaint. The U.S. Court of Appeals for the
Ninth Circuit denied the request.
Page F-90 of F-93
15. SUBSEQUENT EVENTS
The following events occurred after October 10, 2008:
|
|
In November 2008, the Company entered into an agreement under which it expects to receive
$25,000,000 in cash, on or around December 12, 2008, in settlement of its antitrust claim against Abbott
Laboratories and Fournier Industrie et Sante.
|
|
|
In November 2008 the Company entered into agreements with Medicis Pharmaceutical
Corporation settling patent infringement litigation involving the Companys generic versions
of SOLODYN
®
45mg, 90mg, and 135mg products. Medicis granted the Company a license
to market its generic versions of the product upon the occurrence of certain conditions, but
in any event not later than November 2011. The Company may be required to pay Medicis a
royalty based on its sales of the generic product.
|
|
|
|
Separately, the Company also entered into a joint development agreement providing for the
parties to collaborate in the development of five dermatology products, including an advanced
form SOLODYN
®
product. Under the joint development agreement, Medicis will pay the
Company an upfront fee of $40,000,000 in December 2008, plus up to $23,000,000 upon completion
of specified clinical and regulatory milestones. To the extent the products are
commercialized, Medicis will pay the Company royalties based on its sales of the advanced form
SOLODYN product and the parties will share equally in the profits on the sales of the four
additional products.
|
Page F-91 of F-93
16. SUPPLEMENTARY FINANCIAL INFORMATION
Selected (unaudited) quarterly financial information for the three months ended March 31, 2008,
June 30, 2008 and September 30, 2008 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Quarter Ended:
|
|
(in $000s except share
|
|
|
|
|
|
|
|
|
|
and per share amounts)
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, gross
|
|
$
|
38,990
|
|
|
$
|
45,703
|
|
|
$
|
42,343
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks
|
|
|
9,233
|
|
|
|
11,033
|
|
|
|
13,770
|
|
Rebates
|
|
|
4,191
|
|
|
|
5,190
|
|
|
|
4,173
|
|
Returns
|
|
|
946
|
|
|
|
1,381
|
|
|
|
1,478
|
|
Other credits
|
|
|
1,163
|
|
|
|
1,474
|
|
|
|
2,213
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
|
23,457
|
|
|
|
26,625
|
|
|
|
20,709
|
|
|
|
|
|
|
|
|
|
|
|
RX Partner
|
|
|
18,805
|
|
|
|
43,870
|
|
|
|
9,424
|
|
OTC Partner
|
|
|
4,409
|
|
|
|
4,932
|
|
|
|
3,398
|
|
Promotional Partner
|
|
|
3,252
|
|
|
|
3,238
|
|
|
|
3,238
|
|
Other
|
|
|
7
|
|
|
|
7
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
49,930
|
|
|
|
78,672
|
|
|
|
36,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
26,552
|
|
|
|
57,968
|
|
|
|
14,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
959
|
|
|
$
|
17,597
|
|
|
|
(8,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
0.02
|
|
|
$
|
0.30
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (diluted)
|
|
$
|
0.02
|
|
|
$
|
0.29
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted Average:
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,833,979
|
|
|
|
58,978,703
|
|
|
|
59,166,319
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
61,126,768
|
|
|
|
60,584,709
|
|
|
|
59,166,319
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly computations of (unaudited) net income (loss) 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 F-92 of F-93
16. SUPPLEMENTARY FINANCIAL INFORMATION
(continued)
Selected (unaudited) quarterly financial information for the three months ended March 31, 2007,
June 30, 2007 and September 30, 2007 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter Ended:
|
|
(in $000s except share
|
|
|
|
|
|
|
|
|
|
and per share amounts)
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, gross
|
|
$
|
32,478
|
|
|
$
|
33,880
|
|
|
$
|
42,289
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks
|
|
|
7,202
|
|
|
|
7,419
|
|
|
|
10,559
|
|
Rebates
|
|
|
3,375
|
|
|
|
3,520
|
|
|
|
4,306
|
|
Returns
|
|
|
968
|
|
|
|
1,291
|
|
|
|
1,639
|
|
Other credits
|
|
|
1,174
|
|
|
|
1,336
|
|
|
|
1,191
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
|
19,759
|
|
|
|
20,314
|
|
|
|
24,594
|
|
|
|
|
|
|
|
|
|
|
|
RX Partner
|
|
|
8,278
|
|
|
|
33,296
|
|
|
|
81,634
|
|
OTC Partner
|
|
|
2,408
|
|
|
|
2,305
|
|
|
|
4,081
|
|
Promotional Partner
|
|
|
3,201
|
|
|
|
3,279
|
|
|
|
3,104
|
|
Other
|
|
|
17
|
|
|
|
9
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
33,663
|
|
|
|
59,203
|
|
|
|
113,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,677
|
|
|
|
30,902
|
|
|
|
87,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(7,770
|
)
|
|
$
|
83,792
|
|
|
$
|
43,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share (basic)
|
|
$
|
(0.13
|
)
|
|
$
|
1.42
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share (diluted)
|
|
$
|
(0.13
|
)
|
|
$
|
1.37
|
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,794,020
|
|
|
|
58,807,656
|
|
|
|
58,818,971
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
58,794,020
|
|
|
|
61,193,296
|
|
|
|
61,293,615
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly computations of (unaudited) net (loss) 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 F-93 of F-93
Impax Laboratories, Inc.
Schedule II, Valuation and Qualifying Accounts
For the Year Ended December 31, 2005
(in $ 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
Column C
|
|
Column D
|
|
Column E
|
|
|
Balance at
|
|
Charge to
|
|
Charge to
|
|
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
Costs and
|
|
Other
|
|
|
|
|
|
End of
|
Description
|
|
Period
|
|
Expenses
|
|
Accounts
|
|
Deductions
|
|
Period
|
Deferred tax asset valuation allowance
|
|
$
|
80,605
|
|
|
$
|
4,365
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
84,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
|
5,260
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
5,776
|
|
For the Year Ended December 31, 2006
(in $ 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
Column C
|
|
Column D
|
|
Column E
|
|
|
Balance at
|
|
Charge to
|
|
Charge to
|
|
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
Costs and
|
|
Other
|
|
|
|
|
|
End of
|
Description
|
|
Period
|
|
Expenses
|
|
Accounts
|
|
Deductions
|
|
Period
|
Deferred tax asset valuation allowance
|
|
$
|
84,970
|
|
|
$
|
6,992
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
91,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
|
5,776
|
|
|
|
(2,857
|
)
|
|
|
|
|
|
|
|
|
|
|
2,919
|
|
For the Year Ended December 31, 2007
(in $ 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
Column C
|
|
Column D
|
|
Column E
|
|
|
Balance at
|
|
Charge to
|
|
Charge to
|
|
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
Costs and
|
|
Other
|
|
|
|
|
|
End of
|
Description
|
|
Period
|
|
Expenses
|
|
Accounts
|
|
Deductions
|
|
Period
|
Deferred tax asset valuation allowance
|
|
$
|
91,962
|
|
|
$
|
(81,485
|
)
|
|
$
|
(10,477
|
)
|
|
$
|
|
|
|
$
|
|
|
Inventory reserve
|
|
|
2,919
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
3,148
|
|
Reserve for bad debts
|
|
|
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
550
|
|
At June 30, 2007, the Company reversed the deferred tax asset valuation allowance in the amount of
$ 91,962, of which $ 10,477 was credited to additional-paid-in-capital as the tax benefit related to
employee stock options exercised prior to January 01, 2006.
S-1
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to the registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
Date: December 23, 2008
|
|
Impax Laboratories, Inc.
|
|
|
|
|
By:
|
/s/ Larry Hsu, Ph.D.
|
|
|
|
Name:
|
Larry Hsu, Ph.D.
|
|
|
|
Title:
|
President and Chief Executive Officer
|
|
|
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
|
|
3.1
|
|
|
Restated Certificate of Incorporation, dated August 30, 2004.
|
|
|
|
|
3.2
|
|
|
By-Laws. +
|
|
|
|
|
|
|
4.1
|
|
|
Specimen of Common Stock Certificate. +
|
|
|
|
|
|
|
4.2
|
|
|
Form of Debenture (incorporated by reference to Exhibit A to the
Indenture, dated as of June 27, 2005, between the Company and HSBC Bank
USA, National Association, as Trustee, listed on Exhibit 4.3).
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4.3
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Indenture, dated as of June 27, 2005, between the Company and HSBC Bank
USA, National Association, as Trustee. +
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4.4
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Supplemental Indenture, dated as of July 6, 2005, between the Company and
HSBC Bank USA, National Association, as Trustee. +
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4.5
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Registration Rights Agreement, dated as of June 27, 2005, between the
Company and the Initial Purchasers named therein. +
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4.6
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Promissory Note dated June 7, 2006, issued by the Company to Solvay
Pharmaceuticals, Inc. +
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10.1
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Amended and Restated Loan and Security Agreement, dated as of December 15,
2005, between the Company and Wachovia Bank, National Association. +
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10.1.1
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First
Amendment, dated October 14, 2008, to Amended and Restated Loan and
Security Agreement, dated December 15, 2005, between the Company and
Wachovia Bank, National Association. +
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10.2
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Purchase Agreement, dated June 26, 2005, between the Company and the
Purchasers named therein. +
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10.3
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1995 Stock Incentive Plan.* +
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10.4
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1999 Equity Incentive Plan.* +
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10.5
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2001 Non-Qualified Employee Stock Purchase Plan.* +
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10.6
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Amended and Restated 2002 Equity Incentive Plan (Corrected).* +
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10.7
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Executive Non-Qualified Deferred Compensation Plan, restated effective
January 1, 2005.* +
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10.8
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Employment Agreement, dated as of December 14, 1999, between the Company
and Charles Hsiao, Ph.D.* +
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10.9
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Employment Agreement, dated as of December 14, 1999, between the Company
and Larry Hsu, Ph.D.* +
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10.10
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Employment Agreement, dated as of September 1, 2006, between the Company
and David S. Doll.* +
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10.11
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Separation Agreement and General Release, dated July 30, 2008, between the
Company and David S. Doll.* +
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10.12
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Consulting Agreement, effective as of September 4, 2008, between the
Company and David S. Doll.* +
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10.13
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Strategic Alliance Agreement, dated June 27, 2001, between the Company and
Teva Pharmaceuticals Curacao N.V.** +
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10.13.1
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Letter Amendment, dated October 8, 2003, to Strategic Alliance Agreement,
dated June 27, 2001, between the Company and Teva Pharmaceuticals Curacao
N.V.** +
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10.13.2
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Letter Agreement, dated March 24, 2005, between the Company and Teva
Pharmaceuticals Curacao N.V.** +
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10.13.3
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Letter Amendment, dated March 24, 2005 and effective January 1, 2005, to
Strategic Alliance Agreement, dated June 27, 2001, between the Company and
Teva Pharmaceuticals Curacao N.V.** +
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10.13.4
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Amendment, dated January 24, 2006, to Strategic Alliance Agreement, dated
June 27, 2001, between the Company and Teva Pharmaceuticals
Curacao N.V.** +
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10.13.5
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Amendment, dated February 9, 2007, to Strategic Alliance Agreement, dated
June 27, 2001, between the Company and Teva Pharmaceuticals
Curacao N.V.** +
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10.14
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Development, License and Supply Agreement, dated as of June 18, 2002,
between the Company and Wyeth, acting through its Wyeth Consumer
Healthcare Division.** +
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10.14.1
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Amendment, dated as of July 9, 2004, to Development, License and Supply
Agreement, dated as of June 18, 2002, between the Company and Wyeth,
acting through its Wyeth Consumer Healthcare Division. +
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Exhibit No.
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Description of Document
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10.14.2
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Amendment, dated as of February 14, 2005, to Development, License and
Supply Agreement, dated as of June 18, 2002, between the Company and
Wyeth, acting through its Wyeth Consumer Healthcare Division. +
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10.15
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Licensing, Contract Manufacturing and Supply Agreement, dated as of June
18, 2002, between the Company and Schering Corporation.** +
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10.15.1
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Amendment No. 3, effective as of July 23, 2004, to Licensing, Contract
Manufacturing and Supply Agreement, dated as of June 18, 2002, between the
Company and Schering Corporation.** +
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10.15.2
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Amendment No. 4, effective as of December 15, 2006, to Licensing, Contract
Manufacturing and Supply Agreement, dated as of June 18, 2002, between the
Company and Schering Corporation.** +
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10.16
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Supply and Distribution Agreement, dated as of November 3, 2005, between
the Company and DAVA Pharmaceuticals, Inc.** +
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10.16.1
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Amendment No. 2, dated February 6, 2007, to Supply and Distribution
Agreement, dated November 3, 2005, between the Company and DAVA
Pharmaceuticals, Inc.** +
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10.17
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Patent License Agreement, dated as of March 30, 2007, by and among Purdue
Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals L.P. and
the Company.** +
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10.18
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Supplemental License Agreement, dated as of March 30, 2007, by and among
Purdue Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals
L.P. and the Company.** +
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10.19
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Sublicense Agreement, effective as of March 30, 2007, between the Company
and DAVA Pharmaceuticals, Inc.** +
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10.20
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Promotional Services Agreement, dated as of January 19, 2006, between the
Company and Shire US Inc.** +
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10.21
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Co-promotion Agreement, dated as of July 16, 2008, between the Company and
Wyeth, acting through its Wyeth Pharmaceuticals Division.** +
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10.22
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Joint Development Agreement, dated as of November 26, 2008, between the
Company and Medicis Pharmaceutical Corporation.** +
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11.1
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Statement re computation of per share earnings (incorporated by reference
to Note 17 to the Notes to the Consolidated Financial Statements and Note
11 to (Unaudited) Interim Consolidated Financial Statements included in
this registration statement).
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21.1
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Subsidiaries of the registrant. +
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*
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Management contract, compensatory plan or arrangement.
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**
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Confidential treatment requested for certain portions of this exhibit pursuant to Rule
24b-2 under the Exchange Act, which portions are omitted and filed separately with the SEC.
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+
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Previously filed.
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