UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number: 001-34263
Impax
Laboratories, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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65-0403311
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(State or other jurisdiction of incorporation or
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(I.R.S. Employer Identification No.)
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organization)
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30831 Huntwood Avenue, Hayward, CA
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94544
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(Address of principal executive offices)
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(Zip Code)
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(510) 476-2000
(
Registrants telephone number, including area code
)
Not Applicable
(
Former name, former address and former fiscal year, if changed since last report
)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
As of
May 3, 2010, there were 62,612,963 shares of the registrants common stock outstanding.
Impax Laboratories, Inc.
INDEX
Page 2 of 73
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Impax Laboratories, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
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March 31,
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December 31,
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2010
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2009
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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83,747
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$
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31,770
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Short-term investments
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46,615
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58,599
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Accounts receivable, net
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324,692
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185,854
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Inventory, net
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52,015
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49,130
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Current portion of deferred product manufacturing costs-alliance agreements
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11,435
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11,624
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Current portion of deferred income taxes
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35,109
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32,286
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Prepaid expenses and other current assets
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3,963
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4,748
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Total current assets
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557,576
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374,011
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Property, plant and equipment, net
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102,330
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101,650
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Deferred product manufacturing costs-alliance agreements
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95,986
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96,619
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Deferred income taxes, net
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44,570
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48,544
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Other assets
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16,993
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12,358
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Goodwill
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27,574
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27,574
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Total assets
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$
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845,029
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$
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660,756
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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33,249
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$
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23,295
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Accrued expenses
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64,758
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62,055
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Accrued income taxes payable
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78,582
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31,627
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Accrued profit sharing and royalty expenses
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41,307
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53,695
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Current portion of deferred revenue-alliance agreements
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33,433
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33,196
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Total current liabilities
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251,329
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203,868
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Deferred revenue-alliance agreements
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219,727
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224,522
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Other liabilities
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12,212
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10,139
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Total liabilities
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$
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483,268
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$
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438,529
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Commitments and contingencies (Note 18)
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Stockholders equity:
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Preferred Stock, $0.01 par value, 2,000,000 shares authorized,
0 shares outstanding at March 31, 2010 and December 31, 2009
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$
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$
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Common stock, $0.01 par value, 90,000,000 shares authorized and
62,723,482 and 62,210,089 shares issued at March 31, 2010
and December 31, 2009, respectively
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627
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622
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Additional paid-in capital
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230,908
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223,239
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Treasury stock - 243,729 shares
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(2,157
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)
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(2,157
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)
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Accumulated other comprehensive loss
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(177
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)
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(524
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)
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Retained earnings
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132,313
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828
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361,514
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222,008
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Noncontrolling interest
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247
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219
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Total stockholders equity
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361,761
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222,227
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Total liabilities and stockholders equity
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$
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845,029
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$
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660,756
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The accompanying notes are an integral part of these interim consolidated financial statements.
Page 3 of 73
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
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Three Months Ended
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March 31,
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March 31,
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2010
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2009
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(unaudited)
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(unaudited)
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Revenues:
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Global
Product Sales, net
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$
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309,105
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$
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39,121
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Private Label product sales
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672
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1,297
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Rx Partner
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4,903
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10,736
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OTC Partner
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1,765
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1,858
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Research Partner
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3,385
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2,611
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Promotional Partner
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3,503
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3,284
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Other
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6
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Total revenues
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323,333
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58,913
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Cost of revenues
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79,576
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26,250
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Gross profit
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243,757
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32,663
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Operating expenses:
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Research and development
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18,309
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15,789
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Patent litigation
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1,984
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1,017
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Litigation settlement
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237
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Selling, general and administrative
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12,485
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11,485
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Total operating expenses
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32,778
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28,528
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Income from operations
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210,979
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4,135
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Other (expense) income, net
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(18
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)
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55
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Interest income
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82
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149
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Interest expense
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(46
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)
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(294
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)
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Income before income taxes
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210,997
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4,045
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Provision for income taxes
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79,484
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1,836
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Net income before noncontrolling interest
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131,513
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2,209
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Add back (profit) loss attributable to
noncontrolling interest
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(28
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)
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10
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Net income
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$
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131,485
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$
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2,219
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Net Income per share:
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Basic
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$
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2.16
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$
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0.04
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Diluted
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$
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2.06
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|
$
|
0.04
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Weighted average common shares outstanding:
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Basic
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61,008,015
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59,711,133
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Diluted
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63,865,678
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60,222,215
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The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
Page 4 of 73
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
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Three Months Ended
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March 31,
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March 31,
|
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2010
|
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2009
|
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(unaudited)
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(unaudited)
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Cash flows from operating activities:
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Net income
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$
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131,485
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$
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2,219
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Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
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Depreciation
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2,946
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2,544
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Amortization of 3.5% Debentures discount and deferred financing costs
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150
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Amortization of Wachovia Credit Agreement deferred financing costs
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25
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Bad debt expense
|
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|
91
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23
|
|
Deferred income taxes (benefit)
|
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|
1,889
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(3,027
|
)
|
Provision for uncertain tax positions
|
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|
12
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|
218
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Tax benefit related to the exercise of employee stock options
|
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(738
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)
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|
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Deferred revenue-Alliance Agreements
|
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5,495
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|
|
|
19,723
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Deferred product manufacturing costs-Alliance Agreements
|
|
|
(3,427
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)
|
|
|
(9,919
|
)
|
Deferred revenue recognized-Alliance Agreements
|
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(10,053
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)
|
|
|
(15,205
|
)
|
Amortization deferred product manufacturing costs-Alliance Agreements
|
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|
4,249
|
|
|
|
7,666
|
|
Accrued profit sharing and royalty expense
|
|
|
41,307
|
|
|
|
72
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|
Profit sharing and royalty payments
|
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|
(53,695
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)
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(252
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)
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Payments on exclusivity period fee
|
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(3,000
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)
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Payments on accrued litigation settlements
|
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(5,865
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)
|
|
|
(4,007
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)
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Share-based compensation expense
|
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|
2,873
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|
|
|
1,437
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Accretion of interest income on short-term investments
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(64
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)
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(36
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)
|
Changes in assets and liabilities:
|
|
|
|
|
|
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Accounts receivable
|
|
|
(138,929
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)
|
|
|
(18,530
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)
|
Inventory
|
|
|
(2,885
|
)
|
|
|
2,546
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|
Prepaid expenses and other assets
|
|
|
(3,870
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)
|
|
|
2,042
|
|
Accounts payable, accrued expenses and income taxes payable
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|
|
64,678
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|
|
|
(3,481
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)
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Other liabilities
|
|
|
2,088
|
|
|
|
734
|
|
|
|
|
|
|
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|
Net cash provided by (used in) operating activities
|
|
$
|
37,612
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|
|
$
|
(18,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
|
(23,055
|
)
|
|
|
(27,810
|
)
|
Maturities of short-term investments
|
|
|
35,103
|
|
|
|
18,245
|
|
Purchases of property, plant and equipment
|
|
|
(3,116
|
)
|
|
|
(3,881
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
$
|
8,932
|
|
|
$
|
(13,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
|
|
|
|
(36
|
)
|
Tax benefit related to the exercise of employee stock options
|
|
|
738
|
|
|
|
|
|
Proceeds from exercise of stock options and ESPP
|
|
|
4,695
|
|
|
|
334
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
$
|
5,433
|
|
|
$
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
51,977
|
|
|
$
|
(31,231
|
)
|
Cash and cash equivalents, beginning of period
|
|
$
|
31,770
|
|
|
$
|
69,275
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
83,747
|
|
|
$
|
38,044
|
|
|
|
|
|
|
|
|
Page 5 of 73
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
(in $000s)
|
|
2010
|
|
|
2009
|
|
Cash paid for interest
|
|
$
|
46
|
|
|
$
|
169
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
30,710
|
|
|
$
|
63
|
|
|
|
|
|
|
|
|
Unpaid vendor invoices of approximately $4,898,000 and $905,000 which were accrued as of March
31, 2010 and 2009, respectively, are excluded from the purchase of property, plant, and equipment
and the change in accounts payable and accrued expenses.
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
Page 6 of 73
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Impax Laboratories,
Inc. (Impax or the Company), have been prepared based upon United States Securities and
Exchange Commission (SEC) rules permitting reduced disclosure for interim periods, and include
all adjustments necessary for a fair presentation of statements of operations, statements of cash
flows, and financial condition for the interim periods shown, including normal recurring accruals
and other items. While certain information and disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP) have been condensed or omitted pursuant to SEC rules and regulations, the
Company believes the disclosures are adequate to make the information presented not misleading.
The unaudited interim consolidated financial statements of the Company include the accounts of
the operating parent company, Impax Laboratories, Inc., its wholly-owned subsidiary, Impax
Laboratories (Taiwan) Inc., and an equity investment in Prohealth Biotech, Inc. (Prohealth), in
which the Company held a 58.11% majority ownership interest at March 31, 2010. All significant
intercompany accounts and transactions have been eliminated.
The unaudited results of operations and cash flows for the interim period are not necessarily
indicative of the results of the Companys operations for any other interim period or for the full
year ending December 31, 2010.
The unaudited interim consolidated financial statements and footnotes should be read in
conjunction with the consolidated financial statements and footnotes included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC, wherein a
more complete discussion of significant accounting policies and certain other information can be
found.
The preparation of financial statements in conformity with GAAP requires the use of estimates
and assumptions, based on complex judgments considered reasonable, and affect the reported amounts
of assets and liabilities and disclosure of contingent assets and contingent liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant judgments are employed in estimates used in
determining values of tangible and intangible assets, legal contingencies, tax assets and tax
liabilities, fair value of share-based compensation of equity incentive awards issued to employees
and directors, and estimates used in applying the Companys revenue recognition policy including
those related to accrued chargebacks, rebates, product returns, Medicare, Medicaid, and other
government rebate programs, shelf-stock adjustments, and the timing and amount of deferred and
recognized revenue and deferred and amortized manufacturing costs under the Companys several
alliance and collaboration agreements. Actual results may differ from estimated results. Certain
prior year amounts have been reclassified to conform to the current year presentation.
In the normal course of business, the Company is subject to loss contingencies, such as legal
proceedings and claims arising out of its business, covering a wide range of matters, including,
among others, patent litigation, and product and clinical trial liability. In accordance with
Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 450,
Contingencies, the Company records accrued loss contingencies when it is probable a liability has
been incurred and the amount of loss can be reasonably estimated. The Company, in accordance with
FASB ASC Topic 450, does not recognize gain contingencies until realized.
Page 7 of 73
2. REVENUE RECOGNITION
The Company recognizes revenue when the earnings process is complete, which under SEC Staff
Accounting Bulletin No. 104, Topic No. 13, Revenue Recognition (SAB 104), is when revenue is
realized or realizable and earned, and, additionally: there is persuasive evidence a revenue
arrangement exists; delivery of goods or services has occurred; the sales price is fixed or
determinable; and, collectibility is reasonably assured.
The Company accounts for revenue arrangements with multiple deliverables in accordance with
FASB ASC Topic 605, revenue recognition for arrangements with multiple elements, which addresses
the determination of whether an arrangement involving multiple deliverables contains more than one
unit of accounting. A delivered item within an arrangement is considered a separate unit of
accounting only if all of the following criteria are met, including: 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 FASB ASC Topic 605, if the fair value of any
undelivered element cannot be objectively or reliably determined, then separate accounting for the
individual deliverables is not appropriate. Revenue recognition for arrangements with multiple
deliverables constituting a single unit of accounting is recognizable generally over the greater of
the term of the arrangement or the expected period of performance, either on a straight-line basis
or on a proportional performance method.
Global
Product Sales, net
:
The
Global Product Sales, net line item of the statement of operations, includes revenue
recognized related to shipments of pharmaceutical products to the Companys customers, primarily
drug wholesalers and retail chains. Gross sales revenue is recognized at the time title and risk of
loss passes to the customer generally when product is received by the customer. Included in
Global Product revenue are deductions from the gross sales price, including deductions related to
estimates for chargebacks, rebates, returns, shelf-stock, and other pricing adjustments. The
Company records an estimate for these deductions in the same period when revenue is recognized. A
summary of each of these deductions is as follows:
Chargebacks The Companys chargeback is the difference between the Companys invoice price
to a wholesaler and the final price paid by the wholesaler. The final price paid by the wholesaler
can be lower than the Companys invoice price based upon the customer to whom the wholesaler sells
the Companys products. The chargeback generally takes the form of a credit against the invoiced
gross sales amount charged to the wholesaler. A provision for chargeback deductions is estimated
and recorded in the same period the revenue is recognized based upon the terms of the various
chargeback arrangements in effect at the time of product shipment. The Company monitors actual
chargebacks granted and compares them to the estimated provision for chargebacks to assess the
reasonableness of the chargebacks reserve at each balance sheet date on a quarterly basis.
Rebates
The Company maintains various rebate programs with its Global Products customers.
The rebate programs are integral to the Companys effort to maintain a competitive position in its
marketplace, as well as to promote greater product sales along with customer loyalty. The rebates
generally take the form of a credit against the invoiced gross sales amount charged to a customer
for products shipped. A provision for rebate deductions is estimated and recorded in the same
period when revenue is recognized based upon the terms of the various rebate programs in effect at
the time of product shipment. The Company monitors actual rebates granted and compares them to the
estimated provision for rebates to assess the reasonableness of the rebates reserve at each balance
sheet date on a quarterly basis.
Page 8 of 73
2. REVENUE RECOGNITION (continued)
Returns The Company allows its customers to return product (i) if approved by authorized
personnel in writing or by telephone with the lot number and expiration date accompanying any
request and (ii) if such products are returned within six months prior to or until twelve months
following, the products expiration date. The Company estimates a provision for product returns as
a percentage of gross sales based upon historical experience of
Global Product Sales. The sales
return reserve is estimated using a historical lag period which is the time between when the
product is sold and when it is ultimately returned, as determined from the Companys system
generated lag period report and return rates, adjusted by estimates of the future return rates
based on various assumptions, which may include changes to internal policies and procedures,
changes in business practices, and commercial terms with customers, competitive position of each
product, amount of inventory in the wholesaler supply chain, the introduction of new products, and
changes in market sales information. The Company considers other factors when estimating its
current period returns provision, including significant market changes which may impact future
expected returns, and actual product returns. The Company monitors actual returns on a quarterly
basis and may record specific provisions for returns it believes are not covered by historical
percentages.
Medicaid Rebate As required by law, the Company provides a rebate on drugs dispensed under
the Medicaid program. The Company determines its estimated Medicaid rebate accrual primarily based
on historical experience of claims submitted by the various states and any new information
regarding changes in the Medicaid program which may impact the Companys estimate of Medicaid
rebates. In determining the appropriate accrual amount, the Company considers historical payment
rates and processing lag for outstanding claims and payments. The Medicaid rebate accrual for the
three months ended March 31, 2010 includes the effect of the increase in the Medicaid rebate rates,
which were effective on a retroactive basis to January 1, 2010, resulting from the March 2010
enactment into law of the Patient Protection and Affordable Care Act and the Health Care and
Education Affordability Reconciliation Act (the Acts). The change in the Medicaid rebate rates
resulting from the Acts did not have a material impact on the Companys results of operations. The
Company records estimates for Medicaid rebates as a deduction from gross sales, with corresponding
adjustments to accrued liabilities.
Shelf-Stock Adjustment The Company will occasionally reduce the selling price of certain
products. The Company may issue a credit against the sales amount to customers based upon their
remaining inventory of the product in question, provided the customer continues to make future
purchases of product from the Company. This type of customer credit is referred to as a shelf-stock
adjustment, which is the difference between the sales price and the revised lower sales price,
multiplied by an estimate of the number of product units on hand at a given date. Decreases in
selling prices are discretionary decisions made by the Company in response to market conditions,
including estimated launch dates of competing products and estimated declines in market price.
Cash Discounts The Company offers cash discounts to its customers, generally 2% of the sales
price, as an incentive for paying within invoice terms, which generally range from 30 to 90 days.
An estimate of cash discounts is recorded in the same period when revenue is recognized.
Page 9 of 73
2. REVENUE RECOGNITION (continued)
Private Label product sales:
The Private Label product sales line item of the statement of operations includes revenue
recognized related to shipments of generic pharmaceutical products to customers who sell the
product to third parties under their own label (i.e. these products are not sold under the
Companys label). Sales revenue is recognized at the time title and risk of loss passes to the
customer generally when product is received by the customer. Revenue received from Private Label
product sales is not subject to deductions for chargebacks, rebates, product returns, and other
pricing adjustments. Additionally, Private Label product sales do not have upfront, milestone, or
lump-sum payments and do not contain multiple deliverables under FASB ASC Topic 605.
Rx Partner and OTC Partner:
The Rx Partner and OTC Partner line items of the statement of operations include revenue
recognized under alliance agreements between the Company and other unrelated third-party
pharmaceutical companies. The Company has entered into these alliance agreements to develop
marketing and /or distribution relationships with its partners to fully leverage its technology
platform.
The Rx Partners and OTC Partners alliance agreements obligate the Company to deliver multiple
goods and/or services over extended periods. Such deliverables include manufactured pharmaceutical
products, exclusive and semi-exclusive marketing rights, distribution licenses, and research and
development services, among others. In exchange for these deliverables, the Company receives
payments from its alliance agreement partners for product shipments, and may also receive royalty,
profit sharing, and/or upfront or periodic milestone payments. Revenue received from the alliance
agreement partners for product shipments under these agreements is not subject to deductions for
chargebacks, rebates, product returns, and other pricing adjustments. Royalty and profit sharing
amounts the Company receives under these agreements are calculated by the respective alliance
agreement partner, with such royalty and profit share amounts generally based upon estimates of net
product sales or gross profit which include estimates of deductions for chargebacks, rebates,
product returns, and other adjustments the alliance agreement partners may negotiate with their
customers. The Company records the alliance agreement partners adjustments to such estimated
amounts in the period the alliance agreement partner reports the amounts to the Company.
The Company 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 recognized is limited 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 10 of 73
2. REVENUE RECOGNITION (continued)
Research Partner
:
The Research Partner line item of the statement of operations includes revenue recognized
under a Joint Development Agreement with another unrelated third-party pharmaceutical company. The
Joint Development Agreement obligates the Company to provide research and development services over
multiple periods. In exchange for this service, the Company received an upfront payment upon
signing of the Joint Development Agreement and is eligible to receive contingent milestone
payments, based upon the achievement of contractually specified events. Additionally, the Company
may also receive royalty payments from the sale, if any, of a successfully developed and
commercialized product under the Joint Development Agreement. Revenue received from the provision
of research and development services, including the upfront payment and the contingent milestone
payments, if any, will be deferred and recognized on a straight line basis over the expected period
of performance of the research and development services. The Company estimates its expected period
of performance to provide research and development services is 48 months starting in December 2008
and ending in November 2012. Royalty fee income, if any, will be recognized by the Company as
current period revenue when earned. The Company determined this agreement does not include
multiple deliverables under FASB ASC Topic 605.
Promotional Partner:
The Promotional Partner line item of the statement of operations includes revenue recognized
under promotional services agreements with other unrelated third-party pharmaceutical companies.
The promotional services agreements obligate the Company to provide physician detailing sales calls
to promote its partners branded drug products over multiple periods. In exchange for this
service, the Company has received fixed fees generally based on either the number of sales force
representatives utilized in providing the services, or the number of sales calls made (up to
contractual maximum amounts). The Company recognizes revenue from providing physician detailing
services as those services are provided and as performance obligations are met and contingent
payments, if any, at the time when they are earned. The Company determined these agreements do not
include multiple deliverables under FASB ASC Topic 605.
Shipping and Handling Fees and Costs
Shipping
and handling fees related to sales transactions are recorded as selling expense.
Page 11 of 73
3. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2009, the FASB approved an update to the accounting standard related to
multiple-deliverable revenue arrangements currently within the scope of FASB ASC Topic 605. The
updated accounting standard provides principles and guidance to be used to determine whether a
revenue arrangement has multiple deliverables, and if so, how those deliverables should be
separated. If multiple deliverables exist, the updated standard requires revenue received under
the arrangement to be allocated using the estimated selling price of the deliverables if
vendor-specific objective evidence or third-party evidence of selling price is not available. The
updated accounting standard is effective for revenue arrangements entered into or materially
modified in fiscal years beginning on, or after June 15, 2010, with early application permitted.
The Company will determine the impact of the updated accounting standard as it enters into new
revenue arrangements, or materially modifies any of its existing revenue arrangements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-02, Consolidation (Topic
810): Accounting and Reporting for Decreases in Ownership of a Subsidiary a Scope Clarification.
This update provides amendments to Subtopic 810-10, and related guidance within US GAAP, to clarify
the scope of the decrease in ownership provisions. For those entities that have already adopted
Statement 160, the amendments are effective at the beginning of the first interim or annual
reporting period ending on or after December 15, 2009. The amendments should be applied
retrospectively to the first period that an entity adopted Statement 160. Upon becoming effective
this update did not have an impact on the Companys consolidated financial statements.
In March 2010, the FASB issued Accounting Standards Update No. 2010-17, Revenue
Recognition-Milestone Method of Revenue Recognition (Topic 605), which addresses accounting for
arrangements in which a vendor satisfies its performance obligations over time, with all or a
portion of the consideration contingent on future events, referred to as milestones. The
Milestone Method of Revenue Recognition is limited to arrangements which involve research or
development activities. A milestone is defined as an event for which, at the date the arrangement
is entered into, there is substantive uncertainty whether the event will be achieved, and the
achievement of the event is based in whole or in part on either the vendors performance or a
specific outcome resulting from the vendors performance. In addition, the achievement of the event
would result in additional payments being due to the vendor. The Milestone Method of Revenue
Recognition allows a vendor to adopt an accounting policy to recognize arrangement consideration
that is contingent on the achievement of a substantive milestone in its entirety in the period the
milestone is achieved. The Milestone Method of Revenue Recognition is effective on a prospective
basis, with an option for retrospective application for milestones achieved in fiscal years and
interim periods within those fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. If an entity elects early application in a period that is not the first reporting period
of its fiscal year, then the guidance must be applied retrospectively from the beginning of that
fiscal year. The Company will determine the impact of the new accounting standard as it achieves
milestones, and earns payments under either new or existing revenue arrangements.
Page 12 of 73
4. INVESTMENTS
Investments consist of commercial paper, corporate bonds, and medium-term notes, government
enterprise obligations, and /or certificates of deposit. The Companys policy is to invest in only
high quality AAA-rated or investment-grade securities. Investments in debt securities are
accounted for as held-to-maturity and are recorded at amortized cost, which approximates fair
value, based upon observable market values. The Company has historically held all investments in
debt securities until maturity, and has the ability and intent to continue to do so. All of the
Companys investments have remaining contractual maturities of less than 12 months and are
classified as short-term. Upon maturity the Company uses a specific identification method.
A summary of Short-term investments as of March 31, 2010 and December 31, 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(in $000s)
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
March 31, 2010
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Commercial paper
|
|
$
|
16,278
|
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
16,285
|
|
Government sponsored
enterprise obligations
|
|
|
27,535
|
|
|
|
9
|
|
|
|
(4
|
)
|
|
|
27,540
|
|
Corporate bonds
|
|
|
2,563
|
|
|
|
1
|
|
|
|
|
|
|
|
2,564
|
|
Certificates of deposit
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
46,615
|
|
|
$
|
17
|
|
|
$
|
(4
|
)
|
|
$
|
46,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(in $000s)
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
December 31, 2009
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Commercial paper
|
|
$
|
13,387
|
|
|
$
|
4
|
|
|
$
|
(1
|
)
|
|
$
|
13,390
|
|
Government sponsored
enterprise obligations
|
|
|
41,953
|
|
|
|
32
|
|
|
|
(1
|
)
|
|
|
41,984
|
|
Corporate bonds
|
|
|
3,021
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
3,021
|
|
Certificates of deposit
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
58,599
|
|
|
$
|
37
|
|
|
$
|
(3
|
)
|
|
$
|
58,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 13 of 73
5. ACCOUNTS RECEIVABLE
The composition of accounts receivable, net is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
(in $000s)
|
|
2010
|
|
|
2009
|
|
Gross accounts receivable
|
|
$
|
398,648
|
|
|
$
|
254,094
|
|
Less: Chargeback reserve
|
|
|
(27,637
|
)
|
|
|
(21,448
|
)
|
Less: Rebate reserve
|
|
|
(31,716
|
)
|
|
|
(37,781
|
)
|
Less: Other deductions
|
|
|
(14,603
|
)
|
|
|
(9,011
|
)
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
324,692
|
|
|
$
|
185,854
|
|
|
|
|
|
|
|
|
A roll forward of the chargeback and rebate reserves activity for the three months ended March
31, 2010 and the year ended December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
March 31,
|
|
|
December 31
|
|
Chargeback reserve
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
21,448
|
|
|
$
|
4,056
|
|
Provision recorded during the period
|
|
|
56,168
|
|
|
|
126,105
|
|
Credits issued during the period
|
|
|
(49,979
|
)
|
|
|
(108,713
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
27,637
|
|
|
$
|
21,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
March 31,
|
|
|
December 31
|
|
Rebate reserve
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
37,781
|
|
|
$
|
4,800
|
|
Provision recorded during the period
|
|
|
34,824
|
|
|
|
72,620
|
|
Credits issued during the period
|
|
|
(40,889
|
)
|
|
|
(39,639
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
31,716
|
|
|
$
|
37,781
|
|
|
|
|
|
|
|
|
Other deductions include allowance for uncollectible amounts and cash discounts. The Company
maintains an allowance for uncollectible amounts for estimated losses resulting from amounts deemed
to be uncollectible from its customers, with such allowances for specific amounts on certain
accounts. The Company recorded an allowance for uncollectible amounts of $447,000 and $372,000
at March 31, 2010 and December 31, 2009, respectively.
Page 14 of 73
6. INVENTORY
Inventory, net at March 31, 2010 and December 31, 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
(in $000s)
|
|
2010
|
|
|
2009
|
|
Raw materials
|
|
$
|
34,286
|
|
|
$
|
30,758
|
|
Work in process
|
|
|
2,858
|
|
|
|
2,768
|
|
Finished goods
|
|
|
16,235
|
|
|
|
17,051
|
|
|
|
|
|
|
|
|
Total inventory, net
|
|
$
|
53,379
|
|
|
$
|
50,577
|
|
|
|
|
|
|
|
|
|
|
Less: Non-current inventory, net
|
|
|
(1,364
|
)
|
|
|
(1,447
|
)
|
|
|
|
|
|
|
|
Total inventory-current, net
|
|
$
|
52,015
|
|
|
$
|
49,130
|
|
|
|
|
|
|
|
|
The balance of inventory carrying value reserves were $4,469,000 and $4,646,000 at March 31,
2010 and December 31, 2009, respectively.
To the extent inventory is not scheduled to be utilized in the manufacturing process and/or
sold within twelve months of the balance sheet date, it is included as a component of other
non-current assets. Amounts classified as non-current inventory consist of raw materials, net of
valuation reserves. Raw materials generally have a shelf life of approximately three to five
years, while finished goods generally have a shelf life of approximately two years.
When the Company concludes United States Food and Drug Administration (FDA) approval is
expected within approximately six months, the Company will generally begin to schedule
manufacturing process validation studies as required by FDA to demonstrate the production process
can be scaled up to manufacture commercial batches. Consistent with industry practice, the Company
may build quantities of pre-launch inventories of certain products pending required final FDA
approval and/or resolution of patent infringement litigation, when, in the Companys assessment,
such action is appropriate to increase the commercial opportunity, FDA approval is expected in the
near term, and/or the litigation will be resolved in the Companys favor.
The Company recognizes pre-launch inventories at the lower of its cost or the expected net
selling price. Cost is determined using a standard cost method, which approximates actual cost, and
assumes a FIFO flow of goods. Costs of unapproved products are the same as approved products and
include materials, labor, quality control, and production overhead. The carrying value of
unapproved inventory, less reserves, was approximately $3,452,000 and $8,702,000 at March 31,
2010 and December 31, 2009, respectively.
The capitalization of unapproved pre-launch inventory involves risks, including, among other
items, FDA approval of product may not occur; approvals may require additional or different testing
and/or specifications than used for unapproved inventory, and, in cases where the unapproved
inventory is for a product subject to litigation, the litigation may not be resolved or settled in
favor of the Company. If any of these risks were to materialize and the launch of the unapproved
product delayed or prevented, then the net carrying value of unapproved inventory may be partially
or fully reserved. Generally, the selling price of a generic pharmaceutical product is at discount
from the corresponding brand product selling price. Typically, a generic drug is easily substituted
for the corresponding brand product, and once a generic product is approved, the pre-launch
inventory is typically sold within the next three months. If the market prices become lower than
the product inventory carrying costs, then the pre-launch inventory value is reduced to such lower
market value. If the inventory produced exceeds the estimated market acceptance of the generic
product and becomes short-dated, a carrying value reserve will be
recorded. In all cases, the carrying value of the Companys pre-launch product inventory is
lower than the respective estimated net selling prices.
Page 15 of 73
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
(in $000s)
|
|
2010
|
|
|
2009
|
|
Land
|
|
$
|
2,270
|
|
|
$
|
2,270
|
|
Buildings and improvements
|
|
|
78,286
|
|
|
|
77,778
|
|
Equipment
|
|
|
61,332
|
|
|
|
59,612
|
|
Office furniture and equipment
|
|
|
7,585
|
|
|
|
7,425
|
|
Construction-in-progress
|
|
|
6,077
|
|
|
|
4,880
|
|
|
|
|
|
|
|
|
Property, plant and equipment, gross
|
|
$
|
155,550
|
|
|
$
|
151,965
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(53,220
|
)
|
|
|
(50,315
|
)
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
102,330
|
|
|
$
|
101,650
|
|
|
|
|
|
|
|
|
Depreciation expense was $2,946,000 and $2,544,000 for the three months ended March 31, 2010 and
2009, respectively.
Page 16 of 73
8. ACCRUED EXPENSES
The following table sets forth the Companys accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
December 31
|
|
(in $000s)
|
|
2010
|
|
|
2009
|
|
Payroll-related expenses
|
|
$
|
10,184
|
|
|
$
|
15,274
|
|
Product returns
|
|
|
28,599
|
|
|
|
22,114
|
|
Shelf stock adjustments
|
|
|
138
|
|
|
|
225
|
|
Medicaid rebates
|
|
|
16,848
|
|
|
|
9,759
|
|
Physician detailing sales force fees
|
|
|
2,410
|
|
|
|
2,449
|
|
Legal and professional fees
|
|
|
4,126
|
|
|
|
3,660
|
|
Litigation settlements
|
|
|
|
|
|
|
5,865
|
|
Other
|
|
|
2,453
|
|
|
|
2,709
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
64,758
|
|
|
$
|
62,055
|
|
|
|
|
|
|
|
|
Accrued Litigation Settlement Expenses
In January 2010, the Company entered into an agreement to settle a suit related to the
Companys Lipram UL products. Under the terms of this agreement, the Company agreed to reimburse
the plaintiff for litigation costs, which was paid by the Company in January 2010. The Company
recorded an accrued expense for this payment in the year ended December 31, 2009, along with
corresponding incurred legal and professional fees, as litigation settlement expense in the
consolidated statement of operations.
On January 28, 2009, the Company entered into an agreement settling the securities class
actions pending in the United States District Court for the Northern District of California. Under
the terms of the settlement, plaintiffs agreed to dismiss the actions with prejudice, and
defendants, including the Company, without admitting the allegations or any liability, agreed to
pay the plaintiff class $9.0 million, of which the Company paid approximately $3.4 million in
January 2009, with the balance paid by the Companys directors and officers liability insurance
carriers. The Company recorded an accrued expense for its portion of the settlement payment, in
the year ended December 31, 2008.
Taiwan Facility Construction
The Company has constructed a facility in Jhunan Taiwan, R.O.C., intended to be utilized for
manufacturing, research and development, warehouse, and administrative space. In conjunction with
the construction of this facility, the Company entered into several contracts aggregating
approximately $16,617,000 as of March 31, 2010. As of March 31, 2010, the Company had remaining
obligations under these contracts of approximately $1,355,000, which is included in the other line
in the table above. The Company cumulatively capitalized interest expense of $596,000 in
conjunction with the construction of the Taiwan facility.
Product Returns
The Company maintains a product 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 Private Label, the Rx Partner, and the OTC Partners alliance
agreements generally are not subject to returns. A roll forward of the product return reserve for
the three months ended March 31, 2010 and the year ended December 31, 2009, is as follows:
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
March 31
|
|
|
December 31
|
|
Product Return Reserve
|
|
2010
|
|
|
2009
|
|
(in $000s)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
22,114
|
|
|
$
|
13,675
|
|
Provision related to
sales recorded in the period
|
|
|
7,400
|
|
|
|
11,847
|
|
Credits issued during the period
|
|
|
(915
|
)
|
|
|
(3,408
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
28,599
|
|
|
$
|
22,114
|
|
|
|
|
|
|
|
|
Purchase Order Commitments
As of March 31, 2010, the Company had approximately $17,311,000 of open purchase order
commitments, primarily for raw materials. The terms of these purchase order commitments are less
than one year in duration.
Page 17 of 73
9. INCOME TAXES
The Company calculates its interim income tax provision in accordance with FASB ASC Topics 270
and 740. At the end of each interim period, the Company makes an estimate of the annual expected
effective tax rate and applies the estimated effective rate to its ordinary year-to-date taxable
earnings or loss. In addition, the effect of changes in enacted tax laws, rates, or tax status is
recognized in the interim period in which such change occurs.
The computation of the annual estimated effective tax rate at each interim period requires
certain estimates and assumptions including, but not limited to, the expected operating income for
the year, projections of the proportion of income (or loss) earned and taxed in United States state
and local jurisdictions, as well as jurisdictions outside the United States, along with permanent
and temporary differences, and the likelihood of recovering deferred tax assets generated in the
current year. The accounting estimates used to compute the provision for income taxes may change
as new events occur, more experience is acquired or additional information is obtained. The
computation of the annual estimated effective tax rate includes modifications, which were projected
for the year, for share based compensation, the domestic manufacturing deduction, and state
research and development credits, among others.
During the three months ended March 31, 2010, the Company recorded a tax provision of $
79,484,000 for United States domestic income taxes and for foreign income taxes. The three months
ended March 31, 2010 tax provision also included an accrual for uncertain tax positions of $
12,000. In the three months ended March 31, 2009, the Company recorded a tax provision of $
1,836,000 for United States domestic income taxes and for foreign income taxes. The three months
ended March 31, 2009 tax provision also included an accrual for uncertain tax positions of $
218,000. The increase in the tax provision was driven by higher income before taxes in the three
months ended March 31, 2010. The tax provision for the three months ended March 31, 2010 does not
include the effect of the federal research and development tax credit as such credit expired on
December 31, 2009, and has not been reinstated for 2010. The tax provision for the three months
ended March 31, 2009 included the effect of the federal research and development tax credit.
Page 18 of 73
10. REVOLVING LINE OF CREDIT
The Company has a $35,000,000 revolving credit facility under a credit agreement with
Wachovia Bank, N.A. (a Wells Fargo subsidiary) (Credit Agreement), with a June 30, 2010
expiration date, effective with a fourth amendment to the Credit Agreement executed in March 2010.
The revolving credit facility, intended for working capital and general corporate purposes, is
collateralized by eligible accounts receivable, inventory, and machinery and equipment, subject to
limitations and other terms. There were no amounts outstanding under the revolving credit facility
as of March 31, 2010 and December 31, 2009, respectively.
Effective March 31, 2009, the interest rate for the revolving credit facility is set at either
the prime rate plus a margin ranging from 0.25% to 0.75% or LIBOR plus a margin ranging from 2.25%
to 3.0% based upon certain terms and conditions. The Company is required to pay an unused line fee
of 50 basis points per annum and a servicing fee of $1,500 during any month in which no revolver
loans are outstanding. During the three months ended March 31, 2010 and 2009, the Company paid to
Wachovia Bank unused line fees of $44,000 and $40,000, respectively.
The Credit Agreement contains various financial covenants, the most significant of which
include a fixed charge coverage ratio and a capital expenditure limitation. The fixed charge
coverage ratio, applicable only for periods during which the Companys net cash position is less
than $50.0 million, requires EBITDA less cash paid for taxes, dividends, and certain capital
expenditures, to be not less than 1.25 to 1.00 as compared to scheduled principal payments coming
due in the next 12 months plus cash interest paid during the applicable period. The Company is
limited to capital expenditures of no more than $25.0 million for each calendar year. The Credit
Agreement also provides for certain information reporting covenants, including a requirement to
provide certain periodic financial information. At March 31, 2010, the Company was in compliance
with the various financial and information reporting covenants contained in the Credit Agreement.
Page 19 of 73
11. ALLIANCE AND COLLABORATION AGREEMENTS
Strategic Alliance Agreement with Teva
The following tables show the additions to and deductions from the deferred revenue and
deferred product manufacturing costs under the Teva Agreement:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
Inception
|
|
(in $000s)
|
|
March 31,
|
|
|
Through
|
|
Deferred revenue
|
|
2010
|
|
|
Dec 31, 2009
|
|
Beginning balance
|
|
$
|
202,032
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Cost-sharing
|
|
|
175
|
|
|
|
6,653
|
|
Product-related deferrals
|
|
|
4,841
|
|
|
|
410,616
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
5,016
|
|
|
|
417,269
|
|
Exclusivity charges
|
|
|
|
|
|
|
(50,600
|
)
|
Forgiveness of advance deposit
|
|
|
|
|
|
|
6,000
|
|
Forgiveness of interest
|
|
|
|
|
|
|
4,370
|
|
Stock repurchase
|
|
|
|
|
|
|
2,157
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
5,016
|
|
|
$
|
379,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
Forgiveness of advance deposit
|
|
$
|
(54
|
)
|
|
$
|
(2,802
|
)
|
Forgiveness of interest
|
|
|
(39
|
)
|
|
|
(2,045
|
)
|
Stock repurchase
|
|
|
(19
|
)
|
|
|
(1,008
|
)
|
Cost-sharing
|
|
|
(126
|
)
|
|
|
(3,092
|
)
|
Product-related revenue
|
|
|
(4,664
|
)
|
|
|
(168,217
|
)
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(4,902
|
)
|
|
|
(177,164
|
)
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
202,146
|
|
|
$
|
202,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
(in $000s)
|
|
Ended
|
|
|
Inception
|
|
Deferred product
|
|
March 31,
|
|
|
Through
|
|
manufacturing costs
|
|
2010
|
|
|
Dec 31, 2009
|
|
Beginning balance
|
|
$
|
94,040
|
|
|
$
|
|
|
Additions
|
|
|
2,987
|
|
|
|
175,565
|
|
Less amounts amortized
|
|
|
(2,705
|
)
|
|
|
(81,525
|
)
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
94,322
|
|
|
$
|
94,040
|
|
|
|
|
|
|
|
|
Page 20 of 73
11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)
OTC Partners Alliance Agreements
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the OTC Agreements:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
Inception
|
|
(in $000s)
|
|
March 31
|
|
|
Through
|
|
Deferred revenue
|
|
2010
|
|
|
Dec 31, 2009
|
|
Beginning balance
|
|
$
|
16,162
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Upfront fees and
milestone payments
|
|
|
|
|
|
|
8,436
|
|
Cost-sharing and other
|
|
|
|
|
|
|
1,642
|
|
Product-related deferrals
|
|
|
479
|
|
|
|
83,826
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
479
|
|
|
$
|
93,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount recognized:
|
|
|
|
|
|
|
|
|
Upfront fees and
milestone payments
|
|
|
(69
|
)
|
|
|
(7,745
|
)
|
Cost-sharing and other
|
|
|
(187
|
)
|
|
|
(1,550
|
)
|
Product-related revenue
|
|
|
(1,509
|
)
|
|
|
(68,447
|
)
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(1,765
|
)
|
|
|
(77,742
|
)
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
14,876
|
|
|
$
|
16,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
(in $000s)
|
|
Ended
|
|
|
Inception
|
|
Deferred product
|
|
March 31,
|
|
|
Through
|
|
manufacturing costs
|
|
2010
|
|
|
Dec 31, 2009
|
|
Beginning balance
|
|
$
|
14,203
|
|
|
$
|
|
|
Additions:
|
|
|
440
|
|
|
|
77,870
|
|
Less: amount amortized:
|
|
|
(1,544
|
)
|
|
|
(63,667
|
)
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
13,099
|
|
|
$
|
14,203
|
|
|
|
|
|
|
|
|
Page 21 of 73
11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)
Joint Development Agreement with Medicis Pharmaceutical Corporation
The Joint Development Agreement provides for the Company and Medicis to collaborate in the
development of a total of five dermatology products, including four of the Companys generic
products and one branded advanced form of Mediciss SOLODYN
®
product. Under the provisions of The
Joint Development Agreement the Company received a $40,000,000 upfront payment, paid by Medicis in
December 2008. The Company has also received an aggregate $12,000,000 in milestone payments
composed of two $5,000,000 milestone payments, paid by Medicis in March 2009 and September 2009,
and a $2,000,000 milestone payment received in December 2009. The Company has the potential to
receive up to an additional $11,000,000 of contingent milestone payments upon achievement of
certain contractually specified clinical and regulatory milestones, as well as the potential to
receive royalty payments from sales, if any, by Medics of its advanced form SOLODYN
®
brand product.
Finally, to the extent the Company commercializes any of its four generic dermatology products
covered by the Joint Development Agreement, the Company will pay to Medicis a 50% gross profit
share on sales, if any, of such products.
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the Joint Development Agreement with Medicis:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
Inception
|
|
(in $000s)
|
|
March 31,
|
|
|
Through
|
|
Deferred revenue
|
|
2010
|
|
|
Dec 31, 2009
|
|
Beginning balance
|
|
$
|
39,487
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
|
|
|
|
52,000
|
|
Product-related deferrals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
|
|
|
$
|
52,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
(3,385
|
)
|
|
|
(12,513
|
)
|
Product-related revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(3,385
|
)
|
|
|
(12,513
|
)
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
36,102
|
|
|
$
|
39,487
|
|
|
|
|
|
|
|
|
Page 22 of 73
11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)
Agreements with Shire LLC
License and Distribution Agreement
In January 2006, the Company entered into a License and Distribution Agreement with an
affiliate of Shire Laboratories, Inc. (License and Distribution Agreement), under which the
Company received a non-exclusive license to market and sell an authorized generic of Shires
Adderall XR product (AG Product) subject to certain conditions, but in any event by no later than
January 1, 2010. The Company commenced sales of the AG Product in October 2009. Under the terms
of the License and Distribution Agreement with Shire, Shire is responsible for manufacturing the AG
Product, and the Company is responsible for marketing and sales of the AG Product. The Company is
required to pay a profit share to Shire on sales of the AG Product. The Company accrued a profit
share payable of $41,228,000 on sales of the AG Product during the three months ended March 31,
2010 with a corresponding charge included in the Cost of revenues line on the consolidated
statement of operations.
Promotional Services Agreement
In January 2006, the Company entered into a Promotional Services Agreement with an affiliate
of Shire Laboratories, Inc. (Shire Agreement), under which the Company was engaged to perform
physician detailing sales calls services in support of Shires Carbatrol product. The Company was
obligated to perform the detailing sales calls for a period of three years which began on July 1,
2006 and ended on June 30, 2009. The Shire Agreement required 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. The Company
recognized $0 and $3,284,000 in sales force fee revenue for the three months ended March 31, 2010
and 2009, respectively, under the Shire Agreement, with such amounts presented in the captioned
line item Promotional Partner under revenues on the consolidated statement of operations.
Page 23 of 73
11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)
Co-Promotion Agreement with Pfizer
In March 2010, the Company entered into the First Amendment to the Co-Promotion Agreement (the
Amendment) with Wyeth, now a wholly owned subsidiary of Pfizer, an unrelated third-party
pharmaceutical company. Under the terms of the Amendment, the Company will begin to perform
physician detailing sales calls services for Pfizers Lyrica product to neurologists, and will stop
performing physician detailing sales calls for the Wyeth product Pristiq, effective April 1, 2010.
The Company will receive a fixed fee, subject to annual cost adjustment, for providing physician
detailing sales calls within a contractually defined range of an aggregate number of physician
detailing sales calls rendered on a quarterly basis. Under the terms of the Amendment, the fixed
fee payment structure was effective January 1, 2010, on a retro-active basis. The Company
performed the necessary minimum number of physician detailing sales calls during the three months
ended March 31, 2010 to earn the fixed fee under the Amendment. There is no opportunity for the
Company to earn incentive fees under the terms of the Amendment. Pfizer is responsible for
providing sales training to the Companys physician detailing sales force personnel. Pfizer owns
the product and is responsible for all pricing and marketing literature as well as product
manufacture and fulfillment. The Company recognizes the physician detailing sales force fee
revenue as the related services are performed and the performance obligations are met. The Company
recognized $3,503,000 in the three months ended March 31, 2010 under the (amended) Pfizer
Co-Promotion Agreement, and $0 in physician detailing sales force fee revenue for the three months
ended March 31, 2009 under the (former) Wyeth Co-Promotion Agreement, with such amounts presented
in the captioned line item Promotional Partner under revenues on the consolidated statement of
operations.
As noted above, the Company entered into a three year Co-Promotion Agreement with Wyeth, an
unrelated third-party pharmaceutical company, prior to Wyeth becoming a wholly-owned subsidiary of
Pfizer, under which the Company performed physician detailing sales calls for the Wyeth Pristiq
product to neurologists, with such services commencing on July 1, 2009. Wyeth paid the Company a
service fee, subject to an annual cost adjustment, for each physician detailing sales call. During
the term of the Co-Promotion Agreement, the Company was required to complete a minimum and maximum
number of physician detailing sales calls. Wyeth was responsible for providing sales training to
the Companys sales force. Wyeth owned the product and was responsible for all pricing and
marketing literature as well as product manufacture and fulfillment. The Company recognized
service fee revenue as the related physician detailing sales call services were performed and the
performance obligations were met. The Company did not earn any incentive fee revenue under the
terms of the (former) Wyeth Co-Promotion Agreement.
Page 24 of 73
11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)
Exclusive License, Development and Supply Agreement with Putney
On July 31, 2007, the Company, and Putney Inc. (Putney), entered into an Exclusive License,
Development and Supply Agreement (Agreement). Under the Agreement, the Company and Putney agreed
to collaborate on the development and commercialization of a generic equivalent of the Rimadyl
®
chewable tablets in 25mg, 75mg, and/or 100mg dosage strengths.
In May 2009, the Company received a $50,000 milestone payment from Putney upon completion of
successful pivotal bioequivalence studies. The Company has the potential to receive a $50,000
contingent additional milestone payment upon final FDA approval of an Abbreviated New Animal Drug
Application (ANADA). To the extent the ANADA is approved by FDA, the Company will be the
exclusive manufacturer of the product, while Putney will have exclusive rights to market and sell
the product in the United States. Putney will pay the Company a profit share on any
sales of the new product.
The term of the Agreement is a period of six years from the date of first commercial sale. At
this time, the Company estimates a March 2011 FDA ANADA approval and product launch. Accordingly,
the life of the Agreement with Putney is currently estimated to be a period of 116 months beginning
on the July 31, 2007 signing date, and ending on March 31, 2017.
Page 25 of 73
12. SHARE-BASED COMPENSATION
The Company recognizes the fair value of each stock option and restricted share over its
vesting period. Stock options and restricted stock awards are granted under the Companys Amended
and Restated 2002 Equity Incentive Plan (2002 Plan) and generally vest over a three or four year
period and have a term of ten years.
Total share-based compensation expense recognized in the consolidated statement of operations
was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended:
|
|
|
|
March 31,
|
|
|
March 31,
|
|
(in $000s)
|
|
2010
|
|
|
2009
|
|
Manufacturing expenses
|
|
$
|
898
|
|
|
$
|
349
|
|
Research and development
|
|
|
898
|
|
|
|
602
|
|
Selling, general & administrative
|
|
|
1,077
|
|
|
|
486
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,873
|
|
|
$
|
1,437
|
|
|
|
|
|
|
|
|
The following table summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
|
Under Option
|
|
|
per Share
|
|
Outstanding at December 31, 2009
|
|
|
8,229,818
|
|
|
$
|
9.87
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
|
|
|
$
|
|
|
Options exercised
|
|
|
(488,359
|
)
|
|
$
|
8.61
|
|
Options forfeited
|
|
|
(32,363
|
)
|
|
$
|
8.97
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010
|
|
|
7,709,096
|
|
|
$
|
9.96
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2010
|
|
|
7,850,433
|
|
|
$
|
10.01
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2010
|
|
|
4,339,478
|
|
|
$
|
11.39
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of each stock option award on the grant date using the
Black-Scholes Merton option-pricing model, wherein: expected volatility is based solely on
historical volatility of the Companys common stock over the period commensurate with the expected
term of the stock options. The expected term calculation is based on the simplified method
described in SAB No. 107, Share-Based Payment and SAB No. 110, Share-Based Payment as the Company
has limited historical experience of option exercise activity. The risk-free interest rate is
based on the U.S. Treasury yield in effect at the time of grant for an instrument with a maturity
that is commensurate with the expected term of the stock options. The dividend yield of zero is
based on the fact that the Company has never paid cash dividends on its common stock, and has no
present intention to pay cash dividends.
Page 26 of 73
12. SHARE-BASED COMPENSATION (continued)
A summary of the Companys non-vested restricted stock awards is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Restricted
|
|
Number of Restricted
|
|
|
Grant-Date
|
|
Stock Awards
|
|
Stock Awards
|
|
|
Fair Value
|
|
Non-vested at December 31, 2009
|
|
|
1,152,923
|
|
|
$
|
7.72
|
|
Granted
|
|
|
37,200
|
|
|
$
|
13.65
|
|
Vested
|
|
|
(108,020
|
)
|
|
$
|
8.43
|
|
Forfeited
|
|
|
(8,823
|
)
|
|
$
|
7.88
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2010
|
|
|
1,073,280
|
|
|
$
|
7.85
|
|
|
|
|
|
|
|
|
|
The Company grants restricted stock awards to certain eligible employees and directors as a
component of its long-term incentive compensation program. The restricted stock award grants are
made in accordance with the Companys 2002 Plan, and typically specify the restricted
stock awards underlying shares of common stock are not issued until they vest. The restricted
stock awards generally vest ratably over a three or four year period from the date of grant.
As of March 31, 2010, the Company had total unrecognized share-based compensation expense, net
of estimated forfeitures, of $19,735,000 related to all of its share-based awards, which will be
recognized over a weighted average period of 2.2 years. The intrinsic value of stock options
exercised during the three months ended March 31, 2010 and 2009 was $3,730,000 and $1,631,000,
respectively. The total fair value of restricted stock awards which vested during the three months
ended March 31, 2010 and 2009 was $910,000 and $137,000, respectively. As of March 31, 2010, the
Company had 1,426,918 shares of common stock available for issuance of either stock options or
restricted stock awards.
Page 27 of 73
13. STOCKHOLDERS EQUITY
Preferred Stock
Pursuant to its certificate of incorporation, the Company is authorized to issue 2,000,000
shares, $0.01 par value per share, blank check preferred stock, which enables the Board of
Directors, from time to time, to create one or more new series of preferred stock. Each series of
preferred stock issued can have the rights, preferences, privileges and restrictions designated by
the Board of Directors. The issuance of any new series of preferred stock could affect, among
other things, the dividend, voting, and liquidation rights of the Companys common stock. During
the three months ended March 31, 2010 and 2009, the Company did not issue any preferred stock.
Common Stock
The Companys Certificate of Incorporation, as amended, authorizes the Company to issue
90,000,000 shares of common stock with $0.01 par value.
Shareholders Rights Plan
On January 20, 2009, the Board of Directors approved the adoption of a shareholder rights plan
and declared a dividend of one preferred share purchase right for each outstanding share of common
stock of the Company. Under certain circumstances, if a person or group acquires, or announces its
intention to acquire, beneficial ownership of 20% or more of the Companys outstanding common
stock, each holder of such right (other than the third party triggering such exercise), would be
able to purchase, upon exercise of the right at a $15 exercise price, subject to adjustment, the
number of shares of the Companys common stock having a market value of two times the exercise
price of the right. Subject to certain exceptions, if the Company is consolidated with, or merged
into, another entity and the Company is not the surviving entity in such transaction or shares of
the Companys outstanding common stock are exchanged for securities of any other person, cash or
any other property, or more than 50% of the Companys assets or earning power is sold or
transferred, then each holder of the rights would be able to purchase, upon the exercise of the
right at a $15 exercise price, subject to adjustment, the number of shares of common stock of the
third party acquirer having a market value of two times the exercise price of the right. The rights
expire on January 20, 2012, unless extended by the Board of Directors. In connection with the
shareholder rights plan, the Board of Directors designated 100,000 shares of series A junior
participating preferred stock.
Page 28 of 73
14. EARNINGS PER SHARE
The companys earnings per share (EPS) includes basic net income per share, computed by
dividing net income (as presented on the consolidated statement of operations), by the
weighted-average number of common shares outstanding for the period, along with diluted earnings
per share, computed by dividing net income by the weighted-average number of common shares adjusted
for the dilutive effect of common stock equivalents outstanding during the period. A
reconciliation of basic and diluted net income per common share for the three months ended March
31, 2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended:
|
|
|
|
March 31,
|
|
|
March 31
|
|
(in $000s except per share amounts)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
131,485
|
|
|
$
|
2,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding
|
|
|
61,008,015
|
|
|
|
59,711,133
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive options and common
stock purchase warrants
|
|
|
2,857,663
|
|
|
|
511,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average
common shares outstanding
|
|
|
63,865,678
|
|
|
|
60,222,215
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
2.16
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
2.06
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2010 and 2009, the Company excluded 1,034,741 and
7,755,173, respectively, of stock options from the computation of diluted net income per common
share as the effect of these options would have been anti-dilutive.
Page 29 of 73
15. COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended:
|
|
|
|
March 31,
|
|
|
March 31,
|
|
(in $000s)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
131,485
|
|
|
$
|
2,219
|
|
Currency translation adjustments
|
|
|
347
|
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
131,832
|
|
|
|
1,519
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to
the noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable
to Impax Laboratories, Inc.
|
|
$
|
131,832
|
|
|
$
|
1,519
|
|
|
|
|
|
|
|
|
Page 30 of 73
16. SEGMENT INFORMATION
The Company has two reportable segments, the Global Pharmaceuticals Division (Global
Division) and the Impax Pharmaceuticals Division (Impax Division). The Company currently
markets and sells product within the continental United States of America and the Commonwealth of
Puerto Rico.
The Global Division develops, manufactures, sells, and distributes generic pharmaceutical
products, primarily through the following sales channels: the Global Products sales channel, for
sales of generic prescription products, directly to wholesalers, large retail drug chains, and
others; the Private Label sales channel, for generic pharmaceutical over-the-counter and
prescription products sold to unrelated third-party customers, who in-turn sell the products to
third-parties under their own label; the Rx Partner sales channel, for generic prescription
products sold through unrelated third-party pharmaceutical entities under their own label pursuant
to alliance agreements; and the OTC Partner sales channel, for over-the-counter products sold
through unrelated third-party pharmaceutical entities under their own label pursuant to alliance
agreements. The Company also generates revenue from research and development services provided
under a joint development agreement with another unrelated third-party pharmaceutical company, and
reports such revenue under the caption Research Partner revenue on the consolidated statement of
operations. The Company provides these services through the research and development group in its
Global Division.
The Impax Division is engaged in the development of proprietary brand pharmaceutical products
through improvements to already-approved pharmaceutical products to address central nervous system
(CNS) disorders. The Impax Division is also engaged in product 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 (loss) before income taxes. Items below income (loss)
from operations are not reported by segment, except litigation settlements, since they are excluded
from the measure of segment profitability reviewed by the Companys chief operating decision maker.
Additionally, general and administrative expenses, certain selling expenses, certain litigation
settlements, and non-operating income and expenses are included in Corporate and Other. The
Company does not report balance sheet information by segment since it is not reviewed by the
Companys chief operating decision maker. The accounting policies for the Companys segments are
the same as those described above in the discussion of Revenue Recognition and in the Summary of
Significant Accounting Policies in the Companys Form 10K for the year ended December 31, 2009.
The Company has no inter-segment revenue.
The tables below present segment information reconciled to total Company consolidated
financial results, with segment operating income or loss including gross profit less direct
research and development expenses, and direct selling expenses as well as any litigation
settlements, to the extent specifically identified by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
Global
|
|
|
Impax
|
|
|
Corporate
|
|
|
Total
|
|
Three Months Ended March 31, 2010
|
|
Division
|
|
|
Division
|
|
|
and Other
|
|
|
Company
|
|
Revenue, net
|
|
$
|
319,830
|
|
|
$
|
3,503
|
|
|
$
|
|
|
|
$
|
323,333
|
|
Cost of revenue
|
|
|
76,432
|
|
|
|
3,144
|
|
|
|
|
|
|
|
79,576
|
|
Research and development
|
|
|
9,435
|
|
|
|
8,874
|
|
|
|
|
|
|
|
18,309
|
|
Patent Litigation
|
|
|
1,984
|
|
|
|
|
|
|
|
|
|
|
|
1,984
|
|
Income (loss) before provision for income taxes
|
|
$
|
228,645
|
|
|
$
|
(9,324
|
)
|
|
$
|
(8,324
|
)
|
|
$
|
210,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
Global
|
|
|
Impax
|
|
|
Corporate
|
|
|
Total
|
|
Three Months Ended March 31, 2009
|
|
Division
|
|
|
Division
|
|
|
and Other
|
|
|
Company
|
|
Revenue, net
|
|
$
|
55,629
|
|
|
$
|
3,284
|
|
|
$
|
|
|
|
$
|
58,913
|
|
Cost of revenue
|
|
|
23,233
|
|
|
|
3,017
|
|
|
|
|
|
|
|
26,250
|
|
Research and development
|
|
|
10,275
|
|
|
|
5,514
|
|
|
|
|
|
|
|
15,789
|
|
Patent Litigation
|
|
|
1,017
|
|
|
|
|
|
|
|
|
|
|
|
1,017
|
|
Income (loss) before provision for income taxes
|
|
$
|
18,510
|
|
|
$
|
(6,287
|
)
|
|
$
|
(8,178
|
)
|
|
$
|
4,045
|
|
Page 31 of 73
17. LEGAL AND REGULATORY MATTERS
Patent Litigation
There is substantial litigation in the pharmaceutical, biological, and biotechnology
industries with respect to the manufacture, use, and sale of new products which are the subject of
conflicting patent and intellectual property claims. One or more patents typically cover most of
the brand name products for which the Company is developing generic versions.
Under federal law, when a drug developer files an ANDA for a generic drug, seeking approval
before expiration of a patent, which has been listed with the FDA as covering the brand name
product, the developer must certify its product will not infringe the listed patent(s) and/or the
listed patent is invalid or unenforceable (commonly referred to as a Paragraph IV certification).
Notices of such certification must be provided to the patent holder, who may file a suit for
patent infringement within 45 days of the patent holders receipt of such notice. If the patent
holder files suit within the 45 day period, the FDA can review and tentatively approve the ANDA,
but is prevented from granting final marketing approval of the product until a final judgment in
the action has been rendered in favor of the generic, or 30 months from the date the notice was
received, whichever is sooner. Lawsuits have been filed against the Company in connection the
Companys Paragraph IV certifications.
Should a patent holder commence a lawsuit with respect to an alleged patent infringement by
the Company, the uncertainties inherent in patent litigation make the outcome of such litigation
difficult to predict. The delay in obtaining FDA approval to market the Companys product
candidates as a result of litigation, as well as the expense of such litigation, whether or not the
Company is ultimately successful, could have a material adverse effect on the Companys results of
operations and financial position. In addition, there can be no assurance any patent litigation
will be resolved prior to the end of the 30-month period. As a result, even if the FDA were to
approve a product upon expiration of the 30-month period, the Company may elect to not commence
marketing the product if patent litigation is still pending.
Further, under the Teva Agreement, the Company and Teva have agreed to share in fees and costs
related to patent infringement litigation associated with the 12 products covered by the Teva
Agreement. For the six products with ANDAs already filed with the FDA at the time the Teva
Agreement was signed, Teva is required to pay 50% of the fees and costs in excess of $
7,000,000; for three of the products with ANDAs filed since the Teva Agreement was signed, Teva is
required to pay 45% of the fees and costs; and for the remaining three products, Teva is required
to pay 50% of the fees and costs. The Company is responsible for the remaining fees and costs
relating to these 12 products.
The Company is responsible for all of the patent litigation fees and costs associated with
current and future products not covered by the Teva Agreement. The Company records as expense the
costs of patent litigation as incurred.
Although the outcome and costs of the asserted and unasserted claims is difficult to predict,
the Company does not expect the ultimate liability, if any, for such matters to have a material
adverse effect on its financial condition, results of operations, or cash flows.
Page 32 of 73
17. LEGAL AND REGULATORY MATTERS (continued)
Patent Infringement Litigation
AstraZeneca AD et al. v. Impax Laboratories, Inc. (Omeprazole)
In litigation commenced against the Company in the U.S. District Court for the District of
Delaware in May 2000, AstraZeneca AB alleged the Companys submission of an ANDA seeking FDA
permission to market Omeprazole Delayed Release Capsules, 10mg, 20mg and 40mg, constituted
infringement of AstraZenecas U.S. patents relating to its Prilosec
®
product and sought an order
enjoining the Company from marketing its product until expiration of the patents. The case, along
with several similar suits against other manufacturers of generic versions of Prilosec
®
, was
subsequently transferred to the U.S. District Court for the Southern District of New York. In
September 2004, following expiration of the 30-month stay, the FDA approved the Companys ANDA, and
the Company and its alliance agreement partner, Teva, commenced commercial sales of the Companys
product. In January 2005, AstraZeneca added claims of willful infringement, for damages, and for
enhanced damages on the basis of this commercial launch. Claims for damages were subsequently
dropped from the suit against the Company, but were included in a separate suit filed against Teva.
In May 2007, the court found the product infringed two of AstraZenecas patents and these patents
were not invalid. The court ordered FDA approval of the Companys ANDA be converted to a tentative
approval, with a final approval date not before October 20, 2007, the expiration date of the
relevant pediatric exclusivity period. In August 2008 the U.S. Court of Appeals for the Federal
Circuit affirmed the lower courts decision of infringement and validity. In January, 2010,
AstraZeneca, Teva and the Company entered into a settlement agreement and the suits against both
Teva and the Company were dismissed.
Aventis Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc.
(Fexofenadine/Pseudoephedrine)
The Company is a defendant in an action brought in March 2002 by Aventis Pharmaceuticals Inc.
and others in the U.S. District Court for the District of New Jersey alleging the Companys
proposed Fexofenadine and Pseudoephedrine Hydrochloride tablets, generic to Allegra-D
®
, infringe
seven Aventis patents and seeking an injunction preventing the Company from marketing the products
until expiration of the patents. The case has since been consolidated with similar actions brought
by Aventis against five other manufacturers (including generics to both Allegra
®
and Allegra-D
®
).
In March 2004, Aventis and AMR Technology, Inc. filed a complaint and first amended complaint
against the Company and one of the other defendants alleging infringement of two additional
patents, owned by AMR and licensed to Aventis, relating to a synthetic process for making the
active pharmaceutical ingredient, Fexofenadine Hydrochloride and intermediates in the synthetic
process. The Company believes it has defenses to the claims based on non-infringement and
invalidity.
In June 2004, the court granted the Companys motion for summary judgment of non-infringement
with respect to two of the patents 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. Discovery is proceeding. No trial date has been set.
Page 33 of 73
17. LEGAL AND REGULATORY MATTERS (continued)
Endo Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc. (Oxymorphone)
In November 2007, Endo Pharmaceuticals Inc. and Penwest Pharmaceuticals Co. (together, Endo)
filed suit against the Company in the U.S. District Court for the District of Delaware, requesting
a declaration the Companys Paragraph IV Notices with respect to the Companys ANDA for Oxymorphone
Hydrochloride Extended Release Tablets 5 mg, 10 mg, 20 mg and 40 mg, generic to Opana
®
ER, are null
and void and, in the alternative, alleging patent infringement in connection with the filing of
such ANDA. Endo subsequently dismissed its request for declaratory relief and in December 2007
filed another patent infringement suit relating to the same ANDA. In July 2008, Endo asserted
additional infringement claims with respect to the Companys amended ANDA, which added 7.5mg, 15mg
and 30mg strengths of the product. The cases have subsequently been transferred to the U.S.
District Court for the District of New Jersey. The Company has filed an answer and counterclaims.
Discovery is completed. The court issued its
Markman decision
and final pretrial orders in March
2010. No trial date has been set.
Pfizer Inc., et aI. v. Impax Laboratories, Inc. (Tolterodine)
In March 2008, Pfizer Inc., Pharmacia & Upjohn Company LLC, and Pfizer Health AB
(collectively, Pfizer) filed a complaint against the Company in the U.S. District Court for the
Southern District of New York, alleging the Companys filing of an ANDA relating to Tolterodine
Tartrate Extended Release Capsules, 4 mg, generic to Detrol
®
LA, infringes three Pfizer patents.
The Company filed an answer and counterclaims seeking declaratory judgment of non-infringement,
invalidity, or unenforceability with respect to the patents in suit. In April 2008, the case was
transferred to the U.S. District Court for the District of New Jersey. On September 3, 2008, an
amended complaint was filed alleging infringement based on the Companys ANDA amendment adding a
2mg strength. For one of the patents-in-suit, U.S. Patent No. 5,382,600, expiring on September 25,
2012 with pediatric exclusivity, the Company agreed by stipulation to be bound by the decision in
Pfizer Inc. et al. v. Teva Pharmaceuticals USA, Inc.
, Case No. 04-1418 (D. N.J.). After the
Pfizer
court conducted a bench trial, it found the 600 patent not invalid on January 20, 2010, and that
decision is on appeal to the U.S. Court of Appeals for the Federal Circuit. Discovery is
proceeding in the Companys case, and no trial date has been set.
Boehringer Ingelheim Pharmaceuticals, et al. v. Impax Laboratories, Inc. (Tamsulosin)
In July 2008, Boehringer Ingelheim Pharmaceuticals Inc. and Astellas Pharma Inc. (together,
Astellas) filed a complaint against the Company in the U.S. District Court for the Northern
District of California, alleging patent infringement in connection with the filing of the Company
ANDA relating to Tamsulosin Hydrochloride Capsules, 0.4 mg, generic to Flomax
®
. After filing its
answer and counterclaim, the Company filed a motion for summary judgment of patent invalidity. The
District Court conducted hearings on claim construction in May 2009, and summary judgment in June
2009. In October 2009, the parties announced they had entered a settlement agreement allowing the
Company to launch its product no later than March 2, 2010. A stipulated consent judgment was
entered by the Court and the case was dismissed.
Page 34 of 73
17. LEGAL AND REGULATORY MATTERS (continued)
Purdue Pharma Products L.P., et al. v. Impax Laboratories, Inc. (Tramadol)
In August 2008, Purdue Pharma Products L.P., Napp Pharmaceutical Group LTD., Biovail
Laboratories International, SRL, and Ortho-McNeil-Janssen Pharmaceuticals, Inc. (collectively,
Purdue) filed suit against the Company in the U.S. District Court for the District of Delaware,
alleging patent infringement for the filing of the Companys ANDA relating to Tramadol
Hydrochloride Extended Release Tablets, 100 mg, generic to 100mg Ultram
®
ER. In November 2008,
Purdue asserted additional infringement claims with respect to the Companys amended ANDA, which
added 200 mg and 300 mg strengths of the product. The Company filed answers and counterclaims to
those complaints. In August 2009, one of the patents-in-suit, U.S. Patent No. 6,254,887, was found
invalid in another ANDA case relating to Ultram
®
ER, Purdue
Pharma Products L.P. et al, v. Par
Pharmaceutical, Inc. et al.
, Case No. 07-255 (D. Del.) (Par action) The Par action is now on
appeal to the U. S. Court of Appeals for the Federal Circuit. On November 16, 2009, the Company
and Purdue agreed by stipulation to stay the case until the earlier of the following two events:
(a) the Federal Circuit issues a mandate in the Par action or that action is otherwise disposed
of,, or (b) an undisclosed event. Neither event has occurred yet.
Eli Lilly and Company v. Impax Laboratories, Inc. (Duloxetine)
In November 2008, Eli Lilly and Company filed suit against the Company in the U.S. District
Court for the Southern District of Indiana, alleging patent infringement for the filing of the
Companys ANDA relating to Duloxetine Hydrochloride Delayed Release Capsules, 20 mg, 30 mg, and 60
mg, generic to Cymbalta
®
. In February 2009, the parties agreed to be bound by the final judgment
concerning infringement, validity and enforceability of the patent at issue in cases brought by Eli
Lilly and Company against other generic drug manufacturers that have filed ANDAs relating to this
product and proceedings in this case were stayed.
Warner Chilcott, Ltd. et.al. v. Impax Laboratories, Inc. (Doxycycline Hyclate)
In December 2008, Warner Chilcott Limited and Mayne Pharma International Pty. Ltd. (together,
Warner Chilcott) filed suit against the Company in the U.S. District Court for the District of
New Jersey, alleging patent infringement for the filing of the Companys ANDA relating to
Doxycycline Hyclate Delayed Release Tablets, 75 mg and 100 mg, generic to Doryx
®
. The Company has
filed an answer and counterclaim. Thereafter, in March 2009, Warner Chilcott filed another lawsuit
in the same jurisdiction, alleging patent infringement for the filing of the Companys ANDA for the
150 mg strength. Discovery is proceeding, fact discovery closes on August 15, 2010, and no trial
date has been set.
Eurand, Inc., et al. v. Impax Laboratories, Inc. (Cyclobenzaprine)
In January 2009, Eurand, Inc., Cephalon, Inc., and Anesta AG (collectively, Cephalon) filed
suit against the Company in the U.S. District Court for the District of Delaware, alleging patent
infringement for the filing of the Companys ANDA relating to Cyclobenzaprine Hydrochloride
Extended Release Capsules, 15 mg and 30 mg, generic to Amrix
®
. The Company has filed an answer and
counterclaim. Discovery is proceeding, the
Markman
hearing is scheduled for August 13, 2010, and
trial is set to begin on September 27, 2010.
Genzyme Corp. v. Impax Laboratories, Inc. (Sevelamer Hydrochloride)
In March 2009, Genzyme Corporation filed suit against the Company in the U.S. District Court
for the District of Maryland, alleging patent infringement for the filing of the Companys ANDA
relating to Sevelamer Hydrochloride Tablets, 400 mg and 800 mg, generic to Renagel
®
. The Company
has filed an answer and counterclaim. Fact discovery closes on December 3, 2010, the
Markman
hearing is set for January 21, 2011, and trial is scheduled for September 27, 2012.
Page 35 of 73
17. LEGAL AND REGULATORY MATTERS (continued)
Genzyme Corp. v. Impax Laboratories, Inc. (Sevelamer Carbonate)
In April 2009, Genzyme Corporation filed suit against the Company in the U.S. District Court
for the District of Maryland, alleging patent infringement for the filing of the Companys ANDA
relating to Sevelamer Carbonate Tablets, 800 mg, generic to Renvela
®
. The Company has filed an
answer and counterclaim. Fact discovery closes on December 3, 2010, the
Markman
hearing is set for
January 21, 2011, and trial is scheduled for September 27, 2012.
The Research Foundation of State University of New York et al. v. Impax Laboratories, Inc.
(Doxycycline Monohydrate)
In September 2009, The Research Foundation of State University of New York; New York
University; Galderma Laboratories Inc.; and Galderma Laboratories, L.P. (collectively, Galderma)
filed suit against the Company in the U.S. District Court for the District of Delaware alleging
patent infringement for the filing of the Companys ANDA relating to Doxycycline Monohydrate
Delayed-Release Capsules, 40 mg, generic to Oracea
®
. The Company has filed an answer and
counterclaim. In October 2009, the parties agreed to be bound by the final judgment concerning
infringement, validity and enforceability of the patent at issue in cases brought by Galderma
against another generic drug manufacturer that has filed an ANDA relating to this product and
proceedings in this case were stayed.
Elan Pharma International Ltd. and Fournier Laboratories Ireland Ltd. v. Impax Laboratories,
Inc. Abbott Laboratories and Laboratoires Fournier S.A. v. Impax Laboratories, Inc.
(Fenofibrate)
In October 2009, Elan Pharma International Ltd. with Fournier Laboratories Ireland Ltd. and
Abbott Laboratories with Laboratories Fournier S.A. filed separate suits against the Company in the
U.S. District Court for the District of New Jersey alleging patent infringement for the filing of
the Companys ANDA relating to Fenofibrate Tablets, 48 mg and 145 mg, generic to Tricor
®
. The
Company has filed an answer and counterclaim. Fact discovery closes December 31, 2010.
Daiichi Sankyo, Inc. et al. v. Impax Laboratories, Inc. (Colesevelam)
In January 2010, Daiichi Sankyo, Inc. and Genzyme Corporation (together, Genzyme) filed suit
against the Company in the U.S. District Court for the District of Delaware alleging patent
infringement for the filing of the Companys ANDA relating to Colesevelam Hydrochloride Tablets,
625 mg, generic to Welchol
®
. The Company has filed an answer and counterclaim. Fact discovery
closes June 30, 2011, and no trial date has been scheduled.
Abbott Laboratories, et al. v. Impax Laboratories, Inc. (Choline Fenofibrate)
In March 2010, Abbott Laboratories and Fournier Laboratories Ireland Ltd. (together, Abbott)
filed suit against the Company in the U.S District Court for the District of New Jersey alleging
patent infringement for the filing of the Companys ANDA related to Choline Fenofibrate Delayed
Release Capsules, 45 mg and 135 mg, generic of Trilipix
®
. The Company has filed an answer.
Shionogi Pharma, Inc. and LifeCycle Pharma A/S v. Impax Laboratories, Inc. (Fenofibrate)
In April 2010, Shionogi Pharma, Inc. and LifeCycle Pharma A/S filed suit against the Company
in the U.S. District Court for the District of Delaware alleging patent infringement for the filing
of the Companys ANDA relating to Fenofibrate Tablets, 40 and 120 mg, generic to Fenoglide
®
. The
Company has not yet filed its answer.
Page 36 of 73
17. LEGAL AND REGULATORY MATTERS (continued)
Other Litigation Related to Our Business
Axcan Scandipharm Inc. v. Ethex Corp, et al. (Lipram UL)
In May 2007, Axcan Scandipharm Inc., a manufacturer of the Ultrase
®
line of pancreatic enzyme
products, brought suit against the Company in the U.S. District Court for the District of
Minnesota, alleging the Company engaged in false advertising, unfair competition, and unfair trade
practices under federal and Minnesota law in connection with the marketing and sale of the
Companys now-discontinued Lipram UL products. The suit seeks actual and consequential damages,
including lost profits, treble damages, attorneys fees, injunctive relief and declaratory
judgments to prohibit the substitution of Lipram UL for prescriptions of Ultrase
®
. The District
Court granted in part and denied in part the Companys motion to dismiss the complaint, as well as
the motion of co-defendants Ethex Corp. and KV Pharmaceutical Co., holding any claim of false
advertising pre-dating June 1, 2001, is barred by the statute of limitations. On January 5, 2010,
the parties settled the case and the case was subsequently dismissed with prejudice.
Budeprion XL Litigation
In June 2009, the Company was named a co-defendant in class action lawsuits filed in California
state court in an action titled
Kelly v. Teva Pharmaceuticals Indus. Ltd, et al.
, No. BC414812
(Calif. Superior Crt. L.A. County). Subsequently, additional class action lawsuits were filed in
Louisiana (
Morgan v. Teva Pharmaceuticals Indus. Ltd, et a
l., No. 673880 (24th Dist Crt., Jefferson
Parish, LA.)), North Carolina (
Weber v. Teva Pharmaceuticals Indus., Ltd., et al.
, No. 07
CV5002556, (N.C. Superior Crt., Hanover County)), Pennsylvania (
Rosenfeld v. Teva Pharmaceuticals
USA, Inc.. et al.
, No. 2:09-CV-2811 (E.D. Pa.)), Florida (
Henchenski and Vogel v. Teva
Pharmaceuticals Industries Ltd., et al.
, No. 2:09-CV-470-FLM-29SPC (M.D. Fla.)), Texas (
Anderson v.
Teva Pharmaceuticals Indus., Ltd., et al.
, No. 3-09CV1200-M (N.D. Tex.)), Oklahoma (
Brown et al. v.
Teva Pharmaceuticals Inds., Ltd., et al.
, No. 09-cv-649-TCK-PJC (N.D. OK)), Ohio (
Latvala et al. v.
Teva Pharmaceuticals Inds., Ltd., et al.
, No. 2:09-cv-795 (S.D. OH)), Alabama (
Jordan v. Teva
Pharmaceuticals Indus. Ltd et al.
, No. CV09-709 (Ala. Cir. Crt. Baldwin County)), and Washington
(
Leighty v. Teva Pharmaceuticals Indus. Ltd et al.
, No. CV09-01640 (W. D. Wa.)). All of the
complaints involve Budeprion XL, a generic version of Wellbutrin XL
®
that is manufactured by the
Company and marketed by Teva, and allege that, contrary to representations of Teva, Budeprion XL is
less effective in treating depression, and more likely to cause dangerous side effects, than
Wellbutrin XL. The actions are brought on behalf of purchasers of Budeprion XL and assert claims
such as unfair competition, unfair trade practices and negligent misrepresentation under state law.
Each lawsuit seeks damages in an unspecified amount consisting of the cost of Budeprion XL paid by
class members, as well as any applicable penalties imposed by state law, and disclaims damages for
personal injury. The state court cases have been removed to federal court, and a petition for
multidistrict litigation to consolidate the cases in federal court has been granted. These cases
and any subsequently filed cases will be heard under the consolidated action entitled In re:
Budeprion XL Marketing Sales Practices, and Products Liability Litigation, MDL No. 2107, in the
United States District Court for the Eastern District of Pennsylvania. Discovery and other
deadlines are stayed pending resolution of the Companys motion to dismiss the actions based on
several grounds, including the doctrines of federal law preemption and primary jurisdiction.
Page 37 of 73
18. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)
Selected (unaudited) financial information for the quarterly period noted is as follows:
|
|
|
|
|
|
|
Quarter Ended:
|
|
(in $000s except per share amounts)
|
|
March 31, 2010
|
|
Revenue:
|
|
|
|
|
Gross Global
Product Sales
|
|
$
|
425,986
|
|
Less:
|
|
|
|
|
Chargebacks
|
|
|
56,168
|
|
Rebates
|
|
|
29,425
|
|
Product Returns
|
|
|
7,400
|
|
Other credits
|
|
|
23,888
|
|
|
|
|
|
Global
Product Sales, net
|
|
|
309,105
|
|
|
|
|
|
|
|
|
|
|
Private Label product sales
|
|
|
672
|
|
Rx Partner
|
|
|
4,903
|
|
OTC Partner
|
|
|
1,765
|
|
Research Partner
|
|
|
3,385
|
|
Promotional Partner
|
|
|
3,503
|
|
Other
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
323,333
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
243,757
|
|
|
|
|
|
|
Net income
|
|
$
|
131,485
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic)
|
|
$
|
2.16
|
|
|
|
|
|
Net income per share (diluted)
|
|
$
|
2.06
|
|
|
|
|
|
|
|
|
|
|
Weighted Average:
|
|
|
|
|
common shares outstanding:
|
|
|
|
|
Basic
|
|
|
61,008,015
|
|
|
|
|
|
Diluted
|
|
|
63,865,678
|
|
|
|
|
|
Quarterly computations of (unaudited) net income per share amounts are made independently for
each quarterly reporting period, and the sum of the per share amounts for the quarterly reporting
periods may not equal the per share amounts for the year-to-date reporting period.
Page 38 of 73
18. SUPPLEMENTARY FINANCIAL INFORMATION
(unaudited) (continued)
Selected (unaudited) financial information for the quarterly period noted is as follows:
|
|
|
|
|
|
|
Quarter Ended:
|
|
(in $000s except per share amounts)
|
|
March 31, 2009
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
Gross Global
Product Sales
|
|
$
|
78,696
|
|
Less:
|
|
|
|
|
Chargebacks
|
|
|
22,638
|
|
Rebates
|
|
|
10,819
|
|
Product Returns
|
|
|
3,256
|
|
Other credits
|
|
|
2,862
|
|
|
|
|
|
Global
Product Sales, net
|
|
|
39,121
|
|
|
|
|
|
|
|
|
|
|
Private Label product sales
|
|
|
1,297
|
|
Rx Partner
|
|
|
10,736
|
|
OTC Partner
|
|
|
1,858
|
|
Research Partner
|
|
|
2,611
|
|
Promotional Partner
|
|
|
3,284
|
|
Other
|
|
|
6
|
|
|
|
|
|
Total revenues
|
|
|
58,913
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
32,663
|
|
|
|
|
|
|
Net income
|
|
$
|
2,219
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic)
|
|
$
|
0.04
|
|
|
|
|
|
Net income per share (diluted)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding:
|
|
|
|
|
Basic
|
|
|
59,711,133
|
|
|
|
|
|
Diluted
|
|
|
60,222,215
|
|
|
|
|
|
Quarterly computations of (unaudited) net income per share amounts are made independently for
each quarterly reporting period, and the sum of the per share amounts for the quarterly reporting
periods may not equal the per share amounts for the year-to-date reporting period.
Page 39 of 73
|
|
|
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
|
The following discussion and analysis, as well as other sections in this Quarterly Report on
Form 10-Q, should be read in conjunction with the unaudited interim consolidated financial
statements and related notes to the unaudited interim consolidated financial statements included
elsewhere herein.
Statements included in this Quarterly Report on Form 10-Q not related to present or historical
conditions are forward-looking statements. Additional oral or written forward-looking statements
may be made by us from time to time. Such forward-looking statements involve risks and
uncertainties which could cause results or outcomes to differ materially from those expressed in
the forward-looking statements. Forward-looking statements may include statements relating to our
plans, strategies, objectives, expectations and intentions. Words such as believes, forecasts,
intends, possible, estimates, anticipates, and plans and similar expressions are intended
to identify forward-looking statements. Our ability to predict results or the effect of events on
our operating results is inherently uncertain. Forward-looking statements involve a number of
risks, uncertainties and other factors that could cause actual results to differ materially from
those discussed in this Quarterly Report on Form 10-Q. Such risks and uncertainties include the
effect of current economic conditions on our industry, business, financial position, results of
operations and market value of our common stock, our ability to maintain an effective system of
internal control over financial reporting, fluctuations in our revenues and operating income,
reductions or loss of business with any significant customer, the impact of competitive pricing and
products and regulatory actions on our products, our ability to sustain profitability and positive
cash flows, our ability to maintain sufficient capital to fund our operations, any delays or
unanticipated expenses in connection with the operation of our Taiwan facility, our ability to
successfully develop and commercialize pharmaceutical products, the uncertainty of patent
litigation, consumer acceptance and demand for new pharmaceutical products, the difficulty of
predicting Food and Drug Administration (FDA) filings and approvals, our inexperience in
conducting clinical trials and submitting new drug applications, our reliance on key alliance and
collaboration agreements, the availability of raw materials, our ability to comply with legal and
regulatory requirements governing the healthcare industry, the regulatory environment, exposure to
product liability claims, and other risks described in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009 and this Quarterly Report on
Form 10-Q. You should not place undue reliance on forward-looking
statements. Such statements speak only as to the date on which they are made, and we undertake no
obligation to update publicly or revise any forward-looking statement, regardless of future
developments or availability of new information.
Page 40 of 73
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 May 1, 2010, we manufactured and marketed 90 generic pharmaceuticals, which
represent dosage variations of 28 different pharmaceutical compounds through our own Global
Pharmaceuticals division; another 16 of our generic pharmaceuticals representing dosage variations
of 4 different pharmaceutical compounds are marketed by our alliance agreement partners. We have 32
applications pending at the FDA, including 4 tentatively approved by FDA, and 55 other products in
various stages of development for which applications have not yet been filed.
In the generic pharmaceuticals market, we focus our efforts on controlled-release generic
versions of selected brand-name pharmaceuticals covering a broad range of therapeutic areas and
having technically challenging drug-delivery mechanisms or limited competition. We employ our
technologies and formulation expertise to develop generic products that will reproduce the
brand-name products physiological characteristics but not infringe any valid patents relating to
the brand-name product. We generally focus on brand-name products as to which the patents covering
the active pharmaceutical ingredient have expired or are near expiration, and we employ our
proprietary formulation expertise to develop controlled-release technologies that do not infringe
patents covering the brand-name products controlled-release technologies.
We are also developing specialty generic pharmaceuticals that we believe present one or more
barriers to entry by competitors, such as difficulty in raw materials sourcing, complex formulation
or development characteristics or special handling requirements. In the brand-name pharmaceuticals
market, we are developing products for the treatment of central nervous system (CNS) disorders.
Our brand-name product portfolio consists of development-stage projects to which we are applying
our formulation and development expertise to develop differentiated, modified, or
controlled-release versions of currently marketed (either in the U.S. or outside the U.S.) drug
substances. We intend to expand our brand-name products portfolio primarily through internal
development and also through licensing and acquisition.
Page 41 of 73
We operate in two segments, referred to as the Global Pharmaceuticals Division (Global
Division) and the Impax Pharmaceuticals Division (Impax Division).
The Global Division develops, manufactures, sells, and distributes generic pharmaceutical
products through four sales channels: the Global Products sales channel, for generic
pharmaceutical prescription (Rx) products we sell directly to wholesalers, large retail drug
chains, and others; the Private Label sales channel, for generic pharmaceutical and
over-the-counter (OTC) prescription products we sell to unrelated third-party customers who
in-turn sell the product to third parties under their own label, the Rx Partner sales channel,
for generic prescription products sold through unrelated third-party pharmaceutical entities under
their own label pursuant to alliance agreements; and the OTC Partner sales channel, for sales of
generic pharmaceutical OTC products sold through unrelated third-party pharmaceutical entities
under their own label pursuant to alliance agreements.
The Impax Division is engaged in the development of proprietary brand pharmaceutical products
through improvements to already approved pharmaceutical products to address central nervous system
(CNS) disorders. The Impax Division is also engaged in the provision of co-promotion services of
products developed by unrelated third-party pharmaceutical entities through our direct sales force
focused on marketing to physicians (referred to as physician detailing sales calls) in the CNS
community.
Our total revenues for the three months ended March 31, 2010 and 2009 were predominantly
derived from our Global Division. See Part I: Financial Information Item 1: Financial
Statements Note 16 to the Unaudited Interim Consolidated Financial Statements for financial
information about our segments for the three months ended March 31, 2010 and 2009. We sell our
products within the continental United States of America and the Commonwealth of Puerto Rico. We
have no sales in foreign countries.
Global
Product Sales, net.
We recognize revenue from direct sales in accordance with SEC
Staff Accounting Bulletin No. 104, Topic 13, Revenue Recognition (SAB 104). Revenue from direct
product sales is recognized at the time title and risk of loss pass to customers. Accrued
provisions for estimated chargebacks, rebates, product returns, and other pricing adjustments are
provided for in the period the related sales are recorded.
Private Label Sales.
We recognize revenue from direct sales in accordance with SAB 104.
Revenue from direct product sales is recognized at the time title and risk of loss pass to
customers. Revenue received from Private Label product sales is not subject to deductions for
chargebacks, rebates, product returns, and other pricing adjustments. Additionally, Private Label
product sales do not have upfront, milestone, or lump-sum payments and do not contain multiple
deliverables under Financial Accounting Standards Board (FASB) Accounting Standards Codification
TM
(ASC or the Codification) Topic 605.
Page 42 of 73
Rx Partner and OTC Partner.
Each of our alliance agreements involves multiple deliverables in
the form of products, services and/or licenses over extended periods. FASB ASC Topic 605
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 FASB ASC Topic 605. If
separation into individual units of accounting is appropriate, we recognize revenue for each
deliverable when the revenue recognition criteria specified by SAB 104 are achieved for the
deliverable. If separation is not appropriate, we recognize revenue (and related direct
manufacturing costs) over the estimated life of the agreement 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 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 23 years, 3 / 23
of the amount reported is recognized in the year reported and 1/23 of the amount is recognized
during each of the remaining 20 years. A fuller description of our analysis under FASB ASC Topic
605 and the modified proportional performance method is set forth in Part I: Financial Information
Item 1: Financial Statements Note 2 to Unaudited Interim Consolidated Financial Statements.
As noted above, our alliance agreements obligate us to deliver multiple goods and/or services
over extended periods. Such deliverables include manufactured pharmaceutical products, exclusive
and semi-exclusive marketing rights, distribution licenses, and research and development services.
In exchange for these deliverables, we receive payments from our alliance agreement partners for
product shipments, and may also receive royalty, profit sharing, and/or upfront or periodic
milestone payments. Revenue received from the alliance agreement partners for product shipments
under these agreements is not subject to deductions for chargebacks, rebates, returns, shelf-stock
adjustments, and other pricing adjustments. Royalty and profit sharing amounts we receive under
these agreements are calculated by the respective alliance agreement partner, with such royalty and
profit share amounts generally based upon estimates of net product sales or gross profit which
include estimates of deductions for chargebacks, rebates, returns, shelf stock adjustments and
other adjustments the alliance agreement partners may negotiate with their customers. We record
the alliance agreement partners adjustments to such estimated amounts in the period the alliance
agreement partner reports the amounts to us.
Page 43 of 73
Research Partner
. We have entered into a Joint Development Agreement with another unrelated
third-party pharmaceutical company under which we are collaborating in the development of five
dermatological products, including four generic products and one branded product. Under the Joint
Development Agreement, we received an upfront fee with the potential to receive additional
milestone payments upon completion of contractually specified clinical and regulatory milestones.
To the extent the products are commercialized, we are eligible for royalties and profit sharing
based on sales of the one brand product. We estimate our expected period of performance under the
Joint Development Agreement to provide research and development services to be 48 months, beginning
in December 2008 when we received the upfront payment and ending in November 2012. Accordingly, we
recognize revenue from the upfront fee over a 48 month period on a straight-line basis. To the
extent milestone payments are earned, they will be recognized as revenue on a straight-line basis
over the then remaining term of the 48 month revenue recognition period.
Promotional Partner
. We have entered into promotional services agreements with other
unrelated third-party pharmaceutical companies under which we provide physician detailing sales
calls services to promote certain of those companies branded drug products. In exchange for our
services we receive service fees. We recognize revenue from provision of physician detailing sales
calls as such services are rendered and the performance obligations are met and from contingent
payments, if any, at the time they are earned.
Impact of Economic Conditions
The global economy has been undergoing a period of significant volatility which has led, to
among other impacts, diminished credit availability, declines in consumer confidence, and increases
in unemployment rates. There remains a high degree of caution about the stability of the U. S.
economy due to the ongoing domestic and global financial markets conditions, and there can be no
assurances further deterioration in the financial markets will not occur. These economic
conditions have resulted in, and could lead to further, reduced consumer spending related to
healthcare in general and pharmaceutical products in particular. While generic drugs present a
cost-effective alternative to higher-priced branded products, our sales and those of our alliance
agreement and collaboration partners could be negatively affected if patients forego obtaining
healthcare. In addition, reduced consumer spending may force our competitors and us to decrease
prices.
In addition, we have exposure to many different industries and counterparties, including our
partners under our alliance, research, and promotional services agreements, suppliers of raw
chemical materials, drug wholesalers and other customers, who may be financially or operationally
unstable or may become unstable in the current and /or future economic environment. Any such
instability may affect these parties ability to fulfill their respective contractual obligations
to us or cause them to limit or place burdensome conditions upon future transactions with us.
Page 44 of 73
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America (GAAP) and the rules and regulations
of the United States Securities & Exchange Commission (SEC) require the use of estimates and
assumptions, based on complex judgments considered reasonable, and affect the reported amounts of
assets and liabilities and disclosure of contingent assets and contingent liabilities at the date
of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. The most significant judgments are employed in estimates used in determining
values of tangible and intangible assets, legal contingencies, tax assets and tax liabilities, fair
value of share-based compensation of equity incentive awards issued to employees and directors, and
estimates used in applying the Companys revenue recognition policy including those related to
accrued chargebacks, rebates, product returns, Medicare, Medicaid, and other government rebate
programs, shelf-stock adjustments, and the timing and amount of deferred and recognized revenue and
deferred and amortized manufacturing costs under the Companys several alliance and collaboration
agreements. Actual results may differ from estimated results. Certain prior year amounts have
been reclassified to conform to the current year presentation.
Although we believe our estimates and assumptions are reasonable when made, they are based
upon information available to us at the time they are made. We periodically review the factors
having an influence on our estimates and, if necessary, adjust such estimates. Although
historically our estimates have generally been reasonably accurate, due to the risks and
uncertainties involved in our business and evolving market conditions, and given the subjective
element of the estimates made, actual results may differ from estimated results. This possibility
may be greater than normal during times of pronounced economic volatility.
Consistent with industry practice, we record an accrued provision for estimated deductions for
chargebacks, rebates, product returns, Medicare, Medicaid, and other government rebate programs,
shelf-stock adjustments , and other pricing adjustments, in the same period when revenue is
recognized. The objective of recording provisions for such deductions at the time of sale is to
provide a reasonable estimate of the aggregate amount we expect to ultimately credit our customers.
Since arrangements giving rise to the various sales credits are typically time driven (i.e.
particular promotions entitling customers who make purchases of our products during a specific
period of time, to certain levels of rebates or chargebacks), these deductions represent important
reductions of the amounts those customers would otherwise owe us for their purchases of those
products. Customers typically process their claims for deductions 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.
Page 45 of 73
Chargebacks.
We have agreements establishing contract prices for certain products with
certain indirect customers, such as managed care organizations, hospitals, and government agencies
who purchase our products from drug wholesalers. The contract prices are lower than the prices the
customer would otherwise pay to the wholesaler, and the difference is referred to as a chargeback,
which generally takes the form of a credit issued by us to reduce the gross sales amount we
invoiced to our wholesaler customer. An accrued provision for chargeback deductions is estimated
and recorded at the time we ship the products to our wholesaler customers. The primary factors we
consider when estimating the accrued provision for chargebacks are the average historical
chargeback credits given, the mix of products shipped, and the amount of inventory on hand at the
three major drug wholesalers with whom we do business. We monitor aggregate actual chargebacks
granted and compare them to the estimated accrued provision for chargebacks to assess the
reasonableness of the chargeback reserve at each quarterly balance sheet date.
The following table is a roll-forward of the activity in the chargeback reserve for the three
months ended March 31, 2010 and the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
March 31,
|
|
|
December 31
|
|
Chargeback reserve
|
|
2010
|
|
|
2009
|
|
Beginning balance
|
|
$
|
21,448
|
|
|
$
|
4,056
|
|
Provision recorded during the period
|
|
|
56,168
|
|
|
|
126,105
|
|
Credits issued during the period
|
|
|
(49,979
|
)
|
|
|
(108,713
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
27,637
|
|
|
$
|
21,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as
a percent of Gross Global Product Sales
|
|
|
13
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
The decrease in the accrued provision for estimated chargebacks as a percent of Gross Global
Product Sales, principally resulted from our tamsulosin product and our mixed amphetamine salts
products, both of which generally resulted in higher Gross Global Product Sales and carried a lower
chargeback credit amount, relative to our other products sold through our Global Divisions Global
Products sales channel, resulting in a lower overall aggregate average chargeback as a percentage
of Gross Global Product Sales during the three months ended March 31, 2010. We commenced sales of
our tamsulosin product on March 2, 2010 and had (contractual) market exclusivity for this generic
product for the succeeding eight weeks, during which we were able to achieve high market-share
penetration. Our future tamsulosin product sales, however, are not likely to remain at this level,
as competing generic versions of the product entered the market in late April 2010 (at the
conclusion of the contractual exclusivity period), and are likely to result in both price erosion
and reduction of our market-share. (See Results of Operations below for additional discussion.)
Page 46 of 73
Rebates.
In an effort to maintain a competitive position in the marketplace and to promote
sales and customer loyalty, we maintain various rebate programs with our customers to whom we
market our products through our Global Division Global Products sales channel. The rebates
generally take the form of a credit memo to reduce the invoiced gross sales amount charged to a
customer for products shipped. An accrued provision for rebate deductions is estimated and recorded
at the time of product shipment. The accrued provision for rebates is based upon historical
experience of aggregate credits issued compared with payments made, the historical relationship of
rebates as a percentage of total Gross Global Product Sales and the contract terms and conditions
of the various rebate programs in effect at the time of shipment. We monitor aggregate actual
rebates granted and compare them to the estimated accrued provision for rebates to assess the
reasonableness of the rebate reserve at each quarterly balance sheet date.
The following table is a roll-forward of the activity in the rebate reserve for the three
months ended March 31, 2010 and the year December 31, 2009:
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
March 31,
|
|
|
December 31
|
|
Rebate reserve
|
|
2010
|
|
|
2009
|
|
Beginning balance
|
|
$
|
37,781
|
|
|
$
|
4,800
|
|
Provision recorded during the period
|
|
|
34,824
|
|
|
|
72,620
|
|
Credits issued during the period
|
|
|
(40,889
|
)
|
|
|
(39,639
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
31,716
|
|
|
$
|
37,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as
a percent of Gross Global Product Sales
|
|
|
8
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
The decrease in the accrued provision for estimated rebates as a percent of Gross Global
Product Sales, principally resulted from our tamsulosin product and our mixed amphetamine salts
products, both of which generally resulted in higher Gross Global Product Sales and carried a lower
rebate credit amount, relative to our other products sold through our Global Divisions Global
Products sales channel, resulting in a lower overall aggregate average rebate as a percentage of
Gross Global Product Sales during the three months ended March 31, 2010. We commenced sales of our
tamsulosin product on March 2, 2010 and had (contractual) market exclusivity for this generic
product for the succeeding eight weeks, during which we were able to achieve high market-share
penetration. Our future tamsulosin product sales, however, are not likely to remain at this level,
as competing generic versions of the product entered the market in late April 2010 (at the
conclusion of the contractual exclusivity period), and are likely to result in both price erosion
and reduction of our market-share. (See Results of Operations below for additional discussion.)
Page 47 of 73
Returns.
We allow our customers to return product (i) if approved by authorized personnel in
writing or by telephone with the lot number and expiration date accompanying any request and (ii)
if such products are returned within six months prior to, or until 12 months following, the
products expiration date. We estimate a provision for product returns as a percentage of gross
sales based upon historical experience of Global Division Global
Product Sales. The product return
reserve is estimated using a historical lag period (the time between the month of sale and the
month of return) and return rates, adjusted by estimates of the future return rates based on
various assumptions, which may include changes to internal policies and procedures, changes in
business practices, and commercial terms with customers, competitive position of each product,
amount of inventory in the wholesaler supply chain, and the introduction of new products. We also
consider other factors, including significant market changes which may impact future expected
returns, and actual product returns and may record additional provisions for specific product
returns we believe are not covered by the historical rates. We monitor aggregate actual product
returns on a quarterly basis and may record specific provisions for product returns we believe are
not covered by historical percentages.
The following table is a roll-forward of the activity in the product returns reserve for three
months ended March 31, 2010 and the year December 31, 2009:
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
March 31,
|
|
|
December 31
|
|
Product Returns Reserve
|
|
2010
|
|
|
2009
|
|
Beginning balance
|
|
$
|
22,114
|
|
|
$
|
13,675
|
|
Provision related to
sales recorded in the period
|
|
|
7,400
|
|
|
|
11,847
|
|
Credits issued during the period
|
|
|
(915
|
)
|
|
|
(3,408
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
28,599
|
|
|
$
|
22,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as
a percent of Gross Global Product Sales
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
The
change in the provision for returns, as a percent of Gross Global
Product Sales, was de
minimis period over period.
Page 48 of 73
Medicaid Rebate.
As required by law, we provide a rebate payment on drugs dispensed under the
Medicaid program. We determine our estimate of the accrued Medicaid rebate reserve primarily based
on historical experience of claims submitted by the various states and any new information
regarding changes in the Medicaid program which may impact our estimate of Medicaid rebates. In
determining the appropriate accrual amount, we consider historical payment rates and processing lag
for outstanding claims and payments. We record estimates for Medicaid payments as a deduction from
gross sales, with corresponding adjustments to accrued liabilities. The accrual for Medicaid
payments totaled $ 16.8 million and $ 9.8 million as of March 31, 2010 and December 31, 2009,
respectively. The estimated accrued Medicaid rebate reserve increased significantly as a result of
the launch of our mixed amphetamine salts products in October 2009, as well as the launch of our
tamsulosin product in March 2010. As our mixed amphetamine salts products are authorized generics
to the related brand product, Medicaid rebate payments are calculated under the regulations
applicable to branded products. The Medicaid rebate accrual for the three months ended March 31,
2010 includes the effect of the increase in the Medicaid Rebate rates, which were effective on a
retroactive basis to January 1, 2010, resulting from the March 2010 enactment into law of the
Patient Protection and Affordable Care Act and the Health Care and Education Affordability
Reconciliation Act (the Acts). The change in the Medicaid Rebate rates resulting from the Acts
did not have a material impact on our results of operations. Historically, differences between our
estimated and actual payments made have been de minimis.
Shelf-Stock Adjustments.
When, based on competitive market conditions, we may reduce the
ultimate net selling price of a product by issuing a so-called shelf-stock adjustment credit to a
customer, the amount of which is typically agreed upon by us and our customer, by reference to an
estimate of the amount of a specific product held by the customer, as an inducement for our
customer to continue to purchase future additional quantities of our product. The primary factors
we consider when estimating an accrued shelf-stock adjustment reserve include the per-unit credit
amount and an estimate of the level of inventory held by the customer. The accrued shelf-stock
adjustment totaled $ 0.1 million and $ 0.2 million as of March 31, 2010 and December 31,
2009, respectively. Differences between our estimated and actual credits issued for shelf stock
adjustments have been de minimis.
Allowance for Uncollectible Amounts
. We maintain allowances for uncollectible amounts for
estimated losses resulting from amounts we deem to be uncollectible from our customers; these
allowances are for specific amounts on certain accounts. The allowance for uncollectible amounts
totaled $ 0.4 million and $ 0.4 million at March 31, 2010 and December 31, 2009,
respectively.
Page 49 of 73
Estimated Lives of Alliance Agreements.
The revenue we receive under our alliance agreements
is not subject to adjustment for estimated chargebacks, rebates, product returns and other pricing
adjustments, as such adjustments are included in the amounts we receive from our alliance partners.
However, because we recognize 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 last
product subject to the Teva Agreement. Since product launch is dependent upon FDA approval of the
product, we are required to estimate when FDA approval is likely to occur in order to estimate the
life of the Teva Agreement. In 2009 we updated the estimated life of the Teva Agreement to be
approximately 23 years, as compared to our previous estimate of 18 years, from the June 2001
inception date. Our current estimate is based on the development of the last product under the
Teva Agreement, which will require additional time to develop, resulting in FDA approval, if any,
occurring at a later date. In accordance with our accounting policy, the change in the recognition
period for the Teva Agreement was applied prospectively, as an adjustment in the period of change
in 2009. If we determine our estimated timing of FDA approval requires further adjustment, then we
would adjust the recognition period under the Teva Agreement on a prospective basis, resulting in a
change to the amount of revenue and product manufacture cost recognized under the Teva Agreement.
Additionally, for example, our expected period of performance to provide research and
development services under the Joint Development Agreement with Medicis is estimated to be a 48
month period, starting in December 2008 (i.e. when the $ 40.0 million upfront payment was
received) and ending in November 2012 (i.e. upon FDA approval of the fifth and final submission).
The FDA approval of the final submission under the Joint Development Agreement represents the end
of our expected period of performance, as we will have no further contractual obligation to perform
research and development services under the Joint Development Agreement, and therefore the earnings
process will be complete. If the timing of FDA approval for the final submission under the Joint
Development Agreement is different from our estimate, the revenue recognition period will change on
a prospective basis at the time such event occurs. While no such change in the estimated life of
the Medicis Joint Development Agreement has occurred to date, if we were to conclude significantly
more time will be required to obtain FDA approval, then we would increase our estimate of the
recognition period under the agreement, resulting in a lesser amount of revenue (and related costs,
if any) in current and future periods.
Page 50 of 73
Third-Party Research and Development Agreements.
In addition to our own research and
development resources, we may use unrelated third-party vendors, including universities and
independent research companies, to assist in our research and development activities. These
vendors provide a range of research and development services to us, including clinical and
bioequivalency studies. We generally sign agreements with these vendors which establish the terms
of each study performed by them, including, among other things, the technical specifications of the
study, the payment schedule, and timing of work to be performed. Payments are generally earned by
third-party researchers either upon the achievement of a milestone, or on a pre-determined date, as
specified in each study agreement. We account for third-party research and development expenses as
they are incurred according to the terms and conditions of the respective agreement for each study
performed, with an accrued expense at each balance sheet date for estimated fees and charges
incurred by us, but not yet billed to us. We monitor aggregate actual payments and compare them to
the estimated provisions to assess the reasonableness of the accrued expense balance at each
quarterly balance sheet date. Differences between our estimated and actual payments made have been
de minims.
Share-Based Compensation.
We recognize the fair value of each stock option and restricted
stock award over its respective vesting period. Stock options and restricted stock awards granted
under the Amended and Restated 2002 Equity Incentive Plan (the 2002 Plan) generally vest over a
three or four year period and have a term of ten years. We estimate the fair value of each stock
option on its grant date using the Black-Scholes Merton option-pricing model, wherein: expected
volatility is based solely on historical volatility of our common stock over the period
commensurate with the expected term of the stock options. The expected term calculation is based
on the simplified method described in SAB No. 107, Share-Based Payment and SAB No. 110,
Share-Based Payment. The risk-free interest rate is based on the U.S. Treasury yield in effect at
the time of grant for an instrument with a maturity commensurate with the expected term of the
stock options. The dividend yield is zero as we have never paid cash dividends on our common
stock, and have no present intention to pay cash dividends.
Income Taxes.
We are subject to United States federal, state and local income taxes and
Taiwan, R.O.C. income taxes. We create a deferred tax asset, or a deferred tax liability, when we
have temporary differences between the results for GAAP financial reporting purposes and tax
reporting purposes. The computation of the annual estimated effective tax rate at each interim
period requires us to exercise judgment to make certain estimates and assumptions including, but
not limited to, the expected operating income for the year, projections of the proportion of income
(or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences, and the
likelihood of recovering deferred tax assets generated in the current year. The accounting
estimates used to compute the provision for income taxes may change as new events occur, more
experience is acquired or additional information is obtained. The computation of our annual
estimated effective tax rate includes modifications, which were projected for the year, for share
based compensation, the domestic manufacturing deduction, and state research and development
credits, among others. The tax provision for the three months ended March 31, 2010 does not
include the effect of the federal research and development tax credit as such tax credit expired on
December 31, 2009, and has not been reinstated for 2010. The tax provision for the three months
ended March 31, 2009 included the effect of the federal research and development tax credit.
Fair Value of Financial Instruments.
Our cash and cash equivalents include a portfolio of
high-quality credit securities, including U.S. Government sponsored entity securities, treasury
bills, corporate bonds, short-term commercial paper, and /or high rated money market funds. Our
entire portfolio matures in less than one year. The carrying value of the portfolio approximated
the market value at March 31, 2010. Our deferred compensation
liability is carried at fair value, based upon observable market
values. We had no debt outstanding as of March 31, 2010. Our only
remaining debt instrument at March 31, 2010 was the Wachovia revolving credit facility, which would
be subject to variable interest rates and principal payments should we decide to borrow against it.
Contingencies.
In the normal course of business, we are subject to loss contingencies, such
as legal proceedings and claims arising out of our business, covering a wide range of matters,
including, among others, patent litigation, shareholder lawsuits, and product and clinical trial
liability. In accordance with FASB ASC Topic 450 Contingencies, we record accrued loss
contingencies when it is probable a liability will be incurred and the amount of loss can be
reasonably estimated and we do not recognize gain contingencies until realized.
Page 51 of 73
Goodwill
- In accordance with FASB ASC Topic 350, Goodwill and Other Intangibles, goodwill
is subject to an annual assessment for impairment by applying a fair-value-based test, and not
periodic amortization. Under FASB ASC Topic 350, if the fair value of the reporting unit exceeds
the reporting units carrying value, including goodwill, then goodwill is considered not impaired,
making further analysis not required. We consider each of our Global Division and Impax Division
operating segments to be a reporting unit, as this is the lowest level for each of which discrete
financial information is available. We attribute the entire carrying amount of goodwill to the
Global Division. We concluded the carrying value of goodwill was not impaired as of December 31,
2009, as the fair value of the Global Division exceeded its carrying value at such date. We perform
our annual goodwill impairment test in the fourth quarter of each year. We estimate the fair value
of the Global Division using a discounted cash flow model for both the reporting unit and the
enterprise, as well as earnings and revenue multiples per common share outstanding for enterprise
fair value. In addition, on a quarterly basis, we perform a review of our business operations to
determine whether events or changes in circumstances have occurred which may have a material
adverse effect on the estimated fair value of the reporting unit, and thus indicate a potential
impairment of the goodwill carrying value. If such events or changes in circumstances were deemed
to have occurred, we would perform an interim impairment analysis, which may include the
preparation of a discounted cash flow model, or consultation with one or more valuation
specialists, to analyze the impact, if any, on our assessment of the reporting units fair value.
We have not to date deemed there to be any significant adverse changes in the legal, regulatory, or
business environment in which we conduct our operations.
Page 52 of 73
Results of Operations
Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009
Overview:
The following table sets forth summarized, consolidated total Company results of operations
for the three months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Increase/
|
|
|
|
March 31
|
|
|
March 31
|
|
|
(Decrease)
|
|
(in $000s)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
Total revenues
|
|
$
|
323,333
|
|
|
$
|
58,913
|
|
|
$
|
264,420
|
|
|
|
449
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
243,757
|
|
|
|
32,663
|
|
|
|
211,094
|
|
|
|
646
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
210,979
|
|
|
|
4,135
|
|
|
|
206,844
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
210,997
|
|
|
|
4,045
|
|
|
|
206,952
|
|
|
nm
|
|
Provision for income taxes
|
|
|
79,484
|
|
|
|
1,836
|
|
|
|
77,648
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,513
|
|
|
|
2,209
|
|
|
|
129,304
|
|
|
nm
|
|
Non-controlling interest
|
|
|
(28
|
)
|
|
|
10
|
|
|
|
(38
|
)
|
|
|
(380
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
131,485
|
|
|
$
|
2,219
|
|
|
$
|
129,266
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm not meaningful
Net Income
Net income for the three months ended March 31, 2010 was $ 131.5 million, an increase of $
129.3 million as compared to $ 2.2 million for the three months ended March 31, 2009,
resulting principally from increased Global Product Sales, net, partially offset by higher total
operating expenses and an increase in the provision for income taxes. As discussed throughout this
section, we earned significant revenues and gross profit from sales of our tamsulosin, mixed
amphetamine salts, and fenofibrate products during the three months ended March 31, 2010.
Accordingly, any significant diminution of such product sales revenue and gross profit due to
competition or any other reasons in future periods may materially and adversely affect our results
of operations in such periods.
Page 53 of 73
We have two operating divisions, the Global Division and the Impax Division, and we currently
market and sell product within the continental United States of America and the Commonwealth of
Puerto Rico.
The Global Division develops, manufactures, sells, and distributes generic pharmaceutical
products, primarily through the following sales channels: the Global Products sales channel, for
sales of generic Rx products, directly to wholesalers, large retail drug chains, and others; the
Private Label sales channel, for generic pharmaceutical over-the-counter and prescription
products sold to unrelated third-party customers, who in-turn sell the products to third-parties
under their own label; the Rx Partner sales channel, for generic prescription products sold through
unrelated third-party pharmaceutical entities under their own label pursuant to alliance
agreements; and the OTC Partner sales channel, for over-the-counter products sold through
unrelated third-party pharmaceutical entities under their own label pursuant to alliance
agreements. We also generate revenue from research and development services provided under a joint
development agreement with another unrelated third-party pharmaceutical company, and report such
revenue under the caption Research Partner revenue on the consolidated statement of operations.
We provide these services through the research and development group in our Global Division.
The Impax Division is engaged in the development of proprietary brand pharmaceutical products
through improvements to already-approved pharmaceutical products to address central nervous system
(CNS) disorders. The Impax Division is also engaged in the provision co-promotion services through
a direct sales force focused on marketing to physicians, primarily in the CNS community, of
pharmaceutical products developed by other unrelated third-party pharmaceutical entities.
Page 54 of 73
Global Division
The following table sets forth results of operations for the Global Division for the three
months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Increase/
|
|
|
|
March 31
|
|
|
March 31
|
|
|
(Decrease)
|
|
(in $000s)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Product Sales, net
|
|
$
|
309,105
|
|
|
$
|
39,121
|
|
|
$
|
269,984
|
|
|
|
690
|
%
|
Private Label product sales
|
|
|
672
|
|
|
|
1,297
|
|
|
|
(625
|
)
|
|
|
(48
|
)%
|
Rx Partner
|
|
|
4,903
|
|
|
|
10,736
|
|
|
|
(5,833
|
)
|
|
|
(54
|
)%
|
OTC Partner
|
|
|
1,765
|
|
|
|
1,858
|
|
|
|
(93
|
)
|
|
|
(5
|
)%
|
Research Partner
|
|
|
3,385
|
|
|
|
2,611
|
|
|
|
774
|
|
|
|
30
|
%
|
Other
|
|
|
|
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
319,830
|
|
|
|
55,629
|
|
|
|
264,201
|
|
|
|
475
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
76,432
|
|
|
|
23,233
|
|
|
|
53,199
|
|
|
|
229
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
243,398
|
|
|
|
32,396
|
|
|
|
211,002
|
|
|
|
651
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
9,435
|
|
|
|
10,275
|
|
|
|
(840
|
)
|
|
|
(8
|
)%
|
Patent litigation
|
|
|
1,984
|
|
|
|
1,017
|
|
|
|
967
|
|
|
|
95
|
%
|
Selling, general and administrative
|
|
|
3,334
|
|
|
|
2,594
|
|
|
|
740
|
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,753
|
|
|
|
13,886
|
|
|
|
867
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
228,645
|
|
|
$
|
18,510
|
|
|
$
|
210,135
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm not meaningful
Revenues
Total revenues for the Global Division for the three months ended March 31, 2010, were $
319.8 million, an increase of 475% over the same period in 2009.
Global
Product Sales, net, were $ 309.1 million, an increase of 690% over the same period
in 2009 primarily as a result of sales of our tamsulosin, mixed amphetamine salts, and fenofibrate
products. Of the $ 270.0 million increase, $ 176.2 million resulted from sales of tamsulosin,
our generic version of Flomax
®
, a drug used to improve symptoms associated with an enlarged
prostate. We commenced sales of our tamsulosin product on March 2, 2010 and had (contractual)
market exclusivity for this generic product for the succeeding eight weeks, during which we were
able to achieve high market-share penetration. Our future tamsulosin product sales, however, are
not likely to remain at this level, as competing generic versions of the product entered the market
in late April 2010, at the conclusion of our contractual exclusivity, and are likely to result in
both price erosion and reduction of our market share. We commenced sales of our mixed amphetamine
salts products, indicated for the treatment of attention deficit hyperactivity disorder, in October
2009, and thus had no sales of these products in the prior-year period. The increase in sales of
our fenofibrate products a cholesterol-lowering drug, resulted from a continued increase in demand
for generic versions of cholesterol-lowering drugs in general.
Private
Label product sales were $ 0.7 million, a decrease of 48% primarily due to lower
demand for our generic loratadine /pseudoephedrine products.
Rx Partner revenues were $ 4.9 million, down 54%, primarily attributable to reduced sales
of our generic Wellbutrin
®
XL 300mg. The reduction of revenue for generic Wellbutrin
®
XL 300mg
resulted from increased marketplace competition.
OTC Partner revenues were $ 1.8 million, a decrease of 5%, primarily attributable to lower
demand.
Research Partner revenues were $ 3.4 million, an increase of $ 0.8 million, primarily
driven by revenue recognition related to three milestone payments aggregating $ 12.0 million,
received at various times during 2009, including $ 5.0 million in May 2009, $ 5.0 million
received in September 2009, and $ 2.0 million received in December 2009.
Page 55 of 73
Cost of Revenues
Cost of revenues was $ 76.4 million for the three months ended March 31, 2010, an increase
of 229% primarily related to the higher sales of our tamsulosin, mixed amphetamine salts and
fenofibrate products.
Gross Profit
Gross profit for the three months ended March 31, 2010 was $ 243.4 million or approximately
76% of total revenues, as compared to $ 32.4 million or 58% of total revenue in the same period
of the prior year. Gross profit in our Global Division was up $ 211.0 million primarily due to
higher sales of our tamsulosin product, which accounted for $ 167.9 million of the period over
period increase. Also contributing to the increase were higher sales of our mixed amphetamine
salts and fenofibrate products, as described more fully above.
Research and Development Expenses
Total research and development expenses for the three months ended March 31, 2010 were $
9.4 million, a decrease of 8% as compared to the same period of the prior year. Generic research
and development expense decreased $ 0.8 million primarily due to lower spending on bio-studies.
Patent Litigation Expenses
Patent litigation expenses for the three months ended March 31, 2010 and 2009 were $ 2.0
million and $ 1.0 million, respectively, an increase of $ 1.0 million principally resulting
from higher overall expenses in the current year period as a result of increased activity related
to existing litigation matters.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March 31, 2010 were $
3.3 million, a 29% increase attributable principally to increased customer freight expenses $ 0.4 million, and higher sales force incentive compensation $ 0.4 million, both related to
higher sales levels.
Page 56 of 73
Impax Division
The following table sets forth results of operations for the Impax Division for the three
months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
Increase/
|
|
|
|
March 31
|
|
|
March 31
|
|
|
(Decrease)
|
|
(in $000s)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Promotional Partner revenue
|
|
$
|
3,503
|
|
|
$
|
3,284
|
|
|
|
219
|
|
|
|
7
|
%
|
Cost of revenues
|
|
|
3,144
|
|
|
|
3,017
|
|
|
|
127
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
359
|
|
|
|
267
|
|
|
|
92
|
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
8,874
|
|
|
|
5,514
|
|
|
|
3,360
|
|
|
|
61
|
%
|
Selling, general and administrative
|
|
|
809
|
|
|
|
1,040
|
|
|
|
(231
|
)
|
|
|
(22
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,683
|
|
|
|
6,554
|
|
|
|
3,129
|
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(9,324
|
)
|
|
$
|
(6,287
|
)
|
|
|
(3,037
|
)
|
|
|
(48
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Promotional Partner revenues were $ 3.5 million for the three months ended March 31, 2010,
an increase of 7% compared to the same period in the prior year. The change from the prior year
period is primarily the result of the commencement of physician detailing services under our
(amended) Co-Promotion Agreement with Pfizer (which commenced on July 1, 2009 under the (former)
Wyeth Co-Promotion Agreement Wyeth is now a wholly-owned subsidiary of Pfizer). The Promotional
Partner revenue in the three months ended March 31, 2009, was earned under the terms of the
previous Promotional Services Agreement with Shire, with such agreement reaching its contractual
end date on June 30, 2009.
Cost of Revenues
Cost of revenues was $ 3.1 million for the three months ended March 31, 2010, with nominal
change from the same period in 2009.
Gross Profit
Gross profit for the three months ended March 31, 2010 was $ 0.4 million, an increase of
34% attributed primarily to the higher Promotional Partner revenues (as described above).
Research and Development Expenses
Total research and development expenses for the three months ended March 31, 2010 were $
8.9 million, an increase of 61%, as compared to $ 5.5 million in the prior year period, with the
$ 3.4 million increase principally driven by research and development expenses related to our
branded product initiatives, including increases of $ 2.3 million for clinical trial studies, $
0.6 million on employee compensation, and $ 0.4 million on PK studies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $ 0.8 million, a decrease of $ 0.2
million over the prior year period attributable to a decrease in business development-related
activities in the current period.
Page 57 of 73
Corporate and other
The following table sets forth Corporate general and administrative expenses, as well as other
items of income and expense presented below income from operations for the three months ended March
31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Increase/
|
|
|
|
March 31
|
|
|
March 31
|
|
|
(Decrease)
|
|
(in $000s)
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Litigation settlement
|
|
$
|
|
|
|
$
|
237
|
|
|
|
(237
|
)
|
|
|
(100
|
)%
|
General and administrative expenses
|
|
|
8,342
|
|
|
|
7,851
|
|
|
|
491
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,342
|
|
|
|
8,088
|
|
|
|
254
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,342
|
)
|
|
|
(8,088
|
)
|
|
|
(254
|
)
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(18
|
)
|
|
|
55
|
|
|
|
(73
|
)
|
|
|
(133)
|
%
|
Interest income
|
|
|
82
|
|
|
|
149
|
|
|
|
(67
|
)
|
|
|
(45
|
)%
|
Interest expense
|
|
|
(46
|
)
|
|
|
(294
|
)
|
|
|
248
|
|
|
|
84
|
%
|
Provision for income taxes
|
|
$
|
79,484
|
|
|
$
|
1,836
|
|
|
|
77,648
|
|
|
nm
|
|
nm not meaningful
Litigation settlement
The $ 0.2 million of Litigation settlement expense for the three months ended March 31,
2009 included legal and other professional fee expenses incurred by us in defense of a suit related
to our (previously marketed) Lipram UL products which we settled in January 2010, accordingly there
were no similar amounts in the current year period.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31, 2010 were $ 8.3
million, a 6% increase attributable principally to an increase in executive-level compensation of $
1.0 million, partially offset by a decrease in professional fee expenses of $ 0.3 million
related to the completion of the examination and review of our consolidated financial statements in
conjunction with the filing of our SEC Registration Statement on Form 10 and NASDAQ Listing of our
shares of common stock.
Other income (expense), net
Other income (expense), net was minimal for the three months ended March 31, 2010 and 2009,
and contained no individually-significant items.
Interest Income
Interest income in the three months ended March 31, 2010 declined as compared to the prior
year period due to lower overall interest rates.
Interest Expense
Interest expense in the three months ended March 31, 2010 declined $ 0.2 million to $
0.05 million, compared to the prior year period due to the absence of interest bearing debt
resulting from the repurchase, on the June 15, 2009 prepayment option date, of the $ 12.75 million
remaining outstanding balance of our 3.5% convertible senior subordinated debentures, otherwise due
in June 2012, and the August 2009 $ 6.9 million repayment-in-full of a subordinated promissory
note.
Page 58 of 73
Income Taxes
During the three months ended March 31, 2010, we recorded a tax provision of $ 79.5 million
for United States domestic federal and state income taxes and for income taxes in jurisdictions
outside the United States. Included in the tax provision for the three months ended March 31, 2010
is an accrual for uncertain tax positions of $ 0.01 million. In the three months ended March
31, 2009, we recorded a tax provision of $ 1.8 million for United States domestic federal and
state income taxes and for income taxes in jurisdictions outside the United States. Included in
the tax provision for the three months ended March 31, 2009 is an accrual for uncertain tax
positions of $ 0.2 million. The tax provision for the three months ended March 31, 2010 does
not include the effect of the federal research and development tax credit as such tax credit
expired on December 31, 2009, and has not been reinstated for 2010. The tax provision for the
three months ended March 31, 2009 included the effect of the federal research and development tax
credit. The effective tax rate of 37.7% for the three months ended March 31, 2010 was lower than
the effective tax rate of 45.4% for the three months ended March 31, 2009, principally driven by
increased favorable permanent differences between GAAP and income tax reporting, including a higher
estimate of the domestic manufacturing deduction, offset by the absence of the federal research and
development tax credit, all of which had a reduced impact on an effective tax rate basis, as the
current year income before income taxes was significantly higher as compared to the same period of
the prior year.
Page 59 of 73
Liquidity and Capital Resources
We have historically funded our operations with the proceeds from the sale of debt and equity
securities, and more recently, with cash from operations. Currently, our principal source of
liquidity is cash from operations, consisting of the proceeds from the sales of our products and
provision of services.
We expect to incur significant operating expenses, including expanded research and development
activities and patent litigation expenses, for the foreseeable future. We estimate research and
development expenses will be approximately $ 77.0 million and patent litigation expenses will be
approximately $ 11.0 million for the 12 months ending December 31, 2010. We also anticipate
incurring capital expenditures of approximately $ 20.0 million during the 12 months ending
December 31, 2010, principally for continued improvements and expansion of our research and
development and manufacturing facilities in the State of California and our packaging and
distribution facilities in the Commonwealth of Pennsylvania. In addition, we are generally
required to make cash expenditures to manufacture and/or acquire finished product inventory in
advance of selling the finished product to our customers and collecting payment for such product
sales, which may result in a significant use of cash.
We believe our existing cash and cash equivalents and short-term investment balances, together
with cash expected to be generated from operations, and our bank revolving line of credit, will be
sufficient to meet our financing requirements through the next 12 months. We may, however, seek
additional financing through alliance, collaboration, and /or licensing agreements, as well as from
the equity and/or debt capital markets to fund the planned capital expenditures, our research and
development plans, and potential revenue shortfalls due to delays in new product introductions.
Cash and Cash Equivalents
At March 31, 2010, we had $ 83.7 million in cash and cash equivalents, an increase of $ 52.0 million as compared to December 31, 2009. As more fully discussed below, the increase in cash
and cash equivalents during the three months ended March 31, 2010 was primarily driven by $ 36.8
million of cash provided by operations, which included an increase in accounts payable and accrued
expenses to be paid in subsequent periods. The increase in cash was also impacted by net
maturities of short term investments of $ 12.0 million, and $ 4.7 million received from the
exercise of stock options.
Cash Flows
Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009.
Net cash provided by operating activities for the three months ended March 31, 2010 was $
37.6 million, an increase of $ 55.7 million as compared to the prior year period $ 18.1
million net cash used in operating activities.
The period-over-period increase in net cash provided by operating activities resulted
principally from a higher net income and an increase in accounts payable and accrued expenses,
partially offset by a higher accounts receivable balance. Net income increased by $ 129.3
million during the three months ended March 31, 2010 as compared to the same period in the prior
year driven primarily by the launch of our generic tamsulosin product in March 2010. In addition,
higher levels of accounts payable and accrued expenses resulted in a period-over-period increase of
$ 68.2 million in cash flows. The increases noted above were partially offset by higher
accounts receivable which increased to $ 324.7 million at March 31, 2010, resulting in a $
138.9 million use of cash flows, compared to the same period in the prior year when accounts
receivable resulted in a $ 18.5 million use of cash flows. The increased level of accounts
receivable at March 31, 2010 was primarily the result of higher product sales due to the launch of
our tamsulosin product in March 2010, and of our mixed amphetamine salts products in October 2009.
We commenced sales of our tamsulosin product on March 2, 2010 and had (contractual) market
exclusivity for this generic product for the succeeding eight weeks, during which we were able to
achieve high market-share penetration. Our future tamsulosin product sales, however, are not
likely to remain at this level, as competing generic versions of the product entered the market in
late April 2010 (at the conclusion of the contractual exclusivity period), and are likely to result
in both price erosion and reduction of our market-share. (See Results of Operations above for
additional discussion.)
Page 60 of 73
Net cash provided by investing activities for the three months ended March 31, 2010, amounted
to $ 8.9 million, an increase of $ 22.4 million as compared to the prior year period $
13.4 million use of cash flows in investing activities, with the change due to a period-over-period
$ 21.6 million net increase in the maturity of short-term investments, and $ 0.8 million in
lower expenditures on property, plant and equipment. Net maturities of short-term investments
during the three months ended March 31, 2010 resulted in a $ 12.0 million source of cash flows,
as compared to a $ 9.6 million use of cash flows from net purchases of short-term investments
during the same period in the prior year. Purchases of property, plant and equipment for the three
months ended March 31, 2010 amounted to $ 3.1 million as compared to $ 3.9 million for the
prior year period. We expect continued investment in facilities, equipment, and information
technology projects supporting our quality initiatives to ensure we have appropriate levels of
technology infrastructure to manage and grow our global business.
Net cash provided by financing activities for the three months ended March 31, 2010 was
approximately $ 5.4 million, representing an increase of $ 5.1 million as compared to the
prior year period $ 0.3 million of net cash provided by financing activities. The
period-over-period increase in net cash provided by financing activities was primarily due to an
increase in (aggregate) cash proceeds received from the exercise of stock options and contributions
to the employee stock purchase plan (ESPP) of $ 4.7 million for the three months ended March 31,
2010, as compared to $ 0.3 million received in the prior year period.
Page 61 of 73
Outstanding Debt Obligations
Senior Lenders; Wachovia Bank
We have a $ 35.0 million revolving credit facility under a credit agreement with Wachovia
Bank, N.A. (a Wells Fargo subsidiary) (Credit Agreement), with a June 30, 2010 expiration date.
The revolving credit facility, intended for working capital and general corporate purposes, is
collateralized by eligible accounts receivable, inventory, and machinery and equipment, subject to
limitations and other terms. There were no amounts outstanding under the revolving credit facility
as of March 31, 2010 and December 31, 2009, respectively.
The interest rate for the revolving credit facility is either the prime rate plus a margin
ranging from 0.25% to 0.75% or LIBOR plus a margin ranging from 2.25% to 3.0% based upon certain
terms and conditions. We are required to pay an unused line fee of 50 basis points per annum and a
servicing fee of $ 1,500 during any month in which no revolver loans are outstanding. During
the three months ended March 31, 2010 and 2009, we paid to Wachovia Bank unused line fees of $
44,000 and $ 40,000, respectively.
The Credit Agreement contains various financial covenants, the most significant of which
include a fixed charge coverage ratio and a capital expenditure limitation. The fixed charge
coverage ratio, applicable only for periods during which our net cash position is less than $
50.0 million, requires EBITDA less cash paid for taxes, dividends, and certain capital expenditures
to be not less than 1.25 to 1.00 as compared to scheduled principal payments coming due in the next
12 months plus cash interest paid during the applicable period. We are limited to capital
expenditures of no more than $ 25.0 million for each calendar year. The Credit Agreement also
provides for certain information reporting covenants, including a requirement to provide certain
periodic financial information. At March 31, 2010, we were in compliance with the various
financial and information reporting covenants contained in the Credit Agreement.
Page 62 of 73
Recent Accounting Pronouncements
In September 2009, the FASB approved an update to the accounting standard related to
multiple-deliverable revenue arrangements currently within the scope of FASB ASC Topic 605. The
updated accounting standard provides principles and guidance to be used to determine whether a
revenue arrangement has multiple deliverables, and if so, how those deliverables should be
separated. If multiple deliverables exist, the updated standard requires revenue received under
the arrangement to be allocated using the estimated selling price of the deliverables if
vendor-specific objective evidence or third-party evidence of selling price is not available. The
updated accounting standard is effective for revenue arrangements entered into or materially
modified in fiscal years beginning on, or after June 15, 2010, with early application permitted.
We will determine the impact of the updated accounting standard as it enters into new revenue
arrangements, or materially modifies any of its existing revenue arrangements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-02, Consolidation (Topic
810): Accounting and Reporting for Decreases in Ownership of a Subsidiary a Scope Clarification.
This update provides amendments to Subtopic 810-10, and related guidance within US GAAP, to
clarify the scope of the decrease in ownership provisions. For those entities that have already
adopted Statement 160, the amendments are effective at the beginning of the first interim or annual
reporting period ending on or after December 15, 2009. The amendments should be applied
retrospectively to the first period that an entity adopted Statement 160. Upon becoming effective
this update did not have an impact on our consolidated financial statements.
In March 2010, the FASB approved the Milestone Method of Revenue Recognition, which
addresses accounting for arrangements in which a vendor satisfies its performance obligations over
time, with all or a portion of the consideration contingent on future events, referred to as
milestones. The Milestone Method of Revenue Recognition is limited to arrangements which involve
research or development activities. A milestone is defined as an event for which, at the date the
arrangement is entered into, there is substantive uncertainty whether the event will be achieved,
and the achievement of the event is based in whole or in part on either the vendors performance or
a specific outcome resulting from the vendors performance. In addition, the achievement of the
event would result in additional payments being due to the vendor. The Milestone Method of Revenue
Recognition allows a vendor to adopt an accounting policy to recognize arrangement consideration
that is contingent on the achievement of a substantive milestone in its entirety in the period the
milestone is achieved. The Milestone Method of Revenue Recognition is effective on a prospective
basis, with an option for retrospective application, for milestones achieved in fiscal years and
interim periods within those fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. If an entity elects early application in a period that is not the first reporting period
of its fiscal year, then the guidance must be applied retrospectively from the beginning of that
fiscal year. We will determine the impact of the new accounting standard as we achieve milestones,
and earn payments under either new or existing revenue arrangements.
Page 63 of 73
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the quantitative and qualitative disclosures about market
risk set forth in our Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Exchange Act) that are designed to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to the Companys management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
The Companys management, with the participation of the Companys Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon
that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act,
were effective as of March 31, 2010.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2010, there were no changes in the Companys internal
control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that materially
affected, or are reasonably likely to materially affect, the Companys internal control over
financial reporting.
Page 64 of 73
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Patent Infringement Litigation
AstraZeneca AD et al. v. Impax Laboratories, Inc. (Omeprazole)
In litigation commenced against us in the U.S. District Court for the District of Delaware in
May 2000, AstraZeneca AB alleged 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 the patents. The case, along with several similar suits against other
manufacturers of generic versions of Prilosec
®
, was subsequently transferred to the U.S. District
Court for the Southern District of New York. In September 2004, following expiration of the
30-month stay, the FDA approved our ANDA, and we, along with 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 us, but were included in a separate
suit filed against Teva. In May 2007, the court found the product infringed two of AstraZenecas
patents and these patents were not invalid. The court ordered FDA approval of 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. In January, 2010,
AstraZeneca, Teva and we entered into a settlement agreement and the suits against both Teva and us
were dismissed.
Endo Pharmaceuticals Inc., et al. v. Impax Laboratoires, Inc. (Oxymorphone)
In November 2007, Endo Pharmaceuticals Inc. and Penwest Pharmaceuticals Co. (together, Endo)
filed suit against us in the U.S. District Court for the District of Delaware, requesting a
declaration 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 such ANDA. Endo
subsequently dismissed its request for declaratory relief and in December 2007 filed another patent
infringement suit relating to the same ANDA. In July 2008, Endo asserted additional infringement
claims with respect to our amended ANDA, which added 7.5mg, 15mg and 30mg strengths of the product.
The cases have subsequently been transferred to the U.S. District Court for the District of New
Jersey. We have filed an answer and counterclaims. Discovery is completed. The court issued its
Markman decision
and final pretrial orders in March 2010. No trial date has been set.
Pfizer Inc., et aI. v. Impax Laboratories, Inc. (Tolterodine)
In March 2008, Pfizer Inc., Pharmacia & Upjohn Company LLC, and Pfizer Health AB
(collectively, Pfizer) filed a complaint against us in the U.S. District Court for the Southern
District of New York, alleging our filing of an ANDA relating to Tolterodine Tartrate Extended
Release Capsules, 4 mg, generic to Detrol
®
LA, infringes three Pfizer patents. We filed an answer
and counterclaims seeking declaratory judgment of non-infringement, invalidity, or unenforceability
with respect to the patents in suit. In April 2008, the case was transferred to the U.S. District
Court for the District of New Jersey. On September 3, 2008, an amended complaint was filed
alleging infringement based on our ANDA amendment adding a 2mg strength. For one of the
patents-in-suit, U.S. Patent No. 5,382,600, expiring on September 25, 2012 with pediatric
exclusivity, we agreed by stipulation to be bound by the decision in
Pfizer Inc. et al. v. Teva
Pharmaceuticals USA, Inc.
, Case No. 04-1418 (D. N.J.). After the
Pfizer
court conducted a bench
trial, it found the 600 patent not invalid on January 20, 2010, and that decision is on appeal to
the U.S. Court of Appeals for the Federal Circuit. Discovery is proceeding in the case, and no
trial date has been set.
Page 65 of 73
Elan Pharma International Ltd. and Fournier Laboratories Ireland Ltd. v. Impax Laboratories,
Inc. Abbott Laboratories and Laboratories Fournier S.A. v. Impax Laboratories, Inc.
(Fenofibrate)
In October 2009, Elan Pharma International Ltd. with Fournier Laboratories Ireland Ltd. and
Abbott Laboratories with Laboratories Fournier S.A. filed separate suits against us in the U.S.
District Court for the District of New Jersey alleging patent infringement for the filing of our
ANDA relating to Fenofibrate Tablets, 48 mg and 145 mg, generic to Tricor
®
. We have filed an
answer and counterclaim. Fact discovery closes December 31, 2010.
Daiichi Sankyo, Inc. et al. v. Impax Laboratories, Inc. (Colesevelam)
In January 2010, Daiichi Sankyo, Inc. and Genzyme Corporation (together, Genzyme) 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 Colesevelam Hydrochloride Tablets, 625 mg, generic to Welchol
®
.
We have filed an answer and counterclaim. Fact discovery closes June 30, 2011, and no trial date
has been scheduled.
Abbott Laboratories, et al. v. Impax Laboratories, Inc. (Choline Fenofibrate)
In March 2010, Abbott Laboratories and Fournier Laboratories Ireland Ltd. (together, Abbott)
filed suit against us in the U.S District Court for the District of New Jersey alleging patent
infringement for the filing of our ANDA related to Choline Fenofibrate Delayed Release Capsules, 45
mg and 135 mg, generic of Trilipix
®
. We have filed an answer.
Shionogi Pharma, Inc. and LifeCycle Pharma A/S v. Impax Laboratories, Inc. (Fenofibrate)
In April 2010, Shionogi Pharma, Inc. and LifeCycle Pharma A/S filed suit against us in the
U.S. District Court for the District of Delaware alleging patent infringement for the filing of our
ANDA relating to Fenofibrate Tablets, 40 and 120 mg, generic to Fenoglide
®
. We have not yet filed
our answer.
Page 66 of 73
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 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 was seeking actual and consequential damages, including lost profits, treble
damages, attorneys fees, injunctive relief and declaratory judgments to prohibit the substitution
of Lipram UL for prescriptions of Ultrase
®
. The District Court granted in part and denied in part
our motion to dismiss the complaint, as well as the motion of co-defendants Ethex Corp. and KV
Pharmaceutical Co., holding any claim of false advertising pre-dating June 1, 2001, is barred by
the statute of limitations. On January 5, 2010, the parties settled the case and the case was
subsequently dismissed with prejudice.
Budeprion XL Litigation
In June 2009, we were named a co-defendant in class action lawsuits filed in California state
court in an action titled
Kelly v. Teva Pharmaceuticals Indus. Ltd, et al.
, No. BC414812 (Calif.
Superior Crt. L.A. County). Subsequently, additional class action lawsuits were filed in Louisiana
(
Morgan v. Teva Pharmaceuticals Indus. Ltd, et al.
, No. 673880 (24
th
Dist Crt.,
Jefferson Parish, LA.)), North Carolina (
Weber v. Teva Pharmaceuticals Indus., Ltd., et al
., No. 07
CV5002556, (N.C. Superior Crt., Hanover County)), Pennsylvania (
Rosenfeld v. Teva Pharmaceuticals
USA, Inc.. et al.
, No. 2:09-CV-2811 (E.D. Pa.)), Florida (
Henchenski and Vogel v. Teva
Pharmaceuticals Industries Ltd., et al.,
No. 2:09-CV-470-FLM-29SPC (M.D. Fla.)), Texas (
Anderson v.
Teva Pharmaceuticals Indus., Ltd., et al.
, No. 3-09CV1200-M (N.D. Tex.)), Oklahoma (
Brown et al. v.
Teva Pharmaceuticals Inds., Ltd., et al.
, No. 09-cv-649-TCK-PJC (N.D. OK)), Ohio (
Latvala et al. v.
Teva Pharmaceuticals Inds., Ltd., et al.
, No. 2:09-cv-795 (S.D. OH)), Alabama (
Jordan v. Teva
Pharmaceuticals Indus. Ltd et al
., No. CV09-709 (Ala. Cir. Crt. Baldwin County)), and Washington
(
Leighty v. Teva Pharmaceuticals Indus. Ltd et al
., No. CV09-01640 (W. D. Wa.)). All of the
complaints involve Budeprion XL, a generic version of Wellbutrin XL
®
that is manufactured by the
Company and marketed by Teva, and allege that, contrary to representations of Teva, Budeprion XL is
less effective in treating depression, and more likely to cause dangerous side effects, than
Wellbutrin XL. The actions are brought on behalf of purchasers of Budeprion XL and assert claims
such as unfair competition, unfair trade practices and negligent misrepresentation under state law.
Each lawsuit seeks damages in an unspecified amount consisting of the cost of Budeprion XL paid by
class members, as well as any applicable penalties imposed by state law, and disclaims damages for
personal injury. The state court cases have been removed to federal court, and a petition for
multidistrict litigation to consolidate the cases in federal court has been granted. These cases
and any subsequently filed cases will be heard under the consolidated action entitled
In re:
Budeprion XL Marketing Sales Practices, and Products Liability Litigation
, MDL No. 2107, in the
United States District Court for the Eastern District of Pennsylvania. Discovery and other
deadlines are stayed pending resolution of our motion to dismiss the actions based on several
grounds, including the doctrines of federal law preemption and primary jurisdiction.
Page 67 of 73
ITEM 1A. RISK FACTORS
Except as set forth below, there have been no material changes to the risk factors included in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Please carefully
consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors
discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2009, which could materially affect our business, financial condition or future
results. The risks described herein and in our Annual Report on Form 10-K are not the only risks
we face. Additional risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial condition and/or
operating results.
Legislative or regulatory reform of the healthcare system in the United States may harm our future
business.
Healthcare costs have risen significantly over the past decade. On March 23, 2010, President
Obama signed the Patient Protection and Affordable Care Act (H.R. 3590, P.L. 111-148) and on
March 30, 2010, the President signed the Health Care and Education Reconciliation
Act (H.R. 4872, P.L. 111-152), collectively referred to as the Healthcare Reform Law,
which, among other things, requires most individuals to have health insurance (effective January 1,
2014), establishes new regulations on health plans (with the earliest changes for certain benefits
beginning with plan years commencing after September 23, 2010), creates insurance exchanges
(effective January 2014) and imposes new requirements and changes in reimbursement or funding for
healthcare providers, device manufacturers and pharmaceutical companies (with the earliest changes
effective on March 23, 2010) and other changes staged in thereafter. The Healthcare Reform Law may
impose additional requirements and obligations upon our company, which, to a certain extent, will
depend upon the mix of products we sell. These changes include, among other things:
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revisions to the Medicaid rebate program by: (a) increasing the rebate percentage for
branded drugs dispensed after December 31, 2009 to 23.1% of the
average manufacturer price, referred to as AMP, with limited exceptions, (b) increasing the rebate for outpatient generic, multiple
source drugs dispensed after December 31, 2009 to 13% of AMP; (c) changing the definition of
AMP; and (d) effective January 1, 2011, the Medicaid rebate program will be extended to
Medicaid managed care plans, with limited exception;
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the imposition of annual fees upon manufacturers or importers of branded prescription
drugs, which fees will be in amounts determined by the Secretary of Treasury based upon market
share and other data;
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providing a 50% discount on brand-name prescriptions filled in the Medicare Part D coverage
gap beginning in 2011;
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imposing increased penalties for the violation of fraud and abuse laws and funding for
anti-fraud activities; and
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creating a new pathway for approval of biosimilar biological products and granting an
exclusivity period of 12 years for branded drug manufacturers of biological products before
biosimilar products can be approved for marketing in the U.S.
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While the aforementioned Healthcare Reform Law may increase the number of patients who have
insurance coverage for our products, such insurance mandate does not commence until January 2014,
and the Healthcare Reform Law also restructures payments to Medicare managed care plans and reduces
reimbursements to many institutional customers. Accordingly, the timing on the insurance mandate,
the change in the Medicaid rebate levels, the additional fees imposed upon our company if it
markets branded drugs, other compliance obligations, and the reduced reimbursement levels to
institutional customers may result in a loss of revenue and could adversely affect our business.
In addition, the Healthcare Reform Law contemplates the promulgation of significant future
regulatory action which may also further affect our business.
Page 68 of 73
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regarding the purchases of our equity securities by
us during the quarter ended March 31, 2010.
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Total
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Number of
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Shares (or
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Units)
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Purchased
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Maximum Number (or
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as Part of
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Approximate Dollar
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Average
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Publicly
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Value) of Shares (or
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Total Number of
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Price Paid
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Announced
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Units) that May Yet
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Shares (or Units)
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Per Share
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Plans or
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Be Purchased Under
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Period
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Purchased(1)
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(or Unit)
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Programs
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the Plans or Programs
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January 1, 2010 to
January 31, 2010
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February 1, 2010 to
February 28, 2010
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36,463 shares of common stock
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$
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13.79
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March 1, 2010 to
March 31, 2010
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7,829 shares of common stock
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$
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16.48
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(1)
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Represents shares of our common stock that we accepted during the indicated periods as a tax
withholding from certain of our employees in connection with the vesting of shares of
restricted stock pursuant to the terms of our 2002 Plan.
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Page 69 of 73
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
Not Applicable.
Page 70 of 73
ITEM 6. EXHIBITS
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Exhibit No.
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Description of Document
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10.1.1
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Impax Laboratories, Inc. Executive Non-Qualified Deferred
Compensation Plan, amended and restated as of December 31,
2007 and effective as of January 1, 2008.*
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10.1.2
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Amendment to Impax Laboratories, Inc. Executive Non-Qualified
Deferred Compensation Plan, effective as of January 1, 2009.*
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10.2
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Employment Agreement dated as of January 1, 2010 between the
Company and Larry Hsu, Ph.D.* (1)
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10.3
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Employment Agreement dated as of January 1, 2010 between the
Company and Arthur A. Koch, Jr.* (1)
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10.4
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Employment Agreement dated as of January 1, 2010 between the
Company and Christopher Mengler, R.Ph.* (1)
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10.5
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Employment Agreement dated as of January 1, 2010 between the
Company and Michael J. Nestor.* (1)
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10.6
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Employment Agreement dated as of January 1, 2010 between the
Company and Charles V. Hildenbrand.* (1)
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10.7
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Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated as of March 19, 2010, by and among the
Company and Wachovia Bank, National Association.
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11.1
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Statement re computation of per share earnings (incorporated
by reference to Note 14 to the Notes to the unaudited interim
Consolidated Financial Statements in this Quarterly Report on
Form 10-Q).
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31.1
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Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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32.2
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Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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*
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Management contract, compensatory plan or arrangement.
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(1)
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Incorporated by reference to the Companys Current Report on Form 8-K filed on January 14,
2010.
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Page 71 of 73
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Date: May 6, 2010
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Impax Laboratories, Inc.
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By:
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/s/ Larry Hsu, Ph.D
.
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Name:
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Larry Hsu, Ph.D.
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Title:
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President and Chief Executive Officer
(Principal Executive Officer)
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By:
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/s/ Arthur A. Koch, Jr.
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Name:
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Arthur A. Koch Jr.
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Title:
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Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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Page 72 of 73
EXHIBIT INDEX
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Exhibit No.
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Description of Document
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10.1.1
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Impax Laboratories, Inc. Executive Non-Qualified Deferred
Compensation Plan, amended and restated as of December 31,
2007 and effective as of January 1, 2008.*
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10.1.2
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Amendment to Impax Laboratories, Inc. Executive Non-Qualified
Deferred Compensation Plan, effective as of January 1, 2009.*
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10.2
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Employment Agreement dated as of January 1, 2010 between the
Company and Larry Hsu, Ph.D.* (1)
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10.3
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Employment Agreement dated as of January 1, 2010 between the
Company and Arthur A. Koch, Jr.* (1)
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10.4
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Employment Agreement dated as of January 1, 2010 between the
Company and Christopher Mengler, R.Ph.* (1)
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10.5
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Employment Agreement dated as of January 1, 2010 between the
Company and Michael J. Nestor.* (1)
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10.6
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Employment Agreement dated as of January 1, 2010 between the
Company and Charles V. Hildenbrand.* (1)
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10.7
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Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated as of March 19, 2010, by and among the
Company and Wachovia Bank, National Association.
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11.1
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Statement re computation of per share earnings (incorporated
by reference to Note 14 to the Notes to the unaudited interim
Consolidated Financial Statements in this Quarterly Report on
Form 10-Q).
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31.1
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Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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32.2
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Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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*
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Management contract, compensatory plan or arrangement.
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(1)
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Incorporated by reference to the Companys Current Report on Form 8-K filed on January 14,
2010.
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