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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2011

OR

 

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

For the transition period from to

Commission file number: 001-34263

 

 

Impax Laboratories, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   65-0403311

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

30831 Huntwood Avenue, Hayward, CA   94544
(Address of principal executive offices)   (Zip Code)

(510) 476-2000

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered:

Common Stock, par value $0.01 per share   The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

    Yes   x     No   ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes   ¨     No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

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   x     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation of S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the registrant’s outstanding shares of common stock, other than shares held by persons who may be deemed affiliates of the registrant, computed by reference to the price at which the registrant’s common stock was last sold on The NASDAQ Stock Market LLC as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2011), was approximately $ 1,353,682,000.

As of February 15, 2012, there were 66,808,251 shares of the registrant’s common stock outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the definitive proxy statement for the registrant’s Annual Meeting of Stockholders to be held on May 22, 2012 have been incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Forward-Looking Statements

     1   

PART I

     

Item 1.

   Business      2   

Item 1A.

   Risk Factors      20   

Item 1B.

   Unresolved Staff Comments      40   

Item 2.

   Properties      40   

Item 3.

   Legal Proceedings      40   

Item 4.

   Mine Safety Disclosures      40   

PART II

     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      41   

Item 6.

   Selected Financial Data      44   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      45   

Item 7A.

   Quantitative and Qualitative Disclosures about Market Risk      74   

Item 8.

   Financial Statements and Supplementary Data      74   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      74   

Item 9A.

   Controls and Procedures      75   

Item 9B.

   Other Information      77   

PART III

     

Item 10.

   Directors, Executive Officers and Corporate Governance      78   

Item 11.

   Executive Compensation      78   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      78   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      78   

Item 14.

   Principal Accounting Fees and Services      78   

PART IV

     

Item 15.

   Exhibits and Financial Statement Schedules      79   

SIGNATURES

     

EXHIBIT INDEX

        II-1   


Table of Contents

Forward-Looking Statements

Statements included in this Annual Report on Form 10-K that do not relate to present or historical conditions are “forward-looking statements.” Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements may include statements relating to our plans, strategies, objectives, expectations and intentions. Words such as “believes,” “forecasts,” “intends,” “possible,” “estimates,” “anticipates,” and “plans” and similar expressions are intended to identify forward-looking statements. Our ability to predict results or the effect of events on our operating results is inherently uncertain. Forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those discussed in this Annual Report on Form 10-K. Such risks and uncertainties include the effect of current economic conditions on our industry, business, financial position and results of operations, fluctuations in our revenues and operating income, our ability to successfully develop and commercialize pharmaceutical products, reductions or loss of business with any significant customer, the impact of consolidation of our customer base, the impact of competition, our ability to sustain profitability and positive cash flows, any delays or unanticipated expenses in connection with the operation of our Taiwan facility, the effect of foreign economic, political, legal and other risks on our operations abroad, the uncertainty of patent litigation, increased government scrutiny on our agreements with brand pharmaceutical companies, consumer acceptance and demand for new pharmaceutical products, the difficulty of predicting Food and Drug Administration filings and approvals, our inexperience in conducting clinical trials and submitting new drug applications, our ability to successfully conduct clinical trials, our reliance on third parties to conduct clinical trials and testing, the availability of raw materials and impact of interruptions in our supply chain, the use of controlled substances in our products, disruptions or failures in our information technology systems and network infrastructure, our reliance on alliance and collaboration agreements, our dependence on certain employees, our ability to comply with legal and regulatory requirements governing the healthcare industry, the regulatory environment, our ability to protect our intellectual property, exposure to product liability claims, changes in tax regulations, our ability to manage our growth, including through potential acquisitions, the restrictions imposed by our credit facility, uncertainties involved in the preparation of our financial statements, our ability to maintain an effective system of internal control over financial reporting, any manufacturing difficulties or delays, the effect of terrorist attacks on our business, the location of our manufacturing and research and development facilities near earthquake fault lines, and other risks described below in “Item 1A Risk Factors.” 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 or revise any forward-looking statement, regardless of future developments or availability of new information.

 

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PART I

 

Item 1. Business

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 bioequivalent pharmaceutical products, commonly referred to as “generics,” in addition to the development of branded products. We operate in two segments, referred to as the “Global Pharmaceuticals Division” (“Global Division”) and the “Impax Pharmaceuticals Division” (“Impax Division”). The Global Division concentrates its efforts on the development, manufacture, sale and distribution of our generic products, which are the pharmaceutical and therapeutic equivalents of brand-name drug products and are usually marketed under their established nonproprietary drug names rather than by a brand name. The Impax Division is currently focused on the development of proprietary brand pharmaceutical products for the treatment of central nervous system (“CNS”) disorders and the promotion of third-party branded pharmaceutical products through our direct sales force. Each of the Global Division and the Impax Division also generates revenue from research and development services provided to unrelated third-party pharmaceutical entities. See “Item 15. Exhibits and Financial Statement Schedules — Note 16 to Consolidated Financial Statements,” for financial information about our segments for the years ended December 31, 2011, 2010 and 2009.

The following information summarizes our generic pharmaceutical product development activities since inception through February 3, 2012:

 

   

65 Abbreviated New Drug Applications (“ANDAs”) approved by the Food and Drug Administration (“FDA”), which include generic versions of brand name pharmaceuticals such as Brethine ® , Florinef ® , Minocin ® , Claritin-D ® 12-hour, Claritin-D ® 24-hour, Wellbutrin SR ® , Wellbutrin XL ® , Ditropan XL ® , Depakote ER ® and Prilosec ® .

 

   

45 applications pending at the FDA, including 4 tentatively approved ( i.e. , satisfying substantive FDA requirements but remaining subject to statutory pre-approval restrictions), that address approximately $ 20.1 billion in 2011 U.S. product sales.

 

   

46 products in various stages of development for which applications have not yet been filed.

In addition, we have one branded pharmaceutical product for which a New Drug Application (“NDA”) was accepted for filing by the FDA in February 2012 and which the Prescription Drug User Fee Date (“PDUFA”) for a decision by the FDA is October 2012. We also have a second branded pharmaceutical product for which we initiated a phase IIb clinical study in December 2011 and we have other programs in the early exploratory phase.

 

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Our Strategy

We plan to continue to expand our Global Division through targeted ANDAs and a first-to-file and first-to-market strategy. Our products and product candidates are generally difficult to formulate and manufacture, providing certain barriers to entry for potential competitors. In addition to our product pipeline of 45 pending applications at FDA, we are continuing to evaluate and pursue external growth initiatives including acquisitions and partnerships.

A core component of our strategy includes our ongoing focus in our Impax Division on proprietary brand-name pharmaceutical products to treat CNS disorders. We believe that we have the research, development and formulation expertise to develop branded products that will deliver significant improvements over existing therapies. We plan to continue investing in our development pipeline, which consists of one product for which an NDA was accepted for filing by the FDA in February 2012, a second product which is currently in Phase IIb clinical trials and other additional products which are in the exploratory stage.

Global Division

In the generic pharmaceutical market, we focus our efforts on developing, manufacturing, selling and distributing 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 reproduce brand-name products’ physiological characteristics but do not infringe any valid patents relating to such brand-name products. Generic products contain the same active ingredient and are of the same route of administration, dosage form, strength and indication(s) as brand-name products already approved for use in the United States by the FDA. We generally focus our generic product development 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 also develop, manufacture, sell and distribute 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. Our Global Division also generates revenues from research and development services provided under a joint development agreement with an unrelated third-party pharmaceutical entity.

We sell and distribute generic pharmaceutical products primarily through four sales channels:

 

   

the “Global Product” sales channe l: generic pharmaceutical prescription products we sell directly to wholesalers, large retail drug chains, and others;

 

   

the “Private Label” sales channel : generic pharmaceutical over-the-counter (“OTC”) and prescription products we sell to unrelated third parties who in-turn sell the product under their own label;

 

   

the “Rx Partner” sales channel : generic prescription products sold through unrelated third-party pharmaceutical entities pursuant to alliance and collaboration agreements; and

 

   

the “OTC Partner” sales channel : sales of generic pharmaceutical OTC products sold through unrelated third-party pharmaceutical entities pursuant to alliance and collaboration agreements.

As of February 3, 2012, we marketed 108 generic pharmaceutical products representing dosage variations of 30 different pharmaceutical compounds through our Global Division, and 17 other generic pharmaceutical products, representing dosage variations of 4 different pharmaceutical compounds, through our alliance and collaboration agreement partners.

 

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The following table lists our 41 products, representing 41 ANDAs that have been approved by the FDA, and that are currently marketed by our Global Division:

 

Product

  

Generic of

2004 OR EARLIER

  

Methytestosterone 10mg

   Android ®

Orphenadrine 100 mg Tablets

   Norflex ®

Minocycline 50, 75 and 100 mg Capsules

   Minocin ®

Terbutaline 2.5 and 5 mg Tablets

   Brethine ®

Fludrocortisone 0.1 mg Tablets

   Florinef ®

Rimantadine 100 mg Tablets

   Flumadine ®

Pyridostigmine 60 mg Tablets

   Mestinon ®

Chloroquine 250 mg Tablets

   N/A

Chloroquine 500 mg Tablets

   Aralen ®

Flavoxate 100 mg Tablets

   Urispas ®

Fenofibrate 67, 134 and 200 mg Capsules

   Lofibra ®

Loratadine and Pseudoephedrine Sulfate 5/120 mg ER Tablets

   Claritin-D 12-hr ®

Bupropion Hydrochloride 100 and 150 mg ER Tablets (twice daily)

   Wellbutrin SR ®

Bupropion Hydrochloride 150 mg ER Tablets (twice daily)

   Zyban ®

Loratadine and Pseudoephedrine Sulfate 10/240 mg ER Tablets

   Claritin-D ® 24-Hour

Demeclocycline Hydrochloride 150 and 300 mg Tablets

   Declomycin ®

Carbidopa/Levodopa 25/100 & 50/200 mg ER Tablets

   SinemetCR ®

Midodrine Hydrochloride 2.5, 5 and 10 mg Tablets

   ProAmatine ®

Bupropion Hydrochloride 200 mg ER Tablets (twice daily)

   Wellbutrin SR ®

2005

  

Dantrolene Sodium 25, 50 and 100 mg Capsules

   Dantrium ®

Carprofen 25, 75 and 100 mg Caplets (a veterinary product)

   Rimadyl ®

2006

  

Pilocarpine Hydrochloride 5 and 7.5 mg Tablets

   Salagen ®

Colestipol Hydrochloride 5 g Packet and 5 g Scoopful

   Colestid ®

Colestipol Hydrochloride 1 g Tablets

   Colestid ®

Bethanechol Chloride 5, 10, 25 and 50 mg Tablets (4 separate ANDAs)

   Urecholine ®

Oxybutynin Chloride 15 mg ER Tablets (1a)

   Ditropan XL ®

Bupropion Hydrochloride 300 mg ER Tablets (1b) (once daily)

   Wellbutrin XL ®

2007

  

Nadolol /Bendroflumethiazide 40/5 and 80/5 mg Tablets

   Corzide ®

Oxybutynin Chloride 5 and 10 mg ER Tablets (1a)

   Ditropan XL ®

Dipyridamole 25, 50, 75 mg Tablets USP

   Persantine ®

2008

  

Primidone 50 and 250 mg Tablets

   Mysoline ®

Promethazine 12.5, 25 and 50 mg Tablets (2 separate ANDAs)

   Phenergan ®

Fenofibrate 54 and 160 mg Tablets

   Lofibra ®

Bupropion Hydrochloride 150 mg ER Tablets (1b) (once daily)

   Wellbutrin XL ®

2009

  

Acarbose 25, 50 and 100 mg Tablets

   Precose ®

Divalproex Sodium ER 250 and 500 mg Tablets

   Depakote ® ER

Galantamine 8, 16 and 24 mg Capsules

   Razadyne ® ER

 

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Product

  

Generic of

Minocycline HCL Extended Release Tablets 45, 90, 135 mg

   Solodyn ®

2010

  

Tamsulosin Hydrochloride 0.4 mg Capsules

   Flomax ®

Digoxin 125 and 250 mcg Tablets

   Lanoxin ®

2011

  

Doxycycline Capsules USP 150 mg

   Adoxa ®

 

(1) Multiple products filed under same ANDA, including (i) 1a: Oxybutynin Chloride products and (ii) 1b: Bupropion Hydrochloride products.

As of February 3 2012, we had 45 applications pending at the FDA, of which 29 products, representing 29 ANDAs, had been publicly identified. The following table lists our 29 publicly identified products pending at the FDA:

 

Product

  

Generic of

Colesevelam Tablets 625 mg    Welchol ®
Colesevelam Powder 3.75 g    Welchol ®
Cyclobenzaprine ER Capsules 15 and 30 mg    Amrix ®
Dexlansoprazole DR Capsules 30 and 60 mg    Dexilant ®
Dextromethorphan/Quinidine Sulfate Capsules 10 and 20 mg    Nuedexta ®
Doxycycline Hyclate DR Tablets 150 mg    Doryx ®
Doxycycline USP Capsules 40mg    Oracea ®
Duloxetine HCI DR Capsules 20, 30 and 60 mg    Cymbalta ®
Dutasteride/Tamsulosin Capsules 0.5mg/0.4 mg    Jalyn ®
Ezetimibe Simvastatin Tablets 10/10mg, 10/20mg, 10/40mg, 10/80 mg    Vytorin ®
Fenofibrate Tablets 48 and 145mg    Tricor ®
Fenofibrate Tablets 40, 120mg    Fenoglide ®
Fenofibric Acid DR Capsules 45 and 135 mg    Trilipix ®
Fentanyl Buccal Tablet 100, 200, 400, 600, 800 mcg    Fentora ®
Guanfacine ER Tablets 1, 2, 3, 4mg    Intuniv ®
Methylphenidate HCI 18, 27, 36 and 54 mg ER Tablets    Concerta ®
Mixed Amphetamine Salts ER Capsules 5, 10, 15, 20, 25, 30 mg    Adderall XR ®
Niacin ER / Simvastatin Tablets 1000/20mg    Simcor ®
Oxycodone ER Tablets 80 mg    Oxycontin ®
Oxycodone ER Tablets 10, 20 and 40 mg    Oxycontin ®
Oxycodone ER Tablets (Tamper Resistant ) 10, 15, 20, 30, 60, 80mg    Oxycontin ®
Ropinirole ER Tablets 2, 4, 6, 8, 12 mg    Requip XL ®
Sevelamer Carbonate Tablets 800 mg    Renvela ®
Sevelamer HCI Tablets 400 and 800 mg    Renagel ®
Sevelamer Powder 0.8 g, 2.4 g    Renvela ®
Tolterodine Tartrate Tablets 1, 2 mg    Detrol ®
Tolterodine Tartrate ER Capsules 2, 4 mg    Detrol LA ®
Tramadol ER Tablets (Ultram ER) 100, 200, 300 mg    Ultram ER ®
Venlafaxine ER Capsules 37.5, 75, 150 mg    Effexor XR ®

 

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Impax Division

The Impax Division is focused on developing proprietary branded pharmaceuticals products for the treatment of CNS disorders, which include epilepsy, migraine, multiple sclerosis, Parkinson’s disease and Restless Legs Syndrome, and the promotion of branded pharmaceutical products through our specialty sales force. We estimate there are approximately 11,000 neurologists, of which, historically a concentrated number are responsible for writing the majority of neurological CNS prescriptions. CNS is the largest therapeutic category in the United States with 2011 sales of about $ 83 billion, or 21% of the $ 398 billion U.S. prescription drug market. CNS product sales grew 7.5% in 2011, consistent with the overall pharmaceutical industry growth rate. (Source: Wolters Kluwer Health).

Our branded pharmaceutical product portfolio consists of commercial CNS products and development stage projects. In February 2012, we licensed from AstraZeneca the exclusive U.S. commercial rights to Zomig ® (zolmitriptan) tablet, orally disintegrating tablet, and nasal spray formulations. As part of a Distribution, License, Development and Supply Agreement, we also have non-exclusive rights to develop new products containing zolmitriptan and to exclusively commercialize these products in the U.S. in connection with the Zomig ® brand. Zomig ® recorded U.S. net sales for the twelve months ended September 30, 2011 of $ 163 million. With the addition of Zomig ® to the promotional product portfolio, we will increase our specialty sales team from 66 representatives to roughly 90 during 2012. In addition to Zomig ® , we currently co-promote Lyrica ® (pregabalin) CV to neurologists for Pfizer under an amended agreement which will expire at the end of June 2012.

In the development of our pipeline products, we apply formulation and development expertise to develop differentiated, modified, or controlled-release versions of drug substances that are currently marketed either in the U.S. or outside the U.S. We currently have one late-stage branded pharmaceutical product candidate, IPX066, for which an NDA for the treatment of idiopathic Parkinson’s disease (“PD”) was accepted for filing by the FDA in February 2012. The PDUFA for a decision by the FDA is October 2012.

The IPX066 NDA was submitted as a 505(b)(2) application and includes data from three controlled Phase III studies and two open label extensions of IPX066 in early and advanced PD. In these studies, IPX066 has been studied in about 900 PD subjects. Our Phase III clinical program for IPX066 included the APEX-PD clinical trial in subjects with early PD, completed in September 2010, the ADVANCE-PD clinical trial in subjects with advanced PD, completed in March 2011, and the ASCEND-PD comparative study of IPX066 and carbidopa-levodopa (“CD-LD”) and entacapone in subjects with advanced PD, completed in August 2011. IPX066 is an investigational extended release capsule formulation of CD-LD which is intended to maintain consistent plasma concentration of levodopa for a longer duration versus immediate release levodopa, which may have an impact on fluctuations in clinical response. IPX066 is being developed in collaboration with GSK for territories outside the U.S. and Taiwan under the terms of an agreement reached in 2010.

In addition, we have a second branded pharmaceutical program, IPX159, which is currently in a Phase IIb clinical study in patients with moderate to severe Restless Legs Syndrome (“RLS”), which was initiated in December 2011. IPX159 is an oral controlled-release formulation of a small molecule that has an established pharmacological and safety profile for non-RLS use outside the U.S. and may represent a novel mechanism of action in RLS. We have previously completed a proof of concept study with the compound for IPX159 in RLS. We also have multiple research projects in early stages of development. We intend to expand our portfolio of branded pharmaceutical products through internal development and through licensing and acquisition.

 

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Alliance and Collaboration Agreements

We have entered into several alliance and collaboration agreements with respect to certain of our products and services and may enter into similar agreements in the future. These agreements typically 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. Our alliance and collaboration agreements often include milestones and provide for milestone payments upon achievement of these milestones. For more information about the types of milestone events in our agreements and how we categorize them, see “Item 15. Exhibits and Financial Statement Schedules — Note 11 to Consolidated Financial Statements.”

Global Division – Alliance and Collaboration Agreements

License and Distribution Agreement with Shire

In January 2006, we entered into a license and distribution agreement with an affiliate of Shire Laboratories, Inc. (“Shire License and Distribution Agreement”), under which we received a non-exclusive license to market and sell an authorized generic of Shire’s Adderall XR ® product (“AG Product”) subject to certain conditions. We commenced sales of the AG Product in October 2009. Under the terms of the Shire License and Distribution Agreement, Shire is responsible for manufacturing the AG Product, and we are responsible for marketing and sales of the AG Product. We are required to pay a profit share to Shire on sales of the AG Product which was $ 107,145,000 and $ 100,611,000 on sales of the AG Product during the years ended December 31, 2011 and 2010, with a corresponding charge included in the cost of revenues line on our consolidated statement of operations.

Rx Partner and OTC Partner Alliance Agreements

We have entered into alliance agreements with unrelated third-party pharmaceutical companies pursuant to which our partner distributes a specified product or products developed and, in some cases, manufactured by us, and we either receive payment on delivery of the product, share in the resulting profits, or receive royalty or other payments from our partners. Our alliance agreements are separated into two sales channels, the “Rx Partner” sales channel, for generic prescription products sold through our partners under their own label, and the “OTC Partner” sales channel, for sales of generic pharmaceutical OTC products sold through our partners under their own label. The revenue recognized and the percentage of gross revenue for each of the periods noted, for the Rx Partner and the OTC Partner alliance agreements, was as follows:

 

September 30, September 30, September 30, September 30, September 30, September 30,
       Year Ended December 31,  
$’s in 000’s      2011        2010        2009  

Gross Revenue and % Gross Revenue

                             

Rx Partner

     $ 32,083           4%         $ 217,277           18%         $ 33,835           6%   

OTC Partner

     $ 5,021           1%         $ 8,888           1%         $ 6,842           1%   

Rx Partner Alliance Agreement with Teva

We entered into a strategic alliance agreement with Teva Pharmaceuticals Curacao N.V., a subsidiary of Teva Pharmaceutical Industries Limited, in June 2001 (“Teva Agreement”). The Teva Agreement covers generic versions of the following 9 controlled-release generic pharmaceutical branded and OTC products and a 10th product we have not yet publicly identified, as follows:

 

   

Wellbutrin SR ® 100 and 150 mg extended release tablets

 

   

Zyban ® 150 mg extended release tablets

 

   

Claritin-D ® 12-hour 120 mg 12-hour extended release tablets

 

   

Claritin-D ® 24-hour 240 mg 24-hour extended release tablets

 

   

Claritin Reditabs ® 10 mg orally disintegrating tablets

 

   

Ditropan XL ® 5, 10 and 15 mg extended release tablets

 

   

Glucophage XR ® 500 mg extended release tablets

 

   

Concerta ® 18, 27, 36 and 54 mg extended release tablets

 

   

Wellbutrin XL ® 150 and 300 mg extended release tablets

 

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The 10 covered products under the Teva Agreement represent 18 different product/strength combinations, of which, as of February 3, 2012, 12 have been approved by the FDA, 10 of which are currently being marketed, 4 are awaiting FDA approval and 2 are under development. With the exception of Glucophage XR ® , which Teva elected to develop and manufacture itself; Wellbutrin XL ® 150 mg, for which product rights have been returned to us; and the Claritin ® products noted above, we manufacture and supply each of these products to Teva. Teva pays us a fixed percentage of defined profits on its sales of products, except for the Claritin ® products noted above, and reimburses us for our manufacturing costs, for a term of 10 years from the initial commercialization of each product. Additionally, under the Teva Agreement, we share with Teva the profits (up to a maximum of 50%) from the sale of the generic pharmaceutical OTC versions of the Claritin ® products noted above, sold through our OTC Partners’ alliance agreements.

Our remaining obligations under the Teva Agreement are to complete development of the covered product still under development, continue our efforts to obtain FDA approval of those not yet approved, and manufacture and supply the approved products to Teva. Our obligation to manufacture and supply each product extends for 10 years following the commercialization of the product.

 

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OTC Partner Alliance Agreements

We have a development, license and supply agreement with Pfizer Inc. (formerly Wyeth) relating to our generic Claritin-D ® 12-hour extended release product. Under the agreement, which was entered into in 2002 and included an upfront payment and product development milestone payments, we receive quarterly royalty payments consisting of a percentage (less than 10%) of Pfizer’s sales of products covered by the agreement. Pfizer launched the 12-hour product in May 2003 as its OTC Alavert D-12 Hour ® . The Pfizer agreement terminates in April 2018.

We also entered into a non-exclusive licensing, contract manufacturing and supply agreement with Merck & Co., Inc. (formerly Schering-Plough) relating to our generic Claritin-D ® 12-hour extended release product in 2002. Under the agreement, which included an upfront payment and milestone payments by Merck, Merck agreed to purchase the product from us at a fixed price. Merck launched our product as its Claritin-D ® 12-hour in March 2003. Our product supply obligations under the agreement ended on December 31, 2008, after which Merck has manufactured the product. The agreement terminated on December 31, 2010, two years after our product supply obligations concluded. During the two year period from January 1, 2009 to December 31, 2010, Merck paid us a royalty on sales of their manufactured product.

The upfront payments and potential milestone payments provided for by these agreements, together with the upfront and milestone payments received under each as of December 31, 2011, were as follows:

 

September 30, September 30, September 30, September 30,

OTC Partner

     Initial Date        Upfront
Payment

($ in  000’s)
       Potential
Aggregate
Milestone
Payments
       Upfront and
Milestone
Payments
Received
 

Merck

       June 2002         $ 2,250         $ 2,250         $ 4,500   

Pfizer

       June 2002         $ 350         $ 4,050         $ 2,000   

Research Partner Alliance Agreement

In November 2008, we entered into a joint development agreement with Medicis Pharmaceutical Corporation providing for collaboration in the development of five dermatological products, including an advanced form SOLODYN ® product. Medicis paid us an upfront fee of $ 40.0 million in December 2008. We have also received an aggregate of $ 15.0 million in milestone payments consisting of two $ 5.0 million milestone payments, paid by Medicis in March 2009 and September 2009, a $ 2.0 million milestone payment received in December 2009, and a $ 3.0 million milestone payment received in March 2011. We have the potential to receive up to an additional $ 8.0 million of contingent regulatory milestone payments under this agreement. We believe that all of the milestones under this agreement are substantive and expect to recognize the proceeds from these regulatory milestones as revenue when achieved. We do not expect to receive any of these additional milestone payments during the fiscal year ending December 31, 2012. To the extent the products are commercialized, Medicis will pay us royalties based on its sales of the advanced form SOLODYN ® product, and we will share in the profits on the sales of the four additional products.

 

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Impax Division—Alliance and Collaboration Agreements

License, Development and Commercialization Agreement with Glaxo Group Limited

In December 2010, we entered into a license, development and commercialization agreement with Glaxo Group Limited (“GSK”). Under the terms of the agreement with GSK, GSK received an exclusive license to develop and commercialize IPX066 throughout the world, except in the U.S. and Taiwan, and certain follow on products at the option of GSK. GSK paid an $ 11.5 million up-front payment to us in December 2010, and we have the potential to receive up to an additional $ 169.0 million of contingent milestone payments which includes $ 10.0 million contingent upon the achievement of clinical events, $ 29.0 million contingent upon the achievement of regulatory events, and $ 130.0 million upon the achievement of commercialization events. We are also eligible to receive royalty payments on GSK sales of IPX066. We believe that all of the milestones under this agreement are substantive and expect to recognize the proceeds from these milestones as revenue when achieved. We do not expect to receive any of these additional milestone payments during the fiscal year ending December 31, 2012. The agreement with GSK also gives GSK the option to obtain development and commercialization rights to a future product for a one-time payment to us of $ 10.0 million. We and GSK will generally bear our own development costs associated with activities under the License, Development and Commercialization Agreement, except that certain development costs, including with respect to follow on products, will be shared, as set forth in the agreement. The agreement will continue until GSK no longer has any royalty payment obligations or, if earlier, the agreement is terminated in accordance with its terms. The agreement may be terminated by GSK for convenience upon 90 days prior written notice, and may also be terminated under certain other circumstances, including material breach, as set forth in the agreement.

Co-Promotion Agreement with Pfizer Inc.

In March 2010, we entered into a first amendment to our co-promotion agreement (“Pfizer Co-Promotion Agreement”) with Pfizer, Inc., as successor to Wyeth. Under the terms of the Pfizer Co-Promotion Agreement, effective April 1, 2010, we provide physician detailing sales call services for Pfizer’s Lyrica ® (pregablin) product to neurologists. We receive a fixed fee, effective January 1, 2010, subject to annual cost adjustment, for providing such physician detailing sales calls within a contractually defined range of an aggregate number of physician detailing sales calls rendered, determined on a quarterly basis. Pfizer is responsible for providing sales training to our 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. We recognized revenues of $ 14.1 million, $ 14.1 million and $ 6.9 million in the years ended December 31, 2011, 2010 and 2009, under the Pfizer Co-Promotion Agreement. As noted, we previously entered into a three year co-promotion agreement with Wyeth, prior to Wyeth becoming a wholly-owned subsidiary of Pfizer, under which we performed physician detailing sales calls for the Wyeth Pristiq ® product to neurologists, with such physician detailing sales calls commencing on July 1, 2009 and ending in connection with the amendment of the co-promotion agreement described above.

Development and Co-Promotion Agreement with Endo Pharmaceuticals Inc.

In June 2010, we entered into a development and co-promotion agreement (“Endo Agreement”) with Endo Pharmaceuticals, Inc. (“Endo”) under which we have agreed to collaborate in the development and commercialization of a next-generation advanced form of IPX066 (“Endo Agreement Product”). Under the provisions of the Endo Agreement, in June 2010, Endo paid to us a $ 10.0 million up-front payment. We have the potential to receive up to an additional $ 30.0 million of contingent milestone payments which includes $ 15.0 million contingent upon the achievement of clinical events, $ 5.0 million contingent upon the achievement of regulatory events, and $ 10.0 million upon the achievement of commercialization events. We believe that all of the milestones under this agreement are substantive and expect to recognize the proceeds from these milestones as revenue when achieved. We do not expect to receive any of these additional milestone payments during the fiscal year ending December 31, 2012. Upon commercialization of the Endo Agreement Product in the United States, Endo will have the right to co-promote such product to non-neurologists, which will require us to pay Endo a co-promotion service fee of up to 100% of the gross profits attributable to prescriptions for the Endo Agreement Product which are written by the non-neurologists. Upon FDA approval of an NDA for the Endo Agreement Product, we will have the right (but not the obligation) to begin manufacture and sale of such product.

 

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Our Controlled-Release Technology

We have developed a number of different controlled-release delivery technologies which may be utilized with a variety of oral dosage forms and drugs. Controlled-release drug delivery technologies are designed to release drug dosages at specific times and in specific locations in the body and generally provide more consistent and appropriate drug levels in the bloodstream than immediate-release dosage forms. Controlled-release pharmaceuticals may improve drug efficacy, ensure greater patient compliance with the treatment regimen, reduce side effects or increase drug stability and be more patient friendly by reducing the number of times a drug must be taken.

We believe our controlled-release drug delivery technologies are flexible and can be applied to develop a variety of pharmaceutical products, both generic and branded. Our technologies utilize a variety of polymers and other materials to encapsulate or entrap the active pharmaceutical ingredients and to release them at varying rates or at predetermined locations in the gastrointestinal tract.

Competition

The pharmaceutical industry is highly competitive and is affected by new technologies, new developments, government regulations, health care legislation, availability of financing, and other factors. Many of our competitors have longer operating histories and substantially greater financial, research and development, marketing, and other resources than we have. We compete with numerous other companies that currently operate, or intend to operate, in the pharmaceutical industry, including companies that are engaged in the development of controlled-release drug delivery technologies and products, and other manufacturers that may decide to undertake development of such products. Our principal competitors are Teva Pharmaceutical Industries Ltd., Mylan Inc., Lannett Company, Inc., Zydus Pharmaceuticals USA Inc., Watson Pharmaceuticals, Inc., Actavis, Inc. and Sandoz, Inc.

Due to our focus on relatively hard to replicate controlled-release products, competition in the generic pharmaceutical market is sometimes limited to those competitors who possess the appropriate drug delivery technology. The principal competitive factors in the generic pharmaceutical market are:

 

   

the ability to introduce generic versions of products promptly after a patent expires;

 

   

price;

 

   

product quality;

 

   

customer service (including maintenance of inventories for timely delivery); and

 

   

the ability to identify and market niche products.

In the brand-name pharmaceutical market, we are not currently marketing our internally-developed products. However, if we obtain the FDA approval for, and start marketing, our own CNS brand-name pharmaceuticals, we expect that competition will be limited to large pharmaceutical companies, other drug delivery companies, and other specialty pharmaceutical companies that have focused on CNS disorders.

Sales and Marketing

We market and sell our generic pharmaceutical prescription drug products within the continental United States and the Commonwealth of Puerto Rico. We have not made sales in any other jurisdictions over the last three fiscal years. We derive a substantial portion of our revenue from sales to a limited number of customers. The customer base for our products consists primarily of drug wholesalers, warehousing chain drug stores, mass merchandisers, and mail-order pharmacies. We market our products both directly, through our Global Division, and indirectly through our Rx Partner and OTC Partner alliance and collaboration agreements. Together, our four major customers, Cardinal Health, Amerisource-Bergen, McKesson Corporation and Walgreens, accounted for 67% of our gross revenue for the year ended December 31, 2011. These four customers individually accounted for 20%, 19%, 16% and 12% of our gross revenue for the year ended December 31, 2011. We do not have long-term contracts in effect with our four major customers. A reduction in or loss of business with any one of these customers, or any failure of a customer to pay us on a timely basis, would adversely affect our business.

 

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Manufacturing and Distribution

We source our finished dosage form products from our own facilities in Hayward, California and Taiwan. We also use several contract manufacturers for this purpose. We package our products at our Philadelphia, Pennsylvania facility and at several contract packagers. We operate our own distribution center in New Britain, Pennsylvania.

We completed construction of a new manufacturing facility in Taiwan in 2009 and the first phase of our Taiwan facility expansion was completed later that year., We are in the process of transferring a portion of our Hayward, California production to the lower cost production site in Taiwan in order to make capacity available for pending approvals and launch of new products. A second phase expansion of the Taiwan facility is currently underway with an expected completion in late 2012. A major portion of this second phase expansion is dedicated to the production of our one branded pharmaceutical product candidate, IPX066, for which the NDA was accepted for filing by the FDA in February 2012. After the second phase expansion is complete, we expect the Taiwan facility to have an annual production capacity of approximately 2 billion doses. See also “Item 15. Exhibits and Financial Statement Schedules — Note 16 to our Consolidated Financial Statements” for a discussion of our Taiwan facility.

We believe we have sufficient capacity to produce our products for the future. However, if the completion of the second phase expansion of the Taiwan facility is significantly delayed beyond the end of 2012, we will, based upon current projections, reach full production capacity at our Taiwan manufacturing facility and may have inadequate capacity to meet our production requirements for IPX066.

We maintain an inventory of our products in connection with our obligations under our alliance and collaboration agreements. In addition, for products pending approval, we may produce batches for inventory in anticipation of the launch of the products. In the event that FDA approval is denied or delayed, we could be exposed to the risk of this inventory becoming obsolete.

Raw Materials

The active chemical raw materials, essential to our business, are generally readily available from multiple sources in the United States and throughout the world. Certain raw materials used in the manufacture of our products are, however, available from limited sources and, in some cases, a single source. Although we have not experienced any material delays in receipt of raw materials to date, any curtailment in the availability of such raw materials could result in production or other delays or, in the case of products for which only one raw material supplier exists or has been approved by the FDA, a material loss of sales with consequent adverse effects on our business and results of operations. Also, because raw material sources for pharmaceutical products must generally be identified and approved by regulatory authorities, changes in raw material suppliers may result in production delays, higher raw material costs, and loss of sales and customers. We obtain a portion of our raw materials from foreign suppliers, and our arrangements with such suppliers are subject to, among other risks, FDA approval, governmental clearances, export duties, political instability, and restrictions on the transfers of funds.

Those of our raw materials that are available from a limited number of suppliers are Bendroflumethiazide, Chloroquine, Colestipol, Demeclocycline, Digoxin, Flavoxate, Methyltestosterone, Nadolol, Orphenadrine, Terbutaline and Klucel ® , all of which are active pharmaceutical ingredients except Klucel ® , which is an excipient used in several product formulations. The manufacturers of two of these products, Formosa Laboratories, Ltd. and a division of Ashland, Inc., are sole-source suppliers. While none of the active ingredients is individually significant to our business, the excipient, while not covered by a supply agreement, is utilized in a number of significant products, is manufactured for a number of industrial applications and has been readily available. Only one of the active ingredients is covered by a long-term supply agreement and, while we have experienced occasional interruptions in supplies, none has had a material effect on our operations.

Any inability to obtain raw materials on a timely basis, or any significant price increases not passed on to customers, could have a material adverse effect on us. We may experience delays from the lack of raw material availability in the future, which could have a material adverse effect on us.

 

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Quality Control

In June 2011, we received a warning letter from the U.S. Food and Drug Administration (FDA) related to an on-site FDA inspection of our Hayward, California manufacturing facility conducted between December 13, 2010 and January 21, 2011. In the warning letter, the FDA cited deviations from current Good Manufacturing Practices (cGMP), which are extensive regulations governing manufacturing processes, stability testing, record keeping and quality standards. In summary, the FDA observations related to sampling and testing of in-process materials and drug products, production record review, and our process for investigating the failure of certain manufacturing batches (or portions of batches) to meet specifications. The FDA observations do not place restrictions on our ability to manufacture and ship our products.

We have taken a number of steps to thoroughly review and remediate our quality and manufacturing systems and standards and are working with several third-party experts to assist us. This work is ongoing, and we have made significant quality improvements and are committed to improving our quality control and manufacturing practices. From late June 2011 through the end of 2011, we filed our response and subsequent updates with the FDA and have continued to cooperate with the FDA to resolve the FDA observations. In December 2011, we received an acknowledgment letter from the FDA stating that it had received a complete response from us to the warning letter. However, as successful FDA re-inspection is required to close out the warning letter and we cannot be assured that the FDA will be satisfied with our corrective actions and/or will not identify additional observations upon their re-inspection, we cannot be assured of when the warning letter will be closed out. Unless and until our corrective action is completed to the FDA’s satisfaction, it is possible we may be subject to additional regulatory action by the FDA as a result of the current or future FDA observations, including, among others, monetary sanctions or penalties, product recalls or seizure, injunctions, total or partial suspension of production and/or distribution, and suspension or withdrawal of regulatory approvals. Additionally, the FDA may withhold approval of pending drug applications listing our Hayward, California facility as a manufacturing location of finished dosage forms until the FDA observations are resolved. If we are unable to promptly correct the issues raised in the warning letter, our business, consolidated results of operations and consolidated financial condition could be materially adversely affected.

 

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Research and Development

We conduct most of our research and development activities at our facilities in Hayward, California, with a staff of 183 employees as of December 31, 2011. In addition, we have outsourced a number of research and development projects to offshore laboratories.

We spent approximately $ 82.7 million, $ 86.2 million and $ 63.3 million on research and development activities during the years ended December 31, 2011, 2010 and 2009, as more fully set out in the tables below:

 

September 30, September 30, September 30,
       Global
Division
       Impax
Division
       Total
Impax
 
       ($ in millions)  

Year Ended December 31, 2011

              

Clinical study expenses

     $ 15.3         $ 12.1         $ 27.4   

Personnel expenses

       16.5           13.8           30.3   

Experimental materials

       5.0           1.5           6.5   

Outside services

       1.6           3.8           5.4   

Facility expenses

       3.9           1.1           5.0   

Legal expenses

       1.4           0.1           1.5   

Other

       2.5           4.1           6.6   
    

 

 

      

 

 

      

 

 

 

Total

     $ 46.2         $ 36.5         $ 82.7   
    

 

 

      

 

 

      

 

 

 
       Global
Division
       Impax
Division
       Total
Impax
 
       ($ in millions)  

Year Ended December 31, 2010

              

Clinical study expenses

     $ 13.3         $ 22.3         $ 35.6   

Personnel expenses

       17.9           12.0           29.9   

Experimental materials

       6.2           1.8           8.0   

Outside services

       0.7           2.1           2.8   

Facility expenses

       3.1           1.0           4.1   

Legal expenses

       1.1           0.1           1.2   

Other

       2.0           2.6           4.6   
    

 

 

      

 

 

      

 

 

 

Total

     $ 44.3         $ 41.9         $ 86.2   
    

 

 

      

 

 

      

 

 

 
       Global
Division
       Impax
Division
       Total
Impax
 
       ($ in millions)  

Year Ended December 31, 2009

              

Clinical study expenses

     $ 9.9         $ 8.6         $ 18.5   

Personnel expenses

       16.5           11.0           27.5   

Experimental materials

       5.1           1.0           6.1   

Outside services

       1.1           1.4           2.5   

Facility expenses

       3.1           0.8           3.9   

Legal expenses

       0.5           0.2           0.7   

Other

       2.5           1.6           4.1   
    

 

 

      

 

 

      

 

 

 

Total

     $ 38.7         $ 24.6         $ 63.3   
    

 

 

      

 

 

      

 

 

 

 

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We do not generally track research and development expense by individual product in either the Global Division or the Impax Division.

In the Global Division, we focus our research and development efforts based on drug-delivery technology and on products that we believe may have limited competition, rather than on any particular therapeutic area. As of February 3, 2012, the Global Division had 45 products with applications pending with the FDA and another 46 products in development. Accordingly, we believe that our generic pipeline products will, in the aggregate, generate a significant amount of revenue for us in the future. However, while a generic product is still in development, we are unable to predict the level of commercial success that the product may ultimately achieve given the uncertainties relating to the successful and timely completion of bioequivalence studies, ANDA filing, receipt of marketing approval and resolution of any related patent litigation, as well as the amount of competition in the market at the time of product launch and thereafter, and other factors detailed in “Item 1A Risk Factors.” Additionally, we do not believe that any individual generic pipeline product is significant in terms of accrued or anticipated research and development expense given the large volume of products under development in the Global Division, as detailed above. Further, on a per product basis, development costs for generic products tend to be significantly lower than for branded products, as the process for establishing bioequivalence is significantly less extensive than the standard clinical trial process. The regulatory approval process is significantly less onerous as well.

In the Impax Division, we currently have one branded pharmaceutical product candidate, IPX066, for which an NDA was accepted for filing by the FDA in February 2012, a second branded pharmaceutical candidate, IPX159, for which we recently initiated a Phase IIb clinical trial, and a number of other candidates that are primarily in the early exploratory phase. Of these products we currently consider IPX066 to be a significant product. While we believe other pipeline products in this division are potentially viable, profitable product candidates for the Company, given the uncertainties relating to the successful completion of clinical trials, the FDA approval process for branded products, reimbursement levels, the amount of competition at the time of product launch and thereafter and other factors detailed in “Item 1A Risk Factors,” such pipeline products are too early in the development process to be considered significant at this point in time.

 

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Regulation

The manufacturing and distribution of pharmaceutical products are subject to extensive regulation by the federal government, primarily through the FDA and the Drug Enforcement Administration (“DEA”), and to a lesser extent by state and local governments. The Food, Drug, and Cosmetic Act, Controlled Substances Act and other federal statutes and regulations govern or influence the manufacture, labeling, testing, storage, record keeping, approval, advertising and promotion of our products. Facilities used in the manufacture, packaging, labeling and repackaging of pharmaceutical products must be registered with the FDA and are subject to FDA inspection to ensure that drug products are manufactured in accordance with current Good Manufacturing Practices. Noncompliance with applicable requirements can result in product recalls, seizure of products, injunctions, suspension of production, refusal of the government to enter into supply contracts or to approve drug applications, civil penalties and criminal fines, and disgorgement of profits.

FDA approval is required before any “new drug” may be marketed, including new formulations, strengths, dosage forms and generic versions of previously approved drugs. Generally, the following two types of applications are used to obtain FDA approval of a “new drug.”

New Drug Application (“NDA”). For a drug product containing an active ingredient not previously approved by the FDA, a prospective manufacturer must submit a complete application containing the results of clinical studies supporting the drug product’s safety and efficacy. An Investigational New Drug application must be submitted before the clinical studies may begin, and the required clinical studies can take two to five years or more to complete. An NDA is also required for a drug with a previously approved active ingredient if the drug will be used to treat an indication for which the drug was not previously approved or if the dosage form, strength or method of delivery is changed.

Abbreviated New Drug Application (“ANDA”). For a generic version of an approved drug — a drug product that contains the same active ingredient as a drug previously approved by the FDA and is in the same dosage form and strength, utilizes the same method of delivery and will be used to treat the same indications as the approved product — the FDA ordinarily requires only an abbreviated application that need not include clinical studies demonstrating safety and efficacy. An ANDA requires only bioavailability data demonstrating that the generic formulation is bioequivalent to the previously approved “reference listed drug,” indicating that the rate of absorption and levels of concentration of the generic drug in the body do not show a significant difference from those of the reference listed drug. The FDA currently takes an average of approximately 27 months, to approve an ANDA. Under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the “Hatch-Waxman Act”, which established the procedures for obtaining approval of generic drugs, an ANDA filer must make certain patent certifications that can result in significant delays in obtaining FDA approval. If the applicant intends to challenge the validity or enforceability of an existing patent covering the reference listed drug or asserts that its drug does not infringe such patent, the applicant files a so called “Paragraph IV” certification and notifies the patent holder that it has done so, explaining the basis for its belief that the patent is not infringed or is invalid or unenforceable. If the patent holder initiates a patent infringement suit within 45 days after receipt of the Paragraph IV Certification, the FDA is automatically prevented from approving an ANDA until the earlier of 30 months after the date the Paragraph IV Certification is given to the patent holder, expiration of the patents involved in the certification, or when the infringement case is decided in the ANDA applicant’s favor. In addition, the first company to file an ANDA for a given drug containing a Paragraph IV certification can be awarded 180 days of market exclusivity following approval of its ANDA, during which the FDA may not approve any other ANDAs for that drug product.

During any period in which the FDA is required to withhold its approval of an ANDA due to a statutorily imposed non-approval period, the FDA may grant tentative approval to an applicant’s ANDA. A tentative approval reflects the FDA’s preliminary determination that a generic product satisfies the substantive requirements for approval, subject to the expiration of all statutorily imposed non-approval periods. A tentative approval does not allow the applicant to market the generic drug product.

The Hatch-Waxman Act contains additional provisions that can delay the launch of generic products. A five year marketing exclusivity period is provided for new chemical compounds, and a three year marketing exclusivity period is provided for approved applications containing new clinical investigations essential to an approval, such as a new indication for use, or new delivery technologies, or new dosage forms. The three year marketing exclusivity period applies to, among other things, the development of a novel drug delivery system, as well as a new use. In addition, companies can obtain six additional months of exclusivity if they perform pediatric studies of a reference listed drug product. The marketing exclusivity provisions apply to both patented and non-patented drug products. The Act also provides for patent term extensions to compensate for patent protection lost due to time taken in conducting FDA required clinical studies and during FDA review of NDAs.

 

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The Generic Drug Enforcement Act of 1992 establishes penalties for wrongdoing in connection with the development or submission of an ANDA. In general, the FDA is authorized to temporarily bar companies, or temporarily or permanently bar individuals, from submitting or assisting in the submission of an ANDA, and to temporarily deny approval and suspend applications to market generic drugs under certain circumstances. In addition to debarment, the FDA has numerous discretionary disciplinary powers, including the authority to withdraw approval of an ANDA or to approve an ANDA under certain circumstances and to suspend the distribution of all drugs approved or developed in connection with certain wrongful conduct.

We are subject to the Maximum Allowable Cost Regulations, which limit reimbursements for certain generic prescription drugs under Medicare, Medicaid, and other programs to the lowest price at which these drugs are generally available. In many instances, only generic prescription drugs fall within the regulations’ limits. Generally, the pricing and promotion of, method of reimbursement and fixing of reimbursement levels for, and the reporting to federal and state agencies relating to drug products is under active review by federal, state and local governmental entities, as well as by private third-party reimbursers and individuals under whistleblower statutes. At present, the Justice Department and U.S. Attorneys Offices and State Attorneys General have initiated investigations, reviews, and litigation into industry-wide pharmaceutical pricing and promotional practices, and whistleblowers have filed qui tam suits. We cannot predict the results of those reviews, investigations, and litigation, or their impact on our business.

Virtually every state, as well as the District of Columbia, has enacted legislation permitting the substitution of equivalent generic prescription drugs for brand-name drugs where authorized or not prohibited by the prescribing physician, and some states mandate generic substitution in Medicaid programs.

In addition, numerous state and federal requirements exist for a variety of controlled substances, such as narcotics, that may be part of our product formulations. The DEA, which has authority similar to the FDA’s and may also pursue monetary penalties, and other federal and state regulatory agencies have far reaching authority.

The State of California requires that any manufacturer, wholesaler, retailer or other entity in California that sells, transfers, or otherwise furnishes certain so called precursor substances must have a permit issued by the California Department of Justice, Bureau of Narcotic Enforcement. The substances covered by this requirement include ephedrine, pseudoephedrine, norpseudoephedrine, and phenylpropanolamine, among others. The Bureau has authority to issue, suspend and revoke precursor permits, and a permit may be denied, revoked or suspended for various reasons, including (i) failure to maintain effective controls against diversion of precursors to unauthorized persons or entities; (ii) failure to comply with the Health and Safety Code provisions relating to precursor substances, or any regulations adopted thereunder; (iii) commission of any act which would demonstrate actual or potential unfitness to hold a permit in light of the public safety and welfare, which act is substantially related to the qualifications, functions or duties of the permit holder; or (iv) if any individual owner, manager, agent, representative or employee of the permit applicant/permit holder willfully violates any federal, state or local criminal statute, rule, or ordinance relating to the manufacture, maintenance, disposal, sale, transfer or furnishing of any precursor substances.

 

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Patents, Trademarks and Licenses

We own or license a number of patents in the U.S. and other countries covering certain products and have also developed brand names and trademarks for other products. Generally, the brand pharmaceutical business relies upon patent protection to ensure market exclusivity for the life of the patent. We consider the overall protection of our patents, trademarks and license rights to be of material value and act to protect these rights from infringement. However, our business is not dependent upon any single patent, trademark or license.

In the branded pharmaceutical industry, the majority of an innovative product’s commercial value is usually realized during the period in which the product has market exclusivity. In the U.S. and some other countries, when market exclusivity expires and generic versions of a product are approved and marketed, there can often be very substantial and rapid declines in the branded product’s sales. The rate of this decline varies by country and by therapeutic category; however, following patent expiration, branded products often continue to have market viability based upon the goodwill of the product name, which typically benefits from trademark protection.

An innovator product’s market exclusivity is generally determined by two forms of intellectual property: patent rights held by the innovator company and any regulatory forms of exclusivity to which the innovator is entitled.

Patents are a key determinant of market exclusivity for most branded pharmaceuticals. Patents provide the innovator with the right to exclude others from practicing an invention related to the medicine. Patents may cover, among other things, the active ingredient(s), various uses of a drug product, pharmaceutical formulations, drug delivery mechanisms and processes for (or intermediates useful in) the manufacture of products. Protection for individual products extends for varying periods in accordance with the expiration dates of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent, its scope of coverage and the availability of meaningful legal remedies in the country.

Market exclusivity is also sometimes influenced by regulatory intellectual property rights. Many developed countries provide certain non-patent incentives for the development of medicines. For example, the U.S., the EU and Japan each provide for a minimum period of time after the approval of a new drug during which the regulatory agency may not rely upon the innovator’s data to approve a competitor’s generic copy. Regulatory intellectual property rights are also available in certain markets as incentives for research on new indications, on orphan drugs and on medicines useful in treating pediatric patients. Regulatory intellectual property rights are independent of any patent rights and can be particularly important when a drug lacks broad patent protection. However, most regulatory forms of exclusivity do not prevent a competitor from gaining regulatory approval prior to the expiration of regulatory data exclusivity on the basis of the competitor’s own safety and efficacy data on its drug, even when that drug is identical to that marketed by the innovator.

We estimate the likely market exclusivity period for each of our branded products on a case-by-case basis. It is not possible to predict the length of market exclusivity for any of our branded products with certainty because of the complex interaction between patent and regulatory forms of exclusivity, and inherent uncertainties concerning patent litigation. There can be no assurance that a particular product will enjoy market exclusivity for the full period of time that we currently estimate or that the exclusivity will be limited to the estimate.

In addition to patents and regulatory forms of exclusivity, we also market products with trademarks. Trademarks have no effect on market exclusivity for a product, but are considered to have marketing value. Trademark protection continues in some countries as long as used; in other countries, as long as registered. Registration is for fixed terms and may be renewed indefinitely.

 

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Environmental Laws

We are subject to comprehensive federal, state and local environmental laws and regulations that govern, among other things, air polluting emissions, waste water discharges, solid and hazardous waste disposal, and the remediation of contamination associated with current or past generation handling and disposal activities. We are subject periodically to environmental compliance reviews by various environmental regulatory agencies. While it is impossible to predict accurately the future costs associated with environmental compliance and potential remediation activities, compliance with environmental laws is not expected to require significant capital expenditures and has not had, and is not expected to have, a material adverse effect on our business, operations or financial condition.

Available Information

We maintain an Internet website at the following address: www.impaxlabs.com. We make available on or through our Internet website certain reports and amendments to those reports, as applicable, that we file with or furnish to the Securities and Exchange Commission (the “SEC”) in accordance with the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These include our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. Our website also includes our Code of Conduct of Senior Officers and the charters of our Audit Committee, Nominating Committee and Compensation Committee of our board of directors. We make this information available on our website free of charge, as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. The contents of our website are not incorporated by reference in this Annual Report on Form 10-K and shall not be deemed “filed” under the Exchange Act.

Corporate and Other Information

We were incorporated in the State of Delaware in 1995. Our corporate headquarters are located at 30831 Huntwood Avenue, Hayward, California, 94544. We were formerly known as Global Pharmaceutical Corporation until December 14, 1999, when Impax Pharmaceuticals, Inc., a privately held drug delivery company, merged into Global Pharmaceutical Corporation and the name of the resulting entity was changed to Impax Laboratories, Inc.

Unless otherwise indicated, all product sales data and U.S. market size data in this Annual Report on Form 10-K are based on information obtained from Wolters Kluwer Health, an unrelated third-party provider of prescription market data. We did not independently engage Wolters Kluwer Health to provide this information.

Employees

As of December 31, 2011, we had 1,002 full-time employees, of which 500 were in operations, 183 in research and development, 189 in the quality area, 96 in legal and administration, and 34 in sales and marketing. None of our employees are subject to collective bargaining agreements with labor unions, and we believe our employee relations are good.

 

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Item 1A. Risk Factors

An investment in our common stock involves a high degree of risk. In deciding whether to invest in our common stock, you should consider carefully the following risk factors, as well as the other information included in this Annual Report on Form 10-K. The materialization of any of these risks could have a material adverse effect on our business, financial position and results of operations. This Annual Report on Form 10-K contains forward looking statements that involve risks and uncertainties. Our actual results could differ materially from the results discussed in the forward looking statements. Factors that could cause or contribute to these differences include those discussed in this “Risk Factors” section. See “Forward-Looking Statements” on page 1 of this Annual Report on Form 10-K.

Unstable economic conditions may adversely affect our industry, business, financial position and results of operations.

The global economy has undergone a period of significant volatility which has led to diminished credit availability, declines in consumer confidence and increases in unemployment rates. There remains caution about the stability of the U.S. economy due to the global financial crisis, and we cannot assure that 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.

In addition, we have exposure to many different industries and counterparties, including our partners under our alliance and collaboration agreements, suppliers of raw chemical materials, drug wholesalers and other customers that may be affected by an unstable economic environment. Any economic 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 which could materially and adversely affect our business, results of operations and financial position.

Furthermore, the capital and credit markets have experienced extreme volatility. Disruptions in the credit markets make it harder and more expensive to obtain funding. In the event current resources do not satisfy our needs, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions and the general availability of credit. Future debt financing may not be available to us when required or may not be available on acceptable terms, and as a result we may be unable to grow our business, take advantage of business opportunities, or respond to competitive pressures.

 

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Our revenues and operating income could fluctuate significantly.

Our revenues and operating results may vary significantly from year-to-year and quarter to quarter as well as in comparison to the corresponding quarter of the preceding year. Variations may result from, among other factors:

 

   

the timing of FDA approvals we receive;

 

   

the timing of process validation for particular drug products;

 

   

the timing of product launches, and market acceptance of such products launched;

 

   

changes in the amount we spend to research, develop, acquire, license or promote new products;

 

   

the outcome of our clinical trial programs;

 

   

serious or unexpected health or safety concerns with our products, the brand products we have genericized, or our product candidates;

 

   

the introduction of new products by others that render our products obsolete or noncompetitive;

 

   

the ability to maintain selling prices and gross margins on our products;

 

   

the outcome of our patent infringement litigation, and other litigation matters, and expenditures as a result of such litigation;

 

   

the ability to comply with complex governmental regulations which deal with many aspects of our business;

 

   

changes in coverage and reimbursement policies of health plans and other health insurers, including changes to Medicare, Medicaid and similar state programs;

 

   

increases in the cost of raw materials used to manufacture our products;

 

   

manufacturing and supply interruptions, including failure to comply with manufacturing specifications;

 

   

the ability of our brand license partner(s) to secure regulatory approval, gain market share, sales volume, and sales milestone levels;

 

   

timing of revenue recognition related to our alliance and collaboration agreements;

 

   

the ability to protect our intellectual property and avoid infringing the intellectual property of others; and

 

   

the addition or loss of customers.

As an illustration, we earned significant revenues and gross profit from sales of our tamsulosin, an authorized generic of Adderall XR ® , and fenofibrate products during the year ended December 31, 2010. With respect to our authorized generic of Adderall XR ® products, we are dependent on another unrelated third-party pharmaceutical company to supply us with such products we market and sell through our Global Division. Any delay or interruption in the supply of our authorized generic of Adderall XR ® products from the unrelated third-party pharmaceutical company could curtail or delay our product shipments and adversely affect our revenues, as well as jeopardize our relationships with our customers. Any significant diminution of our authorized generic of Adderrall XR ® and fenofibrate product sales revenue and /or gross profit due to competition and /or product supply or any other reasons in future periods may materially and adversely affect our results of operations in such periods. We commenced sales of our tamsulosin product on March 2, 2010 and had contractual market exclusivity for this generic product for the succeeding eight week period, during which we were able to achieve high market-share penetration. Our tamsulosin product sales, however, did not remain at this level, as additional competing generic versions of the product entered the market in late April 2010, at the conclusion of our contractual exclusivity period, and have resulted in both price erosion and reduction of our market share.

 

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Our continued growth is dependent on our ability to continue to successfully introduce new products to the market.

Sales of a limited number of our products often represent a significant portion of our revenues in a given period. Revenue from newly launched products that we are the first to market is typically relatively high during the period immediately following launch and can be expected generally to decline over time. Revenue from generic drugs in general can also be expected to decline over time. Our continued growth is therefore dependent upon our ability to continue to successfully introduce new products. As of February 3, 2012, we had 45 applications pending at the FDA for generic versions of brand-name pharmaceuticals. The FDA and the regulatory authorities may not approve our products submitted to them or our other products under development. Additionally, we may not successfully complete our development efforts. Even if the FDA approves our products, we may not be able to market them if we do not prevail in the patent infringement litigation in which we are involved. Our future results of operations will depend significantly upon our ability to develop, receive FDA approval for, and market new pharmaceutical products or otherwise acquire new products.

A substantial portion of our total revenues is derived from sales to a limited number of customers.

We derive a substantial portion of our revenue from sales to a limited number of customers. In 2011, our five major customers, Cardinal Health, Amerisource-Bergen, McKesson Corporation, Walgreens and Medco accounted for 20%, 19%, 16%, 12% and 3%, or an aggregate of 70%, of our gross revenue.

A reduction in, or loss of business with, any one of these customers, or any failure of a customer to pay us on a timely basis, would adversely affect our business.

A substantial portion of our total revenues is derived from sales of a limited number of products.

We derive a substantial portion of our revenue from sales of a limited number of products. In 2011 our top five products, accounted for 17%, 15%, 10%, 7% and 7%, or an aggregate of 56%, of Global products sales, net. The sale of our products can be significantly influenced by market conditions, as well as regulatory actions. We may experience decreases in the sale of our products in the future as a result of actions taken by our competitors, such as price reductions, or as a result of regulatory actions related to our products or to competing products, which could have a material impact on our results of operations. Actions which could be taken by our competitors, which may materially and adversely affect our business, results of operations and financial condition, may include, without limitation, pricing changes and entering or exiting the market for specific products.

Sales of our products may be adversely affected by the continuing consolidation of our customer base.

A significant proportion of our sales is made to relatively few retail drug chains, wholesalers, and managed care purchasing organizations. These customers are continuing to undergo significant consolidation. Such consolidation has provided and may continue to provide them with additional purchasing leverage, and consequently may increase the pricing pressures that we face. Additionally, the emergence of large buying groups representing independent retail pharmacies, and the prevalence and influence of managed care organizations and similar institutions, enable those groups to extract price discounts on our products.

Our net sales and quarterly growth comparisons may also be affected by fluctuations in the buying patterns of retail chains, major distributors and other trade buyers, whether resulting from seasonality, pricing, wholesaler buying decisions or other factors. In addition, since such a significant portion of our revenues is derived from relatively few customers, any financial difficulties experienced by a single customer, or any delay in receiving payments from a single customer, could have a material adverse effect on our business, results of operations and financial condition.

 

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We face intense competition from both brand-name and generic manufacturers.

The pharmaceutical industry is highly competitive and many of our competitors have longer operating histories and substantially greater financial, research and development, marketing, and other resources than we have. In addition, pharmaceutical manufacturers’ customer base consists of an increasingly limited number of large pharmaceutical wholesalers, chain drug stores that warehouse products, mass merchandisers, mail order pharmacies. Our competitors may be able to develop products and delivery technologies competitive with or more effective or less expensive than our own for many reasons, including that they may have:

 

   

proprietary processes or delivery systems;

 

   

larger research and development and marketing staffs;

 

   

larger production capabilities in a particular therapeutic area;

 

   

more experience in preclinical testing and human clinical trials;

 

   

more experience in obtaining required regulatory approvals, including FDA approval;

 

   

more products; or

 

   

more experience in developing new drugs and financial resources, particularly with regard to brand manufacturers.

The FDA approval process often results in the FDA granting final approval to a number of ANDAs for a given product at the time a patent claim for a corresponding brand product or other market exclusivity expires. This often forces us to face immediate competition when we introduce a generic product into the market. As competition from other manufacturers intensifies, selling prices and gross profit margins often decline, which has been our experience with our existing products. Moreover, with respect to products for which we file a Paragraph IV certification, if we are not the first ANDA filer challenging a listed patent for a product, we are at a significant disadvantage to the competitor that first filed an ANDA for that product containing such a challenge, which is awarded 180 days of market exclusivity for the product. With respect to our 29 disclosed products pending FDA approval for which we have filed Paragraph IV certifications, we believe: (i) unrelated third parties are the first to file with respect to products with which 22 of our products can be expected to compete; (ii) we are the first to file for 6 products; and (iii) we share first to file status with other filers for one product. Accordingly, the level of market share, revenue and gross profit attributable to a particular generic product that we develop is generally related to the number of competitors in that product’s market and the timing of that product’s regulatory approval and launch, in relation to competing approvals and launches. Although we cannot assure, we strive to develop and introduce new products in a timely and cost effective manner to be competitive in our industry (see “Item 1 Business — Regulation”). Additionally, ANDA approvals often continue to be granted for a given product subsequent to the initial launch of the generic product. These circumstances generally result in significantly lower prices and reduced margins for generic products compared to brand products. New generic market entrants generally cause continued price and margin erosion over the generic product life cycle.

In addition to the competition we face from other generic manufacturers, we face competition from brand-name manufacturers related to our generic products. Branded pharmaceutical companies often sell their branded products as “authorized generics” (an industry term that describes instances when a brand-name manufacturer licenses a generic manufacturer to market the brand product under the licensee’s name and registration at typical generic discounts). Further, branded pharmaceutical companies may seek to delay FDA approval of our ANDAs or reduce generic competition by, for example obtaining new patents on drugs whose original patent protection is about to expire, filing patent infringement suits that automatically delay FDA approval of generics, filing “citizen petitions” contesting FDA approvals of generics on alleged health and safety grounds, developing “next generation” versions of products that reduce demand for generic versions we are developing, changing product claims and labeling, and marketing as OTC branded products.

Our principal competitors are Teva Pharmaceutical Industries Limited, Mylan Inc., Lannett Company, Inc., Zydus Pharmaceuticals USA Inc., Watson Pharmaceuticals, Inc., Actavis, Inc. and Sandoz, Inc.

In the brand-name pharmaceutical market, we market one product pursuant to a license agreement and may in-license additional products. We are not currently marketing our internally developed products, however, with respect to either in-licensed or internally developed products we expect that we will face increased competition from large pharmaceutical companies, other drug delivery companies, and other specialty pharmaceutical companies that have focused on CNS disorders.

 

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We have experienced operating losses and negative cash flow from operations in the past, and our future profitability is uncertain.

Although 2007 was our first profitable year, and we continued to record net income through and including 2011, we do not know whether our business will continue to be profitable or generate positive cash flow, and our ability to remain profitable or obtain positive cash flow is uncertain. To remain operational, we must, among other things:

 

   

obtain FDA approval of our products;

 

   

successfully launch new products;

 

   

prevail in patent infringement litigation in which we are involved;

 

   

continue to generate or obtain sufficient capital on acceptable terms to fund our operations; and

 

   

comply with the many complex governmental regulations that deal with virtually every aspect of our business activities.

Any delays or unanticipated expenses in connection with the operation of our Taiwan facility could have a material adverse effect on our results of business operations and financial condition.

We completed construction of a new manufacturing facility in Taiwan, installed equipment, and received FDA approval during 2009 at an aggregate cost of approximately $ 24.5 million. We initiated commercial manufacturing operations in 2010, and produced approximately 50 million and 115 million tablets and capsules in 2010 and 2011 respectively, for sale in the United States. We plan to continue to increase the aggregate total tablet and capsule production, as well as the number of different products manufactured, at our facility in Taiwan during 2012.

We initiated construction of an expansion to our manufacturing facility in Taiwan during 2009 and will expand the Taiwan manufacturing facility in stages. The first phase of the expansion of the Taiwan manufacturing facility was completed in 2009 and the second phase of the expansion is currently expected to be completed in late 2012. After the completion of the second phase of the expansion, we expect the Taiwan facility to have an annual production capacity of approximately 2 billion doses. A major portion of the second phase of the expansion is dedicated to the production of our one branded pharmaceutical product candidate, IPX066, for which the NDA was accepted for filing by the FDA in February 2012.

While we have thus far not suffered any material delays, increases in estimated expenses or other material setbacks associated with the construction and operation of the manufacturing facility in Taiwan, we cannot assure that we will be able to successfully manufacture process validation batches, or that costs of production will be within our projections. During any potential delays in scale-up of commercial operations, changing market conditions could render projections relating to our investment in the new facility inaccurate or unreliable. While the facility was approved by the FDA in 2009, we cannot assure that the facility will continue to receive FDA approval in future inspections. In addition, we cannot assure that the planned expansion of the facility will become operational as anticipated or will ultimately result in profitable operations. If the completion of the second phase of our planned expansion of the Taiwan facility is significantly delayed beyond late 2012, we will, based upon current projections, reach full production capacity at our Taiwan manufacturing facility and may have inadequate capacity to meet our production requirements for IPX066. If our manufacturing capacity were to be exceeded by our production requirements, we could lose customers and market share to competing products, and otherwise materially and adversely affect our business, results of operations and financial condition.

 

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Our business is subject to the economic, political, legal and other risks of maintaining facilities and conducting clinical trials in foreign countries.

In 2010, we commenced shipment of commercial product from our new manufacturing facility in Taiwan, and we plan to increase our commercial manufacturing operations in Taiwan in the future. In addition, certain clinical trials for our product candidates are conducted at multiple sites in Europe. These foreign operations are subject to risks inherent in maintaining operations and doing business abroad, such as economic and political destabilization, international conflicts, restrictive actions by foreign governments, expropriation or nationalization of property, changes in laws and regulations, changes in regulatory requirements, the difficulty of effectively managing diverse global operations, adverse foreign tax or tariff laws, more limited intellectual property protection in certain foreign jurisdictions, and the threat posed by potential international disease pandemics in countries that do not have the resources necessary to deal with such outbreaks. Further, as our global operations require compliance with a complex set of foreign and U.S. laws and regulations, including data privacy requirements, labor relations laws, tax laws, anti-competition regulations, import and trade restrictions, and export requirements, U.S. laws such as the Foreign Corrupt Practices Act of 1977, as amended, and local laws which also prohibit corrupt payments to governmental officials or certain payments or remunerations to customers, there is a risk that some provisions may be inadvertently breached. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business. These foreign economic, political, legal and other risks could impact our operations and have an adverse effect on our business, financial condition and results of operations.

We are routinely subject to patent litigation that can delay or prevent our commercialization of products, force us to incur substantial expense to defend, and expose us to substantial liability.

Brand-name pharmaceutical manufacturers routinely bring patent infringement litigation against ANDA applicants seeking FDA approval to manufacture and market generic forms of their branded products. Likewise, patent holders may bring patent infringement suits against companies that are currently marketing and selling their approved generic products. Patent infringement litigation involves many complex technical and legal issues and its outcome is often difficult to predict, and the risk involved in doing so can be substantial, because the remedies available to the owner of a patent in the event of an unfavorable outcome include damages measured by the profits lost by the patent owner rather than the profits earned by the infringer. Such litigation usually involves significant expense and can delay or prevent introduction or sale of our products.

As of February 3, 2012, we were involved in patent infringement suits involving the following 15 products: (i) Tolterodine Tartrate ER Capsules, 2 mg and 4 mg (generic to Detrol LA ® ); (ii) Doxycycline Hyclate DR Tablets 75 mg, 100 mg and 150 mg (generic to Doryx ® ); (iii) Sevelamer Hydrochloride Tablets, 400 mg and 800 mg (generic to Renagel ® ); (iv) Sevelamer Carbonate Tablets, 800 mg (generic to Renvela ® ); (v) Doxycycline Monohydrate DR Capsules, 40 mg (generic to Oracea ® ); (vi) Sevelamer Carbonate Powder, 0.8 g/packets and 2.4 g/packets (generic to Renvela ® powder); (vii) Ezetimibe-Simvistatin Tablets, 10/80 mg (generic to Vytorin ® ); (viii) Niacin-Simvastatin Tablets, 1000/20mg (generic to Simcor ® ); (ix) Methylphenidate Hydrochloride Tablets, 54 mg (generic to Concerta ® ); (x) Guanfacine Hydrochloride Tablets 1 mg, 2 mg, 3 mg, and 4 mg (generic to Intuniv ® ); (xi) Dexlansoprazole Delayed Release Capsules, 30 mg and 60 mg (generic to Dexilant ® ); (xii) Oxycodone Hydrochloride, Controlled Release Tablets, 10 mg, 15 mg, 20 mg, 30 mg, 40 mg, 60 mg and 80 mg (generic to Oxycontin ® ); (xiii) Dextromethorphan/Quinidine Capsules, 20mg/10mg (generic of Nuedexta ® ); (xiv) Dutasteride/Tamsulosin Capsules, 0.5 mg/0.4 mg (generic of Jalyn ® ); and (xv) Fentanyl Buccal Tablets, 100 mcg, 200 mcg, 400 mcg, 600 mcg and 800 mcg (generic of Fentora ® ). For the year ended December 31, 2011, we incurred costs of approximately $ 7.5 million in connection with our participation in these matters, which are in varying stages of litigation, as well as for other matters that were resolved in 2011. If any of these patent litigation matters are resolved unfavorably, we or any alliance or collaboration partners may be enjoined from manufacturing or selling the product that is the subject of such litigation without a license from the other party. In addition, if we decide to market and sell products prior to the resolution of patent infringement suits, we could be held liable for lost profits if we are found to have infringed a valid patent, or liable for treble damages if we are found to have willfully infringed a valid patent. As a result, any patent litigation could have a material adverse effect on our business, results of operations and financial condition, although it is not possible to quantify the liability we could incur if any of these suits are decided against us.

 

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Our agreements with brand pharmaceutical companies, which are important to our business, are facing increased government scrutiny in the U.S.

We are involved in numerous patent litigations in which we challenge the validity or enforceability of innovator companies’ listed patents and/or their applicability to our products and therefore settling patent litigations has been and is likely to continue to be an important part of our business. Parties to such settlement agreements in the U.S., including us, are required by law to file them with the Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice for review. The FTC has publicly stated that, in its view, some of the brand—generic settlement agreements violate the antitrust laws and has brought actions against some brand and generic companies that have entered into such agreements. Accordingly, we may receive formal or informal requests from the FTC for information about a particular settlement agreement, and there is a risk that the FTC may commence an action against us alleging violation of the antitrust laws.

Our ability to develop or license, or otherwise acquire, and introduce new products on a timely basis in relation to our competitors’ product introductions involves inherent risks and uncertainties.

Product development is inherently risky, especially for new drugs for which safety and efficacy have not been established and the market is not yet proven. Likewise, product licensing involves inherent risks including uncertainties due to matters that may affect the achievement of milestones, as well as the possibility of contractual disagreements with regard to terms such as license scope or termination rights. The development and commercialization process, particularly with regard to new drugs, also requires substantial time, effort and financial resources. The process of obtaining FDA approval to manufacture and market new and generic pharmaceutical products is rigorous, time consuming, costly and largely unpredictable. We, or a partner, may not be successful in obtaining FDA approval or in commercializing any of the products that we are developing or licensing.

Our approved products may not achieve expected levels of market acceptance.

Even if we are able to obtain regulatory approvals for our new products, the success of those products is dependent upon market acceptance. Levels of market acceptance for our new products could be affected by several factors, including:

 

   

the availability of alternative products from our competitors;

 

   

the prices of our products relative to those of our competitors;

 

   

the timing of our market entry;

 

   

the ability to market our products effectively at the retail level;

 

   

the perception of patients and the healthcare community, including third-party payers, regarding the safety, efficacy and benefits of our drug products compared to those of competing products; and

 

   

the acceptance of our products by government and private formularies.

Some of these factors are not within our control, and our products may not achieve expected levels of market acceptance. Additionally, continuing and increasingly sophisticated studies of the proper utilization, safety and efficacy of pharmaceutical products are being conducted by the industry, government agencies and others which can call into question the utilization, safety and efficacy of previously marketed products. In some cases, studies have resulted, and may in the future result, in the discontinuance of product marketing or other risk management programs such as the need for a patient registry.

 

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We expend a significant amount of resources on research and development efforts that may not lead to successful product introductions or the recovery of our research and development expenditures.

We conduct research and development primarily to enable us to manufacture and market pharmaceuticals in accordance with FDA regulations. We spent approximately $ 82.7 million, $ 86.2 million and $ 63.3 million on research and development activities during the years ended December 31, 2011, 2010 and 2009. We are required to obtain FDA approval before marketing our drug products. The FDA approval process is costly and time consuming. Typically, research expenses related to the development of innovative compounds and the filing of NDAs are significantly greater than those expenses associated with ANDAs. As we continue to develop new products, our research expenses will likely increase. Because of the inherent risk associated with research and development efforts in our industry, particularly with respect to new drugs, our research and development expenditures may not result in the successful introduction of FDA approved pharmaceuticals.

Our bioequivalence studies, other clinical studies and/or other data may not result in FDA approval to market our new drug products. While we believe that the FDA’s ANDA procedures will apply to our bioequivalent versions of controlled-release drugs, these drugs may not be suitable for, or approved as part of, these abbreviated applications. In addition, even if our drug products are suitable for FDA approval by filing an ANDA, the abbreviated applications are costly and time consuming to complete. After we submit an NDA or ANDA, the FDA may require that we conduct additional studies, and as a result, we may be unable to reasonably determine the total research and development costs to develop a particular product. Also, for products pending approval, we may obtain raw materials or produce batches of inventory to be used in anticipation of the product’s launch. In the event that FDA approval is denied or delayed, we could be exposed to the risk of this inventory becoming obsolete. Finally, we cannot be certain that any investment made in developing products or product-delivery technologies will be recovered, even if we are successful in commercialization. To the extent that we expend significant resources on research and development efforts and are not able, ultimately, to introduce successful new products or new delivery technologies as a result of those efforts, we will be unable to recover those expenditures.

The time necessary to develop generic drugs may adversely affect whether, and the extent to which, we receive a return on our capital.

We generally begin our development activities for a new generic drug product several years in advance of the patent expiration date of the brand-name drug equivalent. The development process, including drug formulation, testing, and FDA review and approval, often takes three or more years. This process requires that we expend considerable capital to pursue activities that do not yield an immediate or near-term return. Also, because of the significant time necessary to develop a product, the actual market for a product at the time it is available for sale may be significantly less than the originally projected market for the product. If this were to occur, our potential return on our investment in developing the product, if approved for marketing by the FDA, would be adversely affected and we may never receive a return on our investment in the product. It is also possible for the manufacturer of the brand-name product for which we are developing a generic drug to obtain approvals from the FDA to switch the brand-name drug from the prescription market to the OTC market. If this were to occur, we would be prohibited from marketing our product other than as an OTC drug, in which case revenues could be substantially less than we anticipated.

Approvals for our new generic drug products may be delayed or become more difficult to obtain if the FDA institutes changes to its approval requirements.

Some abbreviated application procedures for controlled-release drugs and other products, including those related to our ANDA filings, are or may become the subject of petitions filed by brand-name drug manufacturers seeking changes from the FDA in the approval requirements for particular drugs, which can delay or make development of generic drugs more difficult. We cannot predict whether the FDA will make any changes to its abbreviated application requirements as a result of these petitions, or the effect that any changes may have on us. Any changes in FDA regulations may make it more difficult for us to file ANDAs or obtain approval of our ANDAs and generate revenues and thus may materially harm our business and financial results.

 

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Our inexperience in conducting clinical trials and submitting NDAs could result in delays or failure in development and commercialization of our own branded products, which could have a material adverse effect on our results of operations, liquidity, and financial condition.

With respect to products that we develop that are not generic equivalents of existing brand-name drugs and thus do not qualify for the FDA’s abbreviated application procedures, we must demonstrate through clinical trials that these products are safe and effective for use. We have only limited experience in conducting and supervising clinical trials. The process of completing clinical trials and preparing an NDA may take several years and requires substantial resources. Our studies and filings may not result in FDA approval to market our new drug products and, if the FDA grants approval, we cannot predict the timing of any approval. There are substantial filing fees for NDAs that are not refundable if FDA approval is not obtained.

We cannot assure that our expenses related to NDAs and clinical trials will lead to the development of brand-name drugs that will generate revenues in the near future. Delays or failure in the development and commercialization of our own branded products could have a material adverse effect on our business, results of operations and financial condition.

The risks and uncertainties inherent in conducting clinical trials could delay or prevent the development and commercialization of our own branded products, which could have a material adverse effect on our results of operations, liquidity, financial condition, and growth prospects.

There are a number of risks and uncertainties associated with clinical trials. The results of clinical trials may not be indicative of results that would be obtained from large scale testing. Clinical trials are often conducted with patients having advanced stages of disease and, as a result, during the course of treatment these patients can die or suffer adverse medical effects for reasons that may not be related to the pharmaceutical agents being tested, but which nevertheless affect the clinical trial results. In addition, side effects experienced by the patients may cause delay of approval or limited profile of an approved product. Moreover, our clinical trials may not demonstrate sufficient safety and efficacy to obtain FDA approval.

Failure can occur at any time during the clinical trial process and, in addition, the results from early clinical trials may not be predictive of results obtained in later and larger clinical trials, and product candidates in later clinical trials may fail to show the desired safety or efficacy despite having progressed successfully through earlier clinical testing. A number of companies in the pharmaceutical industry, including us, have suffered significant setbacks in clinical trials, even in advanced clinical trials after showing positive results in earlier clinical trials. For example, we had previously sought to develop an earlier product formulation containing carbidopa/levodopa for the treatment of Parkinson’s disease. Following completion of the clinical trials and submission of the NDA, the NDA was not approved due to the FDA’s concerns over product nomenclature and the potential for medication errors. In the future, the completion of clinical trials for our product candidates may be delayed or halted for many reasons, including:

 

   

delays in patient enrollment, and variability in the number and types of patients available for clinical trials;

 

   

regulators or institutional review boards may not allow us to commence or continue a clinical trial;

 

   

our inability, or the inability of our partners, to manufacture or obtain from third parties materials sufficient to complete our clinical trials;

 

   

delays or failure in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective clinical trial sites;

 

   

risks associated with trial design, which may result in a failure of the trial to show statistically significant results even if the product candidate is effective;

 

   

difficulty in maintaining contact with patients after treatment commences, resulting in incomplete data;

 

   

poor effectiveness of product candidates during clinical trials;

 

   

safety issues, including adverse events associated with product candidates;

 

   

the failure of patients to complete clinical trials due to adverse side effects, dissatisfaction with the product candidate, or other reasons;

 

   

governmental or regulatory delays or changes in regulatory requirements, policy and guidelines; and

 

   

varying interpretation of data by the FDA or foreign regulatory agencies.

 

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In addition, our product candidates could be subject to competition for clinical study sites and patients from other therapies under development which may delay the enrollment in or initiation of our clinical trials.

The FDA or foreign regulatory authorities may require us to conduct unanticipated additional clinical trials, which could result in additional expense and delays in bringing our product candidates to market. Any failure or delay in completing clinical trials for our product candidates would prevent or delay the commercialization of our product candidates. We cannot assure that our expenses related to clinical trials will lead to the development of brand-name drugs which will generate revenues in the near future. Delays or failure in the development and commercialization of our own branded products could have a material adverse effect on our results of operations, liquidity, financial condition, and our growth prospects.

We rely on our license partner for regulatory filing and commercialization of IPX066 outside of the United States and Taiwan.

Glaxo Group Limited, under the terms of our license, development and commercialization agreement, is responsible for certain regulatory activities outside the United States and Taiwan that are essential for the commercialization of IPX066. If Glaxo Group Limited is not successful in its performance of, or fails to perform, their regulatory obligations with respect to IPX066, we may not be able to obtain regulatory approval for IPX066 in certain jurisdictions outside of the United States and Taiwan, which could have a material adverse effect on our results of operations and financial condition.

We rely on third parties to conduct clinical trials and testing for our product candidates, and if they do not properly and successfully perform their legal and regulatory obligations, as well as their contractual obligations to us, we may not be able to obtain regulatory approvals for our product candidates.

We design the clinical trials for our product candidates, but rely on contract research organizations and other third parties to assist us in managing, monitoring and otherwise carrying out these trials, including with respect to site selection, contract negotiation, analytical testing and data management. We do not control these third parties and, as a result, they may not treat our clinical studies as their highest priority, or in the manner in which we would prefer, which could result in delays.

Although we rely on third parties to conduct our clinical trials and related activities, we are responsible for confirming that each of our clinical trials is conducted in accordance with our general investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us to comply with regulations and standards, commonly referred to as good clinical practices and good laboratory practices, for conducting, recording and reporting the results of clinical trials to ensure that the data and results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities and requirements. The FDA enforces good clinical practices and good laboratory practices through periodic inspections of trial sponsors, principal investigators and trial sites. If we, our contract research organizations or our study sites fail to comply with applicable good clinical practices and good laboratory practices, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with good clinical practices and good laboratory practices. In addition, our clinical trials must be conducted with product manufactured under the FDA’s current Good Manufacturing Practices, or cGMP, regulations. Our failure or the failure of our contract manufacturers if any are involved in the process, to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

If third parties do not successfully carry out their duties under their agreements with us; if the quality or accuracy of the data they obtain is compromised due to failure to adhere to our clinical protocols or regulatory requirements; or if they otherwise fail to comply with clinical trial protocols or meet expected deadlines; our clinical trials may not meet regulatory requirements. If our clinical trials do not meet regulatory requirements or if these third parties need to be replaced, our clinical trials may be extended, delayed, suspended or terminated. If any of these events occur, we may not be able to obtain regulatory approval of our product candidates, which could have a material adverse effect on our results of operations, financial condition and growth prospects.

 

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We are dependent on a small number of suppliers for our raw materials that we use to manufacture our products and interruptions in our supply chain could materially and adversely affect our business.

We typically purchase the ingredients, other materials and supplies that we use in the manufacturing of our products, as well as certain finished products, from a small number of foreign and domestic suppliers. The FDA requires identification of raw material suppliers in applications for approval of drug products. If raw materials were unavailable from a specified supplier or the supplier was not in compliance with FDA or other applicable requirements, the FDA approval of a new supplier could delay the manufacture of the drug involved. As a result, there is no guarantee we will always have timely and sufficient access to a required raw material or other product. In addition, some materials used in our products are currently available from only one supplier or a limited number of suppliers. Generally, we would need as much as 18 months to find and qualify a new sole-source supplier. If we receive less than one year’s termination notice from a sole-source supplier that it intends to cease supplying raw materials, it could result in disruption of our ability to produce the drug involved. Further, a significant portion of our raw materials may be available only from foreign sources. Foreign sources can be subject to the special risks of doing business abroad, including:

 

   

greater possibility for disruption due to transportation or communication problems;

 

   

the relative instability of some foreign governments and economies;

 

   

interim price volatility based on labor unrest, materials or equipment shortages, export duties, restrictions on the transfer of funds, or fluctuations in currency exchange rates; and

 

   

uncertainty regarding recourse to a dependable legal system for the enforcement of contracts and other rights.

Those of our raw materials that are available from a limited number of suppliers are Bendroflumethiazide, Chloroquine, Colestipol, Demeclocycline, Digoxin, Flavoxate, Methyltestosterone, Nadolol, Orphenadrine, Terbutaline and Klucel, all of which are active pharmaceutical ingredients except Klucel, which is an excipient used in several product formulations. The manufacturers of two of these products, Formosa Laboratories, Ltd. and a division of Ashland, Inc., are sole-source suppliers. While none of the active ingredients is individually significant to our business, the excipient, while not covered by a supply agreement, is utilized in a number of significant products, it is manufactured for a number of industrial applications and supplies have been readily available. Only one of the active ingredients is covered by a long-term supply agreement and, while we have experienced occasional interruptions in supplies, none has had a material effect on our operations.

Many third-party suppliers are subject to governmental regulation and, accordingly, we are dependent on the regulatory compliance of these third parties. We also depend on the strength, enforceability and terms of our various contracts with these third-party suppliers.

We also rely on complex shipping arrangements throughout the various facilities of our supply chain spectrum. Customs clearance and shipping by land, air or sea routes rely on and may be affected by factors that are not in our full control or are hard to predict.

Any inability to obtain raw materials on a timely basis, or any significant price increases which cannot be passed on to customers, could have a material adverse effect on us.

Certain of our products use controlled substances, the availability of which may be limited by the DEA and other regulatory agencies.

We utilize controlled substances in certain of our current products and products in development and therefore must meet the requirements of the Controlled Substances Act of 1970 and the related regulations administered by the DEA in the U.S. as well as similar laws in other countries where we operate. These laws relate to the manufacture, shipment, storage, sale and use of controlled substances. The DEA and other regulatory agencies limit the availability of the active ingredients used in certain of our current products and products in development and, as a result, our procurement quota of these active ingredients may not be sufficient to meet commercial demand or complete clinical trials. We must annually apply to the DEA and other regulatory agencies for procurement quota in order to obtain these substances. Any delay or refusal by the DEA or such regulatory agencies in establishing our procurement quota for controlled substances could delay or stop our clinical trials or product launches, or could cause trade inventory disruptions for those products that have already been launched, which could have a material adverse effect on our business, results of operations and financial condition.

 

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We may be subject to disruptions or failures in our information technology systems and network infrastructures that could have a material adverse effect on our business.

We rely on the efficient and uninterrupted operation of complex information technology systems and network infrastructures to operate our business. We also hold data in various data center facilities upon which our business depends. A disruption, infiltration or failure of our information technology systems or any of our data centers as a result of software or hardware malfunctions, system implementations or upgrades, computer viruses, third-party security breaches, employee error, theft or misuse, malfeasance, power disruptions, natural disasters or accidents could cause breaches of data security, loss of intellectual property and critical data and the release and misappropriation of sensitive competitive information. Any of these events could result in the loss of key information, impair our production and supply chain processes, harm our competitive position, cause us to incur significant costs to remedy any damages and ultimately materially and adversely affect our business, results of operations and financial condition.

While we have implemented a number of protective measures, including firewalls, antivirus, patches, log monitors, routine back-ups with offsite retention of storage media, system audits, data partitioning and disaster recovery procedures, such measures may not be adequate or implemented properly to prevent or fully address the adverse effect of such events.

We may be adversely affected by alliance, collaboration, supply, or license and distribution agreements we enter into with other companies.

We have entered into several alliance, collaboration, supply or license and distribution agreements with respect to certain of our products and services and may enter into similar agreements in the future. These arrangements may require us to relinquish rights to certain of our technologies or product candidates, or to grant licenses on terms that ultimately may prove to be unfavorable to us. Relationships with alliance partners may also include risks due to regulatory requirements, incomplete marketplace information, inventories, and commercial strategies of our partners, and our agreements may be the subject of contractual disputes. If we or our partners are not successful in commercializing the products covered by the agreements, such commercial failure could adversely affect our business.

Pursuant to a license and distribution agreement with an unrelated third party pharmaceutical company, we are dependent on such company to supply us with product that we market and sell, and we may enter into similar agreements in the future. Any delay or interruption in the supply of product under such agreements could curtail or delay our product shipment and adversely affect our revenues, as well as jeopardize our relationships with our customers.

We depend on qualified scientific and technical employees, and our limited resources may make it more difficult to attract and retain these personnel.

Because of the specialized scientific nature of our business, we are highly dependent upon our ability to continue to attract and retain qualified scientific and technical personnel. We are not aware of any pending, significant losses of scientific or technical personnel. Loss of the services of, or failure to recruit, key scientific and technical personnel, however, would be significantly detrimental to our product-development programs. As a result of our small size and limited financial and other resources, it may be difficult for us to attract and retain qualified officers and qualified scientific and technical personnel.

In January 2010, we entered into employment agreements with our executive officers and certain other key employees. Under the employment agreements, the employee may terminate his or her employment upon 60 days prior written notice to us. All of our other key personnel are employed on an at-will basis with no formal employment agreements. We purchase a life insurance policy as an employee benefit for Dr. Hsu, but do not maintain “Key Man” life insurance on any executives.

 

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We are subject to significant costs and uncertainties related to compliance with the extensive regulations that govern the manufacturing, labeling, distribution, and promotion of pharmaceutical products as well as environmental, safety and health regulations.

The manufacturing, distribution, processing, formulation, packaging, labeling and advertising of our products are subject to extensive regulation by federal agencies, including the FDA, DEA, FTC, Consumer Product Safety Commission and Environmental Protection Agency, among others. We are also subject to state and local laws, regulations and agencies in California, Pennsylvania and elsewhere, as well as the laws and regulations of Taiwan. Compliance with these regulations requires substantial expenditures of time, money and effort in such areas as production and quality control to ensure full technical compliance. Failure to comply with FDA and other governmental regulations can result in fines, disgorgement, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production or distribution, suspension of the FDA’s review of NDAs or ANDAs, enforcement actions, injunctions and civil or criminal prosecution.

We cannot accurately predict the outcome or timing of future expenditures that we may be required to make in order to comply with the federal, state, and local environmental, safety, and health laws and regulations that are applicable to our operations and facilities. We are also subject to potential liability for the remediation of contamination associated with both present and past hazardous waste generation, handling, and disposal activities. We are subject periodically to environmental compliance reviews by environmental, safety, and health regulatory agencies. Environmental laws are subject to change and we may become subject to stricter environmental standards in the future and face larger capital expenditures in order to comply with environmental laws.

We may experience reductions in the levels of reimbursement for pharmaceutical products by governmental authorities, HMOs or other third-party payers. Any such reductions could have a material adverse effect on our business, financial position and results of operations.

Various governmental authorities and private health insurers and other organizations, such as HMOs, provide reimbursement to consumers for the cost of certain pharmaceutical products. Demand for our products depends in part on the extent to which such reimbursement is available. In addition, third-party payers are attempting to control costs by limiting the level of reimbursement for medical products, including pharmaceuticals, and increasingly challenge the pricing of these products which may adversely affect the pricing of our products. Moreover, health care reform has been, and is expected to continue to be, an area of national and state focus, which could result in the adoption of measures that could adversely affect the pricing of pharmaceuticals or the amount of reimbursement available from third-party payers for our products.

Reporting and payment obligations under the Medicaid rebate program and other government programs are complex, and failure to comply could result in sanctions and penalties or we could be required to reimburse the government for underpayments, which could have a material adverse effect on our business.

Medicaid and other government reporting and payment obligations are highly complex and somewhat ambiguous. State attorneys general and the U.S. Department of Justice have brought suits or instituted investigations against a number of other pharmaceutical companies for failure to comply with Medicaid and other government reporting obligations. Our methodologies for making these calculations are complex and the judgments involved require us to make subjective decisions, such that these calculations are subject to the risk of errors. Government agencies may impose civil or criminal sanctions, including fines, penalties and possible exclusion from federal health care programs, including Medicaid and Medicare. Any such penalties or sanctions could have a material adverse effect on our business, results of operations and financial condition.

Legislative or regulatory programs that may influence prices of prescription drugs could have a material adverse effect on our business.

Current or future federal or state laws and regulations may influence the prices of drugs and, therefore, could adversely affect the prices that we receive for our products. Programs in existence in certain states seek to set prices of all drugs sold within those states through the regulation and administration of the sale of prescription drugs. Expansion of these programs, in particular, state Medicaid programs, or changes required in the way in which Medicaid rebates are calculated under such programs, could adversely affect the price we receive for our products and could have a material adverse effect on our business, results of operations and financial condition. Decreases in health care reimbursements could limit our ability to sell our products or decrease our revenues.

 

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Our failure to comply with the legal and regulatory requirements governing the healthcare industry may result in substantial fines, sanctions and restrictions on our business activities.

Our practices and activities related to the sales and marketing of our products, as well as the pricing of our products, are subject to extensive regulation under U.S. federal and state healthcare statutes and regulations intended to combat fraud and abuse to federal and state healthcare payment programs, such as Medicare and Medicaid, Tri-Care, CHAMPUS, and Department of Defense programs. These laws include the federal Anti-Kickback Statute, the federal False Claims Act, and similar state laws and implementing regulations. For example, the payment of any incentive to a healthcare provider to induce the recommendation of our product or the purchase of our products reimbursable under a federal or state program would be considered a prohibited promotional practice under these laws. Similarly, the inaccurate reporting of prices leading to inflated reimbursement rates would also be considered a violation of these laws. These laws and regulations are enforced by the U.S. Department of Justice, the U.S. Department of Health and Human Services, Office of Inspector General, state Medicaid Fraud Units and other state enforcement agencies.

Violations of these laws and regulations are punishable by criminal and civil sanctions, including substantial fines and penal sanctions, such as imprisonment. It is common for enforcement agencies to initiate investigations into sales and marketing practices, as well as pricing practices, regardless of merit. These types of investigations and any related litigation can result in: (i) large expenditures of cash for legal fees, payment for penalties, and compliance activities; (ii) limitations on operations, (iii) diversion of management resources, (iv) injury to our reputation and (v) decreased demand for our products.

While we believe that our practices and activities related to sales and marketing, and the pricing of our products, are in compliance with these fraud and abuse laws, the criteria for compliance are often complex and subject to change and interpretation. An investigation by an enforcement agency could have a material and adverse effect on our business, results of operations and financial condition.

 

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We have entered into, and anticipate entering into, contracts with various U.S. government agencies. Unfavorable provisions in government contracts, some of which may be customary, may harm our business, financial condition and operating results.

Government contracts customarily contain provisions that give the government substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the government to:

 

   

suspend or debar the contractor from doing business with the government or a specific government agency;

 

   

terminate existing contracts, in whole or in part, for any reason or no reason;

 

   

reduce the scope and value of contracts;

 

   

change certain terms and conditions in contracts;

 

   

claim rights to products, including intellectual property, developed under the contract;

 

   

take actions that result in a longer development timeline than expected;

 

   

direct the course of a development program in a manner not chosen by the government contractor;

 

   

audit and object to the contractor’s contract-related costs and fees, including allocated indirect costs; and

 

   

control and potentially prohibit the export of the contractor’s products.

Generally, government contracts contain provisions permitting unilateral termination or modification, in whole or in part, at the government’s convenience. Under general principles of government contracting law, if the government terminates a contract for convenience, the terminated company may recover only its incurred or committed costs, settlement expenses and profit on work completed prior to the termination.

If the government terminates a contract for default, the defaulting company is entitled to recover costs incurred and associated profits on accepted items only and may be liable for excess costs incurred by the government in procuring undelivered items from another source. Some government contracts grant the government the right to use, for or on behalf of the U.S. government, any technologies developed by the contractor under the government contract. If we were to develop technology under a contract with such a provision, we might not be able to prohibit third parties, including our competitors, from using that technology in providing products and services to the government.

As a government contractor, we may also become subject to periodic audits and reviews. As part of any such audit or review, the government may review the adequacy of, and our compliance with, our internal control systems and policies, including those relating to our purchasing, property, compensation and/or management information systems. In addition, if an audit or review uncovers any improper or illegal activity, we may be subject to civil and criminal penalties and administrative sanctions, including termination of our contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the government. We could also suffer serious harm to our reputation if allegations of impropriety were made against us.

 

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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” (P.L. 111-148) and on March 30, 2010, the President signed the “Health Care and Education Reconciliation Act” (P.L. 111-152), collectively commonly 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:

 

   

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 (“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;

 

   

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;

 

   

providing a 50% discount on brand-name prescriptions filled in the Medicare Part D coverage gap beginning in 2011;

 

   

imposing increased penalties for the violation of fraud and abuse laws and funding for anti-fraud activities;

 

   

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.; and

 

   

expanding the definition of “covered entities” that purchase certain outpatient drugs in the 340B Drug Pricing Program of Section 340B of the Public Health Service Act.

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. Moreover, the Health Reform Law is currently subject to legal challenges that may have an impact on the law. 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.

We depend on our intellectual property, and our future success is dependent on our ability to protect our intellectual property and not infringe on the rights of others.

We believe intellectual property protection is important to our business and that our future success will depend, in part, on our ability to maintain trade secret protection and operate without infringing on the rights of others. We cannot assure you that:

 

   

any of our future processes or products will be patentable;

 

   

our processes or products will not infringe upon the patents of third parties; or

 

   

we will have the resources to defend against charges of patent infringement by third parties or to protect our own rights against infringement by third parties.

We rely on trade secrets and proprietary knowledge related to our products and technology which we generally seek to protect by confidentiality and non-disclosure agreements with employees, consultants, licensees and pharmaceutical companies. If these agreements are breached, we may not have adequate remedies for any breach, and our trade secrets may otherwise become known by our competitors.

 

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We are subject to potential product liability claims that can result in substantial litigation costs and liability.

The design, development and manufacture of pharmaceutical products involve an inherent risk of product liability claims and associated adverse publicity. Product liability insurance coverage is expensive, difficult to obtain, and may not be available in the future on acceptable terms, or at all. Although we currently carry $ 45.0 million of such insurance, we believe that no reasonable amount of insurance can fully protect against all such risks because of the potential liability inherent in the business of producing pharmaceutical products for human consumption.

We face risks relating to our goodwill and intangibles.

At December 31, 2011, our goodwill, which was originally generated as a result of the December 1999 merger of Global Pharmaceuticals Corporation and Impax Pharmaceuticals, Inc., was approximately $ 27.6 million, or approximately 3% of our total assets. We may never realize the value of our goodwill and intangibles. We will continue to evaluate, on a regular basis, whether events or circumstances have occurred to indicate all, or a portion, of the carrying amount of goodwill may no longer be recoverable, in which case an impairment charge to earnings would become necessary. Although as of December 31, 2011, the carrying value of goodwill was not impaired based on our assessment performed in accordance with accounting principles generally accepted in the U.S. (“GAAP”), any such future determination requiring the write-off of a significant portion of carrying value of goodwill could have a material adverse effect on our business, results of operations and financial condition.

Changes in tax regulations and varying application and interpretations of these regulations could result in an increase in our existing and future tax liabilities.

We have potential tax exposures resulting from the varying application of statutes, regulations and interpretations, including exposures with respect to manufacturing, research and development, marketing, sales and distribution functions. Although our arrangements are based on accepted tax standards, tax authorities in various jurisdictions including the United States may disagree with and subsequently challenge the amount of profits taxed, which may increase our tax liabilities and could have a material adverse effect on our business, results of our operations and financial condition.

 

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If we are unable to manage our growth, our business will suffer.

We have experienced rapid growth in the past several years and anticipate continued rapid expansion in the future. The number of ANDAs pending approval at the FDA has increased from 24 at December 31, 2008 to 45 at February 3, 2012. This growth has required us to expand, upgrade, and improve our administrative, operational, and management systems, internal controls and resources. We anticipate additional growth in connection with the expansion of our manufacturing operations, development of our brand-name products, and our marketing and sales efforts for the products we develop. Although we cannot assure you that we will, in fact, grow as we expect, if we fail to manage growth effectively or to develop a successful marketing approach, our business and financial results will be materially harmed. We may also seek to expand our business through complementary or strategic acquisitions of other businesses, products or assets, or through joint ventures, strategic agreements or other arrangements. Any such acquisitions, joint ventures or other business combinations may involve significant integration challenges, operational complexities and time consumption and require substantial resources and effort. It may also disrupt our ongoing businesses, which may adversely affect our relationships with customers, employees, regulators and others with whom we have business or other dealings. Further, if we are unable to realize synergies or other benefits expected to result from any acquisitions, joint ventures or other business combinations, or to generate additional revenue to offset any unanticipated inability to realize these expected synergies or benefits, our growth and ability to compete may be impaired, which would require us to focus additional resources on the integration of operations rather than other profitable areas of our business, and may otherwise cause a material adverse effect on our business, results of operations and financial condition.

We may make acquisitions of, or investments in, complementary businesses or products, which may be on terms that are not commercially advantageous, may require additional debt or equity financing, and may involve numerous risks, including the risks that we may be unable to integrate the acquired business successfully and that we may assume liabilities that adversely affect us.

We regularly review the potential acquisition of products, product rights and complementary businesses. We may choose to enter into such transactions at any time. Nonetheless, we cannot provide assurance that we will be able to identify suitable acquisition or investment candidates. To the extent that we do identify candidates that we believe to be suitable, we cannot provide assurance that we will be able to make such acquisitions or investments on commercially advantageous terms or at all.

If we make any acquisitions or investments, we may finance such acquisitions or investments through our cash reserves, debt financing, or by issuing additional equity securities, which could dilute the holdings of our then-existing stockholders. If we require financing, we cannot provide assurance that we will be able to obtain required financing when needed on acceptable terms or at all. Any such acquisitions or investments could also result in an increase in goodwill, intangible assets and amortization expenses that could ultimately negatively impact our profitability. If the fair value of our goodwill or intangible assets is determined at some future date to be less than its recorded value, a charge to earnings may be required. Such a charge could be in an amount that is material to our business, results of operations and financial condition.

Additionally, acquisitions involve numerous risks, including difficulties in assimilating the personnel, operations and products of the acquired companies, the diversion of management’s attention from other business concerns, risks of entering markets in which we have limited or no prior experience, and the potential loss of key employees of the acquired company. There may be overlap between our products or customers and those of an acquired entity that may create conflicts in relationships or other commitments detrimental to the integrated businesses. As a result of acquiring businesses, we may incur significant transaction costs, including substantial fees for investment bankers, attorneys, accountants and financial printing. Any acquisition could result in our assumption of unknown and/or unexpected, perhaps material liabilities. Additionally, in any acquisition agreement, the negotiated representations, warranties and agreements of the selling parties may not entirely protect us, and liabilities resulting from any breaches could exceed negotiated indemnity limitations.

 

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The terms of our revolving credit facility impose financial and operating restrictions on us.

We have a revolving credit facility in the aggregate principal amount of $50 million. Our revolving credit facility contains a number of negative covenants that limit our ability to engage in activities. These covenants limit or restrict, among other things, our ability to:

 

   

incur additional indebtedness and grant liens on assets;

 

   

make certain investments and restricted payments (including the ability to pay dividends and repurchase stock);

 

   

undertake certain acquisitions or sell certain assets; and

 

   

enter into certain transactions with our affiliates.

These limitations and restrictions may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our best interests. Further, the revolving credit facility subjects us to various financial covenants which require us to maintain certain levels of debt ratios and limit our capital expenditures.

Our ability to borrow under the revolving bank facility is subject to compliance with the negative and financial covenants. If we breach any of the covenants in our revolving credit facility, we may be in default under our revolving credit facility. If we default, our borrowings under the revolving credit facility could be declared due and payable, including accrued interest and other fees.

There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with GAAP. Any future changes in estimates, judgments and assumptions used or necessary revisions to prior estimates, judgments or assumptions could lead to a restatement of our results.

The consolidated financial statements included in this Annual Report on Form 10-K are prepared in accordance with GAAP. This involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future and any necessary revisions to prior estimates, judgments or assumptions could lead to a restatement. Any such changes could result in corresponding changes to the amounts of assets (including goodwill and other intangible assets), liabilities, revenues, expenses and income.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud.

Our management or our independent registered public accounting firm may identify material weaknesses in our internal control over financial reporting in the future. The existence of internal control material weaknesses may result in current and potential stockholders and alliance and collaboration agreements’ partners losing confidence in our financial reporting, which could harm our business, the market price of our common stock, and our ability to retain our current, or obtain new, alliance and collaboration agreements’ partners.

In addition, the existence of material weaknesses in our internal control over financial reporting may affect our ability to timely file periodic reports under the Exchange Act. Although we remedied any past accounting issues and do not believe similar accounting problems are likely to recur, an internal control material weakness may develop in the future and affect our ability to timely file our periodic reports. The inability to timely file periodic reports under the Exchange Act could result in the SEC revoking the registration of our common stock, which would prohibit us from listing or having our stock quoted on any public market. This would have an adverse effect on our business and stock price by limiting the publicly available information regarding us and greatly reducing the ability of our stockholders to sell or trade our common stock.

Our business could suffer as a result of manufacturing difficulties or delays.

The manufacture of certain of our products and product candidates, particularly our controlled-release products, is more difficult than the manufacture of immediate-release products. Successful manufacturing of these types of products requires precise manufacturing process controls, API that conforms to very tight tolerances for specific characteristics and equipment that operates consistently within narrow performance ranges. Manufacturing complexity, testing requirements, and safety and security processes combine to increase the overall difficulty of manufacturing these products and resolving manufacturing problems that we may encounter.

Our manufacturing and other processes utilize sophisticated equipment, which sometimes require a significant amount of time to obtain and install. Our business could suffer if certain manufacturing or other equipment, or a portion or all of our facilities were to become inoperable for a period of time. This could occur for various reasons, including catastrophic events such as earthquake, hurricane or explosion, unexpected equipment failures or delays in obtaining components or replacements thereof, as well as construction delays or defects and other events, both within and outside of our control. Our inability to timely manufacture any of our significant products could have a material adverse effect on our business, results of operation and financial condition.

 

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Terrorist attacks and other acts of violence or war may adversely affect our business.

Terrorist attacks at or nearby our facilities in Hayward, California, Philadelphia, Pennsylvania, or our manufacturing facility in Taiwan may negatively affect our operations. While we do not believe that we are more susceptible to such attacks than other companies, such attacks could directly affect our physical facilities or those of our suppliers or customers and could make the transportation of our products more difficult and more expensive and ultimately affect our sales.

We carry insurance coverage on our facilities of types and in amounts that we believe are in line with coverage customarily obtained by owners of similar properties. We continue to monitor the state of the insurance market in general and the scope and cost of coverage for acts of terrorism in particular, but we cannot anticipate what coverage will be available on commercially reasonable terms in future policy years. Currently, we carry terrorism insurance as part of our property and casualty and business interruption coverage. If we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged facilities, as well as the anticipated future net sales from those facilities.

Because of the location of our manufacturing and research and development facilities, our operations could be interrupted by an earthquake or be susceptible to climate changes.

Our corporate headquarters in California, manufacturing operations in California and Taiwan, and research and development activities related to process technologies are located near major earthquake fault lines. Although we have other facilities, we produce a substantial portion of our products at our California facility. A disruption at these California facilities due to an earthquake, other natural disaster, or due to climate changes, even on a short-term basis, could impair our ability to produce and ship products to the market on a timely basis. In addition, we could experience a destruction of facilities which would be costly to rebuild, or loss of life, all of which could materially adversely affect our business and results of operations.

We presently carry $ 10.0 million of earthquake coverage which covers all of our facilities on a worldwide basis. We carry an additional $ 40.0 million of earthquake coverage specifically for our California facilities. We believe the aggregate amount of earthquake coverage we currently carry is appropriate in light of the risks; however, the amount of our earthquake insurance coverage may not be sufficient to cover losses from earthquakes. We may discontinue some or all of this insurance coverage in the future if the cost of premiums exceeds the value of the coverage discounted for the risk of loss. If we experience a loss which is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged facilities, as well as the anticipated future net sales from those facilities.

 

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Item 1B. Unresolved Staff Comments

Not applicable.

 

Item 2. Properties

Our primary properties consist of a leased 45,000 sq. ft. corporate headquarter facility, an owned 35,000 sq. ft. research and development center and an owned 50,000 sq. ft. manufacturing facility, all located in Hayward, California; a 113,000 sq. ft. packaging and warehousing facility located in Philadelphia, Pennsylvania, also owned by us, and a leased 44,000 sq. ft. facility located in New Britain, Pennsylvania, which houses sales, marketing and administration personnel and also serves as our distribution center. In addition, we own a 19,000 sq. ft. office building containing additional administrative and laboratory facilities in Hayward, a 50,400 sq. ft. warehouse building in Hayward, and a 13,300 sq. ft. building in Hayward for future use as an administrative facility. We also lease three additional facilities aggregating 85,100 sq. ft. in Hayward, and Fremont, California, which are utilized for additional research and development, administrative services and equipment storage. The expiration dates of these lease agreements range between May 31, 2012 and December 31, 2015. We also own a 100,000 sq. ft. manufacturing facility in Taiwan. Our properties are generally used to support the operations of both the Global Division and the Impax Division.

In our various facilities we maintain an extensive equipment base that includes new or recently reconditioned equipment for the manufacturing and packaging of compressed tablets, coated tablets, and capsules. The manufacturing and research and development equipment includes mixers and blenders for capsules and tablets, automated capsule fillers, tablet presses, particle reduction, sifting equipment, and tablet coaters. The packaging equipment includes fillers, cottoners, cappers, and labelers. We also maintain two well equipped, modern laboratories used to perform all the required physical and chemical testing of our products. We also maintain a broad variety of material handling and cleaning, maintenance, and support equipment. We own substantially all of our manufacturing equipment and believe it is well maintained and suitable for its requirements.

We maintain property and casualty and business interruption insurance in amounts we believe are sufficient and consistent with practices for companies of comparable size and business.

 

Item 3. Legal Proceedings

Information pertaining to legal proceedings can be found in “Item 15. Exhibits and Financial Statement Schedules – Note 18. Legal and Regulatory Matters” and is incorporated by reference herein.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Price

Our common stock is traded on the NASDAQ Global Market under the symbol “IPXL”. The following table sets forth the high and low sales prices for our common stock as reported by the NASDAQ Global Market, as follows:

 

September 30, September 30,
       Price Range
per Share
 
       High        Low  

Year Ending December 31, 2011

         

First Quarter

     $ 26.19         $ 20.01   

Second Quarter

     $ 28.75         $ 20.00   

Third Quarter

     $ 22.07         $ 14.46   

Fourth Quarter

     $ 20.79         $ 16.50   

Year Ended December 31, 2010

         

First Quarter

     $ 18.15         $ 12.87   

Second Quarter

     $ 22.39         $ 7.20   

Third Quarter

     $ 20.12         $ 14.70   

Fourth Quarter

     $ 22.00         $ 17.61   

Performance Graph

The following performance graph compares the cumulative total stockholder return on our common stock with the cumulative total return of the Russell 2000 Index and the Dow Jones U.S. Pharmaceuticals Index. Our common stock is a member of the Russell 2000 Index and accordingly we have selected the Russell 2000 Index to replace the NASDAQ Market Index as a better comparison of companies our size. The graph assumes $100 was invested on December 31, 2006 in our common stock and in each of the comparison groups and that all dividends were reinvested. The total cumulative stockholder return on our common stock reflected in the graph represents the value that such investment would have had on May 23, 2008, the day our common stock registration under the Exchange Act was revoked. From December 29, 2006 through January 16, 2007, the SEC suspended all trading in our common stock. On December 9, 2008, our common stock again became registered under the Exchange Act and beginning January 2009 it was again quoted on the OTC Bulletin Board and Pink Sheets. Beginning March 2009, our common stock was listed on the NASDAQ Stock Market LLC.

 

LOGO

Comparison of cumulative total return of one or more companies, peer groups, industry indexes and/or broad markets

 

September 30, September 30, September 30, September 30, September 30, September 30, September 30, September 30,

Company/Market/Peer Group

  12/31/2006     12/31/2007     5/23/2008     12/31/2008     1/14/2009     12/31/2009     12/31/2010     12/31/2011  
IMPAX LABORATORIES, INC.   $ 100      $ 112.92      $ 90.44      $ 90.44      $ 25.43      $ 138.45      $ 204.58      $ 205.19   
RUSSELL 2000 INDEX   $ 100      $ 98.44      $ 93.51      $ 65.18      $ 59.16      $ 82.89      $ 105.16      $ 100.77   
DJ US PHARMACEUTICALS INDEX   $ 100      $ 104.46      $ 92.49      $ 85.50      $ 82.41      $ 101.83      $ 103.99      $ 123.38   

This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Impax Laboratories, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.

Holders

As of February 15, 2012, there were approximately 326 holders of record of our common stock, solely based upon the count our transfer agent provided us as of that date.

 

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Dividends

We have never paid cash dividends on our common stock and have no present plans to do so. Our current policy is to retain all earnings, if any, for use in the operation of our business. The payment of future cash dividends, if any, will be at the discretion of the Board of Directors and will be dependent upon our earnings, financial condition, capital requirements and other factors as the Board of Directors may deem relevant. Our loan agreement with Wells Fargo prohibits the payment of dividends without the consent of Wells Fargo.

Unregistered Sales of Securities

There were no sales of unregistered securities during the year ended December 31, 2011.

Purchases of Equity Securities by the Issuer

The following table provides information regarding the purchases of our equity securities by us during the quarter ended December 31, 2011.

 

September 30, September 30, September 30, September 30,

Period

     Total
Number of Shares
(or Units)
Purchased(1)
       Average
Price Paid Per
Share (or Unit)
       Total
Number of
Shares (or
Units)
Purchased
as Part of
Publicly
Announced
Plans or
Programs
       Maximum
Number

(or  Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased
Under the Plans
or Programs
 

October 1, 2011 to October 31, 2011

       71,897         $ 18.91           —             —     

November 1, 2011 to November 30, 2011

       7,333         $ 17.16           —             —     

December 1, 2011 to December 31, 2011

       2,898         $ 19.55           —             —     

 

(1) 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 Amended and Restated 2002 Equity Incentive Plan (the “2002 Plan”).

 

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Equity Compensation Plans

The following table details information regarding our existing equity compensation plans as of December 31, 2011:

 

September 30, September 30, September 30,

Plan Category

     Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights

(a)
    Weighted Average
Exercise Price of
Outstanding
Options,
Warrants and
Rights

(b)
       Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation
Plans (Excluding
Securities reflected in

Column (a))
(c)
 

Equity compensation plans approved by security holders

       5,073,097 (1)      $11.76           1,990,349   

Equity compensation plans not approved by security holders

       —          —             236,353 (2) 

Total:

       5,073,097        $11.76           2,226,702   

 

(1) Represents options issued pursuant to the 2002 Plan, and the Impax Laboratories Inc. 1999 Equity Incentive Plan.

 

(2) Represents 236,353 shares of common stock available for future issuance under the Impax Laboratories, Inc. 2001 Non-Qualified Employee Stock Purchase Plan.

See “Item 15. Exhibits and Financial Statement Schedules — Notes 12 and 13 to Consolidated Financial Statements”, for information concerning our equity compensation plans and employee benefit plans.

 

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Item 6. Selected Financial Data

The following selected financial data should be read together with our consolidated financial statements and accompanying consolidated financial statement footnotes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated financial statement data in this section are not intended to replace our consolidated financial statements and the accompanying consolidated financial statement footnotes. Our historical consolidated financial results are not necessarily indicative of our future consolidated financial results.

The selected financial data set forth below are derived from our consolidated financial statements. The consolidated statements of operations data for the years ended December 31, 2011, 2010 and 2009 and the consolidated balance sheet data as of December 31, 2011 and 2010 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. These audited consolidated financial statements include, in the opinion of management, all adjustments necessary for the fair presentation of our financial position and results of operations for these periods.

 

September 30, September 30, September 30, September 30, September 30,
       For the Years Ended December 31  
($ in 000s, except per share data)      2011        2010        2009        2008      2007  

Statements of Operations Data:

                      

Total revenues

     $ 512,919         $ 879,509         $ 358,409         $ 210,071       $ 273,753   

Research and development

       82,701           86,223           63,274           59,237         39,992   

Total operating expenses

       158,684           145,939           117,683           114,179         89,590   

Income from operations

       99,611           393,324           70,413           3,923         76,507   

Net income

       65,495           250,418           50,061           15,987         125,410   

Net income per share — basic

       1.02           4.04           0.83           0.27         2.13   

Net income per share — diluted

       0.97           3.82           0.82           0.26         2.05   
       As of December 31  
($ in 000s)      2011        2010        2009        2008      2007  

Balance Sheet Data:

                      

Cash, cash equivalents and short-term investments

     $ 346,414         $ 348,401         $ 90,369         $ 119,985       $ 143,496   

Working capital

       443,074           394,278           170,143           126,784         110,108   

Total assets

       793,859           693,318           660,756           514,287         513,745   

Long-term debt

       —             —             —             5,990         16,061   

Total liabilities

       190,853           185,169           438,529           354,637         377,697   

Retained earnings (deficit)

       316,741           251,246           828           (49,233      (65,220

Total stockholders’ equity

       603,006           508,149           222,227           159,650         136,048   

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis, as well as other sections in this report, should be read in conjunction with the consolidated financial statements and related Notes to Consolidated Financial Statements included elsewhere herein. All references to years mean the relevant 12-month period ended December 31.

Overview

General

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 February 3, 2012, we marketed 108 generic pharmaceuticals, which represent dosage variations of 30 different pharmaceutical compounds through our own Global Pharmaceuticals division; another 17 of our generic pharmaceuticals representing dosage variations of 4 different pharmaceutical compounds are marketed by our alliance and collaboration agreement partners. We have 45 applications pending at the FDA, including 4 tentatively approved by the FDA, and 46 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 product’s 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.

We operate in two segments, referred to as the “Global Pharmaceuticals Division” or “Global Division” and the “Impax Pharmaceuticals Division” or “Impax Division.”

 

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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 we sell directly to wholesalers, large retail drug chains, and others; the Private Label Product sales channel, for generic pharmaceutical over-the-counter and 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 over-the-counter products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements. We sell our Global Division products within the continental United States of America and the Commonwealth of Puerto Rico. We have no sales in foreign countries. Revenues from Global Product sales channel and the Private Label Product sales channel are reported under the caption “Global Product Sales, net” on the consolidated statement of operations. We also generate revenue in our Global Division from research and development services provided under a joint development agreement with another pharmaceutical company, and we report such revenue under the caption “Research partner” revenue on the consolidated statement of operations.

The Impax Division is engaged in the development of proprietary branded pharmaceutical products through improvements to already-approved pharmaceutical products to address central nervous system (CNS) disorders. The Impax Division is also engaged in product co-promotion through a direct sales force focused on promoting to physicians, primarily in the CNS community, pharmaceutical products developed by other unrelated third-party pharmaceutical entities. Additionally, we generate revenue in the Impax Division from research and development services provided under a development and license agreement with another unrelated third-party pharmaceutical company, and we report such revenue in the line item “Research Partner” on the consolidated statement of operations. Finally, we generate revenue in the Impax Division under a License, Development and Commercialization Agreement with another unrelated third-party pharmaceutical company, and we report such revenue in the line item “Rx Partner” on the consolidated statement of operations.

We have entered into several alliance, collaboration or license and distribution agreements with respect to certain of our products and services and may enter into similar agreements in the future. These agreements may require us to relinquish rights to certain of our technologies or product candidates, or to grant licenses on terms which ultimately may prove to be unfavorable to us. Relationships with alliance and collaboration partners may also include risks due to the failure of a partner to perform under the agreement, incomplete marketplace information, inventories, development capabilities, regulatory compliance and commercial strategies of our partners and our agreements may be the subject of contractual disputes. If we, or our partners, are not successful in commercializing the products covered by the agreements, such commercial failure could adversely affect our business.

Pursuant to a license and distribution agreement, we are dependent on an unrelated third-party pharmaceutical company to supply us with our authorized generic Adderall XR ® , which we market and sell. We experienced disruptions related to the supply of our authorized generic Adderall XR ® under the license and distribution agreement during each of the years ended December 31, 2011 and 2010. In November 2010, we filed suit against the third party supplier of our authorized generic of Adderall XR ® for breach of contract and other related claims due to a failure to fill our orders as required by the license and distribution agreement. In addition, we have filed a motion for a preliminary injunction and a temporary restraining order seeking to require the third party supplier to fill product orders placed by us. If we suffer supply disruptions related to our authorized generic Adderall XR ® product in the future, our revenues and relationships with our customers may be materially adversely affected. Further, we may enter into similar license and distribution agreements in the future.

 

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Critical Accounting Policies and Use of Estimates

The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States (GAAP) and the rules and regulations of the U.S. 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 related to equity incentive awards issued to employees and directors, and estimates used in applying the Company’s 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 Company’s several alliance and collaboration agreements. Actual results may differ from estimated results.

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.

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.

Consistent with industry practice, we record an accrued provision for estimated deductions for chargebacks, rebates, product returns, Medicare, Medicaid, and other government rebate programs, shelf-stock adjustments, and other pricing adjustments, in the same period when revenue is recognized. The objective of recording provisions for such deductions at the time of sale is to provide a reasonable estimate of the aggregate amount we expect to ultimately credit our customers. Since arrangements giving rise to the various sales credits are typically time driven (i.e. particular promotions entitling customers who make purchases of our products during a specific period of time, to certain levels of rebates or chargebacks), these deductions represent important reductions of the amounts those customers would otherwise owe us for their purchases of those products. Customers typically process their claims for deductions in a reasonably timely manner, usually within the established payment terms. We monitor actual credit memos issued to our customers and compare such actual amounts to the estimated provisions, in the aggregate, for each deduction category to assess the reasonableness of the various reserves at each quarterly balance sheet date. Differences between our estimated provisions and actual credits issued are accounted for in the current period as a change in estimate in accordance with GAAP. We do not have the ability to specifically link any particular sales credit to an exact sales transaction and since there have been no material differences, we believe our systems and procedures are adequate for managing our business. An event such as the failure to report a particular promotion could result in a significant difference between the estimated amount accrued and the actual amount claimed by the customer, and, while there have been none to date, we would evaluate the particular events and factors giving rise to any such significant difference in determining the appropriate accounting.

 

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Chargebacks. We have agreements establishing contract prices for specified products with some of our 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 memo issued by us to reduce the gross sales amount we invoiced to our wholesaler customer. We recognize an estimated accrued provision for chargeback deductions 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 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 years ended December 31, 2011, 2010 and 2009:

 

September 30, September 30, September 30,
       As of December 31,  
       2011     2010     2009  
             ($ in 000s)        

Chargeback reserve

        

Beginning balance

     $ 14,918      $ 21,448      $ 4,056   

Provision recorded during the period

       166,504        181,566        126,105   

Credits issued during the period

       (159,261     (188,096     (108,713
    

 

 

   

 

 

   

 

 

 

Ending balance

     $ 22,161      $ 14,918      $ 21,448   
    

 

 

   

 

 

   

 

 

 

Provision as a percent of gross Global Product sales

       23     19     24

The lower provision for chargebacks as a percent of gross Global Product sales in 2010 as compared to both 2011 and 2009 was principally the result of the launch of our tamsulosin product, which generally resulted in higher gross Global Product sales and carried a lower average chargeback credit amount, relative to our other products sold through our Global Division’s Global Products sales channel, during the year ended December 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 tamsulosin product sales after the end of the contractual exclusivity period, have not remained at this level, as additional competing generic versions of the product entered the market in late April 2010, and have resulted in both price erosion and reduction of our market-share. See “Results of Operations” below for additional discussion on the impact of tamsulosin and our authorized generic of Adderall XR ® product sales on our financial condition.

 

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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. We recognize an estimated accrued provision for rebate deductions at the time of product shipment. The primary factors we consider when estimating the provision for rebates are the average historical experience of aggregate credits issued, the mix of products shipped and the historical relationship of rebates as a percentage of total gross Global Product sales, the contract terms and conditions of the various rebate programs in effect at the time of shipment, and the amount of inventory on hand at the major drug wholesalers with which we do business. We also monitor aggregate actual rebates granted and compare them to the estimated aggregate provision for rebates to assess the reasonableness of the aggregate rebate reserve at each quarterly balance sheet date. The following table is a roll-forward of the activity in the rebate reserve for the years December 31, 2011, 2010 and 2009:

 

September 30, September 30, September 30,
       As of December 31,  
       2011     2010     2009  
             ($ in 000s)        

Rebate reserve

        

Beginning balance

     $ 20,892      $ 37,781      $ 4,800   

Provision recorded during the period

       69,173        91,064        72,620   

Credits issued during the period

       (64,821     (107,953     (39,639
    

 

 

   

 

 

   

 

 

 

Ending balance

     $ 25,244      $ 20,892      $ 37,781   
    

 

 

   

 

 

   

 

 

 

Provision as a percent of gross Global Product sales

       9     9     14

The provision for rebates, as a percent of gross Global Product sales, remained relatively consistent from 2010 to 2011.

The decrease in the provision for estimated rebates as a percent of gross Global Product sales from 2009 to 2010 was principally the result of our tamsulosin product and our authorized generic Adderall XR ® products, both of which resulted in higher gross Global Product sales. Our tamsulosin product carried a lower rebate credit amount, relative to our other products sold through our Global Division’s Global Products sales channel, resulting in a lower overall aggregate average rebate as a percentage of gross Global Product sales during the twelve months ended December 31, 2010. Additionally, average rebates provided for as a percentage on sales of our authorized generic Adderall XR ® products were lower during the year ended December 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. Following the expiration of our contractual exclusivity period, our tamsulosin product sales have decreased as additional competing generic versions of the product entered the market in late April 2010, and have resulted in both price erosion and reduction of our market-share. See “Results of Operations” below for additional discussion on the impact of tamsulosin and our authorized generic of Adderall XR ® product sales on our financial condition.

 

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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 twelve months following, the products’ expiration date. We estimate and recognize an accrued provision for product returns as a percentage of gross sales based upon historical experience of Global Division Global Product sales. We estimate the product return reserve using a historical lag period, which is the time between when the product is sold and when it is ultimately returned, and estimated return rates which may be adjusted based on various assumptions including changes to internal policies and procedures, changes in business practices, and commercial terms with customers, competitive position of each product, amount of inventory in the wholesaler supply chain, the introduction of new products and changes in market sales information. We also consider other factors, including significant market changes which may impact future expected returns, and actual product returns. We monitor aggregate actual product returns on a quarterly basis and we 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 accrued product returns for the years ended December 31, 2011, 2010 and 2009:

 

September 30, September 30, September 30,
       As of December 31,  
       2011     2010     2009  
             ($ in 000s)        

Returns reserve

        

Beginning balance

     $ 33,755      $ 22,114      $ 13,675   

Provision recorded during the period

       688        15,821        11,847   

Credits issued during the period

       (10,342     (4,180     (3,408
    

 

 

   

 

 

   

 

 

 

Ending balance

     $ 24,101      $ 33,755      $ 22,114   
    

 

 

   

 

 

   

 

 

 

Provision as a percent of gross Global Product sales

       0.1     1.6     2.3

The provision for returns as a percent of Global Product sales, gross has declined steadily during the three year period ended December 31, 2011 as the result of continued improvement in our historical experience of actual return credits processed. Our historical experience for returns has improved due to the launch of new products in recent years, for example our tamsulosin product and our authorized generic Adderall XR ® products. Credits issued during 2011 include $ 5.8 million related to a recall of our authorized generic Adderall XR ® products which was initiated by our unrelated third-party manufacturer of those products. Excluding the recall credits noted above, credits issued during 2011 were $ 4.5 million, in line with 2010 and 2009 credits issued.

 

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Medicaid. 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 $ 17,479,000 and $ 12,475,000 as of December 31, 2011 and 2010. The accrual for Medicaid rebate payments increased significantly beginning in 2009 as a result of the launch of our authorized generic Adderall XR ® products in October 2009, as such Medicaid rebate payments are calculated under the regulations applicable to brand products.

Shelf-Stock Adjustments. Based upon competitive market conditions, we may reduce the selling price of certain products. We may issue a credit against the sales amount to a customer based upon their remaining inventory of the product in question, provided the customer agrees to continue 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 us in response to market conditions, including estimated launch dates of competing products and estimated declines in market price. The accrued reserve for shelf-stock adjustments totaled $ 684,000 and $ 281,000 as of December 31, 2011 and 2010. Historically, differences between our estimated and actual credits issued for shelf stock adjustments have not been significant.

 

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Rx Partner and OTC Partner. Each of our Rx Partner and OTC Partner agreements involves multiple deliverables in the form of products, services and/or licenses over extended periods. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification TM (“ASC”) Topic 605-25 supplemented SAB 104 for accounting for such multiple-element revenue arrangements. With respect to our multiple-element revenue arrangements, we determine whether any or all of the elements of the arrangement should be separated into individual units of accounting under FASB ASC Topic 605-25. If separation into individual units of accounting is appropriate, we recognize revenue for each deliverable when the revenue recognition criteria specified by SAB 104 are achieved for the deliverable. If separation is not appropriate, we recognize revenue and related direct manufacturing costs over the estimated life of the agreement or our estimated expected period of performance using either the straight-line method or a modified proportional performance method.

The Rx Partners and OTC Partners 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 agreement partners for product shipments, and may also receive royalty, profit sharing, and/or upfront or periodic milestone payments. Revenue received from the agreement partners for product shipments under these agreements is generally not subject to deductions for chargebacks, rebates, returns, shelf-stock adjustments, and other pricing adjustments. Royalty and profit sharing amounts we receive under these agreements are calculated by the respective 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 agreement partner’s adjustments to such estimated amounts in the period the agreement partner reports the amounts to us.

We applied the updated guidance of ASC 605-25, “Multiple Element Arrangements”, to the Strategic Alliance Agreement with Teva Pharmaceuticals Curacao N.V., a subsidiary of Teva Pharmaceutical Industries Ltd. (“Teva Agreement”) during the year ended December 31, 2010. We look to the underlying delivery of goods and/or services which give rise to the payment of consideration under the Teva Agreement to determine the appropriate revenue recognition. Consideration received as a result of research and development-related activities performed under the Teva Agreement is initially deferred and recorded as a liability captioned “Deferred revenue”. We recognize the deferred revenue on a straight-line basis over our expected period of performance for such services. Consideration received as a result of the manufacture and delivery of products under the Teva Agreement is recognized at the time title and risk of loss passes to the customer which is generally when product is received by Teva. We recognize profit share revenue in the period earned.

OTC Partner revenue is related to our agreement with Pfizer Inc. (formerly Wyeth) with respect to supply of over-the-counter pharmaceutical products and related research and development services. We initially defer all revenue earned under our OTC Partner agreement. We also defer direct product manufacturing costs to the extent these costs are reimbursable by the OTC Partner. We recognize the product manufacturing costs in excess of amounts reimbursable by the OTC Partner as current period cost of revenue. We recognize revenue as OTC Partner revenue and amortize deferred product manufacturing costs as cost of revenues as we fulfill our contractual obligations. Revenue is recognized and associated costs are amortized over the alliance and collaboration agreement’s term of the arrangement or our expected period of performance, using a modified proportional performance method. Under the modified proportional performance method of revenue recognition utilized by us, the amount we recognize in the period of initial recognition is based upon the number of years elapsed under the alliance and collaboration agreement relative to the estimated total length of the recognition period. Under this method, the amount of revenue we recognize 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 and collaboration agreement and the denominator of which is the total estimated life of the alliance and collaboration agreement. The amount recognized as revenue during each remaining year is an equal pro rata amount. Finally, cumulative revenue recognized is limited to the extent of cash collected and/or the fair value received. The result of the modified proportional performance method is a greater portion of the revenue is recognized in the initial period with the remaining balance being recognized ratably over either the remaining life of the arrangement or the expected period of performance of the alliance and collaboration agreement.

 

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Research Partner . We have entered into development agreements with unrelated third-party pharmaceutical companies under which we are collaborating in the development of four dermatological products, including three generic products and one branded dermatological product, and one branded CNS product. Under each of the development agreements, we received an upfront fee with the potential to receive additional milestone payments upon completion of contractually specified clinical and regulatory milestones. Additionally, we may also receive royalty payments from the sale, if any, of a successfully developed and commercialized branded product under one of the development agreements. We defer and recognize revenue received from the provision of research and development services, including the upfront payment and the milestone payments received before January 1, 2011 on a straight line basis over the expected period of performance of the research and development services. We will recognize revenue received from the achievement of contingent research and development milestones, if any, after January 1, 2011 currently in the period such payment is earned. We will recognize royalty fee income, if any, as current period revenue when earned.

Promotional Partner . We have entered into a promotional services agreement with an unrelated third-party pharmaceutical company under which we provide physician detailing sales calls services to promote certain of the unrelated third-party company’s branded drug products. We receive service fee revenue in exchange for providing this service. We recognize revenue from the 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.

 

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Estimated Lives of Alliance and Collaboration Agreements. The revenue we receive under our alliance and collaboration agreements is not subject to adjustment for estimated chargebacks, rebates, product returns and other pricing adjustments as such adjustments are included in the amounts we receive from our alliance partners. However, because we recognize revenue we receive under our alliance agreements, which is required to be deferred, over the estimated life of the related agreement or our expected performance utilizing either the straight-line method or a modified proportional performance method, we are required to estimate the recognition period under each such agreement in order to determine the amount of revenue to be recognized in the current period. Sometimes this estimate is based solely on the fixed term of the particular alliance agreement. In other cases the estimate may be based on more subjective factors as noted in the following paragraphs. While changes to the estimated recognition periods have been infrequent, such changes, should they occur, may have a significant impact on our consolidated financial statements.

As an illustration, the consideration received from the provision of research and development services under the License, Development and Commercialization Agreement with Glaxo Group Limited (“GSK”), including the up-front fee and payments received for manufacturing clinical supplies, will initially be deferred and then recognized as revenue on a straight-line basis over our expected period of performance during the development period, which is currently estimated to be the 24 month period ending December 31, 2012. Any change in the expected period of performance will be adjusted on a prospective basis. In this regard, if we were to estimate our period of performance to require significantly more time, then the License, Development and Commercialization Agreement revenue recognition period would be increased on a prospective basis, resulting in a reduced periodic amount of revenue recognized in current and future periods.

Additionally, for example, the consideration received from the provision of research and development services under the Joint Development Agreement with Medicis, including the up-front fee and milestone payments received before January 1, 2011, have been initially deferred and are being recognized on a straight-line basis over our expected period of performance to provide research and development services under the Joint Development Agreement which is estimated to be a 48 month period, starting in December 2008, upon receipt of the $ 40.0 million upfront payment, and ending in November 2012. The completion of the final Joint Development Agreement deliverable represents the end of our estimated expected period of performance, as we will have no further contractual obligation to perform research and development services under the Joint Development Agreement, and therefore the earnings process will be complete. If the timing of the completion of the research and development services is different from our estimate, the revenue recognition period will change on a prospective basis at such time the event occurs. While no such change in the estimated life of the Joint Development Agreement has occurred to date, if we were to conclude significantly more time will be required to fulfill our contractual obligations, then we would increase our estimate of the revenue recognition period under the Joint Development Agreement, resulting in a reduced periodic amount of revenue recognized prospectively in current and future periods.

 

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Third-Party Research Agreements. In addition to our own research and development resources, we may use unrelated third-party vendors, including universities and independent research companies, to assist in our research and development activities. These vendors provide a range of research and development services to us, including clinical and bio-equivalency studies. We generally sign agreements with these vendors which establish the terms of each study performed by them, including, among other things, the technical specifications of the study, the payment schedule, and timing of work to be performed. Third-party researchers generally earn payments 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 estimates and actual payments made have not been significant.

Share-Based Compensation. We recognize the grant date fair value of each option and restricted share over its vesting period. Options and restricted shares granted under the 2002 Plan vest over a three or four year period and have a term of ten years. We estimate 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 on historical volatility of our common stock, and of a peer group for the period of time our common stock was deregistered, over the period commensurate with the expected term of the stock options. We base the expected term calculation on the “simplified” method described in SAB No. 107, Share-Based Payment and SAB No. 110, Share-Based Payment, because it provides a reasonable estimate in comparison to our actual experience. We base the risk-free interest rate 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 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 U.S. 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 financial statement carrying values (GAAP) and the tax bases of the Company’s assets and liabilities.

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 December 31, 2011. We carry our deferred compensation liability at fair value, based upon observable market values. We had no debt outstanding as of December 31, 2011. Our only remaining debt instrument at December 31, 2011 was our credit facility with Wells Fargo Bank, N.A., which would be subject to variable interest rates and principal payments should we decide to borrow under 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.

 

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Goodwill. In accordance with FASB ASC Topic 350, “Goodwill and Other Intangibles”, rather than recording periodic amortization of goodwill, goodwill is subject to an annual assessment for impairment by applying a fair-value-based test. Under FASB ASC Topic 350, if the fair value of the reporting unit exceeds the reporting unit’s carrying value, including goodwill, then goodwill is considered not impaired, making further analysis not required. 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, 2011 and 2010, as the fair value of the Global Division exceeded its carrying value at each 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 that could have a material adverse effect on the estimated fair value of the reporting unit, and thus indicate a potential impairment of the goodwill carrying value. If such events or changes in circumstances were deemed to have occurred, we would perform an interim impairment analysis, which may include the preparation of a discounted cash flow model, or consultation with one or more valuation specialists, to analyze the impact, if any, on our assessment of the reporting unit’s 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.

 

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Results of Operations

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Overview:

The following table sets forth our summarized, consolidated results of operations for the years ended December 31, 2011 and 2010:

 

September 30, September 30, September 30, September 30,
       Year Ended                  
(in $000’s)      December 31
2011
       December 31
2010
       Increase/
(Decrease)
 
                         $      %  

Total revenues

     $ 512,919         $ 879,509         $ (366,590      (42 )% 

Gross profit

       258,295           539,263           (280,968      (52 )% 

Income from operations

       99,611           393,324           (293,713      (75 )% 
    

 

 

      

 

 

      

 

 

    

Income before income taxes

       98,014           393,879           (295,865      (75 )% 

Provision for income taxes

       32,616           143,521           (110,905      (77 )% 
    

 

 

      

 

 

      

 

 

    
       65,398           250,358           (184,960      (74 )% 

Non-controlling interest

       97           60           37         62
    

 

 

      

 

 

      

 

 

    

Net income

     $ 65,495         $ 250,418         $ (184,923      (74 )% 
    

 

 

      

 

 

      

 

 

    

Net income for the year ended December 31, 2011 was $ 65.5 million, a decrease of $ 184.9 million as compared to $ 250.4 million for the year ended December 31, 2010, primarily attributable to a decrease in Global Product sales, net which was driven by lower revenue from the sale of our tamsulosin product, a generic version of Flomax ® , and decreased Rx Partner revenues, principally driven by a change in the accounting for the Teva Agreement in the year ended December 31, 2010, partially offset by a corresponding decrease in the provision for income taxes. During 2010, sales of our tamsulosin product benefited from an eight week contractual market exclusivity period which commenced on March 2, 2010, and for which there was no similar contractual market exclusivity period in the year ended December 31, 2011. The change in the accounting for the Teva Agreement resulted in an increase of approximately $ 64.2 million to net income in the year ended December 31, 2010. For additional information on the accounting afforded the Teva Agreement, see “Item 15. Exhibits and Financial Statement Schedules — Note 11, Alliance and Collaboration Agreements — Strategic Alliance Agreement with Teva.” In addition, we continued to earn significant revenues and gross profit from sales of our authorized generic Adderall XR ® products, and fenofibrate products, during the year ended December 31, 2011. With respect to our authorized generic Adderall XR ® products, we are dependent on a third-party pharmaceutical company to supply us with the finished product we market and sell through our Global Division. We experienced disruptions related to the supply of our authorized generic Adderall XR ® from this third-party pharmaceutical company. Any continued delay or interruption in whole or part in the supply of our authorized generic Adderall XR ® products from the third-party pharmaceutical company could curtail or delay our product shipments and adversely affect our consolidated revenues, as well as jeopardize our relationships with our customers. Any significant diminution in the consolidated revenue and/or gross profit of our authorized generic Adderall XR ® and fenofibrate products, or any of our other products, due to competition and/or product supply or any other reasons in future periods may materially and adversely affect our consolidated results of operations in such future periods.

 

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Global Division

The following table sets forth results of operations for the Global Division for the years ended December 31, 2011 and 2010:

 

September 30, September 30, September 30, September 30,
       Year Ended           
(in $000’s)      December 31
2011
       December 31
2010
       Increase/
(Decrease)
 

Revenues

                 $         %   
              

 

 

    

 

 

 

Global Product sales, net

     $ 443,818         $ 624,963         $ (181,145      (29 )% 

Rx Partner

       26,333           217,277           (190,944      (88 )% 

OTC Partner

       5,021           8,888           (3,867      (44 )% 

Research Partner

       16,538           13,539           2,999         22
    

 

 

      

 

 

      

 

 

    

Total revenues

       491,710           864,667           (372,957      (43 )% 
    

 

 

      

 

 

      

 

 

    

Cost of revenues

       242,713           328,163           (85,450      (26 )% 
    

 

 

      

 

 

      

 

 

    

Gross profit

       248,997           536,504           (287,507      (54 )% 
    

 

 

      

 

 

      

 

 

    

Operating expenses:

                 

Research and development

       46,169           44,311           1,858         4

Patent litigation

       7,506           6,384           1,122         18

Selling, general and administrative

       13,157           15,404           (2,247      (15 )% 
    

 

 

      

 

 

      

 

 

    

Total operating expenses

       66,832           66,099           733         1
    

 

 

      

 

 

      

 

 

    

Income from operations

     $ 182,165         $ 470,405         $ (288,240      (61 )% 
    

 

 

      

 

 

      

 

 

    

Revenues

Total revenues for the Global Division for the year ended December 31, 2011, were $ 491.7 million, a decrease of 43% from 2010, principally resulting from the decreases in Global Product sales, net and Rx Partner revenue as discussed below.

Global Product sales, net, were $ 443.8 million for the year ended December 31, 2011, a decrease of 29% from the same period in 2010, primarily as a result of lower sales of our tamsulosin product. We commenced sales of our tamsulosin product, on March 2, 2010 and had a contractual market exclusivity period for this product for the succeeding eight weeks. As a result, we were able to achieve high market-share penetration in 2010. Following the expiration of our contractual market exclusivity period, competing generic versions to our own generic version of the tamsulosin product began entering the market in April 2010, resulting in both price erosion and reduction of our market share for that product.

Rx Partner revenues were $ 26.3 million for 2011, a decrease of 88% over the prior year attributable to a change in revenue recognition under the Teva Agreement which increased Rx Partner revenue by $ 196.4 million in the year ended December 31, 2010. Rx Partner revenues excluding the change in accounting in 2010 for the Teva Agreement increased $ 5.5 million in 2011 compared to 2010. This increase principally resulted from a Teva Agreement profit-share adjustment realized by us in 2011. The amount of profit share we receive under the Teva Agreement is calculated by Teva, and is generally based upon estimates of net product sales or gross profit which include estimates of deductions for chargebacks, rebates, product returns, and other adjustments as negotiated by Teva with its customers. We record Teva’s adjustments to such estimated amounts in the period when earned.

OTC Partner revenues were $ 5.0 million for the year ended December 31, 2011, with the decrease over the prior year resulting from lower sales of our product marketed under our OTC Partner alliance agreement with Pfizer.

Research Partner revenues were $ 16.5 million for the year ended December 31, 2011 an increase of $ 3.0 million over the prior year, resulting from the recognition of revenue related to a $ 3.0 milestone payment which was earned in the current year.

 

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Cost of Revenues

Cost of revenues was $ 242.7 million for the year ended December 31, 2011 and $ 328.2 million for the prior year, of which $ 95.4 million in 2010 was related to the Teva Agreement change in accounting related to the amortization of deferred manufacturing costs, corresponding to the adjustment to revenue recognition discussed above. Cost of revenues increased $ 10.0 million, before the Teva Agreement change primarily resulting from higher sales of our authorized generic Adderall XR ® products.

Gross Profit

Gross profit for the year ended December 31, 2011 was $ 249.0 million, or approximately 51% of total revenues, as compared to $ 536.5 million, or approximately 62% of total revenue, in the prior year. Gross profit in the current year decreased when compared to gross profit in the prior year period attributed primarily to lower sales of our tamsulosin product in the current year, and the prior year change in revenue recognition under the Teva Agreement noted above.

Research and Development Expenses

Total research and development expenses for the year ended December 31, 2011 were $ 46.2 million, an increase of 4%, as compared to the same period of the prior year. Generic research and development expenses increased primarily as a result of an increase of $ 3.2 million in outside development costs, and $ 0.9 million of additional depreciation expense related to equipment used in research and development activities, partially offset by a decrease of $ 1.3 million in bio-equivalency study costs, and $ 1.2 million of lower expenses related to active pharmaceutical ingredients used for research.

Patent Litigation Expenses

Patent litigation expenses for the years ended December 31, 2011 and 2010 were $ 7.5 million and $ 6.4 million, with the increase resulting from higher legal activity related to several cases which were not present in 2010.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2011 were $ 13.1 million, a 15% decrease over 2010. The decrease resulted primarily from a $ 1.5 million reduction of post-approval product clinical study costs, in addition to $ 1.1 million in lower executive-level compensation costs and $ 0.9 million in lower sales incentive compensation costs. These cost reductions were partially offset by higher expenses due to increased activities in the Taiwan facility of $ 1.1 million.

 

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Impax Division

The following table sets forth results of operations for the Impax Division for the years ended December 31, 2011 and 2010:

 

September 30, September 30, September 30, September 30,
         Year Ended         
         December 31
2011
     December 31
2010
     Increase/
(Decrease)
 
(in $000’s)                    $      %  

Rx Partner Revenue

     $ 5,750       $ —         $ 5,750         nm   

Promotional Partner revenue

       14,140         14,073         67         —     

Research Partner revenue

       1,319         769         550         72
    

 

 

    

 

 

    

 

 

    

Total revenue

       21,209         14,842         6,367         43
    

 

 

    

 

 

    

 

 

    

Cost of revenues

       11,911         12,083         (172      (1 )% 
    

 

 

    

 

 

    

 

 

    

Gross profit

       9,298         2,759         6,539         237
    

 

 

    

 

 

    

 

 

    

Operating expenses:

             

Research and development

       36,532         41,912         (5,380      (13 )% 

Selling, general and administrative

       7,435         3,510         3,925         112
    

 

 

    

 

 

    

 

 

    

Total operating expenses

       43,967         45,422         (1,455      (3 )% 
    

 

 

    

 

 

    

 

 

    

Loss from operations

     $ (34,669    $ (42,663    $ 7,994         19
    

 

 

    

 

 

    

 

 

    

nm-not meaningful

             

Revenues

Total revenues were $ 21.2 million for the year ended December 31, 2011, an increase of 43% compared to 2010, principally driven by $ 5.8 million of Rx Partner revenue recognition related to the up-front payment received under our License, Development and Commercialization Agreement with GSK entered into in December 2010, for which there were no similar revenues in the prior year. We received an initial $ 11.5 million up-front payment under the License Agreement which we are recognizing as revenue on a straight-line basis over our expected period of performance during the development period, which we currently estimate to be the 24 month period ending December 2012. In addition, under a Development and Co-Promotion Agreement (“Endo Agreement”) with Endo Pharmaceuticals, Inc. (“Endo”), we received an initial $ 10.0 million up-front payment which we are recognizing as Research Partner revenue on a straight-line basis over our expected period of performance during the development period, which we currently estimate to be the 91 month period ending December 2017. Under the Endo Agreement, we recognized $ 1.3 million of Research Partner revenue in the year ended December 31, 2011 and $ 0.8 million in 2010.

Cost of Revenues

Cost of revenues for the Impax Division consists primarily of expenditures related to our sales force which provides physician detailing services under a promotional services agreement with an unrelated pharmaceutical company. Cost of revenues was $ 11.9 million for the year ended December 31, 2011, with no individually significant changes from the prior year.

Gross Profit

Gross profit for the year ended December 31, 2011 was $ 9.3 million, an increase of $ 6.5 million over the prior year period primarily resulting from increases in Rx Partner and Research Partner revenues as described above.

Research and Development Expenses

Total research and development expenses for the year ended December 31, 2011 were $ 36.5 million, a decrease of 13%, as compared to $ 41.9 million in the prior year period, with the $ 5.4 million decrease principally driven by a decrease of $ 10.4 million for clinical study costs partially offset by increases of $ 1.8 million for NDA filing fees, $ 1.5 million for consulting expenses, $ 0.6 million for personnel-related costs, $ 0.5 for product development expenses and $ 0.4 million for contract labor.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $ 7.4 million in the year ended December 31, 2011 as compared to $ 3.5 million in the prior year period with the increase primarily related to increases of $ 2.3 million in new product planning activities, $ 0.7 million for marketing personnel-related costs, in addition to business development legal fees of $ 0.4 million.

 

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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 years ended December 31, 2011 and 2010:

 

September 30, September 30, September 30, September 30,
         Year Ended         
         December 31
2011
     December 31
2010
     Increase/
(Decrease)
 
(in $000’s)                    $      %  

General and administrative expenses

     $ 47,885       $ 34,418       $ 13,467         39
    

 

 

    

 

 

    

 

 

    

Total operating expenses

       47,885         34,418         13,467         39
    

 

 

    

 

 

    

 

 

    

Loss from operations

       (47,885      (34,418      (13,467      (39 )% 
    

 

 

    

 

 

    

 

 

    

Other (expense) income, net

       (2,589      (315      (2,274      722

Interest income

       1,149         1,037         112         11

Interest expense

       (157      (167      10         6

Loss before income taxes

       (49,482      (33,863      (15,619      (46 )% 

Provision for income taxes

     $ 32,616       $ 143,521       $ (110,905      (77 )% 

General and Administrative expenses

General and administrative expenses for the year ended December 31, 2011 were $ 47.9 million, a $ 13.5 million increase over the prior period. The increase was principally driven by higher corporate legal expenses of $ 8.5 million, an increase in executive compensation-related expenses of $ 3.0 million, and an increase in information technology systems related expenses of $ 1.6 million.

Other Expense, net

Other expense, net for the year ended December 31, 2011 increased principally from a charge of $ 2.3 million related to the settlement of the Budeprion XL Litigation.

Interest Income

Interest income in the year ended December 31, 2011 was $ 1.1 million, an increase of $ 0.1 million from 2010 resulting from higher average balances of cash and cash equivalents and short-term investments.

Interest Expense

Interest expense in the years ended December 31, 2011 and 2010 was primarily the result of the amortization of deferred financing costs.

Income Taxes

During the year ended December 31, 2011, we recorded an aggregate tax provision of $ 32.6 million for U.S. domestic income taxes and for foreign income taxes. In the year ended December 31, 2010, we recorded an aggregate tax provision of $ 143.5 million for U.S. domestic income taxes and for foreign income taxes. The decrease in the tax provision resulted from lower income before taxes in the year ended December 31, 2011 as compared to the prior year, resulting principally from the reduced products sales revenue and gross profit as discussed above. The effective tax rate of 33% for the year ended December 31, 2011 was lower than the effective tax rate of 36% for the year ended December 31, 2010, primarily due to the lower level of income before income taxes in the year ended December 31, 2011 as compared to the prior year which resulted in the federal and state research and development tax credits having a more pronounced effect on our overall consolidated effective tax rate in the current year.

 

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Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Overview:

The following table sets forth our summarized, consolidated results of operations for the years ended December 31, 2010 and 2009:

 

September 30, September 30, September 30, September 30,
         Year Ended           
         December 31
2010
       December 31
2009
       Increase/
(Decrease)
 
(in $000’s)                        $      %  

Total revenues

     $ 879,509         $ 358,409         $ 521,100         145

Gross profit

       539,263           188,096           351,167         187

Income from operations

       393,324           70,413           322,911         459
    

 

 

      

 

 

      

 

 

    

Income before income taxes

       393,879           70,977           322,902         455

Provision for income taxes

       143,521           21,006           122,515         583
    

 

 

      

 

 

      

 

 

    
       250,358           49,971           200,387         401

Non-controlling interest

       60           90           (30      (33 )% 
    

 

 

      

 

 

      

 

 

    

Net income

     $ 250,418         $ 50,061         $ 200,357         400
    

 

 

      

 

 

      

 

 

    

Net income for the year ended December 31, 2010 was $ 250.4 million, an increase of $ 200.4 million, or 400%, as compared to net income of $ 50.1 million for the year ended December 31, 2009, primarily attributable to significant revenues and gross profit earned from sales of our tamsulosin, authorized generic Adderall XR ® and fenofibrate products. In addition, the year-over-year increase in net income was positively impacted by an adjustment to the accounting for the Teva Agreement of $ 64.2 million, or 26% of net income for the year ended December 31, 2010, partially offset by higher total operating expenses and an increase in the provision for income taxes. For additional information on the accounting afforded the Teva Agreement, see “Item 15. Exhibits and Financial Statement Schedules—Note 11, Alliance and Collaboration Agreements—Strategic Alliance Agreement with Teva.” As discussed throughout this section, we earned significant revenues and gross profit from sales of our tamsulosin, authorized generic Adderall XR ® , and fenofibrate products during the twelve months ended December 31, 2010. With respect to our authorized generic Adderall XR ® products, we are dependent on an unrelated third-party pharmaceutical company to supply us with such products we market and sell through our Global Division. Any delay or interruption in the supply of our authorized generic Adderall XR ® products from our supplier could curtail or delay our product shipments and adversely affect our revenues, as well as jeopardize our relationships with our customers. Any significant diminution of our authorized generic Adderrall XR ® and fenofibrate product sales revenue and/or gross profit due to competition and/or product supply or any other reasons in future periods may materially and adversely affect our results of operations in such periods.

 

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Global Division

The following table sets forth results of operations for the Global Division for the years ended December 31, 2010 and 2009:

 

September 30, September 30, September 30, September 30,
         Year Ended           
         December 31
2010
       December 31
2009
       Increase/
(Decrease)
 
(in $000’s)                        $        %  

Revenues

                   

Global Product sales, net

     $ 624,963         $ 292,604         $ 332,359           114

Rx Partner

       217,277           33,835           183,442           542

OTC Partner

       8,888           6,842           2,046           30

Research Partner

       13,539           11,680           1,859           16
    

 

 

      

 

 

      

 

 

      

Total revenues

       864,667           344,961           519,706           151
    

 

 

      

 

 

      

 

 

      

Cost of revenues

       328,163           158,270           169,893           107
    

 

 

      

 

 

      

 

 

      

Gross profit

       536,504           186,691           349,813           187
    

 

 

      

 

 

      

 

 

      

Operating expenses:

                   

Research and development

       44,311           38,698           5,613           15

Patent litigation

       6,384           5,379           1,005           19

Selling, general and administrative

       15,404           10,891           4,513           41
    

 

 

      

 

 

      

 

 

      

Total operating expenses

       66,099           54,968           11,131           20
    

 

 

      

 

 

      

 

 

      

Income from operations

     $ 470,405         $ 131,723         $ 338,682           257
    

 

 

      

 

 

      

 

 

      

Revenues

Total revenues for the Global Division for the year ended December 31, 2010, were $ 864.7 million, an increase of 151% over the year ended December 31, 2009.

Global Product sales, net, were $ 625.0 million, an increase of 114% over the year ended December 31, 2009 primarily as a result of sales of our tamsulosin, authorized generic Adderall XR ® , and fenofibrate products. Of the $ 332.4 million increase, $ 215.1 million resulted from sales of tamsulosin, our generic version of Flomax ® , a drug used to improve symptoms associated with an enlarged prostate. We commenced sales of our tamsulosin product on March 2, 2010 and had contractual market exclusivity for this generic product for the succeeding eight week period, during which we were able to achieve high market-share penetration. Our tamsulosin product sales, however, have not remained at this level, as additional competing generic versions of the product entered the market in late April 2010, at the conclusion of our contractual exclusivity period, and have resulted in both price erosion and reduction of our market share. We commenced sales of our authorized generic Adderall XR ® products, indicated for the treatment of attention deficit hyperactivity disorder, in October 2009, and thus had only three months of sales of these products in the prior year. 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.

Rx Partner revenues for the year ended December 31, 2010, were $ 217.3 million, an increase of $ 183.4 million over the prior year, primarily attributable to an adjustment to the accounting for the Teva Agreement of $ 196.4 million and partially offset by reduced sales of our generic Wellbutrin ® XL 300mg resulting from increased marketplace competition. For additional information on the accounting afforded the Teva Agreement, see “Item 15. Exhibits and Financial Statement Schedules—Note 11, Alliance and Collaboration Agreements—Strategic Alliance Agreement with Teva.” The adjustment to the accounting for the Teva Agreement represents the recognition of previously deferred revenue which otherwise would have been recognized, under the previous accounting standards, over the remaining life of the Teva Agreement, using the modified proportional performance method.

OTC Partner revenues were $ 8.9 million for the year ended December 31, 2010, an increase of $ 2.0 million over the prior year, primarily attributable to royalty payments received from Merck & Co., Inc. (formerly Schering-Plough Corporation) on sales of Claritin-D ® 12-hour Extended Release Tablets; there were no such royalty payments received in the year ended December 31, 2009.

 

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Research Partner revenues were $ 13.5 million for the year ended December 31, 2010, an increase of $ 1.9 million over the prior year, primarily driven by revenue recognition related to three milestone payments aggregating $ 12.0 million, received at various times during 2009, including $ 5.0 million in May 2009, $ 5.0 million received in September 2009, and $ 2.0 million received in December 2009.

Cost of Revenues

Cost of revenues was $ 328.2 million for the year ended December 31, 2010, an increase of $ 169.9 million over the prior year, of which $ 95.4 million was related to the adjustment to the amortization of deferred manufacturing costs (corresponding to the adjustment to revenue recognition) under the Teva Agreement. The increase in cost of revenues was also related to the higher sales of our tamsulosin, authorized generic Adderall XR ® , and fenofibrate products.

Gross Profit

Gross profit for the year ended December 31, 2010 was $ 536.5 million, or approximately 62% of total revenues, as compared to $ 186.7 million or 54% of total revenue in the prior year primarily attributable to sales of our tamsulosin product, which accounted for $ 193.9 million of the year over year increase, the adjustment in revenue recognition under the Teva Agreement and higher sales of our authorized generic Adderall XR ® and fenofibrate products, as discussed above.

Research and Development Expenses

Total research and development expenses for the year ended December 31, 2010 were $ 44.3 million, an increase of 15%, as compared to the prior year. Generic research and development expense increased $ 5.6 million due to higher spending on bio-equivalency study costs of $ 3.2 million, $ 1.5 million related to higher employee compensation costs, and $ 1.0 million on active pharmaceutical ingredient used for research purposes.

Patent Litigation Expenses

Patent litigation expenses for the years ended December 31, 2010 and 2009 were $ 6.4 million and $ 5.4 million, an increase of $ 1.0 million over the prior year which principally resulted from higher expenses in the year ended December 31, 2010 resulting from increased activity related to existing litigation matters, as well as new litigation matters which began in 2010.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2010 were $ 15.4 million, a 41% increase over the prior year, generally attributable to overall higher sales levels period over period, and including $ 1.3 million of higher marketing expenses, $ 1.1 million in increased product freight charges, $ 0.9 million in higher incentive compensation, $ 1.1 million of post-approval product clinical study costs, for which there was no amount present in the prior year period, and $ 0.65 million related to the separation of an executive level employee.

 

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Impax Division

The following table sets forth results of operations for the Impax Division for the years ended December 31, 2010 and 2009:

 

September 30, September 30, September 30, September 30,
         Year Ended         
         December 31
2010
     December 31
2009
     Increase/ (Decrease)  
(in $000’s)                    $      %  

Promotional Partner revenue

     $ 14,073       $ 13,448       $ 625         5

Research Partner revenue

       769         —           769         nm   
    

 

 

    

 

 

    

 

 

    

Total revenue

       14,842         13,448         1,394         10
    

 

 

    

 

 

    

 

 

    

Cost of revenues

       12,083         12,043         40         0
    

 

 

    

 

 

    

 

 

    

Gross profit

       2,759         1,405         1,354         96
    

 

 

    

 

 

    

 

 

    

Operating expenses:

             

Research and development

       41,912         24,576         17,336         71

Selling, general and administrative

       3,510         3,469         41         1
    

 

 

    

 

 

    

 

 

    

Total operating expenses

       45,422         28,045         17,377         62
    

 

 

    

 

 

    

 

 

    

Loss from operations

     $ (42,663    $ (26,640    $ (16,023      (60 )% 
    

 

 

    

 

 

    

 

 

    

nm-not meaningful

             

Revenues

Total revenues were $ 14.8 million for the year ended December 31, 2010, an increase of 10% compared to the prior year, principally related to the commencement of physician detailing services under our co-promotion agreement with Pfizer Inc. which commenced on July 1, 2009 (these services were initially provided to Wyeth, now a wholly-owned subsidiary of Pfizer, prior to an amendment to the co-promotion agreement). The Promotional Partner revenue earned by us during the first six month of 2009 was earned under the terms of a promotional services agreement with a subsidiary of Shire Laboratories, Inc., which expired on June 30, 2009. In addition, we recognized $ 0.8 million of Research Partner revenue related to a development and co-promotion agreement with Endo Pharmaceuticals, Inc., which was entered into in June 2010, and, accordingly, there were no similar revenues in the prior year.

Cost of Revenues

Cost of revenues was $ 12.1 million for the year ended December 31, 2010, with no individually significant changes from the prior year.

Gross Profit

Gross profit for the year ended December 31, 2010 was $ 2.8 million, an increase of $ 1.4 million over the prior year attributed primarily to the higher Promotional Partner and Research Partner revenues (as described above).

Research and Development Expenses

Total research and development expenses for the year ended December 31, 2010 were $ 41.9 million, an increase of 71%, as compared to $ 24.6 million in the prior year, with the $ 17.3 million increase principally driven by research and development expenses related to our branded product initiatives, including increases of $ 13.9 million for clinical trial studies, $ 1.0 million on employee compensation, $ 0.6 million on active pharmaceutical ingredients used in research related activities, $ 0.5 million on label supplies for IPX066 bottles & kits, $ 0.4 million on outside labor and $ 0.3 million on shipping costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2010 were $ 3.5 million, a 1% increase compared to $ 3.5 million for the prior year with no individually significant changes from 2009.

 

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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 years ended December 31, 2010 and 2009:

 

September 30, September 30, September 30, September 30,
         Year Ended         
         December 31
2010
     December 31
2009
     Increase/
(Decrease)
 
(in $000’s)                    $      %  

Litigation settlement

     $ —         $ 9,318       $ (9,318      (100 )% 

General and administrative expenses

       34,418         25,352         9,066         36
    

 

 

    

 

 

    

 

 

    

Total operating expenses

       34,418         34,670         (252      (1 )% 
    

 

 

    

 

 

    

 

 

    

Loss from operations

       (34,418      (34,670      252         1
    

 

 

    

 

 

    

 

 

    

Other (expense) income, net

       (315      57         (372      (653 )% 

Interest income

       1,037         753         284         38

Interest expense

       (167      (246      79         32

Loss before income taxes

       (33,863      (34,106      243         1

Provision for income taxes

     $ 143,521       $ 21,006       $ 122,515         583

Litigation Settlement

The $ 9.3 million of Litigation settlement expense for the year ended December 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, and accordingly there were no similar amounts in the year ended December 31, 2010.

General and Administrative expenses

General and administrative expenses for the year ended December 31, 2010 were $ 34.4 million, a 36% increase over the prior year, attributable principally to an increase in compensation-related expenses of $ 2.9 million, an increase in legal fees of $ 1.9 million, higher insurance costs related to increasing levels of business activity of $ 1.3 million, and an increase in system implementation and integration expenses of $ 1.6 million. In addition, in the prior year there was a $ 0.7 million reduction in general and administrative expenses related to the August 2009 repayment-in-full of a subordinated promissory note.

Other Income, net

Other (expense) income, net was $ (0.3) million and $ 0.1 million for the years ended December 31, 2010 and 2009, and contained no individually significant items in either year.

Interest Income

Interest income for the year ended December 31, 2010 was $ 1.0 million, a 38% increase as compared to the prior year due primarily due to higher average balances of cash and cash equivalents and short-term investments partially offset by lower overall interest rates.

Interest Expense

Interest expense in the year ended December 31, 2010 declined $ 0.08 million to $ 0.17 million, compared to the prior year due to the absence of interest bearing debt resulting from the repurchase, on the contractual June 15, 2009 prepayment option date, of the $ 12.75 million remaining outstanding balance of our 3.5% convertible senior subordinated debentures, otherwise due in June 2012 (“3.5% Debentures”).

 

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Income Taxes

During the year ended December 31, 2010, we recorded a tax provision of $ 143.5 million for U.S. domestic federal and state income taxes and for income taxes in jurisdictions outside the United States, including approximately $ 12.9 million for an estimated tax provision related to state and local income taxes, net of a federal tax benefit, as applicable. The tax provision for the year ended December 31, 2010 includes approximately $ 2.7 million of the estimated value of the federal research and development tax credit. The tax provision for the year ended December 31, 2009 included approximately $ 2.5 million of the estimated value of the federal research and development tax credit. The tax provision for the year ended December 31, 2010 also includes an estimate of approximately $ 0.3 million related to uncertain tax positions, as compared to the tax provision for the prior year ended December 31, 2009 which included an approximate $ 6.1 net reduction in the accrual for uncertain tax positions, resulting from the completion, in the quarter ended December 31, 2009, of our analyses and documentation of our federal and state research and development tax credits. Also in the year ended December 31, 2009, the tax provision included the reversal of a valuation allowance on the deferred tax asset related to net operating losses at our wholly-owned subsidiary Impax Laboratories (Taiwan), Inc. We reversed the valuation allowance related to these net operating losses as a result of retroactive changes in Taiwan tax law published in the second quarter of 2009. The effective tax rate of 36.4% for the year ended December 31, 2010 was lower than the prior year (adjusted) effective tax rate of 38.2% (which excludes the effect of the uncertain tax position reserve adjustment noted above)—resulting principally from a lower state and local income tax composite statutory rate due to changes in the mix of jurisdictional apportionment, a higher federal domestic manufacturing deduction due to higher sales of our (domestic United States) manufactured products, including our tamsulosin products in the contractual exclusivity period (as discussed above), and a reduced unfavorable impact of the net share-based compensation adjustment due to higher deductible (actual) equity incentive transactions relative to the amount of non-deductible (GAAP) share-based compensation charges, offset slightly by an adjustment to decrease the value of net deferred tax assets resulting from the aforementioned lower state and local income tax composite statutory rate.

 

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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 research and development activities and patent litigation expenses, for the foreseeable future. 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 significant periodic uses 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 planned capital expenditures, our research and development plans, potential acquisitions, and potential revenue shortfalls due to delays in new product introductions or otherwise.

Cash and Cash Equivalents

At December 31, 2011, we had $ 104.4 million in cash and cash equivalents, an increase of $ 12.6 million as compared to December 31, 2010. As more fully discussed below, the increase in cash and cash equivalents during the year ended December 31, 2011 was primarily driven by $ 6.4 million of cash provided by operations and $ 21.3 million received from the exercise of stock options and employee stock purchase plan contributions, while being partially offset by net cash used in investing activities of $ 15.0 million.

Cash Flows

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010.

Net cash provided by operating activities for the year ended December 31, 2011 was $ 6.4 million, a decrease of $ 243.4 million as compared to the prior year $ 249.8 million net cash provided by operating activities. The period-over-period decrease in net cash provided by operating activities principally resulted from higher accounts receivable and inventory, partially offset by higher accounts payable and accrued expenses. The balance of accounts receivable was $ 153.8 million at December 31, 2011, resulting in a $ 71.9 million use of cash for the year ended December 31, 2011, compared to the prior year when accounts receivable resulted in a $ 103.5 million source of cash flows. In addition, higher inventory at December 31, 2011 resulted in a $ 9.6 million use of cash, while lower inventory levels in the prior year were a $ 4.6 million source of cash. These uses of cash were partially offset by an increase of $ 15.9 million in cash flows related to accounts payable and accrued expenses. The decrease in cash provided by accounts receivable for the year ended December 31, 2011 as compared to the prior year period, was primarily the result of lower sales of our tamsulosin products in the current year as described above. The decrease in cash provided by inventory in the current year was primarily the result of higher levels of raw material and finished goods as of December 31, 2011. Accounts payable and accrued expenses resulted in a $ 2.0 million use of cash for the year ended December 31, 2011, which was a $ 15.9 million increase as compared to a $ 17.9 million use of cash in the prior year. The large use of cash in the prior year was primarily the result of higher levels of payments to vendors, due primarily to timing, as well as higher income tax payments. Income tax payments decreased during the year ended December 31, 2011 as a result of lower consolidated income before income taxes primarily as a result of lower sales of our tamsulosin products in the current year period.

Net cash used in investing activities for the year ended December 31, 2011, amounted to $ 15.0 million, a decrease of $ 198.6 million as compared to the prior year period of $ 213.6 million of cash flows used in investing activities. The decrease was due to a year-over-year net increase of $ 212.8 million in maturities of short-term investments, partially offset by $ 14.3 million in higher expenditures on property, plant and equipment. Net maturities of short-term investments during the year ended December 31, 2011 resulted in a $ 15.5 million source of cash, as compared to a $ 197.4 million use of cash from net purchases of short-term investments during the prior year. Purchases of property, plant and equipment for the year ended December 31, 2011 amounted to $ 30.5 million as compared to $ 16.3 million for the prior year. We expect to incur capital expenditures of approximately $ 78.0 million during the 12 months ending December 31, 2012, 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, and the continuing construction of our manufacturing facility in Jhunan, Taiwan, R.O.C.

 

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Net cash provided by financing activities for the year ended December 31, 2011 was $ 21.3 million, representing a decrease of $ 2.6 million as compared to the prior year period $ 23.9 million of net cash provided by financing activities. The period-over-period decrease in net cash provided by financing activities was due to a $ 3.0 million decrease in the cash proceeds received from the exercise of stock options and contributions to the employee stock purchase plan, partially offset by a $ 0.4 million increase in the tax benefit related to the exercise of employee stock options.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009.

Net cash provided by operating activities for the year ended December 31, 2010 was $ 249.8 million, an increase of $ 257.9 million as compared to the prior year $ 8.2 million net cash used in operating activities.

The year-over-year increase in net cash provided by operating activities resulted principally from a higher net income, a decrease in accounts receivable, partially offset by an increase in prepaid expenses and other assets and a decrease in accounts payable and accrued expenses. The decrease in accounts receivable to $ 82.1 million at December 31, 2010, resulted in a $ 103.5 million source of cash, compared to the same period in the prior year when accounts receivable resulted in a $ 142.8 million use of cash flows. The higher level of prepaid and other assets resulted in a $ 12.1 million use of cash in the current year, compared to a $ 2.2 million source of cash in the prior year; while lower accounts payable and accrued expenses resulted in a year-over-year decrease of $ 75.0 million in cash flows. The decreased level of accounts receivable at December 31, 2010 was primarily the result of amounts owed by our customers related to sales from the launch of our authorized generic Adderall XR ® products (launched in October 2009). Cash provided by operating activities during the current year was also positively impacted by sales from the launch of our tamsulosin product in March 2010, of which we commenced sales with a contractual eight week exclusivity period starting on March 2, 2010, during which time we were able to achieve high market-share penetration. Tamsulosin product sales after the contractual exclusivity period noted above did not remain at this level, as additional competing generic versions of the product entered the market in late April 2010 at the conclusion of our contractual exclusivity period. This additional competition has resulted in both price erosion and reduction of our market-share. See “Results of Operations—Year Ended December 31, 2010 Compared to Year Ended December 31, 2009” above for additional discussion on our sales of tamsulosin in the year ended December 31, 2010.

Net cash used by investing activities for the year ended December 31, 2010, amounted to $ 213.6 million, an increase of $ 191.8 million as compared to the $ 21.8 million use of cash flows in investing activities in the prior year, with the change due to a year-over-year $ 190.0 million net increase in the purchase of short-term investments, and $ 2.6 million in higher expenditures on property, plant and equipment. Net purchases of short-term investments during the year ended December 31, 2010 resulted in a $ 197.4 million use of cash flows, as compared to a $ 7.4 million use of cash flows from net purchases of short-term investments during the prior year. Purchases of property, plant and equipment for the year ended December 31, 2010 amounted to $ 16.3 million as compared to $ 13.7 million for the prior year. 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 business.

Net cash provided by financing activities for the year ended December 31, 2010 was approximately $ 23.9 million, representing an increase of $ 31.5 million as compared to the $ 7.6 million of net cash used in financing activities in the prior year. The year-over-year increase in net cash provided by financing activities was primarily due to an increase in cash proceeds received from the exercise of stock options and contributions to our employee stock purchase plan of $ 17.7 million for the year ended December 31, 2010, as compared to $ 5.1 million received in the prior year. In addition, on the contractual June 15, 2009 prepayment option date, at the request of the holders, we repurchased the remaining $ 12.75 million principal amount of our 3.5% Debentures at 100% of face value, plus accrued interest resulting in a net use of cash in financing activities in the prior year, with no corresponding use of cash in the year ended December 31, 2010.

 

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Commitments and Contractual Obligations

Our contractual obligations as of December 31, 2011 were as follows:

 

September 30, September 30, September 30, September 30, September 30,
       Payments Due by Period  

($ in 000s)

     Total        Less
Than 1
Year
       1-3
Years
       3-5
Years
       More
Than 5
Years
 

Contractual Obligations:

                        

Open Purchase Order Commitments

     $ 32,613         $ 31,432         $ 1,181         $
—  
  
     $ —     

Operating Leases(a)

       4,982           1,591           2,763           628           —     

Construction Contracts(b)

       8,267           8,267           —             —             —     

Total(c)

     $ 46,222         $ 41,290         $ 3,944         $ 628         $ —     

 

(a) We lease office, warehouse, and laboratory facilities under non-cancelable operating leases through December 2015. We also lease certain equipment under various non-cancelable operating leases with various expiration dates through December 2016.
(b) Construction contracts are related to ongoing expansion activities at our manufacturing facility in Taiwan.
(c) Liabilities for uncertain tax positions FASB ASC Topic 740, Sub-topic 10, were excluded as we are not able to make a reasonably reliable estimate of the amount and period of related future payments. As of December 31, 2011, we had a $ 1.8 million provision for uncertain tax positions.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2011.

 

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Outstanding Debt Obligations

Senior Lenders; Wells Fargo Bank, N.A.

On February 11, 2011, we entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, N. A., as a lender and as administrative agent (the “Administrative Agent”). The Credit Agreement provides us with a revolving line of credit in the aggregate principal amount of up to $ 50.0 million (the “Revolving Credit Facility”). Under the Revolving Credit Facility, up to $ 10.0 million is available for letters of credit, the outstanding face amounts of which reduce availability under the Revolving Credit Facility on a dollar for dollar basis. Proceeds under the Credit Agreement may be used for working capital, general corporate and other lawful purposes. We have not yet borrowed any amounts under the Revolving Credit Facility.

Borrowings under the Credit Agreement are secured by substantially all of our personal property assets pursuant to a Security Agreement (the “Security Agreement”) entered into by us and the Administrative Agent. As further security, we also pledged to the Administrative Agent, 65% of our equity interest in Impax Laboratories (Taiwan), Inc. and must similarly pledge all or a portion of our equity interest in future subsidiaries. Under the Credit Agreement, among other things:

 

   

The outstanding principal amount of all revolving credit loans, together with accrued and unpaid interest thereon, will be due and payable on the maturity date, which will occur four years following the February 11, 2011 closing date.

 

   

Borrowings under the Revolving Credit Facility will bear interest, at our option, at either an Alternate Base Rate (as defined in the Credit Agreement) plus the applicable margin in effect from time to time ranging from 0.5% to 1.5%, or a LIBOR Rate (as defined in the Credit Agreement) plus the applicable margin in effect from time to time ranging from 1.5% to 2.5%. We are also required to pay an unused commitment fee ranging from 0.25% to 0.45% per annum based on the daily average undrawn portion of the Revolving Credit Facility. The applicable margin described above and the unused commitment fee in effect at any given time will be determined based on the Company’s Total Net Leverage Ratio (as defined in the Credit Agreement), which is based upon our consolidated total debt, net of unrestricted cash in excess of $100 million, compared to Consolidated EBITDA (as defined in the Credit Agreement) for the immediately preceding four quarters.

 

   

We may prepay any outstanding loan under the Revolving Credit Facility without premium or penalty.

 

   

We are required under the Credit Agreement and the Security Agreement to comply with a number of affirmative, negative and financial covenants. Among other things, these covenants (i) require us to provide periodic reports, notices of material events and information regarding collateral, (ii) restrict our ability, subject to certain exceptions and baskets, to incur additional indebtedness, grant liens on assets, undergo fundamental changes, change the nature of its business, make investments, undertake acquisitions, sell assets, make restricted payments (including the ability to pay dividends and repurchase stock) or engage in affiliate transactions, and (iii) require us to maintain a Total Net Leverage Ratio (which is, generally, our total funded debt, net of unrestricted cash in excess of $ 100 million, over our EBITDA for the preceding four quarters) of less than 3.75 to 1.00, a Senior Secured Leverage Ratio (which is, generally, our total senior secured debt over our EBITDA for the preceding four quarters) of less than 2.50 to 1.00 and a Fixed Charge Coverage Ratio (which is, generally, our EBITDA for the preceding four quarters over the sum of cash interest expense, cash tax payments, scheduled funded debt payments and capital expenditures during such four quarter period) of at least 2.00 to 1.00 (with each such ratio as more particularly defined as set forth in the Credit Agreement). As of December 31, 2011, we were in compliance with the various covenants contained in the Credit Agreement and the Security Agreement.

 

   

The Credit Agreement contains customary events of default (subject to customary grace periods, cure rights and materiality thresholds), including, among others, failure to pay principal, interest or fees, violation of covenants, material inaccuracy of representations and warranties, cross-default and cross-acceleration of material indebtedness and other obligations, certain bankruptcy and insolvency events, certain judgments, certain events related to the Employee Retirement Income Security Act of 1974, as amended, and a change of control.

 

   

Following an event of default under the Credit Agreement, the Administrative Agent would be entitled to take various actions, including the acceleration of amounts due under the Credit Agreement and seek other remedies that may be taken by secured creditors.

 

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Effective with the February 11, 2011 execution of the Credit Agreement discussed above, our former credit agreement under the Amended and Restated Loan and Security Agreement, dated as of December 15, 2005, as amended, between us and the Administrative Agent (as successor by merger to Wachovia Bank, National Association), and its corresponding commitments were terminated. There were no amounts outstanding under the former credit agreement as of February 11, 2011. During the years ended December 31, 2011 and 2010, unused line fees incurred under the credit agreements were $ 144,000 and $ 177,000, respectively.

 

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Recent Accounting Pronouncements

In May 2011, the FASB amended its guidance about fair value measurement and disclosure. The new guidance was issued in conjunction with a new International Financial Reporting Standards (“IFRS”) fair value measurement standard aimed at updating IFRS to conform to U.S. GAAP. The new FASB guidance will result in some additional disclosure requirements; however, it does not result in significant modifications to existing FASB guidance with respect to fair value measurement and disclosure. We are required to adopt this guidance on January 1, 2012. We are in the process of evaluating this guidance; however, we do not believe it will have a material effect on our consolidated financial statements upon adoption.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (Topic 220), in order to increase the prominence of items reported in other comprehensive income. The amendments provide an entity with the option to present the components of net income, other comprehensive income and total comprehensive income, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, regardless of which option the entity chooses, the entity is required to present, on the face of the consolidated financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The requirement of this update to present the components of net income, other comprehensive income and total comprehensive income, either in a single continuous statement of comprehensive income or in two separate but consecutive statements is effective for fiscal years beginning after December 15, 2011. In December 2011, the requirement to present reclassification adjustments on the face of the consolidated financial statements was deferred indefinitely. The adoption of this update is not expected to have a material impact on our consolidated financial statements.

In September 2011, the FASB issued its updated guidance for the testing of goodwill for impairment. The update allows us the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing qualitative factors it is determined that it is more likely than not the fair value of the reporting unit is less than its carrying amount, we will need to perform a more detailed goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. The objective of this new approach is to simplify how entities test goodwill for impairment. We are in the process of evaluating this guidance.

In December 2011, the Financial Accounting Standards Board (“FASB”) issued its updated guidance on balance sheet offsetting. This new standard provides guidance to determine when offsetting in the balance sheet is appropriate. The guidance is designed to enhance disclosures by requiring improved information about financial instruments and derivative instruments. The goal is to provide users of the financial statements the ability to evaluate the effect or potential effect of netting arrangements on an entity’s statement of financial position. This guidance will only impact the disclosures within an entity’s financial statements and notes to the financial statements and does not result in a change to the accounting treatment of financial instruments and derivative instruments. We are required to adopt this guidance on January 1, 2013. We are in the process of evaluating this guidance.

 

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Our cash and cash equivalents, and short-term investments include a portfolio of high credit quality securities, including U.S. government securities, treasury bills, short-term commercial paper, and highly-rated money market funds. Our entire portfolio matures in less than one year. The carrying value of the portfolio approximates the market value at December 31, 2011.

Our portfolio is subject to interest rate risk. Based on the average duration of our investments as of December 31, 2011 and 2010, an increase of one percentage point in interest rates would have resulted in increases in interest income of approximately $ 2.2 million and $ 1.6 million.

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. We limit our credit risk associated with cash and cash equivalents and short-term investments by placing investments with high credit quality securities, including U.S. government securities, treasury bills, corporate debt, short-term commercial paper and highly-rated money market funds. We limit our credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary. We do not require collateral to secure amounts owed to us by our customers.

We had no debt outstanding as of December 31, 2011. Our only remaining debt instrument at December 31, 2011 was the Wells Fargo revolving credit facility, which would be subject to variable interest rates and principal payments should we decide to borrow against it.

We do not use derivative financial instruments and have no material foreign currency exchange exposure, or commodity price risks. See “Item 15. Exhibits and Financial Statement Schedules—Note 16. Segment Information” for more information regarding the value of our investment in Impax Laboratories (Taiwan), Inc.

 

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements and schedule listed in the Index to Financial Statements beginning on page F-1 are filed as part of this Annual Report on Form 10-K and incorporated by reference herein.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On February 28, 2011, we dismissed Grant Thornton LLP (“GT”) and engaged KPMG LLP as our independent registered accounting public accounting firm effective on such date. The reports of GT on our consolidated financial statements as of and for the years ended December 31, 2010 and 2009, did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

During our fiscal years ended December 31, 2009 and December 31, 2010, and through February 28, 2011, there were no disagreements between us and GT on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure that, if not resolved to GT’s satisfaction, would have caused it to make reference to the matter in conjunction with its reports on our consolidated financial statements for the relevant year and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

 

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Item 9A. 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) designed to ensure information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, were effective at the reasonable assurance level as of December 31, 2011.

Management Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles used in the United States (GAAP). Internal control over financial reporting includes those policies and procedures which (i) pertain to the maintenance of records, in reasonable detail, to accurately and fairly record the transactions and dispositions of our assets; (ii) provide reasonable assurance transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets which could have a material effect on the financial statements. Internal control over financial reporting includes the controls themselves, monitoring of those controls, internal audit practices, and actions taken to correct deficiencies as identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of internal control over financial reporting effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011, the end of our fiscal year, and has reviewed the results of this assessment with the Audit Committee of our Board of Directors. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on the assessment, management has concluded our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. The effectiveness of our internal control over financial reporting as of December 31, 2011, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included immediately below.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Impax Laboratories, Inc.

We have audited Impax Laboratories, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Impax Laboratories, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Impax Laboratories, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Impax Laboratories, Inc. and subsidiaries as of December 31, 2011, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for the year ended December 31, 2011, and our report dated February 28, 2012, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Philadelphia, Pennsylvania

February 28, 2012

 

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Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2011, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) which materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 9B. Other Information

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

Code of Ethics

We have adopted a Code of Business Conduct and Ethics (“Code of Ethics”) that applies to all of our directors and employees, including our Chief Executive Officer, Chief Financial Officer and any other accounting officer, controller or persons performing similar functions. The Code of Ethics is available on our website (www.impaxlabs.com) and accessible via the “Investor Relations” page. Any amendments to, or waivers of, the Code of Ethics will be disclosed on our website within four business days following the date of such amendment or waiver.

Additional information required by this item is incorporated by reference to our definitive proxy statement for the Annual Meeting of Stockholders to be held on May 22, 2012 (“Proxy Statement”).

 

Item 11. Executive Compensation

The information required by this item is incorporated by reference to the Proxy Statement.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated by reference to the Proxy Statement, except information concerning the equity compensation plans table which is set forth in “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” and which is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated by reference to the Proxy Statement.

 

Item 14. Principal Accounting Fees and Services

The information required by this item is incorporated by reference to the Proxy Statement.

 

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PART IV

 

Item 15. Exhibits and Financial Statement Schedules

(a)(1) Consolidated Financial Statements

The consolidated financial statements listed in the Index to Financial Statements beginning on page F-1 are filed as part of this Annual Report on Form 10-K.

(a)(2) Financial Statement Schedules

The financial statement schedule listed in the Index to Financial Statements on page F-1 is filed as part of this Annual Report on Form 10-K.

(a)(2) Exhibits

 

Exhibit No.

  

Description of Document

3.1.1    Restated Certificate of Incorporation, dated August 30, 2004.(1)
3.1.2    Certificate of Designation of Series A Junior Participating Preferred Stock, as filed with the Secretary of State of Delaware on January 21, 2009.(2)
3.2    Amended and Restated Bylaws, effective June 29, 2009.(3)
4.1    Specimen of Common Stock Certificate.(4)
4.2    Registration Rights Agreement, dated as of June 27, 2005, between the Company and the Initial Purchasers named therein.(4)
4.3    Preferred Stock Rights Agreement, dated as of January 20, 2009, by and between the Company and StockTrans, Inc., as Rights Agent.(2)
10.1.1    Amended and Restated Loan and Security Agreement, dated as of December 15, 2005, between the Company and Wachovia Bank, National Association.(4)
10.1.2    First Amendment, dated October 14, 2008, to Amended and Restated Loan and Security Agreement, dated December 15, 2005, between the Company and Wachovia Bank, National Association.(5)
10.1.3    Second Amendment to Amended and Restated Loan and Security Agreement, effective as of December 31, 2008, by and among the Company and Wachovia Bank, National Association.(6)
10.1.4    Third Amendment to Amended and Restated Loan and Security Agreement, effective as of March 31, 2009, by and among the Company and Wachovia Bank, National Association.(7)
10.1.5    Fourth Amendment to Amended and Restated Loan and Security Agreement, effective as of March 12, 2010, by and among the Company and Wachovia Bank, National Association, a Wells Fargo Company.(8)
10.1.6    Fifth Amendment to Amended and Restated Loan and Security Agreement, effective as of June 30, 2010, by and among the Company and Wells Fargo Bank, National Association, successor by merger to Wachovia Bank, National Association.(9)
10.1.7    Sixth Amendment to Amended and Restated Loan and Security Agreement, effective as of September 30, 2010, by and among the Company and Wells Fargo Bank, National Association, successor by merger to Wachovia Bank, National Association.(10)
10.1.8    Seventh Amendment to Amended and Restated Loan and Security Agreement, effective as of January 31, 2011, by and among the Company and Wells Fargo Bank, National Association, successor by merger to Wachovia Bank, National Association.(11)

 

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Exhibit No.

  

Description of Document

10.2    Credit Agreement, dated as of February 11, 2011, by and among the Company, the Guarantors named therein, the Lenders named therein and Wells Fargo Bank, National Association, as Administrative Agent.**(12)
10.3    Security Agreement, dated as of February 11, 2011, by and among the Company, the Guarantors named therein, the Lenders named therein and Wells Fargo Bank, National Association, as Administrative Agent. (12)
10.4.1    Impax Laboratories Inc. 1999 Equity Incentive Plan.*(6)
10.4.2    Form of Stock Option Grant under the Impax Laboratories, Inc. 1999 Equity Incentive Plan.*(6)
10.5    Impax Laboratories Inc. 2001 Non-Qualified Employee Stock Purchase Plan.*(4)
10.6.1    Impax Laboratories Inc. Amended and Restated 2002 Equity Incentive Plan.*(13)
10.6.2    Form of Stock Option Grant under the Impax Laboratories, Inc. Amended and Restated 2002 Equity Incentive Plan.*(6)
10.6.3    Form of Stock Bonus Agreement under the Impax Laboratories, Inc. Amended and Restated 2002 Equity Incentive Plan.*(6)
10.7.1    Impax Laboratories Inc. Executive Non-Qualified Deferred Compensation Plan, amended and restated effective January 1, 2008.*(8)
10.7.2    Amendment to Impax Laboratories Inc. Executive Non-Qualified Deferred Compensation Plan, effective as of January 1, 2009.* (8)
10.8.    Employment Agreement, dated as of January 1, 2010, between the Company and Larry Hsu, Ph.D.*(14)
10.9.1    Employment Agreement, dated as of January 1, 2010, between the Company and Charles V. Hildenbrand.*(14)
10.9.2    Confidential Separation and Release Agreement dated as of July 5, 2011, between the Company and Charles V. Hildenbrand.*(15)
10.10    Employment Agreement, dated as of January 1, 2010, between the Company and Arthur A. Koch, Jr.*(14)
10.11    Employment Agreement, dated as of January 1, 2010, between the Company and Michael J. Nestor.*(14)
10.12.1    Offer of Employment Letter, effective as of January 5, 2009, between the Company and Christopher Mengler.*(6)
10.12.2    Employment Agreement, dated as of January 1, 2010, between the Company and Christopher Mengler, R.Ph.*(14)
10.12.3    Separation Agreement and General Release, dated October 19, 2010, by and between the Company and Christopher Mengler, R.Ph.*(16)
10.13.1    Offer of Employment Letter, dated as of March 17, 2011, between the Company and Mark A. Schlossberg.*
10.13.2    Employment Agreement, dated as of May 2, 2011 between the Company and Mark A. Schlossberg.*

 

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Exhibit No.

  

Description of Document

10.14.1    Offer of Employment Letter, dated as of August 18, 2011, between the Company and Carole Ben-Maimon.*(17)
10.14.2    Employment Agreement, dated as of November 7, 2011, between the Company and Carole-Ben-Maimon.*(18)
10.15.1    License and Distribution Agreement, dated as of January 19, 2006, between the Company and Shire LLC.**(19)
10.15.2    Amendment dated as of March 1, 2010 to the License and Distribution Agreement, dated as of January 19, 2006, between the Company and Shire LLC.
10.16.1    Joint Development Agreement, dated as of November 26, 2008, between the Company and Medicis Pharmaceutical Corporation.**(12)
10.16.2    First Amendment dated as of January 26, 2011 to the Joint Development Agreement, dated as of November 26, 2008, between the Company and Medicis Pharmaceutical Corporation.
10.17.1    License, Development and Commercialization Agreement, dated as of December 15, 2010, by and between the Company and Glaxo Group Limited.**(11)
10.17.2    First Amendment dated as of December 23, 2011 to the License, Development and Commercialization Agreement, dated as of December 15, 2010, by and between the Company and Glaxo Group Limited.***
10.18    Supply Agreement, dated as of December 15, 2010, by and between the Company and Glaxo Group Limited.**(11)
10.19    Distribution, License, Development and Supply Agreement, dated as of January 31, 2012, by and between the Company and AstraZeneca UK Limited.***(20)
11.1    Statement re computation of per share earnings (incorporated by reference to Note 15 to the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K).
21.1    Subsidiaries of the registrant.
23.1    Consent of Grant Thornton LLP.
23.2    Consent of KPMG LLP.
31.1    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certifications of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certifications 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.
101    The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2011 and 2010, (ii) Consolidated Statements of Operations for each of the three years in the period ended December 31, 2011, (iii) Consolidated Statements of Changes in Stockholders’ Equity (Deficit) and Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2011, (iv) Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2011 and (v) Notes to Consolidated Financial Statements for each of the three years in the period ended December 31, 2011.

 

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* Management contract, compensatory plan or arrangement.
** Confidential treatment granted for certain portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which portions are omitted and filed separately with the SEC.
*** Confidential treatment requested for certain portions of this exhibit pursuant to Rule 24b-2 under the Exchange Act, which portions are omitted and filed separately with the SEC.
   

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under those sections.

(1) Incorporated by reference to Amendment No. 5 to the Company’s Registration Statement on Form 10 filed on December 23, 2008.
(2) Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 22, 2009.
(3) Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2009.
(4) Incorporated by reference to the Company’s Registration Statement on Form 10 filed on October 10, 2008.
(5) Incorporated by reference to Amendment No. 2 to the Company’s Registration Statement on Form 10 filed on December 2, 2008.
(6) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
(7) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.
(8) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.
(9) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.
(10) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.
(11) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
(12) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.
(13) Incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed on April 14, 2010.
(14) Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 14, 2010.
(15) Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 11, 2011.
(16) Incorporated by reference to the Company’s Current Report on Form 8-K filed on October 22, 2010.
(17) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.
(18) Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 9, 2011.
(19) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
(20) Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 6, 2012.

 

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Impax Laboratories, Inc.

INDEX TO FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm(s)

     F-2   

Consolidated Balance Sheets as of December 31, 2011 and 2010

     F-4   

Consolidated Statements of Operations for each of the three years in the period ended December  31, 2011

     F-5   

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) and Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2011

     F-6   

Consolidated Statements of Cash Flows for each of the three years in the period ended December  31, 2011

     F-7   

Notes to Consolidated Financial Statements for each of the three years in the period ended December  31, 2011

     F-9   

Schedule II, Valuation and Qualifying Accounts

     S-1   

 

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Table of Contents

Impax Laboratories, Inc.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Impax Laboratories, Inc.

We have audited the accompanying consolidated balance sheet of Impax Laboratories, Inc. and subsidiaries as of December 31, 2011, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for the year ended December 31, 2011. In connection with our audit of the consolidated financial statements, we have also audited the related financial statement schedule. These consolidated financial statements and the related financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Impax Laboratories, Inc. and subsidiaries as of December 31, 2011, and the results of their operations and their cash flows for the year ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Impax Laboratories, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Philadelphia, Pennsylvania

February 28, 2012

 

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Table of Contents

Impax Laboratories, Inc.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Impax Laboratories, Inc.

We have audited the accompanying consolidated balance sheets of Impax Laboratories, Inc. (a Delaware corporation) and Subsidiaries (the “Company”) as of December 31, 2010, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income, and cash flows for each of the two years in the period ended December 31, 2010. Our audits of the basic consolidated financial statements included the financial statement schedule, listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Impax Laboratories, Inc. and Subsidiaries as of December 31, 2010, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Notes 2 and 11 to the consolidated financial statements, the Company has adopted the new accounting guidance related to revenue recognition for multiple-element arrangements.

/s/ Grant Thornton LLP

Philadelphia, Pennsylvania

February 25, 2011

 

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Table of Contents

IMPAX LABORATORIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

September 30, September 30,
         December 31,
2011
     December 31,
2010
 

ASSETS

       

Current assets:

       

Cash and cash equivalents

     $ 104,419       $ 91,796   

Short-term investments

       241,995         256,605   

Accounts receivable, net

       153,773         82,054   

Inventory, net

       54,177         44,549   

Deferred product manufacturing costs

       1,413         2,012   

Deferred income taxes

       37,853         39,271   

Prepaid expenses and other current assets

       6,305         4,407   
    

 

 

    

 

 

 

Total current assets

       599,935         520,694   
    

 

 

    

 

 

 

Property, plant and equipment, net

       118,158         106,280   

Deferred product manufacturing costs

       7,433         8,223   

Other assets

       40,759         30,547   

Goodwill

       27,574         27,574   
    

 

 

    

 

 

 

Total assets

     $ 793,859       $ 693,318   
    

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

       

Current liabilities

       

Accounts payable

     $ 22,955       $ 18,812   

Accrued expenses

       70,116         75,181   

Accrued profit sharing and royalty expenses

       40,766         14,147   

Deferred revenue

       23,024         18,276   
    

 

 

    

 

 

 

Total current liabilities

       156,861         126,416   
    

 

 

    

 

 

 

Deferred revenue

       17,131         44,195   

Other liabilities

       16,861         14,558   
    

 

 

    

 

 

 

Total liabilities

     $ 190,853       $ 185,169   
    

 

 

    

 

 

 

Commitments and contingencies (Notes 17 and 18)

       

Stockholders’ equity:

       

Preferred Stock, $ 0.01 par value, 2,000,000 shares authorized, no shares outstanding at December 31, 2011 and 2010

     $ —         $ —     

Common stock, $ 0.01 par value, 90,000,000 shares authorized and 66,748,336 and 64,721,041 shares issued at December 31, 2011 and 2010, respectively

       667         647   

Additional paid-in capital

       285,966         255,440   

Treasury stock—243,729 shares

       (2,157      (2,157

Accumulated other comprehensive income

       1,724         2,811   

Retained earnings

       316,741         251,246   
    

 

 

    

 

 

 
       602,941         507,987   

Noncontrolling interest

       65         162   
    

 

 

    

 

 

 

Total stockholders’ equity

       603,006         508,149   
    

 

 

    

 

 

 

Total liabilities and stockholders’ equity

     $ 793,859       $ 693,318   
    

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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IMPAX LABORATORIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except share and per share data)

 

September 30, September 30, September 30,
         Years Ended December 31  
       2011      2010      2009  

Revenues:

          

Global Product sales, net

     $ 443,818       $ 624,963       $ 292,604   

Rx Partner

       32,083         217,277         33,835   

OTC Partner

       5,021         8,888         6,842   

Research Partner

       17,857         14,308         11,680   

Promotional Partner

       14,140         14,073         13,448   
    

 

 

    

 

 

    

 

 

 

Total revenues

       512,919         879,509         358,409   
    

 

 

    

 

 

    

 

 

 

Cost of revenues

       254,624         340,246         170,313   
    

 

 

    

 

 

    

 

 

 

Gross profit

       258,295         539,263         188,096   
    

 

 

    

 

 

    

 

 

 

Operating expenses:

          

Research and development

       82,701         86,223         63,274   

Patent litigation

       7,506         6,384         5,379   

Litigation settlement

       —           —           9,318   

Selling, general and administrative

       68,477         53,332         39,712   
    

 

 

    

 

 

    

 

 

 

Total operating expenses

       158,684         145,939         117,683   
    

 

 

    

 

 

    

 

 

 

Income from operations

       99,611         393,324         70,413   
    

 

 

    

 

 

    

 

 

 

Other (expense) income, net

       (2,589      (315      57   

Interest income

       1,149         1,037         753   

Interest expense

       (157      (167      (246
    

 

 

    

 

 

    

 

 

 

Income before income taxes

       98,014         393,879         70,977   

Provision for income taxes

       32,616         143,521         21,006   
    

 

 

    

 

 

    

 

 

 

Net income before noncontrolling interest

       65,398         250,358         49,971   

Add back loss attributable to noncontrolling interest

       97         60         90   
    

 

 

    

 

 

    

 

 

 

Net income

     $ 65,495       $ 250,418       $ 50,061   
    

 

 

    

 

 

    

 

 

 

Net Income per share:

          

Basic

     $ 1.02       $ 4.04       $ 0.83   
    

 

 

    

 

 

    

 

 

 

Diluted

     $ 0.97       $ 3.82       $ 0.82   
    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding:

          

Basic

       64,126,855         62,037,908         60,279,602   
    

 

 

    

 

 

    

 

 

 

Diluted

       67,319,989         65,565,132         61,080,184   
    

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

IMPAX LABORATORIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2011

(amounts in thousands)

 

September 30, September 30, September 30, September 30, September 30, September 30, September 30, September 30,

Stockholders’ Equity

   Common Stock      Additional
Paid-In
     Treasury    

Retained

Earnings/
(Accumulated

   

Accumulated

Other
Comprehensive

    Noncontrolling        
   Shares      Par Value      Capital      Stock     Deficit)     Income (loss)     Interest     Total  

Balance at December 31, 2008

     59,892       $ 602       $ 211,128       $ (2,157   $ (49,233   $ (995   $ 305      $ 159,650   

2009

                   

Exercise of stock options issuance of restricted stock and sale of common stock under ESPP

     2,074         20         4,507                 4,527   

Share-based compensation expense

           7,391                 7,391   

Tax benefit related to exercise of stock options and restricted stock

           213                 213   

Currency translation adjustments

                  471          471   

Net income

                50,061            50,061   

Other

                    (86     (86
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009

     61,966         622         223,239         (2,157     828        (524     219        222,227   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2010

                   

Exercise of stock options issuance of restricted stock and sale of common stock under ESPP

     2,495         25         15,004                 15,029   

Share-based compensation expense

           10,693                 10,693   

Issuance of common stock in settlement of royalty obligation

     16         —           332                 332   

Tax benefit related to exercise of stock options and restricted stock

           6,172                 6,172   

Currency translation adjustments

                  3,335          3,335   

Net income

                250,418            250,418   

Other

                    (57     (57
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     64,477         647         255,440         (2,157     251,246        2,811        162        508,149   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2011

                   

Exercise of stock options issuance of restricted stock and sale of common stock under ESPP

     2,027         20         11,306                 11,326   

Share-based compensation expense

           12,685                 12,685   

Tax benefit related to exercise of stock options and restricted stock

           6,535                 6,535   

Currency translation adjustments

                  (1,087       (1,087

Net income

                65,495            65,495   

Other

                    (97     (97
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     66,504       $ 667       $ 285,966       $ (2,157   $ 316,741      $ 1,724      $ 65      $ 603,006   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

September 30, September 30, September 30,

Comprehensive Income

     Years Ended December 31,  
       2011      2010        2009  

Net income

     $ 65,495       $ 250,418         $ 50,061   

Currency translation adjustments

       (1,087      3,335           471   
    

 

 

    

 

 

      

 

 

 

Comprehensive income

     $ 64,408       $ 253,753         $ 50,532   
    

 

 

    

 

 

      

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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IMPAX LABORATORIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

September 30, September 30, September 30,
         Years Ended December 31,  
       2011      2010      2009  

Cash flows from operating activities:

          

Net income

     $ 65,495       $ 250,418       $ 50,061   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

          

Depreciation and amortization

       15,682         12,649         11,266   

Amortization of Credit Agreement deferred financing costs

       28         25         75   

Amortization of 3.5% Debentures discount and deferred financing costs

       —           —           307   

Deferred income taxes (benefit)

       13,463         42,662         (10,379

Tax benefit related to the exercise of employee stock options and restricted stock

       (6,535      (6,172      (213

Change in accrual for uncertain tax positions

       178         280         (6,308

Deferred revenue

       2,568         35,704         49,255   

Deferred product manufacturing costs

       (1,721      (10,640      (26,018

Recognition of deferred revenue

       (25,579      (230,951      (52,357

Amortization deferred product manufacturing costs

       3,111         108,648         24,497   

Accrued profit sharing and royalty expense

       107,760         101,247         53,912   

Profit sharing and royalty payments

       (81,145      (140,794      (469

Share-based compensation expense

       12,685         10,714         7,391   

Accretion of interest income on short-term investments

       (870      (638      (519

Bad debt expense

       163         277         229   

Payments on accrued litigation settlements

       —           (5,865      (11,495

Payments on exclusivity period fee

       —           —           (6,000

Accrued litigation settlement expense

       —           —           5,865   

Changes in assets and liabilities:

          

Accounts receivable

       (71,882      103,523         (142,777

Inventory

       (9,628      4,581         (16,825

Prepaid expenses and other assets

       (17,627      (12,092      2,179   

Accounts payable and accrued expenses

       (2,042      (17,896      57,059   

Other liabilities

       2,254         4,081         3,107   
    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) operating activities

       6,358         249,761         (8,157
    

 

 

    

 

 

    

 

 

 

Cash flows from investing activities:

          

Purchase of short-term investments

       (359,646      (403,086      (66,626

Maturities of short-term investments

       375,126         205,718         59,256   

Purchases of property, plant and equipment

       (30,524      (16,267      (13,667

Acquisition of ANDA intellectual property rights

       —           —           (750
    

 

 

    

 

 

    

 

 

 

Net cash used in investing activities

       (15,044      (213,635      (21,787
    

 

 

    

 

 

    

 

 

 

Cash flows from financing activities:

          

Proceeds from exercise of stock options and ESPP

       14,774         17,728         5,113   

Tax benefit related to the exercise of employee stock options and restricted stock

       6,535         6,172         213   

Repayment of long-term debt

       —           —           (12,887
    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) financing activities

       21,309         23,900         (7,561
    

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

       12,623         60,026         (37,505
    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, beginning of year

       91,796         31,770         69,275   
    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, end of year

     $ 104,419       $ 91,796       $ 31,770   
    

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

Supplemental disclosure of non-cash investing and financing activities:

 

September 30, September 30, September 30,
         Years Ended December 31,  
(in $000s)      2011        2010        2009  

Cash paid for interest

     $ 166         $ 167         $ 622   
    

 

 

      

 

 

      

 

 

 

Cash paid for income taxes

     $ 24,421         $ 129,763         $ 415   
    

 

 

      

 

 

      

 

 

 

Unpaid vendor invoices of approximately $ 795,000, $ 3,119,000 and $ 4,730,000 which were accrued as of December 31, 2011, 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 consolidated financial statements.

 

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Table of Contents

IMPAX LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2011, 2010, 2009

1. THE COMPANY

Impax Laboratories, Inc. (“Impax” or “Company”) is a technology-based, specialty pharmaceutical company. The Company has two reportable segments, referred to as the “Global Pharmaceuticals Division”, (“Global Division”) and the “Impax Pharmaceuticals Division”, (“Impax Division”).

The Global Division develops, manufactures, sells, and distributes generic pharmaceutical products primarily through four sales channels: the “Global products” sales channel, for generic pharmaceutical prescription products the Company sells directly to wholesalers, large retail drug chains, and others; the “Private Label” sales channel, for generic pharmaceutical over-the-counter (“OTC”) and prescription products the Company sells 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 Company also generates revenue from research and development services provided under a joint development agreement with an 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 the Global Division.

The Company’s Impax Division is engaged in the development of proprietary brand pharmaceutical products through improvements to already approved pharmaceutical products to address central nervous system (“CNS”) disorders. The Impax Division is also engaged in the co-promotion through a direct sales force focused on marketing to physicians, primarily in the CNS community, pharmaceutical products developed by other unrelated third-party pharmaceutical entities.

In California, the Company utilizes a combination of owned and leased facilities mainly located in Hayward. The Company’s primary properties in California consist of a leased office building used as the Company’s corporate headquarters, in addition to five properties it owns, including two research and development center facilities, and a manufacturing facility. Additionally, the Company leases three facilities in Hayward, and Fremont, utilized for additional research and development, administrative services, and equipment storage. In Pennsylvania, the Company owns a packaging, warehousing, and distribution center located in Philadelphia, and leases a facility in New Britain used for sales and marketing, finance, and administrative personnel, as well as providing additional warehouse space. Outside the Unites States, in Taiwan, the Company owns a manufacturing facility.

 

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Table of Contents

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the U.S. Securities & Exchange Commission (SEC) requires the use of estimates and assumptions, based on complex judgments considered reasonable, affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the 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 related to equity incentive awards issued to employees and directors, and estimates used in applying the Company’s 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 product manufacturing costs related to 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.

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of the operating parent company, Impax Laboratories, Inc., its wholly owned subsidiary, Impax Laboratories (Taiwan) Inc., and an equity investment in Prohealth Biotech, Inc. (“Prohealth”), in which the Company held a 57.54% majority ownership interest at December 31, 2011. All significant intercompany accounts and transactions have been eliminated.

Cash and Cash Equivalents

The Company considers all short-term investments with maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which, for cash equivalents, approximates fair value due to their short-term maturity. The Company is potentially subject to financial instrument concentration of credit risk through its cash and cash equivalents. The Company maintains cash and cash equivalents with several major financial institutions. Such amounts frequently exceed Federal Deposit Insurance Corporation (“FDIC”) limits.

Short-Term Investments

Short-term investments represent investments in fixed rate financial instruments with maturities of greater than three months but less than 12 months at the time of purchase. The Company’s short-term investments are held in U.S. Treasury securities, corporate bonds, and high grade commercial paper, which are not insured by the FDIC. They are stated at amortized cost, which approximates fair value due to their short-term maturity, generally based upon observable market values of similar securities.

Fair Value of Financial Instruments

The Company’s deferred compensation liability is carried at the value of the amount owed to participants, and is derived from observable market data by reference to hypothetical investments. The carrying values of other financial assets and liabilities such as accounts receivable, accounts payable and accrued expenses approximate their fair values due to their short-term nature.

 

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Table of Contents

Contingencies

In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, covering a wide range of matters, including, among others, patent litigation, shareholder lawsuits, and product liability. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification TM (“ASC”) Topic 450, “Contingencies”, the Company records accruals for such 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. The Company records an accrual for legal costs in the period incurred. A discussion of contingencies is included in the “Commitments and Contingencies,” and “Legal and Regulatory Matters” footnotes below.

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from amounts deemed to be uncollectible from its customers; these allowances are for specific amounts on certain accounts based on facts and circumstances determined on a case-by-case basis.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, cash equivalents, short-term investments, and accounts receivable. The Company limits its credit risk associated with cash, cash equivalents and short-term investments by placing its investments with high quality money market funds, corporate debt, and short-term commercial paper and in securities backed by the U.S. Government. The Company limits its credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary. The Company does not require collateral to secure amounts owed to it by its customers.

The following tables present the percentage of total accounts receivable and gross revenues represented by the Company’s five largest customers as of and for the years ended December 31, 2011, 2010 and 2009:

 

September 30, September 30, September 30,

Percent of Total Accounts Receivable

     2011     2010     2009  

Customer #1

       30.4     15.0     43.8

Customer #2

       25.7     28.3     19.9

Customer #3

       12.9     18.4     18.7

Customer #4

       8.6     13.5     3.6

Customer #5

       —       2.9     2.7

Customer #6

       2.5     —       —  
    

 

 

   

 

 

   

 

 

 

Total Five largest customers

       80.1     78.1     88.7
    

 

 

   

 

 

   

 

 

 

 

September 30, September 30, September 30,

Percent of Gross Revenues

     2011     2010     2009  

Customer #1

       19.6     14.1     26.5

Customer #2

       19.4     14.2     15.3

Customer #3

       15.9     19.9     22.2

Customer #4

       12.4     6.5     3.9

Customer #5

       —       —       —  

Customer #6

       —       —       —  

Customer #7

       —       —       5.7

Customer #8

       2.4     3.4     —  
    

 

 

   

 

 

   

 

 

 

Total Five largest customers

       69.7     58.1     73.6
    

 

 

   

 

 

   

 

 

 

During the years ended December 31, 2011, 2010 and 2009, the Company’s top ten products accounted for 76%, 83% and 70%, respectively, of Global Product sales, net.

 

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Inventory

Inventory is stated at the lower of cost or market. Cost is determined using a standard cost method, and the cost flow assumption is first in, first out (“FIFO”) flow of goods. Standard costs are revised annually, and significant variances between actual costs and standard costs are apportioned to inventory and cost of goods sold based upon inventory turnover. Costs include materials, labor, quality control, and production overhead. Inventory is adjusted for short-dated, unmarketable inventory equal to the difference between the cost of inventory and the estimated value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Consistent with industry practice, the Company may build pre-launch inventories of certain products which are pending required FDA approval and/or resolution of patent infringement litigation, when, in the Company’s assessment, such action is appropriate to increase the commercial opportunity and FDA approval is expected in the near term and/or the litigation will be resolved in the Company’s favor. The Company accounts for all costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) as a current period charge in accordance with GAAP.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred and costs of improvements and renewals are capitalized. Costs incurred in connection with the construction or major renovation of facilities, including interest directly related to such projects, are capitalized as construction in progress. Depreciation is recognized using the straight-line method based on the estimated useful lives of the related assets, which are 40 years for buildings, 15 years for building improvements, 7 to 10 years for equipment, and 3 to 7 years for office furniture and equipment. Land and construction-in-progress are not depreciated.

Goodwill

In accordance with FASB ASC Topic 350, “Goodwill and Other Intangibles”, rather than recording periodic amortization, goodwill is subject to an annual assessment for impairment by applying a fair value based test. Under FASB ASC Topic 350, if the fair value of the reporting unit exceeds the reporting unit’s carrying value, including goodwill, then goodwill is considered not impaired, making further analysis not required. The Company considers the Global Division and the Impax Division operating segments to each be a reporting unit. The Company attributes the entire carrying amount of goodwill to the Global Division.

The Company concluded the carrying value of goodwill was not impaired as of December 31, 2011 and 2010 as the fair value of the Global Division exceeded its carrying value at each date. The Company performs its annual goodwill impairment test in the fourth quarter of each year. The Company estimated the fair value of the Global Division using a discounted cash flow model for both the reporting unit and the enterprise. In addition, on a quarterly basis, the Company performs a review of its business operations to determine whether events or changes in circumstances have occurred which could have a material adverse effect on the estimated fair value of the reporting unit, and thus indicate a potential impairment of the goodwill carrying value. If such events or changes in circumstances were deemed to have occurred, the Company would perform an interim impairment analysis, which may include the preparation of a discounted cash flow model, or consultation with one or more valuation specialists, to determine the impact, if any, on the Company’s assessment of the reporting unit’s fair value. The Company has not to date deemed there to have been any significant adverse changes in the legal, regulatory, or general economic environment in which the Company conducts its business operations.

 

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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, there is persuasive evidence a revenue arrangement exists, delivery of goods or services has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.

The Company accounts for revenue arrangements with multiple deliverables in accordance with FASB ASC Topic 605-25, revenue recognition for arrangements with multiple elements, which addresses the determination of whether an arrangement involving multiple deliverables contains more than one unit of accounting. A delivered item within an arrangement is considered a separate unit of accounting only if both of the following criteria are met:

 

   

the delivered item has value to the customer on a stand-alone basis; and

 

   

if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor.

Under FASB ASC Topic 605-25, if both of the criteria above are not met, then separate accounting for the individual deliverables is not appropriate. Revenue recognition for arrangements with multiple deliverables constituting a single unit of accounting is recognized 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 modified proportional performance method.

The Company accounts for milestones related to research and development activities in accordance with FASB ASC Topic 605-28, milestone method of revenue recognition. FASB ASC Topic 605-28 allows for the recognition of consideration, which is contingent on the achievement of a substantive milestone, in its entirety in the period the milestone is achieved. A milestone is considered to be substantive if all of the following criteria are met:, including the milestone is commensurate with either: (1) the performance required to achieve the milestone, or (2) the enhancement of the value of the delivered items resulting from the performance required to achieve the milestone; the milestone relates solely to past performance; and, the milestone payment is reasonable relative to all of the deliverables and payment terms within the agreement.

 

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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 Company’s customers, primarily drug wholesalers and retail chains. Gross sales revenue is recognized at the time title and risk of loss passes to the customer, which is 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 Company has agreements establishing contract prices for certain products with certain indirect customers, such as managed care organizations, hospitals and government agencies who purchase products from drug wholesalers. The contract prices are lower than the prices the customer would otherwise pay to the wholesaler, and the price difference is referred to as a chargeback, which generally takes the form of a credit memo issued by the Company to reduce the invoiced gross selling price charged to the wholesaler. An estimated accrued provision for chargeback deductions is recognized at the time of product shipment. The primary factors considered when estimating the provision for chargebacks are the average historical chargeback credits given, the mix of products shipped, and the amount of inventory on hand at the major drug wholesalers with whom the Company does business. The Company also monitors actual chargebacks granted and compares them to the estimated provision for chargebacks to assess the reasonableness of the chargeback reserve at each quarterly balance sheet date.

Rebates

The Company maintains various rebate programs with its Global Division Global Products sales channel customers in an effort to maintain a competitive position in the marketplace and to promote sales and customer loyalty. The rebates generally take the form of a credit memo to reduce the invoiced gross selling price charged to a customer for products shipped. An estimated accrued provision for rebate deductions is recognized at the time of product shipment. The primary factors the Company considers when estimating the provision for rebates are the average historical experience of aggregate credits issued, the mix of products shipped and the historical relationship of rebates as a percentage of total gross Global Product sales, the contract terms and conditions of the various rebate programs in effect at the time of shipment, and the amount of inventory on hand at the major drug wholesalers with whom the Company does business. The Company also monitors actual rebates granted and compares them to the estimated provision for rebates to assess the reasonableness of the rebate reserve at each quarterly balance sheet date.

Returns

The Company allows its customers to return product if approved by authorized personnel in writing or by telephone with the lot number and expiration date accompanying any request and if such products are returned within six months prior to or until twelve months following, the products’ expiration date. The Company estimates and recognizes an accrued 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, which is the time between when the product is sold and when it is ultimately returned, and estimated return rates which may be adjusted based on various assumptions including 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 also considers other factors, 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.

 

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Shelf-Stock Adjustments

Based upon competitive market conditions, the Company may 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 agrees to continue 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. The Company records an estimate for shelf-stock adjustments in the period it agrees to grant such a credit to a customer.

Medicaid

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 Company’s estimate of Medicaid rebates. In determining the appropriate accrual amount, the Company considers historical payment rates and processing lag for outstanding claims and payments. The Company records estimates for Medicaid rebates as a deduction from gross sales, with corresponding adjustments to accrued liabilities.

Cash Discounts

The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for paying within invoice terms, which generally range from 30 to 90 days. An estimate of cash discounts is recorded in the same period when revenue is recognized.

 

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Rx Partner and OTC Partner:

The “Rx Partner” and “OTC Partner” line items of the statement of operations include revenue recognized under alliance and collaboration agreements between the Company and 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 partner’s adjustments to such estimated amounts in the period the alliance agreement partner reports the amounts to the Company.

The Company applies the updated guidance of ASC 605-25 “Multiple Element Arrangements” to the Strategic Alliance Agreement with Teva Pharmaceuticals Curacao N.V., a subsidiary of Teva Pharmaceutical Industries Limited (“Teva Agreement”). The Company looks to the underlying delivery of goods and/or services which give rise to the payment of consideration under the Teva Agreement to determine the appropriate revenue recognition. The Company initially defers the consideration received as a result of research and development-related activities performed under the Teva Agreement. The Company recognizes the deferred revenue on a straight-line basis over the Company’s expected period of performance of such services. Consideration received as a result of the manufacture and delivery of products under the Teva Agreement is recognized at the time title and risk of loss passes to the customer which is generally when product is received by Teva. The Company recognizes profit share revenue in the period earned.

OTC Partner revenue is related to an agreement with Pfizer Inc. (formerly Wyeth) with respect to supply of over-the-counter pharmaceutical products and related research and development services. The Company initially defers all revenue earned under the OTC Partner agreement. The Company also defers direct product manufacturing costs to the extent such costs are reimbursable by the OTC Partner. The product manufacturing costs in excess of amounts reimbursable by the OTC Partner are recognized as current period cost of revenue. The Company recognizes revenue as OTC Partner revenue and amortizes deferred product manufacturing costs as cost of revenues as it fulfills contractual obligations. Revenue is recognized and associated costs are amortized over the agreement’s term of the arrangement or the expected period of performance, using a modified proportional performance method. Under the modified proportional performance method of revenue recognition utilized by the Company, the amount recognized in the period of initial recognition is based upon the number of years elapsed under the alliance and collaboration 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 and collaboration agreement and the denominator of which is the total estimated life of the alliance and collaboration agreement. The amount recognized as revenue during each remaining year is an equal pro rata amount. Finally, cumulative revenue recognized is limited to the extent of cash collected and/or the fair value received. The result of the modified proportional performance method is a greater portion of the revenue is recognized in the initial period with the remaining balance being recognized ratably over either the remaining life of the arrangement or the expected period of performance of the alliance and collaboration agreement.

 

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Research Partner:

The “Research Partner” line item of the statement of operations includes revenue recognized under development agreements with unrelated third-party pharmaceutical companies. The development agreements generally obligate the Company to provide research and development services over multiple periods. In exchange for this service, the Company received upfront payments upon signing of each development agreement and is eligible to receive contingent milestone payments, based upon the achievement of contractually specified events. Additionally, the Company may also receive royalty payments from the sale, if any, of a successfully developed and commercialized product under one of these development agreements. Revenue received from the achievement of contingent research and development milestones, if any, will be recognized in its entirety in the period when such payment is earned. Royalty fee income, if any, will be recognized by the Company in the period when the revenue is earned.

Promotional Partner:

The “Promotional Partner” line item of the statement of operations includes revenue recognized under promotional services agreements with 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.

Shipping and Handling Fees and Costs

Shipping and handling fees related to sales transactions are recorded as selling expense. Shipping costs were $ 1,341,000, $ 1,741,000 and $ 647,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

Research and Development

Research and development activities are expensed as incurred and consist of self-funded research and development costs and costs associated with work performed by other participants under collaborative research and development agreements.

Derivatives

The Company does not engage in hedging transactions for trading or speculative purposes or to hedge exposure to currency or interest rate fluctuations. From time to time, the Company may engage in transactions that result in embedded derivatives (e.g. convertible debt securities). In accordance with FASB ASC Topic 815, derivatives and hedging, the Company records the embedded derivative at fair value on the balance sheet and records any related gains or losses in current earnings in the statement of operations.

Share-Based Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with provisions of FASB ASC Topic 718, stock compensation. Under FASB ASC Topic 718, the Company recognizes the grant date fair value of stock-based employee compensation as expense on a straight-line basis over the vesting period of the grant. The Company uses the Black Scholes option pricing model to determine the grant date fair value of employee stock options; the fair value of restricted stock awards is equal to the closing price of the Company’s stock on the date such award was granted.

 

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Income Taxes

The Company provides for income taxes using the asset and liability method as required by FASB ASC Topic 740, income taxes. This approach recognizes the amount of federal, state, local taxes, and foreign taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequences of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates in the period during which they are signed into law. Under FASB ASC Topic 740, a valuation allowance is required when it is more likely than not all or some portion of the deferred tax assets will not be realized through generating sufficient future taxable income.

FASB ASC Topic 740, Sub-topic 10, tax positions, defines the criterion an individual tax position must meet for any part of the benefit of the tax position to be recognized in financial statements prepared in conformity with generally accepted accounting principles. Under FASB ASC Topic 740, Sub-topic 10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the tax position. The tax benefits recognized in the financial statements from such a tax position should be measured based on the largest benefit having a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Additionally, FASB ASC Topic 740, Sub-topic 10 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In accordance with the disclosure requirements of FASB ASC Topic 740, Sub-topic 10, the Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of total interest expense and other expense, respectively.

Earnings per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares adjusted for the dilutive effect of common stock equivalents outstanding during the period.

Other Comprehensive Income

The Company follows the provisions of FASB ASC Topic 220, comprehensive income, which establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined to include all changes in equity during a period except those resulting from investments by owners and distributions to owners. However, effective with its majority equity investment in Prohealth Biotech, Inc. and the formation of its wholly owned subsidiary Impax Laboratories (Taiwan) Inc., the Company recorded foreign currency translation gains and losses, which are reported as comprehensive income. Foreign currency translation gains (losses) gains for the years ended December 31, 2011, 2010 and 2009 were $ (1,087,000), $ 3,335,000 and $ 471,000, respectively.

Deferred Financing Costs

The Company capitalizes direct costs incurred with obtaining debt financing, which are included in other assets on the consolidated balance sheet. Deferred financing costs, including costs incurred in obtaining debt financing, are amortized to interest expense over the term of the underlying debt on a straight-line basis, which approximates the effective interest method. The Company recognized amortized deferred financing costs of $ 28,000, $ 25,000 and $135,000, in the years ended December 31, 2011, 2010, and 2009, respectively.

Foreign Currency Translation

The Company translates the assets and liabilities of the Taiwan dollar functional currency of its majority-owned affiliate Prohealth Biotechnology, Inc. and its wholly-owned subsidiary Impax Laboratories (Taiwan), Inc. into the U.S. dollar reporting currency using exchange rates in effect at the end of each reporting period. The revenue and expense of these entities are translated using an average of the rates in effect during the reporting period. Gains and losses from these translations are recorded as currency translation adjustments included in the consolidated statements of comprehensive income and the consolidated statements of changes in shareholders’ equity.

 

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3. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB amended its guidance about fair value measurement and disclosure. The new guidance was issued in conjunction with a new International Financial Reporting Standards (“IFRS”) fair value measurement standard aimed at updating IFRS to conform to U.S. GAAP. The new FASB guidance will result in some additional disclosure requirements; however, it does not result in significant modifications to existing FASB guidance with respect to fair value measurement and disclosure. The Company is required to adopt this guidance on January 1, 2012. The Company is in the process of evaluating this guidance.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (Topic 220), in order to increase the prominence of items reported in other comprehensive income. The amendments provide an entity with the option to present the components of net income, other comprehensive income and total comprehensive income, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, regardless of which option the entity chooses, the entity is required to present, on the face of the consolidated financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The requirement of this update to present the components of net income, other comprehensive income and total comprehensive income, either in a single continuous statement of comprehensive income or in two separate but consecutive statements is effective for fiscal years beginning after December 15, 2011. In December 2011, the requirement to present reclassification adjustments on the face of the consolidated financial statements was deferred indefinitely. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued its updated guidance for the testing of goodwill for impairment. The update allows the Company the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing qualitative factors it is determined that it is more likely than not the fair value of the reporting unit is less than its carrying amount, the Company will need to perform a more detailed goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. The objective of this new approach is to simplify how entities test goodwill for impairment. The Company is in the process of evaluating this guidance.

In December 2011, the FASB issued its updated guidance on balance sheet offsetting. This new standard provides guidance to determine when offsetting in the balance sheet is appropriate. The guidance is designed to enhance disclosures by requiring improved information about financial instruments and derivative instruments. The goal is to provide users of the financial statements the ability to evaluate the effect or potential effect of netting arrangements on an entity’s statement of financial position. This guidance will only impact the disclosures within an entity’s financial statements and notes to the financial statements and does not result in a change to the accounting treatment of financial instruments and derivative instruments. The Company is required to adopt this guidance on January 1, 2013. The Company is in the process of evaluating this guidance.

 

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4. INVESTMENTS

Investments consist of commercial paper, corporate bonds, medium-term notes, government sponsored enterprise obligations and certificates of deposit. The Company’s 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, generally based upon observable market values of similar securities. 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 Company’s 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 December 31, 2011 and December 31, 2010 follows:

 

September 30, September 30, September 30, September 30,

(in $000’s)

December 31, 2011

     Amortized
Cost
       Gross
Unrecognized
Gains
       Gross
Unrecognized
Losses
     Fair Value  

Commercial paper

     $ 69,341         $ 17         $ (5    $ 69,353   

Government sponsored enterprise obligations

       100,928           32           (13      100,947   

Corporate bonds

       58,219           5           (33      58,191   

Certificates of deposit

       13,507           1           (1      13,507   
    

 

 

      

 

 

      

 

 

    

 

 

 

Total short-term investments

     $ 241,995         $ 55         $ (52    $ 241,998   
    

 

 

      

 

 

      

 

 

    

 

 

 

 

September 30, September 30, September 30, September 30,

(in $000’s)

December 31, 2010

     Amortized
Cost
       Gross
Unrecognized
Gains
       Gross
Unrecognized
Losses
     Fair Value  

Commercial paper

     $ 168,260         $ 36         $ (7    $ 168,289   

Government sponsored enterprise obligations

       56,866           40           (1      56,905   

Corporate bonds

       18,316           15           (13      18,318   

Certificates of deposit

       13,163           13           —           13,176   
    

 

 

      

 

 

      

 

 

    

 

 

 

Total short-term investments

     $ 256,605         $ 104         $ (21    $ 256,688   
    

 

 

      

 

 

      

 

 

    

 

 

 

 

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5. ACCOUNTS RECEIVABLE

The composition of accounts receivable, net is as follows:

 

September 30, September 30,
         December 31,      December 31,  
(in $000’s)      2011      2010  

Gross accounts receivable

     $ 210,557       $ 123,941   

Less: Rebate reserve

       (25,244      (20,892

Less: Chargeback reserve

       (22,161      (14,918

Less: Other deductions

       (9,379      (6,077
    

 

 

    

 

 

 

Accounts receivable, net

     $ 153,773       $ 82,054   
    

 

 

    

 

 

 

A roll forward of the chargeback and rebate reserves activity for the years ended December 31, 2011, 2010 and 2009 is as follows:

 

September 30, September 30, September 30,

(in $000’s)

Rebate reserve

     December 31,      December 31,      December 31,  
     2011      2010      2009  

Beginning balance

     $ 20,892       $ 37,781       $ 4,800   

Provision recorded during the period

       69,173         91,063         72,620   

Credits issued during the period

       (64,821      (107,952      (39,639
    

 

 

    

 

 

    

 

 

 

Ending balance

     $ 25,244       $ 20,892       $ 37,781   
    

 

 

    

 

 

    

 

 

 

 

September 30, September 30, September 30,

(in $000’s)

Chargeback reserve

     December 31,      December 31,      December 31,  
     2011      2010      2009  

Beginning balance

     $ 14,918       $ 21,448       $ 4,056   

Provision recorded during the period

       166,504         181,566         126,105   

Credits issued during the period

       (159,261      (188,096      (108,713
    

 

 

    

 

 

    

 

 

 

Ending balance

     $ 22,161       $ 14,918       $ 21,448   
    

 

 

    

 

 

    

 

 

 

Other deductions include allowance for uncollectible amounts and cash discounts. The Company maintains an allowance for doubtful accounts 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 $ 612,000 and $ 539,000 at December 31, 2011 and 2010, respectively.

 

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6. INVENTORY

Inventory, net of carrying value reserves at December 31, 2011 and 2010 consisted of the following:

 

September 30, September 30,
(in $000’s)      December 31,
2011
       December 31,
2010
 

Raw materials

     $ 32,454         $ 27,871   

Work in process

       5,046           2,575   

Finished goods

       24,947           20,545   
    

 

 

      

 

 

 

Total inventory

       62,447           50,991   

Less: Non-current inventory

       8,270           6,442   
    

 

 

      

 

 

 

Total inventory-current

     $ 54,177         $ 44,549   
    

 

 

      

 

 

 

Inventory carrying value reserves were $ 5,533,000 and $ 5,294,000 at December 31, 2011 and 2010, 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.

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 $ 3,726,000 and $ 2,117,000 at December 31, 2011 and 2010, respectively. When the Company concludes FDA approval is expected within approximately six months, the Company will generally begin to schedule manufacturing process validation studies as required by the FDA to demonstrate the production process can be scaled up to manufacture commercial batches. Consistent with industry practice, the Company may build quantities of pre-launch inventories of certain products pending required final FDA approval and /or resolution of patent infringement litigation, when, in the Company’s 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 Company’s favor. 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 Company’s pre-launch product inventory is lower than the respective estimated net selling prices.

 

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7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consisted of the following:

 

September 30, September 30,
(in $000’s)      December 31,
2011
     December 31,
2010
 

Land

     $ 5,773       $ 2,270   

Buildings and improvements

       86,084         82,836   

Equipment

       75,589         70,785   

Office furniture and equipment

       8,910         9,077   

Construction-in-progress

       16,602         3,958   
    

 

 

    

 

 

 

Property, plant and equipment, gross

     $ 192,958       $ 168,926   

Less: Accumulated depreciation

       (74,800      (62,646
    

 

 

    

 

 

 

Property, plant and equipment, net

     $ 118,158       $ 106,280   
    

 

 

    

 

 

 

Depreciation expense was $ 14,911,000, $ 12,649,000 and $ 11,266,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

 

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8. ACCRUED EXPENSES

The following table sets forth the Company’s accrued expenses:

 

September 30, September 30,
       December 31,        December 31,  
(in $000’s)      2011        2010  

Payroll-related expenses

     $ 16,975         $ 16,796   

Product returns

       24,101           33,755   

Medicaid rebates

       17,479           12,475   

Physician detailing sales force fees

       1,655           2,308   

Legal and professional fees

       5,071           3,143   

Income taxes payable

       1,126           2,393   

Shelf stock price protection

       684           281   

Other

       3,025           4,030   
    

 

 

      

 

 

 

Total accrued expenses

     $ 70,116         $ 75,181   
    

 

 

      

 

 

 

Product Returns

The Company maintains a return policy to allow customers to return product within specified guidelines. The Company estimates a provision for product returns as a percentage of gross sales based upon historical experience for sales made through its Global Products sales channel. Sales of product under the Private Label, the Rx Partner, and the OTC Partner alliance and collaboration agreements generally are not subject to returns. A roll forward of the return reserve activity for the years ended December 31, 2011, 2010 and 2009 is as follows:

 

September 30, September 30, September 30,
(in $000’s)      December 31,      December 31,      December 31,  

Returns Reserve

     2011      2010      2009  

Beginning balance

     $ 33,755       $ 22,114       $ 13,675   

Provision related to sales recorded in the period

       688         15,821         11,847   

Credits issued during the period

       (10,342      (4,180      (3,408
    

 

 

    

 

 

    

 

 

 

Ending balance

     $ 24,101       $ 33,755       $ 22,114   
    

 

 

    

 

 

    

 

 

 

 

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9. INCOME TAXES

The Company is subject to federal, state and local income taxes in the United States and income taxes in Taiwan, R.O.C. The provision for income taxes is comprised of the following:

 

September 30, September 30, September 30,
       For the Years Ended December 31,  
(in $000’s)      2011        2010        2009  

Current:

              

Federal taxes

     $ 23,500         $ 96,560         $ 29,550   

State taxes

       1,034           10,471           1,715   

Foreign taxes

       1,154           0           0   
    

 

 

      

 

 

      

 

 

 

Total current tax expense

       25,688           107,031           31,265   
    

 

 

      

 

 

      

 

 

 

Deferred:

              

Federal taxes

     $ 5,646         $ 27,138         $ (11,520

State taxes

       592           9,140           1,995   

Foreign taxes

       690           212           (734
    

 

 

      

 

 

      

 

 

 

Total deferred tax expense (benefit)

       6,928           36,490           (10,259
    

 

 

      

 

 

      

 

 

 

Provision for income taxes

     $ 32,616         $ 143,521         $ 21,006   
    

 

 

      

 

 

      

 

 

 

A reconciliation of the difference between the tax provision at the federal statutory rate and actual income taxes on income before income taxes, which includes federal, state, and other income taxes, is as follows:

 

September 30, September 30, September 30, September 30, September 30, September 30,
       For the Years Ended December 31,  
(in $000’s)      2011     2010     2009  

Income before income taxes

     $ 98,014         $ 393,879         $ 70,977      
    

 

 

      

 

 

      

 

 

    

Tax provision at the federal statutory rate

       34,305         35.0     137,858         35.0     24,842         35.0

Increase (decrease) in tax rate resulting from:

                 

State and local taxes, net of federal benefit

       3,721         3.8     12,873         3.3     3,628         5.1

Foreign rate differential

       (948      (1.0 )%      0         0.0     0         0.0

Research and development credits

       (3,378      (3.4 )%      (2,700      (0.7 )%      (2,546      (3.6 )% 

Share-based compensation

       92         0.1     979         0.2     1,824         2.6

Domestic manufacturing deduction

       (2,187      (2.2 )%      (6,563      (1.7 )%      (700      (1.0 )% 

Provision for uncertain tax positions

       178         0.2     203         0.1     (6,084      (8.6 )% 

Other, net

       833         0.8     871         0.2     294         0.4

Change in valuation allowance

       —           —       —           —       (252      (0.3 )% 
    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Provision for income taxes

     $ 32,616         33.3   $ 143,521         36.4   $ 21,006         29.6
    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Deferred income taxes result from temporary differences between the financial statement carrying values and the tax bases of the Company’s assets and liabilities. Deferred tax assets principally result from deferred revenue related to certain of the Company’s alliance and collaboration agreements (see “Note 11 – Alliance and Collaboration Agreements” below for a discussion of the Company’s alliance and collaboration agreements), certain accruals and reserves currently not deductible for tax purposes, and state net operating loss carryforwards. Deferred tax liabilities principally result from deferred product manufacturing costs related to the OTC Partners alliance agreements and the use of accelerated depreciation methods for income tax purposes. The components of the Company’s deferred tax assets and liabilities are as follows:

 

September 30, September 30,
       December 31,  
(in $000’s)      2011        2010  

Deferred tax assets:

         

Deferred revenues

     $ 13,225         $ 15,970   

Accrued expenses

       27,382           28,752   

Inventory reserves

       2,439           2,874   

Net operating loss carryforwards

       372           1,317   

Depreciation and amortization

       340           458   

Other

       2,923           4,212   
    

 

 

      

 

 

 

Deferred tax assets

     $ 46,681         $ 53,583   
    

 

 

      

 

 

 

Deferred tax liabilities:

         

Tax depreciation and amortization in excess of book amounts

     $ 4,697         $ 3,862   

Deferred manufacturing costs

       3,872           3,916   

Other

       700           1,465   
    

 

 

      

 

 

 

Deferred tax liabilities

     $ 9,269         $ 9,243   
    

 

 

      

 

 

 

Deferred tax assets, net

     $ 37,412         $ 44,340   
    

 

 

      

 

 

 

The breakdown between current and long-term deferred tax assets and tax liabilities is as follows:

 

September 30, September 30,
       December 31,  
(in $000’s)      2011      2010  

Current deferred tax assets

     $ 39,104       $ 41,506   

Current deferred tax liabilities

       (1,251      (2,235
    

 

 

    

 

 

 

Current deferred tax assets, net

       37,853         39,271   
    

 

 

    

 

 

 

Non-current deferred tax assets

       7,577         12,077   

Non-current deferred tax liabilities

       (8,018      (7,008
    

 

 

    

 

 

 

Non-current deferred tax (liabilities) assets, net

       (441      5,069   
    

 

 

    

 

 

 

Deferred tax assets, net

     $ 37,412       $ 44,340   
    

 

 

    

 

 

 

Non-current deferred tax assets and liabilities are included in Other assets and Other liabilities on the consolidated balance sheet.

 

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The Company had foreign net operating loss (NOL) carryforwards of approximately $ 3,700,000 as of December 31, 2010, with a ten year carryforward period. There were no foreign NOL carryforwards as of December 31, 2011. There were state net operating loss (NOL) carryforwards of $ 5,288,000 and $ 9,228,000 as of December 31, 2011 and 2010, respectively, with a twenty year carryforward period as of December 31, 2011, and utilization expiration dates occurring between the years 2022 and 2023, summarized as follows:

 

September 30,
(in $000’s)         

Year

     Amount  

2022

     $ 1,513   

2023

       3,775   
    

 

 

 

Total

     $ 5,288   
    

 

 

 

FASB ASC 740 provides for a single comprehensive model to address uncertain tax positions by establishing the minimum recognition threshold and a measurement attribute for the financial statement impact of tax positions taken or expected to be taken on an entity’s income tax returns. A reconciliation of the accrued reserve for uncertain tax positions is as follows:

 

September 30,
(in $000’s)         

Balance at January 1, 2011

     $ 1,580   

Increase based on prior year tax positions

       24   

Increase based on current year tax positions

       154   

Interest expense

       84   
    

 

 

 

Balance at December 31, 2011

     $ 1,842   
    

 

 

 

The Company has recognized a tax provision for uncertain tax positions related to federal and state research and development tax credits and inter-company loan interest income. The Company recognizes interest and penalties related to income tax matters as a part of total interest expense and other expense, respectively. At December 31, 2011, the Company had $ 300,000 of accrued interest expense related to its accrued reserve for uncertain tax positions. The Company did not accrue penalties as of December 31, 2011 as it has taken the appropriate steps to mitigate exposure to penalties related to its uncertain tax positions. The Company is currently under audit by the United States Internal Revenue Service for the tax years ended December 31, 2009 and 2008 and by the State of California Franchise Tax Board for the tax years ended December 31, 2009, 2008, 2007, 2006 and 2005.

No provision has been made for U.S. federal deferred income taxes on accumulated earnings on foreign subsidiaries since it is the intention of management to indefinitely reinvest the undistributed earnings in the foreign subsidiary.

 

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10. REVOLVING LINE OF CREDIT

On February 11, 2011, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, N. A., as a lender and as administrative agent (the “Administrative Agent”). The Credit Agreement provides the Company with a revolving line of credit in the aggregate principal amount of up to $ 50,000,000 (the “Revolving Credit Facility”). Under the Revolving Credit Facility, up to $ 10,000,000 is available for letters of credit, the outstanding face amounts of which reduce availability under the Revolving Credit Facility on a dollar for dollar basis. Proceeds under the Credit Agreement may be used for working capital, general corporate and other lawful purposes. The Company has not yet borrowed any amounts under the Revolving Credit Facility.

 

   

The Company’s borrowings under the Credit Agreement are secured by substantially all of the personal property assets of the Company pursuant to a Security Agreement (the “Security Agreement”) entered into by the Company and the Administrative Agent. As further security, the Company also pledged to the Administrative Agent, 65% of the Company’s equity interest in Impax Laboratories (Taiwan), Inc. and must similarly pledge all or a portion of its equity interest in future subsidiaries. Under the Credit Agreement, among other things: The outstanding principal amount of all revolving credit loans, together with accrued and unpaid interest thereon, will be due and payable on the maturity date, which will occur four years following the February 11, 2011 closing date.

 

   

Borrowings under the Revolving Credit Facility will bear interest, at the Company’s option, at either an Alternate Base Rate (as defined in the Credit Agreement) plus the applicable margin in effect from time to time ranging from 0.5% to 1.5%, or a LIBOR Rate (as defined in the Credit Agreement) plus the applicable margin in effect from time to time ranging from 1.5% to 2.5%. The Company is also required to pay an unused commitment fee ranging from 0.25% to 0.45% per annum based on the daily average undrawn portion of the Revolving Credit Facility. The applicable margin described above and the unused commitment fee in effect at any given time will be determined based on the Company’s Total Net Leverage Ratio (as defined in the Credit Agreement), which is based upon the Company’s consolidated total debt, net of unrestricted cash in excess of $100 million, compared to Consolidated EBITDA (as defined in the Credit Agreement) for the immediately preceding four quarters.

 

   

The Company may prepay any outstanding loan under the Revolving Credit Facility without premium or penalty.

 

   

The Company is required under the Credit Agreement and the Security Agreement to comply with a number of affirmative, negative and financial covenants. Among other things, these covenants (i) require the Company to provide periodic reports, notices of material events and information regarding collateral, (ii) restrict the Company’ ability, subject to certain exceptions and baskets, to incur additional indebtedness, grant liens on assets, undergo fundamental changes, change the nature of its business, make investments, undertake acquisitions, sell assets, make restricted payments (including the ability to pay dividends and repurchase stock) or engage in affiliate transactions, and (iii) require the Company to maintain a Total Net Leverage Ratio (which is, generally, our total funded debt, net of unrestricted cash in excess of $ 100 million, over our EBITDA for the preceding four quarters) of less than 3.75 to 1.00, a Senior Secured Leverage Ratio (which is, generally, our total senior secured debt over our EBITDA for the preceding four quarters) of less than 2.50 to 1.00 and a Fixed Charge Coverage Ratio (which is, generally, our EBITDA for the preceding four quarters over the sum of cash interest expense, cash tax payments, scheduled funded debt payments and capital expenditures during such four quarter period) of at least 2.00 to 1.00 (with each such ratio as more particularly defined as set forth in the Credit Agreement). As of December 31, 2011, the Company was in compliance with the various covenants contained in the Credit Agreement and the Security Agreement.

 

   

The Credit Agreement contains customary events of default (subject to customary grace periods, cure rights and materiality thresholds), including, among others, failure to pay principal, interest or fees, violation of covenants, material inaccuracy of representations and warranties, cross-default and cross-acceleration of material indebtedness and other obligations, certain bankruptcy and insolvency events, certain judgments, certain events related to the Employee Retirement Income Security Act of 1974, as amended, and a change of control.

 

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Following an event of default under the Credit Agreement, the Administrative Agent would be entitled to take various actions, including the acceleration of amounts due under the Credit Agreement and seek other remedies that may be taken by secured creditors.

Effective with the February 11, 2011 execution of the Credit Agreement discussed above, the Company’s former credit agreement under the Amended and Restated Loan and Security Agreement, dated as of December 15, 2005, as amended between the Company and the Administrative Agent (as successor by merger to Wachovia Bank, National Association), and its corresponding commitments were terminated. There were no amounts outstanding under the former credit agreement as of February 11, 2011. During the years ended December 31, 2011 and 2010, unused line fees incurred under each of the credit agreements were $ 144,000 and $ 177,000, respectively.

 

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11. ALLIANCE AND COLLABORATION AGREEMENTS

The Company has entered into several alliance, collaboration, license and distribution agreements, and similar agreements with respect to certain of its products and services, with unrelated third-party pharmaceutical companies. The “Rx Partner” and “OTC Partner” line items of the statement of operations include revenue recognized under agreements the Company has entered into to develop marketing and/or distribution relationships with its partners to fully leverage its technology platform. The “Research Partner” line item of the statement of operations includes revenue recognized under development agreements which generally obligate the Company to provide research and development services over multiple periods. The “Promotional Partner” line item of the statement of operations includes revenue recognized under a promotional services agreement which obligates the Company to provide physician detailing sales calls services to promote its promotional partner’s branded drug products over multiple periods.

The Company’s alliance and collaboration agreements often include milestones and provide for milestone payments upon achievement of these milestones. Generally, the milestone events contained in the Company’s alliance and collaboration agreements coincide with the progression of the Company’s products and technologies from pre-commercialization to commercialization.

The Company groups pre-commercialization milestones in its alliance and collaboration agreements into clinical and regulatory categories, each of which may include the following types of events:

Clinical Milestone Events:

 

   

Designation of a development candidate . Following the designation of a development candidate, generally, IND-enabling animal studies for a new development candidate take 12 to 18 months to complete.

 

   

Initiation of a Phase I clinical trial . Generally, Phase I clinical trials take one to two years to complete.

 

   

Initiation or completion of a Phase II clinical trial . Generally, Phase II clinical trials take one to three years to complete.

 

   

Initiation or completion of a Phase III clinical trial . Generally, Phase III clinical trials take two to four years to complete.

 

   

Completion of a bioequivalence study . Generally, bioequivalence studies take three months to one year to complete.

Regulatory Milestone Events:

 

   

Filing or acceptance of regulatory applications for marketing approval such as a New Drug Application in the United States or Marketing Authorization Application in Europe . Generally, it takes six to twelve months to prepare and submit regulatory filings and approximately two months for a regulatory filing to be accepted for substantive review.

 

   

Marketing approval in a major market, such as the United States or Europe . Generally it takes one to three years after an application is submitted to obtain approval from the applicable regulatory agency.

 

   

Marketing approval in a major market, such as the United States or Europe , for a new indication of an already-approved product. Generally it takes one to three years after an application for a new indication is submitted to obtain approval from the applicable regulatory agency.

 

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Commercialization milestones in the Company’s alliance and collaboration agreements may include the following types of events:

 

   

First commercial sale in a particular market, such as in the United States or Europe.

 

   

Product sales in excess of a pre-specified threshold, such as annual sales exceeding $ 100 million . The amount of time to achieve this type of milestone depends on several factors including but not limited to the dollar amount of the threshold, the pricing of the product and the pace at which customers begin using the product.

License and Distribution Agreement with Shire

In January 2006, the Company entered into a License and Distribution Agreement with an affiliate of Shire Laboratories, Inc. (“Shire License and Distribution Agreement”), under which the Company received a non-exclusive license to market and sell an authorized generic of Shire’s Adderall XR ® product (“AG Product”) subject to certain conditions, but in any event by no later than January 1, 2010. The Company commenced sales of the AG Product in October 2009. Under the terms of the Shire License and Distribution Agreement, Shire is responsible for manufacturing the AG Product, and the Company is responsible for marketing and sales of the AG Product. The Company is required to pay a profit share to Shire on sales of the AG Product, of which the Company accrued a profit share payable to Shire of $ 107,145,000 and $ 100,611,000 on sales of the AG Product during the years ended December 31, 2011 and 2010, respectively, with a corresponding charge included in the cost of revenues line on the consolidated statement of operations.

 

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Strategic Alliance Agreement with Teva

The Company entered into a Strategic Alliance Agreement with Teva Pharmaceuticals Curacao N.V., a subsidiary of Teva Pharmaceutical Industries Limited, in June 2001 (“Teva Agreement”). The Teva Agreement commits the Company to develop and manufacture, and Teva to distribute, a specified number controlled release generic pharmaceutical products (“generic products”), each for a 10-year period. The Company identified the following deliverables under the Teva Agreement: (i) the manufacture and delivery of generic products; (ii) the provision of research and development activities (including regulatory services) related to each product; and (iii) market exclusivity associated with the products.

In July 2010, the Teva Agreement was amended to terminate the provisions of the Teva Agreement with respect to the Omeprazole 10mg, 20mg and 40mg products. Additionally, in exchange for the return of product rights, the Company agreed to pay to Teva a profit share on future sales of the fexofenadine HCI/psuedoephedrine product, if any, but in no event will such profit share payments exceed an aggregate amount of $ 3,000,000. The significant rights and obligations under the Teva Agreement are as follows:

Product Development, Manufacture and Sales: The Company is required to develop the products, obtain FDA approval to market the products, and manufacture and deliver the products to Teva. The product-linked revenue the Company earns under the Teva Agreement consists of Teva’s reimbursement of all of the Company’s manufacturing costs plus a fixed percentage of defined profits on Teva’s sales to its customers. Manufacturing costs are direct cost of materials plus actual direct manufacturing costs, including packaging material, not to exceed specified limits. The Company invoices Teva for the manufacturing costs when products are shipped to Teva, and Teva is required to pay the invoiced amount within 30 days. Teva has the exclusive right to determine all terms and conditions of the product sales to its customers. Within 30 days of the end of each calendar quarter, Teva is required to provide the Company with a report of its net sales and profits during the quarter and to pay the Company its share of the profits resulting from those sales on a quarterly basis. Net sales are Teva’s gross sales less discounts, rebates, chargebacks, returns, and other adjustments, all of which are based upon fixed percentages, except chargebacks, which are estimated by Teva and subject to a true-up reconciliation.

Cost Sharing: The Teva Agreement required Teva to pay the Company $ 300,000 at the inception of the Teva Agreement for reimbursement of regulatory expenses previously incurred, and thereafter to pay specified percentages of ongoing regulatory costs incurred in connection with obtaining and maintaining FDA approval, patent infringement litigation and regulatory litigation.

Sale of Common Stock: The Teva Agreement required Teva to purchase $ 15,000,000 of the Company’s common stock in four equal quarterly installments beginning September 15, 2001.

Advance Deposit: Teva agreed to provide the Company with a $ 22,000,000 advance deposit payable for the contingent purchase of exclusive marketing rights for the products. The advance deposit included debt-like terms to facilitate repayment to Teva to the extent the contingencies did not occur. Specifically, the advance deposit payable accrued interest at an 8.0% annual rate from the June 2001 Teva Agreement inception date, and required the Company to repay the advance deposit payable no later than January 15, 2004.

Other Provisions : The Teva Agreement also provides for other deliverables by the Company, consisting of research and development activities, including regulatory services.

 

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As the July 2010 amendment materially modified the Teva Agreement, the Company elected to apply the updated guidance of FASB ASC 605-25 Multiple Element Arrangements (“ASC 605-25”) to the amended Teva Agreement beginning in the three months ended September 30, 2010.

There are two criteria under the updated guidance of ASC 605-25 for determining if deliverables shall be considered separate units of accounting, including: (i) the deliverable has value to the customer on a standalone basis, and (ii) if the arrangement has a general right of return relative to delivered items, delivery or performance of the undelivered items is considered probable and substantially in the control of the vendor. The Company evaluated the deliverables of the amended Teva Agreement under the updated guidance of ASC 605-25 and determined there are two units of accounting, including: a combined unit consisting of research and development activities plus market exclusivity, and the manufacture and delivery of 10 products (i.e. contract manufacturing). The market exclusivity deliverable does not meet the first criteria for separation as it does not have standalone value to Teva. As the products contemplated by the Teva Agreement were to be developed by the Company, the market exclusivity has no value to Teva without the research and development services needed to complete the products. The contract manufacturing deliverable has standalone value to Teva as it is able to resell the delivered items (i.e. finished product) to third-parties.

The consideration received by the Company from Teva under the Teva Agreement is contingent upon future performance, as such the Company was unable to allocate any of the consideration received to delivered items, and therefore the Company looked to the underlying services which gave rise to the payment of consideration by Teva to determine the appropriate recognition of revenue as follows:

 

  Research and development related activities (the Combined Unit) – Consideration received as a result of research and development related activities performed under the Teva Agreement will initially be deferred and recognized on the straight-line method over the Company’s expected period of performance of the research and development related services, estimated to be from July 2001 (following the June 2001 effective date of the Teva Agreement) to October 2014 (with FDA approval of the ANDA for the final product under the Teva Agreement).

 

  Manufacture and delivery of the products – Consideration received as a result of the manufacture and delivery of the products under the Teva Agreement is recognized under the Company’s revenue recognition policy, as proscribed by SAB 104, as follows:

 

  Product shipments – The Company accounts for the shipment of products under the Teva Agreement as current period revenue in accordance with its revenue recognition policy applicable to its Global products.

 

  Profit share – The Company recognizes profit share, if any, as current period revenue when earned.

 

  Gain on the repurchase of Company stock – This represents additional profit share revenue resulting from the successful December 2006 commercial sale of a Tier 2 or Tier 3 product, and was recognized as revenue in the period earned.

The Company applied the updated guidance of ASC 605-25 to the Teva Agreement on a prospective basis beginning in the quarter ended September 30, 2010. In the year ended December 31, 2010, the application of the updated guidance of ASC 605-25 had the effect of increasing Rx Partner revenue by $ 196,440,000, and increasing cost of revenues by $ 95,426,000, and correspondingly, basic earnings per share increased by approximately $ 1.03. The increase in Rx Partner revenue as a result of applying the updated guidance of ASC 605-25 in the year ended December 31, 2010, represents the recognition of previously deferred revenue which would otherwise have been recognized, under the previous accounting standards, over the remaining life of the Teva Agreement, using a modified proportional performance method. Under the previous accounting standards, Rx Partner revenue would have been $ 22,255,000, cost of revenues would have been $ 244,964,000, and basic earnings per share would have been $ 2.97 in the year ended December 31, 2010, please refer to Note 20. Supplementary Financial Information for a summary of this information on a quarterly basis.

 

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The following tables show the additions to and deductions from the deferred revenue and deferred product manufacturing costs under the Teva Agreement:

 

September 30, September 30, September 30, September 30,
(in $000’s)      For the Years Ended December 31,      Inception
Through
Dec 31, 2008
 
       

Deferred revenue

     2011      2010      2009     

Beginning balance

     $ 4,410       $ 202,032       $  200,608       $ —     

Additions:

             

Product related and cost sharing

       551         10,096         35,245         382,024   

Exclusivity charges

       —           —           —           (50,600

Other

       —           —           —           12,527   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total additions

       551         10,096         35,245         343,951   
    

 

 

    

 

 

    

 

 

    

 

 

 

Less: Amount recognized

       (1,256      (11,278      (33,821      (143,343

Accounting adjustment

       —           (196,440      —           —     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total deferred revenue

     $ 3,705       $ 4,410       $ 202,032       $ 200,608   
    

 

 

    

 

 

    

 

 

    

 

 

 

 

September 30, September 30, September 30, September 30,
       For the Years Ended December 31,      Inception
Through
Dec 31, 2008
 
(in $000’s)        

Deferred product manufacturing costs

     2011        2010      2009     

Beginning balance

     $ —           $ 94,040       $ 88,361       $ —     

Additions

       —             7,416         24,089         151,476   

Less: Amount recognized

       —             (6,030      (18,410      (63,115

Accounting adjustment

       —             (95,426      —        
    

 

 

      

 

 

    

 

 

    

 

 

 

Total deferred product manufacturing costs

     $ —           $ —         $ 94,040       $ 88,361   
    

 

 

      

 

 

    

 

 

    

 

 

 

The following schedule shows the expected recognition of deferred revenue and amortization of deferred product manufacturing costs, for transactions recorded through December 31, 2011, for the next five years and thereafter under the Teva Agreement:

 

September 30,
(in $000s)      Deferred
Revenue
Recognition
 

2012

     $ 1,309   

2013

       1,309   

2014

       1,087   

2015

       —     

2016

       —     

Thereafter

       —     
    

 

 

 

Totals

     $ 3,705   
    

 

 

 

 

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OTC Partner Alliance Agreement

The Company has two OTC Partner alliance agreements with unrelated third-party pharmaceutical companies (“OTC Agreements”). The OTC Agreements cover the manufacture, distribution, and marketing of OTC pharmaceutical products. The two OTC Agreements, whose terms are approximately 9 years and 15 years, each commit the Company to manufacture, and the OTC Agreements’ marketing partners to distribute, a single specified generic pharmaceutical product. Both of the OTC Agreements obligate the Company to grant a license to the respective OTC Partner to market the product. Revenue under these OTC Agreements consists of payments upon contract signing, reimbursement of product manufacturing costs or other agreed upon amounts when the Company delivers the product, profit-share or royalty payments based upon the respective OTC Partner’s’ product sales, and, specified milestone payments tied to product development services.

As each of these OTC Agreements contain multiple deliverables the Company applied its accounting policy to determine whether the multiple deliverables within each of the OTC Partner alliance agreements should be accounted for as separate units of accounting or as a single unit of accounting. The Company determined no single deliverable represented a separate unit of accounting given there was not sufficient objective and reliable evidence of the fair value of any single deliverable. When the fair value of a deliverable cannot be determined, it is not possible for the Company to determine whether consideration given by an OTC Partner is in exchange for a given deliverable. The Company concluded the multiple deliverables under each of the OTC Partner alliance agreements represented a single unit of accounting for each agreement.

All revenue under the OTC Agreements is deferred and recognized over the life of the respective OTC Agreement under the modified proportional performance method. Deferred revenue is recorded as a liability captioned “Deferred revenue.” The modified proportional performance method better aligns revenue recognition with performance under a long-term arrangement as compared to a straight-line method. Revenue is recognized only to the extent of cumulative cash collected being greater than cumulative revenue recognized.

The Company begins to recognize payments at the inception of the respective OTC Agreement, milestone payments at the time they are earned, reimbursement of product manufacturing costs at the time of product shipment to the respective OTC Partners, and profit-share and royalty payments at the time they are reported to the Company.

The Company also defers its product manufacturing costs to the extent reimbursable by the respective OTC Partner and recognizes them in the same manner as it recognizes the related product revenue. Additionally, under the Teva Agreement, the Company is obligated to share with Teva the profits from the sale of the over-the-counter products sold under the OTC Agreements — up to a maximum of 50%. These deferred direct product manufacturing costs are recorded as an asset captioned “Deferred product manufacturing costs.”

A summary description of each OTC Partner Alliance Agreement noted above is as follows:

In June 2002, the Company entered into a Development, License and Supply Agreement with Pfizer Inc. (formerly Wyeth) relating to the Company’s Loratadine and Pseudoephedrine Sulfate 5 mg/120 mg 12-hour Extended Release Tablets and Loratadine and Pseudoephedrine Sulfate 10 mg/240 mg 24-hour Extended Release Tablets for the OTC market under the Alavert ® brand. The Company is responsible for developing and manufacturing the products, while Pfizer is responsible for product marketing and sale. The structure of the agreement includes payment upon achievement of milestones and royalties paid to the Company on Pfizer’s sales on a quarterly basis. Pfizer launched this product in May 2003 as Alavert ® D-12 Hour. In February 2005, the agreement was partially cancelled with respect to the 24-hour Extended Release Product due to lower than planned sales volume.

 

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In June 2002, the Company entered into a non-exclusive Licensing, Contract Manufacturing and Supply Agreement with Merck & Co., Inc. (formerly Schering-Plough Corporation) relating to the Company’s Loratadine and Pseudoephedrine Sulfate 5 mg/120 mg 12-hour Extended Release Tablets for the OTC market under the Claritin-D 12-hour brand. The structure of the agreement included milestone payments by Merck and an agreed upon transfer price. Shipments under the agreement commenced at the end of January 2003, and Merck launched the product as its OTC Claritin-D 12-hour in March 2003. The Company’s product supply obligations under the agreement ended on December 31, 2008, after which Merck has manufactured the product. The agreement terminated two years after our product supply obligations concluded, during which Merck paid the Company a royalty on sales of their manufactured product.

The following table shows the additions to and deductions from deferred revenue and deferred product manufacturing costs under the OTC Agreements:

 

September 30, September 30, September 30, September 30,
(in $000’s)      For the Years Ended December 31,      Inception
Through
 

Deferred revenue

     2011      2010      2009      Dec 31, 2008  

Beginning balance

     $  11,382       $  16,162       $  21,044       $ —     

Additions

       2,018         4,108         1,960         91,944   

Less: amounts recognized

       (3,717      (8,888      (6,842      (70,900
    

 

 

    

 

 

    

 

 

    

 

 

 

Total deferred revenue

     $ 9,683       $ 11,382       $ 16,162       $ 21,044   
    

 

 

    

 

 

    

 

 

    

 

 

 

 

September 30, September 30, September 30, September 30,
(in $000’s)      For the Years Ended December 31,      Inception
Through
 

Deferred product manufacturing costs

     2011      2010      2009      Dec 31, 2008  

Beginning balance

     $  10,235       $  14,203       $  18,361       $ —     

Additions

       1,721         3,223         1,929         75,941   

Less: amount recognized

       (3,110      (7,191      (6,087      (57,580
    

 

 

    

 

 

    

 

 

    

 

 

 

Total deferred product manufacturing costs

     $ 8,846       $ 10,235       $ 14,203       $ 18,361   
    

 

 

    

 

 

    

 

 

    

 

 

 

The following schedule shows the expected recognition of deferred revenue and amortization deferred product manufacturing costs, for transactions recorded through December 31, 2011, for the next five years and thereafter under the OTC Agreements:

 

September 30, September 30,
(in $000s)      Deferred
Revenue
Recognition
       Deferred
Product
Manufacturing  Costs
Amortization
 

2012

     $ 1,541         $ 1,413   

2013

       1,541           1,413   

2014

       1,541           1,413   

2015

       1,541           1,413   

2016

       1,541           1,413   

Thereafter

       1,978           1,781   
    

 

 

      

 

 

 

Total

     $ 9,683         $ 8,846   
    

 

 

      

 

 

 

 

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Agreements with Medicis Pharmaceutical Corporation

In November 2008, the Company and Medicis Pharmaceutical Corporation (“Medicis”), entered into a Joint Development Agreement and a License and Settlement Agreement (“License Agreement”).

Joint Development Agreement

The Joint Development Agreement provides for the Company and Medicis to collaborate in the development of a total of four dermatology products, including three of the Company’s generic products and one branded advanced form of Medicis’s 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 of $ 15,000,000 in milestone payments composed of two $ 5,000,000 milestone payments, paid by Medicis in March 2009 and September 2009, a $ 2,000,000 milestone payment paid by Medicis in December 2009, and a $ 3,000,000 milestone payment paid by Medicis in March 2011. The Company has the potential to receive up to an additional $ 8,000,000 of contingent regulatory milestone payments each of which the Company believes to be substantive, as well as the potential to receive royalty payments from sales, if any, by Medicis of its advanced form SOLODYN ® brand product. Finally, to the extent the Company commercializes any of its four generic dermatology products covered by the Joint Development Agreement, the Company will pay to Medicis a gross profit share on sales of such products. The Company began commercializing one of the four generic dermatology products during the year ended December 31, 2011.

The Joint Development Agreement results in three items of revenue for the Company, as follows:

1. Research & Development Services

Revenue received from the provision of research and development services including the $ 40,000,000 upfront payment and the $ 12,000,000 of milestone payments received prior to January 1, 2011, have been deferred and are being 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. Revenue from the remaining $ 11,000,000 of contingent milestone payments, including the $ 3,000,000 received from Medicis in March 2011, will be recognized using the Milestone Method of accounting. Deferred revenue is recorded as a liability captioned “Deferred revenue.” Revenue recognized under the Joint Development Agreement is reported on the consolidated statement of operations, in the line item captioned Research Partner. The Company determined the straight-line method better aligns revenue recognition with performance as the level of research and development services delivered under the Joint Development Agreement are expected to be provided on a relatively constant basis over the period of performance.

2. Royalty Fees Earned — Medicis’s Sale of Advanced Form SOLODYN ® (Brand) Product

Under the Joint Development Agreement, the Company grants Medicis a license for the advanced form of the SOLODYN ® product, with the Company receiving royalty fee income under such license for a period ending eight years after the first commercial sale of the advanced form SOLODYN ® product. Commercial sales of the new SOLODYN ® product, if any, are expected to commence upon FDA approval of Medicis’s NDA. The royalty fee income, if any, from the new SOLODYN ® product, will be recognized by the Company as current period revenue when earned.

 

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3. Accounting for Sales of the Company’s Four Generic Dermatology Products

Upon FDA approval of the Company’s ANDA for each of the four generic products covered by the Joint Development Agreement, the Company will have the right (but not the obligation) to begin manufacture and sale of its four generic dermatology products. The Company sells its manufactured generic products to all Global Division customers in the ordinary course of business through its Global Product sales channel. The Company accounts for the sale, if any, of the generic products covered by the Joint Development Agreement as current period revenue according to the Company’s revenue recognition policy applicable to its Global products. To the extent the Company sells any of the four generic dermatology products covered by the Joint Development Agreement, the Company pays Medicis a gross profit share, with such profit share payments accounted for as a current period cost of goods sold.

The following table shows the additions to and deductions from deferred revenue under the Joint Development Agreement with Medicis:

 

September 30, September 30, September 30, September 30,
(in $000’s)      Years Ended December 31,      Inception
Through
Dec 31, 2008
 

Deferred revenue

     2011      2010      2009     

Beginning balance

     $ 25,948       $ 39,487       $ 39,167       $ —     

Additions:

             

Up-front fees and milestone payments

       —           —           12,000         40,000   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total additions

       —           —           12,000         40,000   
    

 

 

    

 

 

    

 

 

    

 

 

 

Less: amount recognized

       (13,538      (13,539      (11,680      (833
    

 

 

    

 

 

    

 

 

    

 

 

 

Total deferred revenue

     $ 12,410       $ 25,948       $ 39,487       $ 39,167   
    

 

 

    

 

 

    

 

 

    

 

 

 

The following schedule shows the expected recognition of deferred revenue, for transactions recorded through December 31, 2011, for the next five years and thereafter under the Joint Development Agreement with Medicis:

 

September 30,
(in $000s)      Deferred
Revenue
Recognition
 

2012

     $ 12,410   

2013

       —     

2014

       —     

2015

       —     

2016

       —     

Thereafter

       —     
    

 

 

 

Total

     $ 12,410   
    

 

 

 

 

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Development and Co-Promotion Agreement with Endo Pharmaceuticals Inc.

In June 2010, the Company and Endo Pharmaceuticals, Inc. (“Endo”) entered into a Development and Co-Promotion Agreement (“Endo Agreement”) under which the Company and Endo have agreed to collaborate in the development and commercialization of a next-generation advanced form of the Company’s lead branded product candidate (“Endo Agreement Product”). Under the provisions of the Endo Agreement, in June 2010, Endo paid to the Company a $ 10,000,000 up-front payment. The Company has the potential to receive up to $ 30,000,000 of contingent milestone payments which includes $ 15,000,000 contingent upon the achievement of clinical events, $ 5,000,000 contingent upon the achievement of regulatory events, and $ 10,000,000 upon the achievement of commercialization events. The Company believes all milestones under the Endo Agreement are substantive. Upon commercialization of the Endo Agreement Product in the United States, Endo will have the right to co-promote such product to non-neurologists, which will require the Company to pay Endo a co-promotion service fee of up to 100% of the gross profits attributable to prescriptions for the Endo Agreement Product which are written by the non-neurologists.

The Company is recognizing the $ 10,000,000 up-front payment as revenue on a straight-line basis over a period of 91 months, which is the estimated expected period of performance of research and development activities under the Endo Agreement, commencing with the June 2010 effective date of the Endo Agreement and ending in December 2017, the estimated date of FDA approval of the Company’s NDA. The FDA approval of the Endo Agreement Product NDA represents the end of the Company’s expected period of performance, as the Company will have no further contractual obligation to perform research and development activities under the Endo Agreement, and therefore the earnings process will be completed. Deferred revenue is recorded as a liability captioned “Deferred revenue.” Revenue recognized under the Endo Agreement is reported on the consolidated statement of operations, in the line item captioned Research Partner. The Company determined the straight-line method aligns revenue recognition with performance as the level of research and development activities performed under the Endo Agreement are expected to be performed on a ratable basis over the Company’s estimated expected period of performance.

Upon FDA approval of the Company’s Endo Agreement Product NDA, the Company will have the right (but not the obligation) to begin manufacture and sale of such product. The Company will sell its manufactured branded product to customers in the ordinary course of business through its Impax Pharmaceuticals Division. The Company will account for the sale of the product covered by the Endo Agreement as current period revenue. The co-promotion service fee paid to Endo, as described above, if any, will be accounted for as a current period selling expense as incurred.

License, Development and Commercialization Agreement with Glaxo Group Limited

In December 2010, the Company entered into a License, Development and Commercialization Agreement with Glaxo Group Limited (“GSK”). Under the terms of the agreement with GSK, GSK received an exclusive license to develop and commercialize IPX066 throughout the world, except in the U.S. and Taiwan, and certain follow on products at the option of GSK. GSK paid an $ 11,500,000 up-front payment in December 2010, and the Company has the potential to receive up to $ 169,000,000 of contingent milestone payments which includes $ 10,000,000 contingent upon the achievement of clinical events, $ 29,000,000 contingent upon the achievement of regulatory events, and $ 130,000,000 contingent upon the achievement of commercialization events. The Company believes all milestones under the agreement with GSK are substantive. The up-front payment has been deferred and is being recognized as revenue on a straight-line basis over the Company’s expected period of performance to provide research and development services which is estimated to be the 24 month period ending December 31, 2012. The Company will also receive royalty payments on any sales of IPX066 by GSK. The Company and GSK will generally each bear its own development costs associated with its activities under the License, Development and Commercialization Agreement, except that certain development costs, including with respect to follow on products, will be shared, as set forth in the agreement. The agreement with GSK also gives GSK the option to obtain development and commercialization rights to a future product for a one-time payment to the Company of $ 10,000,000. The License, Development and Commercialization Agreement will continue until GSK no longer has any royalty payment obligations, or if the agreement is terminated earlier in accordance with its terms. The License, Development and Commercialization Agreement may be terminated by GSK for convenience upon 90 days prior written notice, and may also be terminated under certain other circumstances, including material breach, as set forth in the agreement.

 

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Co-Promotion Agreement with Pfizer

In March 2010, the Company and Pfizer, Inc. (“Pfizer”) entered into the First Amendment to the Co-Promotion Agreement (originally entered into with Wyeth, now a wholly owned subsidiary of Pfizer) (“Pfizer Co-Promotion Agreement”). Under the terms of the Pfizer Co-Promotion Agreement, effective April 1, 2010, the Company provides physician detailing sales call services for Pfizer’s Lyrica ® product to neurologists. The Company receives a fixed fee, effective January 1, 2010, subject to annual cost adjustment, for providing such physician detailing sales calls within a contractually defined range of an aggregate number of physician detailing sales calls rendered, determined on a quarterly basis. There is no opportunity for the Company to earn incentive fees under the terms of the Pfizer Co-Promotion Agreement. Pfizer is responsible for providing sales training to the Company’s 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 $ 14,140,000, $ 14,073,000 and $ 6,940,000 in the years ended December 31, 2011, 2010 and 2009, respectively, under the Pfizer Co-Promotion Agreement, with such amounts presented in the captioned line item “Promotional Partner” revenue on the consolidated statement of operations.

As noted above, the Company previously entered into a three year Co-Promotion Agreement with Wyeth, an unrelated third-party pharmaceutical company, prior to Wyeth becoming a wholly-owned subsidiary of Pfizer, under which the Company performed physician detailing sales calls for the Wyeth Pristiq ® product to neurologists, with such services commencing on July 1, 2009, and ending in connection with the Pfizer Co-Promotion Agreement described above. Wyeth paid the Company a service fee, subject to an annual cost adjustment, for each physician detailing sales call. During the term of the (former Wyeth) Co-Promotion Agreement, the Company was required to complete a minimum and maximum number of physician detailing sales calls. Wyeth was responsible for providing sales training to the Company’s sales force. Wyeth owned the product and was responsible for all pricing and marketing literature as well as product manufacture and fulfillment. The Company recognized service fee revenue as the related physician detailing sales call services were performed and the performance obligations were met. The Company did not earn any incentive fee revenue under the terms of the (former Wyeth) Co-Promotion Agreement.

Promotional Services Agreement with Shire

In January 2006, the Company entered into a three year Promotional Services Agreement with an affiliate of Shire Laboratories, Inc. (“Shire Co-Promotion Agreement”), under which the Company was engaged to perform physician detailing sales calls services in support of Shire’s Carbatrol ® product, from July 1, 2006 to June 30, 2009. The Company recognized $ 6,508,000 in sales force fee revenue for the year ended December 31, 2009, under the Shire Co-Promotion Agreement with such amounts presented in the captioned line item “Promotional Partner” under revenues on the consolidated statement of operations.

 

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12. EMPLOYEE BENEFIT PLANS

401(k) Defined Contribution Plan

The Company sponsors a 401(k) defined contribution plan covering all employees. Participants are permitted to contribute up to 25% of their eligible annual pre-tax compensation up to established federal limits on aggregate participant contributions. The Company matches 50% of the employee contributions up to a maximum of 3% of employee compensation. Discretionary profit-sharing contributions made by the Company, if any, are determined annually by the Board of Directors. Participants are 100% vested in discretionary profit-sharing and matching contributions made by the Company after three years of service, and are 25% and 50% vested after one and two years of service, respectively. There were approximately $ 1,254,000, $ 1,162,000 and $ 1,156,000 in matching contributions and no discretionary profit-sharing contributions made under this plan for the years ended December 31, 2011, 2010 and 2009, respectively.

Employee Stock Purchase Plan

In February 2001, the Board of Directors of the Company approved the 2001 Non-Qualified Employee Stock Purchase Plan (“ESPP”), with a 500,000 share reservation. The purpose of the ESPP is to enhance employee interest in the success and progress of the Company by encouraging employee ownership of common stock of the Company. The ESPP provides the opportunity to purchase the Company’s common stock at a 15% discount to the market price through payroll deductions or lump sum cash investments. Under the ESPP plan, for the years ended December 31, 2011, 2010 and 2009, the Company sold shares of its common stock to its employees in the amount of 47,128, 79,560 and 72,752, respectively, for net proceeds of approximately $ 887,000, $ 1,082,000 and $ 560,000, respectively.

Deferred Compensation Plan

In February 2002, the Board of Directors of the Company approved the Executive Non-Qualified Deferred Compensation Plan (“ENQDCP”) effective August 15, 2002 covering executive level employees of the Company as designated by the Board of Directors. Participants can defer up to 75% of their base salary and quarterly sales bonus and up to 100% of their annual performance based bonus. The Company matches 50% of employee deferrals up to 10% of base salary and bonus compensation. The maximum total match by the company cannot exceed 5% of total base and bonus compensation. Participants are vested in the employer match contribution at 20% each year, with 100% vesting after five years of employment. Participants can earn a return on their deferred compensation based on hypothetical investments in investment funds. Changes in the market value of the participant deferrals and earnings thereon are reflected as an adjustment to the liability for deferred compensation with an offset to compensation expense. There were approximately $ 589,000, $ 525,000 and $ 529,000 in matching contributions under the ENQDCP for the years ended December 31, 2011, 2010 and 2009, respectively.

The deferred compensation liability is a non-current liability recorded at the value of the amount owed to the ENQDCP participants, with changes in the value of such amounts recognized as a compensation expense in the consolidated statement of operations. The calculation of the deferred compensation obligation is derived from observable market data by reference to hypothetical investments selected by the participants. The Company invests in corporate owned life insurance (“COLI”) policies, of which the cash surrender value is included in the caption line item “Other assets” on the consolidated balance sheet. As of December 31, 2011 and 2010, the Company had a cash surrender value asset of $ 14,547,000 and $ 12,264,000, respectively, and a deferred compensation liability of $ 14,535,000 and $ 12,978,000, respectively.

 

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13. SHARE-BASED COMPENSATION:

The Company recognizes the grant date fair value of each option and restricted share over its vesting period. Options and restricted shares granted under the Company’s Amended and Restated 2002 Equity Incentive Plan (“2002 Plan”) generally vest over a three or four year period and options have a term of ten years.

Impax Laboratories, Inc. 1999 Equity Incentive Plan

In October 2000, the Company’s stockholders approved an increase in the aggregate number of shares of common stock to be issued pursuant to the Company’s 1999 Equity Incentive Plan from 2,400,000 to 5,000,000 shares. Under the 1999 Equity Incentive Plan, 379,872, 664,947, and 1,286,811 stock options were outstanding at December 31, 2011, 2010 and 2009, respectively.

Impax Laboratories, Inc. Amended and Restated 2002 Equity Incentive Plan

Under the Company’s 2002 Plan, the aggregate number of shares of common stock for issuance pursuant to stock option grants and restricted stock awards was increased by the Company’s Board of Directors from 9,800,000 to 11,800,000 during 2010 and was approved by the Company’s stockholders. Under the 2002 Plan, stock options outstanding were 4,693,225, 5,849,729 and 6,943,007 at December 31, 2011, 2010 and 2009, respectively, and unvested restricted stock awards outstanding were 1,663,911, 1,434,759 and 1,152,923 at December 31, 2011, 2010 and 2009, respectively.

The stock option activity for all of the Company’s equity compensation plans noted above is summarized as follows:

 

September 30, September 30,

Stock Options

     Number of Shares
Under Option
     Weighted-
Average
Exercise
Price

per Share
 

Outstanding at December 31, 2008

       8,280,240       $ 10.53   

Options granted

       2,489,141         6.96   

Options exercised

       (1,175,897      3.69   

Options forfeited

       (1,363,666      13.86   
    

 

 

    

Outstanding at December 31, 2009

       8,229,818         9.87   

Options granted

       405,600         20.22   

Options exercised

       (1,900,549      8.62   

Options forfeited

       (220,193      11.03   
    

 

 

    

Outstanding at December 31, 2010

       6,514,676         10.84   

Options granted

       424,000         24.78   

Options exercised

       (1,605,043      11.02   

Options forfeited

       (260,536      9.73   
    

 

 

    

Outstanding at December 31, 2011

       5,073,097         11.76   
    

 

 

    

Options exercisable at December 31, 2011

       3,345,263       $ 11.30   
    

 

 

    

 

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As of December 31, 2011, stock options outstanding and exercisable had average remaining contractual lives of 5.97 years and 4.54 years, respectively. Also, as of December 31, 2011, stock options outstanding and exercisable each had aggregate intrinsic values of $ 44,685,000 and $ 30,673,000, respectively. As of December 31, 2011, the Company estimated 4,491,177 stock options and 1,473,049 restricted shares granted to employees which were vested or expected to vest.

The Company grants restricted stock to certain eligible employees as a component of its long-term incentive compensation program. The restricted stock award grants are made in accordance with the Company’s 2002 Plan. A summary of the non-vested restricted stock awards is as follows:

 

September 30, September 30,
Restricted Stock Awards      Non-Vested
Restricted
Stock
Awards
     Weighted-
Average
Grant  Date

Fair Value
 

Non-vested at December 31, 2008

       399,716       $ 10.30   

Granted

       886,969         6.99   

Vested

       (113,204      10.25   

Forfeited

       (20,558      7.87   
    

 

 

    

Non-vested at December 31, 2009

       1,152,923         7.72   

Granted

       727,556         18.87   

Vested

       (368,825      8.61   

Forfeited

       (76,895      10.17   
    

 

 

    

Non-vested at December 31, 2010

       1,434,759         12.93   

Granted

       868,549         20.73   

Vested

       (452,861      11.81   

Forfeited

       (186,536      13.71   
    

 

 

    

Non-vested at December 31, 2011

       1,663,911       $ 17.20   
    

 

 

    

As of December 31, 2011, the Company had 1,990,349 shares available for issuance of either stock options or restricted stock awards, including 1,706,553 shares from the 2002 Plan, and 283,796 shares from the 1999 Plan.

As of December 31, 2011, the Company had total unrecognized share-based compensation expense, net of estimated forfeitures, of $ 35,587,000 related to all of its share-based awards, which will be recognized over a weighted average period of 2.47 years. The intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $ 19,192,000, $ 19,038,000 and $ 3,407,000, respectively. The total fair value of restricted shares which vested during the years ended December 31, 2011, 2010 and 2009 was $ 5,347,000, $ 3,175,000 and $ 1,538,000, respectively.

The Company estimated the fair value of each stock option award on the grant date using the Black-Scholes option pricing model with the following assumptions:

 

September 30, September 30, September 30,
       For the Years Ended December 31,  
       2011        2010        2009  

Volatility (range)

       50.7%-52.7%           55.1%-56.4%           58.3%-64.2%   

Volatility (weighted average)

       52.3%           55.9%           60.4%   

Risk-free interest rate (range)

       1.5%-2.3%           1.5%-3.1%           2.1%-2.9%   

Risk-free interest rate (weighted average)

       2.1%           2.3%           2.6%   

Dividend yield

       0%           0%           0%   

Expected life (years)

       6.20           6.21           6.25   

Weighted average grant date fair value

       $12.85           $11.08           $4.07   

 

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The Company estimated the fair value of each stock option award on the grant date using the Black-Scholes option pricing model, wherein: expected volatility is based on historical volatility of the Company’s common stock, and of a peer group for the period of time the Company’s common stock was deregistered as described below, 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 result of the simplified method provides a reasonable estimate in comparison to actual experience. The risk-free interest rate is based on the U.S. Treasury yield at the date of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The dividend yield of zero is based on the fact that the Company has never paid cash dividends on its common stock, and has no present intention to pay cash dividends. Options granted under each of the above plans generally vest from three to four years and have a term of ten years. With limited exceptions, the Company’s shares of common stock traded on the “Pink Sheets” beginning in August 2005 through May 2008. Subsequent to the Company’s May 2008 deregistration, and before its stock was re-listed in March 2009, the Company granted stock options and restricted stock awards. As there were no quoted market prices during the period when the Company’s shares of common stock was not publicly traded, the Company engaged a valuation firm to assist with its determination of the fair value of the shares of common stock at the stock option and restricted stock award grant dates. In this regard, the methods used to arrive at the fair value of the underlying stock price included a regression analysis, along with market multiples and discounted net cash flow analyses. The resulting fair value on each respective grant date was used to establish the stock option exercise price and the fair value of the restricted stock.

The amount of share-based compensation expense recognized by the Company is as follows:

 

September 30, September 30, September 30,
       For the Years Ended December 31,  
(in $000’s)      2011        2010        2009  

Cost of revenues

     $ 1,917         $ 2,377         $ 1,600   

Research and development

       4,119           3,466           2,677   

Selling, general and administrative

       6,649           4,871           3,114   
    

 

 

      

 

 

      

 

 

 

Total

     $ 12,685         $ 10,714         $ 7,391   
    

 

 

      

 

 

      

 

 

 

The after tax impact of recognizing the share-based compensation expense related to FASB ASC Topic 718 on basic earnings per common share was $ 0.15, $ 0.14 and $ 0.11 for the years ended December 31, 2011, 2010 and 2009, respectively and diluted earnings per common share was $ 0.14, $ 0.14 and $ 0.11 for the years ended December 31, 2011, 2010 and 2009, respectively. The Company recognized a deferred tax benefit of $ 3,078,000, $ 1,719,000 and $ 899,000 in 2011, 2010 and 2009, respectively; related to share-based compensation expense recorded for non-qualified employee stock options and restricted stock awards.

The Company’s policy is to issue new shares to satisfy stock option exercises and to grant restricted share awards. There were no modifications to any stock options during the years ended December 31, 2011, 2010 or 2009.

 

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14. 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 of the Company, from time to time, to create one or more new series of preferred stock. Each series of preferred stock issued can have the rights, preferences, privileges and restrictions designated by the Company’s 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 Company’s common stock. During the years ended December 31, 2011, 2010 and 2009, the Company did not issue any preferred stock.

Common Stock

The Company’s 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 Company’s 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 Company’s 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 Company’s outstanding common stock are exchanged for securities of any other person, cash or any other property, or more than 50% of the Company’s 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 expired on January 20, 2012.

In connection with the shareholder rights plan, the Board of Directors designated 100,000 shares of series A junior participating preferred stock.

 

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15. EARNINGS PER SHARE

Basic earnings per common share is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted earnings per common share is computed by dividing net income by the weighted average common shares outstanding adjusted for the dilutive effect of stock options, restricted stock awards, stock purchase warrants and convertible debt, excluding anti-dilutive shares.

A reconciliation of basic and diluted earnings per share is as follows:

 

September 30, September 30, September 30,
       For the Years Ended December 31,  
(in $000’s, except share and per share amounts)      2011        2010        2009  

Numerator:

              

Net income

     $ 65,495         $ 250,418         $ 50,061   
    

 

 

      

 

 

      

 

 

 

Denominator:

              

Weighted average common shares outstanding

       64,126,855           62,037,908           60,279,602   

Effect of dilutive options and common stock purchase warrants

       3,193,134           3,527,224           800,582   
    

 

 

      

 

 

      

 

 

 

Diluted weighted averagecommon shares outstanding

       67,319,989           65,565,132           61,080,184   
    

 

 

      

 

 

      

 

 

 

Basic net income per share

     $ 1.02         $ 4.04         $ 0.83   
    

 

 

      

 

 

      

 

 

 

Diluted net income per share

     $ 0.97         $ 3.82         $ 0.82   
    

 

 

      

 

 

      

 

 

 

For the years ended December 31, 2011, 2010 and 2009, the Company excluded 1,244,493, 1,024,466 and 6,620,769, 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.

 

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16. SEGMENT INFORMATION

The Company has two reportable segments, the Global Division and the Impax Division. The Global Division develops, manufactures, sells, and distributes generic pharmaceutical products, primarily through the following sales channels: the Global Products sales channel, for sales of generic prescription products, directly to wholesalers, large retail drug chains, and others; the Private Label Product sales channel, for generic pharmaceutical over-the-counter and prescription products sold to unrelated third-party customers, who in-turn sell the products to third-parties under their own label; the Rx Partner sales channel, for generic prescription products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements; and the OTC Partner sales channel, for over-the-counter products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements. Revenues from the “Global Products” sales channel and the “Private Label” sales channel are reported under the caption “Global Product sales, net” on the consolidated statement of operations. The Company also generates revenue in its Global Division from research and development services provided under a joint development agreement with another unrelated third-party pharmaceutical company, and reports such revenue under the caption “Research Partner” revenue on the consolidated statement of operations.

The Impax Division is engaged in the development of proprietary branded pharmaceutical products through improvements to already-approved pharmaceutical products to address central nervous system (CNS) disorders. The Impax Division is also engaged in product co-promotion through a direct sales force focused on promoting to physicians, primarily in the CNS community, pharmaceutical products developed by other unrelated third-party pharmaceutical entities. Additionally, the Company generates revenue in its Impax Division from research and development services provided under a development and license agreement with another unrelated third-party pharmaceutical company, and reports such revenue in the line item “Research Partner” on the consolidated statement of operations; and the Company generates revenue in its Impax Division under a License, Development and Commercialization Agreement with another unrelated third-party pharmaceutical company, and reports such revenue in the line item “Rx Partner” on the consolidated statement of operations.

The Company’s chief operating decision maker evaluates the financial performance of the Company’s 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 Company’s 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 Company’s chief operating decision maker. The accounting policies for the Company’s segments are the same as those described above in “Note 2. Summary of Significant Accounting Policies – Revenue Recognition.” The Company has no inter-segment revenue.

 

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The tables below present segment information reconciled to total Company financial results, with segment operating income or loss including gross profit less direct research and development expenses, and direct selling expenses as well as any litigation settlements, to the extent specifically identified by segment:

 

September 30, September 30, September 30, September 30,

(in $000’s)

Year Ended December 31, 2011

     Global
Division
       Impax
Division
       Corporate
and Other
       Total
Company
 

Revenues, net

     $  491,710         $  21,209         $ —           $  512,919   

Cost of revenues

       242,713           11,911           —             254,624   

Research and development

       46,169           36,532           —             82,701   

Patent Litigation

       7,506           —             —             7,506   

Income (loss) before income taxes

     $ 182,165         $  (34,669)         $  (49,482)         $ 98,014   

 

September 30, September 30, September 30, September 30,

Year Ended December 31, 2010

     Global
Division
       Impax
Division
       Corporate
and Other
       Total
Company
 

Revenues, net

     $  864,667         $  14,842         $ —           $  879,509   

Cost of revenues

       328,163           12,083           —             340,246   

Research and development

       44,311           41,912           —             86,223   

Patent Litigation

       6,384           —             —             6,384   

Income (loss) before income taxes

     $ 470,405         $  (42,663)         $  (33,863)         $ 393,879   

 

September 30, September 30, September 30, September 30,

Year Ended December 31, 2009

     Global
Division
       Impax
Division
       Corporate
and Other
       Total
Company
 

Revenues, net

     $  344,961        $  13,448         $ —           $  358,409   

Cost of revenues

       158,270           12,043           —             170,313   

Research and development

       38,698           24,576           —             63,274   

Patent Litigation

       5,379           —             —             5,379   

Income (loss) before income taxes

     $ 131,723         $  (26,640)         $  (34,106)         $ 70,977   

Foreign Operations

The Company’s wholly-owned subsidiary, Impax Laboratories (Taiwan) Inc., has constructed a facility in Taiwan which is utilized for manufacturing, research and development, warehouse, and administrative functions, with approximately $ 56,827,000, and $ 38,805,000 of net carrying value of assets, composed principally of a building and equipment, included in the Company’s consolidated balance sheet at December 31, 2011 and 2010, respectively.

 

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17. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases office, warehouse and laboratory facilities under non-cancelable operating leases expiring between May 2012 and December 2015. Rent expense for the years ended December 31, 2011, 2010 and 2009 was $ 1,691,000, $ 1,715,000 and $ 1,893,000, respectively. The Company recognizes rent expense on a straight-line basis over the lease period. The Company also leases certain equipment under various non-cancelable operating leases with various expiration dates between April 2012 and December 2016. Future minimum lease payments under the non-cancelable operating leases are as follows:

 

September 30,
(in $000s)      Years Ended December 31,  

2012

     $ 1,591   

2013

       1,495   

2014

       1,268   

2015

       568   

2016

       60   

Thereafter

       —     
    

 

 

 

Total minimum lease payments

     $ 4,982   
    

 

 

 

Purchase Order Commitments

As of December 31, 2011, the Company had approximately $ 32,613,000 of open purchase order commitments, primarily for raw materials. The terms of these purchase order commitments are generally less than one year in duration.

Taiwan Facility

The Company has entered into several contracts related to ongoing expansion activities at its Taiwan facility. As of December 31, 2011, the Company had remaining obligations under these contracts of approximately $ 8,267,000.

 

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18. 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 controlled release products for which the Company is developing generic versions.

Under federal law, when a drug developer files an Abbreviated New Drug Application (“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 holder’s receipt of such notice. If the patent holder files suit within the 45 day period, the FDA can review and approve the ANDA, but is prevented from granting final marketing approval of the product until a final judgment in the action has been rendered in favor of the generic, or 30 months from the date the notice was received, whichever is sooner. Lawsuits have been filed against the Company in connection the Company’s Paragraph IV certifications seeking an order delaying the approval of the Company’s ANDA until expiration of the patent(s) at issue in the litigation.

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 Company’s 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 Company’s 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.

The Company is generally responsible for all of the patent litigation fees and costs associated with current and future products not covered by its alliance and collaboration agreements. The Company has agreed to share legal expenses with respect to third-party and Company products under the terms of certain of the alliance and collaboration agreements. Under the Teva Agreement, the Company and Teva have agreed to share in fees and costs related to patent infringement litigation associated with the products covered by the Teva Agreement. One product under the Teva Agreement currently remains in litigation (the methylphenidate matter described below), the litigation costs of which the parties share equally. In addition to the Teva Agreement, the Company is sharing litigation costs with respect to three products under the terms of two separate agreements. The Company records the costs of patent litigation as expense in the period when incurred for products it has developed, as well as for products which are the subject of an alliance or collaboration agreement with a third-party.

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.

 

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Patent Infringement Litigation

Pfizer Inc., et aI. v. Impax Laboratories, Inc. (Tolterodine LA)

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 Company’s filing of an ANDA relating to Tolterodine Tartrate Extended Release Capsules, 4 mg, generic to Detrol ® LA, infringes three Pfizer patents (“2008 Action”). 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 Company’s ANDA amendment adding a 2mg strength. For one of the patents-in-suit, U.S. Patent No. 5,382,600 (the “600 patent”), 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.) (“ Pfizer ”). After the Pfizer court conducted a bench trial, in January 2010, it found the 600 patent not invalid. That decision was appealed to the U.S. Court of Appeals for the Federal Circuit, and in July 2011 the appeal was withdrawn, making the trial court decision final and binding on the Company. Discovery is proceeding in the Company’s case with respect to the other patents. Trial is set for September 4, 2012.

Pfizer Inc., et aI. v. Impax Laboratories, Inc. (Tolterodine IR)

In May 2011, 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 District of New Jersey, alleging the Company’s filing of an ANDA relating to Tolterodine Tartrate Capsules, 1 and 2 mg, generic to Detrol ® , infringes U.S. Patent No. 5,382,600 (the “600 patent”), expiring on September 25, 2012 with pediatric exclusivity. The Company filed an answer and counterclaim. In January 2010, the ‘600 patent was found not to be invalid in Pfizer Inc. et al. v. Teva Pharmaceuticals USA, Inc ., Case No. 04-1418 (D. N.J.). That decision was appealed to the U.S. Court of Appeals for the Federal Circuit, and in July 2011 the appeal was withdrawn, making the trial court decision final. As a result, a consent judgment dismissing this case was entered in October 2011.

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 Company’s 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 against other generic drug manufacturers, including Wockhardt Limited, that have filed ANDAs relating to this product and proceedings in the case against the Company were stayed. In March 2011, a stipulated final judgment of patent infringement and validity was entered against Wockhardt Limited. On April 27, 2011, a stipulated order was entered, enjoining the Company from selling or offering to sell its ANDA product before the expiration of U.S. Patent No. 5,023,269 (“the ‘269 patent”) and requiring the Company to convert its Paragraph IV Certification to a Paragraph III Certification with respect to the ‘269 patent.

Warner Chilcott Company, LLC. et.al. v. Impax Laboratories, Inc. (Doxycycline Hyclate)

In December 2008, Warner Chilcott Company, LLC, Warner Chilcott (US), LLS 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 Company’s ANDA relating to Doxycycline Hyclate Delayed Release Tablets, 75 mg and 100 mg, generic to Doryx ® . The Company filed an answer and counterclaim. Thereafter, in March 2009, Warner Chilcott filed another lawsuit in the same jurisdiction, alleging patent infringement for the filing of the Company’s ANDA for the 150 mg strength. A Markman hearing was held and a decision was issued in July 2011. A bench trial was conducted on February 1, 2012, and the Court’s decision is pending.

 

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Genzyme Corporation 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 Company’s ANDA relating to Sevelamer Hydrochloride Tablets, 400 mg and 800 mg, generic to Renagel ® . The Company filed an answer and counterclaim. Discovery is closed, and trial is scheduled for September 27, 2012.

Genzyme Corporation 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 Company’s ANDA relating to Sevelamer Carbonate Tablets, 800 mg, generic to Renvela ® . The Company filed an answer and counterclaim. Discovery is closed, and trial is scheduled for September 27, 2012.

Genzyme Corporation v. Impax Laboratories, Inc. (Sevelamer Carbonate Powder)

In July 2010, Genzyme Corporation filed suit against the Company in the U.S. District Court for the District of Maryland, alleging patent infringement for the filing of the Company’s ANDA relating to Sevelamer Carbonate Powder, 2.4 g and 0.8 g packets, generic to Renvela ® powder. The Company filed an answer and counterclaim. Discovery is closed, and trial is scheduled for September 27, 2012.

The Research Foundation of State University of New York et al. v. Impax Laboratories, Inc.; Galderma Laboratories Inc. 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 Company’s ANDA relating to Doxycycline Monohydrate Delayed-Release Capsules, 40 mg, generic to Oracea ® . In May 2011, Galderma Laboratories Inc., Galderma Laboratories, L.P. and Supernus Pharmaceuticals, Inc. filed a second lawsuit in Delaware alleging infringement of an additional patent related to Oracea ® . The Company filed an answer and counterclaims in both matters. In October 2009 for the first lawsuit and in July 2011 for the second lawsuit, the parties agreed to be bound by the final judgment concerning infringement, validity and enforceability of the patents at issue in an earlier-filed case brought by Galderma and Supernus against another generic drug manufacturer. Proceedings in the lawsuits involving the Company were stayed pending resolution of the related matter. In July 2011, a four-day trial was held in the case involving the other generic manufacturer in the U.S. District Court for the District of Delaware on the issues of patent infringement and validity. In August 2011, the Court issued its decision finding four of the five patents invalid and/or not infringed, and the fifth patent, which expires in December 2027, infringed and not invalid. The decision of the District Court will be binding on the Company unless reversed or modified on appeal or in subsequent litigation.

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 the Company in the U.S. District Court for the District of New Jersey alleging patent infringement for the filing of the Company’s ANDA relating to Fenofibrate Tablets, 48 mg and 145 mg, generic to Tricor ® . The Company filed an answer and counterclaim. In September 2010, the district court vacated the schedule and ordered a stay in the two matters related to the Company. In June 2011, the parties entered into Settlement and License Agreements and the cases were dismissed.

Daiichi Sankyo, Inc. et al. v. Impax Laboratories, Inc. (Colesevelam)

In January 2010, Daiichi Sankyo, Inc. and Genzyme Corporation filed suit against the Company in the U.S. District Court for the District of Delaware alleging patent infringement for the filing of the Company’s ANDA relating to Colesevelam Hydrochloride Tablets, 625 mg, generic to Welchol ® . In June 2011, the parties entered into a Settlement Agreement and the case was dismissed.

 

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Daiichi Sankyo, Inc. et al. v. Impax Laboratories, Inc. (Colesevelam Powder)

In November 2010, Daiichi Sankyo, Inc. and Genzyme Corporation filed suit against the Company in the U.S. District Court for the District of Delaware alleging patent infringement for the filing of the Company’s ANDA relating to Colesevelam Hydrochloride Powder, 1.875 gm/packet and 3.75 gm/packet, generic to Welchol ® for Oral Suspension. The Company filed an answer and counterclaim. In June 2011, the parties entered into a Settlement Agreement and the case was dismissed.

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 Company’s ANDA related to Choline Fenofibrate Delayed Release Capsules, 45 mg and 135 mg, generic of Trilipix ® . The Company has filed an answer. A Markman hearing was held in May 2011, and a decision was issued in July 2011. In October 2011, the parties entered into a Settlement and License Agreement and the case was dismissed.

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 Company’s ANDA relating to Fenofibrate Tablets, 40 and 120 mg, generic to Fenoglide ® . The Company filed an answer and counterclaims. On November 17, 2011, the Court issued an Order substituting Shore Therapeutics, Inc. for Shionogi Pharma, Inc. as plaintiff. In December 2011, the parties entered into Settlement and License Agreements and the case was dismissed in February 2012.

Schering Corporation, et al. v. Impax Laboratories, Inc. (Ezetimibe/Simvastatin)

In August 2010, Schering Corporation and MSP Singapore Company LLC (together, “Schering”) 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 Company’s ANDA relating to Ezetimibe/Simvastatin Tablets, 10/80 mg, generic to Vytorin ® . The Company filed an answer and counterclaim. In December 2010, the parties agreed to be bound by the final judgment concerning validity and enforceability of the patents at issue in cases brought by Schering against other generic drug manufacturers that have filed ANDAs relating to this product and proceedings in the Company’s case were stayed. A bench trial was conducted in those other proceedings in December 2011, and the Court’s decision is pending.

Abbott Laboratories, et al. v. Impax Laboratories, Inc. (Niacin-Simvastatin)

In November 2010, Abbott Laboratories and Abbott Respiratory LLC filed suit against the Company in the U.S. District Court for the District of Delaware, alleging patent infringement for the filing of the Company’s ANDA relating to Niacin-Simvastatin Tablets, 1000/20 mg, generic to Simcor ® . The Company filed an answer and counterclaim. Discovery is proceeding. A final pretrial conference and Markman hearing are set for February 22, 2013. Discovery is proceeding, and no trial date has been set.

ALZA Corp., et al. v. Impax Laboratories, Inc., et al. (Methylphenidate)

In November 2010, ALZA Corp., Ortho-McNeil-Janssen Pharmaceuticals, Inc. (together, “ALZA”) filed suit against the Company in the U.S. District Court for the District of Delaware, alleging patent infringement for the filing of the Company’s ANDA relating to Methylphenidate Hydrochloride Tablets, 54 mg, generic to Concerta ® . Another complaint was subsequently filed to allege infringement of the 18, 27 and 36 mg strengths, based on the Company amending its ANDA to include those additional strengths. The Company has filed its answers to both complaints. The parties have entered a stipulation staying the Company’s litigations until April 9, 2012.

 

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Shire LLC, et al. v. Impax Laboratories, Inc., et al. (Guanfacine)

In December 2010, Shire LLC, Supernus Pharmaceuticals, Inc., Amy F.T. Arnsten, Ph.D., Pasko Rakic, M.D., and Robert D. Hunt, M.D. (together, “Shire”) filed suit against the Company in the U.S. District Court for the Northern District of California alleging patent infringement for the filing of the Company’s ANDA relating to Guanfacine Hydrochloride Tablets, 4 mg, generic to Intuniv ® . In January, 2011 Shire amended its complaint to add the 1 mg, 2 mg, and 3 mg strengths, based on the Company amending its ANDA to include those additional strengths. The Company filed its answer and counterclaims. In September 2011, the Court amended its Scheduling Order setting the Markman hearing for May 30, 2012. No trial date has been scheduled.

Takeda Pharmaceutical Co., Ltd, et al. v. Impax Laboratories, Inc, (Dexlansoprazole)

In April 2011, Takeda Pharmaceutical Co., Ltd., Takeda Pharmaceuticals North America, Inc., Takeda Pharmaceuticals LLC, and Takeda Pharmaceuticals America, Inc. (collectively, “Takeda”) filed suit against the Company in the U.S. District Court for the Northern District of California alleging patent infringement based on the filing of the Company’s ANDA relating to Dexlansoprazole Delayed Release Capsules, 30 and 60 mg, generic to Dexilant ® . The Company filed an answer and counterclaims, including a claim relating to false marking of an expired patent. Takeda filed a motion to dismiss the Company’s false marking counterclaim. Following the enactment of the America Invents Act, the parties stipulated to dismissal of the false marking claim. Discovery is ongoing, and a Markman decision is pending after a hearing on February 16, 2012. No trial date has been set.

Purdue Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals L.P., Rhodes Technologies, Board of Regents of the University of Texas System, and Grunenthal GmbH v. Impax Laboratories, Inc. (Oxycodone)

In April 2011, Purdue Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals L.P., Rhodes Technologies, Board of Regents of the University of Texas System, and Grunenthal GmbH (collectively “Purdue”) filed suit against the Company in the U.S. District Court for the Southern District of New York alleging patent infringement based on the filing of the Company’s ANDA relating to Oxycodone Hydrochloride, Controlled Release tablets, 10, 15, 20, 30, 40, 60 and 80 mg, generic to Oxycontin ® . The Company filed an answer and counterclaims.

Avanir Pharmaceuticals, Inc. et al. v. Impax Laboratories, Inc. (Dextromethorphan/Quinidine)

In August 2011, Avanir Pharmaceuticals, Inc., Avanir Holding Co., and Center for Neurological Study (collectively “Avanir”) filed suit against the Company in the U.S. District Court for the District of Delaware alleging patent infringement based on the filing of the Company’s ANDA relating to Dextromethorphan/Quinidine Capsules, 20 mg/10 mg, generic of Nuedexta ® . The Company filed an answer and counterclaims. Discovery is proceeding, and trial is set for September 2013.

GlaxoSmithKline LLC, et al. v. Impax Laboratories, Inc., et al. (Dutasteride/Tamsulosin)

In September 2011, GlaxoSmithKline LLC and SmithKline Beecham Corp. filed suit against the Company in the U.S. District Court for the District of Delaware alleging patent infringement based on the filing of the Company’s ANDA relating to Dutasteride/Tamsulosin Capsules, 0.5 mg/0.4 mg, generic of Jalyn ® . The Company filed an answer and counterclaim. Discovery is proceeding, and trial is set for October 22, 2012.

Cephalon, Inc. et al. v. Impax Laboratories, Inc. (Fentanyl Citrate)

In November 2011, Cephalon, Inc. and CIMA Labs, Inc. (together “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 Company’s ANDA relating to Fentanyl Citrate Buccal Tablets, 100, 200, 400, 600, and 800 mcg, generic to Fentora ® . The Company filed an answer and counterclaims, as well as a declaratory judgment action to include two other patents (U.S. Patent Nos. 6,264,981 and 8,092,832). In response, Cephalon alleged infringement of those two patents against the Company. Discovery is ongoing, and trial is set for June 24, 2013.

 

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Other Litigation Related to Our Business

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 were removed to federal court, and a petition for multidistrict litigation to consolidate the cases in federal court was granted. These cases and any subsequently filed cases will be heard under the consolidated action entitled In re: Budeprion XL Marketing Sales Practices, and Products Liability Litigation, MDL No. 2107, in the United States District Court for the Eastern District of Pennsylvania. The Company filed a motion to dismiss and a motion to certify that order for interlocutory appeal, both of which were denied. Plaintiffs filed a motion for class certification and the Company filed an opposition to that motion. The class certification hearing was held on May 17, 2011. In September 2011, the Company filed a summary judgment motion on the grounds of plaintiffs’ claims are preempted under federal law based on the United States Supreme Court decision in PLIVA v. Mensing. On January 6, 2012, the Company and co-defendant Teva entered into a classwide settlement agreement for all the actions included in the multidistrict litigation. Pursuant to that settlement, the Company has agreed to take certain actions related to the subject product, to pay for class notice and settlement administration, and to reimburse any attorney’s fees or costs awarded by the Court to plaintiffs’ up to a capped amount. The Company has accrued estimated costs related to the settlement of this matter as of December 31, 2011. The settlement was preliminarily approved by the Court on February 1, 2012 and remains subject to final approval following notice to the class.

Impax Laboratories, Inc. v. Shire LLC and Shire Laboratories, Inc. (generic Adderall XR ® )

On November 1, 2010, the Company filed suit against Shire LLC and Shire Laboratories, Inc. (collectively “Shire”) in the Supreme Court of the State of New York, alleging breach of contract and other related claims due to Shire’s failure to fill the Company’s orders for the generic Adderall XR ® product as required by the parties’ Settlement Agreement and License and Distribution Agreement, each signed in January 2006. In addition, the Company filed a motion for a preliminary injunction and a temporary restraining order seeking to require Shire to fill product orders placed by the Company. In November 2010, the case was removed to the U.S. District Court for the Southern District of New York by Shire based on diversity jurisdiction. Discovery is closed, and trial is set for April 10, 2012.

 

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19. SUBSEQUENT EVENTS

Zomig Distribution, License, Development and Supply Agreement with AstraZeneca

On January 31, 2012, the Company signed an agreement to license from AstraZeneca the exclusive U.S. commercial rights to Zomig ® (zolmitriptan) tablet, orally disintegrating tablet, and nasal spray formulations. As part of a Distribution, License, Development and Supply Agreement, the Company will also have non-exclusive rights to develop new products containing zolmitriptan and to exclusively commercialize these products in the U.S. in connection with the Zomig ® brand. Under terms of the agreement, the Company will pay AstraZeneca quarterly payments totaling $ 130,000,000 during 2012, and thereafter, the Company will pay AstraZeneca tiered royalties on future sales of zolmitriptan products.

FDA Acceptance of NDA Filing for IPX066 for the Treatment of Idiopathic Parkinson’s Disease

The FDA has accepted for filing the Company’s NDA for IPX066 for the treatment of idiopathic Parkinson’s disease submitted to the Agency on December 21, 2011. The Prescription Drug User Fee Date (“PDUFA”) for a decision by the FDA is October 21, 2012. IPX066 has been licensed to GlaxoSmithKline for territories outside the U.S. and Taiwan for development and marketing.

 

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20. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)

Selected financial information for the quarterly periods noted is as follows:

 

September 30, September 30, September 30, September 30,
       2011 Quarters Ended:  
(in $000’s except shares and per share amounts)      March 31        June 30        September 30        December 31  

Revenue:

                   

Global Product sales, gross

     $ 151,832         $ 181,972         $ 169,519         $ 225,122   

Less:

                   

Chargebacks

       35,216           39,395           39,690           52,203   

Rebates

       12,709           17,392           18,014           21,058   

Product Returns

       2,706           1,799           552           (4,369

Other credits

       8,863           12,261           13,602           13,536   
    

 

 

      

 

 

      

 

 

      

 

 

 

Global Product sales, net

       92,338           111,125           97,661           142,694   
    

 

 

      

 

 

      

 

 

      

 

 

 

Rx Partner

       4,120           6,303           14,059           7,601   

OTC Partner

       1,943           1,184           879           1,015   

Research Partner

       6,715           3,713           3,715           3,714   

Promotional Partner

       3,535           3,535           3,535           3,535   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total revenues

       108,651           125,860           119,849           158,559   
    

 

 

      

 

 

      

 

 

      

 

 

 

Gross profit

       58,537           59,702           62,654           77,402   

Net income

     $ 13,863         $ 12,550         $ 17,220         $ 21,862   
    

 

 

      

 

 

      

 

 

      

 

 

 

Net income per share (basic)

     $ 0.22         $ 0.20         $ 0.27         $ 0.34   
    

 

 

      

 

 

      

 

 

      

 

 

 

Net income per share (diluted)

     $ 0.21         $ 0.19         $ 0.26         $ 0.33   
    

 

 

      

 

 

      

 

 

      

 

 

 

Weighted Average:

                   

common shares outstanding:

                   

Basic

       63,390,527           64,024,483           64,387,413           64,687,753   
    

 

 

      

 

 

      

 

 

      

 

 

 

Diluted

       67,044,266           67,654,047           66,986,758           67,029,407   
    

 

 

      

 

 

      

 

 

      

 

 

 

Quarterly computations of 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.

The Company recorded a reduction to its reserve for product returns of $ 5.7 million in the fourth quarter of 2011 based upon actual prescription data related to its generic Adderall XR ® products. Additionally, the Company recorded a reduction to its reserve for product returns of $ 2.0 million in the fourth quarter of 2011 related to all Global Products other than its generic Adderall XR ® products as a result of continued improvement in the Company’s historical experience of actual return credits processed.

 

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Selected financial information for the quarterly periods noted is as follows:

 

September 30, September 30, September 30, September 30,
       2010 Quarters Ended:  
(in $000’s except shares and per share amounts)      March 31        June 30        September 30        December 31  

Revenue:

                   

Global Product sales, gross

     $ 426,658         $ 224,657         $ 168,287         $ 148,234   

Less:

                   

Chargebacks

       56,168           49,420           36,065           39,913   

Rebates

       29,425           16,739           21,630           17,666   

Product Returns

       7,400           4,596           8,344           (4,519

Other credits

       23,888           15,925           10,669           9,544   
    

 

 

      

 

 

      

 

 

      

 

 

 

Global Product sales, net

       309,777           137,977           91,579           85,630   
    

 

 

      

 

 

      

 

 

      

 

 

 

Rx Partner

       4,903           5,802           202,799           3,773   

OTC Partner

       1,765           2,309           2,365           2,449   

Research Partner

       3,385           3,494           3,714           3,715   

Promotional Partner

       3,503           3,500           3,535           3,535   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total revenues

       323,333           153,082           303,992           99,102   
    

 

 

      

 

 

      

 

 

      

 

 

 

Gross profit

       243,757           84,190           160,871           50,445   

Net income

     $ 131,485         $ 31,348         $ 75,163           12,422   
    

 

 

      

 

 

      

 

 

      

 

 

 

Net income per share (basic)

     $ 2.16         $ 0.51         $ 1.20         $ 0.20   
    

 

 

      

 

 

      

 

 

      

 

 

 

Net income per share (diluted)

     $ 2.06         $ 0.48         $ 1.15         $ 0.19   
    

 

 

      

 

 

      

 

 

      

 

 

 

Weighted Average:

                   

common shares outstanding:

                   

Basic

       61,008,015           61,876,599           62,435,116           62,807,768   
    

 

 

      

 

 

      

 

 

      

 

 

 

Diluted

       63,865,678           65,538,805           65,470,341           66,210,101   
    

 

 

      

 

 

      

 

 

      

 

 

 

Quarterly computations of 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.

The Company recorded a reduction to its reserve for product returns of $ 4.1 million in the fourth quarter of 2010 as a result of actual prescription data showing exclusivity period sales of its tamsulosin products had been fully prescribed to patients. Additionally, the Company recorded a reduction to its reserve for product returns of $ 3.7 million in the fourth quarter of 2010 related to all Global Products other than its tamsulosin and generic Adderall XR ® products as a result of continued improvement in the Company’s historical experience of actual return credits processed.

 

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The table below presents a comparison of certain consolidated statement of operations financial reporting captions under the pre-amendment and post-amendment accounting principles of ASC 605-25 for each of the three months ended March 31, 2010, June 30, 2010, September 30, 2010, and December 31, 2010 and for the year ended December 31, 2010, as follows:

 

September 30, September 30, September 30, September 30, September 30,
         Three Months Ended:      Twelve
Months Ended
 
       March 31,      June 30,      September 30,      December 31,      December 31,  
(in $000’s except per share amounts)      2010      2010      2010      2010      2010  

RX Partner revenue

                

Pre-amendment principles

     $ 4,903       $ 5,802       $ 5,922       $ 5,628       $ 22,255   

Change

       (802      407         437         (1,855      (1,813

Post-amendment principles

     $ 4,101       $ 6,209       $ 6,359       $ 3,773       $ 20,442   

Cost of revenues

                

Pre-amendment principles

     $ 79,576       $ 68,892       $ 47,998       $ 48,498       $ 244,964   

Change

       282         1,104         (302      159         1,243   

Post-amendment principles

     $ 79,858       $ 69,996       $ 47,696       $ 48,657       $ 246,207   

Income before income taxes

                

Pre-amendment principles

     $ 210,997       $ 49,438       $ 21,882       $ 11,823       $ 294,140   

Change

       (1,084      (697      739         (2,014      (3,056

Post-amendment principles

     $ 209,913       $ 48,741       $ 22,621       $ 9,809       $ 291,084   

Net income

                

Pre-amendment principles

     $ 131,485       $ 31,348       $ 13,908       $ 7,515       $ 184,256   

Change

       (689      (443      470         (1,280      (1,942

Post-amendment principles

     $ 130,796       $ 30,905       $ 14,378       $ 6,235       $ 182,314   

Earnings per share-basic

                

Pre-amendment principles

     $ 2.16       $ 0.51       $ 0.22       $ 0.12       $ 2.97   

Change

       (0.02      (0.01      0.01         (0.02      (0.03

Post-amendment principles

     $ 2.14       $ 0.50       $ 0.23       $ 0.10       $ 2.94   

Refer to Note 11— Alliance and Collaboration Agreements for more information regarding the accounting for the Teva Agreement.

 

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SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS

For the Year Ended December 31, 2009

(in $000’s)

 

September 30, September 30, September 30, September 30, September 30,

Column A

     Column B        Column C        Column D      Column E  
       Balance at        Charge to      Charge to               Balance at  
       Beginning of        Costs and      Other               End of  

Description

     Period        Expenses      Accounts        Deductions      Period  

Deferred tax asset valuation

                    

Allowance

     $ 333         $ (333    $ —           $ —         $ —     

Reserve for bad debts

       828           229         —             (685      372   

 

September 30, September 30, September 30, September 30, September 30,
For the Year Ended December 31, 2010                                    
(in $000’s)                       

Column A

     Column B        Column C        Column D      Column E  
       Balance at        Charge to        Charge to               Balance at  
       Beginning of        Costs and        Other               End of  

Description

     Period        Expenses        Accounts        Deductions      Period  

Deferred tax asset valuation

                      

Allowance

     $ —           $ —           $ —           $ —         $ —     

Reserve for bad debts

       372           277           —             (110      539   

 

September 30, September 30, September 30, September 30, September 30,
For the Year Ended December 31, 2011                                    
(in $000’s)                       

Column A

     Column B        Column C        Column D      Column E  
       Balance at        Charge
to
       Charge to               Balance at  
       Beginning of        Costs and        Other               End of  

Description

     Period        Expenses        Accounts        Deductions      Period  

Deferred tax asset valuation

                      

Allowance

     $ —           $ —           $ —           $ —         $ —     

Reserve for bad debts

       539           163           —             (90      612   

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

IMPAX LABORATORIES, INC.
By:   / s / Larry Hsu, Ph.D.
Name:   Larry Hsu, Ph.D.
Title:   President and Chief Executive Officer

Date: February 28, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/ Larry Hsu, Ph.D

   President, Chief Executive Officer   February 28, 2012

Larry Hsu, Ph.D

   (Principal Executive Officer) and Director  

/s/ Arthur A. Koch, Jr

   Executive Vice President, Finance, and Chief   February 28, 2012

Arthur A. Koch, Jr.

  

Financial Officer (Principal Financial

and Accounting Officer)

 

/s/ Robert L. Burr

   Chairman of the Board   February 28, 2012

Robert L. Burr

    

/s/ Leslie Z. Benet, Ph.D.

   Director   February 28, 2012

Leslie Z. Benet, Ph.D.

    

/s/ Allen Chao, Ph.D.

   Director   February 28, 2012

Allen Chao, Ph.D.

    

/s/ Nigel Ten Fleming, Ph.D.

   Director   February 28, 2012

Nigel Ten Fleming, Ph.D.

    

/s/ Michael Markbreiter

   Director   February 28, 2012

Michael Markbreiter

    

/s/ Peter R. Terreri

   Director   February 28, 2012

Peter R. Terreri

    

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description of Document

3.1.1    Restated Certificate of Incorporation, dated August 30, 2004.(1)
3.1.2    Certificate of Designation of Series A Junior Participating Preferred Stock, as filed with the Secretary of State of Delaware on January 21, 2009.(2)
3.2    Amended and Restated Bylaws, effective June 29, 2009.(3)
4.1    Specimen of Common Stock Certificate.(4)
4.2    Registration Rights Agreement, dated as of June 27, 2005, between the Company and the Initial Purchasers named therein.(4)
4.3    Preferred Stock Rights Agreement, dated as of January 20, 2009, by and between the Company and StockTrans, Inc., as Rights Agent.(2)
10.1.1    Amended and Restated Loan and Security Agreement, dated as of December 15, 2005, between the Company and Wachovia Bank, National Association.(4)
10.1.2    First Amendment, dated October 14, 2008, to Amended and Restated Loan and Security Agreement, dated December 15, 2005, between the Company and Wachovia Bank, National Association.(5)
10.1.3    Second Amendment to Amended and Restated Loan and Security Agreement, effective as of December 31, 2008, by and among the Company and Wachovia Bank, National Association.(6)
10.1.4    Third Amendment to Amended and Restated Loan and Security Agreement, effective as of March 31, 2009, by and among the Company and Wachovia Bank, National Association.(7)
10.1.5    Fourth Amendment to Amended and Restated Loan and Security Agreement, effective as of March 12, 2010, by and among the Company and Wachovia Bank, National Association, a Wells Fargo Company.(8)
10.1.6    Fifth Amendment to Amended and Restated Loan and Security Agreement, effective as of June 30, 2010, by and among the Company and Wells Fargo Bank, National Association, successor by merger to Wachovia Bank, National Association.(9)
10.1.7    Sixth Amendment to Amended and Restated Loan and Security Agreement, effective as of September 30, 2010, by and among the Company and Wells Fargo Bank, National Association, successor by merger to Wachovia Bank, National Association.(10)
10.1.8    Seventh Amendment to Amended and Restated Loan and Security Agreement, effective as of January 31, 2011, by and among the Company and Wells Fargo Bank, National Association, successor by merger to Wachovia Bank, National Association.(11)
10.2    Credit Agreement, dated as of February 11, 2011, by and among the Company, the Guarantors named therein, the Lenders named therein and Wells Fargo Bank, National Association, as Administrative Agent.**(12)
10.3    Security Agreement, dated as of February 11, 2011, by and among the Company, the Guarantors named therein, the Lenders named therein and Wells Fargo Bank, National Association, as Administrative Agent. (12)
10.4.1    Impax Laboratories Inc. 1999 Equity Incentive Plan.*(6)
10.4.2    Form of Stock Option Grant under the Impax Laboratories, Inc. 1999 Equity Incentive Plan.*(6)
10.5    Impax Laboratories Inc. 2001 Non-Qualified Employee Stock Purchase Plan.*(4)

 

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Table of Contents

 

Exhibit No.   

Description of Document

10.6.1    Impax Laboratories Inc. Amended and Restated 2002 Equity Incentive Plan.*(13)
10.6.2    Form of Stock Option Grant under the Impax Laboratories, Inc. Amended and Restated 2002 Equity Incentive Plan.*(6)
10.6.3    Form of Stock Bonus Agreement under the Impax Laboratories, Inc. Amended and Restated 2002 Equity Incentive Plan.*(6)
10.7.1    Impax Laboratories Inc. Executive Non-Qualified Deferred Compensation Plan, amended and restated effective January 1, 2008.*(8)
10.7.2    Amendment to Impax Laboratories Inc. Executive Non-Qualified Deferred Compensation Plan, effective as of January 1, 2009.* (8)
10.8.    Employment Agreement, dated as of January 1, 2010, between the Company and Larry Hsu, Ph.D.*(14)
10.9.1    Employment Agreement, dated as of January 1, 2010, between the Company and Charles V. Hildenbrand.*(14)
10.9.2    Confidential Separation and Release Agreement dated as of July 5, 2011, between the Company and Charles V. Hildenbrand.*(15)
10.10    Employment Agreement, dated as of January 1, 2010, between the Company and Arthur A. Koch, Jr.*(14)
10.11    Employment Agreement, dated as of January 1, 2010, between the Company and Michael J. Nestor.*(14)
10.12.1    Offer of Employment Letter, effective as of January 5, 2009, between the Company and Christopher Mengler.*(6)
10.12.2    Employment Agreement, dated as of January 1, 2010, between the Company and Christopher Mengler, R.Ph.*(14)
10.12.3    Separation Agreement and General Release, dated October 19, 2010, by and between the Company and Christopher Mengler, R.Ph.*(16)
10.13.1    Offer of Employment Letter, dated as of March 17, 2011, between the Company and Mark A. Schlossberg.*
10.13.2    Employment Agreement, dated as of May 2, 2011 between the Company and Mark A. Schlossberg.*
10.14.1    Offer of Employment Letter, dated as of August 18, 2011, between the Company and Carole Ben-Maimon.*(17)
10.14.2    Employment Agreement, dated as of November 7, 2011, between the Company and Carole-Ben-Maimon.*(18)
10.15.1    License and Distribution Agreement, dated as of January 19, 2006, between the Company and Shire LLC.**(19)
10.15.2    Amendment dated as of March 1, 2010 to the License and Distribution Agreement, dated as of January 19, 2006, between the Company and Shire LLC.
10.16.1    Joint Development Agreement, dated as of November 26, 2008, between the Company and Medicis Pharmaceutical Corporation.**(12)

 

II-3


Table of Contents

 

Exhibit No.

  

Description of Document

10.16.2    First Amendment dated as of January 26, 2011 to the Joint Development Agreement, dated as of November 26, 2008, between the Company and Medicis Pharmaceutical Corporation.
10.17.1    License, Development and Commercialization Agreement, dated as of December 15, 2010, by and between the Company and Glaxo Group Limited.**(11)
10.17.2    First Amendment dated as of December 23, 2011 to the License, Development and Commercialization Agreement, dated as of December 15, 2010, by and between the Company and Glaxo Group Limited.***
10.18    Supply Agreement, dated as of December 15, 2010, by and between the Company and Glaxo Group Limited.**(11)
10.19    Distribution, License, Development and Supply Agreement, dated as of January 31, 2012, by and between the Company and AstraZeneca UK Limited.***(20)
11.1    Statement re computation of per share earnings (incorporated by reference to Note 15 to the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K).
21.1    Subsidiaries of the registrant.
23.1    Consent of Grant Thornton LLP.
23.2    Consent of KPMG LLP.
31.1    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes -Oxley Act of 2002.
31.2    Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certifications of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certifications 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.
101    The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2011 and 2010, (ii) Consolidated Statements of Operations for each of the three years in the period ended December 31, 2011, (iii) Consolidated Statements of Changes in Stockholders’ Equity (Deficit) and Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2011, (iv) Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2011 and (v) Notes to Consolidated Financial Statements for each of the three years in the period ended December 31, 2011.

 

* Management contract, compensatory plan or arrangement.
** Confidential treatment granted for certain portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which portions are omitted and filed separately with the SEC.
*** Confidential treatment requested for certain portions of this exhibit pursuant to Rule 24b-2 under the Exchange Act, which portions are omitted and filed separately with the SEC.
    

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under those sections.

 

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Table of Contents
(1) Incorporated by reference to Amendment No. 5 to the Company’s Registration Statement on Form 10 filed on December 23, 2008.
(2) Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 22, 2009.
(3) Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2009.
(4) Incorporated by reference to the Company’s Registration Statement on Form 10 filed on October 10, 2008.
(5) Incorporated by reference to Amendment No. 2 to the Company’s Registration Statement on Form 10 filed on December 2, 2008.
(6) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
(7) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.
(8) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.
(9) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.
(10) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.
(11) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
(12) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.
(13) Incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A filed on April 14, 2010.
(14) Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 14, 2010.
(15) Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 11, 2011.
(16) Incorporated by reference to the Company’s Current Report on Form 8-K filed on October 22, 2010.
(17) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.
(18) Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 9, 2011.
(19) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
(20) Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 6, 2012.

 

II-5

Exhibit 10.13.1

 

LOGO

30831 Huntwood Avenue, Hayward, CA 94544

(510) 476-2000 Fax (510) 471-3200

www.impaxlabs.com

March 11, 2011

Mr. Mark Schlossberg

5134 Terramar Way

Oxnard, CA 93035

PROPOSED TERMS OF EMPLOYMENT

(REVISED)

Dear Mark,

This letter sets forth the proposed terms on which we would like you to join Impax Laboratories, Inc. (“ Impax ”) as its Senior Vice President and General Counsel. If the terms are acceptable to you, then we would propose to enter into a written employment agreement that incorporates the terms described in this letter, as well as such other terms as you and Impax may agree upon.

The terms we propose for your employment are summarized as follows:

 

  a. As Senior Vice President and General Counsel, you will report to Larry Hsu, Ph.D., President and Chief Executive Officer;

 

  b. You will be based in our Hayward, California office;

 

  c. You will be entitled to a base salary of $17,307.70 paid biweekly ($450,000.00 annually);

 

  d. You will be eligible to participate in the Impax management bonus program, under which, for each full calendar year, you would be eligible for a bonus targeted at 60% of your base salary and potentially up to 90% of your base salary, in each case depending on the achievement of certain business and individual objectives and criteria;

 

  e. Your potential bonus for 2011 will be prorated depending on your start date, but Impax will pay you a one-time cash payment for 2011, concurrent with the timing of any bonus payments for 2011, in the amount of the difference between the prorated bonus amount you are entitled to under the Impax management bonus program and the amount that you would have been entitled to had you been employed with Impax for the full year of 2011;

 

  f. Subject to Board of Directors approval, Impax will award to you: (i) an option to purchase 100,000 shares of Impax common stock, and (ii) 30,000 Restricted Stock Units, in each case subject to our normal vesting schedule of 25% per year starting on the first anniversary of the grant, so long as you remain employed by Impax (these grants are subject to Board of Directors approval and this proposal is not a intended to create any obligation on the part of Impax or its Board of Directors — further details on our equity plans and any specific awards grant to you will be provided following approval of such awards by our Board of Directors);


LOGO

 

  g. Impax will pay you a one-time hiring bonus of $100,000.00 (less applicable taxes and other required withholdings) to be paid as soon as administratively practical following your first day of employment with us;

 

  h. Impax will pay you a relocation allowance of $100,000.00 (which will be grossed up to account for applicable taxes and other required withholdings), which may be used toward any and all expenses that you may incur in your move to the Bay Area, which allowance will be payable as follows: (i) $50,000.00 after thirty (30) days of employment, and (ii) $50,000.00 on the first payroll date following your move to the Bay Area as demonstrated by delivery to Impax of proof of your permanent move to the Bay Area;

 

  i. Pending your acquisition of a permanent residence in the Bay Area, Impax will reimburse you up to $3,000 per month in temporary living expenses for up to a period of 12 months following your first day of employment with us; and

 

  j. You will be eligible for benefits in accordance with the applicable Impax policies for executives, including:

 

  i. medical and dental insurance coverage starting the first of the month following one month of employment;

 

  ii. group term life, and group long-term and short-term disability insurance coverage starting the first of the month following three months of employment;

 

  iii. participation in the Impax 401(k) Plan on the first day of the first calendar quarter following one month of employment;

 

  iv. participation in the Impax Executive Non Qualified Deferred Compensation Plan;

 

  v. accrual of up to twenty (20) days of Paid Time Off (PTO) that accrue on a weekly basis (PTO cannot be used until it is earned); and

 

  vi. a one-time allowance of 5 additional days Paid Time Off, if needed, the week of May 9, 2011.

We anticipate that the definitive written agreement will provide for an initial term expiring December 31, 2012, subject to termination earlier under certain circumstances. Such agreement will include Impax’s normal confidentiality, non-solicitation and non-compete covenants. The definitive written agreement is also expected to provide that (i) if within one year of your hire date you terminate your employment with Impax voluntarily without Good Reason or Impax terminates your employment for Cause (as such terms will be defined therein), then you will repay Impax 100% of the $100,000 hiring bonus and 100% of relocation payments that you received, and (ii) if such an event occurs within the second year after your hire date, then you will repay Impax the second of the relocation payments that you received.

Our offer will be contingent upon your successful completion of a drug test, background check and credit check paid by the Company. We will identify a clinic for drug testing local to you and, if you agree to the proposed terms in this letter and we move forward with a definitive written agreement, we ask that you schedule an appointment within 48 hours of your signed acceptance of the agreement. A positive result will negate our proposal and we will be unable to extend an offer.

 

Page 2 of 3


LOGO

If the terms described in this letter are acceptable to you, then please return to me a signed copy of this letter by confidential fax at 510-429-2146 by no later than March 18, 2011. Upon receipt of your signed copy, Impax will begin preparation of a draft employment agreement for your review. (Until a definitive written agreement is executed and delivered by you and Impax, you will not be an employee of Impax or be entitled to employment with Impax.)

Mark, we believe that you will contribute to the company’s overall success and that Impax will provide you the career environment and opportunities that you seek. We look forward to your joining the Impax team. If you have any questions please call me at 510-240-6045.

 

Sincerely,
/s/ Paul R. Ulatoski

Paul R. Ulatoski

Vice President Human Resources

Impax Laboratories, Inc.

 

Accepted by:    
/s/ Mark Schlossberg   Date:   March 17, 2011
Mark Schlossberg    

CC: Dr. Larry Hsu, Ph.D., President and CEO

 

Page 3 of 3

Exhibit 10.13.2

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT (“ Agreement ”), entered into as of May 2, 2011 (the “ Effective Date ”), by and between Impax Laboratories, Inc., a Delaware corporation (the “ Company ”), and Mark Schlossberg (the “ Executive ”).

W I T N E S S E T H:

WHEREAS, the Executive possesses unique personal knowledge, experience and expertise;

WHEREAS, the Company desires to employ the Executive, and the Executive desires to be employed by the Company, upon the terms and subject to the conditions set forth in this Agreement; and

WHEREAS, effective as of the Effective Date, the Company and the Executive desire to enter into this Agreement as to the terms and conditions of the Executive’s employment with the Company.

NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. EMPLOYMENT AND DUTIES

1.1 Term of Employment . The Executive’s initial term of employment under this Agreement shall commence on the Effective Date and shall continue until December 31, 2012 (the “ Initial Term ”), unless further extended or earlier terminated as provided in this Agreement. This Agreement will automatically be renewed for single one-year periods unless written notice of non-renewal is provided by either party at least 90 days prior to the end of the Initial Term or the successive one-year period then in effect or unless earlier terminated as provided in this Agreement. Neither non-renewal of this Agreement for additional periods after December 31, 2012, nor expiration of this Agreement as a result of such non-renewal, shall, by itself, result in termination of Executive’s employment. The period of time between the Effective Date and the termination of the Executive’s employment under this Agreement or the expiration of this Agreement, whichever is earlier, shall be referred to herein as the “ Term.

1.2 General .

1.2.1 During the Term, the Executive shall have the title of Senior Vice President and General Counsel of the Company and shall have general supervision of the Company’s legal functions and such other authorities, duties and responsibilities as may from time to time be delegated to him by the Chief Executive Officer of the Company. The Executive shall faithfully and diligently discharge his duties hereunder and use his best efforts to implement the policies established by the Board of Directors of the Company (the “ Board ”) from time to time. During the Term, the Executive shall report to the Chief Executive Officer.

 


1.2.2 The Executive shall devote all of his business time, attention, knowledge and skills faithfully, diligently and to the best of his ability, in furtherance of the business and activities of the Company; provided , however , that nothing in this Agreement shall preclude the Executive from devoting reasonable periods of time required for:

(i) serving as a director or member of a committee of up to two (2) organizations or corporations that do not, in the good faith determination of the Board, compete with the Company or otherwise create, or could create, in the good faith determination of the Board, a conflict of interest with the business of the Company;

(ii) delivering lectures, fulfilling speaking engagements, and any writing or publication relating to his area of expertise; provided , however , that any fees, royalties or honorariums received therefrom shall be promptly turned over to the Company;

(iii) engaging in professional organization and program activities;

(iv) managing his personal passive investments and affairs; and

(v) participating in charitable or community affairs;

provided that such activities do not materially, individually or in the aggregate, interfere with the due performance of his duties and responsibilities under this Agreement or create a conflict of interest with the business of the Company, as determined in good faith by the Board.

1.2.3 The Executive shall obtain a comprehensive medical examination every two years during the Term, and the Company shall reimburse the Executive the cost thereof to the extent not reimbursed by health insurance.

1.3 Reimbursement of Expenses . During the Term, the Company shall pay the reasonable expenses incurred by the Executive in the performance of his duties hereunder, including, without limitation, those incurred in connection with business related travel or entertainment, or, if such expenses are paid directly by the Executive, the Company shall promptly reimburse him for such payments, provided that the Executive properly accounts for such expenses in accordance with the Company’s business expense reimbursement policy. To the extent any such reimbursements (and any other reimbursements of costs and expenses provided for herein) are includable in the Executive’s gross income for Federal income tax purposes, all such reimbursements shall be made no later than March 15 of the calendar year next following the calendar year in which the expenses to be reimbursed are incurred.

2. COMPENSATION

2.1 Base Salary . During the Term, the Executive shall be entitled to receive a base salary at the annual rate of $450,000.00, subject to increase or decrease, as determined by the Board or its Compensation Committee from time to time in its discretion, payable in accordance with the payroll practices of the Company (the “ Base Salary ”).

2.2 Incentive Bonuses . In addition to the Base Salary, during the Term the Executive shall participate in the Company’s management bonus program whereby the Executive will be

 

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eligible to receive an annual cash incentive bonus based upon a percentage of the Base Salary and attainment of goals established in writing by the Board or its Compensation Committee at the beginning of each year (together with the one-time cash payment referred to in the last sentence of this Section 2.2, the “ Incentive Bonus ”) for each completed calendar year (subject to Section 5.4 hereof) of service with the Company. Such bonus shall be paid within 2-1/2 months following the end of the calendar year to which it relates. The Executive’s potential bonus for 2011 (targeted at 60% of the Base Salary and potentially up to 90% of the Base Salary depending upon the achievement of certain business and individual objectives and criteria) will be prorated based on the number of days elapsed in the year before and after the Effective Date. The Company shall pay the Executive a one-time cash payment for 2011, concurrent with the timing of any bonus payments for 2011, in the amount of the difference between the prorated bonus amount the Executive actually receives and the amount that he would have been eligible to receive, but for the foregoing proration but all other factors remaining the same, had he been employed with the Company for the full calendar year of 2011.

2.3 Options and Stock Awards . Subject to approval by the Board, the Company shall award to the Executive as soon as practical following the Effective Date: (i) an option to purchase 100,000 shares of the Company’s common stock, and (ii) 30,000 Restricted Stock Units, in each case subject to the Company’s normal vesting schedule of 25% per year starting on the first anniversary of the grant, so long as the Executive remains employed by the Company. During the Term, the Executive shall be eligible to receive such other grants of stock options and restricted stock in such amounts and subject to such terms as determined by the Compensation Committee in its sole discretion.

2.4 Hiring Bonus . The Company shall pay the Executive a one-time hiring bonus of $100,000.00, less applicable taxes and other required withholdings, to be paid as soon as administratively practical following the Effective Date; provided , however , if within one (1) year of the Effective Date the Executive voluntarily terminates his employment without Good Reason or the Company terminates the Executive’s employment for Cause (as such terms are defined below), then the Executive shall repay the Company, within thirty (30) days after the Company’s demand therefore, the full amount of the hiring bonus received.

2.5 Relocation Allowance . The Company shall pay the Executive a relocation allowance in the net amount of $100,000.00, which will be grossed up to account for all applicable taxes and other required withholdings, which may be used toward any and all expenses that the Executive may incur in moving to the Bay Area in California. The Company shall pay such allowance as follows: (i) $50,000.00 after thirty (30) days of employment with the Company, and (ii) the remaining $50,000.00 on the first payroll date following the Executive’s relocation to the Bay Area as demonstrated by delivery to the Company of satisfactory proof of a permanent move; provided , however , that (i) if within one (1) year of the Effective Date the Executive voluntarily terminates his employment without Good Reason or the Company terminates the Executive’s employment for Cause (as such terms are defined below), then the Executive shall repay to the Company the full amount of the relocation allowance received, and (ii) if such an event as described in subparagraph (i) above occurs after the first anniversary of the Effective Date and prior to the second anniversary of the Effective Date, then the Executive shall repay to the Company the second of the relocation allowance payments received. If either relocation allowance is required to be repaid pursuant to the proviso in the preceding sentence, the Executive shall repay the applicable relocation allowance to the Company within thirty (30) days of the Executive’s last day of employment.

 

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2.6 Reimbursement of Temporary Living Expenses . Pending acquisition of a permanent residence in California’s Bay Area, the Company shall reimburse the Executive up to $3,000.00 per month for temporary living expenses for up to a period of twelve (12) months following the Effective Date, provided that the Executive supplies sufficient documentation detailing such expenses. Such reimbursements will cease once the Executive becomes eligible to receive the second relocation allowance payment as set forth in Paragraph 2.5 above, or after a period of twelve (12) months, whichever occurs first.

2.7 Additional Compensation . During the Term, in addition to the foregoing, the Executive shall be eligible to receive such other compensation as may from time to time be awarded him by either the Board or the Compensation Committee in its sole discretion.

3. PLACE OF PERFORMANCE

In connection with his employment by the Company, the Executive shall be based at the Company’s principal executive offices in Hayward, California.

4. EMPLOYEE BENEFITS

During the Term, the Executive shall be entitled to paid time off generally made available to executive personnel of the Company and to participate in and have the benefit of all group life, disability, hospital, surgical and major medical insurance plans and programs and other employee benefit plans and programs as generally are made available to executive personnel of the Company, as such benefit plans or programs may be amended or terminated in the sole discretion of the Board and with the concurrence of the Compensation Committee, from time to time. The Executive shall accrue up to twenty (20) days of paid time off each calendar year which will accrue on a weekly basis (paid time off cannot be used until it is accrued). In addition, the Executive shall receive a one-time allowance of up to five (5) additional days of paid time off, if needed, to be used during the week of May 9, 2011.

5. TERMINATION OF EMPLOYMENT

5.1 General . The Executive’s employment under this Agreement may be terminated without any breach of this Agreement only on the following circumstances:

5.1.1 Death . The Executive’s employment under this Agreement shall terminate upon his death.

5.1.2 Disability . If the Executive suffers a Disability (as defined below), the Company may terminate the Executive’s employment under this Agreement upon 30 days prior written notice; provided that the Executive has not returned to full time performance of his duties during such 30-day period. For purposes of this Agreement, “ Disability ” shall mean the Executive’s inability to perform his duties and responsibilities hereunder, with or without reasonable accommodation, due to any physical or mental illness or incapacity, which condition either (i) has continued for a period of 180 days (including weekends and holidays) in any

 

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consecutive 365-day period, or (ii) is projected by the Board in good faith after consulting with a doctor selected by the Company and consented to by the Executive (or, in the event of the Executive’s incapacity, his legal representative), such consent not to be unreasonably withheld, that the condition is likely to continue for a period of at least six consecutive months from its commencement.

5.1.3 Good Reason . The Executive may terminate his employment under this Agreement for Good Reason (as defined below) at any time on or prior to the 60th day after the occurrence of any of the Good Reason events set forth in the following sentence. For purposes of this Agreement, “ Good Reason ” shall mean the occurrence of any of the following events without the Executive’s consent and which is not cured by the Company upon written notice by the Executive, such notice to have been provided by the Executive within 30 days of any such event having occurred:

(i) any action or inaction by the Company constituting a material breach of the Agreement by the Company;

(ii) a material diminution of the authorities, duties or responsibilities of the Executive set forth in Section 1.2 above (other than temporarily while the Executive is physically or mentally incapacitated and unable to properly perform such duties, as determined by the Board in good faith);

(iii) the loss of any of the titles of the Executive with the Company set forth in Section 1.2 above;

(iv) a material reduction by the Company in the Base Salary or in any of the percentages of the Base Salary payable as an Incentive Bonus, but, except in the case of a reduction following a Change in Control (as defined below), not including (a) a reduction in the Base Salary or in any of the percentages of the Base Salary payable as an Incentive Bonus which is consistent with the reduction in the Base Salary or in any of the percentages of the Base Salary payable as an Incentive Bonus imposed on all senior executives of the Company or (b) a reduction in the Base Salary or in any of the percentages of the Base Salary payable as an Incentive Bonus based on the results of peer benchmark data obtained by the Board and after approval of the Board;

(v) the relocation of the Executive to an office more than 50 miles from its current location;

(vi) the assignment to the Executive of duties or responsibilities that are materially inconsistent with any of his duties and responsibilities set forth in Section 1.2 hereof;

(vii) a material change in the reporting structure set forth in Section 1.2.1 hereof; or

(viii) the failure of the Company to obtain the assumption in writing of its obligation to perform this Agreement by any successor in connection with a sale or other disposition by the Company of all or substantially all of the Company’s assets or businesses within 10 days after such sale or other disposition.

 

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5.1.4 Without Good Reason . The Executive may voluntarily terminate his employment under this Agreement without Good Reason upon written notice by the Executive to the Company at least 60 days prior to the effective date of such termination (which termination the Company may, in its sole discretion, make effective earlier than the date set forth in the Notice of Termination (as defined below)).

5.1.5 Cause . The Company may terminate the Executive’s employment under this Agreement at any time for Cause (as defined below). For purposes of this Agreement, termination for “ Cause ” shall mean termination of the Executive’s employment because of the occurrence of any of the following as determined in good faith by the Board:

(i) the willful and continued failure by the Executive to substantially perform his obligations under this Agreement (other than any such failure resulting from the Executive’s incapacity due to a Disability); provided , however , that the Company shall have provided the Executive with a Notice of Termination specifying such failure and the Executive shall have been afforded at least 15 days within which to cure same;

(ii) the indictment of the Executive for, or his conviction of or plea of guilty or nolo contendere to, a felony or any other crime involving moral turpitude or dishonesty;

(iii) the Executive’s willful misconduct in the performance of his duties hereunder (including theft, fraud, embezzlement, and securities law violations or violation of the Company’s Code of Conduct or other written policies); or

(iv) the Executive’s willful misconduct other than in the performance of his duties for the Company (including theft, fraud, embezzlement, and securities law violations) that is actually or potentially materially injurious to the Company, monetarily or otherwise.

For purposes of this Section 5.1.5, no act or failure to act on the part of the Executive shall be considered “ willful ,” unless done, or omitted to be done, without reasonable belief that his action or omission was in, or not opposed to, the best interest of the Company (including its reputation). Prior to any termination for Cause, the Company shall provide the Executive with a Notice of Termination specifying the event constituting Cause and shall give the Executive the opportunity to appear before the Board to present his views on the Cause event. If, after such hearing, the majority of the full Board (excluding the Executive) does not support such termination, the Notice of Termination shall be rescinded. After providing the notice in the foregoing sentence, the Board may suspend the Executive with full pay and benefits until a final determination pursuant to this Section has been made.

5.1.6 Without Cause . The Company may terminate the Executive’s employment under this Agreement without Cause immediately upon written notice by the Company to the Executive, other than for death or Disability.

 

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5.2 Notice of Termination . Any termination of the Executive’s employment by the Company or by the Executive (other than termination by reason of the Executive’s death) shall be communicated by written Notice of Termination to the other party of this Agreement. For purposes of this Agreement, a “ Notice of Termination ” shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide the basis for such termination.

5.3 Date of Termination . The “ Date of Termination ” shall mean (a) if the termination is the result of the Executive’s death, the date of his death, (b) if the termination is pursuant to Section 5.1.2 hereof, 30 days after the Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such 30-day period), (c) if the termination is pursuant to Section 5.1.5 or Section 5.1.3 hereof, the date specified in the Notice of Termination after the expiration of any applicable cure period, (d) if the termination is pursuant to Section 5.1.4 hereof, the date specified in the Notice of Termination which shall be at least 60 days after the Notice of Termination is given, or such earlier date as the Company shall determine in its sole discretion, and (e) if the termination is pursuant to Section 5.1.6 hereof, the date on which the Notice of Termination is given.

5.4 Compensation Upon Termination .

5.4.1 Termination for Cause or without Good Reason . If the Executive’s employment shall be terminated by the Company for Cause or by the Executive without Good Reason, then the Executive shall receive from the Company: (a) any earned but unpaid portion of the Base Salary through the Date of Termination, paid in accordance with the Company’s standard payroll practices; (b) any Incentive Bonus earned but unpaid for a prior fiscal year, paid in accordance with Section 2.2; (c) reimbursement for any unreimbursed expenses properly incurred and paid in accordance with Section 1.3 and Section 2.6 through the Date of Termination; (d) payment for any accrued but unused vacation time in accordance with Company policy; (e) all stock options and restricted stock previously granted to the Executive that have vested in accordance with the terms of such grants; and (f) such vested accrued benefits, and other payments, if any, as to which the Executive (and his eligible dependents) may be entitled under, and in accordance with the terms and conditions of, the employee benefit arrangements, plans and programs of the Company as of the Date of Termination, other than any severance pay plan (such amounts and benefits set forth in clauses (a) though (f) being referred to hereinafter as the “ Amounts and Benefits ”), and the Company shall have no further obligation with respect to this Agreement other than as provided in Sections 7.4, 8 and 9 hereof. Any stock options and restricted stock previously granted to the Executive that have not vested in accordance with the terms of their grants as of the Date of Termination shall be forfeited as of the Date of Termination.

5.4.2 Termination without Cause or For Good Reason . If, prior to the expiration of the Term, the Executive resigns from his employment hereunder for Good Reason or the Company terminates the Executive’s employment hereunder without Cause (other than a termination by reason of death or Disability), and Section 5.4.3 does not apply, then the Company shall pay or provide the Executive the Amounts and Benefits and, subject to Section 5.4.8:

 

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(i) Subject to Section 9.9.2, an amount equal to the sum of (x) the balance of the Base Salary due under this Agreement or one and one half times the Base Salary as then in effect (without taking into account any reduction therein that constitutes a basis for Good Reason), whichever is the greater, plus (y) an amount equal to one and one half times the average of the Incentive Bonus the Executive received from the Company for all fiscal years completed during the Term, with the aggregate amount due paid in equal installments on the Company’s normal payroll dates for a period of 12 months from the Date of Termination in accordance with the normal payroll practices of the Company, with each such payment deemed to be a separate payment for the purposes of Code Section 409A (as defined below);

(ii) in the event such resignation or termination occurs following the Company’s first fiscal quarter of any year, a pro rata portion of the Executive’s Incentive Bonus for the fiscal year in which the Executive’s termination occurs based on actual results for such year (determined by multiplying the amount of such Incentive Bonus which would be due for the full fiscal year, as determined in good faith by the Board, by a fraction, the numerator of which is the number of days during the fiscal year of termination that the Executive is employed by the Company and the denominator of which is 365), paid in accordance with, and at the times specified in, Section 2.2 (“ Pro Rata Bonus ”); and

(iii) the continuation of all benefits for 24 months from the Date of Termination.

In addition, subject to Section 5.4.8, the vesting of all unvested stock options and restricted stock previously granted to the Executive shall be accelerated by 12 months, and any such stock options, notwithstanding any provision to the contrary in the option or the plan pursuant to which the option was granted, shall remain exercisable for a period of 12 months following the Date of Termination.

5.4.3 Termination Following Change in Control . Anything contained herein to the contrary notwithstanding, if the Executive resigns from his employment hereunder for Good Reason, the Company terminates the Executive’s employment hereunder without Cause (other than a termination by reason of death or Disability) within 60 days preceding or 12 months following a Change in Control (as defined below), or the Term expires or is not renewed due to the Company’s delivery of a notice of nonrenewal and the Executive’s employment is then terminated without Cause within 12 months following a Change in Control, then the Company shall pay or provide the Executive the Amounts and Benefits and, subject to Section 5.4.8, a change-in-control payment as follows:

(i) subject to Section 9.9.2, an amount equal to the sum of (x) the balance of the Base Salary due under this Agreement or two and one quarter times the Base Salary as then in effect (without taking into account any reduction therein that constitutes a basis for Good Reason), whichever is the greater, plus (y) an amount equal to two and one quarter times the average of the Incentive Bonus the Executive received from the Company for all fiscal years completed during the Term, with the aggregate amount due paid in equal installments on the Company’s normal payroll dates for a period of 12 months from the Date of Termination in accordance with the normal payroll practices of the Company, with each such payment deemed to be a separate payment for the purposes of Code Section 409A (as defined below);

 

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(ii) in the event such resignation or termination occurs following the Company’s first fiscal quarter of any year, a Pro Rata Bonus; and

(iii) the continuation of all benefits for 24 months from the Date of Termination.

In addition, subject to Section 5.4.8, the vesting of all unvested stock options and restricted stock previously granted to the Executive shall be accelerated to the Date of Termination, and any such stock options, notwithstanding any provision to the contrary in the option or the plan pursuant to which the option was granted, shall remain exercisable for a period of 12 months following the Date of Termination.

5.4.4 For purposes of this Agreement, a “ Change in Control ” shall be deemed to occur upon any of the following events, provided that such an event is a Change in Control Event within the meaning of Code Section 409A (as defined below): (a) any “ person ” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the common stock), becoming the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company’s then outstanding securities; (b) during any period of 12 consecutive months, the individuals who, at the beginning of such period, constitute the Board, and any new director whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the 12-month period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; (c) a merger or consolidation of the Company with any other corporation or other entity, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto (and held by persons that are not affiliates of the acquirer) continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided , however , that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered by the exceptions in clause (a) of this Section 5.4.4) acquires more than 50% of the combined voting power of the Company’s then outstanding securities shall not constitute a Change in Control; or (d) the consummation of a sale or other disposition by the Company of all or substantially all of the Company’s assets, including a liquidation, other than the sale or other disposition of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, more than 50% of the combined voting power of the outstanding voting securities of the Company immediately prior to the time of the sale or other disposition.

5.4.5 Termination upon Death . In the event of the Executive’s death, the Company shall pay or provide to the Executive’s estate: (i) the Amounts and Benefits and (ii) a Pro Rata Bonus. In addition, (A) all of the then remaining unvested restricted stock previously

 

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granted to the Executive shall immediately become vested on the Date of Termination and shall be distributed to the Executive’s estate within 60 days of the Date of Termination and (B) the portion of the unvested stock options previously granted to the Executive that are scheduled to vest in the calendar year of the Executive’s death shall immediately become vested on the certification of the Compensation Committee based on the achievement of the performance goals for such year, calculated through the Date of Termination, and shall be distributed to the Executive’s estate 60 days after the Date of Termination. After giving effect to the foregoing, any portion of the stock options that remain unvested on the certification following the Executive’s death shall be forfeited.

5.4.6 Termination upon Disability . In the event the Company terminates the Executive’s employment hereunder for reason of Disability, the Company shall pay or provide to the Executive: (i) the Amounts and Benefits, (ii) a Pro Rata Bonus and (iii) medical benefits for six months. In addition, subject to Section 5.4.8, (A) 50% of the unvested restricted stock previously granted to the Executive shall immediately become vested on the Date of Termination and shall be distributed to the Executive as provided in, and subject to, Sections 5.4.8 and 9.9.2 and (B) the portion of the unvested stock options previously granted to the Executive that are scheduled to vest in the calendar year the Date of Termination occurs shall immediately become vested on the certification of the Compensation Committee based on the achievement of the performance goals for such year, calculated through the Date of Termination, and shall be distributed to the Executive as provided in, and subject to, Sections 5.4.8 and 9.9.2. After giving effect to the foregoing, any portion of the restricted shares and stock options that remain unvested on the certification following the Date of Termination shall be forfeited as of the Date of Termination.

5.4.7 No Mitigation or Offset . The Executive shall not be required to mitigate the amount of any payment provided for in this Section 5.4 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 5.4 be reduced by any compensation earned by the Executive as the result of employment by another employer or business or by profits earned by the Executive from any other source at any time before and after the Date of Termination.

5.4.8 Release . Notwithstanding any provision to the contrary in this Agreement, the Company’s obligation to pay or provide the Executive with the payments and benefits under Sections 5.4.2 and 5.4.3 (other than the Amounts and Benefits), and any distributions with respect to the restricted stock and stock options under Sections 5.4.2, 5.4.3 and 5.4.6, shall be conditioned on the Executive’s execution and failure to revoke a waiver and general release in a form consistent with Exhibit A hereto (subject to such changes as may be necessary at the time of execution in order to make such release enforceable) (the “ Release ”). The Company shall provide the Release to the Executive within seven days following the applicable Date of Termination. In order to receive the payments and benefits under Sections 5.4.2 and 5.4.3 (other than the Amounts and Benefits) and the distributions with respect to the restricted stock and stock options under Sections 5.4.2, 5.4.3 and 5.4.6, the Executive will be required to execute and deliver the Release within 21 days after the date it is provided to him and not to revoke it within seven days following such execution and delivery. Notwithstanding anything to the contrary contained herein, (i) all payments delayed pursuant to this Section, except to the extent delayed pursuant to Section 9.9.2, shall be paid to the Executive in a lump sum on the first Company

 

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payroll date on or following the 60th day after the Date of Termination, and any remaining payments due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein, with each such payment deemed to be a separate payment for the purposes of Code Section 409A (as defined below) and (ii) all distributions with respect to the restricted stock and stock options delayed pursuant to this Section, except to the extent delayed pursuant to Section 9.9.2, shall be distributed to the Executive on the 60th day after the Date of Termination.

6. INSURABILITY; RIGHT TO INSURE

The Company shall have the right to maintain key man life insurance in its own name covering the Executive’s life in an amount of up to $50,000,000.00. The Executive shall fully cooperate in the procuring of such insurance, including submitting to any required medical examination and by completing, executing and delivering such applications and other instrument in writing as may be reasonably required by any insurance company to which application for insurance may be made by the Company.

7. CONFIDENTIALITY; NON-SOLICITATION; NON-DISPARAGEMENT; COOPERATION

7.1 Confidential Information. The Company and the Executive acknowledge that the services to be performed by the Executive under this Agreement are unique and extraordinary and, as a result of such employment, the Executive shall be in possession of Confidential Information (as defined below) relating to the business practices of the Company and its subsidiaries and affiliates (collectively, the “ Company Group ”). The term “ Confidential Information ” shall mean any and all information (oral and written) relating to the Company Group, or any of their respective activities, or of the clients, customers or business practices of the Company Group, other than such information which (i) is generally available to the public or within the relevant trade or industry, other than as the result of breach of the provisions of this Section 7.1, or (ii) the Executive is required to disclose under any applicable laws, regulations or directives of any government agency, tribunal or authority having jurisdiction in the matter or under subpoena or other process of law. Confidential Information includes, but it not limited to, information that the Executive creates, develops, derives, obtains, makes known, or learns about which has commercial value in the business in which the Company Group is involved and which is treated by the Company Group as confidential, such as trade secrets, ideas, processes, formulas, compounds, compositions, research and clinical data, know-how, discoveries, developments, designs, innovations, plans, strategies, forecasts and customer and supplier lists. The Executive shall not, during the Term or at any time thereafter, except as may be required in the course of the performance of his duties hereunder (including pursuant to Section 7.5 below) and except with respect to any litigation or arbitration involving this Agreement, including the enforcement hereof, directly or indirectly, use, communicate, disclose or disseminate to any person, firm or corporation any Confidential Information acquired by the Executive during, or as a result of, his employment with the Company, without the prior written consent of the Company. Without limiting the foregoing, the Executive understands that the Executive shall be prohibited from misappropriating any trade secret of the Company Group or of the clients or customers of the Company Group acquired by the Executive during, or as a result of, his employment with the Company, at any time during or after the Term.

 

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7.2 Return of Property. Upon the termination of the Executive’s employment for any reason, all Company Group property that is in the possession of the Executive, including all documents, records, drug formulations, notebooks, equipment, price lists, specifications, programs, customer and prospective customer lists and other materials that contain Confidential Information that are in the possession of the Executive, including all copies thereof, shall be promptly returned to the Company. Anything to the contrary herein notwithstanding, the Executive shall be entitled to retain (i) papers and other materials of a personal nature, including photographs, correspondence, personal diaries, calendars and rolodexes, personal files and phone books, (ii) information showing his compensation or relating to reimbursement of expenses, (iii) information that he reasonably believes may be needed for tax purposes and (iv) copies of plans, programs and agreements relating to his employment, or termination thereof, with the Company.

7.3 Prohibition on Use of Confidential Information to Solicit Customers and Prospects. During the Executive’s employment, the Executive shall not engage in any other employment or activity that might materially interfere with or be in direct competition with the interests of the Company Group. Furthermore, the Executive shall not, except in the furtherance of the Executive’s duties hereunder, directly or indirectly, individually or on behalf of any other person, firm, corporation or other entity, (i) during the Term (except in the good faith performance of his duties) and for a period of 24 months thereafter, solicit, aid or induce any employee, representative or agent of the Company to leave such employment or retention or to accept employment with or render services to or with any other person, firm, corporation or other entity unaffiliated with the Company or hire or retain any such employee, representative or agent, or take any action to materially assist or aid any other person, firm, corporation or other entity in identifying, hiring or soliciting any such employee, representative or agent, (ii) during the Term (except in the good faith performance of his duties) and for a period of 12 months thereafter, use any Confidential Information or trade secrets of the Company Group to solicit, aid, or induce (or attempt to do any of the foregoing), directly or indirectly, any customer or prospective customer of the Company with whom the Executive in any way dealt at any time during the last two years of his employment to purchase goods or services then sold by the Company from another person, firm, corporation or other entity or assist or aid any other persons or entity in identifying or soliciting any such customer or (iii) during the Term (except in the good faith performance of his duties) and for a period of 24 months thereafter, use any Confidential Information or trade secrets to interfere in any manner with the relationship of the Company and any of its vendors. An employee, representative or agent shall be deemed covered by this Section while so employed or retained by the Company and for six months thereafter. Anything to the contrary herein notwithstanding, the following shall not be deemed a violation of this Section 7.3: (a) the Executive’s responding to an unsolicited request for an employment reference regarding any former employee of the Company from such former employee, or from a third party, by providing a reference setting forth his personal views about such former employee; or (b) if an entity with which the Executive is associated hires or engages any employee of the Company, if the Executive was not, directly or indirectly, involved in hiring or identifying such person as a potential recruit or assisting in the recruitment of such employee. For purposes hereof, the Executive shall be deemed to have been involved “ indirectly ” in soliciting, hiring or identifying an employee only if the Executive (x) directs a third party to solicit or hire the Employee, (y) identifies an employee to a third party as a potential recruit or (z) aids, assists or participates with a third party in soliciting or hiring an employee.

 

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7.4 Non-Disparagement. At no time during or within five years after the Term shall the Executive, directly or indirectly, disparage the Company Group or any of the Company Group’s past or present employees, directors, products or services. The Company shall advise its senior officers and the members of the Board (while serving in such capacities) not to disparage the Executive during the period. Notwithstanding the foregoing, nothing in this Section 7.4 shall prevent any person from making any truthful statement to the extent (i) necessary to rebut any untrue public statements made about him or her; (ii) necessary with respect to any litigation, arbitration or mediation involving this Agreement and the enforcement thereof; (iii) required by law or by any court, arbitrator, mediator or administrative or legislative body (including any committee thereof) with jurisdiction over such person; or (iv) made as good faith competitive statements in the ordinary course of business.

7.5 Cooperation. Upon the receipt of reasonable notice from the Company (including the Company’s outside counsel), the Executive shall, while employed by the Company and thereafter, respond and provide information with regard to matters of which the Executive has knowledge as a result of the Executive’s employment with the Company and will provide reasonable assistance to the Company Group and its representatives in defense of any claims that may be made against the Company Group (or any member thereof), and will provide reasonable assistance to the Company Group in the prosecution of any claims that may be made by the Company Group (or any member thereof), to the extent that such claims may relate to matters related to the Executive’s period of employment with the Company (or any predecessors). Any request for such cooperation shall take into account the Executive’s personal and business commitments. The Executive shall promptly inform the Company (to the extent the Executive is legally permitted to do so) if the Executive is asked to assist in any investigation of the Company Group (or any member thereof) or their actions, regardless of whether a lawsuit or other proceeding has then been filed with respect to such investigation. If the Executive is required to provide any services pursuant to this Section 7.5 following the Term, upon presentation of appropriate documentation, the Company shall promptly reimburse the Executive for reasonable out-of-pocket travel, lodging, communication and duplication expenses incurred in connection with the performance of such services and in accordance with the Company’s expense policy for its senior officers, and for reasonable legal fees to the extent the Board in good faith believes that separate legal representation is reasonably required. The Executive’s entitlement to reimbursement of such costs and expenses, including legal fees, pursuant to this Section 7.5, shall in no way affect the Executive’s rights, if any, to be indemnified and/or advanced expenses in accordance with the Company’s (or any of its subsidiaries’) corporate or other organizational documents, any applicable insurance policy, and/or in accordance with this Agreement.

7.6 Remedies and Reformation. Without intending to limit the remedies available to the Company, the Executive acknowledges that a breach of any of the covenants contained in this Section 7 may result in material and irreparable injury to the Company, or its affiliates or subsidiaries, for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat the Company shall be entitled to a temporary restraining order and/or a preliminary or permanent injunction restraining the Executive from engaging in activities prohibited by this Section 7 or such other relief as may be required specifically to enforce any of the covenants in this Section 7. If for any reason it is held that the restrictions under this Section 7 are not reasonable or that consideration therefor is inadequate, such restrictions shall be interpreted or modified to include as much of the duration and scope identified in this Section as will render such restrictions valid and enforceable.

 

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7.7 Violations. In the event of any violation of the provisions of this Section 7, the Executive acknowledges and agrees that: (a) the post-termination restrictions contained in this Section 7 shall be extended by a period of time equal to the period of such violation, it being the intention of the parties hereto that the running of the applicable post-termination restriction period shall be tolled during any period of such violation; (b) any severance payable which remains unpaid or other benefits yet to be received under Section 5.4.2 or 5.4.3 shall be forfeited by the Executive; and (c) any vested options not exercised as of the date of any violation of the provisions of this Section 7 shall be forfeited.

8. INDEMNIFICATION; DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE

During the Term and thereafter, the Company shall indemnify and hold harmless the Executive and his heirs and representatives as, and to the extent, provided in the Company’s by-laws. During the Term and thereafter, the Company shall also cover Executive under the Company’s directors’ and officers’ liability insurance on the same basis as it covers other senior executive officers and directors of the Company.

9. MISCELLANEOUS

9.1 Notices . All notices or communications hereunder shall be in writing, addressed as follows (or to such other address as either party may have furnished to the other in writing by like notice):

To the Company:     Impax Laboratories, Inc.

                                 121 New Britain Boulevard

                                 Chalfont, PA 18914

                                 Attn: Chairman, Compensation Committee

To the Executive, at the last address for the Executive on the books of the Company.

All such notices shall be conclusively deemed to be received and shall be effective (i) if sent by hand delivery, upon receipt, (ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt by the sender of such transmission, (iii) if sent by overnight courier, one business day after being sent by overnight courier, or (iv) if sent by registered or certified mail, postage prepaid, return receipt requested, on the fifth day after the day on which such notice is mailed.

9.2 Severability . Each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

 

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9.3 Binding Effect; Benefits . Executive may not delegate his duties or assign his rights hereunder. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company other than pursuant to a merger or consolidation in which the Company is not the continuing entity, or a sale, liquidation or other disposition of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets or businesses of the Company and assumes the liabilities, obligations and duties of the Company under this Agreement, either contractually or by operation of law. The Company further agrees that, in the event of any disposition of its business and assets described in the preceding sentence, it shall use its best efforts to cause such assignee or transferee expressly to assume the liabilities, obligations and duties of the Company hereunder. For the purposes of this Agreement, the term “ Company ” shall include the Company and, subject to the foregoing, any of its successors and assigns. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives, successors and permitted assigns.

9.4 Modification of Termination Benefits . In the event that RiskMetrics Group or a proxy advisory firm of similar stature recommends that stockholders do not vote in favor of the election of any of the Company’s Directors because of any provision of Sections 5 or 7 of this Agreement, the Executive shall, upon request of the Company, enter into an amendment of this Agreement modifying or eliminating such provision to the extent necessary to cause withdrawal of such recommendation.

9.5 Entire Agreement . This Agreement, including the Exhibits hereto, represent the entire agreement of the parties with respect to the subject matter hereof and shall supersede any and all previous contracts, arrangements, proposed terms, or understandings between the Company and the Executive. This Agreement (including any of the Exhibits hereto) may be amended at any time by mutual written agreement of the parties hereto. In the case of any conflict between any express term of this Agreement and any statement contained in any plan, program, arrangement, employment manual, memorandum or rule of general applicability of the Company, this Agreement shall control.

9.6 Withholding . The payment of any amount pursuant to this Agreement shall be subject to applicable withholding and payroll taxes, and such other deductions as may be required by applicable law.

9.7 Governing Law . This Agreement and the performance of the parties hereunder shall be governed by the internal laws (and not the law of conflicts) of the State of Delaware.

9.8 Arbitration . Any dispute or controversy, including but not limited to statutory discrimination claims and claims involving a class, arising under or in connection with this Agreement or the Executive’s employment with the Company, other than injunctive relief under Section 7.7 hereof, shall be settled exclusively by arbitration, conducted before a single arbitrator in San Francisco, California (applying Delaware law) in accordance with the Commercial Arbitration Rules and Procedures of the American Arbitration Association then in effect. The decision of the arbitrator will be final and binding upon the parties hereto. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. The parties acknowledge and agree that in connection with any such arbitration and regardless of outcome (a) each party shall pay all its own costs and expenses, including without limitation its own legal fees and expenses, and (b) joint expenses shall be borne equally among the parties. EACH PARTY WAIVES RIGHT TO TRIAL BY JURY.

 

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9.9 Section 409A of the Code .

9.9.1 It is intended that the provisions of this Agreement comply with Section 409A of the Internal Revenue Code and the regulations and guidance promulgated thereunder (collectively “ Code Section 409A ”), and all provisions of this Agreement shall be construed in a manner consistent with the requirements for avoiding taxes or penalties under Code Section 409A. If any provision of this Agreement (or of any award of compensation, including equity compensation or benefits) would cause the Executive to incur any additional tax or interest under Code Section 409A, the Company shall, upon the specific request of the Executive, use its reasonable business efforts to in good faith reform such provision to comply with Code Section 409A; provided, that to the maximum extent practicable, the original intent and economic benefit to the Executive and the Company of the applicable provision shall be maintained, but the Company shall have no obligation to make any changes that could create any additional economic cost or loss of benefit to the Company. The Company shall timely use its reasonable business efforts to amend any plan or program in which the Executive participates to bring it in compliance with Code Section 409A. Notwithstanding the foregoing, the Company shall have no liability with regard to any failure to comply with Code Section 409A so long as it has acted in good faith with regard to compliance therewith.

9.9.2 A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits upon or following a termination of employment unless such termination is also a “ Separation from Service ” within the meaning of Code Section 409A and, for purposes of any such provision of this Agreement, references to a “ resignation, ” “ termination, ” “ termination of employment ” or like terms shall mean Separation from Service. If the Executive is deemed on the Date of Termination to be a “ specified employee ,” within the meaning of that term under Section (a)(2)(B) of Code Section 409A (“ Code Section 409(a)(2)(B) ”)and using the identification methodology selected by the Company from time to time, or if none, the default methodology, then with regard to any payment, the providing of any benefit or any distribution of equity made subject to this Section 9.9.2, to the extent required to be delayed in compliance with Code Section 409A(a)(2)(B), and any other payment, the provision of any other benefit or any other distribution of equity that is required to be delayed in compliance with Code Section 409A(a)(2)(B), such payment, benefit or distribution shall not be made or provided prior to the earlier of (i) the expiration of the six-month period measured from the date of the Executive’s Separation from Service or (ii) the date of the Executive’s death. On the first day of the seventh month following the date of Executive’s Separation from Service or, if earlier, on the date of his death, (x) all payments delayed pursuant to this Section 9.9.2 (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Executive in a lump sum, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein and (y) all distributions of equity delayed pursuant to this Section 9.9.2 shall be made to the Executive. In addition to the foregoing, to the extent required by Code Section 409A(a)(2)(B), prior to the occurrence of both a Disability termination as provided in

 

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Section 5.1.2 hereof and the Executive’s becoming “disabled” under Code Section 409A, the payment of any compensation to the Executive under this Agreement shall be suspended for a period of six months commencing at such time that the Executive shall be deemed to have had a Separation from Service because either (A) a sick leave ceases to be a bona fide sick leave of absence, or (B) the permitted time period for a sick leave of absence expires (an “ SFS Disability ”), without regard to whether such SFS Disability actually results in a Disability termination. Promptly following the expiration of such six-month period, all compensation suspended pursuant to the foregoing sentence (whether it would have otherwise been payable in a single sum or in installments in the absence of such suspension) shall be paid or reimbursed to the Executive in a lump sum. On any delayed payment date under this Section 9.9.2, there shall be paid to the Executive or, if the Executive has died, to his estate, in a single cash lump sum together with the payment of such delayed payment, interest on the aggregate amount of such delayed payment at the Delayed Payment Interest Rate (as defined below) computed from the date on which such delayed payment otherwise would have been made to the Executive until the date paid. For purposes of the foregoing, the “ Delayed Payment Interest Rate ” shall mean the short term Applicable Federal Rate as of the business day immediately preceding the payment date for the applicable delayed payment.

9.9.3 With regard to any provision herein that provides for reimbursement of costs and expenses or in-kind benefits, except as permitted by Code Section 409A, (i) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits, provided during any taxable year shall not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, provided that the foregoing clause (ii) shall not be violated with regard to expenses reimbursed under any arrangement covered by Section 105(b) of the Internal Revenue Code and the regulations and guidance promulgated thereunder solely because such expenses are subject to a limit related to the period the arrangement is in effect and (iii) such payments shall be made on or before the last day of the Executive’s taxable year following the taxable year in which the expense was incurred.

9.10 Survival . Except as otherwise expressly set forth in this Agreement, upon the expiration of the Term, the respective rights and obligations of the parties shall survive such expiration to the extent necessary to carry out the intentions of the parties as embodied in this Agreement. This Agreement shall continue in effect until there are no further rights or obligations of the parties outstanding hereunder and shall not be terminated by either party without the express prior written consent of both parties.

9.11 Counterparts . This Agreement may be executed in counterparts (including by electronic transmission) which, when taken together, shall constitute one and the same agreement of the parties.

9.12 Company Representations . The Company represents and warrants to the Executive that (i) the execution, delivery and performance of this Agreement (and the agreements referred to herein) by the Company has been fully and validly authorized by all necessary corporate action, (ii) the officer signing this Agreement on behalf of the Company is duly authorized to do so, (iii) the execution, delivery and performance of this Agreement does not violate any applicable law, regulation, order, judgment or decree or any agreement, plan or

 

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corporate governance document to which the Company is a party or by which it is bound and (iv) upon execution and delivery of this Agreement by the Executive and the Company, it shall be a valid and binding obligation of the Company enforceable against it in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally.

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and the Executive has hereunto set his hand, as of the date first set forth above.

 

IMPAX LABORATORIES, INC.
By:   /s/ Larry Hsu, Ph.D.
Name:   Larry Hsu, Ph.D.
Title:   President and Chief Executive Officer

 

  /s/ Mark Schlossberg
  Mark Schlossberg

 

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EXHIBIT A

Form of General Release and Waiver

This General Release and Waiver (this “ Release ”) is entered into effective as of              , 20__, by              (the “ Executive ”) in favor of Impax Laboratories, Inc. (the “ Company ”).

1. Confirmation of Termination . The Executive’s employment with the Company is terminated as of              , 20              (the “ Termination Date ”). Except as set forth in the Employment Agreement (as defined below), the Executive acknowledges that the Termination Date is the termination date of his employment for purposes of participation in and coverage under all benefit plans and programs sponsored by or through the Company. The Executive acknowledges and agrees that the Company shall not have any obligation to rehire the Executive, nor shall the Company have any obligation to consider him for employment, after the Termination Date. The Executive agrees that he will not seek employment with the Company at any time in the future.

2. Resignation . Effective as of the Termination Date, the Executive hereby resigns as an officer and director of the Company and any of its affiliates and from any such positions held with any other entities at the direction or request of the Company or any of its affiliates. The Executive agrees to promptly execute and deliver such other documents as the Company shall reasonably request to evidence such resignations. In addition, the Executive hereby agrees and acknowledges that the Termination Date shall be date of his termination from all other offices, positions, trusteeships, committee memberships and fiduciary capacities held with, or on behalf of, the Company or any of its affiliates.

3. Termination Benefits . Upon the Executive’s execution and delivery of this Release and failure to revoke it within the time specified in Section 10 below, then, subject to Section 9 below, the Executive will be entitled to the payments and benefits (subject to taxes and all applicable withholding requirements) set forth under Sections 5.4.2 and 5.4.3 of the Employment Agreement effective as of May 2, 2011 between the Company and the Executive (the “ Employment Agreement ”) and the distribution with respect to the restricted stock and stock options set forth under Sections 5.4.2, 5.4.3 and 5.4.6 of the Employment Agreement (the “ Termination Benefits ”). Notwithstanding anything herein to the contrary, the Amounts and Benefits (as defined in the Employment Agreement) shall not be subject to the Executive’s execution of this Release. The Executive acknowledges and agrees that the Termination Benefits exceed any payment, benefit, or other thing of value to which the Executive might otherwise be entitled under any policy, plan or procedure of the Company and/or any agreement between the Executive and the Company, except as provided above.

4. General Release and Waiver . In consideration of the Termination Benefits, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Executive for himself and for his heirs, executors, administrators, trustees, legal representatives and assigns (collectively, the “ Releasors ”), hereby releases, remises, and acquits the Company and its affiliates and all of their respective past, present and future parent entities, subsidiaries, divisions, affiliates and related business entities, any of their successors and assigns, assets,

 

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employee benefit plans or funds, and any of their respective past and/or present directors, officers, fiduciaries, agents, trustees, administrators, managers, supervisors, shareholders, investors, employees, legal representatives, agents, counsel and assigns, whether acting on behalf of the Company or its affiliates or, in their individual capacities (collectively, the “ Releasees ” and each a “ Releasee ”) from any and all claims, known or unknown, which the Releasors have or may have against any Releasee arising on or prior to the date of this Release and any and all liability which any such Releasee may have to the Releasors, whether denominated claims, demands, causes of action, obligations, damages or liabilities arising from any and all bases, however denominated, including but not limited to (a) any claim under the Age Discrimination in Employment Act of 1967 including the Older Workers Benefits Protection Act, the Americans with Disabilities Act of 1990, the Family and Medical Leave Act of 1993, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, Section 1981 of the Civil Rights Act of 1866, the Equal Pay Act, the Lilly Ledbetter Fair Pay Act, the Immigration Reform and Control Act of 1986, the Employee Retirement Income Security Act of 1974, (excluding claims for accrued, vested benefits under any employee benefit or pension plan of the Company, subject to the terms and conditions of such plan and applicable law), and the Sarbanes-Oxley Act of 2002, all as amended; (b) any claim under the California Fair Employment and Housing Act and any other provision of the California Labor Law, all as amended, or any other similar state or local laws; (c) any claim under any other Federal, state, or local law and any workers’ compensation or disability claims under any such laws to the extent such claims are waivable; and (d) any claim for attorneys’ fees, costs, disbursements and/or the like. This Release includes, without limitation, any and all claims arising from or relating to the Executive’s employment relationship with Company and his service relationship as an officer or director of the Company or any of its affiliates, or as a result of the termination of such relationships. Notwithstanding any other provision of this Release, this Release is not intended to interfere with the Executive’s right to file a charge with the Equal Employment Opportunity Commission (“ EEOC ”) in connection with any claim he believes he may have against any Releasee. However, by executing this Release, the Executive hereby waives the right to recover in any proceeding the Executive may bring before the EEOC or any state human rights commission or in any proceeding brought by the EEOC or any state human rights commission on the Executive’s behalf. This Release is for any relief, no matter how denominated, including, but not limited to, injunctive relief, wages, back pay, front pay, compensatory damages, punitive damages, and attorneys’ fees. This Release shall not apply to (i) the obligation of the Company to provide the Executive with the Amounts and Benefits and the Termination Benefits and any provision relating thereto under the Employment Agreement; (ii) the Executive’s rights to indemnification from the Company or rights to be covered under any applicable insurance policy with respect to any liability the Executive incurred or might incur as an employee, officer or director of the Company including, without limitation, the Executive’s rights under Section 8 of the Employment Agreement; or (iii) any right the Executive may have to obtain contribution as permitted by law in the event of entry of judgment against the Executive as a result of any act or failure to act for which the Executive, on the one hand, and Company or any other Releasee, on the other hand, are jointly liable.

The Executive waives and relinquishes all rights and benefits afforded by Section 1542 of the Civil Code of California, to the extent applicable, which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

 

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The Executive hereby acknowledges that the foregoing waiver is an essential and material term of this Release.

5. Continuing Covenants . The Executive acknowledges and agrees that he remains subject to the provisions of Section 7 of the Employment Agreement which shall remain in full force and effect for the periods set forth therein.

6. No Admission . This Release does not constitute an admission of liability or wrongdoing of any kind by the Company or any other Releasee. This Release is not intended, and shall not be construed, as an admission that any Releasee has violated any federal, state or local law (statutory or decisional), ordinance or regulation, breached any contract or committed any wrong whatsoever against any Releasor.

7. Heirs and Assigns . The terms of this Release shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns.

8. Miscellaneous . This Release will be construed and enforced in accordance with the laws of the State of Delaware without regard to the principles of conflicts of law. If any provision of this Release is held by a court of competent jurisdiction to be illegal, void or unenforceable, such provision shall have no effect; however, the remaining provisions will be enforced to the maximum extent possible. The parties acknowledge and agree that, except as otherwise set forth herein, this Release constitutes the complete understanding between the parties with regard to the matters set forth herein and, except as otherwise set forth herein, supersede any and all agreements, understandings, and discussions, whether written or oral, between the parties. No other promises or agreements are binding unless in writing and signed by each of the parties after the Release Effective Date (as defined below). Should any provision of this Release require interpretation or construction, it is agreed by the parties that the entity interpreting or constructing this Release shall not apply a presumption against one party by reason of the rule of construction that a document is to be construed more strictly against the party who prepared the document.

9. Knowing and Voluntary Waiver . The Executive acknowledges that he: (a) has carefully read this Release in its entirety; (b) has had an opportunity to consider it for at least 21 days; (c) is hereby advised by the Company in writing to consult with an attorney of his choosing in connection with this Release; (d) fully understands the significance of all of the terms and conditions of this Release and has discussed them with his independent legal counsel, or had a reasonable opportunity to do so; (e) has had answered to his satisfaction any questions he has asked with regard to the meaning and significance of any of the provisions of this Release and has not relied on any statements or explanations made by any Releasee or their counsel; (f) understands that he has seven days in which to revoke this Release (as described in Section 10) after signing it and (g) is signing this Release voluntarily and of his own free will and agrees to abide by all the terms and conditions contained herein.

 

A-3


10. Effective Time of Release . The Executive may accept this Release by signing it and delivering it to the Company as provided in Section 9.1 of the Employment Agreement within 21 days of his receipt hereof. After executing this Release, the Executive will have seven days (the “ Revocation Period ”) to revoke this Release by indicating his desire to do so in writing delivered to the Company in accordance with Section 9.1 of the Employment Agreement by no later than 5:00 p.m. EST on the seventh day following the date on which he executes and delivers this Agreement. The effective date of this Agreement shall be the eighth day after the Executive executes and delivers this Agreement (the “ Release Effective Date ”). If the last day of the Revocation Period falls on a Saturday, Sunday or holiday, the last day of the Revocation Period will be deemed to be the next business day. If the Executive does not execute this Release or exercises his right to revoke hereunder, he shall forfeit his right to receive any of the Termination Benefits, and to the extent such Termination Benefits have already been provided, the Executive agrees that he will immediately reimburse the Company for the amounts of such payment.

IN WITNESS WHEREOF, the Executive has duly executed this Release as of the date first set forth above.

 

EXECUTIVE:
   
  Name:

 

A-4

Exhibit 10.15.2

EXECUTION COPY

AMENDMENT TO LICENSE AND DISTRIBUTION AGREEMENT

This Amendment to License and Distribution Agreement (this “Amendment”) is dated as of March 1, 2010 by and between Shire LLC, a Kentucky company with offices located at 9200 Brookfield Court, Florence, KY 41042 (“Shire”), and Impax Laboratories, Inc., a Delaware corporation with offices located at 30831 Huntwood Ave., Hayward, CA 94544 (“Impax”). Shire and Impax are collectively referred to herein individually as a “ Party ” and collectively as the “ Parties ”.

RECITALS

WHEREAS, the Parties are parties to that certain License and Distribution Agreement dated the 19 th day of January, 2006 (the “Agreement”) and capitalized terms used in this Amendment shall have the meanings ascribed to them in the Agreement unless otherwise defined herein;

WHEREAS, pursuant to the terms of the Agreement, Impax pays a royalty to Shire on the sale of Generic Product;

WHEREAS, the Parties desire to amend and clarify the timing with respect to Impax’s royalty payments to Shire.

NOW, THEREFORE, in consideration of the foregoing promises and mutual covenants, the terms and sufficiency of which is hereby acknowledged, the Parties hereby agree as follows:

1. Amendment. Section 9.3 of the Agreement is amended and restated in its entirety as follows:

Payments made under this Section 9 for Generic Product sold through the end of calendar year 2009 shall be made within thirty (30) days from the end of each calendar quarter in which such Generic Product is sold; payments made relating to Generic Product sold in the first and second calendar quarters of 2010 shall be made within sixty (60) days from the end of the calendar quarter in which such Generic Product is sold; and payments made relating to Generic Product sold in the third calendar quarter of 2010 through the end of the Term of the Agreement shall be made within forty-five (45) days of the calendar quarter in which the Generic Product is sold. The relevant period for making the above payments is referred to as the “Reporting Period”. All such payments shall include an invoice detailing the calculation of Net Sales and Net Profits, as each may be applicable and the royalties payable hereunder. In the event of two occurrences where payment by Impax is delayed beyond the relevant Reporting Period, the Reporting Period shall revert to thirty (30) days from the end of each calendar quarter at Shire’s election and upon ten (10) days advance written notice from Shire to Impax.


EXECUTION COPY

2. No other Amendments. Except as expressly amended hereby, all of the terms and conditions of the Agreement shall remain in full force and effect.

3. Execution in counterparts. This Amendment may be executed in two (2) counterparts, each of which shall be deemed an original but which together constitute one and the same instrument. This Amendment may be executed by facsimile or electronically scanned signatures, which shall have the same force and effect as original signatures.

IN WITNESS WHEREFORE, the undersigned have executed this Amendment as of the Amendment Effective Date.

SHIRE LLC

By:   /s/ James J. Harrington
Name:   James J. Harrington
Title:   SVP Shire

IMPAX LABORATORIES, INC.

By:   /s/ Arthur A. Koch, Jr.
Name:   Arthur A. Koch, Jr.
Title:   SVP-CFO

Exhibit 10.16.2

FIRST AMENDMENT TO

JOINT DEVELOPMENT AGREEMENT DATED NOVEMBER 26, 2008

This FIRST AMENDMENT to the Joint Development Agreement dated November 26, 2008 (this “ First Amendment ”) is effective as of the date of last signature (“ Amendment Effective Date”) and is made and entered into by and between Impax Laboratories, Inc., a Delaware corporation, with its principal place of business at 30831 Huntwood Avenue, Hayward, California 94544 (“ Impax ”) and Medicis Pharmaceutical Corporation, a corporation organized under the laws of the State of Delaware, with its principal place of business at 7720 North Dobson Road, Scottsdale, Arizona, 85256 (“Medicis”).

RECITALS:

WHEREAS, Medicis and Impax are parties to the Joint Development Agreement dated November 26, 2008 (the “ Agreement ”), and wish to further amend the Agreement as herein provided.

NOW, THEREFORE, in consideration of the foregoing recitals, covenants, and representations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Impax and Medicis agree as follows:

1. Terms used herein without definition are as defined in the Agreement.

2. Exhibit A of the Agreement . Exhibit A of the Agreement is hereby deleted in its entirety and replaced with the new Exhibit A attached to this First Amendment as Attachment No. 1.

3. Section 2.3.1 . Section 2.3.1 of the Agreement is amended as follows (for convenience additions are indicated by bold underlined text and deletions are indicated by hold strikethrough text):

2.3.1 Composition, Duties, and Authority of the Steering Committee . The Steering Committee shall foster the collaborative relationship between the parties and shall in particular monitor the progress of the Development Program and Impax’s progress with respect to the ANDA Products. The Steering Committee shall he comprised of two (2) named representatives of Impax and two (2) named representatives of Medicis. Each party shall appoint its respective representatives to the Steering Committee from time to time, and may substitute one or more of its representatives, in its sole discretion, effective upon notice to the other party of such change but shall use commercially reasonable efforts to maintain stability of Steering Committee representation. The Steering Committee shall not have the power to amend the-terms-of this Agreement but shall have the power to change the Development Plan upon the written agreement of at least one (1) representative of the Steering Committee from each party. The Steering Committee also may amend the Target Product Profile upon written agreement of at least one (1) representative of the Steering Committee from each party. The Steering Committee shall not have any other power to amend the terms of this Agreement .

4. Binding Effect . Except as modified in this First Amendment, the Agreement shall remain unchanged. The parties represent and warrant that, as of the Amendment Effective Date, no other agreements, written or oral, exist between the Parties with respect to the subject matter covered herein except for the Agreement and the First Amendment. The parties acknowledge and agree that in the event of a conflict between the terms amended pursuant to this First Amendment and the other terms of the Agreement, the terms of this First Amendment shall govern.

5. Counterparts . This First Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same instrument.

6. Authority . Each party represents and warrants to the other party that this First Amendment is being executed by the authorized representatives of each party.


IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed by their duly authorized representatives as of the Amendment Effective Date.

 

IMPAX LABORATORIES. INC.     MEDICIS PHARMACEUTICAL CORPORATION
By:   /s/ Arthur A. Koch, Jr.     By:   /s/ Richard D. Peterson
 

Arthur A. Koch, Jr.

SVP – CFO

     

Richard D. Peterson

Executive Vice President, Treasurer and CFO

Date:  

1/5/11

    Date:  

1/26/2011

Exhibit 10.17.2

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

EXECUTION

FIRST AMENDMENT OF

THE LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENT

This F IRST A MENDMENT OF THE L ICENSE , D EVELOPMENT AND C OMMERCIALIZATION A GREEMENT ( THIS “First Amendment ”) is made and effective as of December 23, 2011 (the “ First Amendment Effective Date ”) by and between I MPAX L ABORATORIES , I NC ., a Delaware corporation with its principal place of business at 30831 Huntwood Avenue, Hayward, CA 94544 (“ Impax ”), and G LAXO G ROUP L IMITED , a company organized and existing under the laws of England and having an office and place of business at Glaxo Wellcome House, Berkeley Avenue, Greenford, Middlesex, UB6 ONN, United Kingdom (“GSK”).

WHEREAS, Impax and GSK are parties to certain License, Development and Commercialization Agreement, entered into as of December 15, 2010 (the “ License Agreement ”);

WHEREAS, Impax and GSK now desire to amend certain terms and conditions of the License Agreement as set forth below.

NOW THEREFORE, in consideration of the foregoing premises and the mutual promises, covenants and conditions contained in this First Amendment, the Parties agree as follows:

 

1. Section 4.5(a) is hereby deleted and replaced in its entirety with the following:

(a) [***].”

 

2. Section 4.5(b) is hereby deleted and replaced in its entirety with the following:

(b) [***];”

 

1


3. Section 4.5(d) is hereby deleted and replaced in its entirety with the following:

(d) [***]; and”

 

4. Section 7.3(a) is hereby deleted and replaced in its entirety with the following:

(a) [***]. GSK shall notify Impax within [***]. After the receipt of such notice, Impax shall submit to GSK an invoice of [***] Dollars ($[***]) and GSK shall pay to Impax the amount invoiced within ten (10) days after the receipt of such invoice.”

5. This First Amendment amends the terms of the License Agreement as expressly provided above, and the License Agreement, as so amended and including all of its other terms and provisions that are not amended, remains in full force and effect and sets forth the complete, final and exclusive agreement and all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto with respect to the subject matter of the License Agreement and supersedes, as of the First Amendment Effective Date, all prior and contemporaneous agreements and understandings between the Parties with respect to the subject matter of the License Agreement. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties other than as set forth in the License Agreement (as amended by this First Amendment).

6. Capitalized terms used but not defined herein shall have the meanings set forth in the License Agreement. For clarity, the term “Agreement” in the License Agreement means the License, Development and Commercialization Agreement as amended.

7. The validity, performance, construction, and effect of this First Amendment shall be governed by and construed under the laws of the State of Delaware, without giving effect to any choice of law principles that would require the application of the laws of a different state. This First Amendment may be executed in one (1) or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument.

[Signature page follows]

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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I N W ITNESS W HEREOF , the Parties have executed this First Amendment in duplicate originals by their proper representatives as of the First Amendment Effective Date.

 

G LAXO G ROUP L IMITED     I MPAX L ABORATORIES , I NC .
By:   /s/ Paul Williamson     By:   /s/ Michael Nestor
Name:   Paul Williamson     Name:   Michael Nestor
Title:   Authorized Signatory For and on behalf of Edinburgh Pharmaceutical Industries Limited Corporate Director     Title:   President, Impax Pharmaceuticals

[***] Certain information in this document has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

3

Exhibit 21.1

IMPAX LABORATORIES, INC.

Subsidiaries of the Registrant as of the date of this report:

 

September 30, September 30,

Name of Subsidiary

    

Jurisdiction of Incorporation or Organization

     Ownership  

Impax Laboratories (Taiwan) Inc.

     Taiwan, Republic of China        100

Prohealth Biotech, Inc.

     Taiwan, Republic of China        57.54

Exhibit 23.1

Consent of Independent Registered Public

Accounting Firm

We have issued our report dated February 25, 2011, with respect to the consolidated financial statements and schedule included in the Annual Report of Impax Laboratories, Inc. and Subsidiaries on Form 10-K for the year ended December 31, 2011. We hereby consent to the incorporation by reference of said report in the Registration Statement of Impax Laboratories, Inc. and Subsidiaries on Form S-8 (File No. 333-158259 effective March 27, 2009 and File No. 333-168584 effective August 6, 2010).

/s/ GRANT THORNTON LLP

Philadelphia, Pennsylvania

February 28, 2012

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Impax Laboratories, Inc.:

We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-158259 and 333-168584) of Impax Laboratories, Inc. of our reports dated February 28, 2012 relating to the consolidated balance sheet of Impax Laboratories, Inc. and subsidiaries as of December 31, 2011, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for the year ended December 31, 2011, and the related financial statement schedule, and the effectiveness of internal control over financial reporting as of December 31, 2011, which reports appear in the December 31, 2011 annual report on Form 10-K of Impax Laboratories, Inc.

/s/ KPMG LLP

Philadelphia, Pennsylvania

February 28, 2012

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Larry Hsu, certify that:

 

  1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2011 of Impax Laboratories, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 28, 2012     By:   /s/ Larry Hsu, Ph.D.
      Larry Hsu, Ph.D.
      President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Arthur A. Koch, Jr., certify that:

 

  1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2011 of Impax Laboratories, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 28, 2012     By:   /s/ Arthur A. Koch, Jr.
      Arthur A. Koch, Jr.
      Executive Vice President, Finance, and
      Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Impax Laboratories, Inc. (the “Company”) for the fiscal year ended December 31, 2011 (the “Report”), Larry Hsu, President and Chief Executive Officer, hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), that:

 

  (1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

 

  (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: February 28, 2012     By:   /s/ Larry Hsu, Ph.D.
      Larry Hsu, Ph.D.
      President and Chief Executive Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Impax Laboratories, Inc. (the “Company”) for the fiscal year ended December 31, 2011 (the “Report”), Arthur A. Koch, Jr., Executive Vice President, Finance, and Chief Financial Officer, hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), that:

 

  (3) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

 

  (4) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: February 28, 2012     By:   /s/ Arthur A. Koch, Jr.
      Arthur A. Koch, Jr.
     

Executive Vice President, Finance, and

Chief Financial Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.