XNAS:IPXL Impax Laboratories, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2012

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) 240-6000

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

As of July 27, 2012, there were 67,282,570 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

Impax Laboratories, Inc.

INDEX

 

PART I: FINANCIAL INFORMATION   

Item 1:

 

Financial Statements (unaudited)

     3   

    - Consolidated Balance Sheets as of June  30, 2012 and December 31, 2011

     3   

     - Consolidated Statements of Operations for each of the three and six months ended June 30, 2012 and 2011

     4   

     - Consolidated Statements of Comprehensive Income for each of the three and six months ended June 30, 2012 and 2011

     5   

     - Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

     6   

    - Notes to Interim Consolidated Financial Statements

     8   

Item 2:

 

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

     42   

Item 3:

 

Quantitative and Qualitative Disclosures About Market Risk

     68   

Item 4:

 

Controls and Procedures

     68   
PART II: OTHER INFORMATION   

Item 1:

 

Legal Proceedings

     69   

Item 1A:

 

Risk Factors

     69   

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

     69   

Item 3:

 

Defaults Upon Senior Securities

     70   

Item 4:

 

Mine Safety Disclosures

     70   

Item 5:

 

Other Information

     70   

Item 6:

 

Exhibits

     71   
SIGNATURES      72   
EXHIBIT INDEX      73   

 

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Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

Impax Laboratories, Inc.

CONSOLIDATED BALANCE SHEETS

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

 

     June 30,
2012
    December 31,
2011
 
     (unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 184,632      $ 104,419   

Short-term investments

     169,851        241,995   

Accounts receivable, net

     143,447        153,773   

Inventory, net

     63,092        54,177   

Deferred income taxes

     33,993        37,853   

Prepaid expenses and other current assets

     46,919        7,718   
  

 

 

   

 

 

 

Total current assets

     641,934        599,935   
  

 

 

   

 

 

 

Property, plant and equipment, net

     136,888        118,158   

Other assets

     55,129        45,942   

Deferred income taxes

     35,230        —     

Intangible assets, net

     61,636        2,250   

Goodwill

     27,574        27,574   
  

 

 

   

 

 

 

Total assets

   $ 958,391      $ 793,859   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 23,636      $ 22,955   

Accrued expenses

     79,410        68,990   

Accrued profit sharing and royalty expenses

     32,984        40,766   

Accrued income taxes payable

     28,066        1,126   

Accrued product licensing payments

     96,000        —     

Deferred revenue

     12,743        23,024   
  

 

 

   

 

 

 

Total current liabilities

     272,839        156,861   
  

 

 

   

 

 

 

Deferred revenue

     15,327        17,131   

Other liabilities

     20,780        16,861   
  

 

 

   

 

 

 

Total liabilities

     308,946        190,853   
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value, 2,000,000 shares authorized, 0 shares outstanding at June 30, 2012 and December 31, 2011

     —          —     

Common stock, $0.01 par value, 90,000,000 shares authorized and 67,464,510 and 66,748,336 shares issued at June 30, 2012 and December 31, 2011, respectively

     675        667   

Additional paid-in capital

     300,946        285,966   

Treasury stock—243,729 shares

     (2,157     (2,157

Accumulated other comprehensive income

     2,207        1,724   

Retained earnings

     347,778        316,741   
  

 

 

   

 

 

 
     649,449        602,941   

Noncontrolling interest

     (4     65   
  

 

 

   

 

 

 

Total stockholders’ equity

     649,445        603,006   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 958,391      $ 793,859   
  

 

 

   

 

 

 

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

 

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Impax Laboratories, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,
2012
    June 30,
2011
    June 30,
2012
    June 30,
2011
 

Revenues:

        

Global Product sales, net

   $ 126,435      $ 111,125      $ 242,646      $ 203,463   

Impax Product sales, net

     28,091        —          28,091        —     

Rx Partner

     3,903        6,303        8,319        10,423   

OTC Partner

     783        1,184        1,474        3,127   

Research Partner

     3,713        3,713        7,428        10,428   

Promotional Partner

     3,535        3,535        7,070        7,070   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     166,460        125,860        295,028        234,511   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

     88,637        66,158        154,652        116,272   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     77,823        59,702        140,376        118,239   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     19,869        23,978        38,685        43,469   

Patent litigation

     2,914        2,209        6,952        3,983   

Selling, general and administrative

     24,870        15,509        46,103        32,088   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     47,653        41,696        91,740        79,540   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     30,170        18,006        48,636        38,699   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     (95     (545     (175     (540

Interest income

     244        290        499        611   

Interest expense

     (423     (11     (462     (28
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     29,896        17,740        48,498        38,742   

Provision for income taxes

     11,262        5,214        17,531        12,358   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income before noncontrolling interest

     18,634        12,526        30,967        26,384   

Add back loss attributable to noncontrolling interest

     38        24        70        29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 18,672      $ 12,550      $ 31,037      $ 26,413   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income per share:

        

Basic

   $ 0.29      $ 0.20      $ 0.48      $ 0.41   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.27      $ 0.19      $ 0.46      $ 0.39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     65,482,700        64,024,483        65,289,869        63,709,258   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     67,954,573        67,654,047        68,064,934        67,401,018   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

Impax Laboratories, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands)

(unaudited)

 

     Three Months Ended      Six Months Ended  
     June 30,
2012
    June 30,
2011
     June 30,
2012
     June 30,
2011
 

Net income

   $ 18,672      $ 12,550       $ 31,037       $ 26,413   

Currency translation adjustments

     (1,125     1,247         483         821   
  

 

 

   

 

 

    

 

 

    

 

 

 

Comprehensive income

     17,547        13,797         31,520         27,234   

Comprehensive income attributable to the noncontrolling interest

     —          —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to Impax Laboratories, Inc.

   $ 17,547      $ 13,797       $ 31,520       $ 27,234   
  

 

 

   

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

Impax Laboratories, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

     Six Months Ended  
     June 30,
2012
    June 30,
2011
 

Cash flows from operating activities:

    

Net income

   $ 31,037      $ 26,413   

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

    

Depreciation and amortization

     12,144        8,351   

Accretion of interest income on short-term investments

     (318     (461

Income taxes

     (29,486     3,125   

Tax benefit related to the exercise of employee stock options

     (2,338     (5,641

Deferred revenue

     931        1,887   

Deferred product manufacturing costs

     (1,574     (1,061

Recognition of deferred revenue

     (12,320     (13,461

Amortization of deferred product manufacturing costs

     1,709        2,026   

Accrued profit sharing and royalty expense

     58,445        44,789   

Payments of profit sharing and royalty expense

     (66,226     (31,121

Share-based compensation expense

     8,323        6,133   

Bad debt expense

     —          125   

Changes in certain assets and liabilities:

    

Accounts receivable

     10,326        (39,141

Inventory

     (8,915     (1,489

Prepaid expenses and other assets

     36,626        (15,389

Accounts payable and accrued expenses

     37,374        (2,815

Other liabilities

     3,591        2,487   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     79,329        (15,243
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of short-term investments

     (104,869     (180,274

Maturities of short-term investments

     177,331        239,998   

Purchases of property, plant and equipment

     (24,971     (14,569

Payment for product licensing rights

     (55,000     —     
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (7,509     45,155   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

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

     2,338        5,641   

Proceeds from exercise of stock options and ESPP

     6,055        10,833   
  

 

 

   

 

 

 

Net cash provided by financing activities

     8,393        16,474   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     80,213        46,386   

Cash and cash equivalents, beginning of period

     104,419        91,796   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 184,632      $ 138,182   
  

 

 

   

 

 

 

 

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Table of Contents

Supplemental disclosure of non-cash investing and financing activities:

 

     Six Months Ended  
(in $000’s)    June 30,
2012
     June 30,
2011
 

Cash paid for interest

   $ 14       $ 136   
  

 

 

    

 

 

 

Cash paid for income taxes

   $ 13,440       $ 18,421   
  

 

 

    

 

 

 

Accrued vendor invoices of approximately $1,301,000 and $1,690,000 at June 30, 2012 and 2011, respectively, are excluded from the purchase of property, plant, and equipment and the change in accounts payable and accrued expenses. Depreciation expense was $3,457,000 and $4,711,000 for the three months ended June 30, 2012 and 2011, respectively, and was $6,813,000 and $8,000,000 for the six months ended June 30, 2012 and 2011, respectively.

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

 

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Table of Contents

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. THE COMPANY & BASIS OF PRESENTATION

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 generic pharmaceutical OTC 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 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 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 sale and distribution of Zomig® (zolmitriptan) products, indicated for the treatment of migraine headaches, under the terms of a Distribution, License, Development and Supply Agreement (“AZ Agreement”) with AstraZeneca UK Limited (“AstraZeneca”) in the United States and in certain U.S. territories.

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 United States, in Taiwan, R.O.C., the Company owns a manufacturing facility.

The accompanying unaudited interim consolidated financial statements of the Company, have been prepared based upon United States Securities and Exchange Commission (“SEC”) rules permitting reduced disclosure for interim periods, and include all adjustments necessary for a fair presentation of statements of operations, statements of cash flows, and financial condition for the interim periods shown, including normal recurring accruals and other items. While certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to SEC rules and regulations, the Company believes the disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements of the Company include the accounts of the operating parent company, Impax Laboratories, Inc., its wholly-owned subsidiary, Impax Laboratories (Taiwan) Inc., and an equity investment in Prohealth Biotech, Inc. (“Prohealth”), in which the Company held a 57.54% majority ownership interest at June 30, 2012. All significant intercompany accounts and transactions have been eliminated.

The unaudited results of operations and cash flows for the interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for the full year ending December 31, 2012. The unaudited interim consolidated financial statements and footnotes should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC, wherein a more complete discussion of significant accounting policies and certain other information can be found.

 

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The preparation of financial statements in conformity with GAAP and the rules and regulations of the SEC requires the use of estimates and assumptions, based on complex judgments considered reasonable, which 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.

In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, covering a wide range of matters, including, among others, patent litigation, and product and clinical trial liability. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 450, “Contingencies”, the Company records accrued loss contingencies when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company, in accordance with FASB ASC Topic 450, does not recognize gain contingencies until realized.

 

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2. REVENUE RECOGNITION

The Company recognizes revenue when the earnings process is complete, which under SEC Staff Accounting Bulletin No. 104, Topic No. 13, “Revenue Recognition” (“SAB 104”), is when revenue is realized or realizable and earned, 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 basis.

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: 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 is reasonable relative to all of the deliverables and payment terms within the agreement.

Global Product sales, net, and Impax Product sales, net:

The “Global Product sales, net” and “Impax Product sales, net” line items of the statement of operations, include revenue recognized related to shipments of generic and branded 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. Global and Impax Product revenue, net may include deductions from the gross sales price related to estimates for chargebacks, rebates, distribution service fees, returns, shelf-stock, and other pricing adjustments. The Company records an estimate for these deductions in the same period when the 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.

 

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Table of Contents

2. REVENUE RECOGNITION (continued)

 

Rebates

The Company maintains various rebate programs with its 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 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.

Distribution Service Fees

The Company pays distribution service fees to several of its wholesaler customers related to sales of its Impax Products. The wholesalers are generally obligated to provide the Company with periodic outbound sales information as well as inventory levels of the Company’s Impax Products held in their warehouses. Additionally, the wholesalers have agreed to manage the variability of their purchases and inventory levels within specified days on hand limits. An accrued provision for distribution service fees is recognized at the time products are shipped to wholesalers.

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. 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.

Shelf-Stock Adjustments

Based upon competitive market conditions, the Company may reduce the selling price of certain Global Division products. The Company 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 original selling 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 declines in market price. The Company records an estimate for shelf-stock adjustments in the period it agrees to grant such a credit memo 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 other jurisdictions 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 adjustment to accrued liabilities.

 

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2. REVENUE RECOGNITION (continued)

 

Cash Discounts

The Company offers cash discounts to its customers, generally 2% of the gross selling 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.

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/or the provision of research and development services, 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 respective 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 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 consideration received as a result of research and development-related activities performed under the Teva Agreement. The Company recognizes 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 an over-the-counter pharmaceutical product 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. 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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2. REVENUE RECOGNITION (continued)

 

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 a promotional services agreement with unrelated third-party pharmaceutical companies. The promotional services agreement obligates the Company to provide physician detailing sales calls services 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 sales calls services as the services are provided and as performance obligations are met and contingent payments, if any, in the period when they are earned.

Shipping and Handling Fees and Costs

Shipping and handling fees related to sales transactions are recorded as selling expense.

 

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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 was required to adopt this guidance on January 1, 2012, and it did not have a material impact on the Company’s consolidated financial statements.

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.

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 June 30, 2012 and December 31, 2011 follows:

 

(in $000’s)

June 30, 2012

   Amortized
Cost
     Gross
Unrecognized
Gains
     Gross
Unrecognized
Losses
    Fair
Value
 

Commercial paper

   $ 41,547       $ 8       $ (3   $ 41,552   

Government sponsored enterprise obligations

     65,453         8         (2     65,459   

Corporate bonds

     57,846         2         (46     57,802   

Certificates of deposit

     5,005         —           —          5,005   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total short-term investments

   $ 169,851       $ 18       $ (51   $ 169,818   
  

 

 

    

 

 

    

 

 

   

 

 

 

(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   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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5. ACCOUNTS RECEIVABLE

The composition of accounts receivable, net is as follows:

 

(in $000’s)    June 30,
2012
    December 31,
2011
 

Gross accounts receivable

   $ 206,395      $ 210,557   

Less: Rebate reserve

     (33,409     (29,164

Less: Chargeback reserve

     (22,951     (22,161

Less: Other deductions

     (6,588     (5,459
  

 

 

   

 

 

 

Accounts receivable, net

   $ 143,447      $ 153,773   
  

 

 

   

 

 

 

A roll forward of the rebate and chargeback reserves activity for the six months ended June 30, 2012 and the year ended December 31, 2011 is as follows:

 

(in $000’s)

Rebate reserve

   June 30,
2012
    December 31,
2011
 

Beginning balance

   $ 29,164      $ 23,547   

Provision recorded during the period

     51,150        79,697   

Credits issued during the period

     (46,905     (74,080
  

 

 

   

 

 

 

Ending balance

   $ 33,409      $ 29,164   
  

 

 

   

 

 

 

(in $000’s)

Chargeback reserve

   June 30,
2012
    December 31,
2011
 

Beginning balance

   $ 22,161      $ 14,918   

Provision recorded during the period

     94,273        166,504   

Credits issued during the period

     (93,483     (159,261
  

 

 

   

 

 

 

Ending balance

   $ 22,951      $ 22,161   
  

 

 

   

 

 

 

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 $568,000 and $612,000 at June 30, 2012 and December 31, 2011, respectively.

 

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6. 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 approval from the United States Food and Drug Administration (“FDA”) 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.

Inventory, net of carrying value reserves at June 30, 2012 and December 31, 2011 consisted of the following:

 

(in $000’s)    June 30,
2012
     December 31,
2011
 

Raw materials

   $ 26,491       $ 32,454   

Work in process

     3,223         5,046   

Finished goods

     36,348         24,947   
  

 

 

    

 

 

 

Total inventory

     66,062         62,447   

Less: Non-current inventory

     2,970         8,270   
  

 

 

    

 

 

 

Total inventory-current

   $ 63,092       $ 54,177   
  

 

 

    

 

 

 

Inventory carrying value reserves were $10,135,000 and $5,533,000 at June 30, 2012 and December 31, 2011, respectively.

To the extent inventory is not scheduled to be utilized in the manufacturing process and/or sold within twelve months of the balance sheet date, it is included as a component of other non-current assets. Amounts classified as non-current inventory consist of raw materials, net of valuation reserves. Raw materials generally have a shelf life of approximately three to five years, while finished goods generally have a shelf life of approximately two years.

When the Company concludes that FDA approval is expected within approximately six months for a drug product candidate, the Company may begin to schedule manufacturing process validation studies as required by FDA to demonstrate the production process can be scaled up to manufacture commercial batches. Consistent with industry practice, the Company may build quantities of unapproved product inventory pending final FDA approval and/or resolution of patent infringement litigation, when, in the Company’s assessment, such action is appropriate to increase its commercial product opportunity, and FDA approval is expected in the near term, and/or the litigation will be resolved in the Company’s favor. The carrying value of unapproved product inventory, net was $6,644,000 and $3,726,000 at June 30, 2012 and December 31, 2011, respectively. The capitalization of unapproved pre-launch inventory involves risks, including, among other items, FDA approval 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 the Company’s favor. If any of these risks were to materialize and the launch of the unapproved product inventory delayed or prevented, then the net carrying value of unapproved inventory may be partially or fully reserved.

 

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7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following:

 

(in $000’s)    June 30,
2012
     December 31,
2011
 

Receivable from AstraZeneca

   $ 10,400       $ —     

Deferred charge-Zomig® royalty

     29,496         —     

Other prepaid expenses

     7,023         7,718   
  

 

 

    

 

 

 

Prepaid expenses and other current assets

   $ 46,919       $ 7,718   
  

 

 

    

 

 

 

Receivable from AstraZeneca

Under the terms of the AZ Agreement, AstraZeneca is required to make payments to the Company representing 100% of the gross profit on sales of AstraZeneca-labeled Zomig® products (“transition payments”) during the period between January 1, 2012 and the date the Company begins commercialization of the products (“transition period”). The transition payments have been estimated and accounted for as a reduction of the aggregate amount of $130,000,000 to be paid by the Company to AstraZeneca during 2012. The Company has received transition payments from AstraZeneca aggregating $35,840,000 through June 30, 2012. Information concerning the AZ Agreement can be found in Note 13 “Alliance and Collaboration Agreements.”

Deferred Charge-Zomig® Royalty

Under the terms of the AZ Agreement, the Company is obligated to begin royalty payments to AstraZeneca on sales of Impax-labeled Zomig® products sold on or after January 1, 2013. The Company has determined the aggregate amount of $130,000,000 to be paid by the Company to AstraZeneca during 2012 under the AZ Agreement includes a royalty component for sales of Impax-labeled Zomig® products sold by the Company during 2012. The Company has recorded $9,832,000 of royalty expense related to sales of Impax-labeled Zomig® products during the six months ended June 30, 2012, and such royalty expense is included in cost of revenues on the consolidated statement of operations.

8. PROPERTY, PLANT AND EQUIPMENT

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

 

(in $000’s)    June 30,
2012
    December 31,
2011
 

Land

   $ 5,773      $ 5,773   

Buildings and improvements

     87,785        86,084   

Equipment

     78,846        75,589   

Office furniture and equipment

     9,601        8,910   

Construction-in-progress

     35,963        16,602   
  

 

 

   

 

 

 

Property, plant and equipment, gross

     217,968        192,958   

Less: Accumulated depreciation

     (81,080     (74,800
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 136,888      $ 118,158   
  

 

 

   

 

 

 

 

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9. GOODWILL AND INTANGIBLE ASSETS

Goodwill was $27,574,000 at June 30, 2012 and December 31, 2011, and the Company attributes the entire carrying amount of goodwill to the Global Division. Goodwill is tested at least annually for impairment or whenever 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. The Company concluded the carrying value of goodwill was not impaired as of December 31, 2011.

Intangible assets consisted of the following:

 

(in $000’s)

June 30, 2012

   Initial
Cost
     Accumulated
Amortization
    Carrying
Value
 

Amortized intangible assets:

       

Zomig® product rights

   $ 44,432       $ (4,496   $ 39,936   

Tolmar product rights

     19,450         —          19,450   

Other product rights

     2,250         —          2,250   
  

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 66,132       $ (4,496   $ 61,636   
  

 

 

    

 

 

   

 

 

 

(in $000’s)

December 31, 2011

   Initial
Cost
     Accumulated
Amortization
    Carrying
Value
 

Amortized intangible assets:

       

Zomig® product rights

   $ —         $ —        $ —     

Tolmar product rights

     —           —          —     

Other product rights

     2,250         —          2,250   
  

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 2,250       $ —        $ 2,250   
  

 

 

    

 

 

   

 

 

 

The Zomig® product rights are being amortized on a straight-line basis over a period of 14 months starting in April 2012 and ending upon the expiration of the underlying patent for the tablet, over a period of 11 months starting in July 2012 and ending upon the expiration of the underlying patent for the orally disintegrating tablet, and over a period of 72 months starting in July 2012 and ending upon the estimated timing of competing generic products entering the market for the nasal spray. In June 2012, the Company entered into a Development, Supply and Distribution Agreement (the “Tolmar Agreement”) with TOLMAR, Inc. (“Tolmar”). Under the terms of the Tolmar Agreement, Tolmar granted to the Company an exclusive license to commercialize up to 11 generic topical prescription drug products, including nine currently approved products, one product which is currently in development and one product pending approval at the FDA, in the United States and its territories. Under the terms of the Tolmar Agreement, Tolmar is responsible for developing and manufacturing the products, and the Company is responsible for the marketing and sale of the products. Information concerning the Tolmar Agreement can be found in Note 13 “Alliance and Collaboration Agreements.” The Tolmar product rights will be amortized over the remaining estimated useful lives of the underlying products starting upon commercialization by the Company during the second half of 2012. Other product rights consist of Abbreviated New Drug Applications (“ANDAs”) which have been filed with the FDA. The Company will either commence amortization of the cost of these product rights over their estimated useful life upon FDA approval and commercialization, or will expense the related costs immediately upon failure to obtain FDA approval. Amortization expense is included as a component of cost of revenues on the consolidated statement of operations and was $4,496,000 during the three and six month periods ending June 30, 2012.

The following schedule shows the expected amortization of the Zomig® product rights for the next five years and thereafter:

 

(in $000s)    Amortization
Expense
 

2012

   $ 13,226   

2013

     12,822   

2014

     3,086   

2015

     3,086   

2016

     3,086   

Thereafter

     4,630   
  

 

 

 

Totals

   $ 39,936   
  

 

 

 

 

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10. ACCRUED EXPENSES, COMMITMENTS AND CONTINGENCIES

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

 

(in $000’s)    June 30,
2012
     December 31,
2011
 

Payroll-related expenses

   $ 13,592       $ 16,975   

Product returns

     23,557         24,101   

Medicaid rebates

     27,725         17,479   

Physician detailing sales force fees

     1,836         1,655   

Legal and professional fees

     6,951         5,071   

Shelf stock price protection

     148         684   

Other

     5,601         3,025   
  

 

 

    

 

 

 

Total accrued expenses

   $ 79,410       $ 68,990   
  

 

 

    

 

 

 

Product Returns

The Company maintains a return policy to allow customers to return product within specified guidelines. At the time of sale, the Company estimates a provision for product returns based upon historical experience for sales made through its Global Products sales channel. Sales of product under the Rx Partner, and the OTC Partners alliance and collaboration agreements are generally not subject to returns. A roll forward of the product return reserve for the six month period ended June 30, 2012 and the year ended December 31, 2011, is as follows:

 

(in $000’s)

Returns Reserve

   June 30,
2012
    December 31,
2011
 

Beginning balance

   $ 24,101      $ 33,755   

Provision related to sales recorded in the period

     1,497        688   

Credits issued during the period

     (2,041     (10,342
  

 

 

   

 

 

 

Ending balance

   $ 23,557      $ 24,101   
  

 

 

   

 

 

 

Taiwan Facility Construction

The Company has entered into several contracts relating to ongoing construction at its manufacturing facility located in Jhunan, Taiwan, R.O.C. As of June 30, 2012, the Company had remaining obligations under these contracts of approximately $20,483,000.

Purchase Order Commitments

As of June 30, 2012, the Company had $35,839,000 of open purchase order commitments, primarily for raw materials. The terms of these purchase order commitments are less than one year in duration.

 

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11. INCOME TAXES

The Company calculates its interim income tax provision in accordance with FASB ASC Topics 270 and 740. At the end of each interim period, the Company makes an estimate of the annual United States domestic and foreign jurisdictions’ expected effective tax rates and applies these rates to its respective year-to-date taxable income or loss. The computation of the annual estimated effective tax rates at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year, projections of the proportion of income (or loss) earned and taxed in United States, and the various state and local tax jurisdictions, as well as tax jurisdictions outside the United States, along with permanent differences, and the likelihood of deferred tax asset utilization. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired or additional information is obtained. The computation of the annual estimated effective tax rates includes modifications, which were projected for the year, for share-based compensation, the domestic manufacturing deduction, federal and state research and development credits, among others. In addition, the effects of changes in enacted tax laws, rates, or tax status are recognized in the interim period in which the respective change occurs.

During the six month period ended June 30, 2012, the Company recognized an aggregate consolidated tax provision of $17,531,000 for United States domestic and foreign income taxes. In the six month period ended June 30, 2011, the Company recognized an aggregate consolidated tax provision of $12,358,000 for United States domestic and foreign income taxes. The increase in the tax provision resulted primarily from higher consolidated income before taxes, the absence of a federal research and development tax credit, and higher foreign taxes related to our Taiwan-based operations in the six month period ended June 30, 2012 as compared to the same period in the prior year.

 

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12. REVOLVING LINE OF CREDIT

On February 11, 2011, the Company entered into a Credit Agreement, which was subsequently amended (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 its wholly-owned subsidiary 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’s 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, total funded debt, net of unrestricted cash in excess of $100 million, over EBITDA for the preceding four quarters) of less than 3.75 to 1.00, a Senior Secured Leverage Ratio (which is, generally, total senior secured debt over EBITDA for the preceding four quarters) of less than 2.50 to 1.00 and a Fixed Charge Coverage Ratio (which is, generally, 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 June 30, 2012, 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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12. REVOLVING LINE OF CREDIT (continued)

 

   

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, N.A.), and its corresponding commitments were terminated. There were no amounts outstanding under the former credit agreement as of February 11, 2011. During the six months ended June 30, 2012 and 2011, unused line fees incurred under each of the credit agreements were $63,000 and $81,000, respectively.

 

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13. 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.

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.

 

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13. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

 

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 $58,083,000 and $44,499,000 on sales of the AG Product during the six month period ended June 30, 2012 and 2011, respectively, with a corresponding charge included in the cost of revenues line on the consolidated statement of operations.

Development, Supply and Distribution Agreement with TOLMAR, Inc.

In June 2012, the Company entered into the Tolmar Agreement with Tolmar. Under the terms of the Tolmar Agreement, Tolmar granted to the Company an exclusive license to commercialize up to 11 generic topical prescription drug products, including nine currently approved products, one product which is currently in development and one product pending approval at the FDA, in the United States and its territories. Under the terms of the Tolmar Agreement, Tolmar is responsible for developing and manufacturing the products, and the Company is responsible for marketing and sale of the products. The Company is required to pay a profit share to Tolmar on sales of each product commercialized pursuant to the terms of the Tolmar Agreement. The Company will also pay Tolmar a $21,000,000 up-front payment, and up to $25,000,000 in additional contingent milestone payments if certain commercialization and regulatory events occur. The up-front payment for the Tolmar product rights has been allocated to the underlying topical products based upon the relative fair value of each product and will be amortized over the remaining estimated useful life of each underlying product starting upon commercialization by the Company during the second half of 2012. The amortization of the Tolmar product rights will be included as a component of cost of revenues on the consolidated statement of operations. The Company initially allocated $1,550,000 of the up-front payment to two products which are still in development and has recorded such amount as in-process research and development expense in its results of operations for the three months ended June 30, 2012.

 

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13. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

 

Strategic Alliance Agreement with Teva

The Company entered into a Strategic Alliance Agreement with Teva in June 2001 (“Teva Agreement”). The Teva Agreement commits the Company to develop and manufacture, and Teva to distribute, a specified number of 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/pseudoephedrine product, if any, but in no event will such profit share payments exceed an aggregate amount of $3,000,000.

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

 

(in $000’s)

Deferred revenue

   Six Months
Ended
June 30,
2012
    Inception
Through
Dec 31,
2011
 

Beginning balance

   $ 3,705      $ —     

Additions:

    

Product related and cost sharing

     —          427,916   

Exclusivity charges

     —          (50,600

Other

     —          12,527   
  

 

 

   

 

 

 

Total additions

   $ —        $ 389,843   
  

 

 

   

 

 

 

Less: Amount recognized

     (655     (189,698
          Accounting adjustment      —          (196,440
  

 

 

   

 

 

 

Total deferred revenue

   $ 3,050      $ 3,705   
  

 

 

   

 

 

 

OTC Partners Alliance Agreements

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

 

(in $000’s)

Deferred revenue

   Six Months
Ended
June 30,
2012
    Inception
Through
Dec 31, 2011
 

Beginning balance

   $ 9,683      $ —     

Additions

     931        100,030   

Less: amount recognized

     (1,363     (90,347
  

 

 

   

 

 

 

Total deferred revenue

   $ 9,251      $ 9,683   
  

 

 

   

 

 

 

(in $000’s)

Deferred product manufacturing costs

   Six Months
Ended
June 30,
2012
    Inception
Through
Dec 31, 2011
 

Beginning balance

   $ 8,846      $ —     

Additions

     1,574        82,814   

Less: amount recognized

     (1,709     (73,968
  

 

 

   

 

 

 

Total deferred product manufacturing costs

   $ 8,711      $ 8,846   
  

 

 

   

 

 

 

 

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13. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

 

Joint Development Agreement with Medicis Pharmaceutical Corporation

The Joint Development Agreement provides for the Company and Medicis to collaborate in the development of a total of 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 selling one of the four dermatology products during the year ended December 31, 2011.

 

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13. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

 

License, Development and Commercialization Agreement & Supply 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 to the Company, 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.

Distribution, License, Development and Supply Agreement with AstraZeneca UK Limited

In January 2012, the Company entered into the AZ Agreement with AstraZeneca. Under the terms of the AZ Agreement, AstraZeneca granted to the Company an exclusive license to commercialize the tablet, orally disintegrating tablet and nasal spray formulations of Zomig® (zolmitriptan) products for the treatment of migraine headaches in the United States and in certain U.S. territories, except during an initial transition period when AstraZeneca will fulfill all orders of Zomig® products on the Company’s behalf and AstraZeneca will pay to the Company the gross profit on such Zomig® products. After a certain promotion commencement date, the Company will be obligated to fulfill certain minimum requirements with respect to the promotion of currently approved Zomig® products as well as other dosage strengths of such products approved by the FDA in the future. The Company may, but has no obligation to, develop and commercialize additional products containing zolmitriptan and additional indications for Zomig®, subject to certain restrictions as set forth in the AZ Agreement. The Company will be responsible for conducting clinical studies and preparing regulatory filings related to the development of any such additional products and would bear all related costs. During the term of the AZ Agreement, AstraZeneca will continue to be the holder of the New Drug Application for existing Zomig® products, as well as any future dosage strengths thereof approved by the FDA, and will be responsible for certain regulatory and quality-related activities for such Zomig® products. AstraZeneca will manufacture and supply Zomig® products to the Company and the Company will purchase its requirements of Zomig® products from AstraZeneca until a date determined in the AZ Agreement. Thereafter, AstraZeneca may terminate its supply obligations upon certain advance notice to the Company, in which case the Company would have the right to manufacture or have manufactured its own requirements for the applicable Zomig® product.

Under the terms of the AZ Agreement, AstraZeneca is required to make payments to the Company representing 100% of the gross profit on sales of AstraZeneca-labeled Zomig® products during the specified transition period. Under the terms of the AZ Agreement, the Company is required to make quarterly payments totaling up to $130,000,000 during 2012 to AstraZeneca. Thereafter, the Company will pay AstraZeneca tiered royalties on net sales of Zomig® products, depending on brand exclusivity and subject to customary reductions. After a certain date, the Company will also pay AstraZeneca royalties on gross profit from authorized generic products. In addition, the Company will receive the benefit of the gross profit on U.S. Zomig® sales commencing from January 1, 2012.

During the six months ended June 30, 2012, the Company made payments totaling $55,000,000 to AstraZeneca pursuant to the AZ Agreement.

 

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13. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

 

Development and Co-Promotion Agreement with Endo Pharmaceuticals Inc.

In June 2010, the Company and Endo Pharmaceuticals, Inc. (“Endo”) entered into a Development and Co-Promotion Agreement (“Endo Agreement”) under which the Company and Endo have agreed to collaborate in the development and commercialization of a next-generation advanced form of the Company’s lead brand product candidate (“Endo Agreement Product”). Under the provisions of the Endo Agreement, in June 2010, Endo paid to the Company a $10,000,000 up-front payment. The Company has the potential to receive up to an additional $30,000,000 of contingent 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 contingent 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 and Endo also entered into a Settlement and License Agreement in June 2010 (the “Endo Settlement Agreement”) pursuant to which Endo agreed to provide payment to the Company should Prescription Sales of Opana® ER (as defined in the Endo Settlement Agreement) fall below a predetermined contractual threshold in the quarter immediately prior to the Company launching a generic version of Opana® ER.

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 any 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.

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”). The Company’s obligation to provide physician detailing sales calls under the Pfizer Co-Promotion Agreement ended on June 30, 2012. Prior to such time, the Company had received a fixed fee, effective January 1, 2010, subject to annual cost adjustment, for providing such physician detailing sales call services within a contractually defined range of an aggregate number of physician detailing sales calls rendered, determined on a quarterly basis. Pfizer was 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 recognized the physician detailing sales force fee revenue as the related services were performed and the performance obligations were met. The Company recognized $7,070,000 in each six month period ended June 30, 2012 and 2011, under the Pfizer Co-Promotion Agreement, with such amounts presented in the line item “Promotional Partner” revenue on the consolidated statement of operations.

 

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14. SHARE-BASED COMPENSATION

The Company recognizes the grant date fair value of each stock option and restricted stock award over its vesting period. Stock options and restricted stock awards are granted under the Company’s Amended and Restated 2002 Equity Incentive Plan (“2002 Plan”) and generally vest over a three or four year period and have a term of ten years. Total share-based compensation expense recognized in the consolidated statement of operations was as follows:

 

     Three Months Ended:      Six Months Ended:  
(in $000’s)    June 30,
2012
     June 30,
2011
     June 30,
2012
     June 30,
2011
 

Manufacturing expenses

   $ 530       $ 416       $ 1,167       $ 931   

Research and development

     1,086         1,134         2,299         2,087   

Selling, general & administrative

     2,897         1,696         4,857         3,115   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,513       $ 3,246       $ 8,323       $ 6,133   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes stock option activity:

 

     Number of Shares
Under Option
    Weighted Average
Exercise Price

per Share
 

Outstanding at December 31, 2011

     5,073,097      $ 11.76   

Options granted

     278,500      $ 20.90   

Options exercised

     (600,665   $ 9.42   

Options forfeited

     (44,118   $ 11.36   
  

 

 

   

Outstanding at June 30, 2012

     4,706,814      $ 11.67   
  

 

 

   

Options exercisable at June 30, 2012

     3,326,650      $ 11.53   
  

 

 

   

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 solely on historical volatility of the Company’s common stock over the period commensurate with the expected term of the stock options. The expected term calculation is based on the “simplified” method described in SAB No. 107, Share-Based Payment and SAB No. 110, Share-Based Payment, as the result of the simplified method provides a reasonable estimate in comparison to the Company’s 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.

A summary of the Company’s non-vested restricted stock awards is presented below:

 

Restricted Stock Awards

   Number of Restricted
Stock Awards
    Weighted Average
Grant-Date

Fair Value
 

Non-vested at December 31, 2011

     1,663,911      $ 17.20   

Granted

     252,050      $ 21.70   

Vested

     (222,497   $ 11.55   

Forfeited

     (77,364   $ 18.17   
  

 

 

   

Non-vested at June 30, 2012

     1,616,100      $ 18.56   
  

 

 

   

The Company grants restricted stock awards to certain eligible employees and directors as a component of its long-term incentive compensation program. The restricted stock award grants are made in accordance with the Company’s 2002 Plan, and typically specify the restricted stock awards underlying shares of common stock are not issued until they vest. The restricted stock awards generally vest ratably over a three or four year period from the date of grant.

 

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14. SHARE-BASED COMPENSATION (continued)

 

As of June 30, 2012, the Company had total unrecognized share-based compensation expense, net of estimated forfeitures, of $36,040,000 related to all of its share-based awards, which will be recognized over a weighted average period of 2.31 years. As of June 30, 2012, the Company estimated 4,166,900 stock options and 1,430,700 restricted shares granted to employees which were vested or expected to vest. The intrinsic value of stock options exercised during the six month periods ended June 30, 2012 and 2011 was $7,547,000 and $16,167,000, respectively. The total fair value of restricted stock awards which vested during the six month period ended June 30, 2012 and 2011 was $2,566,000 and $1,738,000 respectively. As of June 30, 2012, the Company had 1,660,193 shares of common stock available for issuance of stock options, restricted stock awards, and/or stock appreciation rights.

15. STOCKHOLDERS’ EQUITY

Preferred Stock

Pursuant to its certificate of incorporation, the Company is authorized to issue 2,000,000 shares, $0.01 par value per share, “blank check” preferred stock, which enables the Board of Directors, from time to time, to create one or more new series of preferred stock. Each series of preferred stock issued can have the rights, preferences, privileges and restrictions designated by the Board of Directors. The issuance of any new series of preferred stock could affect, among other things, the dividend, voting, and liquidation rights of the Company’s common stock. During the six month periods ended June 30, 2012 and 2011, 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.

 

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16. EARNINGS PER SHARE

The Company’s earnings per share (EPS) includes basic net income per share, computed by dividing net income (as presented on the consolidated statement of operations), by the weighted-average number of shares of common stock outstanding for the period, along with diluted net income per share, computed by dividing net income by the weighted-average number of shares of common stock adjusted for the dilutive effect of common stock equivalents outstanding during the period. A reconciliation of basic and diluted net income per share of common stock for the three and six month periods ended June 30, 2012 and 2011 was as follows:

 

     Three Months Ended:      Six Months Ended:  
(in $000’s except per share amounts)    June 30,
2012
     June 30,
2011
     June 30,
2012
     June 30,
2011
 

Numerator:

           

Net income

   $ 18,672       $ 12,550       $ 31,037       $ 26,413   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average common shares outstanding

     65,482,700         64,024,483         65,289,869         63,709,258   

Effect of dilutive stock options and restricted stock awards

     2,471,873         3,629,564         2,775,065         3,691,760   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     67,954,573         67,654,047         68,064,934         67,401,018   

Basic net income per share

   $ 0.29       $ 0.20       $ 0.48       $ 0.41   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per share

   $ 0.27       $ 0.19       $ 0.46       $ 0.39   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three month periods ended June 30, 2012 and 2011, the Company excluded 964,562 and 705,575, respectively, and for the six month periods ended June 30, 2012 and 2011, the Company excluded 966,512 and 705,300, respectively of shares issuable upon the exercise of stock options, and unvested restricted stock awards from the computation of diluted net income per common share as the effect of these options and unvested restricted stock awards would have been anti-dilutive. 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.

 

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17. 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 commercialization and 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, such as the sale and distribution of Zomig® (zolmitriptan) products, indicated for the treatment of migraine headaches, under the terms of the AZ Agreement with AstraZeneca in the United States and in certain U.S. territories. 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 the discussion of “Revenue Recognition” and in the “Summary of Significant Accounting Policies” in the Company’s Form 10-K for the year ended December 31, 2011. The Company has no inter-segment revenue.

 

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17. SEGMENT INFORMATION (continued)

 

The tables below present segment information reconciled to total Company consolidated financial results, with segment operating income or loss including gross profit less direct research and development expenses, and direct selling expenses as well as any litigation settlements, to the extent specifically identified by segment:

 

(in $000’s)    Global
Division
     Impax
Division
    Corporate
and Other
    Total
Company
 

Three Months Ended June 30, 2012

         

Revenues, net

   $ 133,068       $ 33,392      $ —        $ 166,460   

Cost of revenues

     70,478         18,159        —          88,637   

Research and development

     12,136         7,733        —          19,869   

Patent Litigation

     2,914         —          —          2,914   

Income (loss) before provision for income taxes

   $ 44,221       $ 793      $ (15,118   $ 29,896   
(in $000’s)    Global
Division
     Impax
Division
    Corporate
and Other
    Total
Company
 

Three Months Ended June 30, 2011

         

Revenues, net

   $ 120,559       $ 5,301      $ —        $ 125,860   

Cost of revenues

     63,257         2,901        —          66,158   

Research and development

     13,466         10,512        —          23,978   

Patent Litigation

     2,209         —          —          2,209   

Income (loss) before provision for income taxes

   $ 39,048       $ (9,489   $ (11,819   $ 17,740   
(in $000’s)    Global
Division
     Impax
Division
    Corporate
and Other
    Total
Company
 

Six Months Ended June 30, 2012

         

Revenues, net

   $ 256,333       $ 38,695      $ —        $ 295,028   

Cost of revenues

     133,584         21,068        —          154,652   

Research and development

     22,798         15,887        —          38,685   

Patent Litigation

     6,952         —          —          6,952   

Income (loss) before provision for income taxes

   $ 85,307       $ (8,028   $ (28,781   $ 48,498   
(in $000’s)    Global
Division
     Impax
Division
    Corporate
and Other
    Total
Company
 

Six Months Ended June 30, 2011

         

Revenues, net

   $ 223,907       $ 10,604      $ —        $ 234,511   

Cost of revenues

     110,431         5,841        —          116,272   

Research and development

     23,242         20,227        —          43,469   

Patent Litigation

     3,983         —          —          3,983   

Income (loss) before provision for income taxes

   $ 81,053       $ (17,947   $ (24,364   $ 38,742   

Foreign Operations

The Company’s wholly-owned subsidiary, Impax Laboratories (Taiwan) Inc., is constructing a manufacturing facility in Jhunan, Taiwan R.O.C. which is utilized for manufacturing, research and development, warehouse, and administrative functions, with approximately $94,405,000 of net carrying value of assets, composed principally of a building and equipment, included in the Company’s consolidated balance sheet at June 30, 2012.

 

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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 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 drug developer, or 30 months from the date the notice was received, whichever is sooner. Lawsuits have been filed against the Company in connection with 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 that 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 product 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 four 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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18. LEGAL AND REGULATORY MATTERS (continued)

 

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. 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. Fact discovery is closed and expert discovery is proceeding in the Company’s case with respect to the other patents. Trial is set for September 4, 2012.

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 starting on February 1, 2012. In April 2012, the District Court issued its decision finding that the patent in both suits was not infringed by the Company’s ANDAs and that the patent was not invalid. Warner Chilcott appealed the district court’s non-infringement decision and the appeal is pending.

Eurand, Inc., et al. v. Impax Laboratories, Inc. (Cyclobenzaprine)

In January 2009, Eurand, Inc., Cephalon, Inc., and Anesta AG (collectively, “Cephalon”) filed suit against the Company in the U.S. District Court for the District of Delaware (“District Court”), alleging patent infringement for the filing of the Company’s ANDA relating to Cyclobenzaprine Hydrochloride Extended Release Capsules, 15 mg and 30 mg, generic to Amrix®. This matter was settled and dismissed on October 11, 2010.

On November 8, 2011, the District Court expressly named the Company in an order enjoining it from engaging in the commercial use, offer for sale, or sale within the United States of any generic Amrix®. On November 22, 2011, the Company filed a motion to reargue and modify the injunction. Plaintiffs responded on December 9, 2011, with a motion for declaratory judgment, seeking a declaration that Impax does not have the right to sell generic Amrix®. The Company responded on December 20, 2011, and moved to enforce the terms of a settlement agreement entered into with Plaintiffs that it claims grants the Company the right to sell generic Amrix®. On March 15, 2012, the District Court denied the Company’s motion and refused to modify the injunction. The Company appealed the order and the appeal is pending.

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. Fact discovery is closed, and trial is scheduled for October 1, 2012.

 

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18. LEGAL AND REGULATORY MATTERS (continued)

 

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. Fact discovery is closed, and trial is scheduled for October 1, 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. Fact discovery is closed, and trial is scheduled for October 1, 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.

 

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18. LEGAL AND REGULATORY MATTERS (continued)

 

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 (“District Court”) 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. In April 2012, the District Court issued a decision, finding that the latest-expiring patent (U.S. Patent No. RE 42,461) to be valid and enforceable. The decision of validity and enforceability will be binding on the Company unless reversed or modified on appeal or in subsequent litigation.

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. The parties have entered a stipulation staying the Company’s litigation until August 13, 2012.

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 and counterclaims to both complaints. The parties have entered a stipulation staying the Company’s litigations until September 24, 2012.

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 March 2012, Shire dedicated one of the patents-in-suit, U.S. Patent No. 5,854,290, to the public. The Court conducted a Markman hearing on May 30, 2012 and on June 1, 2012, the Court issued an order construing the claims. On July 12, 2012 the Company filed a motion for summary judgment of noninfringement of the ‘290 patent. Trial is scheduled for July 8, 2013.

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. The trial court issued a claim construction ruling on April 11, 2012. Discovery is ongoing and trial is set for June 3, 2013.

 

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18. LEGAL AND REGULATORY MATTERS (continued)

 

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. Discovery is proceeding, and no trial date has been set.

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 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 of U.S. Patent Nos. 6,200,604, 6,974,590, 7,862,832, and 7,862,833, based on 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. The Company also filed a supplemental counterclaim seeking declaratory judgment regarding U.S. Patent No. 8,119,158. Discovery is ongoing, and trial is set for June 24, 2013.

Depomed, Inc. v. Impax Laboratories, Inc. (Gabapentin)

In April 2012, Depomed, Inc. 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 Gabapentin Extended-Release Tablets, 300 and 600 mg, generic to Gralise®. The Company filed an answer and counterclaim. Discovery is ongoing and a final pretrial conference is set for March 13, 2014.

 

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18. LEGAL AND REGULATORY MATTERS (continued)

 

Other Litigation Related to the Company’s 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 al., No. 673880 (24th Dist Crt., Jefferson Parish, LA.)), North Carolina (Weber v. Teva Pharmaceuticals Indus., Ltd., et al., No. 07 CV5002556, (N.C. Superior Crt., Hanover County)), Pennsylvania (Rosenfeld v. Teva Pharmaceuticals USA, Inc. et al., No. 2:09-CV-2811 (E.D. Pa.)), Florida (Henchenski and Vogel v. Teva Pharmaceuticals Industries Ltd., et al., No. 2:09-CV-470-FLM-29SPC (M.D. Fla.)), Texas (Anderson v. Teva Pharmaceuticals Indus., Ltd., et al., No. 3-09CV1200-M (N.D. Tex.)), Oklahoma (Brown et al. v. Teva Pharmaceuticals Inds., Ltd., et al., No. 09-cv-649-TCK-PJC (N.D. OK)), Ohio (Latvala et al. v. Teva Pharmaceuticals Inds., Ltd., et al., No. 2:09-cv-795 (S.D. OH)), Alabama (Jordan v. Teva Pharmaceuticals Indus. Ltd et al., No. CV09-709 (Ala. Cir. Crt. Baldwin County)), and Washington (Leighty v. Teva Pharmaceuticals Indus. Ltd et al., No. CV09-01640 (W. D. Wa.)). All of the complaints involve Budeprion XL, a generic version of Wellbutrin XL® that is manufactured by the Company and marketed by Teva, and allege that, contrary to representations of Teva, Budeprion XL is less effective in treating depression, and more likely to cause dangerous side effects, than Wellbutrin XL. The actions are brought on behalf of purchasers of Budeprion XL and assert claims such as unfair competition, unfair trade practices and negligent misrepresentation under state law. Each lawsuit seeks damages in an unspecified amount consisting of the cost of Budeprion XL paid by class members, as well as any applicable penalties imposed by state law, and disclaims damages for personal injury. The state court cases 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 March 31, 2012. The settlement was finally approved by the Court on July 2, 2012. A third party objector to the settlement filed a notice of appeal on July 25, 2012.

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 currently no trial date has been set.

Civil Investigative Demand from the FTC

On May 2, 2012, the Company received a Civil Investigative Demand (“CID”) from the United States Federal Trade Commission (“FTC”) concerning its investigation into the drug SOLODYN® and its generic equivalents. According to the FTC, the investigation is to determine whether Medicis Pharmaceutical Corporation, the Company, and six other companies have engaged or are engaged in unfair methods of competition in or affecting commerce by (i) entering into agreements regarding SOLODYN® or its generic equivalents and/or (ii) engaging in other conduct regarding the sale or marketing of SOLODYN® or its generic equivalents. The Company is cooperating with the FTC in producing documents and information in response to the CID. To the knowledge of the Company, no proceedings have been initiated against the Company to date, however no assurance can be given as to the timing or outcome of this investigation.

 

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19. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)

Selected financial information for the quarterly periods noted is as follows:

 

     2012 Quarters Ended:  
(in $000’s except shares and per share amounts)    March 31     June 30  

Revenue:

    

Global Product sales, gross

   $ 185,671      $ 223,452   

Less:

    

Chargebacks

     39,155        50,670   

Rebates

     20,589        26,847   

Product Returns

     (329     948   

Other credits

     10,045        18,552   
  

 

 

   

 

 

 

Global Product sales, net

     116,211        126,435   
  

 

 

   

 

 

 

Impax Product sales, net

     —          28,091   

Rx Partner

     4,416        3,903   

OTC Partner

     691        783   

Research Partner

     3,715        3,713   

Promotional Partner

     3,535        3,535   
  

 

 

   

 

 

 

Total revenues

     128,568        166,460   
  

 

 

   

 

 

 

Gross profit

     62,553        77,823   

Net income

   $ 12,365      $ 18,672   
  

 

 

   

 

 

 

Net income per share (basic)

   $ 0.19      $ 0.29   
  

 

 

   

 

 

 

Net income per share (diluted)

   $ 0.18      $ 0.27   
  

 

 

   

 

 

 

Weighted Average:

    

common shares outstanding:

    

Basic

     65,122,240        65,482,700   
  

 

 

   

 

 

 

Diluted

     67,907,263        67,954,573   
  

 

 

   

 

 

 

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.

 

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19. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited) (continued)

 

Selected financial information for the quarterly periods noted is as follows:

 

     2011 Quarters Ended:  
(in $000’s except shares and per share amounts)    March 31      June 30  

Revenue:

     

Global Product sales, gross

   $ 151,832       $ 181,972   

Less:

     

Chargebacks

     35,216         39,395   

Rebates

     12,709         17,392   

Product Returns

     2,706         1,799   

Other credits

     8,863         12,261   
  

 

 

    

 

 

 

Global Product sales, net

     92,338         111,125   
  

 

 

    

 

 

 

Rx Partner

     4,120         6,303   

OTC Partner

     1,943         1,184   

Research Partner

     6,715         3,713   

Promotional Partner

     3,535         3,535   
  

 

 

    

 

 

 

Total revenues

     108,651         125,860   
  

 

 

    

 

 

 

Gross profit

     58,537         59,702   

Net income

   $ 13,863       $ 12,550   
  

 

 

    

 

 

 

Net income per share (basic)

   $ 0.22       $ 0.20   
  

 

 

    

 

 

 

Net income per share (diluted)

   $ 0.21       $ 0.19   
  

 

 

    

 

 

 

Weighted Average:

     

common shares outstanding:

     

Basic

     63,390,527         64,024,483   
  

 

 

    

 

 

 

Diluted

     67,044,266         67,654,047   
  

 

 

    

 

 

 

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.

 

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

The following discussion and analysis, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with the unaudited interim consolidated financial statements and related notes to the unaudited interim consolidated financial statements included elsewhere herein.

Statements included in this Quarterly Report on Form 10-Q not related to present or historical conditions are “forward-looking statements.” Such forward-looking statements involve risks and uncertainties which could cause results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements may include statements relating to our plans, strategies, objectives, expectations and intentions. Words such as “believes,” “forecasts,” “intends,” “possible,” “estimates,” “anticipates,” “plans,” “will,” “should,” “could” and similar expressions are intended to identify forward-looking statements. Our ability to predict results or the effect of events on our operating results is inherently uncertain. Forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those discussed in this Quarterly Report on Form 10-Q. Such risks and uncertainties include the effect of current economic conditions on our industry, business, financial position 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 herein and in our Annual Report on Form 10-K for the year ended December 31, 2011. 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, except to the extent required by applicable law.

 

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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 and sale of third-party branded pharmaceutical products through our direct sales force, such as the sale and distribution of Zomig® (zolmitriptan) products, indicated for the treatment of migraine headaches, under the terms of a Distribution, License, Development and Supply Agreement with AstraZeneca in the United States and in certain U.S. territories. Each of the Global Division and the Impax Division also generates revenue from research and development services provided to unrelated third-party pharmaceutical entities.

We plan to continue to expand our Global Division through targeted ANDAs and a first-to-file and first-to-market strategy. 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 channel: 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 July 27, 2012, we marketed 107 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 four different pharmaceutical compounds, through our alliance and collaboration agreement partners. In addition to a product pipeline of 46 pending applications at the FDA (including applications jointly filed with our alliance and collaboration agreement partners) as of July 27, 2012, we are continuing to evaluate and pursue external growth initiatives including acquisitions and partnerships.

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 and sale of branded pharmaceutical products through our specialty sales force. We believe that we have the research, development and formulation expertise to develop branded products that will deliver significant improvements over existing therapies.

 

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Our branded pharmaceutical product portfolio consists of commercial CNS products and development stage projects. In January 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. With the addition of Zomig® to the promotional product portfolio, we have expanded our specialty sales team during 2012. In addition to Zomig®, we co-promoted Lyrica® (pregabalin) CV to neurologists for Pfizer under an amended agreement that expired 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 Prescription Drug User Fee Date (“PDUFA”) for a decision by the FDA is October 2012. 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.

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 1. Financial Statements — Note 13 to Interim Consolidated Financial Statements.”

Pursuant to a license and distribution agreement, we are dependent on a third-party pharmaceutical company to supply us with our authorized generic Adderall XR®, which we market and sell. We have experienced disruptions related to the supply of our authorized generic Adderall XR® from this third-party pharmaceutical company during 2011 and 2012. 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. 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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Quality Control

In June 2011, we received a warning letter from the 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 set forth in the warning letter 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.

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 acknowledgement letter from the FDA stating that it had received a complete response from us to the warning letter. During the quarter ended March 31, 2012, the FDA completed a re-inspection of our Hayward manufacturing facility in connection with the warning letter and in addition, a general GMP inspection. As a result of the general GMP inspection of our Hayward operations, the FDA issued a Form 483, with observations primarily relating to our Quality Control Laboratory. We have been notified by the FDA that a satisfactory re-inspection of our Hayward manufacturing facility is required to close out the warning letter and such re-inspection by the FDA has not occurred to date.

We have taken a number of steps to thoroughly review our quality control and manufacturing systems and standards and are working with several third-party experts to assist us with our review. This work is ongoing and we are committed to improving our quality control and manufacturing practices. We cannot be assured, however, that the FDA will be satisfied with our corrective actions and as such, we cannot be assured of when the warning letter will be closed out. Unless and until the warning letter is closed out, 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 has withheld and may continue to withhold approval of pending drug applications listing our Hayward, California facility as a manufacturing location of finished dosage forms until these 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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Critical Accounting 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, distribution service fees, 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. Certain prior year amounts have been reclassified to conform to the current year presentation.

Although we believe our estimates and assumptions are reasonable when made, they are based upon information available to us at the time they are made. We periodically review the factors having an influence on our estimates and, if necessary, adjust such estimates. Although historically our estimates have generally been reasonably accurate, due to the risks and uncertainties involved in our business and evolving market conditions, and given the subjective element of the estimates made, actual results may differ from estimated results. This possibility may be greater than normal during times of pronounced economic volatility.

Global Product sales, net, and Impax Product sales, net. We recognize revenue from direct sales in accordance with SEC Staff Accounting Bulletin No. 104, Topic 13 “Revenue Recognition” (“SAB 104”). We recognize revenue from direct product sales at the time title and risk of loss pass to customers. We provide for accrued provisions for estimated chargebacks, rebates, distribution service fees, product returns, and other pricing adjustments in the period we record the related sales.

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 these 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 actual amounts to the estimated provisions, in the aggregate, for each deduction category to assess the reasonableness of the various reserves at each quarterly balance sheet date. Differences between our estimated provisions and actual credits issued have not been significant, and are accounted for in the current period as a change in estimate in accordance with GAAP. We do not have the ability to specifically link any particular sales credit to an exact sales transaction and since there have been no material differences, we believe our systems and procedures are adequate for managing our business. An event such as the failure to report a particular promotion could result in a significant difference between the estimated amount accrued and the actual amount claimed by the customer, and, while there have been none to date, we would evaluate the particular events and factors giving rise to any such significant difference in determining the appropriate accounting.

 

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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 Global Products chargeback reserve for the six months ended June 30, 2012 and the year ended December 31, 2011:

 

     June 30,
2012
    December 31,
2011
 
     ($ in 000’s)  

Chargeback reserve

    

Beginning balance

   $ 22,161      $ 14,918   

Provision recorded during the period

     89,825        166,504   

Credits issued during the period

     (92,722     (159,261
  

 

 

   

 

 

 

Ending balance

   $ 19,264      $ 22,161   
  

 

 

   

 

 

 

Provision as a percent of gross Global Product sales

     22     23
  

 

 

   

 

 

 

The slight decrease in chargebacks as a percent of gross Global Product sales in the six months ended June 30, 2012 as compared to year ended December 31, 2011 was principally the result of relatively higher levels of sales of our authorized generic Adderall XR® products in the current year period. Sales of our authorized generic Adderall XR® products generally carry lower average chargebacks than our other Global Products.

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 Global Products rebate reserve for the six months ended June 30, 2012 and the year ended December 31, 2011:

 

     June 30,
2012
    December 31,
2011
 
     ($ in 000’s)  

Rebate reserve

    

Beginning balance

   $ 29,164      $ 23,547   

Provision recorded during the period

     47,436        79,697   

Credits issued during the period

     (46,905     (74,080
  

 

 

   

 

 

 

Ending balance

   $ 29,695      $ 29,164   
  

 

 

   

 

 

 

Provision as a percent of gross Global Product sales

     12     11
  

 

 

   

 

 

 

As noted in the table above, the provision for rebates, as a percent of gross Global Product sales remained relatively consistent period-over-period.

 

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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 return rates, adjusted by estimates of the future return rates based on various assumptions, which may include changes to internal policies and procedures, changes in business practices, and commercial terms with customers, competitive position of each product, amount of inventory in the wholesaler supply chain, the introduction of new products and changes in market sales information. We also consider other factors, including 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 Global Products returns reserve for the six months ended June 30, 2012 and the year ended December 31, 2011:

 

     June 30,
2012
    December 31,
2011
 
     ($ in 000’s)  

Returns reserve

    

Beginning balance

   $ 24,101      $ 33,755   

Provision related to sales recorded in the period

     619        688   

Credits issued during the period

     (2,041     (10,342
  

 

 

   

 

 

 

Ending balance

   $ 22,679      $ 24,101   
  

 

 

   

 

 

 

Provision as a percent of gross Global Product sales

     0.2     0.1
  

 

 

   

 

 

 

The provision for returns as a percent of gross Global Product sales remained low during the six month period ended June 30, 2012 primarily as the result of favorable historical experience of actual return credits processed. Our historical experience for returns continues to improve due to strong sales in recent years of our authorized generic Adderall XR® and fenofibrate products.

 

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Medicaid Rebate. As required by law, we provide a rebate payment on drugs dispensed under the Medicaid program. We determine our estimate of the accrued Medicaid rebate reserve primarily based on historical experience of claims submitted by the various states, and other jurisdictions, 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 $27,725,000 and $17,479,000 as of June 30, 2012 and December 31, 2011, respectively.

Shelf-Stock Adjustments. Based upon competitive market conditions, we may reduce the selling price of some of our products to customers for certain future product shipments. 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 us. 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 $148,000 and $684,000 as of June 30, 2012 and December 31, 2011, respectively.

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 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.

 

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OTC Partner revenue is related to our alliance and collaboration 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 alliance and collaboration 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.

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 deferred 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 entered into a promotional services agreement with an unrelated third-party pharmaceutical company under which we provided physician detailing sales calls services to promote certain of the unrelated third-party company’s branded drug products. We received service fee revenue in exchange for providing this service. We recognized revenue from the provision of physician detailing sales calls as such services were rendered. Our obligations to provide physician detailing sales calls under the promotional services agreement ended on June 30, 2012.

 

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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, have been initially deferred and are being 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. If the expected period of performance is different from our estimate, then the revenue recognition period 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 as revenue 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 final Joint Development Agreement deliverable 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 Medicis 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 and Development Agreements. In addition to our own research and development resources, we may use unrelated third-party vendors, including universities and independent research companies, to assist in our research and development activities. These vendors provide a range of research and development services to us, including clinical and bio-equivalency studies. We generally sign agreements with these vendors which establish the terms of each study performed by them, including, among other things, the technical specifications of the study, the payment schedule, and timing of work to be performed. 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 our assets and liabilities.

We calculate our interim income tax provision in accordance with FASB ASC Topics 270 and 740. At the end of each interim period, we make an estimate of the annual U.S. domestic and foreign jurisdictions’ expected effective tax rates and apply these rates to their respective year-to-date taxable income or loss. The computation of the annual estimated effective tax rates at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year, projections of the proportion of income (or loss) earned and taxed in United States, and the various state and local tax jurisdictions, as well as tax jurisdictions outside the United States, along with permanent differences, and the likelihood of deferred tax asset utilization. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, or additional information is obtained. The computation of the annual estimated effective tax rates includes modifications, which were projected for the year, for share-based compensation charges, the domestic manufacturing deduction, and federal and state research and development credits, among others. In addition, we recognize the effect of changes in enacted tax laws, rates, or tax status in the interim period in which such change occurs.

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 June 30, 2012. We carry our deferred compensation liability at fair value, based upon observable market values. We had no debt outstanding as of June 30, 2012. Our only remaining debt instrument at June 30, 2012 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 consider each of our Global Division and Impax Division operating segments to be a reporting unit, as this is the lowest level for each of which discrete financial information is available. We attribute the entire carrying amount of goodwill to the Global Division. We concluded the carrying value of goodwill was not impaired as of December 31, 2011, as the fair value of the Global Division exceeded its carrying value. 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

Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011

Overview:

The following table sets forth our summarized, consolidated results of operations for the three month period ended June 30, 2012 and 2011:

 

     Three Months Ended      Increase/
(Decrease)
 
     June 30,
2012
     June 30,
2011
    
(in $000’s)    (unaudited)      (unaudited)                
                   $      %  

Total revenues

   $ 166,460       $ 125,860       $ 40,600         32

Gross profit

     77,823         59,702         18,121         30

Income from operations

     30,170         18,006         12,164         68

Income before income taxes

     29,896         17,740         12,156         69

Provision for income taxes

     11,262         5,214         6,048         116
  

 

 

    

 

 

    

 

 

    
     18,634         12,526         6,108         49

Non-controlling interest

     38         24         14         58
  

 

 

    

 

 

    

 

 

    

Net income

   $ 18,672       $ 12,550       $ 6,122         49
  

 

 

    

 

 

    

 

 

    

Net income for the three month period ended June 30, 2012 was $18.7 million, an increase of $6.1 million as compared to $12.6 million for the three month period ended June 30, 2011, primarily attributable to higher Global Product sales, as well as sales of Impax-labeled Zomig® tablets which we began selling during the three month period ended June 30, 2012. The higher sales during the three months ended June 30, 2012 were partially offset by higher patent litigation costs, selling, general and administrative expenses and income taxes. We continued to earn significant revenues and gross profit from sales of our authorized generic Adderall XR® products and fenofibrate products during the three month period ended June 30, 2012. 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 have experienced disruptions related to the supply of our authorized generic Adderall XR® from this third-party pharmaceutical company. Delays or interruptions 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. In June 2012, a competitor product to our authorized generic Adderall XR® was approved for sale by the FDA. Although we are currently unable to predict the impact this competitor product will have on our business, 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 disruptions 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 three month period ended June 30, 2012 and 2011:

 

     Three Months Ended      Increase/
(Decrease)
 
     June 30,
2012
     June 30,
2011
    
(in $000’s)    (unaudited)      (unaudited)               
                   $     %  

Revenues:

          

Global Product sales, net

   $ 126,435       $ 111,125       $ 15,310        14

Rx Partner

     2,466         4,866         (2,400     (49 )% 

OTC Partner

     783         1,184         (401     (34 )% 

Research Partner

     3,384         3,384         —          —  
  

 

 

    

 

 

    

 

 

   

Total revenues

     133,068         120,559         12,509        10
  

 

 

    

 

 

    

 

 

   

Cost of revenues

     70,478         63,257         7,221        11
  

 

 

    

 

 

    

 

 

   

Gross profit

     62,590         57,302         5,288        9
  

 

 

    

 

 

    

 

 

   

Operating expenses:

          

Research and development

     12,136         13,466         (1,330     (10 )% 

Patent litigation

     2,914         2,209         705        32

Selling, general and administrative

     3,319         2,579         740        29
  

 

 

    

 

 

    

 

 

   

Total operating expenses

     18,369         18,254         115        1
  

 

 

    

 

 

    

 

 

   

Income from operations

   $ 44,221       $ 39,048       $ 5,173        13
  

 

 

    

 

 

    

 

 

   

Revenues

Total revenues for the Global Division for the three month period ended June 30, 2012, were $133.1 million, an increase of 10% over the same period in 2011, principally resulting from the increase in Global Product sales, net and as discussed below.

Global Product sales, net, were $126.4 million for the three month period ended June 30, 2012, an increase of 14% over the same period in 2011, primarily as a result of higher sales of our authorized generic Adderall XR® and fenofibrate products. With respect to sales of our authorized generic Adderall XR® products, the increase principally resulted from higher product sales due to customer buying patterns and increased deliveries of generic Adderall XR® from our third party supplier compared to the prior year period. Inventory levels of our authorized generic Adderall XR® products remain, however, lower than required to meet our current customer demand. With respect to sales of our fenofibrate products, we experienced an increase resulting from overall market growth during the three months ended June 30, 2012.

Rx Partner revenues were $2.5 million for the three month period ended June 30, 2012, a decrease of $2.4 million from the prior year period resulting from lower sales of our generic products marketed through our Strategic Alliance Agreement with Teva.

OTC Partner revenues were $0.8 million for the three month period ended June 30, 2012, with the decrease of $0.4 million from the prior year period resulting from lower sales of our product marketed under our OTC Partner alliance agreement with Pfizer.

Research Partner revenues were $3.4 million for each of the three month periods ended June 30, 2012 and 2011.

Cost of Revenues

Cost of revenues was $70.5 million for the three month period ended June 30, 2012 and $63.3 million for the prior year period. Cost of revenues increased $7.2 million primarily as a result of higher sales of our Global Products.

 

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Gross Profit

Gross profit for the three month period ended June 30, 2012 was $62.6 million, or approximately 47% of total revenues, as compared to $57.3 million, or approximately 48% of total revenue, in the prior year period. Gross profit in the current year period decreased, on a percentage basis, when compared to gross profit in the prior year period due primarily to higher sales of our authorized generic Adderall XR®.

Research and Development Expenses

Total research and development expenses for the three month period ended June 30, 2012 were $12.1 million, a decrease of 10%, as compared to the same period of the prior year. Generic research and development expenses decreased $1.3 million primarily as a result of a reduction of $1.1 million of depreciation expense from the prior year period related to fully depreciated equipment used in research and development activities.

Patent Litigation Expenses

Patent litigation expenses for the three month period ended June 30, 2012 and 2011 were $2.9 million and $2.2 million, respectively, with the increase resulting from legal activity related to several cases which were not present in the prior year period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three month period ended June 30, 2012 were $3.3 million, a 29% increase over the same period in 2011. The increase resulted primarily from $0.5 million in higher executive-level compensation costs as a result of vacancies during the prior year period and $0.2 million in increased business development activity.

 

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Impax Division

The following table sets forth results of operations for the Impax Division for the three month period ended June 30, 2012 and 2011:

 

     Three Months Ended        
     June 30,
2012
     June 30,
2011
    Increase/
(Decrease)
 
(in $000’s)    (unaudited)      (unaudited)              
                  $     %  

Revenues:

         

Impax Product sales, net

   $ 28,091       $ —        $ 28,091        nm   

Rx Partner

     1,437         1,437        —          —     

Promotional Partner

     3,535         3,535        —          —     

Research Partner

     329         329        —          —     
  

 

 

    

 

 

   

 

 

   

Total revenues

     33,392         5,301        28,091        530
  

 

 

    

 

 

   

 

 

   

Cost of revenues

     18,159         2,901        15,258        526
  

 

 

    

 

 

   

 

 

   

Gross profit

     15,233         2,400        12,833        535
  

 

 

    

 

 

   

 

 

   

Operating expenses:

         

Research and development

     7,733         10,512        (2,779     (26 )% 

Selling, general and administrative

     6,707         1,377        5,330        387
  

 

 

    

 

 

   

 

 

   

Total operating expenses

     14,440         11,889        2,551        21
  

 

 

    

 

 

   

 

 

   

Income (loss) from operations

   $ 793       $ (9,489   $ 10,282        nm   
  

 

 

    

 

 

   

 

 

   

nm-not meaningful

         

Revenues

Total revenues were $33.4 million for the three month period ended June 30, 2012, an increase of $28.1 million over the same period in the prior year due to sales of our Impax-labeled Zomig® tablets which we began selling during the three month period ended June 30, 2012. Rx Partner revenue includes the recognition of the $11.5 million up-front payment received under our License, Development and Commercialization Agreement with GSK which we are recognizing as revenue on a straight-line basis over our expected period of performance during the development period currently estimated to be the 24 month period ending December 2012. In addition, under a Development and Co-Promotion Agreement with Endo Pharmaceuticals, Inc. 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.

Cost of Revenues

Cost of revenues was $18.2 million for the three month period ended June 30, 2012, and increased $15.3 million over the prior year period primarily as a result of the commencement of sales of our Impax-labeled Zomig® tablets during the three month period ended June 30, 2012.

Gross Profit

Gross profit for the three month period ended June 30, 2012 was $15.2 million, an increase of $12.8 million over the prior year period primarily resulting from the commencement of sales of our Impax-labeled Zomig® tablets during the three month period ended June 30, 2012.

Research and Development Expenses

Total research and development expenses for the three month period ended June 30, 2012 were $7.7 million, a decrease of 26%, as compared to $10.5 million in the prior year period. The decrease was principally driven by a reduction in research and development expenses related to our branded product initiatives.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $6.7 million for the three month period ended June 30, 2012, an increase of $5.3 million as compared to $1.4 million in the prior period. The increase primarily related to $2.9 million of higher sales and marketing expenses related to Zomig®, which we launched in April 2012, increased compensation costs related to the expansion of the sales and marketing group of $1.0 million, and $0.9 million in higher market research activities.

 

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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 three month period ended June 30, 2012 and 2011:

 

     Three Months Ended        
     June 30,
2012
    June 30,
2011
    Increase/
(Decrease)
 
(in $000’s)    (unaudited)     (unaudited)              
                 $     %  

General and administrative expenses

   $ 14,844      $ 11,553        3,291        28
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (14,844     (11,553     (3,291     (28 )% 
  

 

 

   

 

 

   

 

 

   

Other income (expense), net

     (95     (545     450        83

Interest income

     244        290        (46     (16 )% 

Interest expense

     (423     (11     (412     nm

Loss before income taxes

     (15,118     (11,819     (3,299     (28 )% 

Provision for income taxes

   $ 11,262      $ 5,214        6,048        116

nm-not meaningful

        

General and Administrative Expenses

General and administrative expenses for the three month period ended June 30, 2012 were $14.8 million, a 28% increase over the same period in 2011. The increase was principally driven by $1.9 million of severance related charges in the current year period, higher employee compensation expenses of $1.3 million as a result of higher numbers of employees over the prior year period, higher information technology expenses of $0.4 million and increased professional fees of $0.4 million in support of business growth initiatives, partially offset by lower Shire litigation expenses of $1.6 million.

Other Income (Expense), net

Other expense, net for the three month period ended June 30, 2012 decreased principally from realized exchange rate gains and losses on foreign currency denominated transactions. In the three month period ended June 30, 2012, foreign currency denominated transaction gains and losses were nil as compared to a realized loss of $0.4 million in the prior year period.

Interest Income

Interest income in the three month period ended June 30, 2012 was $0.2 million, with the period over period decrease resulting from lower average balances of short-term investments.

Interest Expense

Interest expense in the three month period ended June 30, 2012 was $0.4 million, representing an increase of $0.4 million over the prior year period which was the result of an accrual for estimated interest payable to the IRS related to adjustments to our 2009 U.S. federal income tax return.

Income Taxes

During the three month period ended June 30, 2012, we recorded an aggregate tax provision of $11.3 million for U.S. domestic income taxes and for foreign income taxes. In the three month period ended June 30, 2011, we recorded an aggregate tax provision of $5.2 million for U.S. domestic income taxes and for foreign income taxes. The increase in the tax provision resulted from higher income before taxes in the three month period ended June 30, 2012 as compared to the same period in the prior year. The effective tax rate of 38% for the three month period ended June 30, 2012 was higher than the effective tax rate of 29% for the prior year period primarily as a result of the lack of a federal research and development tax credit in the current year period and higher foreign taxes related to our Taiwan-based operations.

 

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Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

Overview:

The following table sets forth our summarized, consolidated results of operations for the six month period ended June 30, 2012 and 2011:

 

     Six Months Ended         
     June 30,
2012
     June 30,
2011
     Increase/
(Decrease)
 
(in $000’s)    (unaudited)      (unaudited)                
                   $      %  

Total revenues

   $ 295,028       $ 234,511       $ 60,517         26

Gross profit

     140,376         118,239         22,137         19

Income from operations

     48,636         38,699         9,937         26

Income before income taxes

     48,498         38,742         9,756         25

Provision for income taxes

     17,531         12,358         5,173         42
  

 

 

    

 

 

    

 

 

    
     30,967         26,384         4,583         17

Non-controlling interest

     70         29         41         141
  

 

 

    

 

 

    

 

 

    

Net income

   $ 31,037       $ 26,413       $ 4,624         18
  

 

 

    

 

 

    

 

 

    

Net income for the six month period ended June 30, 2012 was $31.0 million, an increase of $4.6 million as compared to $26.4 million for the six month period ended June 30, 2011, primarily attributable to higher Global Product sales, as well as sales of Impax-labeled Zomig® tablets which we began selling during the three month period ended June 30, 2012. The higher sales during the six months ended June 30, 2012 were partially offset by higher patent litigation costs, selling, general and administrative expenses and income taxes. We continued to earn significant revenues and gross profit from sales of our authorized generic Adderall XR® products and fenofibrate products during the six month period ended June 30, 2012. 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 have experienced disruptions related to the supply of our authorized generic Adderall XR® from this third-party pharmaceutical company. Delays or interruptions 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. In June 2012, a competitor product to our authorized generic Adderall XR® was approved for sale by the FDA. Although we are currently unable to predict the impact this competitor product will have on our business, 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 disruptions 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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Table of Contents

Global Division

The following table sets forth results of operations for the Global Division for the six month period ended June 30, 2012 and 2011:

 

     Six Months Ended         
     June 30,
2012
     June 30,
2011
     Increase/
(Decrease)
 
(in $000’s)    (unaudited)      (unaudited)               
                    $     %  

Revenues:

          

Global Product sales, net

   $ 242,646       $ 203,463       $ 39,183        19

Rx Partner

     5,444         7,548         (2,104     (28 )% 

OTC Partner

     1,474         3,127         (1,653     (53 )% 

Research Partner

     6,769         9,769         (3,000     (31 )% 
  

 

 

    

 

 

    

 

 

   

Total revenues

     256,333         223,907         32,426        14
  

 

 

    

 

 

    

 

 

   

Cost of revenues

     133,584         110,431         23,153        21
  

 

 

    

 

 

    

 

 

   

Gross profit

     122,749         113,476         9,273        8
  

 

 

    

 

 

    

 

 

   

Operating expenses:

          

Research and development

     22,798         23,242         (444     (2 )% 

Patent litigation

     6,952         3,983         2,969        75

Selling, general and administrative

     7,692         5,198         2,494        48
  

 

 

    

 

 

    

 

 

   

Total operating expenses

     37,442         32,423         5,019        15
  

 

 

    

 

 

    

 

 

   

Income from operations

   $ 85,307       $ 81,053       $ 4,254        5
  

 

 

    

 

 

    

 

 

   

Revenues

Total revenues for the Global Division for the six month period ended June 30, 2012, were $256.3 million, an increase of 14% over the same period in 2011, principally resulting from the increase in Global Product sales, net and as discussed below.

Global Product sales, net, were $242.6 million for the six month period ended June 30, 2012, an increase of 19% over the same period in 2011, primarily as a result of higher sales of our authorized generic Adderall XR® and fenofibrate products. With respect to sales of our authorized generic Adderall XR® products, the increase principally resulted from higher product sales due to customer buying patterns and increased deliveries of generic Adderall XR® from our third party supplier compared to the prior year period. Inventory levels of our authorized generic Adderall XR® products remain, however, lower than required to meet our current customer demand. With respect to sales of our fenofibrate products, we experienced an increase resulting from overall higher market growth during the six months ended June 30, 2012.

Rx Partner revenues were $5.4 million for the six month period ended June 30, 2012, a decrease of $2.1 million from the prior year period resulting from lower sales of our generic products marketed through our Strategic Alliance Agreement with Teva.

OTC Partner revenues were $1.5 million for the six month period ended June 30, 2012, with the decrease of $1.7 million from the prior year period resulting from lower sales of our product marketed under our OTC Partner alliance agreement with Pfizer.

Research Partner revenues were $6.8 million for the six month period ended June 30, 2012. The decrease of $3.0 million compared to the same period in 2011 resulted from the recognition of a $3.0 million milestone payment in the previous year period. There were no such milestone payments recognized in the six months ended June 30, 2012.

Cost of Revenues

Cost of revenues was $133.6 million for the six month period ended June 30, 2012 and $110.4 million for the prior year period. Cost of revenues increased $23.2 million primarily as a result of higher sales of our Global Products, a $3.5 million charge related to the withdrawal of a product due to a change in the strategic direction of our product portfolio and a $1.7 million charge for an adjustment of another product’s carrying value to the lower of cost or market.

 

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Gross Profit

Gross profit for the six month period ended June 30, 2012 was $122.7 million, or approximately 48% of total revenues, as compared to $113.5 million, or approximately 51% of total revenue, in the prior year period. Gross profit in the current year period decreased, on a percentage basis, when compared to gross profit in the prior year period due primarily to higher sales of our authorized generic Adderall XR® products, a $3.5 million charge related to the withdrawal of a product due to a change in the strategic direction of our product portfolio and a $1.7 million charge for an adjustment of a product’s carrying value to the lower of cost or market. In addition, gross profit in the prior year period includes the $3.0 million milestone payment as described above.

Research and Development Expenses

Total research and development expenses for the six month period ended June 30, 2012 were $22.8 million, a decrease of 2%, as compared to the same period of the prior year. Generic research and development expenses decreased $0.4 million primarily as a result of $1.1 million of higher depreciation expense in the prior year period related to equipment used in research and development activities partially offset by higher spending on bio-studies of $0.7 million in the current year period.

Patent Litigation Expenses

Patent litigation expenses for the six month period ended June 30, 2012 and 2011 were $7.0 million and $4.0 million, respectively, with the increase resulting from legal activity related to several cases which were not present in the prior year period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six month period ended June 30, 2012 were $7.7 million, a 48% increase over the same period in 2011. The increase resulted primarily from higher marketing expenses of $0.9 million, $1.0 million in higher executive-level compensation costs as a result of vacancies during the prior year period and $0.8 million in increased business development activity.

 

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Impax Division

The following table sets forth results of operations for the Impax Division for the six month period ended June 30, 2012 and 2011:

 

     Six Months Ended        
     June 30,
2012
    June 30,
2011
    Increase/
(Decrease)
 
(in $000’s)    (unaudited)     (unaudited)              
                 $     %  

Revenues:

        

Impax Product sales, net

   $ 28,091      $ —        $ 28,091        nm   

Rx Partner

     2,875        2,875        —          —     

Promotional Partner

     7,070        7,070        —          —     

Research Partner

     659        659        —          —     
  

 

 

   

 

 

   

 

 

   

Total revenues

     38,695        10,604        28,091        265
  

 

 

   

 

 

   

 

 

   

Cost of revenues

     21,068        5,841        15,227        261
  

 

 

   

 

 

   

 

 

   

Gross profit

     17,627        4,763        12,864        270
  

 

 

   

 

 

   

 

 

   

Operating expenses:

        

Research and development

     15,887        20,227        (4,340     (21 )% 

Selling, general and administrative

     9,768        2,483        7,285        293
  

 

 

   

 

 

   

 

 

   

Total operating expenses

     25,655        22,710        2,945        13
  

 

 

   

 

 

   

 

 

   

Loss from operations

   $ (8,028   $ (17,947   $ 9,919        55
  

 

 

   

 

 

   

 

 

   

nm-not meaningful

        

Revenues

Total revenues were $38.7 million for the six month period ended June 30, 2012 an increase of $28.1 million over the same period in the prior year due to sales of our Impax-labeled Zomig® tablets which we began selling during the three month period ended June 30, 2012. Rx Partner revenue includes the recognition of the $11.5 million up-front payment received under our License, Development and Commercialization Agreement with GSK which we are recognizing as revenue on a straight-line basis over our expected period of performance during the development period currently estimated to be the 24 month period ending December 2012. In addition, under a Development and Co-Promotion Agreement with Endo Pharmaceuticals, Inc. 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.

Cost of Revenues

Cost of revenues was $21.1 million for the six month period ended June 30, 2012, and increased $15.2 million over the prior year period primarily as a result of the commencement of sales of our Impax-labeled Zomig® tablets during the three month period ended June 30, 2012.

Gross Profit

Gross profit for the six month period ended June 30, 2012 was $17.6 million, an increase of $12.9 million over the prior year period resulting primarily from the commencement of sales of our Impax-labeled Zomig® tablets during the three month period ended June 30, 2012.

Research and Development Expenses

Total research and development expenses for the six month period ended June 30, 2012 were $15.9 million, a decrease of 21%, as compared to $20.2 million in the prior year period. The decrease was principally driven by a reduction in research and development expenses related to our branded product initiatives.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $9.8 million for the six month period ended June 30, 2012, an increase of $7.3 million as compared to $2.5 million in the prior period. The increase primarily related to $3.4 million of higher sales and marketing expenses related to Zomig®, which we launched in April 2012, $1.8 million in pre-launch marketing expenses related to IPX066, increased compensation costs related to the expansion of the sales and marketing group of $1.5 million, and $0.3 million related to higher business development activities.

 

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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 six month period ended June 30, 2012 and 2011:

 

     Six Months Ended        
     June 30,
2012
    June 30,
2011
    Increase/
(Decrease)
 
(in $000’s)    (unaudited)     (unaudited)              
                 $     %  

General and administrative expenses

   $ 28,643      $ 24,407        4,236        17
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (28,643     (24,407     (4,236     (17 )% 
  

 

 

   

 

 

   

 

 

   

Other income (expense), net

     (175     (540     365        68

Interest income

     499        611        (112     (18 )% 

Interest expense

     (462     (28     (434     nm   

Loss before income taxes

     (28,781     (24,364     (4,417     (18 )% 

Provision for income taxes

   $ 17,531      $ 12,358        5,173        42

nm-not meaningful

        

General and Administrative Expenses

General and administrative expenses for the six month period ended June 30, 2012 were $28.6 million, a 17% increase over the same period in 2011. The increase was principally driven by $1.9 million of severance-related charges in the current year period, higher employee compensation expenses of $1.6 million as a result of a higher number of employees over the prior year period, and higher information technology expenses of $0.5 million.

Other Income (Expense), net

Other expense, net for the six month period ended June 30, 2012 decreased principally from realized exchange rate gains and losses on foreign currency denominated transactions. In the six month period ended June 30, 2012, foreign currency denominated transactions resulted in a realized loss of $0.16 million as compared to a realized loss of $0.4 million in the prior year period.

Interest Income

Interest income in the six month period ended June 30, 2012 was $0.5 million, with a period over period decrease resulting from lower average balances of short-term investments.

Interest Expense

Interest expense in the six month period ended June 30, 2012 was $0.5 million, representing an increase of $0.4 million over the prior year period which was the result of an accrual for estimated interest payable to the IRS related to adjustments to our 2009 U.S. federal income tax return.

Income Taxes

During the six month period ended June 30, 2012, we recorded an aggregate tax provision of $17.5 million for U.S. domestic income taxes and for foreign income taxes. In the six month period ended June 30, 2011, we recorded an aggregate tax provision of $12.4 million for U.S. domestic income taxes and for foreign income taxes. The increase in the tax provision resulted from higher income before taxes in the six month period ended June 30, 2012 as compared to the same period in the prior year. The effective tax rate of 36% for the six month period ended June 30, 2012 was higher than the effective tax rate of 32% for the prior year period primarily as a result of the lack of a federal research and development tax credit in the current year period and higher foreign taxes related to our Taiwan-based operations.

 

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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 a significant use of cash. We believe our existing cash and cash equivalents and short-term investment balances, together with cash expected to be generated from operations, and our bank revolving line of credit, will be sufficient to meet our cash requirements through the next 12 months. We may, however, seek additional financing through alliance, collaboration, and/or licensing agreements, as well as from the debt and/or equity capital markets to fund the planned capital expenditures, our research and development plans, potential acquisitions, and potential revenue shortfalls due to delays in new product introductions.

Cash and Cash Equivalents

At June 30, 2012, we had $184.6 million in cash and cash equivalents, an increase of $80.2 million as compared to December 31, 2011. As more fully discussed below, the increase in cash and cash equivalents during the six month period ended June 30, 2012 was primarily driven by $79.3 million of net cash provided by operating activities.

Cash Flows

Six Month Period Ended June 30, 2012 Compared to the Six Month Period Ended June 30, 2011

Net cash provided by operating activities for the six month period ended June 30, 2012 was $79.3 million, an increase of $94.6 million as compared to the prior year period $15.2 million net cash used in operating activities. The period-over-period increase in net cash provided by operating activities principally resulted from higher cash collections from customers which resulted in lower levels of accounts receivable, as well as higher levels of accounts payable and accrued expenses period-over-period. The balance of accounts receivable was $143.4 million as of June 30, 2012, resulting in a $10.3 million source of cash for the six month period ended June 30, 2012, compared to the same period in the prior year when accounts receivable resulted in a $39.1 million use of cash. In addition, higher levels of accounts payable and accrued expenses resulted in a period-over-period increase of $18.7 million in cash flows. The increase in cash provided by accounts receivable for the six month period ended June 30, 2012, as compared to the prior year period, was primarily the result of higher sales of our authorized generic Adderall XR® and fenofibrate products in the current year period as described above. The increase in cash provided by accounts payable and accrued expenses in the current year period was primarily the result of timing of payments to vendors.

Net cash used in investing activities for the six month period ended June 30, 2012, were $7.5 million, a decrease of $52.7 million as compared to the prior year period of $45.2 million of cash flows provided by investing activities, with the change due to $55.0 million in licensing payments to AstraZeneca and higher capital expenditures of $10.4 million partially offset by a period-over-period $12.7 million increase in cash provided by net maturities of short-term investments. Net maturities of short-term investments during the six month period ended June 30, 2012 resulted in a $72.5 million source of cash, as compared to a $59.7 million source of cash from net purchases of short-term investments during the same period in the prior year. Purchases of property, plant and equipment for the six month period ended June 30, 2012 were $25.0 million as compared to $14.6 million for the prior year period. 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.

Net cash provided by financing activities for the six month period ended June 30, 2012 was $8.4 million, representing a decrease of $8.1 million as compared to the prior year period $16.5 million of net cash provided by financing activities. The period-over-period decrease in net cash provided by financing activities was due to a $4.8 million decrease in cash proceeds received from the exercise of stock options and contributions to the employee stock purchase plan, as well as a $3.3 million decrease in the tax benefit related to the exercise of employee stock options as a result of the lower level of exercise activity in the current year period.

 

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Outstanding Debt Obligations

Senior Lenders; Wells Fargo Bank, N.A.

On February 11, 2011, we entered into a Credit Agreement, which was subsequently amended (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. We have not yet borrowed any amounts under the Revolving Credit Facility. Proceeds under the Credit Agreement may be used for working capital, general corporate and other lawful purposes. 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, 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) requires 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). At June 30, 2012, 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, N.A.), and its corresponding commitments were terminated. There were no amounts outstanding under the former credit agreement as of February 11, 2011. During the six month periods ended June 30, 2012 and 2011, unused line fees incurred under each of the credit agreements were $63,000 and $81,000, respectively.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of June 30, 2012.

Contractual Obligations

As of June 30, 2012, other than payments due to AstraZeneca under the terms of the Distribution, License, Development and Supply Agreement entered into in January 2012, and payments due to Tolmar under the Development, Supply and Distribution Agreement entered into in June 2012, there were no significant changes to our contractual obligations as set forth in our Annual Report on Form 10-K for the year ended December 31, 2011. Information concerning the Distribution, License, Development and Supply Agreement with AstraZeneca and the Development, Supply and Distribution Agreement with Tolmar can be found in “Item 1. Financial Statements – Note 13. Alliance and Collaboration Agreements” and is incorporated by reference herein.

 

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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 were required to adopt this guidance on January 1, 2012, and it did not have a material impact on our consolidated financial statements.

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. 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 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes to the quantitative and qualitative disclosures about market risk set forth in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that 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 that such information is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Acting Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, were effective as of June 30, 2012 at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2012, 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.

Limitations on the Effectiveness of Controls

Systems of disclosure controls and internal controls over financial reporting and their associated policies and procedures, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance the objectives of the system of control are achieved. Further, the design of a control system must be balanced against resource constraints, and therefore the benefits of controls must be considered relative to their costs. Given the inherent limitations in all systems of controls, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Accordingly, given the inherent limitations in a cost-effective system of internal control, financial statement misstatements due to error or fraud may occur and may not be detected. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives. We conduct periodic evaluations of our systems of controls to enhance, where necessary, our control policies and procedures.

 

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PART II. Other Information

 

Item 1. Legal Proceedings

Information pertaining to legal proceedings can be found in “Item 1. Financial Statements – Note 18. Legal and Regulatory Matters” and is incorporated by reference herein.

 

Item 1A. Risk Factors

During the quarter ended June 30, 2012, there were no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which could materially affect our business, consolidated financial condition or consolidated results of operations. The risks described herein, and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 are not the only risks we face. Additional risks and uncertainties not currently known to us or which we currently deem to be immaterial may also materially adversely affect our business, consolidated financial condition and/or consolidated results of operations.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information regarding the purchases of our equity securities by us during the three months ended June 30, 2012.

 

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
 

April 1, 2012 to April 30, 2012

    
 
5,152 shares of
common stock
  
  
   $ 24.52         —           —     

May 1, 2012 to May 31, 2012

    
 
44,482 shares of
common stock
  
  
   $ 21.20         —           —     

June 1, 2012 to June 30, 2012

    
 
6,307 shares of
common stock
  
  
   $ 20.97         —           —     

 

(1) Represents shares of our common stock we accepted during the indicated periods as a tax withholding from certain of our employees in connection with the vesting of shares of restricted stock pursuant to the terms of our 2002 Plan.

 

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ITEM 3. Defaults Upon Senior Securities.

Not Applicable.

 

ITEM 4. Mine Safety Disclosures.

Not Applicable.

 

ITEM 5. Other Information.

Not Applicable.

 

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ITEM 6. Exhibits

 

Exhibit No.

  

Description of Document

  10.1    General Release and Waiver, effective as of July 17, 2012, by and between Arthur A. Koch, Jr. and the Company (1).
  11.1    Statement re computation of per share earnings (incorporated by reference to Note 16 in the Notes to the unaudited interim Consolidated Financial Statements in this Quarterly Report on Form 10-Q).
  31.1    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of the Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of the Acting 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011, (ii) Consolidated Statements of Operation for each of the three and six months ended June 30, 2012 and June 30, 2011, (iii) Consolidated Statements of Comprehensive Income for each of the three and six months ended June 30, 2012 and June 30, 2011, (iv) Consolidated Statements of Cash Flows for each of the six months ended June 30, 2012 and June 30, 2011 and (v) Notes to Interim Consolidated Financial Statements.*

 

(1) Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 18, 2012.
 * 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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SIGNATURES

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

 

Date: August 2, 2012     Impax Laboratories, Inc.
    By:  

/s/ Larry Hsu, Ph.D.

      Name:   Larry Hsu, Ph.D.
      Title:  

President and Chief Executive Officer

(Principal Executive Officer)

    By:  

/s/ Bryan M. Reasons

      Name:   Bryan M. Reasons
      Title:   Vice President, Finance and
        Acting Chief Financial Officer
        (Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description of Document

  10.1    General Release and Waiver, effective as of July 17, 2012, by and between Arthur A. Koch, Jr. and the Company (1).
  11.1    Statement re computation of per share earnings (incorporated by reference to Note 16 in the Notes to the unaudited interim Consolidated Financial Statements in this Quarterly Report on Form 10-Q).
  31.1    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of the Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of the Acting 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011, (ii) Consolidated Statements of Operation for each of the three and six months ended June 30, 2012 and June 30, 2011, (iii) Consolidated Statements of Comprehensive Income for each of the three and six months ended June 30, 2012 and June 30, 2011, (iv) Consolidated Statements of Cash Flows for each of the six months ended June 30, 2012 and June 30, 2011 and (v) Notes to Interim Consolidated Financial Statements.*

 

(1) Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 18, 2012.
 * 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.

 

73

XNAS:IPXL Impax Laboratories, Inc. Quarterly Report 10-Q Filling

Impax Laboratories, Inc. XNAS:IPXL Stock - Get Quarterly Report SEC Filing of Impax Laboratories, Inc. XNAS:IPXL stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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XNAS:IPXL Impax Laboratories, Inc. Quarterly Report 10-Q Filing - 6/30/2012
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