e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
000-27354
IMPAX LABORATORIES,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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65-0403311
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer Identification
No.)
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30831 Huntwood Avenue, Hayward, CA
(Address of principal
executive offices)
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94544
(Zip Code)
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Registrants telephone number, including area code:
(510) 476-2000
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $0.01 per share
(Title of class)
Series A Junior Participating Preferred Stock Purchase
Rights
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation of S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The registrant was not a public company as of the last business
day of its most recently completed second fiscal quarter and,
therefore, cannot calculate the aggregate market value of its
common equity held by non-affiliates as of such date.
As of March 10, 2009, there were 60,225,538 shares of the
registrants common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain portions of the definitive proxy statement for the
registrants Annual Meeting of Stockholders to be held on
May 19, 2009 have been incorporated by reference into
Part III of this Report.
Forward-Looking
Statements
Statements included in this Annual Report that do not relate to
present or historical conditions are forward-looking
statements. Additional oral or written forward-looking
statements may be made by us from time to time. Such
forward-looking statements involve risks and uncertainties that
could cause results or outcomes to differ materially from those
expressed in the forward-looking statements. Forward-looking
statements may include statements relating to our plans,
strategies, objectives, expectations and intentions. Words such
as believes, forecasts,
intends, possible,
estimates, anticipates, and
plans and similar expressions are intended to
identify forward-looking statements. Our ability to predict
results or the effect of events on our operating results is
inherently uncertain. Forward-looking statements involve a
number of risks, uncertainties and other factors that could
cause actual results to differ materially from those discussed
in this Report. Such risks and uncertainties include the effect
of current economic conditions on our industry, business,
financial position, results of operations and market value of
our common stock, our ability to timely file periodic reports
required by the Securities Exchange Act of 1934, our ability to
maintain an effective system of internal control over financial
reporting, our ability to sustain profitability and positive
cash flows, our ability to maintain sufficient capital to fund
our operations, any delays or unanticipated expenses in
connection with the construction of our Taiwan facility, our
ability to successfully develop and commercialize pharmaceutical
products, the uncertainty of patent litigation, consumer
acceptance and demand for new pharmaceutical products, the
impact of competitive products and pricing, the difficulty of
predicting Food and Drug Administration filings and approvals,
our inexperience in conducting clinical trials and submitting
new drug applications, our reliance on key alliance agreements,
the availability of raw materials, the regulatory environment,
exposure to product liability claims, fluctuations in operating
results and other risks described below in Item 1A.
Risk Factors. You should not place undue reliance on
forward-looking statements. Such statements speak only as to the
date on which they are made, and we undertake no obligation to
update publicly or revise any forward-looking statement,
regardless of future developments or availability of new
information.
1
PART I
Our
Business
Impax Laboratories, Inc. is a technology-based, specialty
pharmaceutical company focused on the development and
commercialization of bioequivalent and brand-name
pharmaceuticals, utilizing our controlled-release and other
in-house development and formulation expertise. Bioequivalent
pharmaceuticals, commonly referred to as generics,
are the pharmaceutical and therapeutic equivalents of brand-name
drug products and are usually marketed under their established
nonproprietary drug names rather than by a brand name.
Bioequivalent pharmaceuticals contain the same active ingredient
and are of the same route of administration, dosage form,
strength and indication(s) as brand-name pharmaceuticals already
approved for use in the United States by the Food and Drug
Administration (FDA).
In the generic pharmaceuticals market, we focus our efforts on
controlled-release generic versions of selected brand-name
pharmaceuticals covering a broad range of therapeutic areas and
having technically challenging drug-delivery mechanisms or
limited competition. We employ our technologies and formulation
expertise to develop generic products that will reproduce the
brand-name products physiological characteristics but not
infringe any valid patents relating to the brand-name product.
We generally focus on brand-name products as to which the
patents covering the active pharmaceutical ingredient have
expired or are near expiration, and we employ our proprietary
formulation expertise to develop controlled-release technologies
that do not infringe patents covering the brand-name
products controlled-release technologies.
We are also developing specialty generic pharmaceuticals that we
believe present one or more barriers to entry by competitors,
such as difficulty in raw materials sourcing, complex
formulation or development characteristics or special handling
requirements. In the brand-name pharmaceuticals market, we are
developing products for the treatment of central nervous system
(CNS) disorders. Our brand-name product portfolio
consists of development-stage projects to which we are applying
our formulation and development expertise to develop
differentiated, modified, or controlled-release versions of
currently marketed (either in the U.S. or outside the U.S.)
drug substances. We intend to expand our brand-name products
portfolio primarily through internal development and also
through licensing and acquisition.
To obtain FDA approval for a new drug product, a prospective
manufacturer must submit a new drug application
(NDA) containing the results of clinical studies
supporting the products safety and efficacy. The Drug
Price Competition and Patent Term Restoration Act of 1984,
commonly known as the Hatch-Waxman amendments,
established an abbreviated new drug application
(ANDA) for obtaining FDA approval of generic
versions of certain drugs. An ANDA is similar to an NDA except
that the applicant is not required to conduct and submit to the
FDA clinical studies to demonstrate the safety and effectiveness
of the drug. Instead, for drugs that contain the same active
ingredient and are of the same route of administration, dosage
form, strength and indication(s) as drugs already approved for
use in the United States, the FDA ordinarily requires only
bioavailability data demonstrating the generic formulation is
bioequivalent to the previously approved reference listed drug,
indicating that the rate of absorption and the levels of
concentration of the generic drug in the body do not show a
significant difference from those of the previously approved
reference listed drug product. The FDA currently takes
approximately 20 months on average to approve an ANDA
following the date of its first submission. See
Regulation.
If we intend to market our product before patent expiration and
believe our product will not infringe the innovators
patents or that such patents are invalid or unenforceable, we
are required to so certify in our filing of an ANDA and to send
a notice thereof to the patent holder once our filing is
accepted. If the patent holder responds with a timely suit
against us to enforce the patent, the FDA is required to
withhold its approval of our ANDA for up to 30 months. See
Regulation. Filings made under the
Hatch-Waxman amendments often result in the initiation of
litigation by the patent holder. See Item 3. Legal
Proceedings.
We operate in two segments, referred to as the Global
Pharmaceuticals Division (Global Division) and
the Impax Pharmaceuticals Division (Impax
Division). The Global Division develops, manufactures,
sells, and
2
distributes generic pharmaceutical products through three sales
channels: the Global Products sales channel, for
generic pharmaceutical prescription (Rx) products we
sell directly to wholesalers, large retail drug chains, and
others; the RX Partner sales channel, for generic
prescription products sold through unrelated third-party
pharmaceutical entities pursuant to alliance agreements; and the
OTC Partner sales channel, for sales of generic
pharmaceutical
over-the-counter
(OTC) products sold through unrelated third-party
pharmaceutical entities pursuant to alliance agreements. Our
Impax Division is engaged in the development of proprietary
brand pharmaceutical products through improvements to already
approved pharmaceutical products to address CNS disorders. The
Impax Division is also engaged in the co-promotion of products
developed by unrelated third-party pharmaceutical entities
through a direct sales force focused on marketing to physicians
(referred to as physician detailing sales calls) in
the CNS community. Our total revenues for the years ended
December 31, 2008 and 2007 were predominantly derived from
our Global Division. See Item 8. Financial Statements
and Supplementary Data Note 18 to Consolidated
Financial Statements for financial information about our
segments for the years ended December 31, 2008, 2007 and
2006. We sell our products within the continental United States
and the Commonwealth of Puerto Rico. We have no sales in foreign
countries.
We market generic pharmaceutical prescription and OTC products
through our Global Division and intend to market our branded
pharmaceutical products through our Impax Division.
Additionally, when strategically appropriate, we enter into
alliance agreements to fully leverage our technology platform.
As of March 10, 2009, we marketed 70 generic
pharmaceuticals representing dosage variations of 24 different
pharmaceutical compounds through our Global Pharmaceuticals
Division and another 16 products representing dosage variations
of four different pharmaceutical compounds through our alliance
agreements partners.
The following summarizes our generic pharmaceutical product
development activities as of March 10, 2009:
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53 ANDAs approved by the FDA, which include generic versions of
brand name pharmaceuticals such as
Brethine®,
Florinef®,
Minocin®,
Claritin-D®
12-hour,
Claritin-D®
24-hour,
Wellbutrin
SR®
and
Prilosec®.
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24 applications pending at the FDA, including two tentatively
approved (i.e., satisfying substantive FDA requirements
but remaining subject to statutory pre-approval restrictions),
that address approximately $13.5 billion in recent
12 month U.S. product sales.
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40 products in various stages of development for which
applications have not yet been filed.
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In addition, we have one branded pharmaceutical product for
which we have recently completed a Phase III clinical
study, a second product in Phase II and four other programs
in the early exploratory phase.
Unless otherwise indicated, all product sales data and
U.S. market size data in this Annual Report on
Form 10-K
are based on information obtained from Wolters Kluwer Health, an
unrelated third-party provider of prescription market data. We
did not independently engage Wolters Kluwer Health to provide
this information.
We were incorporated in the State of Delaware in 1995. Our
corporate headquarters are located at 30831 Huntwood Avenue,
Hayward, California 94544. We were formerly known as Global
Pharmaceutical Corporation until December 14, 1999, when
Impax Pharmaceuticals, Inc., a privately held drug delivery
company, merged into Global Pharmaceutical Corporation, which
changed its name to Impax Laboratories, Inc. in connection with
the merger. We treated the merger as the recapitalization of
Impax Pharmaceuticals, Inc., with Impax Pharmaceuticals, Inc.
deemed the acquirer of Global Pharmaceutical Corporation, and
such transaction was deemed a reverse acquisition for accounting
purposes.
Controlled-Release
Technology
Controlled-release drug delivery technologies are designed to
release drug dosages at specific times and in specific locations
in the body and generally provide more consistent and
appropriate drug levels in the bloodstream than
immediate-release dosage forms. The controlled-release
pharmaceuticals may improve drug efficacy, ensure greater
patient compliance with the treatment regimen, reduce side
effects or increase drug stability and be more patient
friendly by reducing the number of times a drug must be
taken.
We have developed a number of different controlled-release
delivery technologies that can be utilized with a variety of
oral dosage forms and drugs. We believe that these technologies
are flexible and can be applied to develop
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a variety of pharmaceutical products, both generic and branded.
Our technologies utilize a variety of polymers and other
materials to encapsulate or entrap the active pharmaceutical
ingredients and to release them at varying rates or at
predetermined locations in the gastrointestinal tract.
Our
Products
Generic
Pharmaceuticals
The following table lists our 50 products, representing 53 ANDAs
that have been approved by the FDA:
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Product
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Generic of
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2004 OR EARLIER
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Pentoxifyline 400 mg Tablets(1)
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Trental®
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Orphenadrine 100 mg Tablets
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Norflex®
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Omeprazole 10 and 20 mg
Capsules(2c)
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Prilosec®
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Minocycline 50, 75 and 100 mg Capsules
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Minocin®
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Sotalol 80, 120(1), 160(1) and 240 mg(1) Tablets
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Betapace®
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Terbutaline 2.5 and 5 mg Tablets
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Brethine®
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Fludrocortisone 0.1 mg Tablets
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Florinef®
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Rimantadine 100 mg Tablets
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Flumadine®
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Riluzole 50 mg Tablets(1)
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Rilutek®
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Pyridostigmine 60 mg Tablets
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Mestinon®
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Chloroquine 250 mg Tablets
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N/A
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Chloroquine 500 mg Tablets
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Aralen®
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Flavoxate 100 mg Tablets
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Urispas®
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Loratadine Orally Disintegrating Tablets, 10mg(1)
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Claritin
Reditab®
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Fenofibrate 67, 134 and 200 mg Capsules
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Lofibra®
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Loratadine and Pseudoephedrine Sulfate 5/120 mg ER Tablets
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Claritin-D
12-hr®
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Methitest (Methyltestosterone) 10 and 25 mg(1) Tablets
(2 separate ANDAs)
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Android®
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Bupropion Hydrochloride 100 and 150 mg ER Tablets (twice
daily)
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Wellbutrin
SR®
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Bupropion Hydrochloride 150 mg ER Tablets (twice daily)
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Zyban®
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Loratadine and Pseudoephedrine Sulfate 10/240 mg ER Tablets
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Claritin-D®
24-Hour
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Demeclocycline Hydrochloride 150 and 300 mg Tablets
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Declomycin®
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Carbidopa/Levodopa 25/100 & 50/200 mg ER Tablets
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SinemetCR®
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Midodrine Hydrochloride 2.5, 5 and 10 mg Tablets
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ProAmatine
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Metformin HCl 500 mg ER Tablets(1)
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Glucophage
XR®
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Oxycodone Hydrochloride 80 mg ER Tablets(1)
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OxyContin®
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Bupropion Hydrochloride 200 mg ER Tablets (twice daily)
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Wellbutrin
SR®
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2005
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Dantrolene Sodium 25, 50 and 100 mg Capsules
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Dantrium®
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Anagrelide Hydrochloride 0.5 and 1.0 mg Capsules(1)
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Agrylin®
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Carprofen 25, 75 and 100 mg Caplets (a veterinary product)
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Rimadyl®
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Metformin HCI 750 mg ER Tablets(1)
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Glucophage
XR®
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Oxycodone Hydrochloride 10, 20 and 40 mg Tablets(1)
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OxyContin®
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2006
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Pilocarpine Hydrochloride 5 and 7.5 mg Tablets
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Salagen®
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Colestipol Hydrochloride 5 g Packet and 5 g Scoopful
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Colestid®
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Colestipol Hydrochloride 1 g Tablets
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Colestid®
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4
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Product
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Generic of
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Bethanechol Chloride 5, 10, 25 and 50 mg Tablets (4
separate ANDAs)
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Urecholine®
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Oxybutynin Chloride 15 mg ER
Tablets(2a)
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Ditropan
XL®
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Bupropion Hydrochloride 300 mg ER
Tablets(2b)
(once daily)
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Wellbutrin
XL®
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2007
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Nadolol /Bendroflumethiazide 40/5 and 80/5 mg Tablets
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Corzide®
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Oxybutynin Chloride 5 and 10 mg ER
Tablets(2a)
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Ditropan
XL®
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Alprazolam 0.5, 1, 2 and 3 mg ER Tablets(1)
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Xanax
XR®
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Gemfibrozil 600 mg Tablets(1)
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Lopid®
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Dipyridamole 25, 50, 75 mg Tablets USP
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Persantine®
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Baclofen 10 and 20 mg Tablets (2 separate ANDAs)(1)
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N/A
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2008
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Primidone 50 and 250 mg Tablets
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Mysoline®
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Promethazine 12.5, 25 and 50 mg Tablets (2 separate
ANDAs)
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Phenergan®
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Fenofibrate 54 and 160 mg Tablets
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Lofibra®
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Benzphetamine 50 mg Tablets(1)
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Didrex®
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Bupropion Hydrochloride 150 mg ER
Tablets(2b)
(once daily)
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Wellbutrin
XL®
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2009
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Omeprazole 40 mg
Capsules(2c)
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Prilosec®
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Minocycline HCI 45, 90 and 135 mg ER Tablets(1)
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Solodyn®
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(1) |
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Not currently marketed. |
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(2) |
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Multiple products filed under same ANDA, including (i) 2a:
Oxybutynin Chloride products, (ii) 2b: Bupropion Hydrochloride
products, and (iii) 2c: Omeprazole products. |
As of March 10, 2009, we had 24 products pending at the
FDA, of which 12 products, representing 12 ANDAs, had been
publicly identified. The following table lists our 12 publicly
identified products pending at the FDA:
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Product
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Generic of
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Cyclobenzaprine CD 15 and 30 mg Capsules
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Amrix®
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Doxycycline Hyclate DR 75 and 100 mg Tablets
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Doryx®
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Divalproex Sodium 250 and 500 mg ER Tablets
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Depakote
ER®
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Fexofenadine Hydrochloride and Pseudoephedrine Hydrochloride
60/120 mg ER Tablets
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Allegra-D®
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Methylphenidate HCI 18, 27, 36 and 54 mg ER Tablets
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Concerta®
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Oxymorphone HCI 5, 7.5, 10, 15, 20, 30 and 40 mg ER Tablets
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Opana
ER®
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Single-Entity Amphetamine 5, 10, 15, 20, 25 and 30 mg ER
Capsules
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Adderall
XR®
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Tamsulosin 0.4 mg Capsules
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Flomax®
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Tolterodine Tartrate 2 and 4 mg ER Capsules
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Detrol
LA®
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Tramadol HCI 100, 200 and 300 mg ER Tablets
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Ultram
ER®
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Venlafaxine HCl 37.5, 75 and 150 mg ER Capsules
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Effexor
XR®
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Duloxetine HCI 20, 30 and 60 mg DR Capsules
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Cymbalta®
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Brand-Name
Pharmaceuticals
In the brand-name pharmaceuticals market, we have thus far
focused our efforts on the development of products for the
treatment of CNS disorders, which include Alzheimers
disease, attention deficit hyperactivity disorder, depression,
epilepsy, migraines, multiple sclerosis, Parkinsons
disease, and schizophrenia. We estimate there are approximately
11,000 neurologists, of which, historically, a concentrated
number are responsible for writing the majority of neurological
CNS prescriptions. CNS is the largest therapeutic category in
the United States
5
with 2008 sales of $70.8 billion, or 21.5% of the
$330.0 billion U.S. drug market. CNS drug sales grew
8.1% in 2008, compared with a sales growth of 4.1% for the
entire industry. Our strategy is to build this portfolio
primarily through internal development and through licensing and
acquisition. We intend to utilize our formulation and
development expertise as well as our drug delivery technologies
in the formulation of drug substances no longer protected by
patents as differentiated, modified, or controlled-release
pharmaceutical products that we will market as brand-name
products.
While we have not yet commercialized a brand-name product and
have withdrawn our only NDA filed to date, we have recently
completed a Phase III clinical study of one product
intended to treat spasticity in patients with multiple
sclerosis. We have also filed an Investigational New Drug
(IND) application and have begun Phase II
clinical studies of another CNS product, and are in the early
exploratory phase with respect to four additional CNS products.
Competition
The pharmaceutical industry is highly competitive and is
affected by new technologies, new developments, government
regulations, health care legislation, availability of financing,
and other factors. Many of our competitors have longer operating
histories and substantially greater financial, research and
development, marketing, and other resources than we have. We
compete with numerous other companies that currently operate, or
intend to operate, in the pharmaceutical industry, including
companies that are engaged in the development of
controlled-release drug delivery technologies and products, and
other manufacturers that may decide to undertake development of
such products. Our principal competitors are Sandoz, Inc.,
Mylan, Inc., Ranbaxy Laboratories Limited, Teva Pharmaceutical
Industries, Ltd., Watson Pharmaceuticals, Inc and Actavis Inc.
Due to our focus on relatively hard to replicate
controlled-release products, competition in the generic
pharmaceutical market is sometimes limited to those competitors
who possess the appropriate drug delivery technology. The
principal competitive factors in the generic pharmaceutical
market are:
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the ability to introduce generic versions of products promptly
after a patent expires;
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price;
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product quality;
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customer service (including maintenance of inventories for
timely delivery);
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the ability to identify and market niche products.
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In the brand-name pharmaceutical market, we are not marketing
our internally-developed products. However, if we obtain the FDA
approval for, and start marketing, our own CNS brand-name
pharmaceuticals, we expect that competition will be limited to
large pharmaceutical companies, other drug delivery companies,
and other specialty pharmaceutical companies that have focused
on CNS disorders.
Sales and
Marketing
We market and sell our generic pharmaceutical prescription drug
products within the continental United States of America and the
Commonwealth of Puerto Rico. We derive a substantial portion of
our revenue from sales to a limited number of customers. The
customer base for our products consists primarily of drug
wholesalers, warehousing chain drug stores, mass merchandisers,
and mail-order pharmacies. We market our products both directly,
through our Global Division, and indirectly through our Rx
Partner and OTC Partner alliance agreements, as described below.
Our five major customers, McKesson Corporation, Teva, DAVA
Pharmaceuticals, Inc., Cardinal Health and Amerisource-Bergen,
accounted for 68% of gross revenue for the year ended
December 31, 2008. These five customers individually
accounted for 18%, 14%, 14%, 12% and 11%, respectively, of our
gross revenue for the year ended December 31, 2008. We have
a long-term contract currently in effect only with Teva. A
reduction in or loss of business with any one of these
customers, or any failure of a customer to pay us on a timely
basis, would adversely affect our business.
6
Rx
Partner and OTC Partner Alliance Agreements
We currently have alliance agreements with Teva, Wyeth and
Schering-Plough Corporation, or their affiliates. We also have
an alliance agreement with DAVA but have not shipped products
under that agreement since early 2008 and do not expect to do so
for the foreseeable future. On a combined basis, the alliance
agreements with Teva and DAVA are referred to as Rx
Partner agreements and those with Wyeth and
Schering-Plough are referred to as OTC Partner
agreements. Under each of these Rx Partner and OTC Partner
alliance agreements, our partner distributes a specified product
or products developed and manufactured by us, and we either
receive payment on delivery of the product, share in the
resulting profits, or receive royalty or other payments from our
partners. The revenue recognized and the percentage of gross
revenue for each of the periods noted, for the Rx Partner and
OTC Partner alliance agreements, is as follows:
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Years Ended December 31
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2008
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2007
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2006
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($ in 000s)
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Gross Revenue and% Gross Revenue
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Teva Agreement
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$
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40,947
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14
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%
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$
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42,480
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13
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%
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$
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33,910
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18
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%
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Dava Agreement
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$
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40,831
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14
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%
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$
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118,634
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35
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%
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$
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2,899
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2
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%
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Sub-Total:
Rx Partner
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$
|
81,778
|
|
|
|
28
|
%
|
|
$
|
161,114
|
|
|
|
48
|
%
|
|
$
|
36,809
|
|
|
|
20
|
%
|
OTC Partner
|
|
$
|
15,946
|
|
|
|
5
|
%
|
|
$
|
11,866
|
|
|
|
4
|
%
|
|
$
|
13,782
|
|
|
|
7
|
%
|
Rx
Partner Alliance Agreements
Teva
Agreement
We entered into the Strategic Alliance Agreement with Teva in
June 2001 (Teva Agreement). The Teva Agreement is
our most significant alliance agreement, and it covers generic
versions of the following 11 controlled-release generic
pharmaceutical branded and OTC products and a 12th product
we have not yet publicly identified, as follows:
|
|
|
|
|
Prilosec®
10, 20 and 40 mg delayed released capsules
|
|
|
|
Wellbutrin
SR®
100 and 150 mg extended release tablets
|
|
|
|
Zyban®
150 mg extended release tablets
|
|
|
|
Claritin-D®
12-hour
120 mg
12-hour
extended release tablets
|
|
|
|
Claritin-D®24-hour
240 mg
24-hour
extended release tablets
|
|
|
|
Claritin
Reditabs®
10 mg orally disintegrating tablets
|
|
|
|
Ditropan
XL®
5, 10 and 15 mg extended release tablets
|
|
|
|
Glucophage
XR®
500 mg extended release tablets
|
|
|
|
Allegra-D®
60/120 mg extended release tablets
|
|
|
|
Concerta®
18, 27, 36 and 54 mg extended release tablets
|
|
|
|
Wellbutrin
XL®
150 and 300 mg extended release tablets
|
The 12 covered products under the Teva Agreement represent 22
different product/strength combinations, of which, as of
February 24, 2009, 15 have been approved by the FDA and are
currently being marketed, five are awaiting FDA approval and two
are under development. With the exception of Glucophage
XR®,
which Teva elected to develop and manufacture itself; Wellbutrin
XL®
150 mg and
Allegra-D®,
for which product rights have been returned to us; and the
Claritin®
products noted above, we manufacture and supply each of these
products to Teva. Teva pays us a fixed percentage of defined
profits on its sales of products, except for the
Claritin®
products noted above, and reimburses us for our manufacturing
costs, for a term of 10 years from the initial
commercialization of each product. Additionally, under the Teva
Agreement, we share with Teva the profits (up to a maximum
7
of 50%) from the sale of the generic pharmaceutical OTC versions
of the
Claritin®
products noted above, sold through our OTC Partners
alliance agreements.
The Teva Agreement also included a number of additional
obligations, terms, and conditions. Under the Teva Agreement,
Teva provided us with an interest-bearing advance deposit
payable of $22 million for the purchase of exclusive
marketing rights to the 12 products, contingent upon our
achievement of specified product development milestones. To the
extent the milestones were not met, we were required to repay
the advance deposit, except to the extent Teva elected to
purchase market exclusivity for particular products in exchange
for forgiveness of specified amounts of the deposit. Ultimately,
none of the milestones were met by us, and Teva elected to
purchase market exclusivity for two of the products, forgiving
$6 million of the advance deposit payable. We also had the
option to repay the remaining $16 million of the advance
deposit payable in shares of our common stock and did so in 2003
and 2004 with approximately 1.05 million shares of our
common stock. Also pursuant to the Teva Agreement, Teva in 2001
and 2002 purchased approximately 1.46 million of our common
shares for $15 million. The Teva Agreement gave us the
right to repurchase one-sixth of the shares for nominal
consideration upon the first commercial sale of specified
products, which we achieved and exercised in 2006. These and
other provisions of the Teva Agreement are discussed in detail
in Item 8. Financial Statements and Supplementary
Data Note 13 to Consolidated Financial
Statements.
Our remaining obligations under the Teva Agreement are to
complete development of the covered products still under
development, continue our efforts to obtain FDA approval of
those not yet approved, and manufacture and supply the approved
products to Teva. Our obligation to manufacture and supply each
product extends for 10 years following the
commercialization of the product.
DAVA
Agreement
In November 2005, we entered into an alliance agreement with
DAVA related to the exclusive supply and distribution of 10, 20,
40 and 80 mg strengths of our generic version of the
branded
OxyContin®
product (DAVA Agreement). The DAVA Agreement
originally provided for DAVAs payment of an appointment
fee in installments over five years, specified acquisition
prices for the various strengths of the product, and a specified
share of the net profits resulting from DAVAs sales of the
product. We amended the DAVA Agreement in February 2007 to
eliminate future installments of the appointment fee in exchange
for an increased share of the net profits. As a result of the
May 2007 settlement of litigation brought by the
OxyContin®
patent holder, distribution of our product for the foreseeable
future terminated in early 2008, and can resume only upon
expiration of the last
OxyContin®
patent in 2013 or certain other events. As a result, the DAVA
agreement, while not terminated, imposes no obligations on
either party for the foreseeable future. Our revenue under the
DAVA Agreement, net of deferred product manufacturing costs
recognized, was $38.7 million, $92.9 million and
$1.8 million for the years ended December 31, 2008,
2007 and 2006, respectively.
OTC
Partner Alliance Agreements
We have a development, license and supply agreement with Wyeth
relating to our generic
Claritin-D®
12-hour
extended release product. Under the agreement, which was entered
into in 2002 and included an upfront payment and product
development milestone payments, we receive quarterly royalty
payments consisting of a percentage (less than 10%) of
Wyeths sales. Wyeth launched the
12-hour
product in May 2003 as its OTC Alavert D-12
Hour®.
The Wyeth agreement terminates in April 2018.
We also entered into a non-exclusive licensing, contract
manufacturing and supply agreement with Schering-Plough relating
to our generic
Claritin-D®
12-hour
extended release product in 2002. Under the agreement, which
included an upfront payment and milestone payments by
Schering-Plough, Schering-Plough agreed to purchase the product
from us at a fixed price. Schering-Plough launched our product
as its
Claritin-D®
12-hour in
March 2003. Our obligation to supply the product to
Schering-Plough expired December 31, 2008, and
Schering-Plough will pay us a royalty fee consisting of an
amount (less than $50) per thousand tablets of their product
sold during the next two years.
8
The upfront payments and potential milestone payments provided
for by these agreements, together with the upfront and milestone
payments received under each as of December 31, 2008, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront and
|
|
|
|
|
|
|
Aggregate
|
|
Milestone
|
|
|
|
|
Upfront
|
|
Milestone
|
|
Payments
|
OTC Partner
|
|
Initial Date
|
|
Payment
|
|
Payments
|
|
Received
|
|
|
(Unaudited and $ in 000s)
|
|
Schering-Plough
|
|
|
June 2002
|
|
|
$
|
2,250
|
|
|
$
|
2,250
|
|
|
$
|
4,500
|
|
Wyeth Consumer Healthcare
|
|
|
June 2002
|
|
|
$
|
350
|
|
|
$
|
4,050
|
|
|
$
|
2,000
|
|
Research
Partner Alliance Agreement
In November 2008, we entered into a Joint Development Agreement
with Medicis Pharmaceutical Corporation providing for
collaboration in the development of five dermatological
products, including an advanced
form SOLODYN®
product. Medicis paid us an upfront fee of $40.0 million in
December 2008 and will also pay us up to $23.0 million upon
completion of specified clinical and regulatory milestones. To
the extent the products are commercialized, Medicis will pay us
royalties based on its sales of the advanced
form SOLODYN®
product and we will share equally in the profits on the sales of
the four additional products.
Promotional
Partners Alliance Agreements
Shire
Co-Promotion Agreement
In 2006, we entered into a promotional services agreement with
Shire Laboratories, Inc. under which we provide physician detail
sales calls to promote a Shire branded CNS product. In exchange
for our services, we receive fees based on the number of sales
force members providing the services and are eligible to receive
contingent payments based on the number of prescriptions filled
for the product. We began providing services under the agreement
in July 2006 and will continue to do so through mid-2009. The
revenue recognized and the percentage of gross revenue for the
periods noted, under the Shire Agreement, were
$12.9 million or 4%, $12.8 million or 4%, and
$6.4 million or 4%, for the years ended December 31,
2008, 2007, and 2006, respectively.
Wyeth
Co-Promotion Agreement
In 2008, we entered into a co-promotion agreement with Wyeth
under which we will perform physician detailing sales calls for
a Wyeth branded product to neurologists beginning in mid-2009.
We will receive a service fee for each face to face product
presentation and will also be eligible to receive incentive fees
based on the number of annual prescriptions filled by
neurologists for the product. The agreement terminates three
years from the initiation of our services.
During the term of the co-promotion agreement, we are required
to complete a minimum and maximum number of physician detailing
sales calls. Wyeth is responsible for providing sales training
to our physician detailing sales force. Wyeth owns the product
and is responsible for all pricing and marketing literature as
well as product manufacture and fulfillment.
Manufacturing
We manufacture our finished dosage form products at our Hayward,
California facility and use our larger and lower operating cost
Philadelphia, Pennsylvania facility to package, warehouse and
distribute the products. We began full scale manufacturing in
the Hayward facility in June 2002 and believe we have sufficient
capacity to produce new products for the immediate future.
During 2008 we operated at about 67% of the facilitys
estimated annual production capacity of up to approximately
1.5 billion tablets and capsules.
In the second half of 2007, we began construction of a new
manufacturing facility in Taiwan at an estimated cost of
$25.0 million. We expect construction of the facility,
which will have an annual production capacity of approximately
450 million tablets and capsules, to be completed in 2009,
equipment to be installed, validated and approved by the FDA
during 2009, and product shipments to begin in early 2010.
9
Based on existing demand and expected increased demand due to
anticipated new product approvals, we expect the Hayward
facility to be fully utilized by the fourth quarter of 2012 if
the additional capacity of the Taiwan facility is not available
by that time, as currently expected.
We maintain an inventory of our products in connection with our
obligations under alliance agreements. In addition, for products
pending approval, we may produce batches of inventory to be used
in anticipation of the launch of the products. In the event that
FDA approval is denied or delayed, we could be exposed to the
risk of this inventory becoming obsolete.
Raw
Materials
The active chemical raw materials, essential to our business,
are generally readily available from multiple sources in the
U.S. and throughout the world. Certain raw materials used
in the manufacture of our products are, however, available from
limited sources and, in some cases, a single source. Although we
have not experienced any material delays in receipt of raw
materials to date, any curtailment in the availability of such
raw materials could result in production or other delays and, in
the case of products for which only one raw material supplier
exists or has been approved by the FDA, could result in material
loss of sales with consequent adverse effects on our business
and results of operations. Also, because raw material sources
for pharmaceutical products must generally be identified and
approved by regulatory authorities, changes in raw material
suppliers may result in production delays, higher raw material
costs, and loss of sales and customers. We obtain a portion of
our raw materials from foreign suppliers, and our arrangements
with such suppliers are subject to, among other risks, FDA
approval, governmental clearances, export duties, political
instability, and restrictions on the transfers of funds.
Those of our raw materials that are available from a limited
number of suppliers are Bendroflumethiazide, Chloroquine,
Colestipol, Digoxin, Flavoxate, Methyltestosterone, Nadolol,
Orphenadrine, Terbutaline and
Klucel®,
all of which are active pharmaceutical ingredients except
Klucel®,
which is an excipient used in several product formulations. The
manufacturers of two of these products, Formosa Laboratories,
Ltd. and a division of Ashland, Inc., are sole-source suppliers.
While none of the active ingredients is individually significant
to our business, the excipient, while not covered by a supply
agreement, is utilized in a number of significant products, it
is manufactured for a number of industrial applications and
supplies have been readily available. Only one of the active
ingredients is covered by a long-term supply agreement and,
while we have experienced occasional interruptions in supplies,
none has had a material effect on our operations.
Any inability to obtain raw materials on a timely basis, or any
significant price increases not passed on to customers, could
have a material adverse effect on us. We may experience delays
from the lack of raw material availability in the future, which
could have a material adverse effect on us.
Quality
Control
In connection with the manufacture of drugs, the FDA requires
testing procedures to monitor the quality of the product, as
well as the consistency of its formulation. We maintain a
quality control laboratory that performs, among other things,
analytical tests and measurements required to control and
release raw materials, in-process materials, and finished
products, and to routinely test marketed products to ensure they
remain within specifications.
Quality monitoring and testing programs and procedures have been
established by us in our effort to assure that all critical
activities associated with the production, control, and
distribution of our drug products will be carefully controlled
and evaluated throughout the process. By following a series of
systematically organized steps and procedures, we seek to assure
that established quality standards will be achieved and built
into the product.
Our policy is to continually seek to meet the highest quality
standards, with the goal of thereby assuring the quality,
purity, safety and efficacy of each of our drug products. We
believe that adherence to high operational quality standards
will also promote more efficient utilization of personnel,
materials and production capacity.
10
Research
and Development
We conduct most of our research and development activities at
our facilities in Hayward, California, with a staff of
approximately 182. In addition, we have outsourced a number of
research and development projects to offshore laboratories.
We spent approximately $59.8 million, $40.0 million
and $29.6 million on research and development activities
during the years ended December 31, 2008, 2007 and 2006,
respectively.
Regulation
The manufacturing and distribution of pharmaceutical products
are subject to extensive regulation by the federal government,
primarily through the FDA and the Drug Enforcement
Administration (DEA), and to a lesser extent by
state and local governments. The Food, Drug, and Cosmetic Act,
Controlled Substances Act and other federal statutes and
regulations govern or influence the manufacture, labeling,
testing, storage, record keeping, approval, advertising and
promotion of our products. Facilities used in the manufacture,
packaging, labeling and repackaging of pharmaceutical products
must be registered with the FDA and are subject to FDA
inspection to ensure that drug products are manufactured in
accordance with current Good Manufacturing Practices.
Noncompliance with applicable requirements can result in product
recalls, seizure of products, injunctions, suspension of
production, refusal of the government to enter into supply
contracts or to approve drug applications, civil penalties and
criminal fines, and disgorgement of profits.
FDA approval is required before any new drug may be
marketed, including new formulations, strengths, dosage forms
and generic versions of previously approved drugs. Generally,
the following two types of applications are used to obtain FDA
approval of a new drug.
New Drug Application (NDA). For a
drug product containing an active ingredient not previously
approved by the FDA, a prospective manufacturer must submit a
complete application containing the results of clinical studies
supporting the drug products safety and efficacy. An
Investigational New Drug application must be submitted before
the clinical studies may begin, and the required clinical
studies can take two to five years or more to complete. An NDA
is also required for a drug with a previously approved active
ingredient if the drug will be used to treat an indication for
which the drug was not previously approved or if the dosage
form, strength or method of delivery is changed.
Abbreviated New Drug Application
(ANDA). For a generic version of an
approved drug a drug product that contains the same
active ingredient as a drug previously approved by the FDA and
is in the same dosage form and strength, utilizes the same
method of delivery and will be used to treat the same
indications as the approved product the FDA
ordinarily requires only an abbreviated application that need
not include clinical studies demonstrating safety and efficacy.
An ANDA requires only bioavailability data demonstrating that
the generic formulation is bioequivalent to the previously
approved reference listed drug, indicating that the
rate of absorption and levels of concentration of the generic
drug in the body do not show a significant difference from those
of the reference listed drug. The FDA currently takes an average
of approximately 20 months, to approve an ANDA.
Under the Hatch-Waxman Act, which established the procedures for
obtaining approval of generic drugs, an ANDA filer must make
certain patent certifications that can result in significant
delays in obtaining FDA approval. If the applicant intends to
challenge the validity or enforceability of an existing patent
covering the reference listed drug or asserts that its drug does
not infringe such patent, the applicant files a so called
Paragraph IV certification and notifies the
patent holder that it has done so, explaining the basis for its
belief that the patent is not infringed or is invalid or
unenforceable. If the patent holder initiates a patent
infringement suit within 45 days after receipt of the
Paragraph IV Certification, the FDA is automatically
prevented from approving an ANDA until the earlier of
30 months after the date the Paragraph IV
Certification is given to the patent holder, expiration of the
patents involved in the certification, or when the infringement
case is decided in our favor. In addition, the first company to
file an ANDA for a given drug containing a Paragraph IV
certification can be awarded 180 days of market exclusivity
following approval of its ANDA, during which the FDA may not
approve any other ANDAs for that drug product.
11
During any period in which the FDA is required to withhold its
approval of an ANDA due to a statutorily imposed non-approval
period, the FDA may grant tentative approval to an
applicants ANDA. A tentative approval reflects the
FDAs preliminary determination that a generic product
satisfies the substantive requirements for approval, subject to
the expiration of all statutorily imposed non-approval periods.
A tentative approval does not allow the applicant to market the
generic drug product.
The Hatch-Waxman Act contains additional provisions that can
delay the launch of generic products. A five year marketing
exclusivity period is provided for new chemical compounds, and a
three year marketing exclusivity period is provided for approved
applications containing new clinical investigations essential to
an approval, such as a new indication for use, or new delivery
technologies, or new dosage forms. The three year marketing
exclusivity period applies to, among other things, the
development of a novel drug delivery system, as well as a new
use. In addition, companies can obtain six additional months of
exclusivity if they perform pediatric studies of a reference
listed drug product. The marketing exclusivity provisions apply
to both patented and non-patented drug products. The Act also
provides for patent term extensions to compensate for patent
protection lost due to time taken in conducting FDA required
clinical studies and during FDA review of NDAs. In addition, by
virtue of the Uruguay Round Agreements Act of 1994 that ratified
the General Agreement on Tariffs and Trade, known as GATT,
certain brand-name drug patent terms have been extended to
20 years from the date of filing of the pertinent patent
application (which can be longer than the former patent term of
17 years from date of issuance).
The Generic Drug Enforcement Act of 1992 establishes penalties
for wrongdoing in connection with the development or submission
of an ANDA. In general, FDA is authorized to temporarily bar
companies, or temporarily or permanently bar individuals, from
submitting or assisting in the submission of an ANDA, and to
temporarily deny approval and suspend applications to market
generic drugs under certain circumstances. In addition to
debarment, the FDA has numerous discretionary disciplinary
powers, including the authority to withdraw approval of an ANDA
or to approve an ANDA under certain circumstances and to suspend
the distribution of all drugs approved or developed in
connection with certain wrongful conduct.
We are subject to the Maximum Allowable Cost Regulations, which
limit reimbursements for certain generic prescription drugs
under Medicare, Medicaid, and other programs to the lowest price
at which these drugs are generally available. In many instances,
only generic prescription drugs fall within the
regulations limits. Generally, the pricing and promotion
of, method of reimbursement and fixing of reimbursement levels
for, and the reporting to federal and state agencies relating to
drug products is under active review by federal, state and local
governmental entities, as well as by private third-party
reimbursers and individuals under whistleblower statutes. At
present, the Justice Department and U.S. Attorneys Offices
and State Attorneys General have initiated investigations,
reviews, and litigation into industry-wide pharmaceutical
pricing and promotional practices, and whistleblowers have filed
qui tam suits. We cannot predict the results of those reviews,
investigations, and litigation, or their impact on our business.
Virtually every state, as well as the District of Columbia, has
enacted legislation permitting the substitution of equivalent
generic prescription drugs for brand-name drugs where authorized
or not prohibited by the prescribing physician, and some states
mandate generic substitution in Medicaid programs.
In addition, numerous state and federal requirements exist for a
variety of controlled substances, such as narcotics, that may be
part of our product formulations. The DEA, which has authority
similar to the FDAs and may also pursue monetary
penalties, and other federal and state regulatory agencies have
far reaching authority.
The State of California requires that any manufacturer,
wholesaler, retailer or other entity in California that sells,
transfers, or otherwise furnishes certain so called precursor
substances must have a permit issued by the California
Department of Justice, Bureau of Narcotic Enforcement. The
substances covered by this requirement include ephedrine,
pseudoephedrine, norpseudoephedrine, and phenylpropanolamine,
among others. The Bureau has authority to issue, suspend and
revoke precursor permits, and a permit may be denied, revoked or
suspended for various reasons, including (i) failure to
maintain effective controls against diversion of precursors to
unauthorized persons or entities; (ii) failure to comply
with the Health and Safety Code provisions relating to precursor
substances, or any regulations adopted thereunder;
(iii) commission of any act which would demonstrate actual
or potential unfitness to hold a permit in light of the public
safety and welfare, which act is substantially related to the
qualifications, functions or duties of the permit holder; or
(iv) if any individual owner, manager, agent,
12
representative or employee of the permit applicant/permit holder
willfully violates any federal, state or local criminal statute,
rule, or ordinance relating to the manufacture, maintenance,
disposal, sale, transfer or furnishing of any precursor
substances.
Environmental
Laws
We are subject to comprehensive federal, state and local
environmental laws and regulations that govern, among other
things, air polluting emissions, waste water discharges, solid
and hazardous waste disposal, and the remediation of
contamination associated with current or past generation
handling and disposal activities, including the past practices
of corporations as to which we are the successor. We are subject
periodically to environmental compliance reviews by various
environmental regulatory agencies.
Employees
As of December 31, 2008, we had 768 full-time
employees, of which 361 were in operations, 182 in research and
development, 130 in the quality area, 65 in legal and
administration, and 30 in sales and marketing. None of our
employees are subject to collective bargaining agreements with
labor unions, and we believe our employee relations are good.
Executive
Officers
Set forth below are the names of our executive officers who are
not also directors, their ages as of February 24, 2009,
their offices at Impax and their principal occupations or
employment for the past five years.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Positions with Impax
|
|
Arthur A. Koch, Jr.
|
|
|
55
|
|
|
Senior Vice President, Finance, and Chief Financial Officer
|
Charles V. Hildenbrand
|
|
|
57
|
|
|
Senior Vice President, Operations
|
Christopher Mengler, R.Ph
|
|
|
46
|
|
|
President, Global Pharmaceuticals Division
|
Michael J. Nestor
|
|
|
56
|
|
|
President, Impax Pharmaceuticals Division
|
Arthur A. Koch, Jr. has served as our Senior Vice
President, Finance, and Chief Financial Officer since
March 2005. Prior to joining Impax, Mr. Koch was
employed by Strategic Diagnostics Inc., a company which
develops, manufactures and markets immunoassay-based diagnostic
test kits. While at Strategic Diagnostics Inc., Mr. Koch
served as Chief Operating Officer for six years, interim Chief
Executive Officer for five months and Chief Financial Officer
and Vice President for five years. In addition, Mr. Koch
has previously held Chief Financial Officer positions at
Paracelsian Inc., IBAH Inc., Liberty Fish Company, and Premier
Solutions Ltd. Mr. Koch holds a Bachelor of Business
Administration from Temple University and has been a Certified
Public Accountant since 1977.
Charles V. Hildenbrand is our Senior Vice President,
Operations, a position he has held since he joined Impax in
August 2004. From 1996 until September 2004,
Mr. Hildenbrand worked for PF Laboratories, Inc. as Plant
Manager until 2001 and then as Executive Director of Engineering
and Technical Services until his departure from the company.
From 1983 until 1996, Mr. Hildenbrand worked at Lederle
Laboratories/Wyeth as Section Head of Biochemical
Production, Manager of Filing and Packaging, and Production
Director of Consumer Health Products. Mr. Hildenbrand holds
a B.S. in Chemical Engineering from Villanova University and an
MBA from Lehigh University.
Christopher Mengler, R.Ph., joined us in January 2009 as
President of our generic products division, Global
Pharmaceuticals. Before joining us he was employed by Barr
Laboratories, Inc. (Barr). Since 2002, Barr employed
Mr. Mengler in the following capacities: (i) Executive
Vice President, Global Strategic Planning; (ii) Senior Vice
President, Corporate Development; and (iii) Vice President,
Strategic Planning. As Executive Vice President, Global
Strategic Planning, Mr. Mengler was responsible for the
global cross-functional development of Barrs generic
R&D and commercial products portfolio. Prior to joining
Barr, Mr. Mengler held various positions, including key
management positions, with Pfizer Inc. and Sterling Winthrop
Inc. Mr. Mengler earned a B.S. in Mathematical Sciences and
Operations Research from Johns Hopkins University, a B.S. in
Pharmacy from St. Johns University and his MBA from
Bernard M. Baruch College in New York.
13
Michael J. Nestor joined us in March 2008 as the
President of our branded products division, Impax
Pharmaceuticals. Before joining us he was Chief Operating
Officer of Piedmont Pharmaceuticals a specialty pharmaceutical
company. Prior to Piedmont, Mr. Nestor was CEO of NanoBio,
a startup biopharmaceutical company, prior to which he was
employed by Alpharma, initially as President of its generic
pharmaceutical business and later as President of its branded
pharmaceutical business. Before this he was President,
International business at Banner Inc, a global contract
manufacturing concern. Mr. Nestor spent 16 years at
Lederle Laboratories / Wyeth holding increasing
positions of responsibility including Vice President,
Cardiovascular business, Vice President / General
Manager of Lederle-Praxis Biologics, and Vice President of
Wyeth-Lederle Vaccines and Pediatrics. Mr. Nestor has
experience in a number of pharmaceutical therapeutic areas
including vaccines, anti-infectives, dermatologics, CNS,
generics, and analgesics. Mr. Nestor has a Bachelor of
Business Administration degree from Middle Tennessee State
University and a MBA from Pepperdine University.
An investment in our common stock involves a high degree of
risk. In deciding whether to invest in our common stock, you
should consider carefully the following risk factors, as well as
the other information included in this Annual Report on
Form 10-K.
The materialization of any of these risks could have a material
adverse effect on our business, financial position and results
of operations. This Report contains forward looking statements
that involve risks and uncertainties. Our actual results could
differ materially from the results discussed in the forward
looking statements. Factors that could cause or contribute to
these differences include those discussed in this Risk
Factors section. See Forward-Looking
Statements on page 1 of this Report.
Risks
Related to Our Business
Current
economic conditions may adversely affect our industry, business,
financial position and results of operations and could cause the
market value of our common stock to decline.
The global economy is currently undergoing a period of
unprecedented volatility, and the future economic environment
may continue to be less favorable than that of recent years. It
is uncertain how long the recession that the U.S. economy
has entered will last. This has resulted in, and could lead to
further, reduced consumer spending related to healthcare in
general and pharmaceutical products in particular. While generic
drugs present a cost-effective alternative to higher-priced
branded products, our sales and those of our alliance agreement
partners could be negatively affected if patients forego
obtaining healthcare. In addition, reduced consumer spending may
force our competitors and us to decrease prices.
In addition, we have exposure to many different industries and
counterparties, including our partners under our alliance,
research and promotional services agreements, suppliers of raw
chemical materials, drug wholesalers and other customers that
may be unstable or may become unstable in the current economic
environment. Any such instability may affect these parties
ability to fulfill their respective contractual obligations to
us or cause them to limit or place burdensome conditions upon
future transactions with us.
Significant changes and volatility in the consumer environment
and in the competitive landscape may make it increasingly
difficult for us to predict our future revenues and earnings. As
a result, any cash flow from operations, expenses or other
financial guidance or outlook which we have given or might give
may be overtaken by future market developments or may otherwise
turn out to be inaccurate. Though we endeavor to give reasonable
estimates of future revenues and earnings at the time we give
such guidance, under current market conditions there is a
significant risk that such guidance or outlook will turn out to
be incorrect.
Furthermore, the global credit markets are currently
experiencing an unprecedented contraction. If current pressures
on credit continue or worsen, future debt financing may not be
available to us when required or may not be available on
acceptable terms, and as a result we may be unable to grow our
business, take advantage of business opportunities, respond to
competitive pressures or satisfy our obligations under our
indebtedness.
14
The
SEC previously revoked the registration of our common stock due
to our failure to file periodic reports required by the Exchange
Act. If we fail to timely file these reports in the future,
public information about us would become more limited and the
SEC could again seek to deregister our common stock, which could
negatively impact our business and liquidity, significantly
reduce the liquidity of our common stock and prevent investors
from buying or selling our common stock in the public
market.
On May 23, 2008, the SEC revoked the registration of our
common stock pursuant to Section 12(j) of the Exchange Act
based upon our failure to file quarterly and annual reports
required by the Exchange Act subsequent to our Quarterly Report
on
Form 10-Q
for the quarter ended September 30, 2004. Our failure to file
these periodic reports was the result of our inability to
determine the appropriate accounting treatment for transactions
under the Teva Agreement. As a result of this deregistration,
public trading in our common stock ceased as of May 23,
2008.
On December 9, 2008 our common stock again became
registered under Section 12 of the Exchange Act, and we are
again required to file periodic reports with the SEC. Although
we have resolved the accounting issues presented by the Teva
Agreement, there can be no assurance that we will not be
delinquent in the filing of these periodic reports in the
future. If we are unable to timely file our periodic reports,
the SEC could again commence proceedings to suspend or revoke
the registration of our common stock. The SEC could also seek to
impose a trading halt in our common stock for up to 10 trading
days if it believes the public interest and the protection of
investors requires it. Our failure to file periodic reports
would also substantially limit the amount of financial and other
information about us that would be available to our stockholders
and investors, which could make it more difficult for investors
to trade our stock or ascertain the price for our stock.
Should our common stock be deregistered again, brokers, dealers
and other market participants would be prohibited from buying or
selling, making a market in, or publishing quotations or
otherwise effecting transactions with respect to our common
stock. As a result, public trading of our common stock would
again cease. This could have an adverse effect on our business
and liquidity, significantly reduce the liquidity of our common
stock and limit the ability of our stockholders to buy or sell
our common stock.
If we
fail to maintain an effective system of internal control over
financial reporting, we may not be able to accurately report our
financial results, timely file our periodic reports, maintain
our reporting status or prevent fraud.
The existence of material weaknesses in our internal control
over financial reporting may affect our ability to obtain
audited financial information and comply with applicable SEC
reporting requirements. We identified five material weaknesses
in our internal control over financial reporting during 2004
relating to: (i) the Teva Agreement; (ii) our
financial close and reporting process relating to our inability
to file the required periodic financial reports with the SEC
within the prescribed time periods from 2005 through the third
quarter of 2008; (iii) our billing controls for
non-electronic data interchange orders; (iv) our inventory
valuation procedures; and (v) our reserve for shelf-stock
adjustments. In addition, we restated our financial statements
for the year ended December 31, 2003 to give effect to the
restatement of accounting for the Teva Agreement, certain
alliance agreements, common stock purchase warrants issued in
May 2003, stock-based compensation, accrued legal fee operating
expense, and accrued interest expense for the year ended
December 31, 2003.
While we believe the internal control material weaknesses
discussed above have been remediated, there can be no assurance
our independent registered public accounting firm will agree
with our assessment that all material weaknesses have been
remediated and may identify additional internal control material
weaknesses in the future. The existence of internal control
material weaknesses may result in current and potential
stockholders and alliance agreements partners losing
confidence in our financial reporting, which could harm our
business, the market price of our common stock, and our ability
to retain our current alliance agreements partners, and to
obtain new alliance agreement partners.
The existence of material weaknesses in our internal control
over financial reporting may also affect our ability to timely
file periodic reports under the Exchange Act. In May 2008, the
SEC revoked the registration of our common stock pursuant to
Section 12(j) of the Exchange Act based upon our failure to
file the quarterly and annual reports required by the Exchange
Act subsequent to our Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2004. Our failure to
file these reports was the result of our inability to determine
the appropriate accounting treatment for transactions under the
Teva Agreement.
15
Although we remedied the accounting issues presented by the Teva
Agreement and do not believe a similar accounting problem is
likely to recur, an internal control material weakness may
develop in the future and affect our ability to timely file our
periodic reports. The inability to timely file periodic reports
under the Exchange Act could result in the SEC again revoking
the registration of our common stock, which would prohibit us
from listing or having our stock quoted on any public market,
including the OTC
Bulletin Board®
and Pink
Sheets®.
This would have an adverse effect on our business and stock
price by limiting the publicly available information regarding
us and greatly reducing the ability of our stockholders to sell
or trade our common stock.
We
have experienced operating losses and negative cash flow from
operations and our future profitability is
uncertain.
We recorded net income of $18.7 million and
$125.9 million for the years ended December 31, 2008
and 2007, respectively. Although 2007 was our first profitable
year and we continued to record net income in 2008, we recorded
a net loss of $12.0 million for the year ended
December 31, 2006. We do not know whether our business will
continue to be profitable or generate positive cash flow, and
our ability to remain profitable or obtain positive cash flow is
uncertain. As of December 31, 2008, our accumulated deficit
was approximately $41.6 million, and we had outstanding
indebtedness in an aggregate principal amount of approximately
$20.6 million. To remain operational, we must, among other
things:
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obtain FDA approval of our products;
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successfully launch new products;
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prevail in patent infringement litigation in which we are
involved;
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continue to generate or obtain sufficient capital on acceptable
terms to fund our operations; and
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comply with the many complex governmental regulations that deal
with virtually every aspect of our business activities.
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Our
limited capital may make it difficult for us to repay
indebtedness, or require us to modify our business operations
and plans by spending less money on research and development
programs, developing fewer products, and filing fewer drug
applications with the FDA.
Prior to 2005, our cash used in operations exceeded cash
generated from operations in each period since our inception. At
December 31, 2008, we had outstanding indebtedness of
approximately $20.6 million, which bears interest at rates
ranging from 3.1% to 6.0% annually. For the years ended
December 31, 2008 and 2007, we paid interest of
approximately $3.0 million and $4.6 million,
respectively. Additionally, as of December 31, 2008, we had
an accumulated deficit of approximately $41.6 million. We
may not be able to maintain adequate capital at any given time
or from time to time in the future, which could result in less
money being spent on research and development programs, fewer
products being developed or at a slower pace, and fewer drug
applications being filed with the FDA.
If
Wachovia is unable to perform its obligations under our credit
agreement or if we are unable to obtain a new credit facility
upon the expiration of our credit agreement with Wachovia, there
can be no assurance that we will be able to obtain a new credit
agreement with another bank or group of lenders on favorable
terms or at all.
In December 2005, we entered into a three-year credit agreement
with Wachovia Bank, N.A., which was amended in October 2008 and
December 2008, providing for a $35.0 million revolving
credit facility intended for working capital and general
corporate purposes. There was no amount outstanding under the
revolving credit facility as of December 31, 2008, 2007 and
2006. Our amended credit agreement with Wachovia terminates on
March 31, 2009. If we are unable to negotiate an extension
to the credit agreement on similar terms, there can be no
assurance that we would be able to obtain a new credit agreement
with another bank or group of lenders on favorable terms or at
all.
16
Any
delays or unanticipated expenses in connection with the
construction of our Taiwan facility could have a material
adverse effect on our results of operations, liquidity and
financial condition.
In the second half of 2007, we began construction of a new
manufacturing facility in Taiwan at an estimated cost of
$25.0 million, of which we spent approximately
$16.2 million, in the aggregate, in 2008 and 2007. We
estimate that the new facility will have an annual production
capacity of approximately 450 million tablets and capsules.
We expect construction of the facility to be completed in 2009,
equipment to be installed, validated and approved by the FDA
during 2009, and product shipments to begin in early 2010.
While we have thus far not suffered any material delays,
increases in estimated expenses or other material setbacks
associated with the construction of the manufacturing facility,
no assurance can be given that we will timely complete the
construction of the facility or that its construction costs will
not exceed any amounts budgeted by us. During any delays in
development, changing market conditions could render projections
relating to our investment in the new facility inaccurate or
unreliable. There can also be no assurance that the facility
will be approved by the FDA within the time frame we expect, or
at all. In addition, there can be no assurance that the facility
will become operational as anticipated or ultimately result in
profitable operations. If the facility has not become
operational by the fourth quarter of 2012, we will, based upon
current projections, reach full production capacity at our
Hayward, California manufacturing facility. If our manufacturing
capacity were to be exceeded by our production requirements, we
could lose customers and market share to competing products, and
otherwise suffer adverse effects to our results of operations,
liquidity and financial condition.
Our
continued growth is dependent on our ability to continue to
successfully introduce new products to the market.
Sales of a limited number of our products often represent a
significant portion of our revenues in a given period. Revenue
from newly launched products that we are the first to market is
typically relatively high during the period immediately
following launch and can be expected generally to decline over
time. Revenue from generic drugs in general can also be expected
to decline over time. Our continued growth is therefore
dependent upon our ability to continue to successfully introduce
new products. As of March 10, 2009, we had 24 applications
pending at the FDA for generic versions of brand-name
pharmaceuticals. The FDA and the regulatory authorities may not
approve our products submitted to them or our other products
under development. Additionally, we may not successfully
complete our development efforts. Even if the FDA approves our
products, we may not be able to market them if we do not prevail
in the patent infringement litigation in which we are involved.
Our future results of operations will depend significantly upon
our ability to develop, receive FDA approval for, and market new
pharmaceutical products or otherwise acquire new products.
We are
routinely subject to patent litigation that can delay or prevent
our commercialization of products, force us to incur substantial
expense to defend, and expose us to substantial
liability.
Brand-name pharmaceutical manufacturers routinely bring patent
infringement litigation against ANDA applicants seeking FDA
approval to manufacture and market generic forms of their
branded products. Likewise, patent holders may bring patent
infringement suits against companies that are currently
marketing and selling their approved generic products. Patent
infringement litigation involves many complex technical and
legal issues and its outcome is often difficult to predict, and
the risk involved in doing so can be substantial, because the
remedies available to the owner of a patent in the event of an
unfavorable outcome include damages measured by the profits lost
by the patent owner rather than the profits earned by the
infringer. Such litigation usually involves significant expense
and can delay or prevent introduction or sale of our products.
As of February 24, 2009, we were involved in nine patent
infringement suits involving the following products:
(i) Omeprazole Delayed Release Capsules 10 mg,
20 mg and 40 mg (generic to
Prilosec®);
(ii) Fexofenadine/Pseudoephedrine Tablets (generic to
Allegra-D®);
(iii) Oxymorphone HCl Extended Release (ER)
Tablets 5 mg, 7.5 mg, 10 mg, 15 mg,
20 mg, 30 mg and 40 mg (generic to
Opana®
ER); (iv) Tolterodine Tartrate ER Capsules, 2 mg and
4 mg (generic to Detrol
LA®);
(v) Tamsulosin Hydrochloride Capsules, 0.4 mg (generic
to
Flomax®);
(vi) Tramadol Hydrochloride ER Tablets 100 mg,
200 mg and 300 mg (generic to
Ultram®
ER); (vii) Duloxetine Hydrochloride DR Capsules 20 mg,
30 mg, and 60 mg (generic to
Cymbalta®);
(viii) Doxycycline Hyclate DR
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Tablets 75 mg and 100 mg (generic to
DORYX®);
and (ix) Cyclobenzaprine Hydrochloride ER Capsules, 15mg
and 30mg (generic to
Amrix®).
For the year ended December 31, 2008, we incurred costs of
approximately $1.9 million in connection with our
participation in these matters, which are in varying stages of
litigation. If any of these patent litigation matters are
resolved unfavorably, we or any collaborative partners may be
enjoined from manufacturing or selling the product that is the
subject of such litigation without a license from the other
party. In addition, if we decide to market and sell products
prior to the resolution of patent infringement suits, we could
be held liable for lost profits if we are found to have
infringed a valid patent, or liable for treble damages if we are
found to have willfully infringed a valid patent. As a result,
any patent litigation could have a material adverse effect on
our results of operations, financial condition and growth
prospects, although it is not possible to quantify the liability
we could incur if any of these suits are decided against us.
Our
ability to develop or license, or otherwise acquire, and
introduce new products on a timely basis in relation to our
competitors product introductions involves inherent risks
and uncertainties.
Product development is inherently risky, especially for new
drugs for which safety and efficacy have not been established
and the market is not yet proven. Likewise, product licensing
involves inherent risks including uncertainties due to matters
that may affect the achievement of milestones, as well as the
possibility of contractual disagreements with regard to terms
such as license scope or termination rights. The development and
commercialization process, particularly with regard to new
drugs, also requires substantial time, effort and financial
resources. The process of obtaining FDA approval to manufacture
and market new and generic pharmaceutical products is rigorous,
time consuming, costly and largely unpredictable. We, or a
partner, may not be successful in obtaining FDA approval or in
commercializing any of the products that we are developing or
licensing.
Our
approved products may not achieve expected levels of market
acceptance.
Even if we are able to obtain regulatory approvals for our new
products, the success of those products is dependent upon market
acceptance. Levels of market acceptance for our new products
could be affected by several factors, including:
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the availability of alternative products from our competitors;
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the prices of our products relative to those of our competitors;
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the timing of our market entry;
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the ability to market our products effectively at the retail
level; and
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the acceptance of our products by government and private
formularies.
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Some of these factors are not within our control, and our
products may not achieve expected levels of market acceptance.
Additionally, continuing and increasingly sophisticated studies
of the proper utilization, safety and efficacy of pharmaceutical
products are being conducted by the industry, government
agencies and others can call into question the utilization,
safety and efficacy of previously marketed products. In some
cases, studies have resulted, and may in the future result, in
the discontinuance of product marketing or other risk management
programs such as the need for a patient registry.
We
expend a significant amount of resources on research and
development efforts that may not lead to successful product
introductions.
We conduct research and development primarily to enable us to
manufacture and market pharmaceuticals in accordance with FDA
regulations. We spent approximately $59.8 million,
$40.0 million and $29.6 million on research and
development activities during the years ended December 31,
2008, 2007 and 2006, respectively. We are required to obtain FDA
approval before marketing our drug products. The FDA approval
process is costly and time consuming. Typically, research
expenses related to the development of innovative compounds and
the filing of NDAs are significantly greater than those expenses
associated with ANDAs. As we continue to develop new products,
our research expenses will likely increase. Because of the
inherent risk associated with research and
18
development efforts in our industry, particularly with respect
to new drugs, our research and development expenditures may not
result in the successful introduction of FDA approved new
bioequivalent pharmaceuticals.
Our bioequivalence studies, other clinical studies
and/or other
data may not result in FDA approval to market our new drug
products. While we believe that the FDAs ANDA procedures
will apply to our bioequivalent versions of controlled-release
drugs, these drugs may not be suitable for, or approved as part
of, these abbreviated applications. In addition, even if our
drug products are suitable for FDA approval by filing an ANDA,
the abbreviated applications are costly and time consuming to
complete. After we submit an NDA or ANDA, the FDA may require
that we conduct additional studies, and as a result, we may be
unable to reasonably determine the total research and
development costs to develop a particular product. Also, for
products pending approval, we may obtain raw materials or
produce batches of inventory to be used in anticipation of the
products launch. In the event that FDA approval is denied
or delayed, we could be exposed to the risk of this inventory
becoming obsolete. Finally, we cannot be certain that any
investment made in developing products or product-delivery
technologies will be recovered, even if we are successful in
commercialization. To the extent that we expend significant
resources on research and development efforts and are not able,
ultimately, to introduce successful new products or new delivery
technologies as a result of those efforts, we will be unable to
recover those expenditures.
The
time necessary to develop generic drugs may adversely affect
whether, and the extent to which, we receive a return on our
capital.
We begin our development activities for a new generic drug
product several years in advance of the patent expiration date
of the brand-name drug equivalent. The development process,
including drug formulation, testing, and FDA review and
approval, often takes three or more years. This process requires
that we expend considerable capital to pursue activities that do
not yield an immediate or near-term return. Also, because of the
significant time necessary to develop a product, the actual
market for a product at the time it is available for sale may be
significantly less than the originally projected market for the
product. If this were to occur, our potential return on our
investment in developing the product, if approved for marketing
by the FDA, would be adversely affected and we may never receive
a return on our investment in the product. It is also possible
for the manufacturer of the brand-name product for which we are
developing a generic drug to obtain approvals from the FDA to
switch the brand-name drug from the prescription market to the
OTC market. If this were to occur, we would be prohibited from
marketing our product other than as an OTC drug, in which case
revenues could be substantially less than we anticipated.
We
face intense competition from both brand-name and generic
manufacturers.
The pharmaceutical industry is highly competitive and many of
our competitors have longer operating histories and
substantially greater financial, research and development,
marketing, and other resources than we have. In addition,
pharmaceutical manufacturers customer base consists of an
increasingly limited number of large pharmaceutical wholesalers,
chain drug stores that warehouse products, mass merchandisers,
mail order pharmacies. Our competitors may be able to develop
products and delivery technologies competitive with or more
effective or less expensive than our own for many reasons,
including that they may have:
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proprietary processes or delivery systems;
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larger research and development and marketing staffs;
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larger production capabilities in a particular therapeutic area;
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more experience in preclinical testing and human clinical trials;
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more experience in obtaining required regulatory approvals,
including FDA approval;
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more products; or
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more experience in developing new drugs and financial resources,
particularly with regard to brand manufacturers.
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The FDA approval process often results in the FDA granting final
approval to a number of ANDAs for a given product at the time a
patent claim for a corresponding brand product or other market
exclusivity expires. This often
19
forces us to face immediate competition when we introduce a
generic product into the market. As competition from other
manufacturers intensifies, selling prices and gross profit
margins often decline, which has been our experience with our
existing products. Moreover, with respect to products for which
we file a Paragraph IV certification, if we are not the
first ANDA filer challenging a listed patent for a product, we
are at a significant disadvantage to the competitor that first
filed an ANDA for that product containing such a challenge,
which is awarded 180 days of market exclusivity for the
product. With respect to our 16 products pending FDA approval
for which we have filed Paragraph IV certifications, we
believe: (i) unrelated third parties are the first to file
with respect to products with which 11 of our products can be
expected to compete; (ii) we are the first to file for
three products; and (iii) we share first to file status
with other filers for two products. Accordingly, the level of
market share, revenue and gross profit attributable to a
particular generic product that we develop is generally related
to the number of competitors in that products market and
the timing of that products regulatory approval and
launch, in relation to competing approvals and launches.
Although there is no assurance, we strive to develop and
introduce new products in a timely and cost effective manner to
be competitive in our industry (see Item 1.
Business Regulation). Additionally, ANDA
approvals often continue to be granted for a given product
subsequent to the initial launch of the generic product. These
circumstances generally result in significantly lower prices and
reduced margins for generic products compared to brand products.
New generic market entrants generally cause continued price and
margin erosion over the generic product life cycle.
In addition to the competition we face from other generic
manufacturers, our competition from brand-name manufacturers
involves intensive efforts to thwart generic competition,
including sales of their branded products as authorized
generics, obtaining new patents on drugs whose original
patent protection is about to expire, filing patent infringement
suits that automatically delay FDA approval of generics, filing
citizen petitions contesting FDA approvals of
generics on alleged health and safety grounds, developing
next generation versions of products that reduce
demand for generic versions we are developing, changing product
claims and labeling, and marketing as OTC branded products.
Our principal competitors are Sandoz, Inc., Mylan, Inc., Ranbaxy
Laboratories Limited, Teva, Watson Pharmaceuticals, Inc and
Actavis Inc.
Approvals
for our new drug products may be delayed or become more
difficult to obtain if the FDA institutes changes to its
approval requirements.
Some abbreviated application procedures for controlled-release
drugs and other products, including those related to our ANDA
filings, are or may become the subject of petitions filed by
brand-name drug manufacturers seeking changes from the FDA in
the approval requirements for particular drugs as part of their
strategy to thwart generic competition. We cannot predict
whether the FDA will make any changes to its abbreviated
application requirements as a result of these petitions, or the
effect that any changes may have on us. Any changes in FDA
regulations may make it more difficult for us to file ANDAs or
obtain approval of our ANDAs and generate revenues and thus may
materially harm our business and financial results.
Our
inexperience in conducting clinical trials and submitting New
Drug Applications could result in delays or failure in
development and commercialization of our own branded products,
which could have a material adverse effect on our results of
operations, liquidity, and financial condition.
With respect to products that we develop that are not generic
equivalents of existing brand-name drugs and thus do not qualify
for the FDAs abbreviated application procedures, we must
demonstrate through clinical trials that these products are safe
and effective for use. We have only limited experience in
conducting and supervising clinical trials. The process of
completing clinical trials and preparing an NDA may take several
years and requires substantial resources. Our studies and
filings may not result in FDA approval to market our new drug
products and, if the FDA grants approval, we cannot predict the
timing of any approval. There are substantial filing fees for
NDAs that are not refundable if FDA approval is not obtained.
There is no assurance that our expenses related to NDAs and
clinical trials will lead to the development of brand-name drugs
that will generate revenues in the near future. Delays or
failure in the development and
20
commercialization of our own branded products could have a
material adverse effect on our results of operations, liquidity
and financial condition.
The
risks and uncertainties inherent in conducting clinical trials
could delay or prevent the development and commercialization of
our own branded products, which could have a material adverse
effect on our results of operations, liquidity, financial
condition, and growth prospects.
There are a number of risks and uncertainties associated with
clinical trials. The results of clinical trials may not be
indicative of results that would be obtained from large scale
testing. Clinical trials are often conducted with patients
having advanced stages of disease and, as a result, during the
course of treatment these patients can die or suffer adverse
medical effects for reasons that may not be related to the
pharmaceutical agents being tested, but which nevertheless
affect the clinical trial results. In addition, side effects
experienced by the patients may cause delay of approval or
limited profile of an approved product. Moreover, our clinical
trials may not demonstrate sufficient safety and efficacy to
obtain FDA approval.
Failure can occur at any time during the clinical trial process
and, in addition, the results from early clinical trials may not
be predictive of results obtained in later and larger clinical
trials, and product candidates in later clinical trials may fail
to show the desired safety or efficacy despite having progressed
successfully through earlier clinical testing. A number of
companies in the pharmaceutical industry, including us, have
suffered significant setbacks in clinical trials, even in
advanced clinical trials after showing positive results in
earlier clinical trials. For example, we had sought to develop a
product containing carbidopa/levodopa for the treatment of
Parkinsons Disease. Following completion of the clinical
trials and submission of the NDA, the NDA was not approved due
to the FDAs concerns over product nomenclature and the
potential for medication errors. In the future, the completion
of clinical trials for our product candidates may be delayed or
halted for many reasons, including:
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delays in patient enrollment, and variability in the number and
types of patients available for clinical trials;
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regulators or institutional review boards may not allow us to
commence or continue a clinical trial;
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our inability, or the inability of our partners, to manufacture
or obtain from third parties materials sufficient to complete
our clinical trials;
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delays or failure in reaching agreement on acceptable clinical
trial contracts or clinical trial protocols with prospective
clinical trial sites;
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risks associated with trial design, which may result in a
failure of the trial to show statistically significant results
even if the product candidate is effective;
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Difficulty in maintaining contact with patients after treatment
commences, resulting in incomplete data;
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poor effectiveness of product candidates during clinical trials;
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safety issues, including adverse events associated with product
candidates;
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the failure of patients to complete clinical trials due to
adverse side effects, dissatisfaction with the product
candidate, or other reasons;
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governmental or regulatory delays or changes in regulatory
requirements, policy and guidelines; and
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varying interpretation of data by the FDA or foreign regulatory
agencies.
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In addition, our product candidates could be subject to
competition for clinical study sites and patients from other
therapies under development which may delay the enrollment in or
initiation of our clinical trials. Many of these companies have
more significant resources than we do.
The FDA or foreign regulatory authorities may require us to
conduct unanticipated additional clinical trials, which could
result in additional expense and delays in bringing our product
candidates to market. Any failure or delay in completing
clinical trials for our product candidates would prevent or
delay the commercialization of our product candidates. There is
no assurance our expenses related to clinical trials will lead
to the development of brand-name drugs which will generate
revenues in the near future. Delays or failure in the
development and
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commercialization of our own branded products could have a
material adverse effect on our results of operations, liquidity,
financial condition, and our growth prospects.
We
rely on third parties to conduct clinical trials for our product
candidates, and if they do not properly and successfully perform
their legal and regulatory obligations, as well as their
contractual obligations to us, we may not be able to obtain
regulatory approvals for our product candidates.
We design the clinical trials for our product candidates, but
rely on contract research organizations and other third parties
to assist us in managing, monitoring and otherwise carrying out
these trials, including with respect to site selection, contract
negotiation and data management. We do not control these third
parties and, as a result, they may not treat our clinical
studies as their highest priority, or in the manner in which we
would prefer, which could result in delays.
Although we rely on third parties to conduct our clinical
trials, we are responsible for confirming that each of our
clinical trials is conducted in accordance with our general
investigational plan and protocol. Moreover, the FDA and foreign
regulatory agencies require us to comply with regulations and
standards, commonly referred to as good clinical practices, for
conducting, recording and reporting the results of clinical
trials to ensure that the data and results are credible and
accurate and that the trial participants are adequately
protected. Our reliance on third parties does not relieve us of
these responsibilities and requirements. The FDA enforces good
clinical practices through periodic inspections of trial
sponsors, principal investigators and trial sites. If we, our
contract research organizations or our study sites fail to
comply with applicable good clinical practices, the clinical
data generated in our clinical trials may be deemed unreliable
and the FDA may require us to perform additional clinical trials
before approving our marketing applications. We cannot assure
you that, upon inspection, the FDA will determine that any of
our clinical trials comply with good clinical practices. In
addition, our clinical trials must be conducted with product
manufactured under the FDAs current Good Manufacturing
Practices, or cGMP, regulations. Our failure, or the failure of
our contract manufacturers if any are involved in the process,
to comply with these regulations may require us to repeat
clinical trials, which would delay the regulatory approval
process.
If third parties do not successfully carry out their duties
under their agreements with us; if the quality or accuracy of
the data they obtain is compromised due to failure to adhere to
our clinical protocols or regulatory requirements; or if they
otherwise fail to comply with clinical trial protocols or meet
expected deadlines; our clinical trials may not meet regulatory
requirements. If our clinical trials do not meet regulatory
requirements or if these third parties need to be replaced, our
clinical trials may be extended, delayed, suspended or
terminated. If any of these events occur, we may not be able to
obtain regulatory approval of our product candidates.
A
substantial portion of our total revenues is derived from sales
to a limited number of customers.
We derive a substantial portion of our revenue from sales to a
limited number of customers. In 2008 our five major customers,
McKesson, Teva, DAVA, Cardinal Health and Amerisource-Bergen,
accounted for 18%, 14%, 14%, 12% and 11%, respectively, or an
aggregate of 68%, of our gross revenue.
We currently have a long-term contract in effect only with Teva.
See Item 1. Business Rx Partner and OTC
Partner Alliance Agreements Rx Partner Alliance
Agreements. A reduction in or loss of business with any
one of these customers, or any failure of a customer to pay us
on a timely basis, would adversely affect our business.
We are
dependent on a small number of suppliers for our raw materials
that we use to manufacture our products.
We typically purchase the ingredients, other materials and
supplies that we use in the manufacturing of our products, as
well as certain finished products, from a small number of
foreign and domestic suppliers. The FDA requires identification
of raw material suppliers in applications for approval of drug
products. If raw materials were unavailable from a specified
supplier or the supplier was not in compliance with FDA or other
applicable requirements, the FDA approval of a new supplier
could delay the manufacture of the drug involved. As a result,
there is no guarantee we will always have timely and sufficient
access to a required raw material or other product. In addition,
some materials used in our products are currently available from
only one supplier or a limited number of suppliers. Generally,
we would need as much as 18 months to find and qualify a
new sole-source supplier. If we
22
receive less than one years termination notice from a
sole-source supplier that it intends to cease supplying raw
materials, it could result in disruption of our ability to
produce the drug involved. Further, a significant portion of our
raw materials may be available only from foreign sources.
Foreign sources can be subject to the special risks of doing
business abroad, including:
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greater possibility for disruption due to transportation or
communication problems;
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the relative instability of some foreign governments and
economies;
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interim price volatility based on labor unrest, materials or
equipment shortages, export duties, restrictions on the transfer
of funds, or fluctuations in currency exchange rates; and
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uncertainty regarding recourse to a dependable legal system for
the enforcement of contracts and other rights.
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Those of our raw materials that are available from a limited
number of suppliers are Bendroflumethiazide, Chloroquine,
Colestipol, Digoxin, Flavoxate, Methyltestosterone, Nadolol,
Orphenadrine, Terbutaline and Klucel, all of which are active
pharmaceutical ingredients except Klucel, which is an excipient
used in several product formulations. The manufacturers of two
of these products, Formosa Laboratories, Ltd. and a division of
Ashland, Inc., are sole-source suppliers. While none of the
active ingredients is individually significant to our business,
the excipient, while not covered by a supply agreement, is
utilized in a number of significant products, it is manufactured
for a number of industrial applications and supplies have been
readily available. Only one of the active ingredients is covered
by a long-term supply agreement and, while we have experienced
occasional interruptions in supplies, none has had a material
effect on our operations.
Any inability to obtain raw materials on a timely basis, or any
significant price increases which cannot be passed on to
customers, could have a material adverse effect on us.
Many third-party suppliers are subject to governmental
regulation and, accordingly, we are dependent on the regulatory
compliance of these third parties. We also depend on the
strength, enforceability and terms of our various contracts with
these third-party suppliers.
We
depend on qualified scientific and technical employees, and our
limited resources may make it more difficult to attract and
retain these personnel.
Because of the specialized scientific nature of our business, we
are highly dependent upon our ability to continue to attract and
retain qualified scientific and technical personnel. Except for
the recent death of Dr. Hsiao, our former chairman of the
board of directors, who co-led our research and development
activities until 2004 and thereafter took charge of exploratory
research activities, we have to date not experienced, or become
aware of pending, significant losses of scientific or technical
personnel and have retained sufficient personnel to assume
Dr. Hsiaos scientific responsibilities. Loss of the
services of, or failure to recruit, key scientific and technical
personnel, however, would be significantly detrimental to our
product-development programs. As a result of our small size and
limited financial and other resources, it may be difficult for
us to attract and retain qualified officers and qualified
scientific and technical personnel.
We maintain an employment agreement with our chief executive
officer, Dr. Hsu, which was entered into in December 1999.
All of our other key personnel are employed on an at-will basis
with no formal employment agreements. We purchase a life
insurance policy as an employee benefit for Dr. Hsu, but do
not maintain Key Man life insurance on any
executives.
We may
be adversely affected by alliance agreements or licensing
arrangements we make with other companies.
We have entered into several alliance agreements or license
agreements with respect to certain of our products and may enter
into similar agreements in the future. These arrangements may
require us to relinquish rights to certain of our technologies
or product candidates, or to grant licenses on terms that
ultimately may prove to be unfavorable to us, either of which
could reduce the value of our common stock. Relationships with
alliance agreements partners may include risks due to
incomplete information regarding the marketplace, inventories,
and
23
commercial strategies of our alliance agreements partners,
and our alliance agreements and /or other licensing agreements
may be the subject of contractual disputes. If we or our
alliance agreements partners are not successful in
commercializing the alliance agreements products, such
commercial failure could adversely affect our business.
We are
subject to significant costs and uncertainties related to
compliance with the extensive regulations that govern the
manufacturing, labeling, distribution, and promotion of
pharmaceutical products as well as environmental, safety and
health regulations.
The manufacturing, distribution, processing, formulation,
packaging, labeling and advertising of our products are subject
to extensive regulation by federal agencies, including the FDA,
DEA, Federal Trade Commission, Consumer Product Safety
Commission and Environmental Protection Agency, among others. We
are also subject to state and local laws, regulations and
agencies in California, Pennsylvania and elsewhere. Compliance
with these regulations requires substantial expenditures of
time, money and effort in such areas as production and quality
control to ensure full technical compliance. Failure to comply
with FDA and other governmental regulations can result in fines,
disgorgement, unanticipated compliance expenditures, recall or
seizure of products, total or partial suspension of production
or distribution, suspension of the FDAs review of NDAs or
ANDAs, enforcement actions, injunctions and criminal prosecution.
We cannot accurately predict the outcome or timing of future
expenditures that we may be required to make in order to comply
with the federal, state, and local environmental, safety, and
health laws and regulations that are applicable to our
operations and facilities. We are also subject to potential
liability for the remediation of contamination associated with
both present and past hazardous waste generation, handling, and
disposal activities. We are subject periodically to
environmental compliance reviews by environmental, safety, and
health regulatory agencies. Environmental laws have changed in
recent years and we may become subject to stricter environmental
standards in the future and face larger capital expenditures in
order to comply with environmental laws.
We may
experience reductions in the levels of reimbursement for
pharmaceutical products by governmental authorities, HMOs or
other third-party payers. Any such reductions could have a
material adverse effect on our business, financial position and
results of operations.
Various governmental authorities and private health insurers and
other organizations, such as HMOs, provide reimbursement to
consumers for the cost of certain pharmaceutical products.
Demand for our products depends in part on the extent to which
such reimbursement is available. In addition, third-party payers
are attempting to control costs by limiting the level of
reimbursement for medical products, including pharmaceuticals,
and increasingly challenge the pricing of these products which
may adversely affect the pricing of our products. Moreover,
health care reform has been, and is expected to continue to be,
an area of national and state focus, which could result in the
adoption of measures that could adversely affect the pricing of
pharmaceuticals or the amount of reimbursement available from
third-party payers for our products.
Reporting
and payment obligations under the Medicaid rebate program and
other government programs are complex, and failure to comply
could result in sanctions and penalties or we could be required
to reimburse the government for underpayments, which could have
a material adverse affect on our business.
Medicaid and other government reporting and payment obligations
are highly complex and somewhat ambiguous. State attorneys
general and the U.S. Department of Justice have brought
suits or instituted investigations against a number of other
pharmaceutical companies for failure to comply with Medicaid and
other government reporting obligations. Our methodologies for
making these calculations are complex and the judgments involved
require us to make subjective decisions, such that these
calculations are subject to the risk of errors. Government
agencies may impose civil or criminal sanctions, including
fines, penalties and possible exclusion from federal health care
programs, including Medicaid and Medicare. Any such penalties or
sanctions could have a material adverse effect on our business.
24
Legislative
or regulatory programs that may influence prices of prescription
drugs could have a material adverse effect on our
business.
Current or future federal or state laws and regulations may
influence the prices of drugs and, therefore, could adversely
affect the prices that we receive for our products. Programs in
existence in certain states seek to set prices of all drugs sold
within those states through the regulation and administration of
the sale of prescription drugs. Expansion of these programs, in
particular, state Medicaid programs, or changes required in the
way in which Medicaid rebates are calculated under such
programs, could adversely affect the price we receive for our
products and could have a material adverse effect on our
business, financial position and results of operations.
Decreases in health care reimbursements could limit our ability
to sell our products or decrease our revenues.
We
depend on our intellectual property, and our future success is
dependent on our ability to protect our intellectual property
and not infringe on the rights of others.
We believe intellectual property protection is important to our
business and that our future success will depend, in part, on
our ability to maintain trade secret protection and operate
without infringing on the rights of others. We cannot assure you
that:
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any of our future processes or products will be patentable;
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our processes or products will not infringe upon the patents of
third parties; or
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we will have the resources to defend against charges of patent
infringement by third parties or to protect our own rights
against infringement by third parties.
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We rely on trade secrets and proprietary knowledge related to
our products and technology which we generally seek to protect
by confidentiality and non-disclosure agreements with employees,
consultants, licensees and pharmaceutical companies. If these
agreements are breached, we may not have adequate remedies for
any breach, and our trade secrets may otherwise become known by
our competitors.
We are
subject to potential product liability claims that can result in
substantial litigation costs and liability.
The design, development and manufacture of pharmaceutical
products involve an inherent risk of product liability claims
and associated adverse publicity. Product liability insurance
coverage is expensive, difficult to obtain, and may not be
available in the future on acceptable terms, or at all. Although
we currently carry $80.0 million of such insurance, we
believe that no reasonable amount of insurance can fully protect
against all such risks because of the potential liability
inherent in the business of producing pharmaceutical products
for human consumption.
We
face risks relating to our goodwill and
intangibles.
At December 31, 2008, our goodwill, originally generated as
a result of the December 1999 merger of Global Pharmaceuticals
Corporation and Impax Pharmaceuticals, Inc., was approximately
$27.6 million, or approximately 5.4% of our total assets.
We may never realize the value of our goodwill and intangibles.
We will continue to evaluate, on a regular basis, whether events
or circumstances have occurred to indicate all, or a portion, of
the carrying amount of goodwill may no longer be recoverable, in
which case an impairment charge to earnings would become
necessary. Although as of December 31, 2008, the carrying
value of goodwill was not impaired based on our assessment
performed in accordance with GAAP, any such future determination
requiring the write-off of a significant portion of carrying
value of goodwill could have a material adverse effect on our
financial condition or results of operations.
Our
revenues and operating income could fluctuate
significantly.
Our revenues and operating results may vary significantly from
quarter to quarter as well as in comparison to the corresponding
quarter of the preceding year. Variations may result from, among
other factors:
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the timing of FDA approvals we receive;
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the timing of process validation for particular generic drug
products;
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the timing of product launches
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the introduction of new products by others that render our
products obsolete or noncompetitive;
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the ability to maintain selling prices and gross margins on our
products;
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the outcome of our patent infringement litigation; and
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the addition or loss of customers.
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For example, when we settled our patent infringement litigation
relating to our generic version of OxyContin and agreed to
terminate sales of our product in early 2008, we revised our
estimate of the remaining life of the related DAVA Agreement and
adjusted the period of revenue recognition and product
manufacturing cost amortization under the DAVA Agreement from
10 years to 27 months (i.e. November 2005 through
January 2008). The change in the revenue recognition period for
the DAVA Agreement had the effect of increasing income from
operations for the year ended December 31, 2007 by
$73.2 million and basic earnings per share by $1.25. In
addition, our revenue under the DAVA Agreement, net of deferred
product manufacturing costs recognized, was $38.7 million
and $92.9 million for the years ended December 31,
2008 and 2007, respectively. The loss of such revenue materially
affected our results of operations for the year ended
December 31, 2008 and may have a material adverse effect on
our future results of operations.
If we
are unable to manage our growth, our business will
suffer.
We have experienced rapid growth in the past several years and
anticipate continued rapid expansion in the future. The number
of ANDAs pending approval at the FDA has increased from 11 at
June 30, 2001 to 24 at March 10, 2009. This growth has
required us to expand, upgrade, and improve our administrative,
operational, and management systems, internal controls and
resources. We anticipate additional growth in connection with
the expansion of our manufacturing operations, development of
our brand-name products, and our marketing and sales efforts for
the products we develop. Although we cannot assure you that we
will, in fact, grow as we expect, if we fail to manage growth
effectively or to develop a successful marketing approach, our
business and financial results will be materially harmed.
There
are inherent uncertainties involved in estimates, judgments and
assumptions used in the preparation of financial statements in
accordance with GAAP. Any future changes in estimates, judgments
and assumptions used or necessary revisions to prior estimates,
judgments or assumptions could lead to a restatement of our
results.
The consolidated financial statements included in this Annual
Report on
Form 10-K
are prepared in accordance with GAAP. This involves making
estimates, judgments and assumptions that affect reported
amounts of assets (including intangible assets), liabilities,
revenues, expenses (including acquired in process research and
development) and income. Estimates, judgments and assumptions
are inherently subject to change in the future and any necessary
revisions to prior estimates, judgments or assumptions could
lead to a restatement. Any such changes could result in
corresponding changes to the amounts of assets (including
goodwill and other intangible assets), liabilities, revenues,
expenses (including acquired in process research and
development) and income.
Terrorist
attacks and other acts of violence or war may adversely affect
our business.
Terrorist attacks at or nearby our facilities in Hayward,
California or Philadelphia, Pennsylvania, or the construction
site of our manufacturing facility in Taiwan may negatively
affect our operations or delay the completion of our Taiwan
facility. While we do not believe that we are more susceptible
to such attacks than other companies, such attacks could
directly affect our physical facilities or those of our
suppliers or customers and could make the transportation of our
products more difficult and more expensive and ultimately affect
our sales.
We carry insurance coverage on our facilities of types and in
amounts that we believe are in line with coverage customarily
obtained by owners of similar properties. We continue to monitor
the state of the insurance market in general and the scope and
cost of coverage for acts of terrorism in particular, but we
cannot anticipate what coverage will be available on
commercially reasonable terms in future policy years. Currently,
we carry terrorism insurance
26
as part of our property and casualty and business interruption
coverage. If we experience a loss that is uninsured or that
exceeds policy limits, we could lose the capital invested in the
damaged facilities, as well as the anticipated future net sales
from those facilities.
Because
of the location of our manufacturing and research and
development facilities, our operations could be interrupted by
an earthquake.
Our corporate headquarters, manufacturing operations in
California, and research and development activities related to
process technologies are located near major earthquake fault
lines. Although we have other facilities, we produce a
substantial portion of our products at our California facility.
A disruption at these California facilities due to an earthquake
or other natural disaster, even on a short-term basis, could
impair our ability to produce and ship products to the market on
a timely basis. In addition, we could experience a destruction
of facilities which would be costly to rebuild, or loss of life,
all of which could materially adversely affect our business and
results of operations.
While we presently carry $40.0 million of dedicated
California earthquake coverage, which we believe is appropriate
in light of the risks, the amount of our earthquake insurance
coverage may not be sufficient to cover losses from earthquakes.
We may discontinue some or all of this insurance coverage in the
future if the cost of premiums exceeds the value of the coverage
discounted for the risk of loss. If we experience a loss which
is uninsured or which exceeds policy limits, we could lose the
capital invested in the damaged facilities, as well as the
anticipated future net sales from those facilities.
Risks
Related to Our Stock
There
is currently a limited market for our common
stock.
Because we were unable to file our periodic reports with the SEC
subsequent to our quarterly report for the third quarter of
2004, our common stock was delisted by The NASDAQ Stock Market
in August 2005. From that time through December 29, 2006,
the stock was quoted in the Pink
Sheets®,
to which dealers submitted daily bid and ask prices for the
stock. On December 29, 2006, the SEC suspended all trading
in the stock through January 16, 2007 and instituted an
administrative proceeding to determine whether, in light of our
reporting delinquency, to suspend or revoke the registration of
our common stock under Section 12 of the Exchange Act.
Beginning January 17, 2007, our stock was again quoted in
the Pink
Sheets®,
but from that time forward dealers were permitted to publish
quotations only on behalf of customers that represented such
customers indications of interest and did not involve
dealers solicitation of such interest. On May 23,
2008, the SEC revoked the registration of our stock, prohibiting
brokers and dealers from effecting transactions in our stock. On
December 9, 2008, our stock again became registered under
Section 12, and beginning January 2009 it was again quoted
on the Pink
Sheets®
and OTC Bulletin Board. While we have applied for relisting
of our stock on The NASDAQ Stock Market, there is no assurance
that, and if so when, the stock will again trade on The NASDAQ
Stock Market.
Our
stockholders may sustain future dilution in ownership as a
result of the terms of some of our outstanding securities or
future issuances of securities.
We may need to raise additional capital in the future to fund
our operations and planned expansion. To the extent we raise
additional capital by issuing equity securities or securities
convertible into or exchangeable for equity securities,
ownership dilution to our stockholders will result. As of
February 24, 2009, there were outstanding:
$12.8 million of our 3.5% convertible senior subordinated
debentures, referred to as 3.5% Debentures,
convertible into 616,240 shares of common stock, subject to
adjustment, and there were also outstanding options to purchase
an additional 8,280,240 shares, of which 6,396,840 are
exercisable, and 399,716 shares of unvested restricted
stock under our long-term incentive compensation program. To the
extent that these options are exercised, debentures converted
and shares of restricted stock issued, stockholders
ownership interest in our common stock will be diluted.
Our
stock price is volatile.
The stock market has, from time to time, experienced significant
price and volume fluctuations that may be unrelated to the
operating performance of particular companies. In addition, the
market price of our common stock,
27
like the stock price of many publicly traded specialty
pharmaceutical companies, is volatile. For example, the sale
price of our stock during the years ended December 31,
2008, 2007 and 2006 ranged from a high of $12.40 during the
quarter ended September 30, 2007 to a low of $4.25 during
the quarter ended September 30, 2006.
Prices of our common stock may be influenced by many factors,
including:
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our ability to maintain compliance with SEC reporting
requirements;
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our ability to relist our common stock on The NASDAQ Stock
Market and maintain such listing;
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investor perception of us;
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analyst recommendations;
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market conditions relating to specialty pharmaceutical companies;
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announcements of new products by us or our competitors;
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publicity regarding actual or potential developments relating to
products under development by us or our competitors;
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developments, disputes or litigation concerning patent or
proprietary rights;
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delays in the development or approval of our product candidates;
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regulatory developments;
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period to period fluctuations in our financial results and those
of our competitors;
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future sales of substantial amounts of common stock by
stockholders; and
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economic and other external factors.
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We may
in the future issue shares of preferred stock which could
adversely affect the rights of holders of our common stock and
the value of our common stock.
Our board of directors has the ability to authorize us to issue
up to 2,000,000 shares of our preferred stock and to
determine the price, rights, preferences, and privileges of
those shares without any further vote or action by the
stockholders.
Although we currently have no preferred stock issued or
outstanding, preferred stock issued in the future could
adversely affect the rights and interests of holders of common
stock by:
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exercising voting, redemption, and conversion rights to the
detriment of the holders of common stock;
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receiving preferences over the holders of common stock regarding
our assets in the event of our dissolution or liquidation;
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delaying, deferring, or preventing a change in control of our
company, even when holders of common stock may desire to effect
such a transaction;
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discouraging bids for our common stock at a premium over the
market price of the common stock; and
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otherwise adversely affecting the market price of the common
stock.
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We
have adopted certain provisions that may have the effect of
hindering, delaying or preventing third party takeovers, which
may prevent our stockholders from receiving premium prices for
shares of their common stock in an unsolicited
takeover.
We have adopted a stockholder rights plan and initially declared
a dividend distribution of one right for each outstanding share
of common stock to stockholders of record as of January 30,
2009. Each Right entitles the holder to purchase one
one-thousandth of a share of our Series A junior
participating preferred stock for $15, subject to adjustment.
28
Under certain circumstances, if a person or group acquires, or
announces its intention to acquire, beneficial ownership of 20%
or more of our outstanding common stock, each holder of such
right (other than the third party triggering such exercise),
would be able to purchase, upon exercise of the right at the
then applicable exercise price (currently $15), that number of
shares of our common stock having a market value of two times
the exercise price of the right (currently $30). Subject to
certain exceptions, if we are consolidated with, or merged into,
another entity and we are not the surviving entity in such
transaction or shares of our outstanding common stock are
exchanged for securities of any other person, cash or any other
property, or more than 50% of our assets or earning power is
sold or transferred, then each holder of the right would be able
to purchase, upon the exercise of the right at the then
applicable exercise price (currently $15), the number of shares
of common stock of the third party acquirer having a market
value of two times the exercise price of the right (currently
$30). The rights expire on January 20, 2012, unless
extended by our board of directors.
If our board of directors does not redeem the rights or amend
the rights agreement to make it inapplicable to the foregoing
acquisitions, mergers or similar transactions, the rights when
exercised could significantly increase the cost for a third
party acquirer seeking to acquire control of us on an
unsolicited basis or substantially dilute the equity ownership
of such third party acquirer. As a result, the existence of the
rights agreement could deter potential third party acquirers
from attempting to acquire us on an unsolicited basis and reduce
the likelihood that stockholders will receive a premium for our
common stock in such a transaction.
In addition, under our Restated Certificate of Incorporation,
our board of directors has authority to issue
2,000,000 shares of blank check preferred
stock, of which 100,000 shares were designated as
series A junior participating preferred stock, which also
may make it more difficult for a third party to acquire control
of us without the approval of our board of directors. Blank
check preferred stock enables our board of directors, without
stockholder approval, to designate and issue additional series
of preferred stock with such dividend, liquidation, conversion,
voting or other rights, including the right to issue convertible
securities with no limitations on conversion, as our board of
directors may determine are appropriate, including rights to
dividends and proceeds in a liquidation that are senior to our
common stock.
We do
not pay dividends on our common stock and do not anticipate
doing so in the foreseeable future.
We have not paid any cash dividends on our common stock and we
do not plan to pay any cash dividends in the foreseeable future.
We plan to retain any earnings for the operation and expansion
of our business. As a Delaware corporation, we may not declare
or pay a dividend on our capital stock if the amount paid
exceeds an amount equal to the surplus, which represents the
excess of our net assets over paid-in capital or, if there is no
surplus, our net profits for the current or immediately
preceding year. In addition, our loan agreement prohibits the
payment of dividends without the lenders consent. As we do
not intend to declare dividends on our common stock in the
foreseeable future, any gains on your investment will result
from an increase in our stock price, which may or may not occur.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our primary properties consist of a 35,000 sq. ft. corporate
headquarters and research and development center and
50,000 sq. ft. manufacturing facility, both located in
Hayward, California, a 113,000 sq. ft. packaging,
warehousing and distribution center in Philadelphia,
Pennsylvania, all of which are owned by us, and a leased
44,000 sq. ft. facility in New Britain, Pennsylvania,
which houses sales, marketing and administration personnel and
provides additional warehouse space. In addition, we own a
19,000 sq. ft. office building containing additional
administrative and laboratory facilities in Hayward and lease
seven additional facilities aggregating
147,000 sq. ft. in Hayward, Pleasanton, and Fremont,
California, which are utilized for additional research and
development, administrative services and equipment storage. The
expiration dates of these lease agreements range between
February 28, 2010 and January 30, 2015. We also have
currently under construction a 100,000 sq. ft.
manufacturing facility in Taiwan. We expect construction of the
facility, which will have an annual production capacity of
29
approximately 450 million tablets and capsules, to be
completed and equipment to be installed, validated, and approved
by the FDA in 2009, and product shipments to begin in early 2010.
In our various facilities we maintain an extensive equipment
base that includes new or recently reconditioned equipment for
the manufacturing and packaging of compressed tablets, coated
tablets, and capsules. The manufacturing and research and
development equipment includes mixers and blenders for capsules
and tablets, automated capsule fillers, tablet presses, particle
reduction, sifting equipment, and tablet coaters. The packaging
equipment includes fillers, cottoners, cappers, and labelers. We
also maintain two well equipped, modern laboratories used to
perform all the required physical and chemical testing of our
products. We also maintain a broad variety of material handling
and cleaning, maintenance, and support equipment. We own
substantially all of our manufacturing equipment and believe it
is well maintained and suitable for its requirements.
We maintain property and casualty and business interruption
insurance in amounts we believe are sufficient and consistent
with practices for companies of comparable size and business.
|
|
Item 3.
|
Legal
Proceedings
|
Patent
Infringement Litigation
AstraZeneca
AD et al. v. Impax Laboratories, Inc.
(Omeprazole)
In litigation commenced against us in the U.S. District
Court for the District of Delaware in May 2000, AstraZeneca AB
alleged that our submission of an ANDA seeking FDA permission to
market Omeprazole Delayed Release Capsules, 10mg, 20mg and 40mg,
constituted infringement of AstraZenecas U.S. patents
relating to its
Prilosec®
product and sought an order enjoining us from marketing our
product until expiration of its patents. The case, along with
several similar suits against other manufacturers of generic
versions of
Prilosec®,
was subsequently transferred to the U.S. District Court for
the Southern District of New York. In September 2004, following
expiration of the
30-month
stay, the FDA approved our ANDA, and we and our alliance
agreement partner, Teva, commenced commercial sales of our
product. In January 2005, AstraZeneca added claims of willful
infringement, for damages, and for enhanced damages on the basis
of this commercial launch. Claims for damages were subsequently
dropped from the suit against the Company, but were included in
a separate suit filed against Teva. In May 2007, the court found
that our product infringed two of AstraZenecas patents and
that these patents were not invalid. The court ordered that FDA
approval of our ANDA be converted to a tentative approval, with
a final approval date not before October 20, 2007, the
expiration date of the relevant pediatric exclusivity period. In
August 2008 the U.S. Court of Appeals for the Federal
Circuit affirmed the lower courts decision of infringement
and validity. If Teva is not ultimately successful in
establishing invalidity or non-infringement in the separate suit
against Teva, the court may award monetary damages associated
with Tevas commercial sale of our omeprazole products.
Under our Teva Agreement, we would be responsible for monetary
damages awarded against Teva up to a specified level, beyond
which, monetary damages would be Tevas responsibility.
Aventis
Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc.
(Fexofenadine/Pseudoephedrine)
We are a defendant in an action brought in March 2002 by Aventis
Pharmaceuticals Inc. and others in the U.S. District Court
for the District of New Jersey alleging that our proposed
Fexofenadine and Pseudoephedrine Hydrochloride tablets, generic
to
Allegra-D®,
infringe seven Aventis patents and seeking an injunction
preventing us from marketing the products until expiration of
the patents. The case has since been consolidated with similar
actions brought by Aventis against five other manufacturers
(including generics to both
Allegra®
and
Allegra-D®).
In March 2004, Aventis and AMR Technology, Inc. filed a
complaint and first amended complaint against us and one of the
other defendants alleging infringement of two additional
patents, owned by AMR and licensed to Aventis, relating to a
synthetic process for making the active pharmaceutical
ingredient, Fexofenadine Hydrochloride and intermediates in that
synthetic process. We believe that we have defenses to the
claims based on non-infringement and invalidity.
In June 2004, the court granted our motion for summary judgment
of non-infringement with respect to two of the patents and, in
May 2005, granted summary judgment of invalidity with respect to
a third patent. We will have the opportunity to file additional
summary judgment motions in the future and to assert both
non-infringement and
30
invalidity of the remaining patents (if necessary) at trial. No
trial date has yet been set. In September 2005, Teva launched
its Fexofenadine tablet products (generic to
Allegra®),
and Aventis and AMR moved for a preliminary injunction to bar
Tevas sales based on four of the patents in suit, which
patents are common to the
Allegra®
and
Allegra-D®
litigations. The district court denied Aventiss motion in
January 2006, finding that Aventis did not establish a
likelihood of success on the merits, which decision was affirmed
on appeal. Discovery is proceeding. No trial date has been set.
Abbott
Laboratories v. Impax Laboratories, Inc.
(Fenofibrate)
We were a defendant in patent-infringement litigation commenced
in January 2003 by Abbott Laboratories and Fournier Industrie et
Sante in the U.S. District Court for the District of
Delaware relating to our ANDAs for Fenofibrate Tablets, 160mg
and 54mg, generic to
TriCor®.
In March 2005, we asserted antitrust counterclaims. By agreement
between the parties, in July 2005, the court entered an order
dismissing the patent-infringement claims, leaving our antitrust
counterclaim intact, and in May 2006 the court denied the
plaintiffs motion to dismiss the counterclaim.
On April 3, 2008, the Court issued an order bifurcating and
staying damages issues, and setting a schedule for trial of
liability issues to begin the week of November 3, 2008. On
November 13, 2008, the parties reached agreement to settle
the case and the case was dismissed with prejudice on
December 12, 2008.
Impax
Laboratories, Inc. v. Aventis Pharmaceuticals, Inc.
(Riluzole)
In June 2002, we filed a suit against Aventis Pharmaceuticals,
Inc. in the U.S. District Court for the District of
Delaware, seeking a declaration that our filing of an ANDA for
Riluzole 50mg tablets, generic to
Rilutek®,
for treatment of patients with amyotrophic lateral scleroses
(ALS) did not infringe claims of Aventiss patent relating
to the drug and a declaration that its patent is invalid.
Aventis filed counterclaims for infringement, and, in December
2002, the district court granted Aventiss motion for a
preliminary injunction enjoining us from marketing any
pharmaceutical product or compound containing Riluzole for the
treatment of ALS. In September 2004, the district court found
Aventiss patent not invalid and infringed by our proposed
product. In November 2006, the Court of Appeals for the Federal
Circuit vacated the district courts finding that the
patent was not invalid and remanded for further findings on this
issue, and, in June 2007, the district court again found that
Aventiss patent is not invalid. In October 2008, the Court
of Appeals for the Federal Circuit affirmed the district court
decision. The district court has entered a permanent injunction
enjoining us from marketing Riluzole 50mg tablets for the
treatment of ALS until the expiration of Aventiss patent
in June 2013.
Wyeth v.
Impax Laboratories, Inc. (Venlafaxine)
In April 2006, Wyeth filed suit against us in the
U.S. District Court for the District of Delaware, alleging
patent infringement as a result of our filing of an ANDA
relating to Venlafaxine HCl Extended Release 37.5mg, 75mg and
150mg capsules, generic to Effexor
XR®.
In June 2008, we entered into an agreement with Wyeth settling
all pending claims and counterclaims related to our generic
Effexor
XR®
products. Under the agreement, we obtained a license allowing
launch of our generic Effexor
XR®
products no later than June 2011, and Wyeth agreed to pay us
$1,000,000 as reimbursement for legal fees associated with this
lawsuit.
Endo
Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc.
(Oxymorphone)
In November 2007, Endo Pharmaceuticals Inc. and Penwest
Pharmaceuticals Co. (together, Endo) filed suit
against us in the U.S. District Court for the District of
Delaware, requesting a declaration that our Paragraph IV
Notices with respect to our ANDA for Oxymorphone Hydrochloride
Extended Release Tablets 5mg, 10mg, 20mg and 40mg, generic to
Opana®
ER, are null and void and, in the alternative, alleging patent
infringement in connection with the filing of that ANDA. Endo
subsequently dismissed its request for declaratory relief and in
December 2007 filed another patent infringement suit relating to
the same ANDA. In July 2008, Endo asserted additional
infringement claims with respect to our amended ANDA, which
added 7.5mg, 15mg and 30mg strengths of the product. The cases
have subsequently been transferred to the U.S. District
Court for the District of New Jersey. We have filed an answer
and counterclaims. Discovery is proceeding and no trial date has
been set.
31
lmpax
Laboratories, Inc. v. Medicis Pharmaceutical Corp.
(Minocycline)
In January 2008, we filed a complaint against Medicis
Pharmaceutical Corp. in the U.S. District Court for the
Northern District of California, seeking a declaratory judgment
that our filing of an ANDA relating to Minocycline Hydrochloride
Extended Release Tablets 45mg, 90mg, and 135mg, generic to
Solodyn®,
did not infringe any valid claim of U.S. Patent
No. 5,908,838. Medicis filed a motion to dismiss the
complaint for lack of subject matter jurisdiction. On April
16, 2008, the District Court granted Medicis motion
to dismiss and judgment was entered on April 22, 2008. We
appealed the dismissal decision to the United States Court of
Appeals for the Federal Circuit. While on appeal in December
2008, the parties announced that they settled the case by
entering into a settlement and license agreement, which allows
us to launch our products no later than November 2011. The
appeal was dismissed by stipulation in accordance with the
settlement and license agreement.
Pfizer
Inc., et aI. v. Impax Laboratories, Inc.
(Tolterodine)
In March 2008, Pfizer Inc., Pharmacia & Upjohn Company
LLC, and Pfizer Health AB (collectively, Pfizer)
filed a complaint against us in the U.S. District Court for
the Southern District of New York, alleging that our filing of
an ANDA relating to Tolterodine Tartrate Extended Release
Capsules, 4mg, generic to
Detrol®
LA, infringes three Pfizer patents. We have filed an answer and
counterclaims seeking declaratory judgment of non-infringement,
invalidity or unenforceability with respect to the patents
subject to the suit. In April 2008, the case was transferred to
the U.S. District Court for the District of New Jersey. On
September 3, 2008 an amended complaint was filed alleging
infringement based on our ANDA amendment adding a 2mg strength.
Discovery is in the early stages, and no trial date has been set.
Boehringer
Ingelheim Pharmaceuticals, et al. v. Impax Laboratories,
Inc. (Tamsulosin)
In July 2008, Boehringer Ingelheim Pharmaceuticals Inc. and
Astellas Pharma Inc. (together, Astellas) filed a
complaint against us in the U.S. District Court for the
Northern District of California, alleging patent infringement in
connection with the filing of our ANDA relating to Tamsulosin
Hydrochloride Capsules, 0.4mg, generic to
Flomax®.
After filing our answer and counterclaim, we filed a motion for
summary judgment of patent invalidity. The District Court
scheduled a hearing on claim construction for May 2009 and
summary judgment for June 2009.
Purdue
Pharma Products L.P., et al. v. Impax Laboratories, Inc.
(Tramadol)
In August 2008, Purdue Pharma Products L.P., Napp Pharmaceutical
Group LTD., Biovail Laboratories International, SRL, and
Ortho-McNeil-Janssen Pharmaceuticals, Inc. (collectively,
Purdue) filed suit against us in the
U.S. District Court for the District of Delaware, alleging
patent infringement for the filing of our ANDA relating to
Tramadol Hydrochloride Extended Release Tablets, 100mg, generic
to 100mg
Ultram®
ER. In November 2008, Purdue asserted additional infringement
claims with respect to our amended ANDA, which added 200mg and
300mg strengths of the product. We have filed answers and
counterclaims to those complaints. Discovery is in the early
stages, and no trial date has been set.
Eli
Lilly and Company v. Impax Laboratories, Inc.
(Duloxetine)
In November 2008, Eli Lilly and Company filed suit against us in
the U.S. District Court for the Southern District of
Indiana, alleging patent infringement for the filing of our ANDA
relating to Duloxetine Hydrochloride Delayed Release Capsules,
20mg, 30mg, and 60mg, generic to
Cymbalta®.
We filed an answer and counterclaim. In February 2008, the
parties jointly submitted a stipulation and proposed order
staying this litigation, which order has been entered by the
Court.
Warner
Chilcott, Ltd. et. al. v. Impax Laboratories, Inc.
(Doxycycline Hyclate)
In December 2008, Warner Chilcott Limited and Mayne Pharma
International Pty. Ltd. (together, Warner Chilcott)
filed suit against us in the U.S. District Court for the
District of New Jersey, alleging patent infringement for the
filing of our ANDA relating to Doxycycline Hyclate Delayed
Release Tablets, 75mg and 100mg, generic to
Doryx®.
We have filed an answer and counterclaim. Discovery is in the
early stages, and no trial date has been set.
32
Eurand,
Inc., et al. v. Impax Laboratories, Inc.
(Cyclobenzaprine)
In January 2009, Eurand, Inc., Cephalon, Inc., and Anesta AG
(collectively, Cephalon) filed suit against us in
the U.S. District Court for the District of Delaware,
alleging patent infringement for the filing of our ANDA relating
to Cyclobenzaprine Hydrochloride Extended Release Capsules, 15mg
and 30mg, generic to
Amrix®.
We have filed an answer and counterclaim. Discovery is in the
early stages and the trial is scheduled to begin on
September 27, 2010.
Other
Litigation Related to Our Business
Axcan
Scandipharm Inc. v. Ethex Corp, et al. (Lipram
UL)
In May 2007, Axcan Scandipharm Inc., a manufacturer of the
Ultrase®
line of pancreatic enzyme products, brought suit against us in
the U.S. District Court for the District of Minnesota,
alleging that we engaged in false advertising, unfair
competition, and unfair trade practices under federal and
Minnesota law in connection with the marketing and sale of our
now-discontinued Lipram UL products. The suit seeks actual and
consequential damages, including lost profits, treble damages,
attorneys fees, injunctive relief and declaratory
judgments that would prohibit the substitution of Lipram UL for
prescriptions of
Ultrase®.
The District Court granted in part and denied in part our motion
to dismiss the complaint, as well as that of co-defendants Ethex
Corp. and KV Pharmaceutical Co., holding that any claim of false
advertising pre-dating June 1, 2001, is barred by the
statute of limitations. We have answered the complaint, and
discovery is proceeding. Trial is set for May 2010.
Freeberg v.
Impax Laboratories, Inc., et al. (Freeberg)
In January 2009, an employment law action was filed against us
by former employee Vanna Freeberg in the Superior Court of the
State of California for the County of Alameda. The complaint
alleges eight causes of action: (i) violation of the
California Family Rights Act and California Government Code
Section 12945.2; (ii) disability or perceived
disability discrimination in violation of California Government
Code Section 12940; (iii) violation of California
Civil Code Section 46(3); (iv) failure to compensate
for hours worked under California Industrial Welfare Commission
Orders and California Labor Code Section 1182.11;
(v) retaliation in violation of California public policy;
(vi) age discrimination in violation of California
Government Code Section 12940; (vii) retaliation in
violation of California Government Code 12940; and
(viii) age discrimination in violation of California public
policy. We believe these claims are without merit and intend to
defend against them vigorously.
Securities
Litigation
We, our CEO and several former officers and directors were
defendants in several class actions filed in the United States
District Court for the Northern District of California, all of
which were consolidated into a single action. These actions,
brought on behalf of all purchasers of our stock between May 5
and November 3, 2004, sought unspecified damages and
alleged that we and the individual defendants, in violation of
the antifraud provisions of the federal securities laws, had
artificially inflated the market price of the stock during that
period by filing false financial statements for the first and
second quarters of 2004, based upon the subsequent restatement
of its results for those periods.
On January 28, 2009, the parties entered into an agreement
settling these securities class actions. Under the terms of the
settlement, plaintiffs agreed to dismissal of the actions with
prejudice, and defendants, without admitting the allegations or
any liability, agreed to pay the plaintiff class
$9.0 million, of which we will pay approximately
$3.5 million and the balance will be funded by directors
and officers liability insurance.
Insurance
Product liability claims by customers constitute a risk to all
pharmaceutical manufacturers. At December 31, 2008, we
carried $80 million of product liability insurance for our
own manufactured products. This insurance may not be adequate to
cover any product liability claims to which we may become
subject.
33
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Stock
Price
Our common stock was traded on The NASDAQ Stock Market under the
symbol IPXL until August 8, 2005, when it was
delisted due to our failure to file our Annual Report on
Form 10-K
for the year ended December 31, 2004 and Quarterly Report
on
Form 10-Q
for the quarter ended March 31, 2005. Our failure to file
these periodic reports violated NASDAQ Marketplace
Rule 4310(c)(14), compliance with which was required for
continued listing on The NASDAQ Stock Market.
From August 8, 2005 until December 29, 2006, our
common stock was quoted on the Pink
Sheets®
operated by Pink OTC Markets Inc. under the symbol
IPXL.PK. On December 29, 2006, the SEC
suspended all trading in our common stock through
January 16, 2007 and instituted an administrative
proceeding to determine whether, in light of our reporting
delinquency, to suspend or revoke the registration of our common
stock under Section 12 of the Exchange Act. Beginning
January 17, 2007, our common stock was again quoted in the
Pink
Sheets®,
but from that time forward dealers were permitted to publish
quotations only on behalf of customers that represent such
customers indications of interest and do not involve
dealers solicitation of such interest. On May 23,
2008, our registration of the common stock under Section 12
of the Exchange Act was revoked and brokers and dealers were
prohibited from effecting transactions in our common stock. On
December 9, 2008 our common stock again became registered
under Section 12 of the Exchange Act and beginning January
2009 it was again quoted on the Pink
Sheets®
and OTC Bulletin Board under the symbol IPXL.OB.
The following table sets forth the high and low sales prices for
our common stock as reported by Pink OTC Markets Inc. for the
periods indicated below. These prices reflect inter-dealer
quotations, without retail
mark-up,
mark-down or commission:
|
|
|
|
|
|
|
|
|
|
|
Price Range
|
|
|
|
per Share
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ending December 31, 2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
11.40
|
|
|
$
|
6.50
|
|
Second Quarter (through May 23, 2008)
|
|
$
|
9.55
|
|
|
$
|
8.00
|
|
Third Quarter
|
|
|
n/a
|
|
|
|
n/a
|
|
Fourth Quarter
|
|
|
n/a
|
|
|
|
n/a
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
10.76
|
|
|
$
|
8.30
|
|
Second Quarter
|
|
$
|
12.00
|
|
|
$
|
4.55
|
|
Third Quarter
|
|
$
|
12.40
|
|
|
$
|
8.00
|
|
Fourth Quarter
|
|
$
|
12.15
|
|
|
$
|
9.45
|
|
Holders
As of December 31, 2008, there were approximately 536
holders of record of our common stock, solely based upon the
count our transfer agent provided us as of that date and this
number does not include:
|
|
|
|
|
any beneficial owners of common stock whose shares are held in
the names of various dealers, clearing agencies, banks, brokers
and other fiduciaries; and
|
34
|
|
|
|
|
broker-dealers or other participants who hold or clear shares
directly or indirectly through the Depository
Trust Company, or its nominee, Cede & Co.
|
Dividends
We have never paid cash dividends on our common stock and have
no present plans to do so in the foreseeable future. Our current
policy is to retain all earnings, if any, for use in the
operation of our business. The payment of future cash dividends,
if any, will be at the discretion of the Board of Directors and
will be dependent upon our earnings, financial condition,
capital requirements and other factors as the Board of Directors
may deem relevant. Our loan agreements prohibit the payment of
dividends without the consent of the other party to the
agreements.
Unregistered
Sales of Equity Securities
During the year ended December 31, 2008, we sold an
aggregate of 2,700 shares of our common stock to
13 persons pursuant to the Impax Laboratories Inc. 2001
Non-Qualified Employee Stock Purchase Plan; an aggregate of
443,105 shares of our common stock to seven persons
pursuant to the exercise of stock options; and
106,642 shares of our common stock to four persons
pursuant to the exercise of common stock purchase warrants. We
also issued 75,580 shares of our common stock to a former
senior executive in connection with his resignation and his
entering into a consulting agreement with us. With respect to
the foregoing, we relied upon the exemption provided by
Section 4(2) of the Securities Act.
Equity
Compensation Plans
The following table details information regarding our existing
equity compensation plans as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
Remaining Available for
|
|
|
Number of Securities to
|
|
|
|
Future Issuance Under
|
|
|
be Issued Upon
|
|
Weighted Average
|
|
Equity Compensation
|
|
|
Exercise of Outstanding
|
|
Exercise Price of
|
|
Plans (Excluding
|
|
|
Options, Warrants and
|
|
Outstanding Options,
|
|
Securities Reflected in
|
|
|
Rights
|
|
Warrants and Rights
|
|
Column (a))
|
Plan Category
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
6,027,029
|
|
|
$
|
10.45
|
|
|
|
244,631
|
|
Equity compensation plans not approved by security holders
|
|
|
2,253,211
|
(1)
|
|
$
|
10.72
|
|
|
|
1,641,200
|
(2)
|
Total:
|
|
|
8,280,240
|
|
|
$
|
10.53
|
|
|
|
1,885,831
|
|
|
|
|
(1) |
|
Represents options issued pursuant to the Impax Laboratories,
Inc. Amended and Restated 2002 Equity Incentive Plan in excess
of the number of shares authorized for issuance under such plan.
See Note 15 to our consolidated audited financial
statements for information concerning our equity compensation
plans. |
(2) |
|
Includes 435,793 shares of common stock available for future
issuance under the Impax Laboratories, Inc. 2001 Non-Qualified
Employee Stock Purchase Plan. |
35
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read together with our consolidated financial statements and
accompanying notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing elsewhere in this Annual Report on
Form 10-K.
The selected consolidated financial data in this section are not
intended to replace our consolidated financial statements and
the accompanying notes. Our historical results are not
necessarily indicative of our future results.
The selected consolidated financial data set forth below are
derived from our consolidated financial statements. The
consolidated statements of operations data for the years ended
December 31, 2008, 2007 and 2006 and the consolidated
balance sheet data as of December 31, 2008 and 2007 are
derived from our audited consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K.
These audited consolidated financial statements include, in the
opinion of management, all adjustments necessary for the fair
presentation of our financial position and results of operations
for these periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in 000s, except per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
210,071
|
|
|
$
|
273,753
|
|
|
$
|
135,246
|
|
|
$
|
112,400
|
|
|
$
|
91,086
|
|
Research and development
|
|
|
59,809
|
|
|
|
39,992
|
|
|
|
29,635
|
|
|
|
26,095
|
|
|
|
23,069
|
|
Total operating expenses
|
|
|
114,179
|
|
|
|
89,590
|
|
|
|
74,245
|
|
|
|
59,588
|
|
|
|
76,301
|
|
Income (loss) from operations
|
|
|
3,923
|
|
|
|
76,507
|
|
|
|
(11,247
|
)
|
|
|
(5,623
|
)
|
|
|
(46,551
|
)
|
Net income (loss)
|
|
|
18,700
|
|
|
|
125,925
|
|
|
|
(12,044
|
)
|
|
|
(5,780
|
)
|
|
|
(48,825
|
)
|
Net income (loss) per share basic
|
|
$
|
0.32
|
|
|
$
|
2.14
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.84
|
)
|
Net income (loss) per share diluted
|
|
$
|
0.31
|
|
|
$
|
2.06
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in 000s)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
119,985
|
|
|
$
|
143,496
|
|
|
$
|
29,834
|
|
|
$
|
56,081
|
|
|
$
|
79,039
|
|
Working capital
|
|
|
126,639
|
|
|
|
110,107
|
|
|
|
81,919
|
|
|
|
55,796
|
|
|
|
76,151
|
|
Total assets
|
|
|
514,582
|
|
|
|
516,459
|
|
|
|
343,888
|
|
|
|
260,285
|
|
|
|
259,077
|
|
Long-term debt
|
|
|
5,990
|
|
|
|
20,510
|
|
|
|
89,603
|
|
|
|
80,285
|
|
|
|
102,047
|
|
Total liabilities
|
|
|
355,184
|
|
|
|
382,292
|
|
|
|
347,864
|
|
|
|
251,399
|
|
|
|
244,831
|
|
Accumulated deficit
|
|
|
(41,590
|
)
|
|
|
(60,290
|
)
|
|
|
(186,215
|
)
|
|
|
(174,171
|
)
|
|
|
(168,390
|
)
|
Total stockholders equity (deficit)
|
|
$
|
159,398
|
|
|
$
|
134,167
|
|
|
$
|
(3,976
|
)
|
|
$
|
8,886
|
|
|
$
|
14,246
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis, as well as other sections
in this Report, should be read in conjunction with the
Consolidated Financial Statements and related Notes to
Consolidated Financial Statements included elsewhere herein. All
references to years mean the relevant
12-month
period ended December 31.
Overview
We are a technology based, specialty pharmaceutical company
applying formulation and development expertise, as well as our
drug delivery technology, to the development, manufacture and
marketing of controlled-release and niche generics, in addition
to the development of branded products. As of February 24,
2009, we manufactured and marketed 70 generic pharmaceuticals,
which represent dosage variations of 24 different pharmaceutical
compounds through our own Global Pharmaceuticals division;
another 16 of our generic pharmaceuticals representing dosage
variations of four different pharmaceutical compounds are
marketed by our
36
strategic partners. We have 24 applications pending at the FDA,
including two that have been tentatively approved, and 40 other
products in various stages of development for which applications
have not yet been filed.
We sell our products both directly to drug wholesalers and
through alliance agreements with other unrelated third-party
pharmaceutical companies. In our Global Division, the four
principal revenue components are Global Product Sales, net,
representing revenue received from sales of the products we sell
directly; Rx Partner, representing revenue received from sales
of prescription drugs through our Rx Partners; OTC Partner,
representing revenue received from sales of OTC drugs sold by
our OTC Partners; and Research Partner, representing revenue
received under a joint development agreement with another
pharmaceutical company. A fifth revenue component since 2006,
within our Impax Division, is the Promotional Partner, which
represents revenue we receive for physician detailing sales
calls services promoting the products of other pharmaceutical
companies.
Global Product Sales, net. We recognize
revenue from direct sales in accordance with SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101), as revised
by Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB 104). Revenue from direct
product sales is recognized at the time title and risk of loss
pass to customers. Provisions for estimated discounts, rebates,
chargebacks, returns and other adjustments are provided for in
the period the related sales are recorded.
Rx Partner and OTC Partner. Each of our
alliance agreements involves multiple deliverables in the form
of products, services or licenses over extended periods.
Emerging Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21)
supplemented SAB 104 for accounting for such multiple
deliverable arrangements. With respect to our multiple
deliverable arrangements, we determine whether any or all of the
elements of the arrangement should be separated into individual
units of accounting under
EITF 00-21.
If separation into individual units of accounting is
appropriate, we recognize revenue for each deliverable when the
revenue recognition criteria specified by SAB 101 and
SAB 104 are achieved for that deliverable. If separation is
not appropriate, we recognize revenue (and related direct
manufacturing costs) over the estimated life of the agreement
utilizing a modified proportional performance method. Under this
method the amount recognized in the period of initial
recognition is based upon the number of years that have elapsed
under the agreement relative to the estimated life of the
particular agreement. The amount of revenue recognized in the
year of initial recognition is thus determined by multiplying
the total amount realized by a fraction, the numerator of which
is the then current year of the agreement and the denominator of
which is the total number of estimated agreement years. The
balance of the amount realized is recognized in equal amounts in
each of the remaining years. Thus, for example, with respect to
profit share or royalty payment reported by a strategic partner
during the third year of an agreement with an estimated life of
18 years,
3/18
of the amount reported is recognized in the year reported and
1/18
of the amount is recognized during each of the remaining
15 years. A fuller description of our analysis under
EITF 00-21
and the modified proportional performance method is set forth in
Item 8. Financial Statements and Supplementary
Data Note 2 to Consolidated Financial
Statements.
Research Partner. We have entered into a Joint
Development Agreement with another pharmaceutical company under
which we are collaborating in the development of five
dermatological products, including four generic products and one
brand product. Under this agreement, we received an upfront fee
with the potential to receive additional milestone payments upon
completion of specified clinical and regulatory milestones. To
the extent the products are commercialized, we are eligible for
royalties and profit sharing based on sales of the one brand
product. We recognize revenue from the upfront fee over a
48 month period on a straight-line basis. To extent
milestone payments are earned, they will be recognized as
revenue on a straight-line basis over the remaining revenue
recognition period. We estimate our expected period of
performance to provide research and development services to be
48 months, beginning in December 2008 when we received the
upfront payment and ending in November 2012.
Promotional Partner. We have entered into
promotional services agreements with other pharmaceutical
companies under which we provide physician detail sales calls to
promote certain of those companies branded drug products.
In exchange for our services we receive fixed sales force fees
and are eligible for contingent payments based upon the number
of prescriptions filled for the product. We recognize revenue
from sales force fees as the services are provided and the
performance obligations are met and from contingent payments at
the time they are earned.
37
The global economy is currently undergoing a period of
unprecedented volatility, and the future economic environment
may continue to be less favorable than that of recent years. It
is uncertain how long the recession that the U.S. economy
has entered will last. This has resulted in, and could lead to
further, reduced consumer spending related to healthcare in
general and pharmaceutical products in particular. While generic
drugs present a cost-effective alternative to higher-priced
branded products, our sales and those of our alliance agreement
partners could be negatively affected if patients forego
obtaining healthcare. In addition, reduced consumer spending may
force our competitors and us to decrease prices.
In addition, we have exposure to many different industries and
counterparties, including our partners under our alliance,
research and promotional services agreements, suppliers of raw
chemical materials, drug wholesalers and other customers that
may be unstable or may become unstable in the current economic
environment. Any such instability may affect these parties
ability to fulfill their respective contractual obligations to
us or cause them to limit or place burdensome conditions upon
future transactions with us.
Critical
Accounting Estimates
The preparation of our financial statements requires the use of
estimates and assumptions, based on complex judgments considered
reasonable when made, affecting the reported amounts of assets
and liabilities and disclosure of contingent assets and
contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. The most significant judgments are employed in
estimates used in determining values of tangible and intangible
assets, legal contingencies, tax assets and tax liabilities,
fair value of common stock purchase warrants, fair value of
share-based compensation expense, estimates used in applying our
revenue recognition policy, particularly those related to
deductions from gross Global Product Sales for chargebacks,
rebates, returns, shelf-stock adjustments and Medicaid payments,
and those related to the recognition periods under our alliance
agreements.
Although we believe that our estimates and assumptions are
reasonable when made, they are based upon information available
to us at the time they are made. We periodically review the
factors that influence our estimates and, if necessary, adjust
them. Although historically our estimates have generally been
reasonably accurate, due to the risks and uncertainties involved
in our business and evolving market conditions, and given the
subjective element of the estimates made, actual results may
differ from estimated results. This possibility may be greater
than normal during times of pronounced market volatility or
turmoil.
Consistent with industry practice, we record estimated
deductions for chargebacks, rebates, returns, shelf-stock, and
other pricing adjustments in the same period when revenue is
recognized. The objective of recording provisions for such
deductions at the time of sale is to provide a reasonable
estimate of the aggregate amount we expect to credit our
customers. Since arrangements giving rise to the various sales
credits are typically time driven (i.e. particular promotions
entitling customers who make purchases of our products during a
specific period of time, to certain levels of rebates or
chargebacks), these deductions represent important reductions of
the amounts those customers would otherwise owe us for their
purchases of those products. Customers typically process their
claims for deductions promptly, usually within the established
payment terms. We monitor actual credit memos issued to our
customers and compare such actual amounts to the estimated
provisions, in the aggregate, for each deduction category to
assess the reasonableness of the various reserves at each
quarterly balance sheet date. Differences between our estimated
provisions and actual credits issued have not been significant,
and are accounted for in the current period as a change in
estimate in accordance with GAAP. We do not have the ability to
specifically link any particular sales credit to an exact sales
transaction and since there have been no material differences,
we believe our systems and procedures are adequate for managing
our business. An event such as the failure to report a
particular promotion could result in a significant difference
between the amount accrued and the amount claimed by the
customer, and, while there have been none to date, we would
evaluate the particular events and factors giving rise to any
such significant difference in determining the appropriate
accounting.
Chargebacks. We have agreements establishing
contract prices for certain products with certain indirect
customers, such as managed care organizations, hospitals and
government agencies that purchase our products from drug
wholesalers. The contract prices are lower than the prices the
customer would otherwise pay to the wholesaler, and the
difference is referred to as a chargeback, which generally takes
the form of a credit issued by us to reduce the
38
gross sales amount we invoiced to our wholesaler. A provision
for chargeback deductions is estimated and recorded at the time
we ship the products to the wholesalers. The primary factors we
consider when estimating the provision for chargebacks are the
average historical chargeback credits given, the mix of products
shipped, and the amount of inventory on hand at the three major
drug wholesalers with which we do business. We monitor aggregate
actual chargebacks granted and compare them to the estimated
provision for chargebacks to assess the reasonableness of the
chargeback reserve at each quarterly balance sheet date.
The following table is a roll-forward of the activity in the
chargeback reserve for the years ended December 31, 2008,
2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in 000s)
|
|
|
Chargeback reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,977
|
|
|
$
|
4,401
|
|
|
$
|
4,438
|
|
Provision recorded during the period
|
|
|
50,144
|
|
|
|
33,972
|
|
|
|
26,664
|
|
Credits issued during the period
|
|
|
(49,065
|
)
|
|
|
(35,396
|
)
|
|
|
(26,701
|
)
|
Ending balance
|
|
$
|
4,056
|
|
|
$
|
2,977
|
|
|
$
|
4,401
|
|
Provision as a percent of Global product sales, gross
|
|
|
28
|
%
|
|
|
23
|
%
|
|
|
21
|
%
|
The increase in the provision for chargebacks from 2006 through
2008 was the result of increasing price competition for generic
drugs sold through our Global Divisions Global Products
sales channel. Reductions in the selling prices of our generic
products sold through this channel frequently take the form of a
larger chargeback credit issued to a wholesaler. As pricing
competition increases, the difference between the contract
prices we negotiate with indirect customers and the wholesaler
prices will increase, thereby resulting in larger chargebacks.
Rebates. We maintain various rebate programs
with our Global Division Global Products sales channel
customers in an effort to maintain a competitive position in the
marketplace and to promote sales and customer loyalty. The
rebates generally take the form of a credit memo to reduce the
invoiced gross sales amount charged to a customer for products
shipped. A provision for rebate deductions is estimated and
recorded at the time of product shipment. The provision for
rebates is based upon historical experience of aggregate credits
issued compared with payments made, the historical relationship
of rebates as a percentage of total Global product sales, gross,
and the contract terms and conditions of the various rebate
programs in effect at the time of shipment. We monitor aggregate
actual rebates granted and compare them to the estimated
provision for rebates to assess the reasonableness of the rebate
reserve at each quarterly balance sheet date.
The following table is a roll-forward of the activity in the
rebate reserve for the years December 31, 2008, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in 000s)
|
|
|
Rebate reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,603
|
|
|
$
|
3,124
|
|
|
$
|
5,391
|
|
Provision recorded during the period
|
|
|
20,361
|
|
|
|
15,968
|
|
|
|
13,856
|
|
Credits issued during the period
|
|
|
(19,164
|
)
|
|
|
(15,489
|
)
|
|
|
(16,123
|
)
|
Ending balance
|
|
$
|
4,800
|
|
|
$
|
3,603
|
|
|
$
|
3,124
|
|
Provision as a percent of Global product sales, gross
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
The provision for rebates, as a percent of Global product sales,
gross, has been consistent for each of the three years ended
December 31, 2008. Our historical experience for aggregate
rebates paid has been more consistent than our experience for
other sales deductions because the terms of the various rebate
programs we offer to our customers are less susceptible to
market forces (in the aggregate), and the terms and conditions
of the various rebate programs offered to customers have not
changed significantly over time.
39
Returns. We allow our customers to return
product (i) if approved by authorized personnel in writing
or by telephone with the lot number and expiration date
accompanying any request and (ii) if such products are
returned within six months prior to, or until 12 months
following, the products expiration date. We estimate a
provision for product returns as a percentage of gross sales
based upon historical experience of Global Division Global
Product sales. The sales return reserve is estimated using a
historical lag period (the time between the month of sale and
the month of return) and return rates, adjusted by estimates of
the future return rates based on various assumptions, which may
include changes to internal policies and procedures, changes in
business practices, and commercial terms with customers,
competitive position of each product, amount of inventory in the
wholesaler supply chain, the introduction of new products, and
changes in market sales information. We also consider other
factors, including levels of inventory in the distribution
channel, significant market changes which may impact future
expected returns, and actual product returns and may record
additional provisions for specific returns we believe are not
covered by the historical rates. We monitor aggregate actual
returns on a quarterly basis and may record specific provisions
for returns we believe are not covered by historical percentages.
The following table is a roll-forward of the activity in the
accrued product returns for the years ended December 31,
2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in 000s)
|
|
|
Accrued product returns
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
14,261
|
|
|
$
|
12,903
|
|
|
$
|
10,625
|
|
Provision related to sales recorded in the period
|
|
|
5,719
|
|
|
|
5,459
|
|
|
|
7,220
|
|
Credits recorded in the period
|
|
|
(6,305
|
)
|
|
|
(4,101
|
)
|
|
|
(4,942
|
)
|
Ending balance
|
|
$
|
13,675
|
|
|
$
|
14,261
|
|
|
$
|
12,903
|
|
Provision as a percent of Global product sales, gross
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
6
|
%
|
During 2006 we experienced a higher level of returns related to
our generic drug products that are not bioequivalent (sometimes
referred to as non-AB-rated) to the associated brand
drug, driving the increase in the provision for returns recorded
in that year. Sales of our non-AB-rated products declined 74%
and 29% from 2007 to 2008 and from 2006 to 2007, respectively,
as a result of our decision to begin to discontinue the sale of
non-AB-rated
products, thereby having less impact on the overall returns
percentage in 2007, and continuing through 2008. In addition,
the increase in the return percentage rate during 2006 was
affected by a decline from 2005 to 2006 in sales of our generic
Wellbutrin®
SR 200mg tablets, which have a relatively low return rate.
Medicaid. As required by law, we provide a
rebate payment on drugs dispensed under the Medicaid program. We
determine our estimate of Medicaid rebate accrual primarily
based on historical experience of claims submitted by the
various states and any new information regarding changes in the
Medicaid program which may impact our estimate of Medicaid
rebates. In determining the appropriate accrual amount, we
consider historical payment rates and processing lag for
outstanding claims and payments. We record estimates for
Medicaid payments as a deduction from gross sales, with
corresponding adjustments to accrued liabilities. The accrual
for Medicaid payments totaled $584,000 and $566,000 as of
December 31, 2008 and 2007, respectively. The Medicare
Part D prescription drug benefit, which went into effect on
January 1, 2006, had the effect of lowering our overall
aggregate Medicaid payments and, as a result, the Medicaid
payments reserve was reduced by $2.1 million in 2006. After
the January 1, 2006 transition from Medicaid to Medicare
Part D, Medicaid payments have been less than 0.5% of
Global product sales, gross. Differences between our estimated
and actual payments made have been de minimis.
Shelf-Stock Adjustments. When, based on market
conditions, we reduce the selling price of a product, we may
choose to issue a shelf-stock adjustment credit to customers,
the amount of which is typically derived from the level of a
specific product held by the customer, who agrees to continue to
purchase the product from us. Such a credit is referred to as a
shelf-stock adjustment, which is the difference between the
invoiced gross sales price and the revised lower gross sales
price, multiplied by an estimate of the number of product units
in the customers inventory. The primary factors we
consider when estimating a reserve for a shelf-stock adjustment
include the per unit credit amount and an estimate of the level
of inventory held by the customer. The accrued reserve for shelf-
40
stock adjustments totaled $572,000 and $384,000 as of
December 31, 2008 and 2007, respectively. Differences
between our estimated and actual credits issued for shelf stock
adjustments have been de minimis.
Estimated Lives of Alliance Agreements. The
revenue we receive under our alliance agreements is not subject
to adjustment for estimated discounts, rebates, chargebacks,
returns and similar adjustments, as such adjustments have
already been reflected in the amounts we receive from our
alliance partners. However, because we recognize the revenue we
receive under our alliance agreements over the estimated life of
the related agreement or our expected performance utilizing a
modified proportional performance method, we are required to
estimate the recognition period under each such agreement in
order to determine the amount of revenue to be recognized in the
current period. Sometimes this estimate is based solely on the
fixed term of the particular alliance agreement. In other cases
the estimate may be based on more subjective factors as noted in
the following paragraphs. While changes to the estimated
recognition periods have been infrequent, such changes, should
they occur, may have a significant impact on our financial
statements.
The term of the Teva Agreement, for example, is 10 years
following the launch of the last product subject to the
agreement. Since product launch is dependent upon FDA approval
of the product, we are required to estimate when that approval
is likely to occur in order to estimate the life of the Teva
Agreement. We currently estimate its life to be 18 years,
based upon the June 2001 inception of the agreement and our
estimate that the last product will be approved by the FDA in
2009. If the timing of FDA approval for the last product is
different from our estimate, the revenue recognition and product
manufacturing amortization period will change on a prospective
basis at the time such event occurs. While no such change in the
estimated life of the Teva Agreement has occurred to date, if we
were to conclude that significantly more time will be required
to obtain such approval, then we would increase our estimate of
the recognition period under the agreement, resulting in a
lesser amount of revenue and related costs in current and future
periods.
We have changed our estimate of the life of the DAVA Agreement,
resulting in the recognition of a substantially greater portion
of the revenue thereunder in 2007 and 2008 than we would have
recognized under our original estimate. When we entered into the
DAVA Agreement in November 2005, we estimated its life at
10 years, which was the fixed term of the agreement, and
began recognizing revenue thereunder over 10 years. In
March 2007, in connection with the settlement of a patent
infringement lawsuit against us, we agreed to stop manufacturing
and selling the product covered by the DAVA Agreement in January
2008. While the settlement permits us to resume manufacture and
sale of the product in 2013 or earlier under certain
circumstances and the DAVA Agreement will remain effective
through November 2015, we concluded that if any of the
contingent events occur to permit us to resume sales of the
product, the same events will result in such a highly
competitive generic marketplace to make it unlikely we will find
it economically favorable to devote manufacturing resources to
the resumption of sales of our product. As a result, we
concluded the economic life of the DAVA Agreement, and therefore
our expected period of performance, ended in January 2008.
Accordingly, on March 30, 2007, the effective date of the
patent litigation settlement, we adjusted the period of revenue
recognition and product manufacturing costs amortization under
the DAVA Agreement from 10 years to 27 months (i.e.
November 2005 through January 2008). As the terms of the patent
litigation settlement did not exist and could not have been
known when the life of the DAVA Agreement was originally
estimated, the change in the recognition period has been applied
prospectively as an adjustment in the period of change. The
change in the revenue recognition period for the DAVA Agreement
had the effect of increasing revenue recognized under the DAVA
Agreement by $17.1 million and $93.9 million for the
years ended December 31, 2008 and 2007, respectively.
Third-Party Research and Development
Agreements. We use vendors, including
universities and independent research companies, to assist in
our research and development activities. These vendors provide a
range of research and development services to us, including
clinical and bioequivalent studies. We generally sign agreements
with these vendors which establish the terms of each study
performed by them, including, among other things, the technical
specifications of the study, the payment schedule, and timing of
work to be performed. Payments are generally earned by
third-party researchers either upon the achievement of a
milestone, or on a pre-determined date, as specified in each
study agreement. We account for third-party research and
development expenses as they are incurred according to the terms
and conditions of the respective agreement for each study
performed, with an accrual provided for operating expense
incurred but not yet billed to us at each balance sheet date. We
monitor aggregate actual payments and compare them to the
estimated provisions to assess the reasonableness of the
41
accrued expense balance at each quarterly balance sheet date.
Differences between our estimated and actual payments made have
been de minimis.
Share-Based Compensation. We account for
stock-based employee compensation arrangements in accordance
with provisions of SFAS 123(R), Share-Based
Payments, which we adopted on January 1, 2006 using the
modified prospective method. Under this method, compensation
expense is recognized on a straight-line basis over the
remaining vesting period of any outstanding unvested options at
the adoption date and any new options granted after the adoption
date. Prior periods are not restated under this method. Prior to
adoption of SFAS 123(R), we recognized compensation expense
related to stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). Under APB 25,
compensation cost for stock options, if any, was measured as the
excess of the quoted market price of the common stock at the
date of grant over the amount an employee must pay to acquire
the stock.
Income Taxes. We are subject to
U.S. federal, state and local income taxes and Taiwan
income taxes. We create a deferred tax asset when we have
temporary differences between the results for financial
reporting purposes and tax reporting purposes. Prior to
June 30, 2007, we recorded a valuation allowance for all of
our deferred tax assets since up and until that time, it was
more likely than not that we would be unable to realize those
assets primarily due to our history of operating losses. At
June 30, 2007, due primarily to the successful sales of
generic
OxyContin®
under a license, we determined that it would be more likely than
not that we would be able to realize these assets and the
valuation reserve was removed. This resulted in the recognition
of a substantial tax benefit in the second quarter of 2007. We
have determined that these assets remain realizable primarily
due to the amount of taxable income which has been or we expect
will be generated to utilize these amounts. In 2008, we recorded
a valuation allowance related to the net operating losses
generated by our subsidiary. We determined that it was more
likely than not that the results of future operations of that
subsidiary will not generate sufficient taxable income to
realize the deferred tax assets related to its net operating
loss carryforward.
Fair Value of Financial Instruments. The
carrying values of our cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued
expenses approximate their fair values due to their short-term
nature. We estimate the fair value of our fixed-rate long-term
debt to be $12.4 million, $69.9 million and
$73.3 million at December 31, 2008, 2007 and 2006,
respectively.
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 liability. In
accordance with SFAS No. 5, Accounting for
Contingencies (SFAS 5), we record accruals
for such loss contingencies when it is probable a liability will
be incurred and the amount of loss can be reasonably estimated.
We, in accordance with SFAS 5, do not recognize gain
contingencies until realized. A discussion of contingencies is
included in Notes 19 and 20 to Consolidated Financial
Statements.
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142), rather than
recording periodic amortization of goodwill, goodwill is subject
to an annual assessment for impairment by applying a
fair-value-based test. According to SFAS 142, if the fair
value of the reporting unit exceeds the reporting units
carrying value, including goodwill, then goodwill is considered
not impaired, making further analysis not required. We consider
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 that the carrying value of goodwill was
not impaired as of December 31, 2008 and 2007, as the fair
value of the Global Division exceeded its carrying value at each
date. We perform our annual goodwill impairment test in the
fourth quarter of each year. We estimate the fair value of the
Global Division using a discounted cash flow model for both the
reporting unit and the enterprise, as well as earnings and
revenue multiples per common share outstanding for enterprise
fair value. In addition, on a quarterly basis, we perform a
review of our business operations to determine whether events or
changes in circumstances have occurred that could have a
material adverse effect on the estimated fair value of the
reporting unit, and thus indicate a potential impairment of the
goodwill carrying value. If such events or changes in
circumstances were deemed to have occurred, we would perform an
interim impairment analysis, which may include the preparation
of a discounted cash flow model, or consultation with one or
more valuation specialists, to analyze the impact, if any, on
42
our assessment of the reporting units fair value. We have
not to date deemed there to be any significant adverse changes
in the legal, regulatory or business environment in which we
conduct our operations.
Allowance for Doubtful Accounts. We maintain
allowances for doubtful accounts for estimated losses resulting
from amounts deemed to be uncollectible from our customers;
these allowances are for specific amounts on certain accounts.
Results
of Operations
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Total
Revenues
Total revenues for the year ended December 31, 2008, were
$210.1 million, a decrease of 23% over the same period in
2007. Global product sales, net, were $98.6 million, an
increase of 12% primarily due to sales of our fenofibrate
products, the generic versions of
Lofibra®
capsules, a cholesterol-lowering drug. Our increased sales of
this product in 2008 resulted from a general increase in demand
for generic versions of cholesterol-lowering drugs combined with
the September 2008 cessation of U.S. sales of fenofibrate
products by our principal competitor for such sales. Rx Partner
revenues were $81.8 million, down 49%, primarily
attributable to reduced sales of generic
OxyContin®
and our generic
Wellbutrin®
XL 300mg. While the reduction of revenue for generic
Wellbutrin®
XL 300mg resulted from increased marketplace competition, the
decrease in our sales of generic
OxyContin®
resulted from a litigation settlement agreement. In this regard,
our generic
OxyContin®
product was one of only two generic versions of
OxyContin®
in the marketplace during the second and fourth quarters of 2007
and in January 2008, when we ceased further sales of this
product. The year-over-year comparison of Rx Partner revenue is
principally impacted by the absence in the current year of a
$93.9 million increase in revenue recognized from sales of
generic
OxyContin®
under the DAVA Agreement during the year ended December 31,
2007 related to the change in the recognition period resulting
from the 2007 settlement of patent litigation. The cessation of
the sale of our generic version of
OxyContin®,
and the lower revenue in the year ended December 31, 2008
as compared to the same period in 2007, has materially affected
the Rx Partner revenues for the year ended December 31,
2008 (as discussed above), and the loss of this revenue may
materially affect our Rx Partner revenue (and therefore our
total revenue) and resulting gross profit in the future. OTC
Partner revenues were $15.9 million, an increase of 34%,
primarily attributable to higher demand for seasonal allergy
products. Research Partner revenues were $0.8 million, and
we had no such revenues during 2007. Promotional Partner
revenues were $12.9 million with nominal change from the
same period in 2007.
Cost of
Revenues
Cost of revenues was $92.0 million for the year ended
December 31, 2008, a decrease of 15% primarily due to
reduced amortization of deferred manufacturing costs with the
completion of sales of generic
OxyContin®
in 2008. The year ended December 31, 2007, included a
$20.7 million increase in the amortization of deferred
product costs under the DAVA Agreement related to the change in
the amortization period.
Gross
Profit
Gross profit for the year ended December 31, 2008 was
$118.1 million or approximately 56% of total revenues, as
compared to 61% of total revenue in the prior period. The
decrease in profit margin was due principally to sales of our
generic versions of
Oxycontin®
during 2008 and 2007. The year ended December 31, 2007
included a $73.2 million increase in gross profit related
to the change in the recognition period for the DAVA Agreement.
The cessation of the sale of our generic version of
OxyContin®
has materially affected the gross profit for the year ended
December 31, 2008 (as discussed above), and may materially
affect our gross profit in the future.
Research
and Development Expenses
Total research and development expenses for the year ended
December 31, 2008 were $59.8 million, an increase of
50%. Generic project activity increased $12.3 million
primarily due to increased spending on bioequivalence studies of
$3.0 million, and additional research personnel of
$2.6 million, related to six new and 23 pending ANDA
filings, higher non-litigation related patent activities of
$1.0 million. Expenses related to our
43
brand-product pipeline increased $7.5 million including an
increase of $2.8 million related to higher spending on
additional research personnel.
Patent
Litigation Expenses
Patent litigation expenses for the year ended December 31,
2008 and 2007 were $6.5 million and $10.0 million,
respectively, a decrease of $3.5 million, principally
resulting from lower overall expenses as a result of the
settlement of two litigation matters and the receipt of
$1.0 million in reimbursement of legal fees in connection
with one of the settlements during 2008.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses for the year ended
December 31, 2008 were $47.9 million, a 21% increase
attributable to an increase in professional fees of
$2.2 million related to the examination and review of our
financial statements for the years 2004 through the end of 2008,
as well as the preparation of our registration statement on
Form 10, $2.9 million increase in salary and benefits
related expenses primarily driven by the addition of several
executive level personnel, $1.4 million in severance
expense related to the separation of a former employee, and
$1.1 million in higher consulting expenses associated with
strategic and operational management analyses.
Other
income (expense), net
Other income (expense), net was $21.6 million for the year
ended December 31, 2008 and included $25.0 million
received under an antitrust claim settlement, partially offset
by the accrual of $3.5 million for litigation settlement
charges related to the settlement of the 2004 securities class
actions in the U.S. District Court for the Northern
District of California.
Interest
Income
Interest income was $0.5 million lower for the year ended
December 31, 2008, primarily due to lower average cash
balances due to the repurchase of a portion of our
3.5% Debentures and the repayment of the Cathay Bank term
loans.
Interest
Expense
Interest expense was $1.5 million lower for the year ended
December 31, 2008, due to reduced amounts of average debt
outstanding, including the Cathay Bank term loans which were
paid-in full during May 2008 and the repurchase of our
3.5% Debentures.
Income
Taxes
For the year ended December 31, 2008, we recorded a tax
provision of $11.0 million for federal and state income
taxes, and an accrual for uncertain tax positions of
$1.1 million. For the year ended December 31, 2007, we
recorded a benefit of $48.8 million which included the
reversal of the deferred tax asset valuation allowance of
$81.5 million offset by an accrual of $6.1 million for
uncertain tax positions. The total amount of unrecognized tax
benefits was $7.5 million as of December 31, 2008. The
tax provision for the year ended December 31, 2008 included
the effect of the research and development tax credit, which was
reinstated on October 3, 2008. The current year effective
tax rate of 37.0% was lower than the 42.4% prior year effective
tax rate (before the reversal of the deferred tax asset
valuation allowance), resulting principally from higher research
and development credit related to increased levels of
expenditures in both generic and brand research and development
activities.
Net
Income
Net income for the year ended December 31, 2008 was
$18.7 million as compared to net income of
$125.9 million in 2007, primarily due to the factors
described above.
44
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Total
Revenues
Total revenues for the year ended December 31, 2007 were
$273.8 million, an increase of 102% over 2006, driven
primarily by Rx Partner and Global Product sales.
Global product sales, net were $88.0 million, an increase
of 13% primarily due to the launch of our generic version of
Colestid®
tablets and increased sales of our fenofibrate capsule product,
the generic version of
Lofibra®
capsules, a cholesterol-lowering drug of which ours was the only
generic version in a market of increasing demand for drugs of
this type. These increases were partially offset by lower sales
of the generic versions of
Brethine®
and
Minocin®
due to increasing price competition.
Rx Partner revenues were $161.1 million up more than 300%,
primarily attributable to sales of our generic version of
OxyContin®.
Under a patent litigation settlement agreement, our product was
one of only two generic version of
OxyContin®
in the marketplace during the second and fourth quarters of 2007
and in January 2008, when we ceased further sales of this
product. As a result, we concluded the economic life of the DAVA
Agreement, and therefore our expected period of performance,
would end in January 2008. Accordingly, on March 30, 2007,
the effective date of the settlement, we adjusted the period of
amortization for revenue recognition and product manufacturing
costs under the DAVA Agreement from 10 years to
27 months ( i.e. November 2005 through January
2008). The change in the revenue recognition period for the DAVA
Agreement had the effect of increasing revenue recognized under
the DAVA Agreement by $93.9 million for the year ended
December 31, 2007. Additionally, higher sales of our new
generic versions of
Ditropan®
XL 5 mg, 10 mg and 15 mg tablets and
Wellbutrin®
XL 300 mg were partially offset by a decline in sales of
generic
Wellbutrin®
SR 100 mg & 150 mg tablets, and generic
Prilosec®
10 mg and 20 mg capsules due to a declining market
which contributed to both lower volume and pricing as
competitors sought to maintain or grow market share.
Revenues under the Teva Agreement increased to
$42.5 million, as compared to $33.9 million in 2006,
an increase of over 25%, primarily due to generic
Wellbutrin®
XL 300 mg, sales of which did not begin until December 2006.
OTC Partner revenues declined $1.9 million to
$11.9 million due to lower demand for our seasonal allergy
products.
Promotional Partner revenues were $12.8 million in 2007,
double that of 2006 due to the fact that we did not begin
providing promotional services until mid-2006.
Cost of
Revenues
Cost of revenues was $107.7 million for the year ended
December 31, 2007, an increase of 49% primarily as a result
of the increases in product sales as described above, including
an increase of $20.7 million for the amortization of
deferred product manufacturing costs under the DAVA Agreement,
related to the change in the amortization period. This amount
includes the of cost of products sold under our Teva Agreement
in the amount of $20.7 million, an increase of
$7.8 million from 2006, primarily due to the launch of our
300 mg generic version of
Wellbutrin®
XL. It also includes $10.8 million of costs associated with
the Promotional Partner revenues.
Gross
Profit
Gross profit for the year ended December 31, 2007 was
$166.1 million (including $73.2 million under the DAVA
Agreement related to the change in the recognition period), or
approximately 61% of total revenues, compared with
$63.0 million, or 47% of total revenue in 2006. Of the
total increase of 14 percentage points, nine percentage
points resulted from the relatively high margins associated with
sales of generic
OxyContin®
and the balance resulted from operational efficiencies.
Research
and Development Expenses
Total research and development expenses for the year ended
December 31, 2007 were $40.0 million, an increase of
35%. Generic project activity increased to $31.2 million, a
28% increase primarily due to increased
45
spending on bioequivalent studies related to submission of 13
new ANDA filings in 2007 as compared to seven filings in 2006.
Investments in our brand product pipeline in 2007 were
$8.8 million, an increase of 66% related to higher spending
on clinical trials.
Patent
Litigation Expenses
Patent litigation expenses for the years ended December 31,
2007 and 2006 were $10.0 million and $9.7 million,
respectively, an increase of $0.3 million, due to higher
expenses related to our generic Effexor
XR®
litigation.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses for the year ended
December 31, 2007 were $39.6 million, a 22% increase,
primarily driven by $1.7 million in professional fees
related to legal, accounting, and audit services and
$3.9 million in incentive compensation.
Litigation
Settlement and Related Expenses
There were no material litigation settlement expenses for the
year ended December 31, 2007, as compared with
$2.6 million for interest expense and legal fees related to
a litigation settlement in 2006 of a suit brought against us in
2003 by Solvay Pharmaceuticals, Inc.
Interest
Income
Interest Income for the year ended December 31, 2007 was
$4.8 million, a $2.5 million increase over 2006,
primarily due to higher cash balances as a result of the
increase in net sales.
Interest
Expense
Interest expense for the year ended December 31, 2007 was
$4.1 million, a $0.3 million increase over 2006, due
to higher amounts of average debt outstanding.
Income
Taxes
Income tax benefit for the year ended December 31, 2007 was
$48.8 million with an effective tax rate of 42.4% before
the change in valuation allowance. There was a nominal income
tax expense in 2006 as we reported a loss from operations.
Net
Income (Loss)
Net income for the year ended December 31, 2007 was
$125.9 million as compared to a net loss of
$12.0 million in 2006, primarily due to the factors
described above.
Liquidity
and Capital Resources
We have historically funded our operations with the proceeds
from the sale of debt and equity securities, and more recently,
with cash from operations. Currently, our primary source of
liquidity is cash from operations, consisting of the proceeds
from the sales of our products. We expect to incur significant
operating expenses, including expanded research and development
activities and patent litigation expenses, for the foreseeable
future. We also anticipate incurring capital expenditures of
approximately $17 million during the next 12 months,
of which $7 million relates to our plant capacity expansion
in Taiwan, with the balance principally for continued
improvements and expansion of our research and development and
manufacturing facilities in California and our packaging and
distribution facilities in Pennsylvania. We believe our existing
cash and cash equivalents and short-term investment balances,
together with cash generated from operations, and our bank
revolving line of credit, will be sufficient to meet our
financing requirements through the next 12 months. We may,
however, seek additional financing through alliance agreements
or the equity or debt capital markets to fund the planned
capital expenditures, our research and development plans, and
potential revenue shortfalls due to delays in new product
introductions.
46
Cash
and Cash Equivalents
At December 31, 2008, we had $69.3 million in cash and
cash equivalents, an increase of $31.8 million as compared
to December 31, 2007. At December 31, 2007, we had
$37.5 million in cash and cash equivalents, an increase of
$31.1 million as compared to December 31, 2006.
The increase in cash and cash equivalents during 2008 was driven
by cash flow from operating activities, the receipt of the
$40.0 million upfront payment received in connection with
the Joint Development Agreement with Medicis Pharmaceutical
Corporation and the receipt of $25.0 million from the
settlement of antitrust litigation.
Cash
Flows
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007.
Net cash provided by operating activities for the year ended
December 31, 2008 was $64.6 million, a decrease of
$54.5 million from the prior year period.
The decrease in net cash provided by operating activities
resulted from, among other items noted below, a
$107.2 million reduction in net income, of which such
amount was $18.7 million for the year ended
December 31, 2008 as compared to $125.9 million for
the same period in the prior year. Additionally, the change in
revenue deferrals of $98.9 million, less the change in
deferred product manufacturing cost of $27.7 million,
resulted in a $71.2 million net decrease of deferrals
related to our alliance agreements, offset by a
$55.8 million increase in revenue recognized in excess of
product manufacturing costs amortized under our alliance
agreements. The net decrease of deferrals related to our
alliance agreements was principally due to lower sales of our
generic
OxyContin®
and generic Wellbutrin
XL®
products, marketed under our Rx Partner alliance agreements.
These items were partially offset by the absence of certain
items in the current period as compared to the prior period
including an $81.5 million reversal of the valuation
allowance on deferred tax assets and a $10.5 million
deduction for the tax benefit related to the exercise of
employee stock options (which for the year ended
December 31, 2007, was classified as a source of cash flows
from financing activities under GAAP), offset by a
$6.0 million provision for uncertain tax provisions in the
prior year period.
Other items contributing to the decrease in net cash provided by
operating activities include a $12.8 million change in
deferred income taxes resulting principally from a lower
deferred tax benefit corresponding to the lower net deferrals
related to our alliance agreements noted above; a
$11.3 million increase in inventory; a $8.4 million
decrease in accounts payable and accrued expenses; and a
$4.7 million decrease in the provision for uncertain tax
positions, partially offset by lower aggregate exclusivity
period fee payments of $6.2 million; a $4.3 million
increase in share-based compensation operating expense; and a
$3.5 million increase in accrued litigation settlement
expense.
Net cash provided by investing activities for the year ended
December 31, 2008, amounted to $32.3 million, an
increase of $130.6 million as compared to the prior year
period, with the change primarily due to $137.6 million net
liquidations of short-term investments (related to the
repurchase of our 3.5% Debentures see the
discussion of net cash used in financing activities below).
Purchases of property, plant and equipment for the year ended
December 31, 2008 amounted to $25.9 million as
compared to $18.8 million for the prior year period. The
2008 purchases of property, plant and equipment, include capital
expenditures of approximately $15.7 million (of a total
estimated investment of $25.0 million) for our new Taiwan
manufacturing facility, which is expected to be completed during
2009. In addition, we expect continued investment in facilities,
equipment, and information technology projects supporting our
quality initiatives to ensure we have appropriate levels of
technology infrastructure to manage and grow our global
business. We estimate research and development and patent
litigation expenses to be approximately $64.0 million and
$10.0 million, respectively, for the next 12 months.
Net cash used in financing activities for the year ended
December 31, 2008 was approximately $65.1 million
related to the repayment of long-term debt. In this regard,
during August and September 2008, at the request of the holders,
we made aggregate cash payments of $59.9 million to
repurchase, at a discount, an aggregate of $62.25 million
in principal face value of our 3.5% Debentures. Proceeds to
fund the repurchase of the 3.5% Debentures were generated
from the liquidation of our short-term investments. The
remaining $12.75 million principal
47
amount of the 3.5% Debentures are subject to repurchase by
us at 100% of the face value on June 15, 2009 at the option
of the holders. Additionally, during 2008, aggregate payments of
$5.2 million (which includes $5.1 million in early
repayments, without penalty) were made for our Cathay Bank term
loans, resulting in the repayment in full of both the term
loans. Net cash provided by financing activities for the year
ended December 31, 2007 was approximately
$10.3 million, principally resulting from the
$10.5 million tax benefit related to the exercise of
employee stock options.
Year
Ended December 31, 2007 Compared to the Year Ended
December 31, 2006.
Net cash provided by operating activities for the year ended
December 31, 2007 was $119.0 million, an increase of
$124.8 million from the prior year period. This increase
was primarily attributable to net income generated by the
business principally due to sales of generic
OxyContin®
and net deferred revenue from Rx Partners of approximately
$55.4 million. In addition, $18.2 million in payments
to Teva as exclusivity fees regarding the launch of generic
Wellbutrin®
XL 300 mg was partially offset by a $9.9 million
increase in cash receipts from trade accounts receivables, lower
inventories of $6.5 million and other working capital items.
Net cash used in investing activities for the year ended
December 31, 2007 were purchases of short-term investments,
net of sales of $98.3 million, an increase of
$54.6 million as compared to the prior period . This
reflects our decision to invest the excess portion of our cash
balances into higher yielding short term investments. Our
capital expenditures for the year ended December 31, 2007
were $18.8 million as compared to $21.5 million for
the same period in 2006. The 2007 expenditures included
$0.4 million as part of our total estimated investment of
$25.0 million for our new Taiwan manufacturing facility
which is expected to be completed during 2009.
Net cash used by financing activities for the year ended
December 31, 2007 was approximately $10.3 million,
principally resulting from the $10.5 million tax benefit
related to the exercise of employee stock options, and
$0.1 million net proceeds from exercise of stock options
and warrants and purchases under the ESPP, offset by
$0.3 million used for repayment of long-term debt. Cash
flows from financing activities for the year ended
December 31, 2006, consisted of $0.1 million net
proceeds from exercise of stock options and warrants and
purchases under the ESPP, fully offset by $0.1 million used
for repayment of long-term debt.
Outstanding
Debt Obligations
Senior
Lenders; Wachovia Bank
In December 2005, we entered into a three year credit agreement
with Wachovia, which provides for a $35.0 million revolving
credit facility intended for working capital and general
corporate purposes. The revolving credit facility is
collateralized by eligible accounts receivable, inventory, and
machinery and equipment, subject to limitations and other terms.
The interest rate for the revolving credit facility is either
the prime rate, or LIBOR plus a margin ranging from 1.50% to
2.25% based upon terms and conditions, at our option.
The credit agreement contains various financial covenants, the
most significant of which include a fixed charge coverage
ratio and a capital expenditure limitation. The fixed
charge coverage ratio requires EBITDA less cash paid for taxes,
dividends, and certain capital expenditures, to be not less than
1.25 to 1.00 as compared to scheduled principal payments coming
due in the next 12 months plus cash interest paid during
the applicable period. We were limited to capital expenditures
of no more than $50 million for the period from
January 1, 2005 to December 31, 2006; $25 million
for the period from January 1, 2007 to December 31,
2007; and $34 million for the period from January 1,
2008 to December 31, 2008. The credit agreement also
provides for certain information reporting covenants, including
a requirement to provide certain periodic financial information.
On October 14, 2008, we entered into a first amendment to
the credit agreement with Wachovia, in which Wachovia waived our
failure to (i) timely deliver annual financial statements
for the years ended December 31, 2004, December 31,
2005, December 31, 2006 and December 31, 2007 and
interim financial statements for each period ending on or after
December 31, 2005, and (ii) comply with the fixed
charge coverage ratio at June 30, 2006. In addition, we
agreed to an increase in the unused line fee from 25 basis
points per annum to 50 basis points per annum. During the
years ended December 31, 2008, 2007 and 2006, we paid
$108,000, $88,000 and $93,000, respectively, for unused line
fees to Wachovia.
48
On December 31, 2008, we entered into a second amendment to
the credit agreement with Wachovia, which extended the
termination date from December 31, 2008 to March 31,
2009. All other material terms of the credit agreement remain in
full force and effect.
At December 31, 2008, we were in compliance with the
various financial and information reporting covenants contained
in the credit agreement. There were no amounts outstanding under
the revolving credit facility as of December 31, 2008, 2007
and 2006, respectively.
3.5% Debentures
On June, 27, 2005, we issued $75.0 million principal amount
of 3.5% Debentures to a qualified institutional buyer. The
3.5% Debentures are our senior subordinated, unsecured
obligations that mature on June 15, 2012 and may not be
redeemed by us prior to maturity. Holders also have the right to
require us to repurchase all or any portion of the
3.5% Debentures on June 15, 2009. We used the net
proceeds from the sale of the 3.5% Debentures together with
existing cash to repay our $95.0 million
1.25% Convertible Senior Subordinated Debentures due 2024
(1.25% Debentures), which, together with
accrued interest thereon, had become due and payable following
our default under the terms of the indenture governing such
1.25% Debentures. Our default under the
1.25% Debentures resulted from our failure to file our 2004
annual report on
Form 10-K,
which constituted a breach of a covenant of the indenture
governing the 1.25% Debentures.
The 3.5% Debentures rank pari passu with our accounts
payable and other liabilities and are subordinate to certain
senior indebtedness, including our credit agreement with
Wachovia. The indenture governing the 3.5% Debentures
limits the aggregate amount of our indebtedness ranking senior
to or pari passu with the 3.5% Debentures to the greater of
(i) $50 million or (ii) as of any date, four
times our EBITDA for the immediately preceding 12 month
period for which public financial information is available. The
3.5% Debentures bear interest at the annual rate of 3.5%,
payable on June 15 and December 15 of each year, beginning
December 15, 2005.
The 3.5% Debentures are convertible into shares of our
common stock at an initial conversion price of $20.69 per share.
The 3.5% Debentures are not convertible prior to
June 15, 2011, however, unless certain contingencies occur,
including the closing price of the common stock having exceeded
120% of the conversion price for at least 20 trading days during
the 30 consecutive trading days ending on the last trading day
of the immediately preceding fiscal quarter. Upon conversion,
the value (the conversion value) of the cash and
shares of common stock, if any, to be received by a holder
converting $1,000 principal amount of the 3.5% Debentures
will be determined by multiplying the applicable conversion rate
by the
20-day
average closing price of the common stock beginning on the
second trading day immediately following the day on which the
3.5% Debentures are submitted for conversion. The
conversion value will be payable as follows: (1) an amount
in cash (the principal return) equal to the lesser
of (a) the conversion value and (b) $1,000, and
(2) to the extent the conversion value exceeds $1,000, a
number of shares of common stock with a value equal to the
difference between the conversion value and the principal return
or a cash payment, at our option. In addition, if a holder
elects to convert the 3.5% Debentures within a period of 30
trading days after the effective date of a fundamental change
transaction generally a transaction constituting a
change of control of Impax, as defined by the
Indenture the holder will be entitled to receive a
make-whole premium consisting of additional shares
of common stock (or, if we so elect, the same consideration
offered in connection with the fundamental change).
Under a related registration rights agreement, we agreed to file
a registration statement covering the 3.5% Debentures and
shares of common stock issuable upon the conversion of such
debentures. Because we did not meet the deadlines set forth in
the registration rights agreement, we are required to pay
liquidated damages, at an annual rate of 0.5% of the aggregate
principal amount of the 3.5% debentures until the
registration statement becomes effective. We incurred expense
related to these liquidated damages of $261,000, $464,000 and
$144,000 for the years ended December 31, 2008, 2007 and
2006, respectively.
In August and September 2008, at the request of the holders, we
repurchased at a discount, an aggregate face value of
$62.25 million principal amount of the
3.5% Debentures, paying $60.3 million including
$433,000 of accrued interest. Proceeds to fund the repurchase of
the 3.5% Debentures were generated from the liquidation of
our short-term investments. The remaining $12.75 million
principal amount of the 3.5% Debentures are subject to
repurchase by us at 100% of the face value on June 15, 2009
at the option of the holders.
49
Solvay
Promissory Note
In June, 2006, we issued a subordinated promissory note in the
amount of $11.0 million related to the settlement of
litigation brought by Solvay Pharmaceuticals, Inc.
(Solvay), bearing interest at 6.0% per annum, with
24 quarterly principal and interest installment payments of
$549,165 commencing March 2007 through December 2012. The Solvay
promissory note becomes immediately due and payable upon the
occurrence of a default in any payment due, a change in control
of us, voluntary or involuntary bankruptcy proceeding by or
against us and failure to maintain working capital less than
150% of the remaining unpaid balance of the promissory note. As
of December 31, 2008, none of the four events noted above
occurred.
Commitments
and Contractual Obligations
Our contractual obligations as of December 31, 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
($ in 000s)
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Contractual Obligations(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facilities and Long- Term Debt(b)
|
|
$
|
20,647
|
|
|
$
|
14,657
|
|
|
$
|
3,873
|
|
|
$
|
2,117
|
|
|
$
|
|
|
Interest Expense Payable Long-Term Debt
|
|
|
1,286
|
|
|
|
686
|
|
|
|
520
|
|
|
|
80
|
|
|
|
|
|
Open Purchase Order Commitments
|
|
|
11,796
|
|
|
|
11,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease(c)
|
|
|
6,806
|
|
|
|
1,412
|
|
|
|
2,324
|
|
|
|
2,038
|
|
|
|
1,032
|
|
Construction Contracts(d)
|
|
|
1,988
|
|
|
|
1,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,523
|
|
|
$
|
30,539
|
|
|
$
|
6,717
|
|
|
$
|
4,235
|
|
|
$
|
1,032
|
|
|
|
|
(a) |
|
Liabilities for incomes taxes under FIN 48 were excluded as
the Company is not able to make a reasonably reliable estimate
of the amount and period of related future payments. As of
December 31, 2008, the Company had $7.5 million of
gross unrecognized tax benefits under FIN 48. |
|
(b) |
|
Represents the principal portion of payments of debt
obligations, including: (i) $12.75 million
3.5% Debentures callable on June 15, 2009, interest
paid semi-annually, starting December 15, 2005;
(ii) 6.0% note payable to Solvay in 24 quarterly
principal and interest installment payments of $549,165
commencing March 2007 through December 2012; and
(iii) Vendor financing agreement related to software
licenses with interest at 3.10% in two monthly installments of
$0 and thirty-four monthly principal and interest installments
of $12,871 commencing December 2006 through November 2009. |
|
(c) |
|
We lease office, warehouse, and laboratory facilities under
non-cancelable operating leases through June 2015. We also lease
certain equipment under various non-cancelable operating leases
with various expiration dates through 2013. |
|
(d) |
|
Construction contracts are related to our currently under
construction facility in Taiwan, R.O.C., which is intended to be
utilized for manufacturing, research and development, warehouse,
and administrative space. The construction phase of this project
is expected to be completed and equipment to be installed,
validated, and approved by FDA in 2009, and product shipments to
begin in early 2010. In conjunction with the construction of our
Taiwan facility, we have entered into several contracts,
amounting to an aggregate of approximately $16,617,000 and
$853,000 as of December 31, 2008 and 2007, respectively. As
of December 31, 2008 and 2007, we had remaining commitments
under these contracts of approximately $1,988,000 and $422,000,
respectively. |
Off
Balance-Sheet Arrangements
We have not entered into any off-balance arrangements other than
a $500,000 letter of credit entered into in the ordinary course
of business. In February 2009, this letter of credit was allowed
to expire as it was deemed no longer necessary by one of our
suppliers.
50
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair Value
Measurements, (SFAS 157), which defines
fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. With respect
to financial assets and liabilities, SFAS 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. The effective date of SFAS 157, with respect to
non-financial assets and liabilities, was deferred by FASB Staff
Position FAS 157-2 and is effective for financial
statements issued for fiscal years beginning after
November 15, 2008 and interim periods within those fiscal
years. The adoption of SFAS 157 did not have a significant
impact on our consolidated financial statements.
In June 2007, the EITF reached a final consensus on EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities,
(EITF 07-3).
EITF 07-3,
which is effective for fiscal years beginning after
December 15, 2007, requires non-refundable advance payments
for future research and development activities to be capitalized
until the goods have been delivered or related services have
been performed. Adoption is on a prospective basis and could
impact the timing of expense recognition for agreements entered
into after December 31, 2007. The adoption of
EITF 07-3
did not have a significant impact on our consolidated financial
statements.
In November 2007, the EITF reached a final consensus on EITF
Issue
No. 07-1
Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual
Property,
(EITF 07-1).
EITF 07-1
is focused on how the parties to a collaborative agreement
should account for costs incurred and revenue generated on sales
to third parties, how sharing payments pursuant to a
collaborative agreement should be presented in the income
statement and certain related disclosure questions.
EITF 07-1
is effective for fiscal years beginning after December 15,
2008 and interim periods within those fiscal years. Adoption is
on a retrospective basis to all prior periods presented for all
collaborative arrangements existing as of the effective date. We
do not expect the adoption of
EITF 07-1
to have a material impact on our consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141
(Revised 2007), Business Combinations,
(SFAS 141(R)), which replaces SFAS 141.
The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including
changes in the way assets and liabilities are recognized in
purchase accounting. It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies,
requires the capitalization of in-process research and
development at fair value, and requires the expensing of
acquisition related costs as incurred. SFAS 141(R) is
effective beginning January 1, 2009 and will apply
prospectively to business combinations completed on or after
this date. The effect of SFAS 141(R) on our consolidated
financial statements will be dependent on the nature and terms
of any business combinations to occur after the effective date.
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements, (SFAS 160). SFAS 160
clarifies that a non-controlling (minority) interest in a
subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements, and establishes a single method of accounting for
changes in a parents ownership interest in a subsidiary
that do not result in deconsolidation. SFAS 160 requires
retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other
requirements of SFAS 160 shall be applied prospectively.
SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008. We do not expect the adoption of
SFAS 160 to have a significant impact on our consolidated
financial statements unless a future transaction results in a
non-controlling interest in a subsidiary.
In April 2008, the FASB issued FASB Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets (FSP
FAS 142-3).
FSP
FAS 142-3
amends the factors to be considered in developing renewal or
extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS 142, Goodwill
and Other Intangible Assets. The FSP is intended to
improve the consistency between the useful life of a recognized
intangible asset under Statement 142 and the period of expected
cash flows used to measure the fair value of the asset under
SFAS 141(R) and other U.S. generally accepted
accounting principles. The new standard is effective for
financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. We do not expect the
adoption of FSP
FAS 142-3
to have a material impact on our consolidated financial
statements.
51
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles,
(SFAS 162). This statement identifies the
sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial
statements of nongovernmental entities in conformity with GAAP
in the United States (the GAAP hierarchy). The effective date of
SFAS 162 is November 15, 2008, which is sixty days
following the SECs approval on September 16, 2008 of
the Public Company Accounting Oversight Board
(PCAOB) amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles. We do not expect the adoption of
SFAS 162 to have a material impact on our consolidated
financial statements.
In May 2008, the FASB issued FASB Staff Position APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement), (FSP APB
14-1).
FSP APB 14-1
specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that
will reflect the entitys nonconvertible debt borrowing
rate when interest cost is recognized in subsequent periods.
This FASB staff position is effective for financial statements
issued for fiscal years beginning after December 31, 2008,
and for interim periods within those fiscal years, with
retrospective application required. Early adoption is not
permitted. We are currently evaluating the impact of FSP APB
14-1 on our
consolidated financial statements.
In June 2008, the FASB issued FASB Staff Position (FSP)
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities,
(FSP
EITF 03-6-1).
This FSP provides that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings
per share pursuant to the two-class method. FSP
EITF 03-6-1
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those years. The adoption of FSP
EITF 03-6-1
is not expected to have a material impact on our consolidated
financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Our cash and cash equivalents include a portfolio of high credit
quality securities, including U.S. Government securities,
treasury bills, short-term commercial paper, and high rated
money market funds. Our entire portfolio matures in less than
one year. The carrying value of the portfolio approximates the
market value at December 31, 2008. Our debt instruments at
December 31, 2008, are subject to fixed and variable
interest rates and principal payments. We estimate the fair
value of our fixed rate long-term debt to be $12,444,000,
$69,938,000 and $73,313,000 at December 31, 2008, 2007 and
2006, respectively. While changes in market interest rates may
affect the fair value of our fixed and variable rate long-term
debt, we believe the effect, if any, of reasonably possible
near-term changes in the fair value of such debt on our
financial statements will not be material.
We do not use derivative financial instruments and have no
material foreign exchange, except for the carrying value of our
investment in our wholly-owned subsidiary Impax Laboratories
(Taiwan), Inc., or commodity price risks.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The consolidated financial statements and schedule listed in the
Index to Financial Statements beginning on
page F-1
are filed as part of this Annual Report on
Form 10-K
and incorporated by reference herein.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A(T).
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
The Company maintains disclosure controls and procedures (as
defined in
Rule 13a-15(e)
of the Exchange Act) that are designed to ensure that
information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified
52
in the SECs rules and forms, and that such information is
accumulated and communicated to the Companys management,
including its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Companys
disclosure controls and procedures as of the end of the period
covered by this Annual Report on
Form 10-K.
Based upon that evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures, as defined in
Rule 13a-15(e)
of the Exchange Act, were effective as of December 31, 2008.
Changes
in Internal Control over Financial Reporting
During the quarter ended December 31, 2008, there were no
changes in the Companys internal control over financial
reporting (as defined in
Rule 13a-15(f)
of the Exchange Act) that materially affected, or are reasonably
likely to materially affect, the Companys internal control
over financial reporting.
Report of
Management on Internal Control over Financial
Reporting
This Report does not include a report of managements
assessment regarding internal control over financial reporting
or an attestation report of the Companys registered public
accounting firm due to a transition period established by rules
of the SEC for newly public companies.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Code of
Ethics
We have adopted a Code of Business Conduct and Ethics
(Code of Ethics) that applies to all of our
directors and employees, including our Chief Executive Officer,
Chief Financial Officer and any other accounting officer,
controller or persons performing similar functions. The Code of
Ethics is available on our website (www.impaxlabs.com) and
accessible via the Investor Relations page. Any
amendments to, or waivers of, the Code of Ethics will be
disclosed on our website within four business days following the
date of such amendment or waiver.
Additional information required by this item is incorporated by
reference to our definitive proxy statement for the Annual
Meeting of Stockholders to be held on May 19, 2009
(Proxy Statement).
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference to the Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is incorporated by
reference to the Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is incorporated by
reference to the Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item is incorporated by
reference to the Proxy Statement.
53
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Consolidated Financial Statements
The consolidated financial statements listed in the Index to
Financial Statements beginning on
page F-1
are filed as part of this Annual Report on
Form 10-K.
(a)(2) Financial Statement Schedules
The financial statement schedule listed in the Index to
Financial Statements on
page F-1
is filed as part of this Annual Report on
Form 10-K
(a)(3) Exhibits
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
3
|
.1.1
|
|
Restated Certificate of Incorporation, dated August 30,
2004.(1)
|
|
3
|
.1.2
|
|
Certificate of Designation of Series A Junior Participating
Preferred Stock, as filed with the Secretary of State of
Delaware on January 21, 2009.(3)
|
|
3
|
.2
|
|
By-Laws.(2)
|
|
4
|
.1
|
|
Specimen of Common Stock Certificate.(2)
|
|
4
|
.2
|
|
Form of Debenture (incorporated by reference to Exhibit A
to the Indenture, dated as of June 27, 2005, between the
Company and HSBC Bank USA, National Association, as Trustee,
listed on Exhibit 4.3)
|
|
4
|
.3
|
|
Indenture, dated as of June 27, 2005, between the Company
and HSBC Bank USA, National Association, as Trustee.(2)
|
|
4
|
.4
|
|
Supplemental Indenture, dated as of July 6, 2005, between
the Company and HSBC Bank USA, National Association, as
Trustee.(2)
|
|
4
|
.5
|
|
Registration Rights Agreement, dated as of June 27, 2005,
between the Company and the Initial Purchasers named therein.(2)
|
|
4
|
.6
|
|
Promissory Note dated June 7, 2006, issued by the Company
to Solvay Pharmaceuticals, Inc.(2)
|
|
4
|
.7
|
|
Preferred Stock Rights Agreement, dated as of January 20,
2009, by and between the Company and StockTrans, Inc., as Rights
Agent.(3)
|
|
10
|
.1
|
|
Amended and Restated Loan and Security Agreement, dated as of
December 15, 2005, between the Company and Wachovia Bank,
National Association.(2)
|
|
10
|
.1.1
|
|
First Amendment, dated October 14, 2008, to Amended and
Restated Loan and Security Agreement, dated December 15,
2005, between the Company and Wachovia Bank, National
Association.(4)
|
|
10
|
.1.2
|
|
Second Amendment to Amended and Restated Loan and Security
Agreement, effective as of December 31, 2008, by and among
the Company and Wachovia Bank, National Association.
|
|
10
|
.2
|
|
Purchase Agreement, dated June 26, 2005, between the
Company and the Purchasers named therein.(2)
|
|
10
|
.3
|
|
Impax Laboratories Inc. 1995 Stock Incentive Plan.*(2)
|
|
10
|
.3.1
|
|
Amendment No. 1 to Impax Laboratories, Inc. 1995 Stock
Incentive Plan, dated July 1, 1998.*
|
|
10
|
.3.2
|
|
Amendment No. 2 to Impax Laboratories, Inc. 1995 Stock
Incentive Plan, dated May 25, 1999.*
|
|
10
|
.4
|
|
Impax Laboratories Inc. 1999 Equity Incentive Plan.*
|
|
10
|
.4.1
|
|
Form of Stock Option Grant under the Impax Laboratories, Inc.
1999 Equity Incentive Plan.*
|
|
10
|
.5
|
|
Impax Laboratories Inc. 2001 Non-Qualified Employee Stock
Purchase Plan.*(2)
|
|
10
|
.6
|
|
Impax Laboratories Inc. Amended and Restated 2002 Equity
Incentive Plan.*
|
|
10
|
.6.1
|
|
Form of Stock Option Grant under the Impax Laboratories, Inc.
Amended and Restated 2002 Equity Incentive Plan.*
|
|
10
|
.6.2
|
|
Form of Stock Bonus Agreement under the Impax Laboratories, Inc.
Amended and Restated 2002 Equity Incentive Plan.*
|
54
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
10
|
.7
|
|
Impax Laboratories Inc. Executive Non-Qualified Deferred
Compensation Plan, restated effective January 1, 2005.*(4)
|
|
10
|
.8
|
|
Employment Agreement, dated as of December 14, 1999,
between the Company and Charles Hsiao, Ph.D.*(4)
|
|
10
|
.9
|
|
Employment Agreement, dated as of December 14, 1999,
between the Company and Larry Hsu, Ph.D.*(4)
|
|
10
|
.10
|
|
Offer of Employment Letter, dated August 12, 2004, between
the Company and Charles V. Hildenbrand.*
|
|
10
|
.11
|
|
Offer of Employment Letter, dated February 9, 2005, between
the Company and Arthur A. Koch, Jr.*
|
|
10
|
.12.1
|
|
Employment Agreement, dated as of September 1, 2006,
between the Company and David S. Doll.*(2)
|
|
10
|
.12.2
|
|
Separation Agreement and General Release, dated July 30,
2008, between the Company and David S. Doll.*(2)
|
|
10
|
.12.3
|
|
Consulting Agreement, effective as of September 4, 2008,
between the Company and David S. Doll.*(2)
|
|
10
|
.13
|
|
Offer of Employment Letter, effective as of March 31, 2008,
between the Company and Michael Nestor.*
|
|
10
|
.14
|
|
Offer of Employment Letter, effective as of January 5,
2009, between the Company and Christopher Mengler.*
|
|
10
|
.15
|
|
Strategic Alliance Agreement, dated June 27, 2001, between
the Company and Teva Pharmaceuticals Curacao N.V.**(5)
|
|
10
|
.15.1
|
|
Letter Amendment, dated October 8, 2003, to Strategic
Alliance Agreement, dated June 27, 2001, between the
Company and Teva Pharmaceuticals Curacao N.V.**(5)
|
|
10
|
.15.2
|
|
Letter Agreement, dated March 24, 2005, between the Company
and Teva Pharmaceuticals Curacao N.V.**(5)
|
|
10
|
.15.3
|
|
Letter Amendment, dated March 24, 2005 and effective
January 1, 2005, to Strategic Alliance Agreement, dated
June 27, 2001, between the Company and Teva Pharmaceuticals
Curacao N.V.**(5)
|
|
10
|
.15.4
|
|
Amendment, dated January 24, 2006, to Strategic Alliance
Agreement, dated June 27, 2001, between the Company and
Teva Pharmaceuticals Curacao N.V.**(6)
|
|
10
|
.15.5
|
|
Amendment, dated February 9, 2007, to Strategic Alliance
Agreement, dated June 27, 2001, between the Company and
Teva Pharmaceuticals Curacao N.V.**(5)
|
|
10
|
.16
|
|
Development, License and Supply Agreement, dated as of
June 18, 2002, between the Company and Wyeth, acting
through its Wyeth Consumer Healthcare Division.**(5)
|
|
10
|
.16.1
|
|
Amendment, dated as of July 9, 2004, to Development,
License and Supply Agreement, dated as of June 18, 2002,
between the Company and Wyeth, acting through its Wyeth Consumer
Healthcare Division.(6)
|
|
10
|
.16.2
|
|
Amendment, dated as of February 14, 2005, to Development,
License and Supply Agreement, dated as of June 18, 2002,
between the Company and Wyeth, acting through its Wyeth Consumer
Healthcare Division.(6)
|
|
10
|
.17
|
|
Licensing, Contract Manufacturing and Supply Agreement, dated as
of June 18, 2002, between the Company and Schering
Corporation.**(6)
|
|
10
|
.17.1
|
|
Amendment No. 3, effective as of July 23, 2004, to
Licensing, Contract Manufacturing and Supply Agreement, dated as
of June 18, 2002, between the Company and Schering
Corporation.**(5)
|
|
10
|
.17.2
|
|
Amendment No. 4, effective as of December 15, 2006, to
Licensing, Contract Manufacturing and Supply Agreement, dated as
of June 18, 2002, between the Company and Schering
Corporation.**(5)
|
|
10
|
.18
|
|
Supply and Distribution Agreement, dated as of November 3,
2005, between the Company and DAVA Pharmaceuticals, Inc.**(5)
|
|
10
|
.18.1
|
|
Amendment No. 2, dated February 6, 2007, to Supply and
Distribution Agreement, dated November 3, 2005, between the
Company and DAVA Pharmaceuticals, Inc.**(6)
|
|
10
|
.19
|
|
Patent License Agreement, dated as of March 30, 2007, by
and among Purdue Pharma L.P., The P.F. Laboratories, Inc.,
Purdue Pharmaceuticals L.P. and the Company.(7)
|
55
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
10
|
.20
|
|
Supplemental License Agreement, dated as of March 30, 2007,
by and among Purdue Pharma L.P., The P.F. Laboratories, Inc.,
Purdue Pharmaceuticals L.P. and the Company.(7)
|
|
10
|
.21
|
|
Sublicense Agreement, effective as of March 30, 2007,
between the Company and DAVA Pharmaceuticals, Inc.(7)
|
|
10
|
.22
|
|
Promotional Services Agreement, dated as of January 19,
2006, between the Company and Shire US Inc.**(5)
|
|
10
|
.23
|
|
Co-promotion Agreement, dated as of July 16, 2008, between
the Company and Wyeth, acting through its Wyeth Pharmaceuticals
Division.**(7)
|
|
10
|
.24
|
|
Joint Development Agreement, dated as of November 26, 2008,
between the Company and Medicis Pharmaceutical Corporation.**(5)
|
|
10
|
.25
|
|
Special Cash Bonus Payments and Directors Fees.*(8)
|
|
10
|
.26
|
|
Construction Work Agreement, dated as of February 18, 2008,
by and between Impax Laboratories (Taiwan), Inc., a wholly-owned
subsidiary of the Company, and E&C Engineering Corporation
(English translation from the Taiwanese language).
|
|
10
|
.27
|
|
Construction Agreement, dated as of March 11, 2008, by and
between Impax Laboratories (Taiwan), Inc., a wholly-owned
subsidiary of the Company, and Fu Tsu Construction (English
translation from the Taiwanese language).
|
|
11
|
.1
|
|
Statement re computation of per share earnings (incorporated by
reference to Note 17 to the Notes to the Consolidated
Financial Statements in this Annual Report on
Form 10-K).
|
|
21
|
.1
|
|
Subsidiaries of the registrant.
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certifications of the Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
* |
|
Management contract, compensatory plan or arrangement. |
|
** |
|
Confidential treatment requested for certain portions of this
exhibit pursuant to
Rule 24b-2
under the Exchange Act, which portions are omitted and filed
separately with the SEC. |
|
(1) |
|
Incorporated by reference to Amendment No. 5 to the
Companys Registration Statement on Form 10 filed on
December 23, 2008. |
|
(2) |
|
Incorporated by reference to the Companys Registration
Statement on Form 10 filed on October 10, 2008. |
|
(3) |
|
Incorporated by reference to the Companys Current Report
on
Form 8-K
filed on January 22, 2009. |
|
(4) |
|
Incorporated by reference to Amendment No. 2 to the
Companys Registration Statement on Form 10 filed on
December 2, 2008. |
|
(5) |
|
Incorporated by reference to Amendment No. 6 to the
Companys Registration Statement on Form 10 filed on
January 14, 2009. |
|
(6) |
|
Incorporated by reference to Amendment No. 1 to the
Companys Registration Statement on Form 10 filed on
November 12, 2008. |
|
(7) |
|
Incorporated by reference to Amendment No. 7 to the
Companys Registration Statement on Form 10 filed on
January 21, 2009. |
|
(8) |
|
Incorporated by reference to the Companys Current Report
on
Form 8-K
filed on January 6, 2009. |
56
Impax
Laboratories, Inc.
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7 to F-58
|
|
|
|
|
S-1
|
|
Page F-1 of F-58
Impax
Laboratories, Inc.
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Impax Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of
Impax Laboratories, Inc. and Subsidiaries (a Delaware
corporation), (Company) as of December 31, 2008
and 2007 and the related consolidated statements of operations,
changes in stockholders equity (deficit), comprehensive
income (loss) and cash flows for each of the three years in the
period ended December 31, 2008. Our audits of the basic
consolidated financial statements included the financial
statement schedule listed in the index appearing under
Item 15. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Impax Laboratories, Inc. and Subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Notes 2 and 10 to the consolidated
financial statements, the Company has adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 in 2007.
Philadelphia, Pennsylvania
March 12, 2009
Page F-2 of F-58
Impax
Laboratories, Inc.
(amounts in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
69,275
|
|
|
$
|
37,462
|
|
Short-term investments
|
|
|
50,710
|
|
|
|
106,034
|
|
Accounts receivable, net
|
|
|
43,306
|
|
|
|
51,503
|
|
Inventory, net
|
|
|
32,305
|
|
|
|
27,568
|
|
Current portion of deferred product manufacturing costs-alliance
agreements
|
|
|
13,578
|
|
|
|
11,923
|
|
Current portion of deferred income taxes
|
|
|
17,996
|
|
|
|
27,376
|
|
Prepaid expenses and other current assets
|
|
|
9,298
|
|
|
|
8,592
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
236,468
|
|
|
|
270,458
|
|
Property, plant and equipment, net
|
|
|
95,629
|
|
|
|
81,223
|
|
Deferred product manufacturing costs-alliance agreements
|
|
|
93,144
|
|
|
|
82,474
|
|
Deferred income taxes, net
|
|
|
52,599
|
|
|
|
47,937
|
|
Other assets
|
|
|
9,168
|
|
|
|
6,793
|
|
Goodwill
|
|
|
27,574
|
|
|
|
27,574
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
514,582
|
|
|
$
|
516,459
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
14,657
|
|
|
$
|
69,234
|
|
Accounts payable
|
|
|
12,797
|
|
|
|
16,898
|
|
Accrued expenses
|
|
|
41,360
|
|
|
|
35,838
|
|
Current portion of deferred revenue-alliance agreements
|
|
|
35,015
|
|
|
|
26,381
|
|
Current portion of accrued exclusivity period fee payments due
|
|
|
6,000
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
109,829
|
|
|
|
160,351
|
|
3.5% Debentures
|
|
|
|
|
|
|
12,750
|
|
Long-term debt
|
|
|
5,990
|
|
|
|
7,760
|
|
Fair value of common stock purchase warrants
|
|
|
|
|
|
|
2,285
|
|
Deferred revenue-alliance agreements
|
|
|
225,804
|
|
|
|
181,720
|
|
Accrued exclusivity period fee payments due
|
|
|
|
|
|
|
6,000
|
|
Other liabilities
|
|
|
13,561
|
|
|
|
11,426
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
355,184
|
|
|
$
|
382,292
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 19 and 20)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.01 par value, 2,000,000 shares
authorized, 0 shares outstanding at December 31, 2008
and 2007
|
|
$
|
|
|
|
$
|
|
|
Common stock, $0.01 par value, 90,000,000 shares
authorized and 60,135,686 and 59,066,277 issued at
December 31, 2008 and 2007, respectively
|
|
|
602
|
|
|
|
591
|
|
Additional paid-in capital
|
|
|
203,538
|
|
|
|
196,049
|
|
Treasury stock-acquired as a result of achievement of milestone
under the Teva Agreement, 243,729 shares
|
|
|
(2,157
|
)
|
|
|
(2,157
|
)
|
Accumulated other comprehensive loss
|
|
|
(995
|
)
|
|
|
(26
|
)
|
Accumulated deficit
|
|
|
(41,590
|
)
|
|
|
(60,290
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
159,398
|
|
|
$
|
134,167
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
514,582
|
|
|
$
|
516,459
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
Page F-3 of F-58
Impax
Laboratories, Inc.
(amounts in
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
$
|
98,602
|
|
|
$
|
87,978
|
|
|
$
|
78,201
|
|
Rx Partner
|
|
|
81,778
|
|
|
|
161,114
|
|
|
|
36,809
|
|
OTC Partner
|
|
|
15,946
|
|
|
|
11,866
|
|
|
|
13,782
|
|
Research Partner
|
|
|
833
|
|
|
|
|
|
|
|
|
|
Promotional Partner
|
|
|
12,891
|
|
|
|
12,759
|
|
|
|
6,434
|
|
Other
|
|
|
21
|
|
|
|
36
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
210,071
|
|
|
|
273,753
|
|
|
|
135,246
|
|
Cost of revenues
|
|
|
91,969
|
|
|
|
107,656
|
|
|
|
72,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
118,102
|
|
|
|
166,097
|
|
|
|
62,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
59,809
|
|
|
|
39,992
|
|
|
|
29,635
|
|
Patent litigation
|
|
|
6,472
|
|
|
|
10,025
|
|
|
|
9,693
|
|
Litigation settlement
|
|
|
|
|
|
|
|
|
|
|
2,556
|
|
Selling, general and administrative
|
|
|
47,898
|
|
|
|
39,573
|
|
|
|
32,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
114,179
|
|
|
|
89,590
|
|
|
|
74,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
3,923
|
|
|
|
76,507
|
|
|
|
(11,247
|
)
|
Change in fair value of common stock purchase warrants
|
|
|
1,234
|
|
|
|
(110
|
)
|
|
|
1,098
|
|
Gain on repurchase of 3.5% Debentures
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
21,576
|
|
|
|
73
|
|
|
|
(192
|
)
|
Interest income
|
|
|
4,218
|
|
|
|
4,751
|
|
|
|
2,233
|
|
Interest expense
|
|
|
(2,599
|
)
|
|
|
(4,113
|
)
|
|
|
(3,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
29,671
|
|
|
|
77,108
|
|
|
|
(11,904
|
)
|
Provision (benefit) for income taxes
|
|
|
10,971
|
|
|
|
(48,817
|
)
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
18,700
|
|
|
$
|
125,925
|
|
|
$
|
(12,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
|
$
|
2.14
|
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.31
|
|
|
$
|
2.06
|
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
59,072,752
|
|
|
|
58,810,452
|
|
|
|
58,996,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
60,782,721
|
|
|
|
61,217,470
|
|
|
|
58,996,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
Page F-4 of F-58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
Stockholders Equity (Deficit)
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Loss
|
|
|
Total
|
|
|
Balance at December 31, 2005
|
|
|
58,977
|
|
|
$
|
590
|
|
|
$
|
182,467
|
|
|
$
|
|
|
|
$
|
(174,171
|
)
|
|
$
|
|
|
|
$
|
8,886
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock purchase warrants, stock options, and
sale of common stock under ESPP
|
|
|
52
|
|
|
|
|
|
|
|
659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
659
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
683
|
|
Achievement of milestone under the Teva Agreement
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,157
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,157
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,044
|
)
|
|
|
|
|
|
|
(12,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
58,785
|
|
|
$
|
590
|
|
|
$
|
183,809
|
|
|
$
|
(2,157
|
)
|
|
$
|
(186,215
|
)
|
|
$
|
(3
|
)
|
|
$
|
(3,976
|
)
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock purchase warrants, stock options, and
sale of common stock under ESPP
|
|
|
37
|
|
|
|
1
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,513
|
|
Tax benefit related to exercise of employee stock options
|
|
|
|
|
|
|
|
|
|
|
10,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,477
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(23
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,925
|
|
|
|
|
|
|
|
125,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
58,822
|
|
|
$
|
591
|
|
|
$
|
196,049
|
|
|
$
|
(2,157
|
)
|
|
$
|
(60,290
|
)
|
|
$
|
(26
|
)
|
|
$
|
134,167
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock purchase warrants and stock options,
issuance of restricted stock and sale of common stock under ESPP
|
|
|
994
|
|
|
|
10
|
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,039
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
5,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,817
|
|
Issuance of common stock
|
|
|
76
|
|
|
|
1
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
644
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(969
|
)
|
|
|
(969
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,700
|
|
|
|
|
|
|
|
18,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
59,892
|
|
|
$
|
602
|
|
|
$
|
203,538
|
|
|
$
|
(2,157
|
)
|
|
$
|
(41,590
|
)
|
|
$
|
(995
|
)
|
|
$
|
159,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Comprehensive Income (Loss)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income (loss)
|
|
$
|
18,700
|
|
|
$
|
125,925
|
|
|
$
|
(12,044
|
)
|
Currency translation adjustments
|
|
|
(969
|
)
|
|
|
(23
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
17,731
|
|
|
$
|
125,902
|
|
|
$
|
(12,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
Page F-5 of F-58
Impax
Laboratories, Inc.
(amounts in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
18,700
|
|
|
$
|
125,925
|
|
|
$
|
(12,044
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,895
|
|
|
|
8,612
|
|
|
|
7,307
|
|
Bad debt expense
|
|
|
568
|
|
|
|
550
|
|
|
|
|
|
Tax benefit on reversal of valuation allowance on deferred tax
asset
|
|
|
|
|
|
|
(81,485
|
)
|
|
|
|
|
Deferred income taxes, net
|
|
|
4,718
|
|
|
|
17,483
|
|
|
|
|
|
Tax benefit related to exercise of employee stock options
|
|
|
|
|
|
|
(10,477
|
)
|
|
|
|
|
Provision for uncertain tax positions
|
|
|
1,397
|
|
|
|
6,118
|
|
|
|
|
|
Gain, net on repurchase of 3.5% Debentures
|
|
|
(1,319
|
)
|
|
|
|
|
|
|
|
|
Deferred revenue Rx Partners
|
|
|
94,876
|
|
|
|
234,816
|
|
|
|
115,391
|
|
Deferred product manufacturing costs Rx Partners
|
|
|
(33,928
|
)
|
|
|
(64,681
|
)
|
|
|
(42,431
|
)
|
Deferred revenue recognized Rx Partners
|
|
|
(81,778
|
)
|
|
|
(161,114
|
)
|
|
|
(36,809
|
)
|
Amortization deferred product manufacturing costs Rx
Partners
|
|
|
22,713
|
|
|
|
46,363
|
|
|
|
14,006
|
|
Deferred revenue OTC Partners
|
|
|
16,399
|
|
|
|
15,359
|
|
|
|
11,215
|
|
Deferred product manufacturing costs OTC Partners
|
|
|
(16,087
|
)
|
|
|
(13,014
|
)
|
|
|
(11,678
|
)
|
Deferred revenue recognized OTC Partners
|
|
|
(15,946
|
)
|
|
|
(11,866
|
)
|
|
|
(13,782
|
)
|
Amortization deferred product manufacturing costs
OTC Partners
|
|
|
14,977
|
|
|
|
9,900
|
|
|
|
12,421
|
|
Deferred revenue Research Partner
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
Deferred revenue recognized Research Partner
|
|
|
(833
|
)
|
|
|
|
|
|
|
|
|
Payments on exclusivity period fee
|
|
|
(12,000
|
)
|
|
|
(18,200
|
)
|
|
|
(14,400
|
)
|
Payments on accrued litigation settlements
|
|
|
(2,197
|
)
|
|
|
(2,573
|
)
|
|
|
(12,000
|
)
|
Accrued litigation settlement expense
|
|
|
3,500
|
|
|
|
|
|
|
|
2,556
|
|
Share-based compensation expense
|
|
|
5,817
|
|
|
|
1,513
|
|
|
|
683
|
|
Fair value of shares issued under severance arrangement
|
|
|
561
|
|
|
|
|
|
|
|
|
|
Accretion of interest income on short-term investments
|
|
|
(2,867
|
)
|
|
|
(3,147
|
)
|
|
|
(1,004
|
)
|
Change in fair value of common stock purchase warrants
|
|
|
(1,234
|
)
|
|
|
110
|
|
|
|
(1,098
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
7,629
|
|
|
|
9,868
|
|
|
|
(31,393
|
)
|
Inventory
|
|
|
(4,737
|
)
|
|
|
6,543
|
|
|
|
(846
|
)
|
Prepaid expenses and other current assets
|
|
|
(4,184
|
)
|
|
|
(6,324
|
)
|
|
|
1,960
|
|
Accounts payable and accrued expenses
|
|
|
(814
|
)
|
|
|
7,546
|
|
|
|
4,372
|
|
Other liabilities
|
|
|
738
|
|
|
|
1,189
|
|
|
|
1,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
64,564
|
|
|
$
|
119,014
|
|
|
$
|
(5,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
$
|
(202,133
|
)
|
|
$
|
(244,119
|
)
|
|
$
|
(57,530
|
)
|
Maturities of short-term investments
|
|
|
260,324
|
|
|
|
164,667
|
|
|
|
35,302
|
|
Purchases of property, plant and equipment
|
|
|
(25,863
|
)
|
|
|
(18,836
|
)
|
|
|
(21,475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
$
|
32,328
|
|
|
$
|
(98,288
|
)
|
|
$
|
(43,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
$
|
(65,234
|
)
|
|
$
|
(253
|
)
|
|
$
|
(108
|
)
|
Tax benefit related to exercise of employee stock options
|
|
|
|
|
|
|
10,477
|
|
|
|
|
|
Proceeds from stock option exercises and purchases under ESPP
|
|
|
155
|
|
|
|
113
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(65,079
|
)
|
|
$
|
10,337
|
|
|
$
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
31,813
|
|
|
$
|
31,063
|
|
|
$
|
(49,478
|
)
|
Cash and cash equivalents, beginning of the year
|
|
$
|
37,462
|
|
|
$
|
6,399
|
|
|
$
|
55,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
69,275
|
|
|
$
|
37,462
|
|
|
$
|
6,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in $000s)
|
|
|
Cash paid for interest
|
|
$
|
2,970
|
|
|
$
|
4,556
|
|
|
$
|
3,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
8,381
|
|
|
$
|
14,106
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company issued 106,642, 9,388 and 35,243 shares of
common stock as the result of cashless exercises of common stock
purchase warrants for the years ended December 31, 2008,
2007 and 2006, respectively.
Unpaid vendor invoices of approximately $1,247,000, $2,150,000
and $722,000 which are accrued as of December 31, 2008,
2007 and 2006, respectively, are excluded from the purchase of
property, plant, and equipment and the change in accounts
payable and accrued expenses.
The accompanying notes are an integral part of these
consolidated financial statements.
Page F-6 of F-58
IMPAX
LABORATORIES, INC.
YEARS
ENDED DECEMBER 31, 2008, 2007, 2006
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 Pharmaceutical
Division, (Impax Division). The Global
Division develops, manufactures, sells, and distributes generic
pharmaceutical products. The Impax Division is engaged in the
process of developing branded pharmaceutical products.
The Companys Global Division develops, formulates,
manufactures, and sells controlled release and specialty generic
pharmaceutical products, through three sales channels,
including: Global Products, which includes direct
sales of generic prescription (Rx) products to
wholesalers, large retail drug chains, and others; Rx
Partners, which include the sale of generic Rx products
through unrelated third-party pharmaceutical entities pursuant
to alliance agreements; and, OTC Partners, which
include the sale of generic over-the-counter (OTC)
products through unrelated third-party pharmaceutical entities
pursuant to alliance agreements.
The Company marketed a total of 70 generic pharmaceutical
products as of December 31, 2008, which represented dosage
variations of 23 different pharmaceutical compounds marketed
under the Companys Global Products label; plus a total of
12 generic prescription pharmaceuticals, representing dosage
variations of four different pharmaceutical compounds sold to
other unrelated third-party pharmaceutical entities pursuant to
the Rx Partners Alliance Agreements; and three generic OTC
products of a single compound sold to other unrelated
third-party pharmaceutical entities pursuant to the OTC Partners
Alliance Agreements.
The Company has 24 applications for approval of new generic
products under review by the U.S. Food and Drug
Administration (FDA), two of which have been
tentatively approved, and 40 additional generic products in
various stages of research and development, for which
applications have not yet been filed.
The Companys Impax Division is engaged in the development
of proprietary brand pharmaceutical products through
improvements to already approved pharmaceutical products to
address central nervous system (CNS) disorders. The
Impax Division is also engaged in the co-promotion through a
direct sales force focused on marketing to physicians, primarily
in the CNS community, of pharmaceutical products developed by
other unrelated third-party pharmaceutical entities.
In California, the Company utilizes a combination of owned and
leased facilities mainly located in Hayward. The Company owns
three properties, including a research and development center, a
manufacturing facility, and an office building used as the
Companys corporate headquarters for management,
manufacturing support staff, and administrative personnel.
Additionally, the Company leases seven facilities in Hayward,
Pleasanton, and Fremont, utilized for additional research and
development, administrative services, and equipment storage. In
Pennsylvania, the Company owns a packaging, warehousing, and
distribution center located in Philadelphia, and leases a
facility in New Britain used for sales and marketing, finance,
and administrative personnel, as well as providing additional
warehouse space. Outside the Unites States, in Taiwan, the
Company currently has under construction a facility to
eventually be utilized for manufacturing, research and
development, warehouse, and administrative space, which is
expected to be operational in 2010.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP) requires the use of estimates and
assumptions, based on complex judgments considered reasonable,
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and contingent liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The most
significant judgments are employed in estimates used in
determining values
Page F-7 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of tangible and intangible assets, legal contingencies, tax
assets and tax liabilities, fair value of stock purchase
warrants, fair value of share-based compensation awards issued
to employees, and estimates used in applying the Companys
revenue recognition policy including those related to sales
rebates, chargebacks and shelf stock adjustments, participation
in Medicare and Medicaid rebate programs, sales returns and
recognition periods related to alliance agreements. Actual
results may differ from estimated results.
Principles
of Consolidation
The consolidated financial statements of the Company include the
accounts of the operating parent company, Impax Laboratories,
Inc., its wholly owned subsidiary, Impax Laboratories (Taiwan)
Inc., and an equity investment in Prohealth Biotech, Inc.
(Prohealth), in which the Company held a 58.68%
majority ownership interest at December 31, 2008. All
significant intercompany accounts and transactions have been
eliminated.
Cash
and Cash Equivalents
The Company considers all short-term investments with maturity
of three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents are stated at cost, which
approximates fair value. The Company is potentially subject to
financial instrument concentration of credit risk through its
cash and cash equivalents. The Company maintains cash and cash
equivalents with several major financial institutions. Such
amounts frequently exceed Federal Deposit Insurance Corporation
(FDIC) limits.
Short-Term
Investments
Short-term investments represent investments in fixed rate
financial instruments with maturities of greater than three
months but less than 12 months at the time of purchase. The
Companys short-term investments are held in
U.S. Treasury securities, corporate bonds, and high grade
commercial paper, which are not insured by the FDIC. They are
stated at amortized cost, which approximates fair value, based
upon observable market values.
Fair
Value of Financial Instruments
The carrying values of the Companys cash and cash
equivalents, short-term investments, accounts receivable,
accounts payable and accrued expenses approximate their fair
values due to their short-term nature. The Company estimates the
fair value of its fixed rate long-term debt to be $12,444,000
and $69,938,000 at December 31, 2008 and 2007, respectively.
Contingencies
In the normal course of business, the Company is subject to loss
contingencies, such as legal proceedings and claims arising out
of its business, covering a wide range of matters, including,
among others, patent litigation, shareholder lawsuits, and
product liability. In accordance with SFAS No. 5,
Accounting for Contingencies,
(SFAS 5), the Company records accruals for such
loss contingencies when it is probable a liability has been
incurred and the amount of loss can be reasonably estimated. The
Company, in accordance with SFAS 5, does not recognize gain
contingencies until realized. A discussion of contingencies is
included in Note 19, Commitments and
Contingencies, and Note 20, Legal and
Regulatory Matters.
Allowance
for Doubtful Accounts
The Company maintains allowances for doubtful accounts for
estimated losses resulting from amounts deemed to be
uncollectible from its customers; these allowances are for
specific amounts on certain accounts based on facts and
circumstances determined on a
case-by-case
basis.
Page F-8 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are cash, cash equivalents,
short-term investments, and accounts receivable. The Company
limits its credit risk associated with cash, cash equivalents
and short-term investments by placing its investments with high
quality money market funds, corporate debt, short-term
commercial paper and in securities backed by the
U.S. Government. The Company limits its credit risk with
respect to accounts receivable by performing credit evaluations
when deemed necessary. The Company does not require collateral
to secure amounts owed to it by its customers.
The following tables present the percentage of total accounts
receivable and gross revenues represented by the Companys
five largest customers as of and for the years ended
December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Accounts Receivable
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Customer #1
|
|
|
22.9
|
%
|
|
|
8.7
|
%
|
|
|
7.1
|
%
|
Customer #2
|
|
|
20.4
|
%
|
|
|
19.1
|
%
|
|
|
13.5
|
%
|
Customer #3
|
|
|
20.4
|
%
|
|
|
15.8
|
%
|
|
|
11.2
|
%
|
Customer #4
|
|
|
13.5
|
%
|
|
|
26.1
|
%
|
|
|
45.5
|
%
|
Customer #5
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
Customer #6
|
|
|
|
|
|
|
8.4
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total-Five largest customers
|
|
|
83.2
|
%
|
|
|
78.1
|
%
|
|
|
82.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Gross Revenues
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Customer #1
|
|
|
18.0
|
%
|
|
|
13.2
|
%
|
|
|
17.3
|
%
|
Customer #2
|
|
|
14.0
|
%
|
|
|
12.7
|
%
|
|
|
18.3
|
%
|
Customer #3
|
|
|
13.9
|
%
|
|
|
35.5
|
%
|
|
|
|
|
Customer #4
|
|
|
11.6
|
%
|
|
|
10.3
|
%
|
|
|
17.9
|
%
|
Customer #5
|
|
|
10.9
|
%
|
|
|
5.5
|
%
|
|
|
8.4
|
%
|
Customer #6
|
|
|
|
|
|
|
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total-Five largest customers
|
|
|
68.4
|
%
|
|
|
77.2
|
%
|
|
|
67.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2008, 2007 and 2006,
the Companys top ten products accounted for 65%, 68% and
67%, respectively, of Global product sales, net.
Inventory
Inventory is stated at the lower of cost or market. Cost is
determined using a standard cost method, and the cost flow
assumption is first in, first out (FIFO) flow of
goods. Standard costs are revised annually, and significant
variances between actual costs and standard costs are
apportioned to inventory and cost of goods sold based upon
inventory turnover. Costs include materials, labor, quality
control, and production overhead. Inventory is adjusted for
short-dated, unmarketable inventory equal to the difference
between the cost of inventory and the estimated value based upon
assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by the
Company, additional inventory write-downs may be required.
Consistent with industry practice, the Company may build
pre-launch inventories of certain products which are pending
required FDA approval
and/or
resolution of patent infringement litigation, when, in the
Companys assessment, such action is appropriate to
increase the commercial opportunity and FDA approval is expected
in the near term and /or the litigation will be resolved in the
Companys favor.
In November 2004, the FASB issued SFAS No. 151
(SFAS 151), Inventory Costs, an amendment
of ARB No. 43, Chapter 4. SFAS 151
clarifies abnormal inventory costs, such as costs of idle
facilities, excess freight and
Page F-9 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
handling costs, and wasted materials (spoilage) are required to
be recognized as current period costs. The provisions of
SFAS 151 were effective for the fiscal year ended
December 31, 2006. The adoption of SFAS 151 did not
have an impact on the Companys financial position, results
of operations or cash flows, as the Company already accounted
for abnormal inventory costs as a current period charge.
The Company is dependent on a small number of suppliers for its
raw materials, and any delay or unavailability of raw materials
can materially adversely affect its ability to produce products.
The Company believes it has, and will continue to have, adequate
and dependable sources for the supply of raw materials and
components for its manufacturing requirements. All of the
Companys manufacturing facilities are located in northern
California, and significant adverse events affecting this
geographical area could have a material adverse effect on the
Companys ability to produce products.
Property,
Plant and Equipment
Property, plant and equipment are recorded at cost. Maintenance
and repairs are charged to expense as incurred and costs of
improvements and renewals are capitalized. Costs incurred in
connection with the construction or major renovation of
facilities, including interest directly related to such
projects, are capitalized as construction in progress.
Depreciation is recognized using the straight-line method based
on the estimated useful lives of the related assets, which are
40 years for buildings, 15 years for building improvements,
seven to 10 years for equipment, and three to five years for
office furniture and equipment. Land and
construction-in-progress
are not depreciated.
Goodwill
In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets (SFAS 142),
rather than recording periodic amortization, goodwill is subject
to an annual assessment for impairment by applying a fair value
based test. According to SFAS 142, if the fair value of the
reporting unit exceeds the reporting units carrying value,
including goodwill, then goodwill is considered not impaired,
making further analysis not required.
The Company considers the Global Division and the Impax Division
operating segments to each be a reporting unit as this is the
lowest level for which discrete financial information is
available. The Company attributes the entire carrying amount of
goodwill to the Global Division.
The Company concluded the carrying value of goodwill was not
impaired as of December 31, 2008 and 2007 as the fair value
of the Global Division exceeded its carrying value at each date.
The Company performs its annual goodwill impairment test in the
fourth quarter of each year. The Company estimated the fair
value of the Global Division using a discounted cash flow model
for both the reporting unit and the enterprise, as well as
earnings and revenue multiples per common share outstanding, for
enterprise fair value. In addition, on a quarterly basis, the
Company performs a review of its business operations to
determine whether events or changes in circumstances have
occurred which could have a material adverse effect on the
estimated fair value of the reporting unit, and thus indicate a
potential impairment of the goodwill carrying value. If such
events or changes in circumstances were deemed to have occurred,
the Company would perform an interim impairment analysis, which
may include the preparation of a discounted cash flow model, or
consultation with one or more valuation specialists, to
determine the impact, if any, in the Companys assessment
of the reporting units fair value. The Company has not to
date deemed there to have been any significant adverse changes
in the legal, regulatory, or general economic environment in
which the Company conducts its business operations.
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.
Page F-10 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company accounts for revenue arrangements with multiple
deliverables in accordance with Emerging Issues Task Force Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Elements
(EITF 00-21),
which addresses the determination of whether an arrangement
involving multiple deliverables contains more than one unit of
accounting. A delivered item within an arrangement is considered
a separate unit of accounting only if all of the following
criteria are met:
|
|
|
|
|
the delivered item has value to the customer on a stand alone
basis;
|
|
|
|
there is objective and reliable evidence of the fair value of
the undelivered item; and
|
|
|
|
if the arrangement includes a general right of return relative
to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially in the
control of the vendor.
|
Under
EITF 00-21,
if the fair value of any undelivered element cannot be
objectively or reliably determined, then separate accounting for
the individual deliverables is not appropriate. Revenue
recognition for arrangements with multiple deliverables
constituting a single unit of accounting is recognizable
generally over the greater of the term of the arrangement or the
expected period of performance, either on a straight-line basis
or on a modified proportional performance method.
Global
product sales, net:
The Global product sales, net line item of the
statement of operations, includes revenue recognized related to
shipments of pharmaceutical products to the Companys
customers, primarily drug wholesalers and retail chains. Gross
sales revenue is recognized at the time title and risk of loss
passes to the customer generally when product is
received by the customer. Included in Global product revenue are
deductions from the gross sales price, including deductions
related to estimates for chargebacks, rebates, returns,
shelf-stock, and other pricing adjustments. The Company records
an estimate for these deductions in the same period when revenue
is recognized. A summary of each of these deductions is as
follows:
Returns
The Company allows its customers to return product (i) if
approved by authorized personnel in writing or by telephone with
the lot number and expiration date accompanying any request and
(ii) if such products are returned within six months prior
to or until twelve months following, the products
expiration date.
The Company estimates a provision for product returns as a
percentage of gross sales based upon historical experience of
Global product sales. The sales return reserve is estimated
using a historical lag period which is the
time between when the product is sold and when it is ultimately
returned, as determined from the Companys system generated
lag period report and return rates, adjusted
by estimates of the future return rates based on various
assumptions, which may include changes to internal policies and
procedures, changes in business practices, and commercial terms
with customers, competitive position of each product, amount of
inventory in the wholesaler supply chain, the introduction of
new products, and changes in market sales information. The
Company considers other factors when estimating its current
period returns provision, including significant market changes
which may impact future expected returns, and actual product
returns. The Company monitors actual returns on a quarterly
basis and may record specific provisions for returns it believes
are not covered by historical percentages.
Rebates
and Chargebacks
The Company maintains various rebate programs with its Global
Products customers. The rebate programs are integral to the
Companys effort to maintain a competitive position in its
marketplace, as well as to promote greater product sales along
with customer loyalty. The rebates generally take the form of a
credit against the invoiced gross sales amount charged to a
customer for products shipped. A provision for rebate
Page F-11 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deductions is estimated and recorded in the same period when
revenue is recognized based upon the terms of the various rebate
programs in effect at the time of product shipment. The Company
monitors actual rebates granted and compares them to the
estimated provision for rebates to assess the reasonableness of
the rebates reserve at each balance sheet date on a quarterly
basis.
The Companys chargeback is the difference between the
Companys invoice price to a wholesaler and the final price
paid by the wholesaler. The final price paid by the wholesaler
can be lower than the Companys invoice price based upon
the customer to whom the wholesaler sells the Companys
products. The chargeback generally takes the form of a credit
against the invoiced gross sales amount charged to the
wholesaler. A provision for chargeback deductions is estimated
and recorded in the same period the revenue is recognized based
upon the terms of the various chargeback arrangements in effect
at the time of product shipment. The Company monitors actual
chargebacks granted and compares them to the estimated provision
for chargebacks to assess the reasonableness of the chargebacks
reserve at each balance sheet date on a quarterly basis.
Shelf-Stock
Adjustments
The Company will occasionally reduce the selling price of
certain products. The Company may issue a credit against the
sales amount to customers based upon their remaining inventory
of the product in question, provided the customer continues to
make future purchases of product from the Company. This type of
customer credit is referred to as a shelf-stock adjustment,
which is the difference between the sales price and the revised
lower sales price, multiplied by an estimate of the number of
product units on hand at a given date. Decreases in selling
prices are discretionary decisions made by the Company in
response to market conditions, including estimated launch dates
of competing products and estimated declines in market price.
Medicaid
As required by law, the Company provides a rebate on drugs
dispensed under the Medicaid program. The Company determines its
estimate of Medicaid rebate accrual primarily based on
historical experience of claims submitted by the various states
and any new information regarding changes in the Medicaid
program which may impact the Companys estimate of Medicaid
rebates. In determining the appropriate accrual amount, the
Company considers historical payment rates and processing lag
for outstanding claims and payments. The Company records
estimates for Medicaid rebates as a deduction from gross sales,
with corresponding adjustments to accrued liabilities.
Cash
Discounts
The Company offers cash discounts to its customers, generally 2%
of the sales price, as an incentive for paying within invoice
terms, which generally range from 30 to 90 days. An
estimate of cash discounts is recorded in the same period when
revenue is recognized.
RX
Partner and OTC Partner
The Rx Partner and OTC Partner line
items of the statement of operations include revenue recognized
under alliance agreements between the Company and other
pharmaceutical companies. The Company has entered into these
alliance agreements to develop marketing and /or distribution
relationships with its partners to fully leverage its technology
platform.
The Rx 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. In exchange for these deliverables, the Company
receives payments from its alliance agreement partners for
product shipments, and may also receive royalty, profit sharing,
and /or upfront or periodic milestone payments. Revenue received
from the
Page F-12 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
alliance agreement partners under these agreements are not
subject to deductions for chargebacks, rebates, returns,
shelf-stock adjustments, and other pricing adjustments.
The Company initially defers all revenue earned under its Rx
Partners and OTC Partners alliance agreements. The deferred
revenue is recorded as a liability captioned Deferred
revenue alliance agreements. The
Company also defers its direct product manufacturing costs to
the extent such costs are reimbursable by the Rx Partners and
OTC Partners. These deferred product manufacturing costs are
recorded as an asset captioned Deferred product
manufacturing costs alliance
agreements. The product manufacturing costs in excess of
amounts reimbursable by the Rx Partners or OTC Partners are
recognized as current period cost of revenue.
The Company recognizes such deferred revenue as either Rx
Partner revenue or OTC Partner revenue under the respective
alliance agreement, and amortizes deferred product manufacturing
costs as cost of revenues as the Company
fulfills its contractual obligations. Revenue is recognized over
the respective alliance agreements term of the arrangement
or the Companys expected period of performance, using a
modified proportional performance method, which results in a
greater portion of the revenue being recognized in the period of
initial recognition and the remaining balance being recognized
ratably over either the remaining life of the arrangement or the
Companys expected period of performance of each respective
alliance agreements.
Under the modified proportional performance method of revenue
recognition utilized by the Company, the amount recognized in
the period of initial recognition is based upon the number of
years elapsed under the respective alliance agreement relative
to the estimated total length of the recognition period. Under
this method, the amount of revenue recognized in the year of
initial recognition is determined by multiplying the total
amount realized by a fraction, the numerator of which is the
then current year of the alliance agreement and the denominator
of which is the total estimated life of the alliance agreement.
The amount recognized during each remaining year is an equal pro
rata amount. Finally, cumulative revenue is recognized only to
the extent of cash collected and /or the fair value received.
The Companys judgment is this modified proportional
performance method better aligns revenue recognition with
performance under a long-term arrangement as compared to a
straight-line method.
Research
Partner:
The Research Partner line item of the statement of
operations includes revenue recognized under a Joint Development
Agreement with another pharmaceutical company. The Joint
Development Agreement obligates the Company to provide research
and development services over multiple periods. In exchange for
these services, the Company received an upfront payment upon
signing of the Joint Development Agreement and is eligible to
receive contingent milestone payments, based upon the
achievement of specified events. Additionally, the Company may
also receive royalty payments from the sale, if any, of a
successfully developed and commercialized product under the
Joint Development Agreement.
Revenue received from the provision of research and development
services, including the upfront payment and the contingent
milestone payments, if any, will be deferred and recognized on a
straight-line basis over the expected period of performance of
the research and development services. The Company estimates its
expected period of performance to provide research and
development services is 48 months starting in December 2008
and ending in November 2012. Royalty fee income, if any, will be
recognized as current period revenue when earned. The Company
determined this agreement does not include multiple deliverables
under
EITF 00-21.
Promotional
Partner:
The Promotional Partner line item of the statement
of operations includes revenue recognized under a promotional
services agreement with another pharmaceutical company. The
promotional services agreement obligates the Company to provide
physician detailing sales calls to promote its partners
branded drug product over multiple periods. In exchange for this
service, the Company receives a fixed fee based on the number of
sales force representatives utilized in providing the services
(up to a maximum number of sales force representatives and an
Page F-13 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
annual maximum payment amount per sales force representative).
The Company is also eligible to receive contingent payments
based upon the number of prescriptions filled for its
partners product above a contractual minimum threshold.
Additionally, the Company may be required to refund portions of
the sales force fees if it fails to perform a minimum number of
physician detail calls during specified periods.
The Company recognizes revenue from sales force fees as the
services are provided and the performance obligations are met,
and contingent payments at the time when they are earned. The
Company would record a charge, as a reduction to Promotional
Partner revenue, for periods in which a refund liability had
been incurred. The Company determined this agreement does not
include multiple deliverables under
EITF 00-21.
Shipping
and Handling Fees and Costs
Shipping and handling fees related to sales transactions are
recorded as selling expense. Shipping costs were $599,000,
$652,000 and $344,000 for the years ended December 31,
2008, 2007 and 2006, respectively.
Research
and Development
Research and development activities are expensed as incurred and
consist of self-funded research and development costs and costs
associated with work performed by other participants under
collaborative research and development agreements.
Derivatives
The Company does not engage in hedging transactions for trading
or speculative purposes or to hedge exposure to currency or
interest rate fluctuations. From time to time, the Company does
engage in transactions that result in embedded derivatives (e.g.
Convertible Debt). In accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) and related
pronouncements, the Company records the embedded derivative at
fair value on the balance sheet and records any related gains or
losses in current earnings in the statement of operations.
Income
Taxes
The Company provides for income taxes using the asset and
liability method as required by SFAS No. 109,
Accounting for Income Taxes
(SFAS 109). This approach recognizes the amount
of federal, state, and local taxes payable or refundable for the
current year, as well as deferred tax assets and liabilities for
the future tax consequences of events recognized in the
consolidated financial statements and income tax returns.
Deferred income tax assets and liabilities are adjusted to
recognize the effects of changes in tax laws or enacted tax
rates in the period during which they are signed into law. Under
SFAS 109, a valuation allowance is required when it is more
likely than not all or some portion of the deferred tax assets
will not be realized through generating sufficient future
taxable income.
The Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of SFAS 109 (FIN 48),
effective January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in a
companys financial statements in accordance with
SFAS 109. In this regard, SFAS 109 does not prescribe
a recognition threshold or measurement attribute for the
financial statement recognition and measurement of a tax
position taken in a tax return. FIN 48 clarifies the
application of SFAS 109 by defining the criterion an
individual tax position must meet for any part of the benefit of
the tax position to be recognized in financial statements
prepared in conformity with generally accepted accounting
principles. Under FIN 48, the Company may recognize the tax
benefit from an uncertain tax position only if it is more likely
than not the tax position will be sustained on examination by
the taxing authorities, based solely on the technical merits of
the tax position. The tax benefits recognized in the financial
statements from such a tax position should be measured based on
the largest benefit having a greater than 50% likelihood of
being realized upon ultimate settlement with the
Page F-14 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tax authority. Additionally, FIN 48 provides guidance on
measurement, de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. In accordance with the disclosure requirements of
FIN 48, the Companys policy on income statement
classification of interest and penalties related to income tax
obligations is to include such items as part of total interest
expense and other expense, respectively.
Share-Based
Compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with provisions of
SFAS No. 123(R), Share-Based Payment
(SFAS 123(R)), which it adopted on
January 1, 2006 using the modified prospective method.
Under this method, compensation expense is recognized on a
straight-line basis over the remaining vesting period of any
outstanding unvested options at the adoption date and any new
options granted after the adoption date. Prior periods are not
restated under this method. Prior to adoption of
SFAS 123(R), the Company recognized compensation expense
related to its stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). Under APB 25,
compensation cost for stock options, if any, was measured as the
excess of the quoted market price of the common stock at the
date of grant over the amount an employee must pay to acquire
the stock.
Litigation
Settlement
In November 2008, the Company entered into an agreement to
settle its antitrust claim related to the Companys
Fenofibrate Tablets, 160mg and 54mg, and Fenofribate Capsules,
67mg 134mg, and 200mg, each generic to
TriCor®.
Under this litigation settlement, the Company received
$25,000,000 in December 2008, which was recorded in Other income
(expense), net in the consolidated statement of operations.
Earnings
(loss) per Share
Basic earnings (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share is
computed by dividing net income (loss) by the weighted average
number of common shares adjusted for the dilutive effect of
common stock equivalents outstanding during the period.
Other
Comprehensive Income (Loss)
The Company follows the provisions of SFAS No. 130,
Reporting Comprehensive Income
(SFAS No. 130), which establishes standards for the
reporting and display of comprehensive income and its
components. Comprehensive income is defined to include all
changes in equity during a period except those resulting from
investments by owners and distributions to owners. However,
effective with its majority equity investment in Prohealth
Biotech, Inc. and the formation of its wholly owned subsidiary
Impax Laboratories (Taiwan) Inc., the Company recorded foreign
currency translation gains and losses, which are reported as
comprehensive income (loss). Foreign currency translation losses
for the years ended December 31, 2008, 2007 and 2006 were
$969,000, $23,000 and $3,000, respectively.
Deferred
Financing Costs
The Company capitalizes direct costs incurred with obtaining
debt financing, which are included in Other assets on the
consolidated balance sheet. Deferred financing costs, including
costs incurred in obtaining debt financing, are amortized to
interest expense over the term of the underlying debt on a
straight-line basis, which approximates the effective interest
method. The Company recognized amortized deferred financing
costs of $307,000, $468,000 and $466,000, in the years ended
December 31, 2008, 2007, and 2006, respectively.
Page F-15 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Foreign
Currency Translation
The Company translates the assets and liabilities of the Taiwan
dollar functional currency of its majority-owned affiliate
Prohealth Biotechnology, Inc. and its wholly-owned subsidiary
Impax Laboratories (Taiwan), Inc. into the United States dollar
reporting currency using exchange rates in effect at the end of
each reporting period. The revenue and expense of these entities
are translated using an average of the rates in effect during
the reporting period. Gains and losses from these translations
are recorded as currency translation adjustments included in the
consolidated statements of comprehensive income (loss) and the
consolidated statements of changes in shareholders equity
(deficit).
|
|
3.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157, Fair
Value Measurements, (SFAS 157), which
defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements.
With respect to financial assets and liabilities, SFAS 157
is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. The effective date of SFAS 157,
with respect to non-financial assets and liabilities, was
deferred by FASB Staff Position
FAS 157-2
and is effective for financial statements issued for fiscal
years beginning after November 15, 2008 and interim periods
within those fiscal years. The adoption of SFAS 157 did not
have a significant impact on the Companys consolidated
financial statements.
In June 2007, the EITF reached a final consensus on EITF Issue
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities
(EITF 07-3).
EITF 07-3,
which is effective for fiscal years beginning after
December 15, 2007, requires non-refundable advance payments
for future research and development activities to be capitalized
until the goods have been delivered or related services have
been performed. Adoption is on a prospective basis and could
impact the timing of expense recognition for agreements entered
into after December 31, 2007. The adoption of
EITF 07-3
did not have a significant impact on the Companys
consolidated financial statements.
In November 2007, the EITF reached a final consensus on EITF
Issue
No. 07-1
Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual
Property,
(EITF 07-1).
EITF 07-1
is focused on how the parties to a collaborative agreement
should account for costs incurred and revenue generated on sales
to third parties, how sharing payments pursuant to a
collaborative agreement should be presented in the income
statement and certain related disclosure questions.
EITF 07-1
is effective for fiscal years beginning after December 15,
2008 and interim periods within those fiscal years. Adoption is
on a retrospective basis to all prior periods presented for all
collaborative arrangements existing as of the effective date.
The Company does not expect the adoption of this authoritative
guidance to have a material impact on the Companys
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(Revised 2007), Business Combinations
(SFAS 141(R)) which replaces SFAS 141. The
statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including
changes in the way assets and liabilities are recognized in
purchase accounting. It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies,
requires the capitalization of in-process research and
development at fair value, and requires the expensing of
acquisition related costs as incurred. SFAS 141(R) is
effective for the Company beginning January 1, 2009 and
will apply prospectively to business combinations completed on
or after this date. The effect of SFAS 141(R) on the
Companys consolidated financial statements will be
dependent on the nature and terms of any business combinations
to occur after the effective date.
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements, (SFAS 160). SFAS 160
clarifies a non-controlling (minority) interest in a subsidiary
is an ownership interest in the consolidated entity that should
be reported as equity in the consolidated financial statements,
and
Page F-16 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
establishes a single method of accounting for changes in a
parents ownership interest in a subsidiary that do not
result in deconsolidation. SFAS 160 requires retroactive
adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements of
SFAS 160 shall be applied prospectively. SFAS 160 is
effective for fiscal years beginning on or after
December 15, 2008. The Company does not expect the adoption
of SFAS 160 to have a significant impact on the
Companys consolidated financial statements unless a future
transaction results in a non-controlling interest in a
subsidiary.
In April 2008, the FASB issued FASB Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets (FSP
FAS 142-3).
FSP
FAS 142-3
amends the factors to be considered in developing renewal or
extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS 142, Goodwill
and Other Intangible Assets. The FSP is intended to
improve the consistency between the useful life of a recognized
intangible asset under Statement 142 and the period of expected
cash flows used to measure the fair value of the asset under
SFAS 141(R) and other U.S. generally accepted
accounting principles. The new standard is effective for
financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. The Company does not
expect the adoption of this authoritative guidance to have a
material impact on the Companys consolidated financial
statements.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). This statement identifies the
sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial
statements of nongovernmental entities in conformity with GAAP
in the United States (the GAAP hierarchy). The effective date of
SFAS 162 is November 15, 2008, which is sixty days
following the SECs approval on September 16, 2008 of
the Public Company Accounting Oversight Board
(PCAOB) amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles. The Company does not expect the
adoption of this authoritative guidance to have a material
impact on the Companys consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB
14-1).
FSP APB 14-1
specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that
will reflect the entitys nonconvertible debt borrowing
rate when interest cost is recognized in subsequent periods.
This FASB staff position is effective for financial statements
issued for fiscal years beginning after December 15, 2008,
and for interim periods within those fiscal years, with
retrospective application required. Early adoption is not
permitted. The Company is currently evaluating the impact of FSP
APB 14-1 on
its consolidated financial statements.
In June 2008, the FASB issued FASB Staff Position (FSP)
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(FSP
EITF 03-6-1).
This FSP provides that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings
per share pursuant to the two-class method. FSP
EITF 03-6-1
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those years. The adoption of FSP
EITF 03-6-1
is not expected to have a material impact on the Companys
consolidated financial statements.
Investments consist of commercial paper, corporate bonds and
medium-term notes, government agency obligations and
certificates of deposit. The Companys policy is to invest
in only high quality AAA-rated or investment grade
securities. Investments in debt securities are accounted for as
held-to-maturity and are recorded at amortized cost.
The Company has historically held all investments in debt
securities until maturity and has the ability and intent to
continue to do so. All of the Companys investments have
remaining contractual maturities of less than 12 months and are
classified as short-term. Upon sale the Company uses a specific
identification method.
Page F-17 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of Short-term investments as of December 31, 2008
and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In $000s)
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
6,194
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,194
|
|
Government agency obligations
|
|
|
35,948
|
|
|
|
52
|
|
|
|
(6
|
)
|
|
|
35,994
|
|
Corporate bonds
|
|
|
7,856
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
7,802
|
|
Asset-backed securities
|
|
|
481
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
450
|
|
Certificates of deposit
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
50,710
|
|
|
$
|
52
|
|
|
$
|
(91
|
)
|
|
$
|
50,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In $000s)
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
94,107
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
94,107
|
|
Government agency obligations
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
Corporate bonds
|
|
|
3,202
|
|
|
|
5
|
|
|
|
(8
|
)
|
|
|
3,199
|
|
Asset-backed securities
|
|
|
1,503
|
|
|
|
|
|
|
|
(64
|
)
|
|
|
1,439
|
|
Certificates of deposit
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
106,034
|
|
|
$
|
5
|
|
|
$
|
(72
|
)
|
|
$
|
105,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The details of accounts receivable, net are set forth in the
following table:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In $000s)
|
|
|
Gross accounts receivable
|
|
$
|
54,591
|
|
|
$
|
60,272
|
|
Less: Rebate reserve
|
|
|
(4,800
|
)
|
|
|
(3,603
|
)
|
Less: Chargeback reserve
|
|
|
(4,056
|
)
|
|
|
(2,977
|
)
|
Less: Other deductions
|
|
|
(2,429
|
)
|
|
|
(2,189
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
43,306
|
|
|
$
|
51,503
|
|
|
|
|
|
|
|
|
|
|
Other deductions include allowance for doubtful accounts, and
cash discounts.
Page F-18 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A roll forward of the chargeback and rebate reserve activity is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In $000s)
|
|
|
Rebate reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
3,603
|
|
|
$
|
3,124
|
|
|
$
|
5,391
|
|
Provision recorded during the period
|
|
|
20,361
|
|
|
|
15,968
|
|
|
|
13,856
|
|
Credits issued during the period
|
|
|
(19,164
|
)
|
|
|
(15,489
|
)
|
|
|
(16,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,800
|
|
|
$
|
3,603
|
|
|
$
|
3,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In $000s)
|
|
|
Chargeback reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,977
|
|
|
$
|
4,401
|
|
|
$
|
4,438
|
|
Provision recorded during the period
|
|
|
50,144
|
|
|
|
33,972
|
|
|
|
26,664
|
|
Credits issued during the period
|
|
|
(49,065
|
)
|
|
|
(35,396
|
)
|
|
|
(26,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,056
|
|
|
$
|
2,977
|
|
|
$
|
4,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 and 2007, inventory, net of carrying
value reserves, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In $000s)
|
|
|
Raw materials
|
|
$
|
16,940
|
|
|
$
|
15,005
|
|
Work in process
|
|
|
1,397
|
|
|
|
1,827
|
|
Finished goods
|
|
|
16,504
|
|
|
|
11,373
|
|
|
|
|
|
|
|
|
|
|
Total inventory, net
|
|
$
|
34,841
|
|
|
$
|
28,205
|
|
Less: Non-current inventory, net
|
|
|
(2,536
|
)
|
|
|
(637
|
)
|
|
|
|
|
|
|
|
|
|
Inventory, net
|
|
$
|
32,305
|
|
|
$
|
27,568
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded inventory reserves of $4,405,000 and
$3,148,000 as of December 31, 2008 and 2007, respectively.
To the extent inventory is not scheduled to be utilized in the
manufacturing process and /or sold within 12 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 24 months.
When the Company concludes FDA approval is expected within
approximately six months, the Company will generally begin to
schedule process validation studies as required by the FDA to
demonstrate the production process can be scaled up to
manufacture commercial batches. Consistent with industry
practice, the Company may build quantities of pre-launch
inventories of certain products pending required final FDA
approval and /or resolution of patent infringement litigation,
when, in the Companys assessment, such action is
appropriate to increase the commercial opportunity, FDA approval
is expected in the near term,
and/or the
litigation will be resolved in the Companys favor.
Page F-19 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recognizes pre-launch inventories at the lower of
its cost or the amount expected net selling price. Cost is
determined using a standard cost method, which approximates
actual cost, and assumes a FIFO flow of goods. Costs of
unapproved products are the same as approved products and
include materials, labor, quality control, and production
overhead. The carrying value of unapproved inventory, less
reserves, is approximately $1,368,000 and $63,000 at
December 31, 2008 and 2007, respectively.
The capitalization of unapproved pre-launch inventory involves
risks, including: (i) FDA approval of product may not
occur; (ii) approvals may require additional or different
testing / specifications than used for unapproved
inventory and (iii) in cases where the unapproved inventory
is for a product subject to litigation, the litigation may not
be resolved or settled in favor of the Company. If any of these
risks were to materialize and the launch of the unapproved
product delayed or prevented, then the net carrying value of
unapproved inventory may be partially or fully reserved.
Generally, the selling price of a generic pharmaceutical product
is at discount from the corresponding brand product selling
price. Typically, a generic drug is easily substituted for the
corresponding brand product, and once a generic product is
approved the pre-launch inventory is typically sold within the
next three months. If the market prices become lower than the
historical product costs, then the pre-launch inventory value is
reduced to such lower market prices. If the inventory produced
exceeds the estimated market acceptance of the generic product
and becomes short-dated, a carrying value reserve will be
recorded. In all cases, the pre-launch products have inventory
costs lower than their related net selling prices.
|
|
7.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property, plant and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In $000s)
|
|
|
Land
|
|
$
|
2,270
|
|
|
$
|
2,270
|
|
Buildings and improvements
|
|
|
55,310
|
|
|
|
51,287
|
|
Equipment
|
|
|
49,983
|
|
|
|
44,001
|
|
Office furniture and equipment
|
|
|
6,733
|
|
|
|
5,332
|
|
Construction-in-progress
|
|
|
21,019
|
|
|
|
10,323
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, gross
|
|
|
135,315
|
|
|
|
113,213
|
|
Less: Accumulated depreciation
|
|
|
(39,686
|
)
|
|
|
(31,990
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
95,629
|
|
|
$
|
81,223
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $9,588,000, $8,144,000 and $6,841,000
for the years ended December 31, 2008, 2007 and 2006,
respectively.
Page F-20 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the Companys Accrued
expenses:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In $000s)
|
|
|
Payroll related expenses
|
|
$
|
15,147
|
|
|
$
|
9,983
|
|
Product returns
|
|
|
13,675
|
|
|
|
14,261
|
|
Shelf stock price protection
|
|
|
572
|
|
|
|
384
|
|
Medicaid rebates
|
|
|
584
|
|
|
|
566
|
|
Royalty expense
|
|
|
259
|
|
|
|
551
|
|
Physician detailing sales force fees
|
|
|
2,279
|
|
|
|
2,096
|
|
Legal and professional fees
|
|
|
2,087
|
|
|
|
3,382
|
|
Litigation settlements
|
|
|
4,526
|
|
|
|
1,555
|
|
Other
|
|
|
2,231
|
|
|
|
3,060
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
41,360
|
|
|
$
|
35,838
|
|
|
|
|
|
|
|
|
|
|
Included in Payroll related expenses is $0 and $26,000 at
December 31, 2008 and 2007, respectively related to
post-employment severance related charges. Included in Other at
December 31, 2008 and 2007 are state income taxes payable
amounting to $0 and $1,638,000, respectively.
On January 28, 2009, the Company entered into an agreement
settling the securities class actions pending in the
U.S. District Court for the Northern District of
California. Under the terms of the settlement, plaintiffs have
agreed to dismissal of the actions with prejudice, and
defendants, including the Company, without admitting the
allegations or any liability, have agreed to pay the plaintiff
class $9.0 million, of which the Company paid approximately
$3.4 million in 2009, with the balance paid by the
Companys directors and officers liability insurance
carriers. The Company recorded an accrued expense for its
portion of the settlement payment, in the year ended
December 31, 2008, with such charge included in Other
income (expense), net in the consolidated statement of
operations.
As described more fully above, the Company maintains a return
policy to allow customers to return product within specified
guidelines. The Company estimates a provision for product
returns as a percentage of gross sales based upon historical
experience for sales made through its Global Products sales
channel. Sales of product under the OTC Partners and RX Partners
alliance agreements generally are not subject to returns. A
reconciliation of the Companys product returns reserve
activity is as follows for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In $000s)
|
|
|
Beginning balance
|
|
$
|
14,261
|
|
|
$
|
12,903
|
|
|
$
|
10,625
|
|
Provision related to sales recorded in the period
|
|
|
5,719
|
|
|
|
5,459
|
|
|
|
7,220
|
|
Credits recorded in the period
|
|
|
(6,305
|
)
|
|
|
(4,101
|
)
|
|
|
(4,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
13,675
|
|
|
$
|
14,261
|
|
|
$
|
12,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page F-21 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
FAIR
VALUE OF COMMON STOCK PURCHASE WARRANTS
|
Common
Stock Purchase Warrants
In connection with a May 2003 private financing, the Company
issued 878,815 common stock purchase warrants, each of which
entitled the holder to purchase one share of the Companys
common stock at an exercise price of $7.421 per share for five
years from the date of issuance.
During 2008, 2007, and 2006, warrants for 604,887, 36,616 and
100,000 shares of the Companys common stock,
respectively, were exercised. At December 31, 2008, no
common stock purchase warrants remained outstanding.
Consistent with the guidance in Emerging Issues Task Force Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock
(EITF 00-19),
the common stock purchase warrants were classified as
liabilities, as there were certain conditions attached to the
warrants which may have required cash settlement. Accordingly,
the warrants were accounted for at fair value and changes in
fair value were recognized as a component of other
income at each quarter end period over the life of the
respective warrants. The warrants are also considered
derivatives consistent with the guidance in SFAS 133.
The Company used a Black-Scholes option pricing model to value
the common stock purchase warrants, with the key valuation
assumptions being the terms of the warrants and the actual price
of the Companys common stock at the end of each quarter,
as well as a volatility rate calculated based on changes in the
price of the Companys common stock and a risk-free
interest rate corresponding to the rate on Treasury securities
with a time frame approximately the same as the common stock
purchase warrants remaining time to expiration as of each
valuation date. During the three years ended December 31,
2008, the estimated fair value of the warrants ranged from a
high of $5.66 per share on February 24, 2006 to a low of
$1.62 on June 30, 2006.
The following table summarizes the number of outstanding common
stock purchase warrants and the corresponding estimated fair
value of the common stock purchase warrant liability at each
December 31, year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Total
|
|
|
|
Purchase
|
|
|
Purchase
|
|
|
Reported
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Liability
|
|
|
|
Outstanding
|
|
|
Value
|
|
|
Value
|
|
|
Ending balance December 31, 2005
|
|
|
741,503
|
|
|
$
|
5.36
|
|
|
$
|
3,977,000
|
|
Warrants exercised in 2006
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2006
|
|
|
641,503
|
|
|
$
|
3.60
|
|
|
$
|
2,313,000
|
|
Warrants exercised in 2007
|
|
|
(36,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2007
|
|
|
604,887
|
|
|
$
|
3.78
|
|
|
$
|
2,285,000
|
|
Warrants exercised in 2008
|
|
|
(604,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As noted above, the estimated fair value of the common stock
purchase warrants at each balance sheet date was determined
using a Black-Scholes option pricing model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Volatility (range)
|
|
|
43.0 - 49.0
|
%
|
|
|
24.2 - 46.4
|
%
|
|
|
48.7 - 57.6
|
%
|
Risk-free interest rate (range)
|
|
|
1.25 - 1.50
|
%
|
|
|
3.4 - 4.9
|
%
|
|
|
4.7 - 5.2
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The expected life of the common stock purchase warrants was
estimated based on the time-to-expiration at each balance sheet
date.
Page F-22 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is subject to U.S. federal, state and local
income taxes. The provision for (benefit from) income taxes on
earnings is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In $000s)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal taxes
|
|
$
|
6,315
|
|
|
$
|
8,383
|
|
|
$
|
320
|
|
State taxes
|
|
|
(62
|
)
|
|
|
6,802
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense
|
|
|
6,253
|
|
|
|
15,185
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal taxes
|
|
$
|
3,478
|
|
|
$
|
17,830
|
|
|
$
|
(4,971
|
)
|
Federal taxes-change in valuation allowance
|
|
|
|
|
|
|
(66,783
|
)
|
|
|
4,651
|
|
State taxes
|
|
|
1,240
|
|
|
|
(347
|
)
|
|
|
(2,391
|
)
|
State taxes-change in valuation allowance
|
|
|
|
|
|
|
(14,702
|
)
|
|
|
2,341
|
|
Foreign taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax expense (benefit)
|
|
|
4,718
|
|
|
|
(64,002
|
)
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
10,971
|
|
|
$
|
(48,817
|
)
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the difference between the tax provision
(benefit) at federal statutory rates and actual income taxes on
income (loss) before income taxes, which includes federal,
state, and other income taxes, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In $000s)
|
|
|
Income (loss) before income taxes
|
|
$
|
29,671
|
|
|
|
|
|
|
$
|
77,108
|
|
|
|
|
|
|
$
|
(11,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision (benefit) at federal statutory rate
|
|
|
10,385
|
|
|
|
35.0
|
%
|
|
|
26,988
|
|
|
|
35.0
|
%
|
|
|
(4,047
|
)
|
|
|
(34.0
|
)%
|
Increase (decrease) in tax rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes, net of federal benefit
|
|
|
130
|
|
|
|
0.5
|
%
|
|
|
2,886
|
|
|
|
3.8
|
%
|
|
|
(1,699
|
)
|
|
|
(14.3
|
)%
|
Increase in federal statutory tax rate on deferred tax accounts
|
|
|
|
|
|
|
|
|
|
|
(1,993
|
)
|
|
|
(2.6
|
)%
|
|
|
|
|
|
|
|
|
Research and development credits
|
|
|
(2,228
|
)
|
|
|
(7.5
|
)%
|
|
|
(1,306
|
)
|
|
|
(1.7
|
)%
|
|
|
(996
|
)
|
|
|
(8.3
|
)%
|
Share-based compensation
|
|
|
1,438
|
|
|
|
4.9
|
%
|
|
|
528
|
|
|
|
0.7
|
%
|
|
|
232
|
|
|
|
2.0
|
%
|
Domestic manufacturing deduction
|
|
|
(531
|
)
|
|
|
(1.8
|
)%
|
|
|
(676
|
)
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
Change in warrant fair value
|
|
|
(432
|
)
|
|
|
(1.5
|
)%
|
|
|
38
|
|
|
|
0.1
|
%
|
|
|
(373
|
)
|
|
|
(3.1
|
)%
|
Provision for uncertain tax positions
|
|
|
1,050
|
|
|
|
3.5
|
%
|
|
|
6,118
|
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
1,159
|
|
|
|
3.9
|
%
|
|
|
85
|
|
|
|
0.1
|
%
|
|
|
31
|
|
|
|
0.2
|
%
|
Change in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(81,485
|
)
|
|
|
(105.7
|
)%
|
|
|
6,992
|
|
|
|
58.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
10,971
|
|
|
|
37.0
|
%
|
|
$
|
(48,817
|
)
|
|
|
(63.3
|
)%
|
|
$
|
140
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes are provided for temporary differences
between the financial statement carrying values and the tax
bases of the Companys assets and liabilities. Deferred tax
assets result principally from deferred revenue related to the
Companys alliance agreements, consisting of the Teva
Agreement, DAVA Agreement, OTC Agreements, and the Medicis Joint
Development Agreement, each as defined below, as well as
recording certain
Page F-23 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accruals and reserves currently not deductible for tax purposes,
and, additionally, net operating loss carryforwards and from tax
credit carryforwards. Deferred tax liabilities principally
result from deferred product manufacturing costs related to the
alliance agreements, and the use of accelerated depreciation and
amortization methods for tax reporting purposes.
The components of the Companys deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In $000s)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
830
|
|
|
$
|
1,024
|
|
Research and development credits
|
|
|
3,009
|
|
|
|
6,118
|
|
Inventory reserves
|
|
|
2,490
|
|
|
|
1,249
|
|
Accrued expenses
|
|
|
11,711
|
|
|
|
10,230
|
|
Deferred revenues
|
|
|
87,789
|
|
|
|
81,654
|
|
Accrued exclusivity period fee payments
|
|
|
3,073
|
|
|
|
7,145
|
|
Litigation settlements
|
|
|
2,376
|
|
|
|
3,345
|
|
Depreciation and amortization
|
|
|
371
|
|
|
|
|
|
Other
|
|
|
4,838
|
|
|
|
3,752
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
$
|
116,487
|
|
|
$
|
114,517
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Tax depreciation and amortization in excess of book amounts
|
|
$
|
2,205
|
|
|
$
|
1,508
|
|
Deferred manufacturing costs
|
|
|
42,267
|
|
|
|
37,468
|
|
Deferred revenues
|
|
|
854
|
|
|
|
|
|
Other
|
|
|
566
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
$
|
45,892
|
|
|
$
|
39,204
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
70,595
|
|
|
$
|
75,313
|
|
|
|
|
|
|
|
|
|
|
The breakdown between current and long-term deferred tax assets
and tax liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In $000s)
|
|
|
Current deferred tax assets
|
|
$
|
23,940
|
|
|
$
|
32,336
|
|
Current deferred tax liabilities
|
|
|
(5,944
|
)
|
|
|
(4,960
|
)
|
|
|
|
|
|
|
|
|
|
Current deferred tax assets, net
|
|
|
17,996
|
|
|
|
27,376
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets
|
|
|
92,547
|
|
|
|
82,181
|
|
Non-current deferred tax liabilities
|
|
|
(39,948
|
)
|
|
|
(34,244
|
)
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets, net
|
|
|
52,599
|
|
|
|
47,937
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
$
|
70,595
|
|
|
$
|
75,313
|
|
|
|
|
|
|
|
|
|
|
The Company historically recorded a deferred tax asset valuation
allowance, based upon its history of generating net operating
losses (NOLs) and therefore not having regular
income tax obligations. The Company did, however, make payments
for federal and state alternative minimum taxes
(AMT) in years 2006 and 2005, and while these AMT
payments were recorded as deferred tax assets, they did not have
a valuation reserve, as such AMT
Page F-24 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
payments have no expiration date. The Company had a state AMT
deferred tax asset of $717,000 at December 31, 2008, with
an indefinite carryforward until used against regular state
income taxes.
During the second quarter of 2007, as a result of significant
revenue earned under one of the alliance agreements, the Company
determined it was more likely than not its deferred tax assets
would be realized as an offset against current income tax
obligations. Accordingly, at June 30, 2007, the Company
reversed the deferred tax asset valuation allowance in the
amount of approximately $91,962,000, of which $10,477,000 was
credited to additional paid-in capital, as the tax benefit
resulted from employee stock options which were exercised prior
to January 1, 2006.
The Company had no federal NOL carryforwards as of
December 31, 2008 and 2007, and $75,369,000 as of
December 31, 2006. The Company also had state and local NOL
carryforwards of $12,773,000, $15,773,000 and $21,493,000 as of
December 31, 2008, 2007 and 2006, respectively. The state
NOLs as of December 31, 2008 have a twenty year
carryforward period, and expire between the years 2020 and 2023,
as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
|
|
(In $000s)
|
|
|
2020
|
|
$
|
2,075
|
|
2021
|
|
|
4,968
|
|
2022
|
|
|
1,955
|
|
2023
|
|
|
3,775
|
|
|
|
|
|
|
Total
|
|
$
|
12,773
|
|
|
|
|
|
|
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109
(FIN 48), which sets out the use of a single
comprehensive model to address uncertainty in tax positions and
clarifies the accounting for income taxes by establishing the
minimum recognition threshold and a measurement attribute for
the financial statement benefit of tax positions taken or
expected to be taken in a tax return. The Company has recognized
a provision for uncertain tax positions related to federal and
state research and development credits. A reconciliation of the
accrual of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
(In $000s)
|
|
|
Balance at January 1, 2008
|
|
$
|
6,118
|
|
Increase/(decrease) based on prior year tax positions
|
|
|
|
|
Increase/(decrease) based on current year tax positions
|
|
|
1,397
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
7,515
|
|
|
|
|
|
|
The balance of unrecognized tax benefits at December 31,
2008, if ultimately recognized, will reduce the Companys
annual effective tax rate. The Company is not able to determine
whether there will be any significant increase or decrease in
the unrecognized tax benefits over the next 12 months.
The Company recognizes interest and penalties related to income
tax matters as a part of total interest expense and other
expense, respectively. At December 31, 2008, the Company
had $347,000 of accrued interest expense related to its reserve
for uncertain tax positions. The Company has taken the
appropriate steps to eliminate exposure to penalties related to
its uncertain tax positions and therefore did not accrue
penalties at December 31, 2008.
The tax years ended December 31, 2008, 2007, 2006 and 2005
remain open to examination by the Internal Revenue Service and
Pennsylvania Department of Revenue. The tax years ended
December 31, 2008, 2007, 2006, 2005 and 2004 remain open
for examination by the California Franchise Tax Board. The
Company is currently under audit by the California Franchise Tax
Board for the tax years ended December 31, 2006 and 2005.
The Company is currently undergoing a sales and use tax audit by
the California State Board of Equalization for the period
July 1, 2005 through June 30, 2008.
Page F-25 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
REVOLVING
LINE OF CREDIT
|
In December 2005, the Company and Wachovia Bank, N.A.
(Wachovia) entered into a three year credit
agreement (Credit Agreement), which provides for a
$35,000,000 revolving credit facility intended for working
capital and general corporate purposes. The revolving credit
facility is collateralized by eligible accounts receivable,
inventory, and machinery and equipment, subject to limitations
and other terms. The interest rate for the revolving credit
facility is either the prime rate, or LIBOR plus a margin
ranging from 1.50% to 2.25% based upon terms and conditions, at
the Companys option.
The Credit Agreement contains various financial covenants, the
most significant of which include a fixed charge coverage
ratio and a capital expenditure limitation. The fixed
charge coverage ratio requires EBITDA less cash paid for taxes,
dividends, and certain capital expenditures, to be not less than
1.25 to 1.00 as compared to scheduled principal payments coming
due in the next 12 months plus cash interest paid during
the applicable period. The Company was limited to capital
expenditures of no more than $50,000,000 for the period from
January 1, 2005 to December 31, 2006; $25,000,000 for
the period from January 1, 2007 to December 31, 2007;
and $34,000,000 for the period from January 1, 2008 to
December 31, 2008. The Credit Agreement also provides for
certain information reporting covenants, including a requirement
to provide Wachovia with certain periodic financial information.
On October 14, 2008, the Company and Wachovia entered into
the First Amendment to the Credit Agreement (First
Amendment). Under the First Amendment, Wachovia agreed to
waive the Companys failure to: (i) timely deliver
annual financial statements for the years ended
December 31, 2004, December 31, 2005,
December 31, 2006 and December 31, 2007 and interim
financial statements for each period ending on or after
December 31, 2005; and (ii) comply with the fixed
charge coverage ratio at June 30, 2006. In addition, the
parties agreed to an increase in the unused line fee from
25 basis points per annum to 50 basis points per
annum. During the years ended December 31, 2008, 2007 and
2006, the Company paid $108,000, $88,000 and $93,000,
respectively, for unused line fees to Wachovia.
On December 31, 2008, the Company and Wachovia entered into
the Second Amendment to the Credit Agreement, which extended the
termination date from December 31, 2008 to March 31,
2009. All other material terms of the Credit Agreement remain in
full force and effect.
At December 31, 2008, the Company was in compliance with
the various financial and information reporting covenants
contained in the Credit Agreement. There were no amounts
outstanding under the revolving credit facility as of
December 31, 2008 and 2007, respectively.
3.5% Convertible
Senior Subordinated Debentures
On June 27, 2005, the Company sold $75,000,000 of 3.5%
convertible senior subordinated debentures due 2012
(3.5% Debentures) to a qualified institutional
buyer. The net proceeds from the sale of the
3.5% Debentures, together with additional funds, were used
to repay the Companys $95,000,000 in aggregate principal
amount of its 1.25% convertible senior subordinated debentures
due 2024 (1.25% Debentures). The Company was
required to repay the 1.25% Debentures, which had been
issued in April 2004, because of its failure to file its 2004
annual report on
Form 10-K
with the SEC, which failure constituted a default under the
indenture governing the 1.25% Debentures.
The 3.5% Debentures are senior subordinated, unsecured
obligations of the Company and rank pari passu with the
Companys accounts payable and other liabilities, and are
subordinate to certain senior indebtedness, including the
Companys credit agreement with Wachovia. The Indenture
governing the 3.5% Debentures limits the aggregate amount
of the Companys indebtedness ranking senior to or pari
passu with the 3.5% Debentures to the greater of
(i) $50,000,000 or (ii) as of any date, four times the
Companys EBITDA for the immediately preceding twelve month
period for which public financial information is available. The
3.5% Debentures bear interest at the rate of
Page F-26 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
3.5% per annum. Interest on the 3.5% Debentures is payable on
June 15 and December 15 of each year, beginning on
December 15, 2005.
While the 3.5% Debentures mature on June 15, 2012 and
may not be redeemed by the Company prior to maturity, holders of
the 3.5% Debentures have the right to require the Company
to repurchase all or any part of their 3.5% Debentures on
June 15, 2009 at a repurchase price equal to 100% of the
principal amount of the 3.5% Debentures, plus accrued and
unpaid interest and liquidated damages, if any, up to but
excluding the repurchase date.
Each 3.5% Debenture was issued at a price of $1,000 and is
convertible into Company common stock at an initial conversion
price of $20.69 per share.
Under a related Registration Rights Agreement, the Company
agreed to file a registration statement covering the
3.5% Debentures no later than March 24, 2006 and to
have the registration statement declared effective by the SEC no
later than June 22, 2006. As these deadlines were not met,
the Company is required to pay the holders of the
3.5% Debentures liquidated damages, initially at the annual
rate of 0.25% of the aggregate principal amount of the 3.5%
Debentures, and then escalating to 0.50% of such amount until
the registration statement became effective. The Company
incurred expense related to these liquidated damages of
$261,000, $464,000 and $144,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Prior to June 15, 2011, the 3.5% Debentures will not
be convertible unless certain contingencies occur, including the
closing price of the common stock having exceeded 120% of the
conversion price for at least twenty trading days during the 30
consecutive trading days ending on the last trading day of the
immediately preceding fiscal quarter. Upon conversion, the value
(conversion value) of the cash and shares of common
stock, if any, to be received by a holder converting $1,000
principal amount of the 3.5% Debentures will be determined
by multiplying the applicable conversion rate by the 20-day
average closing price of the common stock beginning on the
second trading day immediately following the day on which the
3.5% Debentures are submitted for conversion. The conversion
value will be payable as follows: (1) an amount in cash
(principal return) equal to the lesser of
(a) the conversion value and (b) $1,000, and
(2) to the extent the conversion value exceeds $1,000, a
number of shares of common stock with a value equal to the
difference between the conversion value and the principal return
or cash, at the Companys option.
In addition, if a holder elects to convert 3.5% Debentures
within a period of 30 trading days after the effective date of a
fundamental change transaction consisting generally
of a transaction constituting a change of control of the
Company, as defined by the Indenture the holder will
be entitled to receive a make-whole premium
consisting of additional shares of the Companys common
stock (or, if the Company so elects, the same consideration
offered in connection with the fundamental change).
In August and September 2008, the Company repurchased at a
discount an aggregate of $62,250,000 face value principal amount
of the 3.5% Debentures at the request of the holders. The
Company paid $59,916,000, plus $433,000 of accrued interest
expense. Proceeds to fund the repurchase of the
3.5% Debentures were generated from the liquidation of the
Companys short-term investments. The Company recorded a
net gain on the 3.5% Debentures repurchases of $1,319,000,
net of a $1,015,000 write-off of related unamortized deferred
finance costs.
Page F-27 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the Companys long-term debt:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In $000s)
|
|
|
3.5% Debentures(1)
|
|
$
|
12,750
|
|
|
$
|
75,000
|
|
8.17% Term loan Cathay Bank(2)
|
|
|
|
|
|
|
2,215
|
|
7.5% Term loan Cathay Bank(3)
|
|
|
|
|
|
|
2,957
|
|
Subordinated promissory note(4)
|
|
|
7,760
|
|
|
|
9,428
|
|
Vendor financing agreement(5)
|
|
|
137
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
20,647
|
|
|
$
|
89,744
|
|
Less: Current portion of long-term debt
|
|
|
(14,657
|
)
|
|
|
(69,234
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
5,990
|
|
|
$
|
20,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In August and September 2008, the Company repurchased at a
discount an aggregate of $62,250,000 face value principal amount
of its 3.5% Debentures at the request of the holders. The
remaining $12,750,000 principal amount matures on June 15,
2012, but is subject to repurchase by the Company at 100% of the
outstanding principal amount on June 15, 2009, at the
option of the holders. |
|
(2) |
|
Term loan payable at 8.17% to Cathay Bank in 83 monthly
installments of $19,540 commencing June 28, 2001 through
May 27, 2008 with a balance due on June 28, 2008. The
8.17% Cathay Bank loan was collateralized by land, building and
building improvements in the Companys 35,000 square
foot headquarters and research facility in Hayward, California.
This loan was paid in full without penalty in May 2008. |
|
(3) |
|
Term loan payable at 7.5% to Cathay Bank in 83 monthly
installments of $24,629 commencing November 14, 2001
through October 13, 2008 with a balance of $2,917,598 due
on November 14, 2008. The 7.5% Cathay Bank loan was
collateralized by land, building and building improvements in
the Companys 50,000 square foot manufacturing
facility in Hayward, California. This loan was paid in full
without penalty in May 2008. |
|
(4) |
|
Subordinated promissory note in the amount of $11,000,000
related to the June 2006 settlement of litigation brought by
Solvay Pharmaceuticals, Inc. (Solvay). In the
settlement, the Company agreed to pay $23,000,000 to Solvay,
with such amount recorded as litigation settlement expense in
the Companys 2004 financial statements. The settlement
included a $12,000,000 cash payment upon signing of the
settlement agreement with the remaining $11,000,000 to be paid
under the terms of the subordinated promissory note between the
Company and Solvay. The subordinated promissory note interest
rate is 6.0% per annum, and requires the Company to pay 24
quarterly installments of $549,165, commencing in March 2007
through December 2012. Additionally, the subordinated promissory
note becomes immediately due and payable upon the occurrence of
a default in any payment due, a change in control of the
Company, voluntary or involuntary bankruptcy proceeding by or
against the Company, and working capital less than 150% of the
remaining unpaid balance of the subordinated promissory note. At
December 31, 2008, none of these events has occurred to
date. |
|
(5) |
|
Vendor financing agreement related to software licenses, with
interest at 3.1% annum, and two monthly installments of $0 and
thirty-four monthly installments of $12,871, commencing December
2006 through November 2009. |
Page F-28 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Scheduled maturities and repurchases of long-term debt as of
December 31, 2008 are as follows:
|
|
|
|
|
|
|
(In $000s)
|
|
|
2009
|
|
$
|
14,657
|
|
2010
|
|
|
1,879
|
|
2011
|
|
|
1,994
|
|
2012
|
|
|
2,117
|
|
2013
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,647
|
|
|
|
|
|
|
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, 12 specified controlled release generic
pharmaceutical products, each for a 10-year period. The
significant rights and obligations under the Teva Agreement are
as follows:
Product Development, Manufacture and
Sales: The Company is required to develop the
products, obtain FDA approval to market the products, and
manufacture and deliver the products to Teva. The
product-linked
revenue the Company earns under the Teva Agreement consists of
Tevas reimbursement of all of the Companys
manufacturing costs plus a fixed percentage of defined profits
on Tevas sales to its customers. Manufacturing costs are
direct cost of materials plus actual direct manufacturing costs,
including packaging material, not to exceed specified limits.
The Company invoices Teva for the manufacturing costs when
products are shipped to Teva, and Teva is required to pay the
invoiced amount within 30 days. Teva has the exclusive right to
determine all terms and conditions of the product sales to its
customers. Within 30 days of the end of each calendar quarter,
Teva is required to provide the Company with a report of its net
sales and profits during the quarter and to pay the Company its
share of the profits resulting from those sales on a quarterly
basis. Net sales are Tevas gross sales less discounts,
rebates, chargebacks, returns, and other adjustments, all of
which are based upon fixed percentages, except chargebacks,
which are estimated by Teva and subject to quarterly
true-up
reconciliation.
Cost Sharing: The Teva Agreement required Teva
to pay the Company $300,000 at the inception of the Teva
Agreement for reimbursement of regulatory expenses previously
incurred, and thereafter to pay specified percentages of ongoing
regulatory costs incurred in connection with obtaining and
maintaining FDA approval, patent infringement litigation and
regulatory litigation.
Advance Deposit: Teva agreed to provide the
Company with a $22,000,000 advance deposit payable for the
contingent purchase of exclusive marketing rights for the 12
products. The advance deposit included
debt-like
terms to facilitate repayment to Teva to the extent the
contingencies did not occur. Specifically, the advance deposit
payable accrued interest at an 8.0% annual rate from the June
2001 Teva Agreement inception date, and required the Company to
repay the advance deposit payable no later than January 15,
2004. In addition, the advance deposit included the following
provisions:
|
|
|
|
|
Contingent Sale of Market Exclusivity
The Teva Agreement obligated the Company
to deliver and Teva to purchase the exclusive marketing rights
for four of the 12 covered products for $22,000,000 to the
extent the Company achieved specified product development
milestones relating to four products. Portions of this
$22,000,000 purchase price were assigned to milestones based on
their negotiated values at the inception of the Teva Agreement.
If some, but not all of the milestones were achieved, then
exclusive marketing rights would transfer only for those
products for which the related milestones were met. To the
extent the
|
Page F-29 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
milestones were not achieved by January 15, 2004 and Teva
had not exercised the contingent option to purchase market
exclusivity described below, the related exclusive marketing
rights would not be transferred to Teva, the Company would be
required to repay the corresponding portions of the $22,000,000
advance deposit and Teva would retain non-exclusive marketing
rights with respect to the related products. The milestones and
related portions to be repaid were: $2,000,000 if tentative FDA
approval for one specified product was not obtained by
June 15, 2002; $5,000,000 if the same product was not
launched by February 15, 2003; $5,000,000 and $4,000,000,
respectively, if two additional products were not launched by
December 15, 2003; $1,000,000 if tentative FDA approval of
a fourth product was not received by January 15, 2003; and
$5,000,000 if the same product was not launched by
December 15, 2003.
|
|
|
|
|
|
Contingent Option to Purchase Market Exclusivity
The Company also granted Teva an option
to purchase the exclusive marketing rights to the four specified
products to the extent the product development milestones were
not met. Teva could exercise this right by forgiving repayment
of half of the foregoing portions of the $22,000,000 advance
deposit payable as assigned in the Teva Agreement to the
specified product.
|
|
|
|
The Companys Share Settlement Option
To the extent the Company failed to
achieve the milestones and Teva failed to exercise its option to
purchase market exclusivity for the four specified products and
the Company was thus required to repay the advance deposit, the
Company had the option to settle, or repay, the applicable
portion of the advance deposit either in cash or with shares of
its common stock valued at the average closing price of the
stock during the ten trading days ending two days prior to the
date of Tevas receipt of the shares (Designated
Share Price).
|
|
|
|
Interest Forgiveness /FDA Approval Provision
Under the terms of the Teva Agreement,
when the Company received FDA approval for any three of the 12
covered products, the entire amount of interest payable under
the advance deposit would be forgiven. The nominal amount of the
accrued interest expected to be incurred over the life of the
advance deposit was estimated not to exceed approximately
$4,400,000.
|
Sale of Common Stock: The Teva Agreement
required Teva to purchase $15,000,000 of the Companys
common stock in four equal quarterly installments beginning
September 15, 2001. The number of shares purchased in each
installment was determined by dividing $3,750,000 by the
Designated Share Price. Pursuant to these provisions, the
Company sold a total of 1,462,083 shares of common stock to
Teva, with the last sale occurring on June 15, 2002. The
stock purchase agreement included the following terms:
|
|
|
|
|
Contingent Stock Repurchase Option. The
Teva Agreement divided eleven of the products into three
categories, referred to as product tiers. The
Tier 1 products were those pending FDA approval when the
Teva Agreement was entered into, whereas Tier 2 and
Tier 3 products were those for which applications to the
FDA had not as yet been filed at the inception of the Teva
Agreement. The Teva Agreement gave the Company the option to
repurchase from Teva 243,729 shares of its common stock
(one-sixth of the shares initially sold to Teva) for $1.00
contingent upon Teva achieving a commercial sale of either a
Tier 2 or Tier 3 product.
|
Other Provisions: The Teva Agreement also
provides for other deliverables by the Company, consisting of
research and development activities, including regulatory
services.
Revenue Recognition under the Teva
Agreement: The Company applied its accounting
policy to determine whether the multiple deliverables within the
Teva Agreement should be accounted for as separate units of
accounting or as a single unit of accounting. The Company
identified the following deliverables under the Teva Agreement:
manufacture and delivery of 12 products; research and
development activities (including regulatory services) related
to each product; and market exclusivity associated with the
products.
The Company determined no single deliverable represented a
separate unit of accounting as there was not sufficient
objective and reliable evidence of the fair value of any single
deliverable. When the fair value of a
Page F-30 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deliverable can not be determined, it is not possible for the
Company to determine whether consideration provided by Teva
under the Teva Agreement is in exchange for a given deliverable.
The Company thus concluded the multiple deliverables under the
Teva Agreement represents a single unit of accounting.
The Company initially defers all revenue earned under the Teva
Agreement and then recognizes such deferred revenue over the
life of the Teva Agreement, estimated to be 18 years, measured
from the June 2001 inception of the Teva Agreement through 10
years following the estimated time of the last product FDA
approval. The deferred portion of the revenue is recorded as a
liability captioned Deferred revenue
alliance agreements. Revenue is
recognized using a modified proportional performance method,
which results in a greater portion of the revenue being
recognized in the period of initial recognition and the balance
recognized ratably over the remaining life of the agreement.
This modified proportional performance method better aligns
revenue recognition with performance under a long-term
arrangement as compared to a straight-line method.
The Company also defers its direct manufacturing costs
reimbursable by Teva and recognizes them in the same manner as
it recognizes the related product revenue. These deferred direct
manufacturing costs are recorded as an asset captioned
Deferred product manufacturing costs
alliance agreements. Manufacturing
costs in excess of amounts reimbursable under the terms of the
Teva Agreement are not deferred.
The elements of revenue under the Teva Agreement are summarized
as follows:
|
|
|
|
|
Tevas reimbursement of manufacturing costs;
|
|
|
|
The Companys profit share associated with Tevas
sales of products to its customers;
|
|
|
|
The sale of market exclusivity for certain products;
|
|
|
|
The estimated fair value received upon the Companys
exercise of the contingent stock repurchase option upon
achieving the commercial sale of a Tier 2 or Tier 3
product;
|
|
|
|
Tevas reimbursement of regulatory and litigation
costs; and
|
|
|
|
The value received as a result of the forgiveness of interest on
the advance deposit upon receipt of the third FDA approval to
market a product.
|
Recognition of each of the revenue elements while spread over
the estimated life of the agreement, begins upon occurrence of
the following events:
|
|
|
|
|
Tevas reimbursement of manufacturing costs
at the time the Company delivers the product
to Teva;
|
|
|
|
The Companys pro rata profit share at
the time Teva reports the Companys respective pro rata
profit share to the Company;
|
|
|
|
The sale of market exclusivity at the time
market exclusivity was delivered by Tevas exercise of its
contingent option to purchase market exclusivity;
|
|
|
|
The milestone associated with the first commercial sale of a
Tier 2 or Tier 3 product and concurrent exercise of
the contingent stock repurchase option at the time
the right to exercise the option accrued;
|
|
|
|
Cost sharing payments at the time the related
costs are incurred (except for the $300,000 cost reimbursement
payable upon inception of the Teva Agreement, recognition of
which began at such inception); and
|
|
|
|
Forgiveness of interest at the time the
Company received its third FDA approval to market a product
covered by the agreement.
|
Revenue is recognized only to the extent of cumulative cash
collected from product sales and cost-sharing payments and, with
respect to forgiveness of the advance deposit and interest
thereon and exercise of the contingent
Page F-31 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock repurchase option, the fair value received upon such
forgiveness and exercise, being greater than cumulative revenue
recognized.
Under the modified proportional performance method utilized by
the Company, the amount recognized for a given element in the
period of initial recognition is based upon the number of years
elapsed prior to the respective elements event occurring
under the Teva Agreement relative to the estimated life of the
Teva Agreement. Under this method the amount of revenue
recognized in the year of initial recognition is determined by
multiplying the total amount realized by a fraction, the
numerator of which is the then current year of the agreement and
the denominator of which is 18 years i.e. the
estimated life of the Teva Agreement. The amount recognized
during each remaining year is
1/18
of such amount. Thus, for example, with respect to profit share
reported by Teva during 2005 (the fourth year of the agreement),
4/18
of the amount reported is recognized during 2005 and
1/18
of the amount is recognized during each of the remaining 14
years of the estimated life of the Teva Agreement.
Teva
Agreement Transactions
The Advance Deposit: The $22,000,000 advance
deposit relating to the Companys sale of market
exclusivity to Teva (in certain circumstances) and Tevas
contingent option to purchase market exclusivity from the
Company (in other circumstances), represents Tevas
prepayment of the market exclusivity purchase price associated
with these two features. The Company recorded the $22,000,000
advance deposit as an advance deposit payable liability and
accounted for at its face amount through its ultimate settlement
in January 2004.
The milestones potentially triggering Tevas purchase of
market exclusivity for the $22,000,000 advance deposit were not
met. Teva exercised its contingent option to purchase market
exclusivity for two products, including: one for $3,500,000 in
December 2003, and the other for $2,500,000 in January 2004. The
corresponding amounts of the $22,000,000 advance deposit were
thus extinguished at those times. Given the advance deposit was
within 30 days of maturity when Teva exercised its contingent
purchase options, the fair value of the forgiven portion of the
advance deposit approximated book value and any gain or loss on
the extinguishment of the liability was immaterial. Accordingly,
on the dates of exercise the Company reclassified the $3,500,000
and $2,500,000 principal amounts of the advance deposit
associated with the exercised options to deferred revenue under
the Teva Agreement. Such amounts are being recognized as revenue
over the life of the Teva Agreement in accordance with the
modified proportional performance method.
Share-Settlement Option: The Company repaid
the remaining $16,000,000 of the advance deposit payable through
issuance of shares of the Companys common stock.
Specifically, $13,500,000 was repaid, by the issuance of
888,918 shares on September 26, 2003 and the remaining
$2,500,000 was repaid by the issuance of 160,751 shares on
January 14, 2004. The provision enabling the Company to
repay the advance deposit with shares of common stock was
embedded in the Teva Agreement.
Interest Forgiveness and FDA Approval
Provision: The Company achieved the milestone
triggering forgiveness of interest on November 21, 2002. In
accordance with the Teva Agreement, the Companys
obligation to pay interest on the $22,000,000 advance payable,
including the amount previously accrued of approximately
$2,500,000 and an imputed discount of approximately $1,900,000,
was forgiven and the resulting $4,400,000 was recorded as
deferred revenue under the Teva Agreement. Such amount being
recognized as revenue over the life of the Teva Agreement in
accordance with the modified proportional performance method.
Sale of Common Stock: Under the terms of the
Teva Agreement, the Company sold 1,462,083 shares to Teva
in four consecutive quarterly installments beginning in June
2001. The number of shares sold in each quarterly installment
was determined by dividing $3,750,000 by the Designated Share
Price. The Company determined this provision met the
SFAS 133 definition of an embedded derivative. However, its
value was less than $50,000, which the Company deemed
immaterial, and this feature of the agreement was therefore not
accounted for separately as a derivative.
Page F-32 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contingent Stock Repurchase Option: The
Companys option to repurchase one-sixth of the shares it
sold Teva is embedded in the agreement. When evaluated on an
as if freestanding basis, the option qualifies for a
scope exception under SFAS 133 because, as a freestanding
instrument, it would be indexed to the Companys own stock
and classified as equity. As a result, the contingent stock
repurchase option did not require bifurcation and separate
accounting as a derivative instrument pursuant to the provisions
of SFAS 133. Rather, consistent with its revenue
recognition policy, the Company did not begin recognizing any
revenue associated with the value received upon exercise of the
contingent stock repurchase option until Teva achieved the first
commercial sale of a Tier 2 or Tier 3 product, which
occurred on December 15, 2006. The Company determined the
fair value of this provision was approximately $2,200,000 (based
upon the fair value of the Companys common stock on the
date the milestone was met and the right to exercise the option
accrued), with such amount being recognized as revenue over the
life of the Teva Agreement in accordance with the modified
proportional performance method.
Arrangement with Anchen: Anchen
Pharmaceuticals, Inc. received the first approval for its
generic Wellbutrin 300mg XL product in 2006. The Company entered
into an agreement with Anchen and Teva whereby Anchen
selectively waived its 180-day market exclusivity in favor of
the Company and transferred to Teva all of its rights to market
the product, all in return for certain payments by Teva (for
which the Company is responsible for its proportionate share
under the profit sharing provisions of the Teva Agreement, as
amended). The Company received final approval for the product
and Teva launched the product in December 2006. In February
2007, on going patent litigation with Biovail Laboratories
International, SRL, concerning the product, was resolved and the
agreement with Anchen and Teva was amended to include, among
other things, certain additional payments to Anchen by Teva (for
which the Company is responsible for its proportionate share).
The Company recorded its proportionate share of its obligations
to Anchen as an Accrued exclusivity period fee payments
due and a corresponding Deferred charge-exclusivity
period fee on its consolidated balance sheet, initially at
$41,600,000 and then increased to $50,600,000 upon the February
2007 amendment. The Deferred charge-exclusivity period fee was
amortized over the six month exclusivity period commencing in
December 2006, as a reduction in the gross amount of revenue to
be deferred for each monthly period and the Accrued exclusivity
period fee payments due obligation is reduced as the Company
reimburses Teva for the Companys proportionate share of
the payments made to Anchen.
Page F-33 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables show the additions to and deductions from
the deferred revenue and deferred product manufacturing costs
under the Teva Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
For the Years Ended December 31,
|
|
|
Dec 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In $000s)
|
|
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
181,149
|
|
|
$
|
136,157
|
|
|
$
|
78,014
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost sharing
|
|
|
700
|
|
|
|
732
|
|
|
|
861
|
|
|
|
3,660
|
|
Product related deferrals
|
|
|
59,706
|
|
|
|
133,873
|
|
|
|
92,502
|
|
|
|
89,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
60,406
|
|
|
|
134,605
|
|
|
|
93,363
|
|
|
|
93,650
|
|
Exclusivity charges
|
|
|
|
|
|
|
(47,133
|
)
|
|
|
(3,467
|
)
|
|
|
|
|
Forgiveness of advance deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
Forgiveness of interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,370
|
|
Stock repurchase
|
|
|
|
|
|
|
|
|
|
|
2,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
60,406
|
|
|
$
|
87,472
|
|
|
$
|
92,053
|
|
|
$
|
104,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of advance deposit
|
|
$
|
(333
|
)
|
|
$
|
(333
|
)
|
|
$
|
(333
|
)
|
|
$
|
(1,500
|
)
|
Forgiveness of interest
|
|
|
(243
|
)
|
|
|
(243
|
)
|
|
|
(243
|
)
|
|
|
(1,094
|
)
|
Stock repurchase
|
|
|
(120
|
)
|
|
|
(120
|
)
|
|
|
(659
|
)
|
|
|
|
|
Cost sharing
|
|
|
(583
|
)
|
|
|
(516
|
)
|
|
|
(466
|
)
|
|
|
(916
|
)
|
Product related revenue
|
|
|
(39,668
|
)
|
|
|
(41,268
|
)
|
|
|
(32,209
|
)
|
|
|
(22,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(40,947
|
)
|
|
|
(42,480
|
)
|
|
|
(33,910
|
)
|
|
|
(26,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
200,608
|
|
|
$
|
181,149
|
|
|
$
|
136,157
|
|
|
$
|
78,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
For the Years Ended December 31,
|
|
|
Dec 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In $000s)
|
|
|
Deferred product manufacturing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
75,296
|
|
|
$
|
49,728
|
|
|
$
|
27,059
|
|
|
$
|
|
|
Additions
|
|
|
33,621
|
|
|
|
46,246
|
|
|
|
35,530
|
|
|
|
36,079
|
|
Less amounts amortized
|
|
|
(20,556
|
)
|
|
|
(20,678
|
)
|
|
|
(12,861
|
)
|
|
|
(9,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred product manufacturing costs
|
|
$
|
88,361
|
|
|
$
|
75,296
|
|
|
$
|
49,728
|
|
|
$
|
27,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page F-34 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following schedule shows the expected recognition of
deferred revenue and amortization of deferred product
manufacturing costs (for transactions recorded through
December 31, 2008) for the next five years and
thereafter under the Teva Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
Deferred
|
|
|
Product
|
|
|
|
Revenue
|
|
|
Manufacturing Costs
|
|
|
|
Recognition
|
|
|
Amortization
|
|
|
|
(In $000s)
|
|
|
2009
|
|
$
|
19,112
|
|
|
$
|
8,415
|
|
2010
|
|
|
19,112
|
|
|
|
8,415
|
|
2011
|
|
|
19,112
|
|
|
|
8,415
|
|
2012
|
|
|
19,112
|
|
|
|
8,415
|
|
2013
|
|
|
19,112
|
|
|
|
8,415
|
|
Thereafter
|
|
|
105,048
|
|
|
|
46,286
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
200,608
|
|
|
$
|
88,361
|
|
|
|
|
|
|
|
|
|
|
OTC
Partners Alliance Agreements
The Company is party to four OTC Partners alliance agreements
with three different unrelated third-party pharmaceutical
entities marketing partners (OTC Agreements) related
to the manufacture, distribution, and marketing of OTC
pharmaceutical products. The four OTC Agreements, whose terms
range from three to 15 years, each commit the Company to
manufacture, and the OTC Agreements marketing partners to
distribute, a single specified generic pharmaceutical product.
All of the OTC Agreements obligate the Company to grant a
license to the respective OTC Partner to market the product, and
two of the OTC Agreements require the Company to provide
research and development services to complete the development of
the covered product. Revenue under these OTC Agreements consists
of payments upon contract signing, reimbursement of product
manufacturing costs or other agreed upon amounts when the
Company delivers the product, profit-share or royalty payments
based upon the OTC Partners product sales, and, with
respect to three of the OTC Agreements, specified milestone
payments are tied to further product development services.
As each of these OTC Agreements contain multiple deliverables
the Company applied its accounting policy to determine whether
the multiple deliverables within each of the OTC Partners
alliance agreements should be accounted for as separate units of
accounting or as a single unit of accounting. The Company
determined no single deliverable represented a separate unit of
accounting given there was not sufficient objective and reliable
evidence of the fair value of any single deliverable. When the
fair value of a deliverable cannot be determined, it is not
possible for the Company to determine whether consideration
given by an OTC Partner is in exchange for a given deliverable.
The Company concluded the multiple deliverables under each of
the OTC Partners alliance agreements represents a single unit of
accounting for each agreement.
Consistent with how revenue is recognized under the Teva
Agreement, all revenue under the OTC Agreements is deferred and
subsequently recognized over the life of the respective OTC
Agreements under the modified proportional performance method.
Deferred revenue is recorded as a liability captioned
Deferred revenue-alliance agreement. The modified
proportional performance method better aligns revenue
recognition with performance under a long-term arrangement as
compared to a straight-line method. Revenue is recognized only
to the extent of cumulative cash collected being greater than
cumulative revenue recognized.
The Company begins to recognize payments at the inception of the
respective OTC Agreement, milestone payments at the time they
are earned, reimbursement of product manufacturing costs at the
time of product shipment to the respective OTC Partners, and
profit-share and royalty payments at the time they are reported
to the Company.
Page F-35 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company also defers its product manufacturing costs to the
extent reimbursable by the respective OTC Partner and recognizes
them in the same manner as it recognizes the related product
revenue. Additionally, under the Teva Agreement, the Company is
obligated to share with Teva the profits from the sale of the
over-the-counter products sold under the OTC Agreements
up to a maximum of 50%. These deferred direct
product manufacturing costs are recorded as an asset captioned
Deferred product manufacturing costs-alliance
agreements.
A summary description of each of the OTC Partners Alliance
Agreements noted above is as follows:
In June 2002, the Company entered into a Development, License
and Supply Agreement with Wyeth relating to the Companys
Loratadine and Pseudoephedrine Sulfate 5 mg/120 mg
12-hour
Extended Release Tablets and Loratadine and Pseudoephedrine
Sulfate 10 mg/240 mg
24-hour
Extended Release Tablets for the OTC market under the
Alavert®
brand. The Company is responsible for developing and
manufacturing the products, while Wyeth is responsible for
product marketing and sale. The structure of the Wyeth agreement
includes payment upon achievement of milestones and royalties
paid to the Company on Wyeths sales on a quarterly basis.
Wyeth launched this product in May 2003 as
Alavert®
D-12 Hour. In February 2005, the Wyeth agreement was partially
cancelled with respect to the
24-hour
Extended Release Product due to lower than planned sales volume.
In June 2002, the Company entered into a non-exclusive
Licensing, Contract Manufacturing and Supply Agreement with
Schering-Plough relating to the Companys Loratadine and
Pseudoephedrine Sulfate 5 mg/120 mg
12-hour
Extended Release Tablets for the OTC market under the Claritin-D
12-hour
brand. The structure of the Schering-Plough agreement included
milestone payments by Schering-Plough and an agreed upon
transfer price. Shipments to Schering-Plough commenced at the
end of January 2003, and Schering-Plough launched the product as
its OTC Claritin-D
12-hour in
March 2003. The Companys product supply obligations to
Schering-Plough ended on December 31, 2008, after which
Schering-Plough is expected to manufacture the product. The
Schering-Plough agreement terminates two years after our product
supply obligations concluded. During this two year period,
Schering-Plough will pay the Company a royalty on sales of their
manufactured product.
In July 2004, the Company entered into two agreements with
Leiner Health Products, LLC for (1) the supply and
distribution of the Loratadine Orally Disintegrating Tablets
(ODT) and (2) Loratadine and Pseudoephedrine
Sulfate Extended Release Tablets 24 hour products. These
products were manufactured by the Company and marketed by Leiner
as OTC store brand generic equivalents to the branded products.
Leiner commenced sale of the ODT product in November 2004. In
November 2006, the Leiner agreement for the Loratadine and
Pseudoephedrine Sulfate Extended Release Tablets 24 Hour product
was terminated due to lower than planned sales volume. The
Company has not shipped product to Leiner under the Loratadine
ODT agreement since October 2007 and has sent notice of
non-renewal of the Loratadine ODT agreement which will cause the
agreement to terminate effective June 2009.
Page F-36 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table shows the additions to and deductions from
deferred revenue and deferred product manufacturing costs under
the OTC Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
For the Years Ended December 31,
|
|
|
Dec 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In $000s)
|
|
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
20,591
|
|
|
$
|
17,098
|
|
|
$
|
19,665
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
|
|
|
|
84
|
|
|
|
42
|
|
|
|
8,310
|
|
Cost sharing and other
|
|
|
|
|
|
|
424
|
|
|
|
158
|
|
|
|
1,060
|
|
Product related deferrals
|
|
|
16,399
|
|
|
|
14,851
|
|
|
|
11,015
|
|
|
|
39,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
16,399
|
|
|
$
|
15,359
|
|
|
$
|
11,215
|
|
|
$
|
48,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
(297
|
)
|
|
|
(315
|
)
|
|
|
(786
|
)
|
|
|
(6,071
|
)
|
Cost sharing and other
|
|
|
(112
|
)
|
|
|
(312
|
)
|
|
|
(221
|
)
|
|
|
(793
|
)
|
Product related revenue
|
|
|
(15,537
|
)
|
|
|
(11,239
|
)
|
|
|
(12,775
|
)
|
|
|
(22,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(15,946
|
)
|
|
|
(11,866
|
)
|
|
|
(13,782
|
)
|
|
|
(29,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
21,044
|
|
|
$
|
20,591
|
|
|
$
|
17,098
|
|
|
$
|
19,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
For the Years Ended December 31,
|
|
|
Dec 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In $000s)
|
|
|
Deferred product manufacturing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
17,251
|
|
|
$
|
14,137
|
|
|
$
|
14,880
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product related deferrals
|
|
|
16,037
|
|
|
|
12,172
|
|
|
|
11,727
|
|
|
|
29,981
|
|
Cost sharing and other
|
|
|
50
|
|
|
|
842
|
|
|
|
(49
|
)
|
|
|
5,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
16,087
|
|
|
$
|
13,014
|
|
|
$
|
11,678
|
|
|
$
|
35,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product related cost
|
|
|
(14,634
|
)
|
|
|
(9,201
|
)
|
|
|
(12,024
|
)
|
|
|
(17,260
|
)
|
Cost sharing and other
|
|
|
(343
|
)
|
|
|
(699
|
)
|
|
|
(397
|
)
|
|
|
(3,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount amortized
|
|
|
(14,977
|
)
|
|
|
(9,900
|
)
|
|
|
(12,421
|
)
|
|
|
(20,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred product manufacturing costs
|
|
$
|
18,361
|
|
|
$
|
17,251
|
|
|
$
|
14,137
|
|
|
$
|
14,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page F-37 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following schedule shows the expected recognition of
deferred revenue and amortization deferred product manufacturing
costs (for transactions recorded through December 31,
2008) for the next five years and thereafter under the OTC
Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
Deferred
|
|
|
Product
|
|
|
|
Revenue
|
|
|
Manufacturing Costs
|
|
|
|
Recognition
|
|
|
Amortization
|
|
|
|
(In $000s)
|
|
|
2009
|
|
$
|
5,903
|
|
|
$
|
5,163
|
|
2010
|
|
|
5,903
|
|
|
|
5,163
|
|
2011
|
|
|
1,949
|
|
|
|
1,703
|
|
2012
|
|
|
1,158
|
|
|
|
1,011
|
|
2013
|
|
|
1,158
|
|
|
|
1,011
|
|
Thereafter
|
|
|
4,973
|
|
|
|
4,310
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,044
|
|
|
$
|
18,361
|
|
|
|
|
|
|
|
|
|
|
Supply &
Distribution Agreement with DAVA Pharmaceuticals, Inc.
On November 3, 2005, the Company entered into a 10-year
Supply and Distribution Agreement with DAVA Pharmaceuticals,
Inc. (DAVA Agreement) under which the Company
appointed DAVA the exclusive U.S. distributor of its
generic version of
OxyContin®
tablets in 80mg, 40mg, 20mg, and 10mg strengths and agreed to be
DAVAs exclusive supplier of the product. DAVA agreed to
pay the Company an aggregate appointment fee of $60,000,000 and
to pay the Company a mark up on its fully burdened cost of
manufacture for the product plus a share of the gross profits of
DAVAs sales of the product.
The DAVA Agreement required DAVA to provide the Company with
monthly purchase orders covering the succeeding three months,
and the Company was required to manufacture and fulfill at least
95% of DAVAs monthly requirements. If the Company was
unable to deliver at least 90% of the monthly requirements, and
such delay continued for more than 45 days, the Company could
have been liable to DAVA for delay payments up to $10,000,000.
The appointment fee payment schedule was as follows:
(i) $1,000,000 upon the signing of the agreement,
(ii) $9,000,000 paid by DAVA pro rata upon the
Companys delivery of the product as required by
DAVAs initial purchase order and (iii) $10,000,000
payable on December 31, 2006 and on each of the succeeding
four years. DAVA had the right to suspend appointment fee
payments in the event the Company was unable to meet DAVAs
product requirements or satisfy other obligations under the DAVA
Agreement.
As the DAVA Agreement involved two deliverables (the product and
market exclusivity), the Company reviewed the DAVA Agreement
under the provisions of
EITF 00-21
and determined, because it did not have objective and reliable
evidence of the fair value of either deliverable, no single
deliverable represented a separate unit of accounting. The
Company thus concluded the arrangement represents a single unit
of accounting, and it therefore accounts for all deliverables as
a single unit of accounting in accordance with
EITF 00-21.
As with the Teva Agreement and the OTC Agreements, the Company
initially defers all revenue under the DAVA Agreement and then
recognizes revenue over the estimated life of the DAVA
Agreement. The deferred portion of the revenue is recorded as a
liability captioned Deferred revenue
alliance agreements. Revenue under the
DAVA Agreement is recognized using the same modified
proportional performance method used for the Teva Agreement. The
Company also defers its direct manufacturing costs to the extent
reimbursable by DAVA and recognizes them in the same manner as
it recognizes the related product revenue. These deferred direct
product manufacturing costs are recorded as an asset captioned
Deferred product manufacturing costs
alliance agreements.
Page F-38 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recognition of revenues related to the manufacturing costs
begins at the time the related product is delivered to DAVA, and
recognition of the Companys pro rata profit share begins
at the time DAVA reports to the Company such amount. The Company
begins to recognize appointment fee installments when earned as
the Companys related product delivery obligation has been
met and DAVAs obligation to pay the installment becomes
fixed. In this regard, the Company began recognizing the initial
$1,000,000 appointment fee installment when paid in 2005 and the
$9,000,000 installment in 2006, as earned when the
Companys related product delivery obligations were met.
Product shipments under the agreement commenced in 2005, and the
Company began recognizing its share of the profits in the first
quarter of 2006. Revenue is recognized only to the extent of
cumulative cash collected being greater than cumulative revenue
recognized.
During the second half of 2006, the Companys two principal
competitors for sales of generic OxyContin announced they would,
as part of the settlement of patent infringement litigation with
Purdue Pharma LP (Purdue), leave the market by
December 31, 2006 and some later undisclosed date,
respectively, which would result in the Companys product
being the only remaining generic product on the market and
thereby substantially increasing the Companys exposure to
potential liability in a pending patent infringement suit
brought against the Company by Purdue. This change in market
dynamics led to an amendment to the agreement with DAVA whereby
the parties agreed to rebalancing the risks between the parties,
providing the Company certain additional flexibility with
respect to product supply, and providing the Company with a
larger share of the profits. As a result, on February 6,
2007, the parties amended the DAVA Agreement, effective
November 29, 2006. The DAVA Agreement amendment resulted in
the Company receiving a greater portion of the pro rata profit
share (once a prescribed bottle delivery target was met);
elimination of the remaining $50,000,000 of the appointment fee
potentially payable by DAVA; and reducing the price paid by DAVA
for the product to the amount of the Companys
manufacturing cost. The DAVA Agreement amendment also permits
the Company to unilaterally suspend shipment of product to DAVA
in exchange for a one time payment equal to DAVAs share of
the profits for the quarterly reporting period immediately
preceding such product shipment suspension. After such product
shipment suspension, DAVA has the right to purchase a competing
equivalent product from an alternative supplier.
On March 30, 2007, the Company entered into an agreement
settling Purdues patent infringement suit against the
Company. Under this Purdue settlement agreement, the Company
agreed to withdraw its generic product from the market by
January 2008, and Purdue granted the Company a license
permitting it to manufacture and sell its product during
specified periods between March 2007 and January 2008, and,
additionally, authorized the Company to grant a sublicense to
DAVA allowing DAVA to distribute the product during the same
periods. While the Company continued to manufacture and sell the
product during the authorized periods, the Purdue settlement
agreement precludes the Company from re-entering the market
after January 2008 until expiration of the last Purdue patents
in 2013, or earlier under certain circumstances.
While the amended DAVA Agreement will remain effective through
November 3, 2015, the Company concluded if any of the
contingent events occur to permit the Company to resume sales of
the generic product under the Purdue settlement agreement, the
same events will result in such a highly competitive generic
market to make it unlikely the Company will find it economically
favorable to devote manufacturing resources to the resumption of
sales of this product. As a result, the Company concluded the
economic life of the DAVA Agreement, and therefore the
Companys expected period of performance, ended in January
2008. Accordingly, on the March 30, 2007 effective date of
the Purdue settlement agreement, the Company adjusted the period
of revenue recognition and product manufacturing costs
amortization under the DAVA Agreement from 10 years to 27 months
(i.e. November 2005 through January 2008). As the terms of the
Purdue settlement did not exist and could not have been known
when the life of the DAVA Agreement was originally estimated,
the change in the recognition period has been applied
prospectively as an adjustment in the period of change. For the
year ended December 31, 2007, the change in the revenue
recognition period had the effect of increasing income from
operations by $73,226,000 and basic earnings per share by $1.25.
Page F-39 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the year ended December 31, 2008, the increased
volume of sales during January 2008, which were otherwise
recognizable under the performance conditions of the
Companys revenue recognition policy, would have resulted
in an excess of revenues over the amount of cash collected
through the date thereof. Therefore the Company further deferred
the recognition of those revenues until the cash was collected
from DAVA in the second quarter of 2008.
The Company recognized revenue of $40,831,000 and amortized
$2,157,000 of manufacturing costs during the year ended
December 31, 2008. The revenue recognized by the Company
during 2008 was composed primarily of profit share earned under
the agreement with DAVA.
The following table shows the additions to and deductions from
deferred revenue and deferred product manufacturing costs under
the DAVA Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
For the Years Ended December 31,
|
|
|
Dec 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In $000s)
|
|
|
Deferred revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
6,361
|
|
|
$
|
24,784
|
|
|
$
|
5,655
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
|
|
|
|
|
|
|
|
9,000
|
|
|
|
1,000
|
|
Product related deferrals
|
|
|
34,470
|
|
|
|
100,211
|
|
|
|
13,028
|
|
|
|
4,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
|
34,470
|
|
|
|
100,211
|
|
|
|
22,028
|
|
|
|
5,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
(858
|
)
|
|
|
(7,975
|
)
|
|
|
(1,150
|
)
|
|
|
(17
|
)
|
Product related revenue
|
|
|
(39,973
|
)
|
|
|
(110,659
|
)
|
|
|
(1,749
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(40,831
|
)
|
|
|
(118,634
|
)
|
|
|
(2,899
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
|
|
|
$
|
6,361
|
|
|
$
|
24,784
|
|
|
$
|
5,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
|
Through
|
|
|
|
For the Years Ended December 31,
|
|
|
Dec 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In $000s)
|
|
|
Deferred product manufacturing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,850
|
|
|
$
|
9,100
|
|
|
$
|
3,344
|
|
|
$
|
|
|
Additions
|
|
|
307
|
|
|
|
18,435
|
|
|
|
6,901
|
|
|
|
3,401
|
|
Less: amount recognized
|
|
|
(2,157
|
)
|
|
|
(25,685
|
)
|
|
|
(1,145
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred product manufacturing costs
|
|
$
|
|
|
|
$
|
1,850
|
|
|
$
|
9,100
|
|
|
$
|
3,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreements
with Medicis Pharmaceutical Corporation
In November 2008, the Company and Medicis Pharmaceutical
Corporation (Medicis), entered into a License and
Settlement Agreement (License Agreement) and a Joint
Development Agreement.
License
and Settlement Agreement
The License Agreement settled patent infringement litigation
involving the Companys generic versions of Mediciss
SOLODYN®
45mg, 90mg and 135mg branded products. Under the License
Agreement, Medicis grants a license allowing the Company to
launch its generic
SOLODYN®
products (i.e. Minocycline-ER) no later than
Page F-40 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
November 2011. As required under the License Agreement, to the
extent the Company sells its manufactured Minocycline-ER
product, the Company will pay Medicis a royalty fee as defined
in the License Agreement. Under the License Agreement, when
permitted, the Company will have the right (but not the
obligation) to begin manufacturing and sale of its generic
SOLODYN®
products. The Company anticipates it will sell its
manufactured generic product to all Global Division customers in
the ordinary course of business through its Global Products
sales channel. The Company will account for the sale of its
generic
SOLODYN®
products according to the Companys revenue recognition
policy applicable to its Global Products. To the extent the
Company sells the generic
SOLODYN®
products, the Company will pay Medicis a royalty calculated
as a share of gross profits, with such profit share payments
being accounted for as a current period cost of goods sold
charge. Through December 31, 2008, the Company has not
commenced sales of its generic
SOLODYN®
products.
Joint
Development Agreement
The Joint Development Agreement provides for the Company and
Medicis to collaborate in the development of a total of five
dermatology products, including four of the Companys
generic products and one brand advanced form of Mediciss
SOLODYN®
product. The Joint Development Agreement provides for the
Company to receive a $40,000,000 upfront payment, paid by
Medicis in December 2008, along with the Company to potentially
receive up to $23,000,000 of contingent additional payments upon
achievement of certain specified clinical and regulatory
milestones, and the potential for the Company to receive royalty
payments from sales, if any, by Medics of its advanced
form SOLODYN®
brand product. Finally, to the extent the Company
commercializes any of its four generic dermatology products
covered by the Joint Development Agreement, the Company will pay
to Medicis a 50% gross profit share on sales, if any, of such
products.
The Joint Development Agreement results in three items of
revenue for the Company, as follows:
1. Research &
Development Services
Revenue received from the provision of research and development
services, including the $40,000,000 upfront payment and the
contingent $23,000,000 milestone payments, will be deferred
and recognized on a straight-line basis over the expected period
of performance of the research and development services. The
Company estimates its expected period of performance to provide
research and development services is 48 months starting in
December 2008 (i.e. when the $40,000,000 upfront payment was
received) and ending in November 2012.
Revenue recognition of the contingent milestone fees, if any,
will commence when the cash has been received, over the then
remaining expected period of performance. The FDA approval of
the final submission under the Joint Development Agreement
represents the end of the Companys expected period of
performance, as the Company will have no further contractual
obligation to perform research and development services under
the Joint Development Agreement, and therefore the earnings
process will be completed. Deferred revenue is recorded as a
liability captioned Deferred revenue-alliance
agreement. Revenue recognized under the Joint Development
Agreement is reported on the consolidated statement of
operations, in the line item captioned Research Partner. The
Company determined the straight-line method better aligns
revenue recognition with performance as the level of research
and development services delivered under the joint development
agreement are expected to be provided on a relatively constant
basis over the period of performance.
2. Royalty
Fees Earned Mediciss Sale of Advanced Form
SOLODYN®
(Brand)
Product
Under the Joint Development Agreement, the Company grants
Medicis a license for the advanced form of the
SOLODYN®
product, with the Company receiving royalty fee income under
such license for a period ending eight years after the first
commercial sale of the advanced form
SOLODYN®
product. Commercial sales of the new
SOLODYN®
product, if any, are expected to commence upon FDA approval
of Mediciss
Page F-41 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NDA. The royalty fee income, if any, from the new
SOLODYN®
product, will be recognized by the Company as current period
revenue when earned.
3. Accounting
for Sales of the Companys Four Generic Dermatology
Products
Upon FDA approval of the Companys ANDA for each of the
four generic products covered by the Joint Development
Agreement, the Company will have the right (but not the
obligation) to begin manufacture and sale of its four generic
dermatology products. The Company will sell its manufactured
generic products to all Global Division customers in the
ordinary course of business through its Global Products sales
channel. The Company will account for the sale of the four
generic products covered by the Joint Development Agreement as
current period revenue according to the Companys revenue
recognition policy applicable to its Global Products. To the
extent the Company sells any of the four generic dermatology
products covered by the Joint Development Agreement, the Company
will pay Medicis a 50% gross profit share, with such profit
share payments being accounted for as a current period cost of
goods sold charge.
The following table shows the additions to and deductions from
deferred revenue under the Joint Development Agreement with
Medicis:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
|
(In $000s)
|
|
|
Deferred revenue
|
|
|
|
|
Beginning balance
|
|
$
|
|
|
Additions:
|
|
|
|
|
Up-front fees and milestone payments
|
|
|
40,000
|
|
Product related deferrals
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
|
40,000
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
Up-front fees and milestone payments
|
|
|
(833
|
)
|
Product related revenue
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(833
|
)
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
39,167
|
|
|
|
|
|
|
The following schedule shows the expected recognition of
deferred revenue (for transactions recorded through
December 31, 2008) for the next five years and
thereafter under the Joint Development Agreement with Medicis:
|
|
|
|
|
|
|
Deferred
|
|
|
|
Revenue
|
|
|
|
Recognition
|
|
|
|
(In $000s)
|
|
|
2009
|
|
$
|
10,000
|
|
2010
|
|
|
10,000
|
|
2011
|
|
|
10,000
|
|
2012
|
|
|
9,167
|
|
2013
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,167
|
|
|
|
|
|
|
Page F-42 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shire
Laboratories Promotional Services Agreement
In January 2006, the Company entered into a five year
Promotional Services Agreement with an affiliate of Shire
Laboratories, Inc. (Shire Agreement), under which
the Company was engaged to perform physician detailing sales
calls in support of Shires Carbatrol product. The Shire
Agreement requires Shire to pay the Company a sales force fee of
up to $200,000 annually for each of as many as 66 sales force
members, a gain share fee for each prescription
filled in excess of a stated minimum during each quarter, and,
if filled prescriptions exceed a specified target during the
first six months of 2009, a $5,000,000 bonus. In addition, if
the Company fails to perform a minimum number of sales calls
during any quarter and fails to make up the shortfall by the end
of the following quarter, Shire has the right to a refund of a
fixed amount per remaining shortfall.
The Company recognizes the sales force service fees as the
related services are performed and the performance obligations
are met, and for gain share fees, if and when such fees are
earned. The Company recognized $12,891,000, $12,759,000 and
$6,434,000 in sales force fee revenue for the years ended
December 31, 2008, 2007 and 2006, respectively, under the
Shire Agreement, with such amounts presented in the captioned
line item Promotional Partner under revenues on the
statement of operations. The Company has not earned any gain
share fees or been required to make any shortfall reimbursements
under the Shire Agreement. Any such reimbursements in the future
will be recognized as a reduction to Promotional Partner revenue
during the period in which such reimbursement liability is
incurred.
Agreements
with Wyeth
In June 2008, the Company entered into a Settlement and Release
Agreement (Settlement Agreement) with Wyeth. The
Settlement Agreement settled pending claims and counter-claims
asserted in an existing patent infringement lawsuit between the
Company and Wyeth. The Company and Wyeth also entered into a
License Agreement and a Co-Promotion Agreement. The Settlement
Agreement provided certain settlement conditions precedent which
were required to occur for the License Agreement and the
Co-Promotion Agreement to become effective. As the settlement
conditions were satisfied, the License Agreement and
Co-Promotion Agreement became effective on the July 15,
2008 settlement date. Provided below is a summary of the
provisions of the Settlement Agreement, the License Agreement,
and the Co-Promotion Agreement.
Settlement
and Release Agreement
The Settlement Agreement between the Company and Wyeth:
(i) resolved outstanding claims and counter-claims between
the Company and Wyeth asserted in the patent infringement
lawsuit related to the Companys ANDA for generic
venlafaxine hydrochloride capsules, (ii) provided for the
Company to defer the manufacture and launch of its generic
venlafaxine product, and (iii) provided for a $1,000,000
payment by Wyeth to the Company as reimbursement for legal fees
associated with the patent infringement lawsuit. The Company
recorded the $1,000,000 legal fee reimbursement received from
Wyeth as a reduction of its patent litigation operating expense
on the consolidated statement of operations.
License
Agreement
The License Agreement granted to the Company, from Wyeth, a
non-exclusive license, allowing the Company the right (but not
the obligation) to manufacture and market the Companys
generic venlafaxine product in the United States of America. The
license effective date is expected to be on or about
June 1, 2011. The Company will pay Wyeth a royalty fee on
the sale of its generic venlafaxine product under the license,
computed as a percentage of gross profits, as defined in the
License Agreement. The license royalty fee term begins with the
license effective date and ends on the expiration of the Wyeth
patents covered by the License Agreement. The Company is solely
responsible for manufacturing and marketing its generic
venlafaxine product. If the Company chooses to manufacture its
generic product, sales of such generic product will be to all
unrelated third-party customers in the ordinary course of
business through its Global Division Global Products sales
channel. The Company will account
Page F-43 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for the sale of its generic product as current period revenue
according to the Companys revenue recognition policy
applicable to its Global Division Global Products. The
license royalty payments to Wyeth will be accounted for as
current period cost of goods sold. Through December 31,
2008, the Company has not commenced sales of its generic
venlafaxine product.
Co-Promotion
Agreement
The Company entered into a three year Co-Promotion Agreement
with Wyeth, under which the Company will perform physician
detailing sales calls for a Wyeth product to neurologists, which
are expected to commence in 2009. Wyeth will pay the Company a
service fee, subject to an annual cost adjustment, during the
life of the Co-Promotion Agreement for each physician detailing
sales call, and an incentive fee for each
prescription by neurologists in excess of a certain minimum
threshold. During the term of the Co-Promotion Agreement, the
Company is required to complete a minimum and maximum number of
physician detailing sales calls. Wyeth is responsible for
providing sales training to the Companys sales force.
Wyeth owns the product and is responsible for all pricing and
marketing literature as well as product manufacture and
fulfillment.
The Company will recognize the sales force fee revenue as the
related services are performed and the performance obligations
are met. The incentive fee revenue, if any, will be recognized
if and when such fees are earned. Through December 31,
2008, the Company had not recognized any revenue under the
Co-Promotion agreement with Wyeth.
|
|
14.
|
EMPLOYEE
BENEFIT PLANS
|
401(k)
Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan covering
all employees. Participants are permitted to contribute up to
25% of their eligible annual pre-tax compensation up to
established federal limits on aggregate participant
contributions. The Company matches 50% of the employee
contributions up to a maximum of 3% of employee compensation.
Discretionary profit-sharing contributions made by the Company,
if any, are determined annually by the Board of Directors.
Participants are 100% vested in discretionary profit-sharing and
matching contributions made by the Company after three years of
service, and are 25% and 50% vested after one and two years of
service, respectively. There were approximately $1,036,000,
$707,000 and $681,000 in matching contributions and no
discretionary profit-sharing contributions made under this plan
for the years ended December 31, 2008, 2007 and 2006,
respectively.
Employee
Stock Purchase Plan
In February 2001, the Board of Directors of the Company approved
the 2001 Non-Qualified Employee Stock Purchase Plan
(ESPP), with a 500,000 share reservation. The
purpose of the ESPP is to enhance employee interest in the
success and progress of the Company by encouraging employee
ownership of common stock of the Company. The ESPP provides the
opportunity to purchase the Companys common stock at a 15%
discount to the market price through payroll deductions or lump
sum cash investments. When public trading of the Companys
common stock ceased on May 23, 2008, the Company suspended
its ESPP program. The Company plans to resume the ESPP program
upon the effectiveness of a
Form S-8
Registration Statement to be filed with the SEC in the future.
Under the ESPP plan, for the years ended December 31, 2008,
2007 and 2006, the Company sold shares of its common stock to
its employees in the amount of 2,700, 27,961 and 8,080,
respectively, for net proceeds of approximately $24,000,
$112,000 and $56,000, respectively.
Deferred
Compensation Plan
In February 2002, the Board of Directors of the Company approved
the Executive Non-Qualified Deferred Compensation Plan
(ENQDCP) effective August 15, 2002 covering
executive level employee of the Company as
Page F-44 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
designated by the Board of Directors. Participants can defer up
to 75% of their base salary and quarterly sales bonus and up to
100% of their annual performance based bonus. The Company
matches 50% of employee deferrals up to 10% of base salary and
bonus compensation. The maximum total match by the company
cannot exceed 5% of total base and bonus compensation.
Participants are vested in the employer match contribution at
20% each year, with 100% vesting after five years of employment.
There were approximately $557,000, $332,000 and $417,000 in
matching contributions under the ENQDCP for the years ended
December 31, 2008, 2007 and 2006, respectively.
The deferred compensation liability is a non-current liability
recorded at the fair value of the amount owed to the ENQDCP
participants, with changes in the fair value of such amounts
recognized as a compensation expense in the consolidated
statement of operations. The Company invests amounts contributed
by the deferred compensation plan participants and the
associated Company matching contributions in company owned life
insurance (COLI) policies, of which the cash
surrender value is included in the caption line item Other
assets on the consolidated balance sheet. As of
December 31, 2008 and 2007, the Company had a ENQDCP cash
surrender asset of $3,646,000 and $3,482,000, respectively, and
a deferred compensation liability of $5,742,000 and $5,162,000,
respectively.
|
|
15.
|
SHARE-BASED
COMPENSATION:
|
On January 1, 2006, the Company adopted SFAS 123(R)
using the modified prospective method. Under this method, the
Company recognizes share-based compensation expense for all
outstanding options not fully vested as of the adoption date and
for all share-based compensations awards, classified as equity,
granted or modified after the adoption date based on the fair
value of the awards on the grant date, net of estimated
forfeitures. Accordingly, prior periods have not been restated.
Impax
Laboratories, Inc. 1995 Stock Incentive Plan
In 1995, the Companys Board of Directors adopted the 1995
Stock Incentive Plan (1995 Plan). Under the 1995
Plan, 8,400, 61,100 and 66,100 stock options were outstanding at
December 31, 2008, 2007 and 2006, respectively.
Impax
Laboratories, Inc. 1999 Equity Incentive Plan
The Companys 1999 Equity Incentive Plan was adopted by the
Companys Board of Directors in December 1999. In October
2000, the Companys stockholders approved an increase in
the aggregate number of shares of common stock to be issued
pursuant to the Companys 1999 Equity Incentive Plan from
2,400,000 to 5,000,000 shares. Under the 1999 Equity
Incentive Plan, 2,388,717, 3,332,883, and 3,242,049 stock
options were outstanding at December 31, 2008, 2007 and
2006, respectively.
Impax
Laboratories, Inc. 2002 Equity Incentive Plan
The 2002 Equity Incentive Plan was adopted by the Companys
Stockholders in May 2002. The aggregate number of shares of
common stock for issuance pursuant to stock option grants and
restricted stock awards was increased by the Companys
Board of Directors from 4,000,000 shares to
6,500,000 shares during 2007, and from 6,500,000 to
7,900,000 shares during 2008. Under the 2002 Equity
Incentive Plan, stock options outstanding were 5,883,123, and
5,653,778 and 3,830,022 at December 31, 2008, 2007 and
2006, respectively, and unvested restricted stock awards
outstanding were 399,716, 270,341 and 0 at December 31,
2008, 2007 and 2006, respectively.
Page F-45 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The stock option activity for all of the Companys equity
compensation plans noted above, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Number of Shares
|
|
|
Price
|
|
Stock Options
|
|
Under Option
|
|
|
per Share
|
|
|
Outstanding at December 31, 2005
|
|
|
7,152,301
|
|
|
$
|
10.06
|
|
Options granted
|
|
|
291,000
|
|
|
$
|
6.85
|
|
Options exercised
|
|
|
(8,613
|
)
|
|
$
|
4.21
|
|
Options forfeited
|
|
|
(296,517
|
)
|
|
$
|
21.38
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
7,138,171
|
|
|
$
|
9.46
|
|
Options granted
|
|
|
1,991,678
|
|
|
$
|
11.34
|
|
Options exercised
|
|
|
(20,719
|
)
|
|
$
|
2.28
|
|
Options forfeited
|
|
|
(61,369
|
)
|
|
$
|
8.38
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
9,047,761
|
|
|
$
|
9.90
|
|
Options granted
|
|
|
539,850
|
|
|
$
|
8.80
|
|
Options exercised
|
|
|
(956,824
|
)
|
|
$
|
4.18
|
|
Options forfeited
|
|
|
(350,547
|
)
|
|
$
|
9.07
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
8,280,240
|
|
|
$
|
10.53
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2008
|
|
|
8,155,317
|
|
|
$
|
10.58
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2008
|
|
|
6,396,840
|
|
|
$
|
10.58
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, stock options outstanding, vested
and expected to vest, and exercisable had average remaining
contractual lives of 6.32 years, 6.30 years, and
5.57 years, respectively. Also, as of December 31,
2008, stock options outstanding, vested and expected to vest,
and exercisable each had aggregate intrinsic values of
$8,304,000, $8,323,000, and $8,147,000, respectively.
The Company grants restricted stock to certain eligible
employees as a component of its long-term incentive compensation
program. The restricted stock award grants are made in
accordance with the Companys 2002 Equity Incentive Plan,
as amended and restated. The restricted stock awards vest
ratably over a four-year period from the date of grant. A
summary of the non-vested restricted stock awards is as follows:
|
|
|
|
|
|
|
|
|
|
|
Non-Vested
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average
|
|
|
|
Stock
|
|
|
Grant Date
|
|
Restricted Stock Awards
|
|
Awards
|
|
|
Fair Value
|
|
|
Non-vested at December 31, 2006
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
272,678
|
|
|
$
|
11.45
|
|
Vested
|
|
|
|
|
|
$
|
|
|
Forfeited
|
|
|
(2,337
|
)
|
|
$
|
11.48
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2007
|
|
|
270,341
|
|
|
$
|
11.45
|
|
Granted
|
|
|
210,300
|
|
|
$
|
8.81
|
|
Vested
|
|
|
(64,111
|
)
|
|
$
|
11.45
|
|
Forfeited
|
|
|
(16,814
|
)
|
|
$
|
11.15
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2008
|
|
|
399,716
|
|
|
$
|
10.30
|
|
|
|
|
|
|
|
|
|
|
Page F-46 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2008, the Company had
1,450,038 shares available for issuance of either stock
options or restricted stock awards, including
1,327,553 shares from the 2002 Equity Incentive Plan, and
122,485 shares from the 1999 Equity Incentive Plan.
As of December 31, 2008, the Company had total unrecognized
share-based compensation expense, net of estimated forfeitures,
of $14,238,000 related to all of its share-based awards, which
will be recognized over a weighted average period of
2.7 years. The intrinsic value of options exercised during
the years ended December 31, 2008, 2007 and 2006 was
$3,468,000, $178,000 and $42,000, respectively. The total fair
value of restricted shares which vested during the years ended
December 31, 2008, 2007 and 2006 was $734,000, $0 and $0,
respectively.
The Company estimated the fair value of each stock option award
on the grant date using the Black-Scholes option pricing model
with the following assumptions:
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Volatility (range)
|
|
64.1%-67.7%
|
|
67.7%-75.2%
|
|
76.2%-76.3%
|
Volatility (weighted average)
|
|
66.8%
|
|
69.9%
|
|
76.3%
|
Risk-free interest rate (weighted average)
|
|
3.0%
|
|
4.0%
|
|
4.7%
|
Dividend yield
|
|
0%
|
|
0%
|
|
0%
|
Expected life (years)
|
|
6.25
|
|
6.07
|
|
6.25
|
Weighted average grant date fair value per option
|
|
$5.58
|
|
$7.43
|
|
$4.91
|
The Company estimated the fair value of each stock option award
on the grant date using the Black-Scholes option pricing model,
wherein: expected volatility is based on historical volatility
of the Companys common stock over the period commensurate
with the expected term of the stock options. The expected term
calculation is based on the simplified method
described in SAB No. 107, Share-Based Payment and
SAB No. 110, Share-Based Payment. The risk-free
interest rate is based on the U.S. Treasury yield in effect
at the time of grant for an instrument with a maturity that is
commensurate with the expected term of the stock options. The
dividend yield of zero is based on the fact that the Company has
never paid cash dividends on its common stock, and has no
present intention to pay cash dividends. Options granted under
each of the above plans vest from three to five years and have a
term of ten years. With limited exceptions, the Companys
shares of common stock traded on the Pink Sheets
beginning in August 2005 through May 2008. Subsequent to the
Companys May 2008 deregistration, the Company granted
stock options and restricted stock awards. As there were no
quoted market prices during the period when the Companys
shares of common stock were not publicly traded, the Company
engaged a valuation firm to assist with its determination of the
fair value of the shares of common stock at the stock option and
restricted stock award grant dates. In this regard, the methods
used to arrive at the fair value of the underlying stock price
included a regression analysis, along with market multiples and
discounted net cash flow analyses. The resulting fair value on
each respective grant date was used to establish the stock
option exercise price and the fair value of the restricted stock.
As a result of the adoption of SFAS 123(R), the amount of
share-based compensation expense recognized by the Company is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In $000s)
|
|
|
Cost of revenues
|
|
$
|
1,522
|
|
|
$
|
418
|
|
|
$
|
168
|
|
Research and development
|
|
|
2,262
|
|
|
|
563
|
|
|
|
236
|
|
Selling, general and administrative
|
|
|
2,033
|
|
|
|
532
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,817
|
|
|
$
|
1,513
|
|
|
$
|
683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page F-47 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The after tax impact of recognizing the share-based compensation
expense related to SFAS 123(R) on basic and diluted
earnings per common share was $0.06, $0.02 and $0.01 for the
years ended December 31, 2008, 2007 and 2006, respectively.
The adoption of SFAS 123(R) had no effect on the
Companys cash flows from operations or cash flows from
financing activities. The Company recognized a deferred tax
benefit of $782,000 in 2008 related to share-based compensation
expense recorded for non-qualified employee stock options and
restricted stock awards. The Company did not recognize any tax
benefits in 2007 or 2006 related to share-based compensation
costs because options issued by the Company in those years were
designated incentive stock options and there were no
disqualifying dispositions of options exercised.
The Companys policy is to issue new shares to satisfy
stock option exercises and share unit conversions pursuant to
restricted share awards. There were no modifications to any
stock options during the years ended December 31, 2008,
2007 or 2006.
|
|
16.
|
STOCKHOLDERS
EQUITY (DEFICIT)
|
Preferred
Stock
Pursuant to its certificate of incorporation, the Company is
authorized to issue 2,000,000 shares, $0.01 par value
per share, blank check preferred stock, which
enables the Board of Directors of the Company, from time to
time, to create one or more new series of preferred stock. Each
series of preferred stock issued can have the rights,
preferences, privileges and restrictions designated by the
Companys Board of Directors. The issuance of any new
series of preferred stock could affect, among other things, the
dividend, voting, and liquidation rights of the Companys
common stock. During 2008 and 2007, the Company did not issue
any preferred stock.
Common
Stock
The Companys Certificate of Incorporation, as amended,
authorizes the Company to issue 90,000,000 shares of common
stock with $0.01 par value.
Shareholders
Rights Plan
On January 20, 2009, the Board of Directors approved the
adoption of a shareholder rights plan and declared a dividend of
one preferred share purchase right for each outstanding share of
common stock of the Company. Under certain circumstances, if a
person or group acquires, or announces its intention to acquire,
beneficial ownership of 20% or more of the Companys
outstanding common stock, each holder of such right (other than
the third party triggering such exercise), would be able to
purchase, upon exercise of the right at a $15 exercise price,
subject to adjustment, the number of shares of the
Companys common stock having a market value of two times
the exercise price of the right. Subject to certain exceptions,
if the Company is consolidated with, or merged into, another
entity and the Company is not the surviving entity in such
transaction or shares of the Companys outstanding common
stock are exchanged for securities of any other person, cash or
any other property, or more than 50% of the Companys
assets or earning power is sold or transferred, then each holder
of the rights would be able to purchase, upon the exercise of
the right at a $15 exercise price, subject to adjustment, the
number of shares of common stock of the third party acquirer
having a market value of two times the exercise price of the
right. The rights expire on January 20, 2012, unless
extended by the Board of Directors.
In connection with the shareholder rights plan, the Board of
Directors designated 100,000 shares of series A junior
participating preferred stock.
Basic earnings per common share is computed by dividing net
earnings by the weighted average common shares outstanding for
the period. Diluted earnings per common share is computed by
dividing net income (loss) by
Page F-48 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the weighted average common shares outstanding adjusted for the
dilutive effect of stock options, restricted stock awards, stock
purchase warrants, and convertible debt, excluding anti-dilutive
shares.
A reconciliation of basic and diluted earnings per common share
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In $000s, except share and per share amounts)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
18,700
|
|
|
$
|
125,925
|
|
|
$
|
(12,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
59,072,752
|
|
|
|
58,810,452
|
|
|
|
58,996,365
|
|
Effect of dilutive options and and common stock purchase warrants
|
|
|
1,709,969
|
|
|
|
2,407,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
60,782,721
|
|
|
|
61,217,470
|
|
|
|
58,996,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.32
|
|
|
$
|
2.14
|
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.31
|
|
|
$
|
2.06
|
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2008, 2007 and 2006, the
Company excluded 5,641,543, 1,986,978 and 3,601,285,
respectively, of stock options from the computation of diluted
net income (loss) per common share as the effect of these
options would have been anti-dilutive.
In November 2004, the EITF reached consensus on Issue
04-8,
The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share
(EITF 04-08).
This Issue requires the inclusion of convertible shares for
contingently convertible instruments in the calculation of
diluted earnings per share regardless of whether the market
price contingency has been met, if the effect is dilutive. While
the Company followed the guidance in
EITF 04-08,
the 3.5% Debentures have nonetheless not been included in
diluted earnings per share because the principal amount of the
debentures must be settled in cash, and since the Companys
share price is less than the conversion price for all periods
presented, there is no dilutive impact of a conversion premium.
The Company has two reportable segments, the Global Division and
the Impax Division. The Company currently markets and sells
product within the continental United States and the
Commonwealth of Puerto Rico.
The Global Division develops, manufactures, sells, and
distributes generic pharmaceutical products, through three sales
channels: the Global Products sales channel, for sales of
generic Rx products, directly to wholesalers, large retail drug
chains, and others; the RX Partner sales channel, for generic Rx
products sold through unrelated third-party pharmaceutical
entities pursuant to alliance agreements; and the OTC Partner
sales channel, for OTC products sold through unrelated
third-party pharmaceutical entities pursuant to alliance
agreements. The Company also generates revenue from research and
development services provided under a joint development
agreement with another pharmaceutical company, and reports such
revenue under the caption Research partner revenue
on the consolidated statement of operations. The Company
provides theses services through the research and development
group in its Global Division.
The Impax Division is engaged in the development of proprietary
brand pharmaceutical products through improvements to
already-approved pharmaceutical products to address CNS
disorders. The Impax Division is also engaged in co-promotion
through a direct sales force focused on marketing to physicians,
primarily in the CNS community, pharmaceutical products
developed by other unrelated third-party pharmaceutical entities.
Page F-49 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys chief operating decision maker evaluates the
financial performance of the Companys segments based upon
segment Income (loss) before income taxes. Items below Income
(loss) from operations are not reported by segment, except
litigation settlements, since they are excluded from the measure
of segment profitability reviewed by the Companys chief
operating decision maker. Additionally, general and
administrative expenses, certain selling expenses, certain
litigation settlements, and non-operating income and expenses
are included in Corporate and Other. The Company
does not report balance sheet information by segment since it is
not reviewed by the Companys chief operating decision
maker. Accounting policies for the Companys segments are
the same as those described above in the Summary of
Significant Accounting Policies. The Company has no
inter-segment revenue.
The tables below present segment information reconciled to total
Company financial results, with segment operating income or loss
including gross profit less direct research and development
expenses, and direct selling expenses as well as any litigation
settlements, to the extent specifically identified by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
Impax
|
|
|
Corporate
|
|
|
Total
|
|
Year Ended December 31, 2008
|
|
Division
|
|
|
Division
|
|
|
and Other
|
|
|
Company
|
|
|
|
(In $000s)
|
|
|
Revenues, net
|
|
$
|
197,180
|
|
|
$
|
12,891
|
|
|
$
|
|
|
|
$
|
210,071
|
|
Cost of revenues
|
|
|
80,724
|
|
|
|
11,245
|
|
|
|
|
|
|
|
91,969
|
|
Research and development
|
|
|
43,502
|
|
|
|
16,307
|
|
|
|
|
|
|
|
59,809
|
|
Patent Litigation
|
|
|
6,472
|
|
|
|
|
|
|
|
|
|
|
|
6,472
|
|
Income (loss) before income taxes
|
|
$
|
60,944
|
|
|
$
|
(16,198
|
)
|
|
$
|
(15,075
|
)
|
|
$
|
29,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
Impax
|
|
|
Corporate
|
|
|
Total
|
|
Year Ended December 31, 2007
|
|
Division
|
|
|
Division
|
|
|
and Other
|
|
|
Company
|
|
|
Revenues, net
|
|
$
|
260,994
|
|
|
$
|
12,759
|
|
|
$
|
|
|
|
$
|
273,753
|
|
Cost of revenues
|
|
|
96,829
|
|
|
|
10,827
|
|
|
|
|
|
|
|
107,656
|
|
Research and development
|
|
|
31,170
|
|
|
|
8,822
|
|
|
|
|
|
|
|
39,992
|
|
Patent Litigation
|
|
|
10,025
|
|
|
|
|
|
|
|
|
|
|
|
10,025
|
|
Income (loss) before income taxes
|
|
$
|
118,964
|
|
|
$
|
(8,585
|
)
|
|
$
|
(33,271
|
)
|
|
$
|
77,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
Impax
|
|
|
Corporate
|
|
|
Total
|
|
Year Ended December 31, 2006
|
|
Division
|
|
|
Division
|
|
|
and Other
|
|
|
Company
|
|
|
Revenues, net
|
|
$
|
128,812
|
|
|
$
|
6,434
|
|
|
$
|
|
|
|
$
|
135,246
|
|
Cost of revenues
|
|
|
66,675
|
|
|
|
5,573
|
|
|
|
|
|
|
|
72,248
|
|
Research and development
|
|
|
24,362
|
|
|
|
5,273
|
|
|
|
|
|
|
|
29,635
|
|
Patent Litigation
|
|
|
9,693
|
|
|
|
|
|
|
|
|
|
|
|
9,693
|
|
Income (loss) before income taxes
|
|
$
|
25,781
|
|
|
$
|
(6,208
|
)
|
|
$
|
(31,477
|
)
|
|
$
|
(11,904
|
)
|
|
|
19.
|
COMMITMENTS
AND CONTINGENCIES
|
Leases
The Company leases office, warehouse and laboratory facilities
under non-cancelable operating leases expiring between February
2010 and June 2015. Rent expense for the years ended
December 31, 2008, 2007 and 2006 was $1,664,000, $1,251,000
and $970,000, respectively. The Company recognizes rent expense
on a straight-line basis over the lease period.
Page F-50 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company also leases certain equipment under various
non-cancelable operating leases with various expiration dates
between March 2009 and March 2013. Future minimum lease payments
under the non-cancelable operating leases are as follows:
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
(In $000s)
|
|
|
2009
|
|
$
|
1,412
|
|
2010
|
|
|
1,265
|
|
2011
|
|
|
1,059
|
|
2012
|
|
|
1,014
|
|
2013
|
|
|
1,024
|
|
Thereafter
|
|
|
1,032
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
6,806
|
|
|
|
|
|
|
Purchase
Order Commitments
As of December 31, 2008, the Company had approximately
$11,796,000 of open purchase order commitments, primarily for
raw materials. The terms of these purchase order commitments are
less than one year in duration.
Taiwan
Facility Construction
The Company currently has under construction a facility in
Taiwan intended to be utilized for manufacturing, research and
development, warehouse, and administrative space, and to be
operational in 2010. In conjunction with the construction of
this facility, the Company has entered into several contracts
aggregating approximately $16,617,000 as of December 31,
2008. As of December 31, 2008, the Company had remaining
commitments under these contracts of approximately $1,988,000.
The Company has capitalized interest expense of $348,000 in
conjunction with the facility in Taiwan as of December 31,
2008.
|
|
20.
|
LEGAL AND
REGULATORY MATTERS
|
Patent
Litigation
There is substantial litigation in the pharmaceutical,
biological, and biotechnology industries with respect to the
manufacture, use, and sale of new products which are the subject
of conflicting patent and intellectual property 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
holders receipt of such notice. If the patent holder files
suit within the 45 day period, the FDA can review and approve
the ANDA, but is prevented from granting final marketing
approval of the product until a final judgment in the action has
been rendered in favor of the generic, or 30 months from the
date the notice was received, whichever is sooner. Lawsuits have
been filed against the Company in connection the Companys
Paragraph IV certifications.
Should a patent holder commence a lawsuit with respect to an
alleged patent infringement by the Company, the uncertainties
inherent in patent litigation make the outcome of such
litigation difficult to predict. The delay in obtaining FDA
approval to market the Companys product candidates as a
result of litigation, as well as the expense
Page F-51 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of such litigation, whether or not the Company is ultimately
successful, could have a material adverse effect on the
Companys results of operations and financial position. In
addition, there can be no assurance any patent litigation will
be resolved prior to the end of the 30-month period. As a
result, even if the FDA were to approve a product upon
expiration of the 30-month period, the Company may elect to not
commence marketing the product if patent litigation is still
pending.
Further, under the Teva Agreement, the Company and Teva have
agreed to share in fees and costs related to patent infringement
litigation associated with the 12 products covered by the Teva
Agreement. For the six products with ANDAs already filed with
the FDA at the time the Teva Agreement was signed, Teva is
required to pay 50% of the fees and costs in excess of
$7,000,000; for three of the products with ANDAs filed since the
Teva Agreement was signed, Teva is required to pay 45% of the
fees and costs; and for the remaining three products, Teva is
required to pay 50% of the fees and costs. The Company is
responsible for the remaining fees and costs relating to these
12 products.
The Company is responsible for all of the patent litigation fees
and costs associated with current and future products not
covered by the Teva Agreement. The Company records as expense
the costs of patent litigation as incurred.
Although the outcome and costs of the asserted and unasserted
claims is difficult to predict, the Company does not expect the
ultimate liability, if any, for such matters to have a material
adverse effect on its financial condition, results of
operations, or cash flows.
Patent
Infringement Litigation
AstraZeneca
AD et al. v. Impax Laboratories, Inc.
(Omeprazole)
In litigation commenced against the Company in the
U.S. District Court for the District of Delaware in May
2000, AstraZeneca AB alleged the Companys submission of an
ANDA seeking FDA permission to market Omeprazole Delayed Release
Capsules, 10mg, 20mg and 40mg, constituted infringement of
AstraZenecas U.S. patents relating to its
Prilosec®
product and sought an order enjoining the Company from marketing
its product until expiration of the patents. The case, along
with several similar suits against other manufacturers of
generic versions of
Prilosec®,
was subsequently transferred to the U.S. District Court for
the Southern District of New York. In September 2004, following
expiration of the
30-month
stay, the FDA approved the Companys ANDA, and the Company
and its alliance agreement partner, Teva, commenced commercial
sales of the Companys product. In January 2005,
AstraZeneca added claims of willful infringement, for damages,
and for enhanced damages on the basis of this commercial launch.
Claims for damages were subsequently dropped from the suit
against the Company, but were included in a separate suit filed
against Teva. In May 2007, the court found the product infringed
two of AstraZenecas patents and these patents were not
invalid. The court ordered FDA approval of the Companys
ANDA be converted to a tentative approval, with a final approval
date not before October 20, 2007, the expiration date of
the relevant pediatric exclusivity period. In August 2008 the
U.S. Court of Appeals for the Federal Circuit affirmed the
lower courts decision of infringement and validity. If
Teva is not ultimately successful in establishing invalidity or
non-infringement in the separate suit against Teva, the court
may award monetary damages associated with Tevas
commercial sale of the Companys omeprazole products. Under
the Teva Agreement, the Company would be responsible for
monetary damages awarded against Teva up to a specified level,
beyond which, monetary damages would be Tevas
responsibility.
Aventis
Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc.
Fexofenadine(Pseudoepbedrine)
The Company is a defendant in an action brought in March 2002 by
Aventis Pharmaceuticals Inc. and others in the
U.S. District Court for the District of New Jersey alleging
the Companys proposed Fexofenadine and Pseudoephedrine
Hydrochloride tablets, generic to
Allegra-D®,
infringe seven Aventis patents and seeking an injunction
preventing the Company from marketing the products until
expiration of the patents. The case has since
Page F-52 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
been consolidated with similar actions brought by Aventis
against five other manufacturers (including generics to both
Allegra®
and
Allegra-D®).
In March 2004, Aventis and AMR Technology, Inc. filed a
complaint and first amended complaint against the Company and
one of the other defendants alleging infringement of two
additional patents, owned by AMR and licensed to Aventis,
relating to a synthetic process for making the active
pharmaceutical ingredient, Fexofenadine Hydrochloride and
intermediates in the synthetic process. The Company believes we
have defenses to the claims based on non-infringement and
invalidity.
In June 2004, the court granted the Companys motion for
summary judgment of non-infringement with respect to two of the
patents and, in May 2005, granted summary judgment of invalidity
with respect to a third patent. The Company will have the
opportunity to file additional summary judgment motions in the
future and to assert both non-infringement and invalidity of the
remaining patents (if necessary) at trial. No trial date has yet
been set. In September 2005, Teva launched its Fexofenadine
tablet products (generic to
Allegra®),
and Aventis and AMR moved for a preliminary injunction to bar
Tevas sales based on four of the patents in suit, which
patents are common to the
Allegra®
and
Allegra-D®
litigations. The district court denied Aventiss motion in
January 2006, finding Aventis did not establish a likelihood of
success on the merits, which decision was affirmed on appeal.
Discovery is proceeding. No trial date has been set.
Abbott
Laboratories v. Impax Laboratories, Inc.
(Fenofibrate)
The Company was a defendant in patent-infringement litigation
commenced in January 2003 by Abbott Laboratories and Fournier
Industrie et Sante in the U.S. District Court for the
District of Delaware relating to Company ANDAs for Fenofibrate
Tablets, 160mg and 54mg, generic to
TriCor®.
In March 2005 the Company asserted antitrust counterclaims. By
agreement between the parties, in July 2005 the court entered an
order dismissing the patent-infringement claims, leaving the
Companys antitrust counterclaim intact, and in May 2006
the court denied Abbotts and Fourniers motion to
dismiss the counterclaim.
On April 3, 2008, the Court issued an order bifurcating and
staying damages issues, and setting a schedule for trial of
liability issues to begin the week of November 3, 2008. On
November 13, 2008, the parties reached agreement to settle
the case and the case was dismissed with prejudice on
December 12, 2008.
Impax
Laboratories, Inc. v. Aventis Pharmaceuticals, Inc.
(Riluzole)
In June 2002, the Company filed a suit against Aventis
Pharmaceuticals, Inc. in the U.S. District Court for the
District of Delaware, seeking a declaration the Companys
filing of an ANDA for Riluzole 50mg tablets, generic to
Rilutek®,
for treatment of patients with amyotrophic lateral scleroses
(ALS) did not infringe claims of Aventiss patent relating
to the drug and a declaration its patent is invalid. Aventis
filed counterclaims for infringement, and, in December 2002, the
district court granted Aventis motion for a preliminary
injunction enjoining the Company from marketing any
pharmaceutical product or compound containing Riluzole for the
treatment of ALS. In September 2004, the district court found
Aventiss patent not invalid and infringed by the
Companys proposed product. In November 2006, the Court of
Appeals for the Federal Circuit vacated the district
courts finding of the patent not invalid and remanded for
further findings on this issue, and, in June 2007, the district
court again found Aventiss patent is not invalid. In
October 2008, the Court of Appeals for the Federal Circuit
affirmed the district court decision. The district court has
entered a permanent injunction enjoining the Company from
marketing Riluzole 50mg tablets for the treatment of ALS until
the expiration of Aventiss patent in June 2013.
Wyeth v.
Impax Laboratories, Inc. (Venlafaxine)
In April 2006, Wyeth filed suit against the Company in the
U.S. District Court for the District of Delaware, alleging
patent infringement for the filing of the Companys ANDA
relating to Venlafaxine HCl Extended Release 37.5mg, 75mg and
150mg capsules, generic to Effexor
XR®.
In June 2008, the Company entered into a Settlement and Release
Agreement with Wyeth settling all pending claims and
counter-claims related to the Companys generic Effexor
XR®
products. Pursuant to the Settlement and Release Agreement, the
Company obtained a license
Page F-53 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
allowing launch of its generic Effexor
XR®
products no later than June 2011, and Wyeth agreed to pay the
Company $1,000,000 as reimbursement for legal fees associated
with this lawsuit.
Endo
Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc.
(Oxymorphone)
In November 2007, Endo Pharmaceuticals Inc. and Penwest
Pharmaceuticals Co. (together, Endo) filed suit
against the Company in the U.S. District Court for the
District of Delaware, requesting a declaration the
Companys Paragraph IV Notices with respect to the
Companys ANDA for Oxymorphone Hydrochloride Extended
Release Tablets 5 mg, 10 mg, 20 mg and
40 mg, generic to
Opana®
ER, are null and void and, in the alternative, alleging patent
infringement in connection with the filing of such ANDA. Endo
subsequently dismissed its request for declaratory relief and in
December 2007 filed another patent infringement suit relating to
the same ANDA. In July 2008, Endo asserted additional
infringement claims with respect to the Companys amended
ANDA, which added 7.5mg, 15mg and 30mg strengths of the product.
The cases have subsequently been transferred to the
U.S. District Court for the District of New Jersey. The
Company has filed an answer and counterclaims. Discovery is
proceeding, and no trial date has been set.
lmpax
Laboratories, Inc. v. Medicis Pharmaceutical Corp.
(Minocycline)
In January 2008, the Company filed a complaint against Medicis
Pharmaceutical Corp. in the U.S. District Court for the
Northern District of California, seeking a declaratory judgment
of the Companys filing of its ANDA relating to Minocycline
Hydrochloride Extended Release Tablets 45 mg, 90 mg,
and 135 mg, generic to
Solodyn®,
did not infringe any valid claim of U.S. Patent
No. 5,908,838. Medicis filed a motion to dismiss the
complaint for lack of subject matter jurisdiction. On
April 16, 2008, the District Court granted Medicis
motion to dismiss, and judgment was entered on April 22,
2008. The Company appealed the dismissal decision to the United
States Court of Appeals for the Federal Circuit. While on appeal
in December 2008, the parties announced they had settled the
case by entering into the Settlement and License Agreement,
which allows Impax to launch its products no later than November
2011. The appeal was dismissed by stipulation in accordance with
the Settlement and License Agreement.
Pfizer
Inc., et aI. v. Impax Laboratories, Inc.
(Tolterodine)
In March 2008, Pfizer Inc., Pharmacia & Upjohn Company
LLC, and Pfizer Health AB (collectively, Pfizer)
filed a complaint against the Company in the U.S. District
Court for the Southern District of New York, alleging the
Companys filing of an ANDA relating to Tolterodine
Tartrate Extended Release Capsules, 4 mg, generic to
Detrol®
LA, infringes three Pfizer patents. The Company filed an answer
and counterclaims seeking declaratory judgment of
non-infringement, invalidity, or unenforceability with respect
to the patents in suit. In April 2008, the case was transferred
to the U.S. District Court for the District of New Jersey.
On September 3, 2008 an amended complaint was filed
alleging infringement based on the Companys ANDA amendment
adding a 2mg strength. Discovery is in the early stages, and no
trial date has been set.
Boehringer
Ingelheim Pharmaceuticals, et al. v. Impax Laboratories,
Inc. (Tamsulosin)
In July 2008, Boehringer Ingelheim Pharmaceuticals Inc. and
Astellas Pharma Inc. (together, Astellas) filed a
complaint against the Company in the U.S. District Court
for the Northern District of California, alleging patent
infringement in connection with the filing of the Company ANDA
relating to Tamsulosin Hydrochloride Capsules, 0.4 mg,
generic to
Flomax®,.
After filing its answer and counterclaim, the Company filed a
motion for summary judgment of patent invalidity. The District
Court scheduled a hearing on claim construction for May 2009 and
summary judgment for June 2009.
Page F-54 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Purdue
Pharma Products L.P., et al. v. Impax Laboratories, Inc.
(Tramadol)
In August 2008, Purdue Phanna Products L.P., Napp Pharmaceutical
Group LTD., Biovail Laboratories International, SRL, and
Ortho-McNeil-Janssen Pharmaceuticals, Inc. (collectively,
Purdue) filed suit against the Company in the
U.S. District Court for the District of Delaware, alleging
patent infringement for the filing of the Companys ANDA
relating to Tramadol Hydrochloride Extended Release Tablets,
100 mg, generic to 100mg
Ultram®
ER. In November 2008, Purdue asserted additional infringement
claims with respect to the Companys amended ANDA, which
added 200 mg and 300 mg strengths of the product. The
Company has filed answers and counterclaims to those complaints.
Discovery is in the early stages, and no trial date has been set.
Eli Lilly
and Company v. Impax Laboratories, Inc.
(Duloxetine)
In November 2008, Eli Lilly and Company filed suit against the
Company in the U.S. District Court for the Southern
District of Indiana, alleging patent infringement for the filing
of the Companys ANDA relating to Duloxetine Hydrochloride
Delayed Release Capsules, 20 mg, 30 mg, and
60 mg, generic to
Cymbalta®.
The Company filed an answer and counterclaim. In February 2008,
the parties jointly submitted a stipulation and proposed order
staying this litigation, which order has been entered by the
Court. .
Warner
Chilcott, Ltd. et.al. v. Impax Laboratories, Inc.
(Doxycycline Hyclate)
In December 2008, Warner Chilcott Limited and Mayne Pharma
International Pty. Ltd. (together, Warner Chilcott)
filed lawsuit against the Company in the U.S. District
Court for the District of New Jersey, alleging patent
infringement for the filing of the Companys ANDA relating
to Doxycycline Hyclate Delayed Release Tablets, 75 mg and
100 mg, generic to
Doryx®.
The Company has filed an answer and counterclaim. Discovery is
in the early stages, and no trial date has been set.
Eurand,
Inc., et al. v. Impax Laboratories, Inc.
(Cyclobenzaprine)
In January 2009, Eurand, Inc., Cephalon, Inc., and Anesta AG
(collectively, Cephalon) filed suit against the
Company in the U.S. District Court for the District of
Delaware, alleging patent infringement for the filing of the
Companys ANDA relating to Cyclobenzaprine Hydrochloride
Extended Release Capsules, 15 mg and 30 mg, generic to
Amrix®.
The Company has filed an answer and counterclaim. Discovery is
in the early stages, and the trial is scheduled to begin on
September 27, 2010.
Other
Litigation Related to Our Business
Axcan
Scandipharm Inc. v. Ethex Corp, et al. (Lipram
UL)
In May 2007, Axcan Scandipharm Inc., a manufacturer of the
Ultrase®
line of pancreatic enzyme products, brought suit against the
Company in the U.S. District Court for the District of
Minnesota, alleging the Company engaged in false advertising,
unfair competition, and unfair trade practices under federal and
Minnesota law in connection with the marketing and sale of the
Companys now-discontinued Lipram UL products. The suit
seeks actual and consequential damages, including lost profits,
treble damages, attorneys fees, injunctive relief and
declaratory judgments to prohibit the substitution of Lipram UL
for prescriptions of
Ultrase®.
The District Court granted in part and denied in part the
Companys motion to dismiss the complaint, as well as the
motion of co-defendants Ethex Corp. and KV Pharmaceutical Co.,
holding any claim of false advertising pre-dating June 01,
2001, is barred by the statute of limitations. The Company has
answered the complaint, and discovery is proceeding. Trial is
set for May 2010.
Freeberg v.
Impax Laboratories, Inc., et al. (Freeberg)
In January 2009, an employment law action was filed against the
Company by former employee Vanna Freeberg in the Superior Court
of the State of California for the County of Alameda. The
complaint alleges eight
Page F-55 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
causes of action: violation of California Family Rights Act and
California Government Code Section 12945.2, disability or
perceived disability discrimination in violation of California
Government Code Section 12940, violation of Civil Code
Section 46(3), failure to compensate for hours worked under
California Industrial Welfare Commission Orders and California
Labor Code Section 1182.11, retaliation in violation of
California public policy, age discrimination in violation of
Government Code Section 12940, retaliation in violation of
California Government Code 12940, and age discrimination in
violation of California public policy. The Company believes
these claims are without merit and intends to defend against
them vigorously.
Securities
Litigation
The Company, its Chief Executive Officer and several former
officers and directors were defendants in several class actions
filed in the United States District Court for the Northern
District of California, all of which were consolidated into a
single action. These actions, brought on behalf of all
purchasers of the Companys common stock between May 5 and
November 3, 2004, sought unspecified damages and alleged
that the Company and the individual defendants, in violation of
the antifraud provisions of the federal securities laws, had
artificially inflated the market price of the Companys
common stock during that period by filing false financial
statements for the first and second quarters of 2004, based upon
the subsequent restatement of its results for those periods.
On January 28, 2009, the parties entered into an agreement
settling the securities class actions. Under the terms of the
settlement, plaintiffs agreed to dismissal of the actions with
prejudice, and defendants, without admitting the allegations or
any liability, agreed to pay the plaintiff class $9,000,000, of
which the Company paid approximately $3,400,000 and the balance
was funded by directors and officers liability insurance.
The following events occurred after December 31, 2008:
On January 20, 2009, the Board of Directors approved the
adoption of the shareholder rights plan described in Note 16.
Page F-56 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
22.
|
SUPPLEMENTARY
FINANCIAL INFORMATION (unaudited)
|
Selected (unaudited) quarterly financial information for the
year ended December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Quarters Ended:
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In $000s except share and per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, gross
|
|
$
|
38,990
|
|
|
$
|
45,703
|
|
|
$
|
42,343
|
|
|
$
|
54,544
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks
|
|
|
9,233
|
|
|
|
11,033
|
|
|
|
13,770
|
|
|
|
16,108
|
|
Rebates
|
|
|
4,191
|
|
|
|
5,190
|
|
|
|
4,173
|
|
|
|
6,805
|
|
Returns
|
|
|
946
|
|
|
|
1,381
|
|
|
|
1,478
|
|
|
|
1,914
|
|
Other credits
|
|
|
1,163
|
|
|
|
1,474
|
|
|
|
2,213
|
|
|
|
1,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
|
23,457
|
|
|
|
26,625
|
|
|
|
20,709
|
|
|
|
27,811
|
|
RX Partner
|
|
|
18,805
|
|
|
|
43,870
|
|
|
|
9,424
|
|
|
|
9,679
|
|
OTC Partner
|
|
|
4,409
|
|
|
|
4,932
|
|
|
|
3,398
|
|
|
|
3,207
|
|
Research Partner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
833
|
|
Promotional Partner
|
|
|
3,252
|
|
|
|
3,238
|
|
|
|
3,238
|
|
|
|
3,163
|
|
Other
|
|
|
7
|
|
|
|
7
|
|
|
|
5
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
49,930
|
|
|
|
78,672
|
|
|
|
36,774
|
|
|
|
44,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
26,552
|
|
|
$
|
57,968
|
|
|
$
|
14,478
|
|
|
$
|
19,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
959
|
|
|
$
|
17,597
|
|
|
$
|
(8,914
|
)
|
|
$
|
9,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
0.02
|
|
|
$
|
0.30
|
|
|
$
|
(0.15
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (diluted)
|
|
$
|
0.02
|
|
|
$
|
0.29
|
|
|
$
|
(0.15
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,833,979
|
|
|
|
58,978,703
|
|
|
|
59,166,319
|
|
|
|
59,308,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
61,126,768
|
|
|
|
60,584,709
|
|
|
|
59,166,319
|
|
|
|
60,624,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly computations of (unaudited) net income (loss) per
share amounts are made independently for each quarterly
reporting period, and the sum of the per share amounts for the
quarterly reporting periods may not equal the per share amounts
for the full year.
Included in the (unaudited) quarterly financial information
shown above are the following transactions, summarized as
follows:
|
|
|
|
|
The Company recognized $1.2 million in income during in the
fourth quarter 2008, resulting from the adjustment of the
assumptions used to determine the change in the fair value of
the common stock purchase warrants.
|
Page F-57 of F-58
IMPAX
LABORATORIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Selected (unaudited) quarterly financial information for the
year ended December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarters Ended:
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In $000s except share and per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, gross
|
|
$
|
32,478
|
|
|
$
|
33,880
|
|
|
$
|
42,289
|
|
|
$
|
39,852
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks
|
|
|
7,202
|
|
|
|
7,419
|
|
|
|
10,559
|
|
|
|
8,792
|
|
Rebates
|
|
|
3,375
|
|
|
|
3,520
|
|
|
|
4,306
|
|
|
|
4,767
|
|
Returns
|
|
|
968
|
|
|
|
1,291
|
|
|
|
1,639
|
|
|
|
1,565
|
|
Other credits
|
|
|
1,174
|
|
|
|
1,336
|
|
|
|
1,191
|
|
|
|
1,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
|
19,759
|
|
|
|
20,314
|
|
|
|
24,594
|
|
|
|
23,311
|
|
RX Partner
|
|
|
8,278
|
|
|
|
33,296
|
|
|
|
81,634
|
|
|
|
37,906
|
|
OTC Partner
|
|
|
2,408
|
|
|
|
2,305
|
|
|
|
4,081
|
|
|
|
3,072
|
|
Promotional Partner
|
|
|
3,201
|
|
|
|
3,279
|
|
|
|
3,104
|
|
|
|
3,175
|
|
Other
|
|
|
17
|
|
|
|
9
|
|
|
|
7
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
33,663
|
|
|
|
59,203
|
|
|
|
113,420
|
|
|
|
67,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
13,677
|
|
|
$
|
30,902
|
|
|
$
|
87,428
|
|
|
$
|
34,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,770
|
)
|
|
$
|
83,792
|
|
|
$
|
43,402
|
|
|
$
|
6,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
(0.13
|
)
|
|
$
|
1.42
|
|
|
$
|
0.74
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (diluted)
|
|
$
|
(0.13
|
)
|
|
$
|
1.37
|
|
|
$
|
0.71
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,794,020
|
|
|
|
58,807,656
|
|
|
|
58,818,971
|
|
|
|
58,821,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
58,794,020
|
|
|
|
61,193,296
|
|
|
|
61,293,615
|
|
|
|
61,301,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly computations of (unaudited) net income (loss) per
share amounts are made independently for each quarterly
reporting period, and the sum of the per share amounts for the
quarterly reporting periods may not equal the per share amounts
for the full year.
Included in the (unaudited) quarterly financial information
shown above are the following transactions:
|
|
|
|
|
As more fully discussed above in the Alliance Agreements
footnote, the settlement of a patent infringement lawsuit
resulted in the Company being granted a license permitting it to
manufacture and sell its oxycodone product (under the terms of
the DAVA Agreement), resulting in the Companys
determination to shorten the revenue recognition period of the
DAVA Agreement. The license authorized the Company to sell a
fixed amount of its product (under a sub-license granted to
DAVA) through June 2007. The increased amount of revenue
recognized in the third quarter of 2007 resulted from the
recognition of these product sales over the resulting revised
shorter recognition period.
|
|
|
|
As more fully discussed above in the Income Taxes footnote, at
June 30, 2007, the Company reversed the valuation allowance
on the deferred tax asset, resulting in a significant tax
benefit for the second quarter of 2007.
|
Page F-58 of F-58
SCHEDULE II,
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
|
Balance at
|
|
|
Charge to
|
|
|
Charge to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
End of
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(In $000s)
|
|
|
Deferred tax asset valuation allowance
|
|
$
|
84,970
|
|
|
$
|
6,992
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
91,962
|
|
Inventory reserve
|
|
|
5,776
|
|
|
|
(2,857
|
)
|
|
|
|
|
|
|
|
|
|
|
2,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
|
Balance at
|
|
|
Charge to
|
|
|
Charge to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
End of
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(In $000s)
|
|
|
Deferred tax asset valuation allowance
|
|
$
|
91,962
|
|
|
$
|
(81,485
|
)
|
|
$
|
(10,477
|
)
|
|
$
|
|
|
|
$
|
|
|
Inventory reserve
|
|
|
2,919
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
3,148
|
|
Reserve for bad debts
|
|
|
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2008
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
|
Balance at
|
|
|
Charge to
|
|
|
Charge to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
End of
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(In $000s)
|
|
|
Deferred tax asset valuation allowance
|
|
$
|
|
|
|
$
|
333
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
333
|
|
Inventory reserve
|
|
|
3,148
|
|
|
|
1,257
|
|
|
|
|
|
|
|
|
|
|
|
4,405
|
|
Reserve for bad debts
|
|
|
550
|
|
|
|
568
|
|
|
|
|
|
|
|
(290
|
)
|
|
|
828
|
|
At June 30, 2007, the Company reversed the deferred tax
asset valuation allowance in the amount of $91,962, of which
$10,477 was credited to additional-paid-in-capital as the tax
benefit related to employee stock options exercised prior to
January 1, 2006.
S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
IMPAX LABORATORIES, INC.
|
|
|
Date: March 12, 2009
|
|
By: /s/ Larry
Hsu, Ph.D.
Name: Larry
Hsu, Ph.D.
Title: President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Larry
Hsu, Ph.D
Larry
Hsu, Ph.D
|
|
President, Chief Executive Officer (Principal Executive Officer)
and Director
|
|
March 12, 2009
|
|
|
|
|
|
/s/ Arthur
A. Koch, Jr.
Arthur
A. Koch, Jr.
|
|
Senior Vice President, Finance, and
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
March 12, 2009
|
|
|
|
|
|
/s/ Leslie
Z. Benet, Ph.D.
Leslie
Z. Benet, Ph.D.
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
/s/ Robert
L. Burr
Robert
L. Burr
|
|
Chairman of the Board
|
|
March 12, 2009
|
|
|
|
|
|
/s/ Nigel
Ten Fleming, Ph.D.
Nigel
Ten Fleming, Ph.D.
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
/s/ Michael
Markbreiter
Michael
Markbreiter
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
/s/ Oh
Kim Sun
Oh
Kim Sun
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
/s/ Peter
R. Terreri
Peter
R. Terreri
|
|
Director
|
|
March 12, 2009
|
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
3
|
.1.1
|
|
Restated Certificate of Incorporation, dated August 30,
2004.(1)
|
|
3
|
.1.2
|
|
Certificate of Designation of Series A Junior Participating
Preferred Stock, as filed with the Secretary of State of
Delaware on January 21, 2009.(3)
|
|
3
|
.2
|
|
By-Laws.(2)
|
|
4
|
.1
|
|
Specimen of Common Stock Certificate.(2)
|
|
4
|
.2
|
|
Form of Debenture (incorporated by reference to Exhibit A
to the Indenture, dated as of June 27, 2005, between the
Company and HSBC Bank USA, National Association, as Trustee,
listed on Exhibit 4.3)
|
|
4
|
.3
|
|
Indenture, dated as of June 27, 2005, between the Company
and HSBC Bank USA, National Association, as Trustee.(2)
|
|
4
|
.4
|
|
Supplemental Indenture, dated as of July 6, 2005, between
the Company and HSBC Bank USA, National Association, as
Trustee.(2)
|
|
4
|
.5
|
|
Registration Rights Agreement, dated as of June 27, 2005,
between the Company and the Initial Purchasers named therein.(2)
|
|
4
|
.6
|
|
Promissory Note dated June 7, 2006, issued by the Company
to Solvay Pharmaceuticals, Inc.(2)
|
|
4
|
.7
|
|
Preferred Stock Rights Agreement, dated as of January 20,
2009, by and between the Company and StockTrans, Inc., as Rights
Agent.(3)
|
|
10
|
.1
|
|
Amended and Restated Loan and Security Agreement, dated as of
December 15, 2005, between the Company and Wachovia Bank,
National Association.(2)
|
|
10
|
.1.1
|
|
First Amendment, dated October 14, 2008, to Amended and
Restated Loan and Security Agreement, dated December 15,
2005, between the Company and Wachovia Bank, National
Association.(4)
|
|
10
|
.1.2
|
|
Second Amendment to Amended and Restated Loan and Security
Agreement, effective as of December 31, 2008, by and among
the Company and Wachovia Bank, National Association.
|
|
10
|
.2
|
|
Purchase Agreement, dated June 26, 2005, between the
Company and the Purchasers named therein.(2)
|
|
10
|
.3
|
|
Impax Laboratories Inc. 1995 Stock Incentive Plan.*(2)
|
|
10
|
.3.1
|
|
Amendment No. 1 to Impax Laboratories, Inc. 1995 Stock
Incentive Plan, dated July 1, 1998.*
|
|
10
|
.3.2
|
|
Amendment No. 2 to Impax Laboratories, Inc. 1995 Stock
Incentive Plan, dated May 25, 1999.*
|
|
10
|
.4
|
|
Impax Laboratories Inc. 1999 Equity Incentive Plan.*
|
|
10
|
.4.1
|
|
Form of Stock Option Grant under the Impax Laboratories, Inc.
1999 Equity Incentive Plan.*
|
|
10
|
.5
|
|
Impax Laboratories Inc. 2001 Non-Qualified Employee Stock
Purchase Plan.*(2)
|
|
10
|
.6
|
|
Impax Laboratories Inc. Amended and Restated 2002 Equity
Incentive Plan.*
|
|
10
|
.6.1
|
|
Form of Stock Option Grant under the Impax Laboratories, Inc.
Amended and Restated 2002 Equity Incentive Plan.*
|
|
10
|
.6.2
|
|
Form of Stock Bonus Agreement under the Impax Laboratories, Inc.
Amended and Restated 2002 Equity Incentive Plan.*
|
|
10
|
.7
|
|
Impax Laboratories Inc. Executive Non-Qualified Deferred
Compensation Plan, restated effective January 1, 2005.*(4)
|
|
10
|
.8
|
|
Employment Agreement, dated as of December 14, 1999,
between the Company and Charles Hsiao, Ph.D.*(4)
|
|
10
|
.9
|
|
Employment Agreement, dated as of December 14, 1999,
between the Company and Larry Hsu, Ph.D.*(4)
|
|
10
|
.10
|
|
Offer of Employment Letter, dated August 12, 2004, between
the Company and Charles V. Hildenbrand.*
|
|
10
|
.11
|
|
Offer of Employment Letter, dated February 9, 2005, between
the Company and Arthur A. Koch, Jr.*
|
|
10
|
.12.1
|
|
Employment Agreement, dated as of September 1, 2006,
between the Company and David S. Doll.*(2)
|
|
10
|
.12.2
|
|
Separation Agreement and General Release, dated July 30,
2008, between the Company and David S. Doll.*(2)
|
|
10
|
.12.3
|
|
Consulting Agreement, effective as of September 4, 2008,
between the Company and David S. Doll.*(2)
|
|
10
|
.13
|
|
Offer of Employment Letter, effective as of March 31, 2008,
between the Company and Michael Nestor.*
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
10
|
.14
|
|
Offer of Employment Letter, effective as of January 5,
2009, between the Company and Christopher Mengler.*
|
|
10
|
.15
|
|
Strategic Alliance Agreement, dated June 27, 2001, between
the Company and Teva Pharmaceuticals Curacao N.V.**(5)
|
|
10
|
.15.1
|
|
Letter Amendment, dated October 8, 2003, to Strategic
Alliance Agreement, dated June 27, 2001, between the
Company and Teva Pharmaceuticals Curacao N.V.**(5)
|
|
10
|
.15.2
|
|
Letter Agreement, dated March 24, 2005, between the Company
and Teva Pharmaceuticals Curacao N.V.**(5)
|
|
10
|
.15.3
|
|
Letter Amendment, dated March 24, 2005 and effective
January 1, 2005, to Strategic Alliance Agreement, dated
June 27, 2001, between the Company and Teva Pharmaceuticals
Curacao N.V.**(5)
|
|
10
|
.15.4
|
|
Amendment, dated January 24, 2006, to Strategic Alliance
Agreement, dated June 27, 2001, between the Company and
Teva Pharmaceuticals Curacao N.V.**(6)
|
|
10
|
.15.5
|
|
Amendment, dated February 9, 2007, to Strategic Alliance
Agreement, dated June 27, 2001, between the Company and
Teva Pharmaceuticals Curacao N.V.**(5)
|
|
10
|
.16
|
|
Development, License and Supply Agreement, dated as of
June 18, 2002, between the Company and Wyeth, acting
through its Wyeth Consumer Healthcare Division.**(5)
|
|
10
|
.16.1
|
|
Amendment, dated as of July 9, 2004, to Development,
License and Supply Agreement, dated as of June 18, 2002,
between the Company and Wyeth, acting through its Wyeth Consumer
Healthcare Division.(6)
|
|
10
|
.16.2
|
|
Amendment, dated as of February 14, 2005, to Development,
License and Supply Agreement, dated as of June 18, 2002,
between the Company and Wyeth, acting through its Wyeth Consumer
Healthcare Division.(6)
|
|
10
|
.17
|
|
Licensing, Contract Manufacturing and Supply Agreement, dated as
of June 18, 2002, between the Company and Schering
Corporation.**(6)
|
|
10
|
.17.1
|
|
Amendment No. 3, effective as of July 23, 2004, to
Licensing, Contract Manufacturing and Supply Agreement, dated as
of June 18, 2002, between the Company and Schering
Corporation.**(5)
|
|
10
|
.17.2
|
|
Amendment No. 4, effective as of December 15, 2006, to
Licensing, Contract Manufacturing and Supply Agreement, dated as
of June 18, 2002, between the Company and Schering
Corporation.**(5)
|
|
10
|
.18
|
|
Supply and Distribution Agreement, dated as of November 3,
2005, between the Company and DAVA Pharmaceuticals, Inc.**(5)
|
|
10
|
.18.1
|
|
Amendment No. 2, dated February 6, 2007, to Supply and
Distribution Agreement, dated November 3, 2005, between the
Company and DAVA Pharmaceuticals, Inc.**(6)
|
|
10
|
.19
|
|
Patent License Agreement, dated as of March 30, 2007, by
and among Purdue Pharma L.P., The P.F. Laboratories, Inc.,
Purdue Pharmaceuticals L.P. and the Company.(7)
|
|
10
|
.20
|
|
Supplemental License Agreement, dated as of March 30, 2007,
by and among Purdue Pharma L.P., The P.F. Laboratories, Inc.,
Purdue Pharmaceuticals L.P. and the Company.(7)
|
|
10
|
.21
|
|
Sublicense Agreement, effective as of March 30, 2007,
between the Company and DAVA Pharmaceuticals, Inc.(7)
|
|
10
|
.22
|
|
Promotional Services Agreement, dated as of January 19,
2006, between the Company and Shire US Inc.**(5)
|
|
10
|
.23
|
|
Co-promotion Agreement, dated as of July 16, 2008, between
the Company and Wyeth, acting through its Wyeth Pharmaceuticals
Division.**(7)
|
|
10
|
.24
|
|
Joint Development Agreement, dated as of November 26, 2008,
between the Company and Medicis Pharmaceutical Corporation.**(5)
|
|
10
|
.25
|
|
Special Cash Bonus Payments and Directors Fees.*(8)
|
|
10
|
.26
|
|
Construction Work Agreement, dated as of February 18, 2008,
by and between Impax Laboratories (Taiwan), Inc., a wholly-owned
subsidiary of the Company, and E&C Engineering Corporation
(English translation from the Taiwanese language).
|
|
10
|
.27
|
|
Construction Agreement, dated as of March 11, 2008, by and
between Impax Laboratories (Taiwan), Inc., a wholly-owned
subsidiary of the Company, and Fu Tsu Construction (English
translation from the Taiwanese language).
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Document
|
|
|
11
|
.1
|
|
Statement re computation of per share earnings (incorporated by
reference to Note 17 to the Notes to the Consolidated
Financial Statements in this Annual Report on
Form 10-K).
|
|
21
|
.1
|
|
Subsidiaries of the registrant.
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certifications of the Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
* |
|
Management contract, compensatory plan or arrangement. |
|
** |
|
Confidential treatment requested for certain portions of this
exhibit pursuant to
Rule 24b-2
under the Exchange Act, which portions are omitted and filed
separately with the SEC. |
|
(1) |
|
Incorporated by reference to Amendment No. 5 to the
Companys Registration Statement on Form 10 filed on
December 23, 2008. |
|
(2) |
|
Incorporated by reference to the Companys Registration
Statement on Form 10 filed on October 10, 2008. |
|
(3) |
|
Incorporated by reference to the Companys Current Report
on
Form 8-K
filed on January 22, 2009. |
|
(4) |
|
Incorporated by reference to Amendment No. 2 to the
Companys Registration Statement on Form 10 filed on
December 2, 2008. |
|
(5) |
|
Incorporated by reference to Amendment No. 6 to the
Companys Registration Statement on Form 10 filed on
January 14, 2009. |
|
(6) |
|
Incorporated by reference to Amendment No. 1 to the
Companys Registration Statement on Form 10 filed on
November 12, 2008. |
|
(7) |
|
Incorporated by reference to Amendment No. 7 to the
Companys Registration Statement on Form 10 filed on
January 21, 2009. |
|
(8) |
|
Incorporated by reference to the Companys Current Report
on
Form 8-K
filed on January 6, 2009. |