e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2009 |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from to |
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
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(I.R.S. Employer Identification No.) |
organization) |
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30831 Huntwood Avenue, Hayward, CA
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94544 |
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(Address of principal executive offices)
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(Zip Code) |
(510) 476 2000
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer þ
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of May 4, 2009, there were 60,657,275 shares of the registrants common stock outstanding.
Impax Laboratories, Inc.
INDEX
i
Impax Laboratories, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
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March 31, |
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December 31, |
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2009 |
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2008 |
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(unaudited) |
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(as adjusted) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
38,044 |
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$ |
69,275 |
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Short-term investments |
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60,311 |
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50,710 |
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Accounts receivable, net |
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61,813 |
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43,306 |
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Inventory, net |
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29,759 |
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32,305 |
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Current portion of deferred product manufacturing costs-alliance agreements |
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14,136 |
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13,578 |
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Current portion of deferred income taxes |
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21,607 |
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17,900 |
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Prepaid expenses and other current assets |
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4,371 |
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9,298 |
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Total current assets |
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230,041 |
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236,372 |
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Property, plant and equipment, net |
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95,914 |
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95,629 |
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Deferred product manufacturing costs-alliance agreements |
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94,839 |
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93,144 |
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Deferred income taxes, net |
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51,871 |
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52,551 |
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Other assets |
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11,892 |
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9,017 |
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Goodwill |
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27,574 |
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27,574 |
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Total assets |
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$ |
512,131 |
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$ |
514,287 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Current portion of long-term debt, net |
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$ |
14,536 |
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$ |
14,416 |
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Accounts payable |
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11,795 |
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12,797 |
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Accrued expenses |
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34,811 |
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41,360 |
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Current portion of deferred revenue-alliance agreements |
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37,173 |
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35,015 |
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Current portion of accrued exclusivity period fee payments due |
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3,000 |
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6,000 |
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Total current liabilities |
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101,315 |
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109,588 |
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Long-term debt |
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5,531 |
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5,990 |
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Deferred revenue-alliance agreements |
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228,164 |
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225,804 |
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Other liabilities |
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14,217 |
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13,255 |
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Total liabilities |
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$ |
349,227 |
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$ |
354,637 |
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Commitments and contingencies (Note 18) |
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Stockholders equity: |
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Preferred Stock, $0.01 par value, 2,000,000 shares authorized,
0 shares outstanding at March 31, 2009 and December 31, 2008 |
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$ |
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$ |
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Common stock, $0.01 par value, 90,000,000 shares authorized and
60,793,195 and 60,135,686 shares issued at March 31, 2009
and December 31, 2008, respectively |
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608 |
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602 |
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Additional paid-in capital |
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212,867 |
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211,128 |
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Treasury stock-acquired as a result of achievement of milestone under
the Teva Agreement, 243,729 shares |
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(2,157 |
) |
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(2,157 |
) |
Accumulated other comprehensive loss |
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(1,695 |
) |
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(995 |
) |
Accumulated deficit |
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(47,014 |
) |
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(49,233 |
) |
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Total Impax Laboratories, Inc. stockholders equity |
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$ |
162,609 |
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$ |
159,345 |
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Noncontrolling interest |
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295 |
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305 |
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Total stockholders equity |
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162,904 |
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159,650 |
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Total liabilities and stockholders equity |
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$ |
512,131 |
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$ |
514,287 |
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The accompanying notes are an integral part of these interim consolidated financial statements.
1
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
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Three Months Ended March 31, |
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2009 |
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2008 |
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(unaudited) |
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(unaudited) |
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(as adjusted) |
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Revenues: |
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Global product sales, net |
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$ |
39,121 |
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$ |
22,979 |
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Private Label product sales |
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1,297 |
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478 |
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Rx Partner |
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10,736 |
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18,805 |
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OTC Partner |
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1,858 |
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4,409 |
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Research Partner |
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2,611 |
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Promotional Partner |
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3,284 |
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3,252 |
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Other |
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6 |
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7 |
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Total revenues |
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58,913 |
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49,930 |
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Cost of revenues |
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26,250 |
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23,378 |
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Gross profit |
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32,663 |
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26,552 |
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Operating expenses: |
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Research and development |
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16,056 |
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13,339 |
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Patent litigation |
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1,017 |
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1,701 |
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Selling, general and administrative |
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11,455 |
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10,362 |
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Total operating expenses |
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28,528 |
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25,402 |
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Income from operations |
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4,135 |
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1,150 |
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Change in fair value of common stock purchase warrant |
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44 |
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Other income (expense), net |
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65 |
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61 |
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Interest income |
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149 |
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1,537 |
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Interest expense |
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(294 |
) |
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(1,764 |
) |
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Income before income taxes |
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4,055 |
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1,028 |
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Provision for income taxes |
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1,836 |
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568 |
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Net income |
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$ |
2,219 |
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$ |
460 |
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Net Income per share: |
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Basic |
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$ |
0.04 |
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$ |
0.01 |
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Diluted |
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$ |
0.04 |
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$ |
0.01 |
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Weighted average common shares outstanding: |
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Basic |
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59,711,133 |
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58,833,979 |
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Diluted |
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60,222,215 |
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61,126,768 |
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The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
2
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
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Three Months Ended March 31, |
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2009 |
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2008 |
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(unaudited) |
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(unaudited) |
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(as adjusted) |
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Cash flows from operating activities: |
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Net income |
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$ |
2,219 |
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$ |
460 |
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Adjustments
to reconcile net income to net cash used in
operating activities: |
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Depreciation |
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2,544 |
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2,174 |
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Amortization of discount and deferred financing costs
on the 3.5% Debentures |
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150 |
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851 |
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Amortization of deferred financing costs on Wachovia
credit agreement |
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37 |
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Bad debt expense |
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23 |
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39 |
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Deferred income taxes |
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(3,027 |
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163 |
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Provision for uncertain tax positions |
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218 |
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Deferred revenue Rx Partners |
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13,837 |
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57,149 |
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Deferred product manufacturing costs Rx Partners |
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(9,008 |
) |
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(10,887 |
) |
Deferred revenue recognized Rx Partners |
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(10,736 |
) |
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(18,805 |
) |
Amortization deferred product manufacturing costs Rx Partners |
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5,982 |
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7,454 |
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Deferred revenue OTC Partners |
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886 |
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5,166 |
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Deferred product manufacturing costs OTC Partners |
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(911 |
) |
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(5,150 |
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Deferred revenue recognized OTC Partners |
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(1,858 |
) |
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(4,409 |
) |
Amortization deferred product manufacturing costs OTC Partners |
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1,684 |
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4,213 |
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Deferred revenue Research Partners |
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5,000 |
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Deferred revenue recognized Research Partners |
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(2,611 |
) |
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Payments on exclusivity period fee |
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(3,000 |
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(3,000 |
) |
Payments on accrued litigation settlements |
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(549 |
) |
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(549 |
) |
Share-based compensation expense |
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1,437 |
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1,625 |
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Accretion of interest income on short-term investments |
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(36 |
) |
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(1,146 |
) |
Change in fair value of stock purchase warrants |
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(44 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(18,530 |
) |
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(36,245 |
) |
Inventory |
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2,546 |
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|
861 |
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Prepaid expenses and other assets |
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2,042 |
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1,210 |
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Accounts payable and accrued expenses |
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(7,119 |
) |
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(5,615 |
) |
Other liabilities |
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734 |
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530 |
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Net cash used in operating activities |
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$ |
(18,083 |
) |
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$ |
(3,918 |
) |
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Cash flows from investing activities: |
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Purchase of short-term investments |
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(27,810 |
) |
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(91,710 |
) |
Maturities of short-term investments |
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18,245 |
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82,306 |
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Purchases of property, plant and equipment |
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(3,881 |
) |
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(4,241 |
) |
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Net cash used in investing activities |
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$ |
(13,446 |
) |
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$ |
(13,645 |
) |
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Cash flows from financing activities: |
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Repayment of long-term debt |
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(36 |
) |
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(66 |
) |
Proceeds from exercise of stock options and
purchases under the ESPP |
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334 |
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154 |
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Net cash provided by financing activities |
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$ |
298 |
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$ |
88 |
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Net decrease in cash and cash equivalents |
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$ |
(31,231 |
) |
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$ |
(17,475 |
) |
Cash and cash equivalents, beginning of period |
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$ |
69,275 |
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$ |
37,462 |
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Cash and cash equivalents, end of period |
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$ |
38,044 |
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$ |
19,987 |
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3
Supplemental disclosure of non-cash investing and financing activities:
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Three Months Ended March 31, |
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2009 |
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2008 |
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(in $ 000s) |
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Cash paid for interest |
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$ |
169 |
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$ |
268 |
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Cash paid for income taxes |
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$ |
63 |
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$ |
63 |
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|
Unpaid vendor invoices of approximately $905,000 and $3,117,000 which were accrued as of March 31,
2009 and 2008, respectively, are excluded from the purchase of property, plant, and equipment and
the change in accounts payable and accrued expenses.
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
4
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared based
upon United States Securities and Exchange Commission (SEC) rules permitting reduced disclosure
for interim periods, and include all adjustments necessary for a fair presentation of statements of
operations, statements of cash flows, and financial condition for the interim periods shown,
including normal recurring accruals and other items.
While certain information and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States of America (GAAP)
have been condensed or omitted pursuant to SEC rules and regulations, the Company believes the
disclosures are adequate to make the information presented not misleading.
The unaudited interim consolidated financial statements and footnotes should be read in
conjunction with the financial statements and footnotes included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2008 as filed with the SEC, wherein a more complete
discussion of significant accounting policies and certain other information can be found.
The unaudited interim consolidated financial statements of the Company include the accounts of
the operating parent company, Impax Laboratories, Inc., its wholly-owned subsidiary, Impax
Laboratories (Taiwan) Inc., and an equity investment in Prohealth Biotech, Inc. (Prohealth), in
which the Company held a 58.68% majority ownership interest at March 31, 2009. All significant
intercompany accounts and transactions have been eliminated.
The unaudited results of operations and cash flows for the interim period are not necessarily
indicative of the results of the Companys operations for any other interim period or for the full
year ending December 31, 2009.
As required, Financial Accounting Standards Board (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) was applied on a retrospective basis, beginning with the
year ended December 31, 2007.
As a result of the adoption of FSP APB 14-1, accumulated deficit as of January 1, 2008
increased $4,931,000 to $65,220,000. The following table shows the effect of FSP APB 14-1 on net
income and net income per share for the three months ended March 31, 2009 and 2008:
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March 31, |
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March 31, |
(in $000s, except per share data) |
|
2009 |
|
2008 |
Additional interest expense |
|
$ |
136 |
|
|
$ |
771 |
|
Provision (benefit) for income taxes |
|
|
(48 |
) |
|
|
(272 |
) |
Decrease in net income |
|
$ |
(88 |
) |
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$ |
(499 |
) |
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Decrease in Net income per share: |
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|
|
|
|
|
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Basic |
|
$ |
|
|
|
$ |
(0.01 |
) |
Diluted |
|
$ |
|
|
|
$ |
(0.01 |
) |
As of December 31, 2008, additional paid-in capital increased $7,591,000 to $211,128,000, and
deferred income taxes, net decreased $144,000 to $70,451,000 as a result of the adoption of FSP APB
14-1. The Long-Term Debt footnote contains additional information about the adoption of FSP APB
14-1.
5
1. BASIS OF PRESENTATION (continued)
The preparation of financial statements in conformity with GAAP requires the use of estimates
and assumptions, based on complex judgments considered reasonable, and affect the reported amounts
of assets and liabilities and disclosure of contingent assets and contingent liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant judgments are employed in estimates used in
determining values of tangible and intangible assets, legal contingencies, tax assets and tax
liabilities, fair value of share-based compensation awards issued to employees, fair value of
convertible debt, 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. Certain prior year amounts have been
reclassified to conform to the current year presentation.
In the normal course of business, the Company is subject to loss contingencies, such as legal
proceedings and claims arising out of its business, covering a wide range of matters, including,
among others, patent litigation, shareholder lawsuits, and product liability. In accordance with
Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, (SFAS No. 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
No. 5, does not recognize gain contingencies until realized.
6
2. REVENUE RECOGNITION
The Company recognizes revenue when the earnings process is complete, which under SEC Staff
Accounting Bulletin No. 104, Topic No. 13, Revenue Recognition (SAB 104), is when revenue is
realized or realizable and earned, and: there is persuasive evidence a revenue arrangement exists;
delivery of goods or services has occurred; the sales price is fixed or determinable; and,
collectibility is reasonably assured.
The Company accounts for revenue arrangements with multiple deliverables in accordance with
Emerging Issues Task Force Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Elements, (EITF 00-21), which addresses the determination of whether an arrangement involving
multiple deliverables contains more than one unit of accounting. A delivered item within an
arrangement is considered a separate unit of accounting only if all of the following criteria are
met:
|
|
the delivered item has value to the customer on a stand alone basis; |
|
|
|
there is objective and reliable evidence of the fair value of the undelivered item; and |
|
|
|
if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially in the control of the vendor. |
Under EITF 00-21, if the fair value of any undelivered element cannot be objectively or
reliably determined, then separate accounting for the individual deliverables is not appropriate.
Revenue recognition for arrangements with multiple deliverables constituting a single unit of
accounting is recognizable generally over the greater of the term of the arrangement or the
expected period of performance, 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 generic 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.
Private Label product sales:
The Private Label product sales line item of the statement of operations includes revenue
recognized related to shipments of generic pharmaceutical products to customers who sell the
product to third parties under their own label; these products are not sold under the Companys
label. Sales revenue is recognized at the time title and risk of loss passes to the customer
generally when product is received by the customer. Revenue received from Private Label product
sales is not subject to deductions for chargebacks, rebates, returns, shelf-stock adjustments, and
other pricing adjustments. Additionally, Private Label product sales do not have upfront,
milestone, or lump-sum payments and do not contain multiple deliverables under EITF 00-21.
7
2. REVENUE RECOGNITION (continued)
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 multiple deliverables, the Company receives payments
from its alliance agreement partners for product shipments, and may also receive royalty, profit
sharing, and /or upfront or periodic milestone payments. Revenue received from the alliance
agreement partners under these agreements is 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 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.
8
2. REVENUE RECOGNITION (continued)
Research Partner:
The Research Partner line item of the statement of operations includes revenue recognized
under a Joint Development Agreement with another pharmaceutical company. The Joint Development
Agreement obligates the Company to provide research and development services over multiple periods.
In exchange for this service, the Company received an upfront payment upon signing of the Joint
Development Agreement and is eligible to receive contingent milestone payments, based upon the
achievement of specified events. Additionally, the Company may also receive royalty payments from
the sale, if any, of a successfully developed and commercialized product under the Joint
Development Agreement.
Revenue received from the provision of research and development services, including the
upfront payment and the contingent milestone payments, if any, will be deferred and recognized on a
straight line basis over the expected period of performance of the research and development
services. The Company estimates its expected period of performance to provide research and
development services is 48 months starting in December 2008 and ending in November 2012. Royalty
fee income, if any, will be recognized by the Company as current period revenue when earned. The
Company determined this agreement does not include multiple deliverables under 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 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.
9
3. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the 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. In October 2008, the FASB issued FSP FAS 157-3
which clarified the application of SFAS 157 in a market that is not active and provided an
example to illustrate key considerations in determining the fair value of a financial asset when
the market for that financial asset is not active. The adoption of SFAS 157 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. Upon becoming effective, EITF 07-1 did not 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 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. The Company adopted
the provisions of SFAS 160 on January 1, 2009; the adoption of SFAS 160 did not have a significant
impact on the Companys consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position (FSP) 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. Upon becoming effective FAS 142-3 did not have a material impact on the
Companys consolidated financial statements.
10
3. RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) . FSP APB 14-1
specifies that issuers of such instruments should separately account for the liability and equity
components in a manner that will reflect the entitys nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. The provisions of FSP APB 14-1 must be applied
retrospectively for all periods presented even if the instrument has matured, has been
extinguished, or has been converted as of the effective date. The application of FSP APB 14-1 to
the Companys $75 million, 3.5% convertible senior subordinated debentures (3.5% Debentures)
required the retrospective restatement of all reporting periods beginning January 01, 2007. The
Basis of Presentation and Long-Term Debt footnotes contain additional details about the adoption of
FSP APB 14-1.
In June 2008, the FASB issued FASB Staff Position 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 non-forfeitable
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. Upon becoming effective, FSP EITF
03-6-1 did not have a material impact on the Companys consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides
additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level
of activity for an asset or liability has significantly decreased. FSP FAS 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is
effective for interim and annual reporting periods ending after June 15, 2009, and is applied
prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company
is currently evaluating the impact of FSP FAS 157-4 on its consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). This FSP
requires publicly traded companies to disclose information about fair value of financial
instruments in interim financial statements, as well as in annual financial statements. FSP FAS
107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. The Company is currently
evaluating the impact of FSP FAS 107-1 and APB 28-1 on its consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). This FSP amends
the factors to be considered in determining if a decline in the fair value of a debt security is
not temporary. Generally, if the fair value of a debt security is less than its amortized cost,
and it is more likely than not the debt security will be sold, then an other-than-temporary
impairment shall be considered to have occurred. An other-than-temporary impairment is recognized
equal to the entire difference between the debt securitys amortized cost and its fair value as of
the balance sheet date. FSP FAS 115-2 and FAS 124-2 is effective for interim reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.
The Company is currently evaluating the impact of FSP FAS 115-2 and FAS 124-2 on its consolidated
financial statements.
11
4. INVESTMENTS
Investments consist of commercial paper, corporate bonds and medium-term notes, government
agency obligations and certificates of deposit. The Companys policy is to invest in only high
quality AAA-rated or investment-grade securities. Investments in debt securities are accounted
for as held-to-maturity and are recorded at amortized cost, which approximates fair value, based
upon observable market values. The Company has historically held all investments in debt
securities until maturity, and has the ability and intent to continue to do so. All of the
Companys investments have remaining contractual maturities of less than 12 months and are
classified as short-term. Upon maturity the Company uses a specific identification method.
A summary of Short-term investments as of March 31, 2009 and December 31, 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
(in $000s) |
|
Amortized |
|
|
Unrecognized |
|
|
Unrecognized |
|
|
Fair |
|
March 31, 2009 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Commercial paper |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Government agency obligations |
|
|
52,721 |
|
|
|
256 |
|
|
|
|
|
|
|
52,977 |
|
Corporate bonds |
|
|
7,064 |
|
|
|
|
|
|
|
(5 |
) |
|
|
7,059 |
|
Asset-backed securities |
|
|
293 |
|
|
|
|
|
|
|
(11 |
) |
|
|
282 |
|
Certificates of deposit |
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
60,311 |
|
|
$ |
256 |
|
|
$ |
(16 |
) |
|
$ |
60,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
(in $000s) |
|
Amortized |
|
|
Unrecognized |
|
|
Unrecognized |
|
|
Fair |
|
December 31, 2008 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
5. ACCOUNTS RECEIVABLE
The details of Accounts receivable, net are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(in $000s) |
|
2009 |
|
|
2008 |
|
Gross accounts receivable |
|
$ |
78,023 |
|
|
$ |
54,591 |
|
Less: Rebate reserve |
|
|
(7,537 |
) |
|
|
(4,800 |
) |
Less: Chargeback reserve |
|
|
(5,622 |
) |
|
|
(4,056 |
) |
Less: Other deductions |
|
|
(3,051 |
) |
|
|
(2,429 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
61,813 |
|
|
$ |
43,306 |
|
|
|
|
|
|
|
|
The Company maintains an allowance 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. The Company recorded an allowance for doubtful accounts of $555,000 and $828,000
at March 31, 2009 and December 31, 2008, respectively. Other deductions include allowance for
uncollectible amounts and cash discounts.
A roll forward of the chargeback and rebate reserve activity for the three months ended March 31,
2009 and the year ended December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
(in $000s) |
|
March 31, |
|
|
December 31 |
|
Rebate reserve |
|
2009 |
|
|
2008 |
|
Beginning balance |
|
$ |
4,800 |
|
|
$ |
3,603 |
|
Provision recorded during the period |
|
|
10,819 |
|
|
|
20,361 |
|
Credits issued during the period |
|
|
(8,082 |
) |
|
|
(19,164 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
7,537 |
|
|
$ |
4,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
March 31, |
|
|
December 31 |
|
Chargeback reserve |
|
2009 |
|
|
2008 |
|
Beginning balance |
|
$ |
4,056 |
|
|
$ |
2,977 |
|
Provision recorded during the period |
|
|
22,638 |
|
|
|
50,144 |
|
Credits issued during the period |
|
|
(21,072 |
) |
|
|
(49,065 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
5,622 |
|
|
$ |
4,056 |
|
|
|
|
|
|
|
|
13
6. INVENTORY
Inventory, net at March 31, 2009 and December 31, 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(in $000s) |
|
2009 |
|
|
2008 |
|
Raw materials |
|
$ |
16,021 |
|
|
$ |
16,940 |
|
Work in process |
|
|
1,739 |
|
|
|
1,397 |
|
Finished goods |
|
|
14,548 |
|
|
|
16,504 |
|
|
|
|
|
|
|
|
Total inventory, net |
|
$ |
32,308 |
|
|
$ |
34,841 |
|
|
Less: Non-current inventory, net |
|
|
(2,549 |
) |
|
|
(2,536 |
) |
|
|
|
|
|
|
|
Total inventory-current, net |
|
$ |
29,759 |
|
|
$ |
32,305 |
|
|
|
|
|
|
|
|
The Company recorded inventory reserves of $5,152,000 and $4,405,000 at March 31, 2009 and
December 31, 2008, 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.
The Company recognizes pre-launch inventories at the lower of its cost or the expected net
selling price. Cost is determined using a standard cost method, which approximates actual cost, and
assumes a FIFO flow of goods. Costs of unapproved products are the same as approved products and
include materials, labor, quality control, and production overhead. The carrying value of
unapproved inventory, less reserves, was approximately $1,724,000 and $1,368,000 at March 31, 2009
and December 31, 2008, 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.
14
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(in $000s) |
|
2009 |
|
|
2008 |
|
Land |
|
$ |
2,270 |
|
|
$ |
2,270 |
|
Buildings and improvements |
|
|
56,460 |
|
|
|
55,310 |
|
Equipment |
|
|
51,640 |
|
|
|
49,983 |
|
Office furniture and equipment |
|
|
6,268 |
|
|
|
6,733 |
|
Construction-in-progress |
|
|
21,113 |
|
|
|
21,019 |
|
|
|
|
|
|
|
|
Property, plant and equipment, gross |
|
$ |
137,751 |
|
|
$ |
135,315 |
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation |
|
|
(41,837 |
) |
|
|
(39,686 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
95,914 |
|
|
$ |
95,629 |
|
|
|
|
|
|
|
|
Depreciation expense was $2,544,000 and $2,174,000 for the three months ended March 31, 2009 and
2008, respectively.
15
8. ACCRUED EXPENSES
The following table sets forth the Companys accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31 |
|
(in $000s) |
|
2009 |
|
|
2008 |
|
Payroll-related expenses |
|
$ |
9,209 |
|
|
$ |
15,147 |
|
Product returns |
|
|
16,229 |
|
|
|
13,675 |
|
Shelf stock price protection |
|
|
375 |
|
|
|
572 |
|
Medicaid rebates |
|
|
734 |
|
|
|
584 |
|
Royalty expense |
|
|
82 |
|
|
|
259 |
|
Physician detailing sales force fees |
|
|
1,755 |
|
|
|
2,279 |
|
Legal and professional fees |
|
|
2,694 |
|
|
|
2,087 |
|
Litigation settlements |
|
|
918 |
|
|
|
4,526 |
|
Other |
|
|
2,815 |
|
|
|
2,231 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
34,811 |
|
|
$ |
41,360 |
|
|
|
|
|
|
|
|
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
January 2009, with the balance paid by the Companys directors and officers liability insurance
carriers. The Company recorded an accrued expense for its portion of the settlement payment, in
the year ended December 31, 2008.
The Company maintains a return policy to allow customers to return product within specified
guidelines. The Company estimates a provision for product returns as a percentage of gross sales
based upon historical experience for sales made through its Global Products sales channel. Sales of
product under the Private Label, and the OTC Partners and RX Partners alliance agreements generally
are not subject to returns. A roll forward of the return reserve activity for the three months
ended March 31, 2009 and the year ended December 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31 |
|
(in $000s) |
|
2009 |
|
|
2008 |
|
Beginning balance |
|
$ |
13,675 |
|
|
$ |
14,261 |
|
Provision related to
sales recorded in the period |
|
|
3,256 |
|
|
|
5,719 |
|
Credits issued during the period |
|
|
(702 |
) |
|
|
(6,305 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
16,229 |
|
|
$ |
13,675 |
|
|
|
|
|
|
|
|
16
9. INCOME TAXES
The Company calculates its interim income tax provision in accordance with Accounting
Principles Board Opinion No. 28 and FASB Interpretation No. 18. At the end of each interim period,
the Company makes an estimate of the annual expected effective tax rate and applies that rate to
its ordinary year-to-date earnings or loss. In addition, the effect of changes in enacted tax
laws, rates or tax status is recognized in the interim period in which the change occurs.
The computation of the annual expected effective tax rate at each interim period requires
certain estimates and assumptions including, but not limited to, the expected operating income for
the year, projections of the proportion of income (or loss) earned and taxed in foreign
jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax
assets generated in the current year. The accounting estimates used to compute the provision for
income taxes may change as new events occur, more experience is acquired or additional information
is obtained. The computation of the annual effective tax rate includes modifications, which were
projected for the year, for share based compensation, the domestic manufacturing deduction and
state research and development credits among others.
For the three months ended March 31, 2009 and 2008, the Company recorded a tax provision of
$1,836,000 and $568,000, respectively, for federal and state income taxes, which includes an
accrual for uncertain tax positions of $218,000 and $0, respectively. The total amount of
unrecognized tax benefits was $7,830,000 at March 31, 2009.
17
10. REVOLVING LINE OF CREDIT
The Company has a $35,000,000 revolving credit facility under a credit agreement with Wachovia
Bank, N.A. (a Wells Fargo subsidiary) (Credit Agreement), with a March 31, 2010 expiration date.
The revolving credit facility, intended for working capital and general corporate purposes, is
collateralized by eligible accounts receivable, inventory, and machinery and equipment, subject to
limitations and other terms.
The Credit Agreement had a three year term upon its initial execution in December 2005. In
October 2008, the Company entered into a first amendment to the Credit Agreement in which Wachovia
waived 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 Company agreed to an increase in the
unused line fee from 25 basis points per annum to 50 basis points per annum. On December 31, 2008,
the Company entered into a second amendment to the Credit Agreement, which extended the termination
date from December 31, 2008 to March 31, 2009. Effective March 31, 2009, the Company entered into
a third amendment to the Credit Agreement, which, among other matters: (i) extended the termination
date from March 31, 2009 to March 31, 2010; (ii) set the interest rate for the revolving credit
facility at either the prime rate plus a margin ranging from 0.25% to 0.75% or LIBOR plus a margin
ranging from 2.25% to 3.0% based upon certain terms and conditions; (iii) limited capital
expenditures to no more than $25.0 million for the period from January 1, 2009 to December 31,
2009, and for each calendar year thereafter; (iv) eliminated the servicing fee during any month in
which no revolver loans were outstanding; and (v) required the fixed charge coverage ratio be
tested only for certain fiscal periods during which our net cash position was less than $50.0
million. In connection with the execution of the third amendment, the Company paid Wachovia a
commitment fee of $100,000. All other material terms of the Credit Agreement remained in full
force and effect.
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 $25.0 million for the period from January 1, 2007
to December 31, 2007 and $34.0 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.
At March 31, 2009, 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 March 31, 2009 and December 31, 2008, respectively. During the
three months ended March 31, 2009 and 2008, the Company paid $40,000 and $21,000, respectively, for
unused line fees to Wachovia.
18
11. LONG-TERM DEBT
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
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 $16,000 and $94,000 for the three
months ended March 31, 2009 and 2008, 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).
19
11. LONG-TERM DEBT (continued)
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.
Adoption of FSP APB 14-1
In May 2008, the FASB issued Staff Position APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSB
APB 14-1), to require issuers of such debt instruments to separately account for the liability
component and the equity component. Under FSP APB 14-1, interest expense will be computed on the
basis of the Companys borrowing rate on debt without the conversion feature. The Company
determined the provisions of FSP APB 14-1 are applicable to its 3.5% Debentures discussed above, as
the 3.5% Debentures will be settled, at least partially, in cash. The Company adopted FSP APB 14-1
on January 1, 2009, and, as required by FSP ABP 14-1, applied its provisions to the consolidated
financial statements on a retrospective basis, beginning with the year ended December 31, 2007, the
earliest year presented in the Companys annual consolidated financial statements for the year
ending December 31, 2009.
As noted above, the provisions of FSP APB 14-1 require issuers of debt securities, to
separate affected securities into two accounting components, including (i) the debt component,
representing the issuers contractual obligation to pay principal and interest, and (ii) the equity
component, representing the holders option to convert the debt security into equity of the issuer
or, if the issuer elects, an equivalent amount of cash.
Upon initial recognition, the proceeds received from the issuance of the 3.5% Debentures were
allocated between the debt component and the equity component, with such allocation based upon an
estimate of the fair value of a debt instrument containing all embedded features of the debt being
evaluated, except for the conversion option. Under FSP APB 14-1, the difference between the face
value of the debt and the estimated fair value is deemed to be the accounting value of the
conversion option and is recorded as the equity component, with the offset recorded as a
contra-liability debt discount. The debt discount is amortized as interest expense over the
estimated life of the debt instrument using the effective interest method.
The Company estimated the fair value of the 3.5% Debentures, excluding the conversion option,
to be $63,487,000 on June 27, 2005, the date the 3.5% Debentures were sold, using a credit rating
analysis. The difference of $11,513,000 between the $75,000,000 face value of the 3.5% Debentures
and the estimated fair value is the value of the conversion option, which resulted in a debt
discount reduction to the net carrying value of the debt and the establishment of the value of the
conversion option as a component of stockholders equity. Aggregate transaction costs of
$2,238,000 were incurred by the Company in relation to the issuance of the 3.5% Debentures, of
which $344,000 was allocated to the conversion option. The carrying value of the conversion
option, including the allocated issuance costs, was $11,170,000 at March 31, 2009 and December 31,
2008.
Notwithstanding their stated June 2012 maturity date, at their June 2005 issuance date, the
Company had expected the 3.5% Debentures actual (real) maturity date to be the June 2009 prepayment
date. Accordingly, as the Company concluded it was probable the prepayment option would be
exercised by the holders of the 3.5% Debentures, the fair value of the 3.5% Debentures was computed
using a 48 month discount period i.e. representing the time from their issue date to the June 15,
2009 prepayment date discussed above.
20
11. LONG-TERM DEBT (continued)
The Company is amortizing the $11,513,000 discount on the 3.5% Debentures over the expected
life of 48 months using the effective interest method; accordingly, there were three months of
amortization remaining at March 31, 2009. The following table summarizes the amount of interest
cost recognized for the three months ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
(in $000s) |
|
2009 |
|
|
2008 |
|
Contractual interest |
|
$ |
128 |
|
|
$ |
750 |
|
Discount amortization |
|
|
130 |
|
|
|
735 |
|
Deferred financing cost amortization |
|
|
20 |
|
|
|
116 |
|
|
|
|
|
|
|
|
Total interest cost |
|
$ |
278 |
|
|
$ |
1,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective interest rate on 3.5% Debentures |
|
|
8.7 |
% |
|
|
8.5 |
% |
|
|
|
|
|
|
|
The following table summarizes the net carrying value of the Companys long-term debt:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(in $000s) |
|
2009 |
|
|
2008 |
|
3.5% Debentures face value |
|
$ |
12,750 |
|
|
$ |
12,750 |
|
Unamortized discount |
|
|
(111 |
) |
|
|
(241 |
) |
|
|
|
|
|
|
|
3.5% Debentures net carrying amount |
|
|
12,639 |
|
|
|
12,509 |
|
|
|
|
|
|
|
|
|
|
Subordinated
promissory note (1) |
|
|
7,328 |
|
|
|
7,760 |
|
Vendor financing agreement (2) |
|
|
100 |
|
|
|
137 |
|
|
|
|
|
|
|
|
Total Debt |
|
$ |
20,067 |
|
|
$ |
20,406 |
|
Less: Current portion |
|
|
(14,536 |
) |
|
|
(14,416 |
) |
|
|
|
|
|
|
|
Long-term portion |
|
$ |
5,531 |
|
|
$ |
5,990 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Subordinated promissory note in the amount of $11.0 million related to the June
2006 settlement of litigation brought by Solvay Pharmaceuticals, Inc. (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 March 31, 2009,
none of these events has occurred to-date. |
|
(2) |
|
Vendor financing agreement at 3.10% payable in two monthly installments of $0 and
34 monthly installments of $12,871 commencing December 2006 through November 2009. |
21
12. ALLIANCE AGREEMENTS
Strategic Alliance Agreement with Teva
The following tables show the additions to and deductions from the deferred revenue and
deferred product manufacturing costs under the Teva Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Inception |
|
(in $000s) |
|
Ended |
|
|
Through |
|
Deferred revenue |
|
March 31,2009 |
|
|
Dec 31, 2008 |
|
Beginning balance |
|
$ |
200,608 |
|
|
$ |
|
|
Additions: |
|
|
|
|
|
|
|
|
Cost-sharing |
|
|
175 |
|
|
|
5,953 |
|
Product-related deferrals |
|
|
13,662 |
|
|
|
376,071 |
|
|
|
|
|
|
|
|
Sub-total |
|
|
13,837 |
|
|
|
382,024 |
|
Exclusivity charges |
|
|
|
|
|
|
(50,600 |
) |
Forgiveness of advance deposit |
|
|
|
|
|
|
6,000 |
|
Forgiveness of interest |
|
|
|
|
|
|
4,370 |
|
Stock repurchase |
|
|
|
|
|
|
2,157 |
|
|
|
|
|
|
|
|
Total additions |
|
$ |
13,837 |
|
|
$ |
343,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized: |
|
|
|
|
|
|
|
|
Forgiveness of advance deposit |
|
$ |
(83 |
) |
|
$ |
(2,499 |
) |
Forgiveness of interest |
|
|
(61 |
) |
|
|
(1,823 |
) |
Stock repurchase |
|
|
(30 |
) |
|
|
(899 |
) |
Cost-sharing |
|
|
(158 |
) |
|
|
(2,481 |
) |
Product-related revenue |
|
|
(10,404 |
) |
|
|
(135,641 |
) |
|
|
|
|
|
|
|
Total amount recognized |
|
|
(10,736 |
) |
|
|
(143,343 |
) |
|
|
|
|
|
|
|
Total deferred revenue |
|
$ |
203,709 |
|
|
$ |
200,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
Three Months |
|
|
Inception |
|
Deferred product |
|
Ended |
|
|
Through |
|
manufacturing costs |
|
March 31, 2009 |
|
|
Dec 31, 2008 |
|
Beginning balance |
|
$ |
88,361 |
|
|
$ |
|
|
Additions |
|
|
9,008 |
|
|
|
151,476 |
|
Less amounts amortized |
|
|
(5,982 |
) |
|
|
(63,115 |
) |
|
|
|
|
|
|
|
Total deferred product
manufacturing costs |
|
$ |
91,387 |
|
|
$ |
88,361 |
|
|
|
|
|
|
|
|
22
12. ALLIANCE AGREEMENTS (continued)
OTC Partners Alliance Agreements
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the OTC Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Inception |
|
(in $000s) |
|
Ended |
|
|
Through |
|
Deferred revenue |
|
March 31, 2009 |
|
|
Dec 31, 2008 |
|
Beginning balance |
|
$ |
21,044 |
|
|
$ |
|
|
Additions: |
|
|
|
|
|
|
|
|
Upfront fees and milestone
payments |
|
|
|
|
|
|
8,436 |
|
Cost-sharing and other |
|
|
|
|
|
|
1,642 |
|
Product-related deferrals |
|
|
886 |
|
|
|
81,866 |
|
|
|
|
|
|
|
|
Total additions |
|
$ |
886 |
|
|
$ |
91,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount recognized: |
|
|
|
|
|
|
|
|
Upfront fees and milestone payments |
|
(69 |
) |
|
|
(7,469 |
) |
Cost-sharing and other |
|
|
(28 |
) |
|
|
(1,438 |
) |
Product-related revenue |
|
|
(1,761 |
) |
|
|
(61,993 |
) |
|
|
|
|
|
|
|
Total amount recognized |
|
|
(1,858 |
) |
|
|
(70,900 |
) |
|
|
|
|
|
|
|
Total deferred revenue |
|
$ |
20,072 |
|
|
$ |
21,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
Three Months |
|
|
Inception |
|
Deferred product |
|
Ended |
|
|
Through |
|
manufacturing costs |
|
March 31, 2009 |
|
|
Dec 31, 2008 |
|
Beginning balance |
|
$ |
18,361 |
|
|
$ |
|
|
Additions: |
|
|
911 |
|
|
|
75,941 |
|
Less: amount amortized: |
|
|
(1,684 |
) |
|
|
(57,580 |
) |
|
|
|
|
|
|
|
Total deferred product
manufacturing costs |
|
$ |
17,588 |
|
|
$ |
18,361 |
|
|
|
|
|
|
|
|
23
12. ALLIANCE AGREEMENTS (continued)
Supply and Distribution Agreement with DAVA Pharmaceuticals, Inc.
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.
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the DAVA Supply and Distribution Agreement during the period over
which revenue was recognized beginning with the inception of the contract in November 2005 and
ending in April 2008, when final cash payment was received for product shipped to DAVA, and for
profit share earned, in January 2008.
|
|
|
|
|
|
|
Inception |
|
(in $000s) |
|
Through |
|
Deferred revenue |
|
April 2008 |
|
Beginning balance |
|
$ |
|
|
Additions: |
|
|
|
|
Upfront fees and milestone payments |
|
|
10,000 |
|
Product-related deferrals |
|
|
152,447 |
|
|
|
|
|
Total additions |
|
$ |
162,447 |
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized: |
|
|
|
|
Upfront fees and milestone payments |
|
|
(10,000 |
) |
Product-related revenue |
|
|
(152,447 |
) |
|
|
|
|
Total amount recognized |
|
|
(162,447 |
) |
|
|
|
|
Total deferred revenue |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
Inception |
|
Deferred product |
|
Through |
|
manufacturing costs |
|
April 2008 |
|
Beginning balance |
|
$ |
|
|
Additions: |
|
|
29,044 |
|
Less: amount amortized: |
|
|
(29,044 |
) |
|
|
|
|
Total deferred product
manufacturing costs |
|
$ |
|
|
|
|
|
|
24
12. ALLIANCE AGREEMENTS (continued)
Joint Development Agreement with Medicis Pharmaceutical Corporation
The Joint Development Agreement provides for the Company and Medicis to collaborate in the
development of a total of five dermatological products. The Company received a $40,000,000 upfront
payment, paid by Medicis in December 2008; and has the potential to receive up to $23,000,000 of
contingent additional payments upon achievement of certain specified clinical and regulatory
milestones.
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the Joint Development Agreement with Medicis:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
Ended |
|
|
Inception |
|
(in $000s) |
|
March 31, |
|
|
Through |
|
Deferred revenue |
|
2009 |
|
|
Dec 31, 2008 |
|
Beginning balance |
|
$ |
39,167 |
|
|
$ |
|
|
Additions: |
|
|
|
|
|
|
|
|
Upfront fees and milestone payments |
|
|
5,000 |
|
|
|
40,000 |
|
Product-related deferrals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions |
|
$ |
5,000 |
|
|
$ |
40,000 |
|
|
|
|
|
|
|
|
|
Less: amounts recognized: |
|
|
|
|
|
|
|
|
Upfront fees and milestone payments |
|
|
(2,611 |
) |
|
|
(833 |
) |
Product-related revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized |
|
|
(2,611 |
) |
|
|
(833 |
) |
|
|
|
|
|
|
|
Total deferred revenue |
|
$ |
41,556 |
|
|
$ |
39,167 |
|
|
|
|
|
|
|
|
25
12. ALLIANCE AGREEMENTS (continued)
Shire Laboratories Promotional Services Agreement
In January 2006, the Company entered into a Promotional Services Agreement with an affiliate
of Shire Laboratories, Inc. (Shire Agreement), under which the Company was engaged to perform
physician detailing sales calls in support of Shires Carbatrol product. The Company is obligated
to perform the detailing sales for three years from the commencement date of July 1, 2006. 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 $3,284,000 and $3,252,000 in sales force fee revenue for the interim periods
ended March 31, 2009 and 2008, 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.
26
12. ALLIANCE AGREEMENTS (continued)
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 during the fourth quarter of
2008 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 venlafaxine product, sales of such generic product will be to unrelated
third-party customers in the ordinary course of business through its Global Division Global
Products sales channel. The Company will account for the sale of its generic venlafaxine 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 March 31, 2009, the Company had 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 the second-half of 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 March 31, 2009, the Company had not
recognized any revenue under the Co-Promotion agreement with Wyeth.
27
13. SHARE-BASED COMPENSATION
The Company recognizes the fair value of each option and restricted share over its vesting
period. Options and restricted shares granted under the Companys 2002 Equity Incentive Plan vest
over a four year period and have a term of ten years.
Total share-based compensation expense recognized in the consolidated statement of operations
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31 |
|
(in $000s) |
|
2009 |
|
|
2008 |
|
Manufacturing expenses |
|
$ |
349 |
|
|
$ |
473 |
|
Research and development |
|
|
602 |
|
|
|
616 |
|
Selling, general & administrative |
|
|
486 |
|
|
|
536 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,437 |
|
|
$ |
1,625 |
|
|
|
|
|
|
|
|
The following table summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Number of Shares |
|
Exercise Price |
|
|
Under Option |
|
per Share |
Outstanding at December 31, 2008 |
|
|
8,280,240 |
|
|
$ |
10.53 |
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
671,596 |
|
|
$ |
5.18 |
|
Options exercised |
|
|
(413,654 |
) |
|
$ |
0.81 |
|
Options forfeited |
|
|
(31,296 |
) |
|
$ |
10.53 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
8,506,886 |
|
|
$ |
10.58 |
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2009 |
|
|
8,336,243 |
|
|
$ |
10.68 |
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2009 |
|
|
6,057,986 |
|
|
$ |
11.25 |
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of each stock option award on the grant date using the
Black-Scholes Merton option-pricing model, wherein: expected volatility is based solely on
historical volatility of the Companys common stock over the period commensurate with the expected
term of the stock options. The expected term calculation is based on the simplified method
described in SAB No. 107, Share-Based Payment and SAB No. 110, Share-Based Payment. The risk-free
interest rate is based on the U.S. Treasury yield in effect at the time of grant for an instrument
with a maturity that is commensurate with the expected term of the stock options. The dividend
yield of zero is based on the fact that the Company has never paid cash dividends on its common
stock, and has no present intention to pay cash dividends.
A summary of the Companys non-vested restricted stock awards is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
Restricted |
|
Number of Restricted |
|
Grant-Date |
Stock Awards |
|
Stock Awards |
|
Fair Value |
Non-vested at December 31, 2008 |
|
|
399,716 |
|
|
$ |
10.30 |
|
Granted |
|
|
255,152 |
|
|
$ |
5.19 |
|
Vested |
|
|
(13,125 |
) |
|
$ |
10.43 |
|
Forfeited |
|
|
(6,402 |
) |
|
$ |
9.85 |
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2009 |
|
|
635,341 |
|
|
$ |
8.10 |
|
|
|
|
|
|
|
|
|
|
The Company grants restricted stock to certain eligible employees as a component of its
long-term incentive compensation program. The restricted stock award grants are made in accordance
with the Companys 2002 Equity Incentive Plan, as amended and restated, and typically specify the
shares of restricted stock are not issued until they vest. The restricted stock awards vest
ratably over a four year period from the date of grant.
28
13. SHARE-BASED COMPENSATION (continued)
As of March 31, 2009, the Company had total unrecognized share-based compensation expense, net
of estimated forfeitures, of $15,773,000 related to all of its share-based awards, which will be
recognized over a weighted average period of 2.6 years. The intrinsic value of options exercised
during the three months ended March 31, 2009 and 2008 was $1,631,000 and $690,000, respectively.
The total fair value of restricted shares which vested during the three months ended March 31, 2009
and 2008 was $137,000 and $0, respectively. In March 2009, the Board authorized, subject to
stockholder approval, an increase of 1,900,000 in the number of shares available for issuance of
stock options and restricted stock awards under the Companys 2002 Equity Incentive Plan. As of
March 31, 2009, the Company had 2,465,883 shares available for issuance of stock options and
restricted stock awards.
29
14. 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, from time to time, to create one or more new series of preferred stock.
Each series of preferred stock issued can have the rights, preferences, privileges and restrictions
designated by the Board of Directors. The issuance of any new series of preferred stock
could affect, among other things, the dividend, voting, and liquidation rights of the Companys
common stock. During the three months ended March 31, 2009 and 2008, 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.
30
15. EARNINGS PER SHARE
Basic net income per share is computed by dividing net income by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share is computed by dividing
net income by the weighted-average number of common shares adjusted for the dilutive effect of
common stock equivalents outstanding during the period.
A reconciliation of basic and diluted earnings per common share for the three months ended
March 31, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
|
March 31, |
|
|
March 31, |
|
(in $000s except per share amounts) |
|
2009 |
|
|
2008 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,219 |
|
|
$ |
460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding |
|
|
59,711,133 |
|
|
|
58,833,979 |
|
|
|
|
|
|
|
|
|
|
Effect of dilutive options and
common stock purchase warrants |
|
|
511,082 |
|
|
|
2,292,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average
common shares outstanding |
|
|
60,222,215 |
|
|
|
61,126,768 |
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.04 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.04 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 and 2008, the Company excluded 7,755,173 and
4,253,507, 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.
EITF Issue No. 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings
per Share (EITF 04-8) (as amended by FSP APB 14-1), provides accounting guidance on the treatment
of contingently convertible instruments in the calculation of diluted earnings per share. The
guidance indicates contingently convertible instruments should be included in diluted earnings per
share, regardless of whether the market price trigger (i.e. the contingency) has been met. With
respect to the Companys 3.5% Debentures, however, as the principal portion must be paid in cash,
EITF 04-8 (as amended by FSP APB 14-1) prohibits the use of the if-converted method generally
required by SFAS No. 128, Earnings Per Share (SFAS 128), but rather proscribes a treasury
stock method approach to computing potential common shares issuable, wherein the conversion
spread value functions as the proceeds to be used to determine the number of potential common
shares issuable given an average share price during the period. With respect to a conversion
premium which may be settled in either cash or stock, under EITF 04-8, diluted earnings per share
is computed in accordance with SFAS 128, wherein the diluted earnings per share denominator is
adjusted for the conversion premium potential common shares issuable, provided however, such
adjustment to the diluted earnings per share denominator has a more dilutive effect compared to
adjustment to the corresponding numerator (i.e. income available to common shareholders). Such
determination of the greater dilutive effect is required to be performed for each reporting period.
With respect to the Companys 3.5% Debentures potential conversion premium, the SFAS 128
adjustment has been to the numerator i.e. the inclusion of the 3.5% Debentures interest expense
in the computation of income available to common shareholders, as it has a more dilutive effect
than adjustment to the diluted earnings per share denominator, as the conversion spread value of
the Companys 3.5% Debentures has been negative i.e. the average share price has been less than
the conversion price. Accordingly, adjustment to the diluted earnings per share denominator is not
necessary.
31
16. COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
(in $000s) |
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
2,219 |
|
|
$ |
460 |
|
Currency translation adjustments |
|
|
(700 |
) |
|
|
200 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
1,519 |
|
|
$ |
660 |
|
Comprehensive income attributable to the noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Impax Laboratories, Inc. |
|
$ |
1,519 |
|
|
$ |
660 |
|
|
|
|
|
|
|
|
32
17. SEGMENT INFORMATION
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, primarily through the following sales channels: the Global Products sales channel, for
sales of generic Rx products, directly to wholesalers, large retail drug chains, and others; the
Private Label product sales channel, for generic pharmaceutical over-the-counter and prescription products sold to unrelated third-party customers, who in-turn sell the products to third-parties under their own label; the Rx Partner sales channel, for generic prescription products sold
through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements; and the OTC
Partner sales channel, for over-the-counter products sold through unrelated third-party pharmaceutical entities
under their own label pursuant to alliance agreements. 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 these services through the research and development group in its
Global Division.
The Impax Division is engaged in the development of proprietary brand pharmaceutical products
through improvements to already-approved pharmaceutical products to address 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.
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 discussion of Revenue Recognition and in the Summary of Significant Accounting Policies in the Companys Annual Report on Form 10-K for the year ended December 31, 2008. The Company has
no inter-segment revenue.
The tables below present segment information reconciled to total Company financial results,
with segment operating income or loss including gross profit less direct research and development
expenses, and direct selling expenses as well as any litigation settlements, to the extent
specifically identified by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
Global |
|
Impax |
|
Corporate |
|
Total |
Three Months Ended March 31, 2009 |
|
Division |
|
Division |
|
and Other |
|
Company |
Revenue, net |
|
$ |
55,629 |
|
|
$ |
3,284 |
|
|
$ |
|
|
|
$ |
58,913 |
|
Cost of revenue |
|
|
23,233 |
|
|
|
3,017 |
|
|
|
|
|
|
|
26,250 |
|
Research and development |
|
|
10,542 |
|
|
|
5,514 |
|
|
|
|
|
|
|
16,056 |
|
Patent Litigation |
|
|
1,017 |
|
|
|
|
|
|
|
|
|
|
|
1,017 |
|
Income (loss) before provision for income taxes |
|
$ |
18,609 |
|
|
$ |
(6,287 |
) |
|
$ |
(8,267 |
) |
|
$ |
4,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s) |
|
Global |
|
Impax |
|
Corporate |
|
Total |
Three Months Ended March 31, 2008 |
|
Division |
|
Division |
|
and Other |
|
Company |
Revenue, net |
|
$ |
46,678 |
|
|
$ |
3,252 |
|
|
$ |
|
|
|
$ |
49,930 |
|
Cost of revenue |
|
|
20,410 |
|
|
|
2,968 |
|
|
|
|
|
|
|
23,378 |
|
Research and development |
|
|
9,128 |
|
|
|
4,211 |
|
|
|
|
|
|
|
13,339 |
|
Patent Litigation |
|
|
1,701 |
|
|
|
|
|
|
|
|
|
|
|
1,701 |
|
Income (loss) before provision for income taxes |
|
$ |
14,176 |
|
|
$ |
(4,403 |
) |
|
$ |
(8,745 |
) |
|
$ |
1,028 |
|
33
18. COMMITMENTS AND CONTINGENCIES
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 March 31, 2009. As of March 31, 2009,
the Company had remaining commitments under these contracts of
approximately $1,514,000. Through March 31, 2009, the
Company has capitalized cumulative interest expense of $480,000 in
conjunction with the construction of the facility in Taiwan.
34
19. 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 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.
35
19. LEGAL AND REGULATORY MATTERS (continued)
Patent Infringement Litigation
AstraZeneca AD et al. v. Impax Laboratories, Inc. (Omeprazole)
In litigation commenced against the Company in the U.S. District Court for the District of
Delaware in May 2000, AstraZeneca AB alleged the Companys submission of an ANDA seeking FDA
permission to market Omeprazole Delayed Release Capsules, 10mg, 20mg and 40mg, constituted
infringement of AstraZenecas U.S. patents relating to its Prilosec® product and sought an order
enjoining the Company from marketing its product until expiration of the patents. The case, along
with several similar suits against other manufacturers of generic versions of Prilosec®, was
subsequently transferred to the U.S. District Court for the Southern District of New York. In
September 2004, following expiration of the 30-month stay, the FDA approved the Companys ANDA, and
the Company and its alliance agreement partner, Teva, commenced commercial sales of the Companys
product. In January 2005, AstraZeneca added claims of willful infringement, for damages, and for
enhanced damages on the basis of this commercial launch. Claims for damages were subsequently
dropped from the suit against the Company, but were included in a separate suit filed against Teva.
In May 2007, the court found the product infringed two of AstraZenecas patents and these patents
were not invalid. The court ordered FDA approval of the Companys ANDA be converted to a tentative
approval, with a final approval date not before October 20, 2007, the expiration date of the
relevant pediatric exclusivity period. In August 2008 the U.S. Court of Appeals for the Federal
Circuit affirmed the lower courts decision of infringement and validity. If Teva is not ultimately
successful in establishing invalidity or non-infringement in the separate suit against Teva, the
court may award monetary damages associated with Tevas commercial sale of the Companys omeprazole
products. Under the Teva Agreement, the Company would be responsible for monetary damages awarded
against Teva up to a specified level, beyond which, monetary damages would be Tevas
responsibility.
Aventis Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc. Fexofenadine (Pseudoephedrine)
The Company is a defendant in an action brought in March 2002 by Aventis Pharmaceuticals Inc.
and others in the U.S. District Court for the District of New Jersey alleging the Companys
proposed Fexofenadine and Pseudoephedrine Hydrochloride tablets, generic to Allegra-D®, infringe
seven Aventis patents and seeking an injunction preventing the Company from marketing the products
until expiration of the patents. The case has since been consolidated with similar actions brought
by Aventis against five other manufacturers (including generics to both Allegra® and Allegra-D®).
In March 2004, Aventis and AMR Technology, Inc. filed a complaint and first amended complaint
against the Company and one of the other defendants alleging infringement of two additional
patents, owned by AMR and licensed to Aventis, relating to a synthetic process for making the
active pharmaceutical ingredient, Fexofenadine Hydrochloride and intermediates in the synthetic
process. The Company believes it has defenses to the claims based on non-infringement and
invalidity.
In June 2004, the court granted the Companys motion for summary judgment of non-infringement
with respect to two of the patents and, in May 2005, granted summary judgment of invalidity with
respect to a third patent. The Company will have the opportunity to file additional summary
judgment motions in the future and to assert both non-infringement and invalidity of the remaining
patents (if necessary) at trial. No trial date has yet been set. In September 2005, Teva launched
its Fexofenadine tablet products (generic to Allegra®), and Aventis and AMR moved for a preliminary
injunction to bar Tevas sales based on four of the patents in suit, which patents are common to
the Allegra® and Allegra-D® litigations. The district court denied Aventiss motion in January
2006, finding Aventis did not establish a likelihood of success on the merits, which decision was
affirmed on appeal. Discovery is proceeding. No trial date has been set.
36
19. LEGAL AND REGULATORY MATTERS (continued)
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 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.
37
19. LEGAL AND REGULATORY MATTERS (continued)
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 proceeding, 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. Discovery is proceeding, and no trial date has been set.
Purdue Pharma Products L.P., et al. v. Impax Laboratories, Inc. (Tramadol)
In August 2008, Purdue Pharma Products L.P., Napp Pharmaceutical Group LTD., Biovail
Laboratories International, SRL, and Ortho-McNeil-Janssen Pharmaceuticals, Inc. (collectively,
Purdue) filed suit against the Company in the U.S. District Court for the District of Delaware,
alleging patent infringement for the filing of the Companys ANDA relating to Tramadol
Hydrochloride Extended Release Tablets, 100 mg, generic to 100mg Ultram® ER. In November 2008,
Purdue asserted additional infringement claims with respect to the Companys amended ANDA, which
added 200 mg and 300 mg strengths of the product. The Company has filed answers and counterclaims
to those complaints. Discovery is proceeding, 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®. In February 2009, the parties agreed to be bound by the final judgment
concerning infringement, validity and enforceability of the patent at issue in cases brought by Eli
Lilly and Company against other generic drug manufacturers that have filed ANDAs relating to this
product and proceedings in this case were stayed.
38
19. LEGAL AND REGULATORY MATTERS (continued)
Warner Chilcott, Ltd. et.al. v. Impax Laboratories, Inc. (Doxycycline Hyclate)
In December 2008, Warner Chilcott Limited and Mayne Pharma International Pty. Ltd. (together,
Warner Chilcott) filed suit against the Company in the U.S. District Court for the District of
New Jersey, alleging patent infringement for the filing of the Companys ANDA relating to
Doxycycline Hyclate Delayed Release Tablets, 75 mg and 100 mg, generic to Doryx®. The Company has
filed an answer and counterclaim. Thereafter, in March 2009, Warner Chilcott filed another lawsuit
in the same jurisdiction, alleging patent infringement for the filing of the Companys ANDA for the
150 mg strength. Discovery is 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.
Genzyme Corp. v. Impax Laboratories, Inc. (Sevelamer Hydrochloride)
In March 2009, Genzyme Corporation filed suit against the Company in the U.S. District Court
for the District of Maryland, alleging patent infringement for the filing of the Companys ANDA
relating to Sevelamer Hydrochloride Tablets, 400 mg and 800 mg, generic to Renagel®.
Genzyme Corp. v. Impax Laboratories, Inc. (Sevelamer Carbonate)
In April 2009, Genzyme Corporation filed suit against the Company in the U.S. District Court
for the District of Maryland, alleging patent infringement for the filing of the Companys ANDA
relating to Sevelamer Carbonate Tablets, 800 mg, generic to Renvela®.
39
19. LEGAL AND REGULATORY MATTERS (continued)
Other Litigation Related to Our Business
Axcan Scandipharm Inc. v. Ethex Corp, et al. (Lipram UL)
In May 2007, Axcan Scandipharm Inc., a manufacturer of the Ultrase® line of pancreatic
enzyme
products, brought suit against the Company in the U.S. District Court for the District of
Minnesota, alleging the Company engaged in false advertising, unfair competition, and unfair trade
practices under federal and Minnesota law in connection with the marketing and sale of the
Companys now-discontinued Lipram UL products. The suit seeks actual and consequential damages,
including lost profits, treble damages, attorneys fees, injunctive relief and declaratory
judgments to prohibit the substitution of Lipram UL for prescriptions of Ultrase®. The District
Court granted in part and denied in part the Companys motion to dismiss the complaint, as well as
the motion of co-defendants Ethex Corp. and KV Pharmaceutical Co., holding any claim of false
advertising pre-dating June 1, 2001, is barred by the statute of limitations. 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 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.
Based on the allegations, the plaintiff seeks general and non-economic damages, special and
punitive damages, prejudgment interest, attorney fees and costs of suit, and compensation for all
hours worked but not paid. 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.
40
20. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)
Selected (unaudited) quarterly financial information for the three months ended March 31, 2009 is
summarized as follows:
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended: |
|
(in $000s except per share amounts) |
|
March 31, 2009 |
|
Revenue: |
|
|
|
|
Global product sales, gross |
|
$ |
78,696 |
|
Less: |
|
|
|
|
Chargebacks |
|
|
22,638 |
|
Rebates |
|
|
10,819 |
|
Returns |
|
|
3,256 |
|
Other credits |
|
|
2,862 |
|
|
|
|
|
Global product sales, net |
|
|
39,121 |
|
|
|
|
|
|
|
|
|
|
Private label product sales |
|
|
1,297 |
|
RX Partner |
|
|
10,736 |
|
OTC Partner |
|
|
1,858 |
|
Research Partner |
|
|
2,611 |
|
Promotional Partner |
|
|
3,284 |
|
Other |
|
|
6 |
|
|
|
|
|
Total revenues |
|
|
58,913 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
32,663 |
|
|
|
|
|
|
Net income |
|
$ |
2,219 |
|
|
|
|
|
|
Net income per share (basic) |
|
$ |
0.04 |
|
|
|
|
|
Net income per share (diluted) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
Weighted Average: |
|
|
|
|
common shares outstanding: |
|
|
|
|
Basic |
|
|
59,711,133 |
|
|
|
|
|
Diluted |
|
|
60,222,215 |
|
|
|
|
|
Quarterly computations of (unaudited) net income per share amounts are made independently for
each quarterly reporting period, and the sum of the per share amounts for the quarterly reporting
periods may not equal the per share amounts for the year-to-date reporting period.
41
20. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited) (continued)
Selected (unaudited) quarterly financial information for the three months ended March 31, 2008 is
summarized as follows:
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended: |
|
(in $000s except per share amounts) |
|
March 31, 2008 |
|
Revenues: |
|
|
|
|
Global product sales, gross |
|
$ |
38,401 |
|
Less: |
|
|
|
|
Chargebacks |
|
|
9,233 |
|
Rebates |
|
|
4,191 |
|
Returns |
|
|
946 |
|
Other credits |
|
|
1,052 |
|
|
|
|
|
Global product sales, net |
|
|
22,979 |
|
|
|
|
|
|
|
|
|
|
Private label product sales |
|
|
478 |
|
RX Partner |
|
|
18,805 |
|
OTC Partner |
|
|
4,409 |
|
Research Partner |
|
|
|
|
Promotional Partner |
|
|
3,252 |
|
Other |
|
|
7 |
|
|
|
|
|
Total revenues |
|
|
49,930 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
26,552 |
|
|
|
|
|
|
Net income |
|
$ |
460 |
|
|
|
|
|
|
|
|
|
|
Net income per share (basic) |
|
$ |
0.01 |
|
|
|
|
|
Net income per share (diluted) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding: |
|
|
|
|
Basic |
|
|
58,833,979 |
|
|
|
|
|
Diluted |
|
|
61,126,768 |
|
|
|
|
|
Quarterly computations of (unaudited) net income (loss) per share amounts are made
independently for each quarterly reporting period, and the sum of the per share amounts for the
quarterly reporting periods may not equal the per share amounts for the year-to-date reporting
period.
42
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION |
The following discussion and analysis, as well as other sections in this Quarterly Report on
Form 10-Q, should be read in conjunction with the unaudited interim consolidated financial
statements and related notes to the unaudited interim consolidated financial statements included
elsewhere herein.
Statements included in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. Such risks and uncertainties include the
effect of current economic conditions on our industry, business, financial position, results of
operations and market value of our common stock, our ability to timely file periodic reports
required by the Securities Exchange Act of 1934, as amended, 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 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. 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.
43
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 April 28, 2009, we manufactured and marketed 71generic 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 alliance agreement partners. We have
25 applications pending at the FDA, including three tentatively approved by FDA, and 42 other
products in various stages of development for which applications have not yet been filed.
In the generic pharmaceuticals market, we focus our efforts on controlled-release generic
versions of selected brand-name pharmaceuticals covering a broad range of therapeutic areas and
having technically challenging drug-delivery mechanisms or limited competition. We employ our
technologies and formulation expertise to develop generic products that will reproduce the
brand-name products physiological characteristics but not infringe any valid patents relating to
the brand-name product. We generally focus on brand-name products as to which the patents covering
the active pharmaceutical ingredient have expired or are near expiration, and we employ our
proprietary formulation expertise to develop controlled-release technologies that do not infringe
patents covering the brand-name products controlled-release technologies.
We are also developing specialty generic pharmaceuticals 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.
44
We operate in two segments, referred to as the Global Pharmaceuticals Division (Global
Division) and the Impax Pharmaceuticals Division (Impax Division).
The Global Division develops, manufactures, sells, and distributes generic pharmaceutical
products through four sales channels: the Global Products sales channel, for generic
pharmaceutical prescription (Rx) products we sell directly to wholesalers, large retail drug
chains, and others; the Private Label sales channel, for generic pharmaceutical over-the-counter and prescription
products we sell to unrelated third-party customers who in-turn sell the product to third parties under their own label, the RX
Partner sales channel, for generic prescription products sold through unrelated third-party
pharmaceutical entities under their own label pursuant to alliance agreements; and the OTC
Partner sales channel, for sales of generic pharmaceutical over-the-counter (OTC) products sold
through unrelated third-party pharmaceutical entities under their own label pursuant to alliance
agreements.
The Impax Division is engaged in the development of proprietary brand pharmaceutical products
through improvements to already approved pharmaceutical products to address CNS disorders. The
Impax Division is also engaged in the co-promotion of products developed by unrelated third-party
pharmaceutical entities through our direct sales force focused on marketing to physicians (referred
to as physician detailing sales calls) in the CNS community.
Our total revenues for the three
months ended March 31, 2009 and 2008 were predominantly derived from our Global Division. See
Part I: Financial Information Item 1: Financial Statements Note 17 to the unaudited interim
consolidated financial statements for financial information about our segments for the three months
ended March 31, 2009 and 2008. We sell our products within the continental United States and the
Commonwealth of Puerto Rico. We have no sales in foreign countries.
Global Product Sales, net. We recognize revenue from direct sales in accordance with SEC
Staff Accounting Bulletin No. 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.
Private Label Sales. We recognize revenue from direct sales in accordance with SAB 101, as
revised by SAB 104. Revenue from direct product sales is recognized at the time title and risk of
loss pass to customers. Revenue received from Private Label product sales is not subject to
deductions for chargebacks, rebates, returns, shelf-stock adjustments, and other pricing
adjustments. Additionally, Private Label product sales do not have upfront, milestone, or lump-sum
payments and do not contain multiple deliverables under Emerging Issues Task Force Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables (EITF 00-21).
Rx Partner and OTC Partner. Each of our alliance agreements involves multiple deliverables in
the form of products, services or licenses over extended periods. 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 Part I: Financial Information Item 1:
Financial Statements Note 2 to Unaudited Interim Consolidated Financial Statements.
45
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 the 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.
The global economy is currently undergoing a period of significant volatility, and the future
economic environment may continue to be less favorable as compared to recent years. It is uncertain
how long the U.S. economy recession 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 pharmaceutical products present a cost-effective alternative to
generally relatively higher-priced branded pharmaceutical products, our sales and those of our
alliance agreement partners could nonetheless 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 and packaging materials, drug wholesalers and other customers who may be or become
financially 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.
46
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 our estimates and assumptions are reasonable when made, they are
based upon information available to us at the time they are made. We periodically review the
factors having an influence on our estimates and, if necessary, adjust such estimates. Although historically our
estimates have generally been reasonably accurate, due to the risks and uncertainties involved in
our business and evolving market conditions, and given the subjective element of the estimates
made, actual results may differ from estimated results. This possibility may be greater than normal
during times of pronounced 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.
47
Chargebacks. We have agreements establishing contract prices for certain products with
certain indirect customers, such as managed care organizations, hospitals and government agencies
that purchase our products from drug wholesalers. The contract prices are lower than the prices the
customer would otherwise pay to the wholesaler, and the difference is referred to as a chargeback,
which generally takes the form of a credit issued by us to reduce the gross sales amount we
invoiced to our wholesaler. A provision for chargeback deductions is estimated and recorded at the
time we ship the products to the wholesalers. The primary factors we consider when estimating the
provision for chargebacks are the average historical chargeback credits given, the mix of products
shipped, and the amount of inventory on hand at the three major drug wholesalers with which we do
business. We monitor aggregate actual chargebacks granted and compare them to the estimated
provision for chargebacks to assess the reasonableness of the chargeback reserve at each quarterly
balance sheet date.
The following table is a roll-forward of the activity in the chargeback reserve for the three
months ended March 31, 2009 and the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
(in $000s) |
|
March 31, |
|
|
December 31 |
|
Chargeback reserve |
|
2009 |
|
|
2008 |
|
Beginning balance |
|
$ |
4,056 |
|
|
$ |
2,977 |
|
Provision recorded during the period |
|
|
22,638 |
|
|
|
50,144 |
|
Credits issued during the period |
|
|
(21,072 |
) |
|
|
(49,065 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
5,622 |
|
|
$ |
4,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as a percent of Global product sales, gross |
|
|
29 |
% |
|
|
28 |
% |
The increase in the provision for chargebacks, as a percent of Global product sales, gross 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.
48
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 three
months ended March 31, 2009 and the year December 31, 2008:
|
|
|
|
|
|
|
|
|
(in $000s) |
|
March 31, |
|
|
December 31 |
|
Rebate reserve |
|
2009 |
|
|
2008 |
|
Beginning balance |
|
$ |
4,800 |
|
|
$ |
3,603 |
|
Provision recorded during the period |
|
|
10,819 |
|
|
|
20,361 |
|
Credits issued during the period |
|
|
(8,082 |
) |
|
|
(19,164 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
7,537 |
|
|
$ |
4,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as a percent of Global product sales, gross |
|
|
14 |
% |
|
|
11 |
% |
The increase in the provision for rebates, as a percent of Global product sales, gross, was
primarily due to higher sales of our fenofibrate products, the generic versions of Lofibra®
capsules, a cholesterol-lowering drug, in the three months ended March 31, 2009. Sales of our fenofibrate products
generally carry a higher rebate percentage, and had the effect of raising the average rebate
provision, as a percent of Global product sales, gross, on an overall aggregate basis in the three months ended March 31, 2009.
49
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
three months ended March 31, 2009 and the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31 |
|
(in $000s) |
|
2009 |
|
|
2008 |
|
Beginning balance |
|
$ |
13,675 |
|
|
$ |
14,261 |
|
Provision related to
sales recorded in the period |
|
|
3,256 |
|
|
|
5,719 |
|
Credits issued during the period |
|
|
(702 |
) |
|
|
(6,305 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
16,229 |
|
|
$ |
13,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision as a percent of Global product sales, gross |
|
|
4 |
% |
|
|
3 |
% |
The change in the provision for returns, as a percent of Global product sales, gross, was de
minimis period over period.
50
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 $ 734,000 and $ 584,000 as of March 31, 2009 and December 31, 2008, 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. After the January 1, 2006 transition
from Medicaid to Medicare Part D, Medicaid payments have been less than 0.5% of Global product
sales, gross. Differences between our estimated and actual payments made have been de minimis.
Shelf-Stock Adjustments. When, based on market conditions, we reduce the selling price of a
product; we may choose to issue a shelf-stock adjustment credit to customers, the amount of which
is typically derived from the level of a specific product held by the customer, who agrees to
continue to purchase the product from us. Such a credit is referred to as a shelf-stock adjustment,
which is the difference between the invoiced gross sales price and the revised lower gross sales
price, multiplied by an estimate of the number of product units in the customers inventory. The
primary factors we consider when estimating a reserve for a shelf-stock adjustment include the per
unit credit amount and an estimate of the level of inventory held by the customer. The accrued
reserve for shelf-stock adjustments totaled $ 375,000 and $ 572,000 as of March 31, 2009 and
December 31, 2008, respectively. Differences between our estimated and actual credits issued for
shelf stock adjustments have been de minimis.
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. The allowance for doubtful accounts totaled $ 555,000
and $ 828,000 at March 31, 2009 and December 31, 2008, respectively.
51
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 estimate our expected period of performance to provide research and development services
under the Joint Development Agreement with Medicis is 48 months starting in December 2008 (i.e.
when the $40,000,000 upfront payment was received) and ending in November 2012 (i.e. upon FDA
approval of the fifth and final submission). The FDA approval of the final submission under the
Joint Development Agreement represents the end of our expected period of performance, as we will
have no further contractual obligation to perform research and development services under the Joint
Development Agreement, and therefore the earnings process will be complete. If the timing of FDA
approval for the final submission under the Joint Development Agreement is different from our
estimate, the revenue recognition period will change on a prospective basis at the time such event
occurs. While no such change in the estimated life of the Medicis Joint Development Agreement has
occurred to date, if we were to conclude that significantly more time will be required to obtain
FDA approval, then we would increase our estimate of the recognition period under the agreement,
resulting in a lesser amount of revenue and related costs 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 was applied
prospectively as an adjustment in the period of change.
52
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
bioequivalency studies. We generally sign agreements with these vendors which establish the terms
of each study performed by them, including, among other things, the technical specifications of the
study, the payment schedule, and timing of work to be performed. Payments are generally earned by
third-party researchers either upon the achievement of a milestone, or on a pre-determined date, as
specified in each study agreement. We account for third-party research and development expenses as
they are incurred according to the terms and conditions of the respective agreement for each study
performed, with an accrual provided for operating expense incurred but not yet billed to us at each
balance sheet date. We monitor aggregate actual payments and compare them to the estimated
provisions to assess the reasonableness of the accrued expense balance at each quarterly balance
sheet date. Differences between our estimated and actual payments made have been de minimis.
Share-Based Compensation. We recognize the fair value of each option and restricted share
over its vesting period. Options and restricted shares granted under the 2002 Equity Incentive
Plan vest over a four year period and have a term of ten years. We estimate the fair value of each
stock option award on the grant date using the Black-Scholes Merton option-pricing model, wherein:
expected volatility is based solely on historical volatility of our common stock over the period
commensurate with the expected term of the stock options. The expected term calculation is based
on the simplified method described in SAB No. 107, Share-Based Payment and SAB No. 110,
Share-Based Payment. The risk-free interest rate is based on the U.S. Treasury yield in effect at
the time of grant for an instrument with a maturity that is commensurate with the expected term of
the stock options. The dividend yield is zero as we have never paid cash dividends on our common
stock, and have no present intention to pay cash dividends.
Income Taxes. We are subject to U.S. federal, state and local income taxes and Taiwan income
taxes. We create a deferred tax asset when we have temporary differences between the results for
GAAP financial reporting purposes and tax reporting purposes. During the three months ended March
31, 2009 and the year ended December 31, 2008, we recorded a valuation allowance related to the net
operating losses generated by our wholly-owned subsidiary. We determined it was more likely than
not that the results of future operations of the wholly-owned 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. Our cash and cash equivalents include a portfolio of
high-quality credit securities, including U.S. Government securities, treasury bills, corporate
bonds, 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 approximated the market value
at March 31, 2009. Our debt instruments at March 31, 2009, are subject to fixed and variable
interest rates and principal payments. 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.
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.
53
Goodwill - 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. Under 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 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 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.
54
Results of Operations
Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008
The following table sets forth certain results of operations for the three months ended March
31, 2009 and 2008;
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Three Months Ended March 31, |
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Increase/ |
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|
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2009 |
|
|
2008 |
|
|
(Decrease) |
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|
|
(unaudited) |
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|
(unaudited) |
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(in $000s) |
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(as adjusted) |
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Revenues: |
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Global product sales, net |
|
$ |
39,121 |
|
|
$ |
22,979 |
|
|
$ |
16,142 |
|
|
|
70 |
% |
Private Label product sales |
|
|
1,297 |
|
|
|
478 |
|
|
|
819 |
|
|
|
171 |
% |
Rx Partner |
|
|
10,736 |
|
|
|
18,805 |
|
|
|
(8,069 |
) |
|
|
(43 |
%) |
OTC Partner |
|
|
1,858 |
|
|
|
4,409 |
|
|
|
(2,551 |
) |
|
|
(58 |
%) |
Research Partner |
|
|
2,611 |
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|
|
|
|
|
|
2,611 |
|
|
|
|
|
Promotional Partner |
|
|
3,284 |
|
|
|
3,252 |
|
|
|
32 |
|
|
|
1 |
% |
Other |
|
|
6 |
|
|
|
7 |
|
|
|
(1 |
) |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
58,913 |
|
|
|
49,930 |
|
|
|
8,983 |
|
|
|
18 |
% |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
26,250 |
|
|
|
23,378 |
|
|
|
2,872 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
32,663 |
|
|
|
26,552 |
|
|
|
6,111 |
|
|
|
23 |
% |
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Operating expenses: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
16,056 |
|
|
|
13,339 |
|
|
|
2,717 |
|
|
|
20 |
% |
Patent litigation |
|
|
1,017 |
|
|
|
1,701 |
|
|
|
(684 |
) |
|
|
(40 |
%) |
Selling, general and administrative |
|
|
11,455 |
|
|
|
10,362 |
|
|
|
1,093 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
28,528 |
|
|
|
25,402 |
|
|
|
3,126 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
4,135 |
|
|
|
1,150 |
|
|
|
2,985 |
|
|
|
260 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of common stock purchase warrant |
|
|
|
|
|
|
44 |
|
|
|
(44 |
) |
|
|
(100 |
%) |
Other income (expense), net |
|
|
65 |
|
|
|
61 |
|
|
|
4 |
|
|
|
7 |
% |
Interest income |
|
|
149 |
|
|
|
1,537 |
|
|
|
(1,388 |
) |
|
|
(90 |
%) |
Interest expense |
|
|
(294 |
) |
|
|
(1,764 |
) |
|
|
1,470 |
|
|
|
83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,055 |
|
|
|
1,028 |
|
|
|
3,027 |
|
|
|
294 |
% |
Provision for income taxes |
|
|
(1,836 |
) |
|
|
(568 |
) |
|
|
(1,268 |
) |
|
|
(223 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,219 |
|
|
$ |
460 |
|
|
$ |
1,759 |
|
|
|
382 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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Total Revenues |
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|
Total revenues for the three months ended March 31, 2009, were $ 58.9 million, an increase of
18% over the same period in 2008. Global product sales, net, were $ 39.1 million, an increase of
70% primarily due to sales of our fenofibrate products, the generic versions of Lofibra® capsules
and tablets, a cholesterol-lowering drug. Our increased sales of this product in 2009 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 a principal competitor for
such sales. Private label product sales were $ 1.3 million, an increase of 171% primarily due to
sales of generic loratadine /pseudoephedrine as a result of a new supply agreement. Rx Partner
revenues were $ 10.7 million, down 43%, 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 period-over-period comparison of Rx Partner revenue was principally impacted by the
absence in the three months ended March 31, 2009 of revenue recognized from sales of generic OxyContin® under the DAVA
Agreement which ended in January 2008. During the three months ended March 31, 2009 and 2008,
revenue recognized from the sale of generic OxyContin® under the DAVA Agreement was $ 0 and $ 6.3
million, respectively. The cessation of the sale of our generic version of OxyContin®, and no
revenue in the three months ended March 31, 2009 as compared to the same period in 2008, materially
affected the Rx Partner revenues for the three months ended March 31, 2009 (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 $ 1.9 million, a
decrease of 58%, primarily attributable to the expiration of our obligation to supply
Schering-Plough with product on December 31, 2008. The
55
loss of this revenue for the three months ended March 31, 2009, was only partially offset by
revenue from Private Label product sales. Research Partner revenues were $ 2.6 million, and we had
no such revenues during the same period in 2008, as the underlying agreement was entered into
during the fourth quarter of 2008. Promotional Partner revenues were $ 3.3 million with nominal
change from the same period in 2008.
Cost of Revenues
Cost of revenues was $ 26.3 million for the three months ended March 31, 2009, an increase of
12% primarily related to the higher sales of our generic fenofibrate.
Gross Profit
Gross profit for the three months ended March 31, 2009 was $ 32.7 million or approximately 55%
of total revenues, as compared to 53% of total revenue in the prior period. Gross profit in our
Global business was up $ 12.0 million primarily due to an increase in our generic fenofibrate
product line margins of $ 14.8 million offset by the cessation of prior year period sales of our
generic version of OxyContin® as well as lower manufacturing efficiencies, and an increase in
inventory carrying-value reserves.
Research and Development Expenses
Total research and development expenses for the three months ended March 31, 2009 were $ 16.1
million, an increase of 20%. Generic project activity increased $ 1.4 million primarily due to
increased spending on bioequivalence studies of $ 0.4 million, along with a $ 0.4 million increase
in expenses related to active pharmaceutical ingredient used in research activities, and additional
research personnel of $ 0.3 million. Expenses related to our brand-product pipeline increased $
1.3 million including an increase of $ 0.5 million related to higher spending on additional
research personnel, and increases of $ 0.6 million on clinical studies and $ 0.2 million on
research supplies.
Patent Litigation Expenses
Patent litigation expenses for the three months ended March 31, 2009 and 2008 were $ 1.0
million and $ 1.7 million, respectively, a decrease of $ 0.7 million, principally resulting from
lower overall expenses as a result of the settlement of three litigation matters which were active
during the first quarter of 2008.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March 31, 2009 were $
11.5 million, a 11% increase attributable principally to an increase in professional fees of $ 0.5
million related to the examination and review of our financial statements for the year ended
December 31, 2008, as well as to support public-company reporting requirements, and a $ 0.7 million
increase in salary and benefits related expenses primarily driven by the addition of several
executive level personnel.
Other income (expense), net
Other income (expense), net was $ 0.1 million for the three months ended March 31, 2009 with
nominal change from the same period in 2008.
Interest Income
Interest income in the first quarter of 2009 declined $ 1.4 million to $ 0.1 million, compared
to the prior year period due to lower average cash and short-term investment balances in the three months ended March 31, 2009 resulting from the use of funds to repurchase at a discount a significant portion of
our 3.5% Debentures in August and September of 2008 and the repayment-in-full of bank term loans in
May 2008.
56
Interest Expense
Interest expense in the first quarter of 2009 declined $ 1.5 million to $ 0.3 million, compare
to the prior year period due to reduced amounts of average debt outstanding as a result of the same
repurchase of 3.5% Debentures and repayment-in-full of the bank term loans noted above.
Income Taxes
For the three months ended March 31, 2009, we recorded a tax provision of $ 1.6 million for
federal and state income taxes, and an accrual for uncertain tax positions of $ 0.2 million. For
the three months ended March 31, 2008, we recorded a tax provision of $ 0.6 million, which did not
include an accrual for uncertain tax positions. The total amount of unrecognized tax benefits was
$ 7.8 million as of March 31, 2009. The tax provision for the three months ended March 31, 2009
included the effect of the research and development tax credit, which was reinstated on October 3,
2008, for a two year period retroactive to January 1, 2008. The tax provision for the three months
ended March 31, 2008 did not include the effect of the research and development tax credit. The effective tax rate of 45% for the three months ended March 31, 2009 was lower than the
effective tax rate of 55% for the three months ended March 31, 2008, 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 three months ended March 31, 2009 was $ 2.2 million, an increase of $ 1.8
million, or 382%, as compared to net income of $ 0.5 million for the three months ended March 31,
2008, resulting principally from higher net revenue, higher gross margin, lower interest expense,
net, and a reduced overall effective tax rate, offset by higher research and development expenses as
well as selling, general and administrative expenses as discussed above.
57
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 and
services. We expect to incur significant operating expenses, including expanded research and
development activities and patent litigation expenses, for the foreseeable future. We estimate
research and development and patent litigation expenses will be approximately $ 64.0 million and $
10.0 million, respectively, for the 12 months ending December 31, 2009. We also anticipate
incurring capital expenditures of approximately $ 17.0 million during the 12 months ending December
31, 2009, of which $ 7.0 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 the State of California and our packaging and distribution facilities
in the Commonwealth of Pennsylvania. We believe our existing cash and cash equivalents and
short-term investment balances, together with cash expected to be generated from operations, and our bank
revolving line of credit, will be sufficient to meet our financing requirements through the next 12
months. We may, however, seek additional financing through alliance 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.
Cash and Cash Equivalents
At March 31, 2009, we had $ 38.0 million in cash and cash equivalents, a decrease of $ 31.2
million as compared to December 31, 2008. As more fully discussed below, the decrease in cash and
cash equivalents during the three months ended March 31, 2009 was primarily driven by $ 18.1
million of cash used in operations, which included the payment of $ 3.4
million related to the settlement of the securities class action, and a $ 9.6 million increase in short-term investments.
Cash Flows
Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008.
Net cash used in operating activities for the three months ended March 31, 2009 was $ 18.1
million, an increase of $ 14.2 million from the prior year period.
The period-over-period increase in net cash used in operating activities resulted principally
from less revenue deferrals related to our alliance agreements, net of product manufacturing costs
deferred, which decreased $ 36.5 million in the three months ended March 31, 2009 as compared to the same period ended March 31, 2008.
The change period-over-period was composed of a decrease in revenue deferrals of $ 42.6
million, offset by a change in deferred product manufacturing costs of $ 6.1 million. The net
decrease of deferrals related to our alliance agreements was principally due to the absence of
sales of our generic OxyContin® to DAVA, and of our seasonal allergy products to Schering-Plough,
in the three months ended March 31, 2009, as well as lower sales of our generic Wellbutrin XL® product, marketed under
our strategic alliance agreement with Teva.
The decrease in cash provided by revenue deferrals related to our alliance agreements was
partially offset by a lower usage of cash in accounts receivable for the three months ended March
31, 2009 as compared to the same period in 2008. Cash used for accounts receivable was $ 18.5
million and $ 36.2 million for the three months ended March 31, 2009 and 2008, respectively. The
increased level of accounts receivable at March 31, 2008 was the result of $ 35.5 million of profit
share earned on sales of our generic OxyContin® by DAVA in January 2008, which was not paid by DAVA
until April 2008.
Other items contributing to the increase in net cash used in operating activities include a $
3.2 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 and a $ 1.5
million increase in cash used to pay down accounts payable and accrued expenses; offset by a $ 1.7
million increase in inventory.
58
Net cash used in investing activities for the three months ended March 31, 2009, amounted to $
13.5 million, a decrease of $ 0.2 million as compared to the prior year period, with the change
primarily due to lower investments in property, plant and equipment. Purchases of property, plant
and equipment for the three months ended March 31, 2009 amounted to $ 3.9 million as compared to $
4.2 million for the prior year period. The 2009 purchases of property, plant and equipment,
included capital expenditures of approximately $ 0.7 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.
Net cash provided by financing activities for the three months ended March 31, 2009 and 2008
was approximately $ 0.3 million and $ 0.1 million, respectively, principally the result of cash
received from the exercise of employee stock options in both periods.
59
Outstanding Debt Obligations
Senior Lenders; Wachovia Bank
We have a $ 35,000,000 revolving credit facility under a credit agreement with Wachovia Bank,
N.A. (a Wells Fargo subsidiary) (Credit Agreement), with a March 31, 2010 expiration date. The
revolving credit facility, intended for working capital and general corporate purposes, is
collateralized by eligible accounts receivable, inventory, and machinery and equipment, subject to
limitations and other terms.
The Credit Agreement had a three year term upon its initial execution in December 2005. In
October 2008, we entered into a first amendment to the Credit Agreement 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. On December 31, 2008, we entered into a
second amendment to the Credit Agreement, which extended the termination date from December 31,
2008 to March 31, 2009. Effective March 31, 2009, we entered into a third amendment to the Credit
Agreement, which, among other matters: (i) extended the termination date from March 31, 2009 to
March 31, 2010; (ii) set the interest rate for the revolving credit facility at either the prime
rate plus a margin ranging from 0.25% to 0.75% or LIBOR plus a margin ranging from 2.25% to 3.0%
based upon certain terms and conditions; (iii) limited capital expenditures to no more than $ 25.0
million for the period from January 1, 2009 to December 31, 2009, and for each calendar year
thereafter; (iv) eliminated the servicing fee during any month in which no revolver loans were
outstanding; and (v) required the fixed charge coverage ratio be tested only for certain fiscal
periods during which our net cash position was less than $ 50.0 million. In connection with the
execution of the third amendment, we were obligated to pay to Wachovia a commitment fee of $
100,000. All other material terms of the Credit Agreement remained in full force and effect.
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 $ 25.0 million for the period from January 1, 2007 to December
31, 2007 and $ 34.0 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.
At March 31, 2009, 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 March 31, 2009 and December 31, 2008, respectively. During the three months
ended March 31, 2009 and 2008, we paid $ 40,000 and $ 21,000, respectively, for unused line fees to
Wachovia.
60
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 $ 16,000 and $ 94,000 for the three months ended
March 31, 2009 and 2008, 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.
61
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 March 31,
2009, none of the four events noted above occurred.
62
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. In October 2008,
the FASB issued FSP FAS 157-3 which clarified the application of SFAS 157 in a market that is
not active and provided an example to illustrate key considerations in determining the fair value
of a financial asset when the market for that financial asset is not active. The adoption of
SFAS 157 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. Upon becoming effective, EITF 07-1 did not 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 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. We adopted the
provisions of SFAS 160 on January 1, 2009; the adoption of SFAS 160 did not have a significant
impact on our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position (FSP) 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. Upon becoming effective, FAS 142-3 did not 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. The provisions of FSP APB
14-1 must be applied retrospectively for all periods presented even if the instrument has matured,
has been extinguished, or has been converted as of the FSP APB 14-1 pronouncements effective date.
The application of FSP APB 14-1 to our $ 75 million, 3.5% convertible senior subordinated
debentures (3.5% Debentures) required the retrospective restatement of all reporting periods
beginning January 01, 2007. For additional details of the adoption of FSP APB 14-1, see Part I:
Financial Information Item 1. Financial Statements Note 1 and Note 11 to Unaudited Interim
Consolidated Financial Statements.
63
In June 2008, the FASB issued FASB Staff Position 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 non-forfeitable
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. Upon becoming effective FSP EITF 03-6-1
did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides
additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level
of activity for an asset or liability has significantly decreased. FSP FAS 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is
effective for interim and annual reporting periods ending after June 15, 2009, and is applied
prospectively. Early adoption is permitted for periods ending after March 15, 2009. We are
currently evaluating the impact of FSP FAS 157-4 on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). This FSP
requires publicly traded companies to disclose information about fair value of financial
instruments in interim financial statements, as well as in annual financial statements. FSP FAS
107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. We are currently evaluating the
impact of FSP FAS 107-1 and APB 28-1 on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). This FSP amends
the factors to be considered in determining if a decline in the fair value of a debt security is
not temporary. Generally, if the fair value of a debt security is less than its amortized cost,
and it is more likely than not the debt security will be sold, then an other-than-temporary
impairment shall be considered to have occurred. An other-than-temporary impairment is recognized
equal to the entire difference between the debt securitys amortized cost and its fair value as of
the balance sheet date. FSP FAS 115-2 and FAS 124-2 is effective for interim reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.
We are currently evaluating the impact of FSP FAS 115-2 and FAS 124-2 on our consolidated financial
statements
64
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes to the
quantitative and qualitative disclosures about market risk set forth in our Annual Report on Form 10-K for the year ended December 31, 2008.
65
ITEM 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Exchange Act) that are designed to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to the Companys management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
The Companys management, with the participation of the Companys Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon
that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act,
were effective as of March 31, 2009.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2009, 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.
66
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Patent Infringement Litigation
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 by the filing of our ANDA relating to Cyclobenzaprine Hydrochloride Extended Release
Capsules, 15 mg and 30 mg, generic to Amrix®. We have filed an answer and counterclaim. Discovery
is in the early stages, and trial is scheduled to begin on September 27, 2010.
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 by the filing of our ANDA relating
to Duloxetine Hydrochloride Delayed Release Capsules, 20 mg, 30 mg, and 60 mg, generic to
Cymbalta®. In February 2009 the parties agreed to be bound by the final judgment concerning
infringement, validity and enforceability of the patent at issue in cases brought by Lily against
other generic drug manufacturers that have filed ANDAs relating to this product and proceedings in
this case were stayed.
Genzyme Corp. v. Impax Laboratories, Inc. (Sevelamer Hydrochloride)
In March 2009, Genzyme Corporation filed suit against us in the U.S. District Court for the
District of Maryland, alleging patent infringement by the filing of our ANDA relating to Sevelamer
Hydrochloride Tablets, 400 mg and 800 mg, generic to Renagel®.
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 by the filing of our ANDA relating to Doxycycline Hyclate Delayed
Release Tablets, 75 mg and 100 mg, generic to Doryx®. In March 2009, Warner Chilcott filed a
second suit against us in the same court, alleging patent infringement by the filing of our ANDA
for the 150 mg strength of this product. Discovery is in the early stages, and no trial date has
been set.
Genzyme Corp. v. Impax Laboratories, Inc. (Sevelamer Carbonate)
In April 2009, Genzyme Corporation filed suit against us in the U.S. District Court for the
District of Maryland, alleging patent infringement by the filing of our ANDA relating to Sevelamer
Carbonate Tablets, 800 mg, generic to Renvela®.
67
Other Litigation Related to Our Business
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: 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 plaintiff seeks
general and non-economic damages, special and punitive damages, prejudgment interest, attorneys
fees and costs of suit, and compensation for all hours worked but not paid for. We believe these
claims are without merit and intend to defend against them vigorously.
Securities Litigation
We, our Chief Executive Officer and several former officers and directors were defendants in a
consolidated class action filed in the United States District Court for the Northern District of
California on behalf of all purchasers of our common stock between May 5 and November 3,
2004. Plaintiffs 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 our common stock during that period by filing false financial statements for the
first and second quarters of 2004, based upon the subsequent restatement of our results for those
periods. On January 28, 2009, the parties entered into an agreement settling the case. 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 we paid approximately $ 3,400,000 and the balance was funded by directors and
officers liability insurance.
68
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you
should carefully consider the risk factors discussed in Part I, Item 1A. Risk Factors in our
Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our
business, financial condition or future results. The risk factors in our Annual Report on Form 10-K
have not materially changed. The risks described in our Annual Report on Form 10-K are not the only
risks we face. Additional risks and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our business, financial condition and/or
operating results.
69
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2009, we sold an aggregate of 413,654 shares of our
common stock to three persons pursuant to the exercise of stock options. With respect to the
foregoing, we relied upon the exemption provided by Section 4(2) of the Securities Act.
70
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
71
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
72
ITEM 5. OTHER INFORMATION
Not Applicable.
73
ITEM 6. EXHIBITS
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Exhibit No. |
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Description of Document |
3.1
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Certificate of Designation of Series A Junior Participating
Preferred Stock, as filed with the Secretary of State of
Delaware on January 21, 2009. (1) |
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4.1
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Preferred Stock Rights Agreement, dated as of January 20,
2009, by and between the Company and StockTrans, Inc., as
Rights Agent. (1) |
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10.1
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Third Amendment to Amended and Restated Loan and Security
Agreement, effective as of March 31, 2009, by and among the
Company and Wachovia Bank, National Association. |
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10.2
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Offer of Employment Letter, effective as of January 5, 2009,
between the Company and Christopher Mengler.* (2) |
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10.3
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2008 Cash Incentive Awards for Executive Officers.* (3) |
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11.1
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Statement re computation of per share earnings (incorporated
by reference to Note 15 to the Notes to the unaudited interim
Consolidated Financial Statements in this Quarterly Report on
Form 10-Q). |
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31.1
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Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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32.2
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Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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* |
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Management contract, compensatory plan or arrangement. |
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(1) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on January 22,
2009. |
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(2) |
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Incorporated by reference to the Companys Annual Report on Form 10-K for the year ended
December 31, 2008. |
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(3) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on March 5,
2009. |
74
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Date: May 7, 2009 |
Impax Laboratories, Inc. |
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By: |
/s/ Larry Hsu, Ph.D.
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Name: |
Larry Hsu, Ph.D. |
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Title: |
President and Chief Executive Officer
(Principal Executive Officer) |
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By: |
/s/ Arthur A. Koch, Jr.
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Name: |
Arthur A. Koch Jr. |
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Title: |
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer) |
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EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Description of Document |
3.1
|
|
Certificate of Designation of Series A Junior Participating
Preferred Stock, as filed with the Secretary of State of
Delaware on January 21, 2009. (1) |
|
|
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4.1
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Preferred Stock Rights Agreement, dated as of January 20,
2009, by and between the Company and StockTrans, Inc., as
Rights Agent. (1) |
|
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10.1
|
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Third Amendment to Amended and Restated Loan and Security
Agreement, effective as of March 31, 2009, by and among the
Company and Wachovia Bank, National Association. |
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10.2
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Offer of Employment Letter, effective as of January 5, 2009,
between the Company and Christopher Mengler.* (2) |
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10.3
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2008 Cash Incentive Awards for Executive Officers.* (3) |
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11.1
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Statement re computation of per share earnings (incorporated
by reference to Note 15 to the Notes to the unaudited interim
Consolidated Financial Statements in this Quarterly Report on
Form 10-Q). |
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31.1
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Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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32.2
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Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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* |
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Management contract, compensatory plan or arrangement. |
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(1) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on January 22,
2009. |
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(2) |
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Incorporated by reference to the Companys Annual Report on Form 10-K for the year ended
December 31, 2008. |
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(3) |
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Incorporated by reference to the Companys Current Report on Form 8-K filed on March 5, 2009. |