UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

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

Commission file number: 001-34263

Impax Laboratories, Inc.

(Exact name of registrant as specified in its charter)

Delaware		65-0403311
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
30831 Huntwood Avenue, Hayward, CA		94544
(Address of principal executive offices)		(Zip Code)

(510)- 476-2000

Not Applicable

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):

Large accelerated filer o		Accelerated filer o	Non-accelerated filer þ (Do not check if a smaller reporting company)			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 November 2, 2009, there were 61,874,568 shares of the registrant’s common stock outstanding.

 

 

Impax Laboratories, Inc.

INDEX

PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
- Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008			3
- Consolidated Statements of Operations for each of the three and nine months ended September 30, 2009 and 2008 (unaudited)			4
- Consolidated Statements of Cash Flows for each of the nine months ended September 30, 2009 and 2008 (unaudited)			5
- Notes to Consolidated Financial Statements (unaudited)			7
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			49
Item 3: Quantitative and Qualitative Disclosures About Market Risk			81
Item 4T: Controls and Procedures			82
PART II: OTHER INFORMATION
Item 1: Legal Proceedings			83
Item 1A: Risk Factors			85
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds			86
Item 3: Defaults Upon Senior Securities			87
Item 4: Submission of Matters to a Vote of Security Holders			88
Item 5: Other Information			89
Item 6: Exhibits			90
SIGNATURES
EXHIBIT INDEX
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Impax Laboratories, Inc.

		September 30,				December 31,
		2009				2008
		(unaudited)				(as adjusted)
ASSETS
Current assets:
Cash and cash equivalents		$	47,577			$	69,275
Short-term investments			52,950				50,710
Accounts receivable, net			61,543				43,306
Inventory, net			38,911				32,305
Current portion of deferred product manufacturing costs-alliance agreements			14,750				13,578
Current portion of deferred income taxes			18,611				17,900
Prepaid expenses and other current assets			2,654				9,298
Total current assets			236,996				236,372
Property, plant and equipment, net			96,457				95,629
Deferred product manufacturing costs-alliance agreements			93,075				93,144
Deferred income taxes, net			61,270				52,551
Other assets			14,521				9,017
Goodwill			27,574				27,574
Total assets		$	529,893			$	514,287
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt, net		$	—			$	14,416
Accounts payable			13,245				12,797
Accrued expenses			55,799				41,360
Current portion of deferred revenue-alliance agreements			39,925				35,015
Current portion of accrued exclusivity period fee payments due			—				6,000
Total current liabilities			108,969				109,588
Long-term debt			—				5,990
Deferred revenue-alliance agreements			223,439				225,804
Other liabilities			16,739				13,255
Total liabilities		$	349,147			$	354,637
Commitments and contingencies (Note 18)
Stockholders’ equity:
Preferred Stock, $0.01 par value, 2,000,000 shares authorized, 0 shares outstanding at September 30, 2009 and December 31, 2008		$	—			$	—
Common stock, $0.01 par value, 90,000,000 shares authorized and 61,833,440 and 60,135,686 shares issued at September 30, 2009 and December 31, 2008, respectively			618				602
Additional paid-in capital			219,960				211,128
Treasury stock-acquired as a result of achievement of milestone under the Teva Agreement, 243,729 shares			(2,157	)			(2,157	)
Accumulated other comprehensive loss			(615	)			(995	)
Accumulated deficit			(37,316	)			(49,233	)
			180,490				159,345
Noncontrolling interest			256				305
Total stockholders’ equity			180,746				159,650
Total liabilities and stockholders’ equity		$	529,893			$	514,287

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

Impax Laboratories, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2009				2008				2009				2008
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
						(as adjusted)								(as adjusted)
Revenues:
Global product sales, net		$	46,636			$	20,080			$	123,144			$	69,044
Private Label product sales			1,752				629				5,269				1,747
Rx Partner			8,328				9,424				30,183				72,099
OTC Partner			1,769				3,398				5,255				12,739
Research Partner			2,962				—				8,406				—
Promotional Partner			3,499				3,238				10,007				9,728
Other			—				5				11				19
Total revenues			64,946				36,774				182,275				165,376
Cost of revenues			28,055				22,296				81,589				66,378
Gross profit			36,891				14,478				100,686				98,998
Operating expenses:
Research and development			15,243				16,188				46,744				43,275
Patent litigation			1,647				1,876				4,058				4,827
Selling, general and administrative			9,838				14,542				31,600				37,047
Total operating expenses			26,728				32,606				82,402				85,149
Income (loss) from operations			10,163				(18,128	)			18,284				13,849
Change in fair value of common stock purchase warrant			—				—				—				59
Other income (expense), net			22				(4	)			105				36
Interest income			180				723				636				3,282
Interest expense			(185	)			(971	)			(735	)			(4,447	)
Income (loss) before income taxes			10,180				(18,380	)			18,290				12,779
Provision (benefit) for income taxes			3,495				(7,850	)			6,373				5,761
Net income (loss)		$	6,685			$	(10,530	)		$	11,917			$	7,018
Net Income (loss) per share:
Basic		$	0.11			$	(0.18	)		$	0.20			$	0.12
Diluted		$	0.11			$	(0.18	)		$	0.20			$	0.12
Weighted average common shares outstanding:
Basic			60,559,064				59,166,319				60,130,608				58,993,633
Diluted			61,247,700				59,166,319				60,667,227				60,813,707

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

Impax Laboratories, Inc.

		Nine Months Ended September 30,
		2009				2008
		(unaudited)				(unaudited)
						(as adjusted)
Cash flows from operating activities:
Net income		$	11,917			$	7,018
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation			7,806				6,791
Amortization of 3.5% Debentures discount and deferred financing costs			301				1,946
Amortization of Wachovia Credit Agreement deferred financing costs			50				287
Bad debt expense			131				278
Deferred income taxes (benefit)			(9,430	)			1,997
Provision for uncertain tax positions			695				—
Loss, net on repurchase of 3.5% Debentures			—				114
Deferred revenue — Rx Partners			34,601				82,774
Deferred product manufacturing costs — Rx Partners			(19,053	)			(25,405	)
Deferred revenue recognized — Rx Partners			(30,183	)			(72,099	)
Amortization deferred product manufacturing costs — Rx Partners			15,044				17,153
Deferred revenue — OTC Partners			1,787				13,901
Deferred product manufacturing costs — OTC Partners			(1,800	)			(13,760	)
Deferred revenue recognized — OTC Partners			(5,255	)			(12,739	)
Amortization deferred product manufacturing costs — OTC Partners			4,706				12,059
Deferred revenue — Research Partners			10,000				—
Deferred revenue recognized — Research Partners			(8,406	)			—
Payments on exclusivity period fee			(6,000	)			(9,000	)
Payments on accrued litigation settlements			(8,037	)			(1,648	)
Share-based compensation expense			5,179				4,458
Fair value of shares issued under severance arrangement			—				561
Accretion of interest income on short-term investments			(424	)			(2,160	)
Change in fair value of stock purchase warrants			—				(59	)
Changes in assets and liabilities:
Accounts receivable			(18,368	)			13,379
Inventory			(6,606	)			(3,060	)
Prepaid expenses and other assets			1,346				(6,102	)
Accounts payable and accrued expenses			14,892				753
Other liabilities			2,740				3,051
Net cash (used in) provided by operating activities		$	(2,367	)		$	20,488
Cash flows from investing activities:
Purchase of short-term investments			(49,563	)			(195,218	)
Maturities of short-term investments			47,748				248,143
Purchases of property, plant and equipment			(8,405	)			(20,873	)
Net cash (used in) provided by investing activities		$	(10,220	)		$	32,052
Cash flows from financing activities:
Repayment of long-term debt			(12,887	)			(65,198	)
Proceeds from exercise of stock options and purchases under the ESPP			3,776				1,079
Net cash used in financing activities		$	(9,111	)		$	(64,119	)
Net decrease in cash and cash equivalents		$	(21,698	)		$	(11,579	)
Cash and cash equivalents, beginning of period		$	69,275			$	37,462
Cash and cash equivalents, end of period		$	47,577			$	25,883

Supplemental disclosure of non-cash investing and financing activities:

		Nine Months Ended September 30,
(in $000’s)		2009				2008
Cash paid for interest		$	597			$	2,558
Cash paid for income taxes		$	187			$	5,387

Unpaid vendor invoices of approximately $1,391,000 and $1,691,000 which were accrued as of September 30, 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.

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of Impax Laboratories, Inc. (“Impax” or “the Company”), have been prepared based upon United States Securities and Exchange Commission (“SEC”) rules permitting reduced disclosure for interim periods, and include all adjustments necessary for a fair presentation of statements of operations, statements of cash flows, and financial condition for the interim periods shown, including normal recurring accruals and other items. While certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to SEC rules and regulations, the Company believes the disclosures are adequate to make the information presented not misleading. In preparing the unaudited interim consolidated financial statements, the Company has evaluated subsequent events occurring through November 4 2009; the date on which the Company filed this Quarterly Report on Form 10Q with the SEC for the quarter ended September 30, 2009.

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ^TM (“ASC” or “Codification”), and, for SEC registrants, including the Company, SEC rules and interpretive releases, promulgated under authority of federal securities laws, are the authoritative source of GAAP. The FASB Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

The unaudited interim consolidated financial statements of the Company include the accounts of the operating parent company, Impax Laboratories, Inc., its wholly-owned subsidiary, Impax Laboratories (Taiwan) Inc., and an equity investment in Prohealth Biotech, Inc. (“Prohealth”), in which the Company held a 58.11% majority ownership interest at September 30, 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 Company’s operations for any other interim period or for the full year ending December 31, 2009.

The unaudited interim consolidated financial statements and footnotes should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the SEC, wherein a more complete discussion of significant accounting policies and certain other information can be found.

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions, based on complex judgments considered reasonable, and affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant judgments are employed in estimates used in determining values of tangible and intangible assets, legal contingencies, tax assets and tax liabilities, fair value of share-based compensation awards issued to employees, and estimates used in applying the Company’s revenue recognition policy including those related to sales rebates, chargebacks, shelf stock adjustments, 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 FASB ASC Topic 450, “Contingencies”, the Company records accruals for such loss contingencies when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company, in accordance with FASB ASC Topic 450, does not recognize gain contingencies until realized.

1. BASIS OF PRESENTATION (continued)

As required, FASB ASC Topic 470, the amended accounting standard for debt with conversion and other options, was applied on a retrospective basis beginning with the year ended December 31, 2007. The adoption of FASB ASC Topic 470 resulted in an increase to accumulated deficit of $ 4,931,000 to $65,220,000 at January 1, 2008. The following table presents the effect of the adoption of FASB ASC Topic 470 on net income and net income per share for the three and nine months ended September 30, 2009 and 2008:

		Three Months Ended:								Nine Months Ended:
		September 30,				September 30,				September 30,				September 30,
(in $000’s except per share amounts)		2009				2008				2009				2008
Additional interest expense		$	—			$	487			$	253			$	2,045
Reduction in gain on extinguishment of debt			—				(1,432	)			—				(1,432	)
Provision (benefit) for income taxes			—				(303	)			(89	)			(853	)
Decrease in net income		$	—			$	(1,616	)		$	(164	)		$	(2,624	)
Decrease in Net income per share:
Basic		$	—			$	(0.03	)		$	—			$	(0.04	)
Diluted		$	—			$	(0.03	)		$	—			$	(0.04	)

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 FASB ASC Topic 470. The Long-Term Debt footnote herein contains additional information about the adoption of FASB ASC Topic 470.

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

	•		the delivered item has value to the customer on a stand alone basis;
	•		there is objective and reliable evidence of the fair value of the undelivered item; and
	•		if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor.

Under FASB ASC Topic 605, if the fair value of any undelivered element cannot be objectively or reliably determined, then separate accounting for the individual deliverables is not appropriate. Revenue recognition for arrangements with multiple deliverables constituting a single unit of accounting is recognizable generally over the greater of the term of the arrangement or the expected period of performance, either on a straight-line basis or on a proportional performance method.

Global product sales, net:

The “Global product sales, net” line item of the statement of operations includes revenue recognized related to shipments of generic pharmaceutical products to the Company’s customers, primarily drug wholesalers and retail chains. Gross sales revenue is recognized at the time title and risk of loss passes to the customer — 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 (i.e. these products are not sold under the Company’s 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 FASB ASC Topic 605.

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 Company’s 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 Company’s 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 Company’s 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.

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 FASB ASC Topic 605.

Promotional Partner:

The “Promotional Partner” line item of the statement of operations includes revenue recognized under promotional services agreements with other pharmaceutical companies. The promotional services agreements obligate the Company to provide physician detailing sales calls to promote its partners’ branded drug products over multiple periods. In exchange for this service, the Company receives a fixed fee generally based on either the number of sales force representatives utilized in providing the services, or the number of sales calls made (up to contractual maximums). The Company may also be eligible to receive contingent payments based upon the number of prescriptions filled for one of its partner’s product above a contractual minimum threshold. Additionally, the Company may be required to refund portions of the fees it receives if it fails to perform a minimum number of physician detail calls during specified periods.

The Company recognizes revenue from providing physician detailing services as those services are provided and the performance obligations are met; and contingent payments, if any, 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 these agreements do not include multiple deliverables under FASB ASC Topic 605.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In November 2007, the EITF reached a final consensus on accounting standards related to collaborative arrangements, referred to as FASB ASC Topic 808. The FASB ASC Topic 808 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. The FASB ASC Topic 808 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company’s adoption of FASB ASC Topic 808 was on a retrospective basis to all prior periods presented for all collaborative arrangements existing as of the effective date. Upon becoming effective, FASB ASC Topic 808 did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB revised previously issued accounting standards related to business combinations, referred to as FASB ASC Topic 805. The revised accounting standards retained the purchase method of accounting for acquisitions, but required a number of other changes, including changes in the way assets and liabilities are recognized in purchase accounting, and also changed 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. The FASB ASC Topic 805, as amended, became effective for the Company beginning January 1, 2009 and applies prospectively to business combinations completed on or after such date. The FASB ASC Topic 805 effect on the Company’s 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 an accounting standard which clarified a non-controlling (minority) interest in a subsidiary is an ownership interest in the consolidated entity which should be reported as equity in the consolidated financial statements, and established a single method of accounting for changes in a parent’s ownership interest in a subsidiary which does not result in deconsolidation, referred to as FASB ASC Topic 810. The FASB ASC Topic 810 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of FASB ASC Topic 810 are applied prospectively. The Company adopted the provisions of FASB ASC Topic 810 on January 1, 2009. The adoption of FASB ASC Topic 810 did not have a significant impact on the Company’s consolidated financial statements.

In April 2008, the FASB issued an accounting standard which amended the factors to be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset, referred to as FASB ASC Topic 350. The intent of the accounting standard was to improve the consistency between the useful life of a recognized intangible asset under FASB ASC Topic 350 and the period of expected cash flows used to measure the fair value of the asset under FASB ASC Topic 805 and other GAAP. The FASB ASC Topic 350 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Upon becoming effective the FASB ASC Topic 350 did not have a material impact on the Company’s consolidated financial statements.

3. RECENT ACCOUNTING PRONOUNCEMENTS (continued)

In May 2008, the FASB issued an accounting standard related to convertible debt instruments which may be settled in cash upon conversion (including partial cash settlement), referred to as FASB ASC Topic 470. The FASB ASC Topic 470 requires the issuing entity of such instruments to separately account for the liability and equity components to represent the issuing entity’s nonconvertible debt borrowing interest rate when interest charges are recognized in subsequent periods. The provisions of FASB ASC Topic 470 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 FASB ASC Topic 470 to the Company’s $75 million, 3.5% convertible senior subordinated debentures (“3.5% Debentures”) required the retrospective restatement of all reporting periods beginning January 1, 2007. The Basis of Presentation and the Long-Term Debt footnotes herein contain additional details about the Company’s adoption of FASB ASC Topic 470.

In June 2008, the FASB issued an accounting standard which provides for unvested share-based payment awards containing 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, referred to as FASB ASC Topic 260. The FASB ASC Topic 260, as amended, is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Upon becoming effective, FASB ASC Topic 260 did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued an accounting standard to amend previously issued accounting standards related to the determination of fair value, referred to as FASB ASC Topic 820. As amended, FASB ASC Topic 820 provides additional guidance for estimating fair value when the volume and level of activity for an asset or liability has significantly decreased, and also includes guidance on identifying circumstances to indicate a transaction is not orderly. The FASB ASC Topic 820, as amended, is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively, with early adoption permitted for periods ending after March 15, 2009. Upon becoming effective, FASB ASC Topic 820, as amended, did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued an accounting standard to amend FASB ASC Topic 825 to require publicly traded companies disclose information about fair value of financial instruments in interim financial statements, as well as in annual financial statements. The FASB ASC Topic 825 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Upon becoming effective, FASB ASC Topic 825, as amended, did not have an impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued an accounting standard to amend the accounting standards for investments in debt and equity securities, referred to as FASB ASC Topic 320. The accounting standard amendment clarified the factors 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 or be required to 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 security’s amortized cost and its fair value as of the balance sheet date. The FASB ASC Topic 320, as amended, is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Upon becoming effective, FASB ASC Topic 320, as amended, did not have an impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued an accounting standard establishing the general rules of accounting for and disclosure of events occurring after the balance sheet date but before the financial statements are issued, referred to as FASB ASC Topic 855. The FASB ASC Topic 855 requires the disclosure of the date through which an entity has evaluated subsequent events and whether such date represents the date the financial statements were issued, or were available to be issued. The FASB ASC Topic 855 is effective for interim or annual reporting periods ending after June 15, 2009, and is applied prospectively. The Company’s adoption of FASB ASC Topic 855 did not have a material impact on the Company’s consolidated financial statements.

3. RECENT ACCOUNTING PRONOUNCEMENTS (continued)

In September 2009, the FASB approved an update to the accounting standard related to multiple-deliverable revenue arrangements currently within the scope of FASB ASC Topic 605. The updated accounting standard provides principles and guidance to be used to determine whether a revenue arrangement has multiple deliverables, and if so, how those deliverables should be separated. If multiple deliverables exist, the updated standard requires revenue received under the arrangement to be allocated using the estimated selling price of the deliverables if vendor-specific objective evidence or third-party evidence of selling price is not available. The updated accounting standard is effective for revenue arrangements entered into or materially modified in fiscal years beginning on, or after June 15, 2010, with early application permitted. The Company will determine the impact of the updated accounting standard as it enters into new revenue arrangements, or materially modifies any of its existing revenue arrangements.

4. INVESTMENTS

Investments consist of commercial paper, corporate bonds, and medium-term notes, government agency obligations and certificates of deposit. The Company’s policy is to invest in only high quality “AAA-rated” or investment-grade securities. Investments in debt securities are accounted for as ‘held-to-maturity’ and are recorded at amortized cost, which approximates fair value, 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 Company’s investments have remaining contractual maturities of less than 12 months and are classified as short-term. Upon maturity the Company uses a specific identification method.

A summary of Short-term investments as of September 30, 2009 and December 31, 2008 follows:

						Gross				Gross
(in $000’s)		Amortized				Unrecognized				Unrecognized				Fair
September 30, 2009		Cost				Gains				Losses				Value
Commercial paper		$	1,797			$	—			$	(1	)		$	1,796
Government agency obligations			47,898				84				—				47,982
Corporate bonds			3,019				2				(1	)			3,020
Asset-backed securities			—				—				—				—
Certificates of deposit			236				—				—				236
Total short-term investments		$	52,950			$	86			$	(2	)		$	53,034

						Gross				Gross
(in $000’s)		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

5. ACCOUNTS RECEIVABLE

The composition of accounts receivable, net is as follows:

		September 30,				December 31,
(in $000’s)		2009				2008
Gross accounts receivable		$	78,843			$	54,591
Less: Rebate reserve			(8,421	)			(4,800	)
Less: Chargeback reserve			(6,022	)			(4,056	)
Less: Other deductions			(2,857	)			(2,429	)
Accounts receivable, net		$	61,543			$	43,306

A roll forward of the chargeback and rebate reserves activity for the nine months ended September 30, 2009 and the year ended December 31, 2008 is as follows:

(in $000’s)		September 30,				December 31,
Rebate reserve		2009				2008
Beginning balance		$	4,800			$	3,603
Provision recorded during the period			33,655				20,361
Credits issued during the period			(30,034	)			(19,164	)
Ending balance		$	8,421			$	4,800

(in $000’s)		September 30,				December 31,
Chargeback reserve		2009				2008
Beginning balance		$	4,056			$	2,977
Provision recorded during the period			68,747				50,144
Credits issued during the period			(66,781	)			(49,065	)
Ending balance		$	6,022			$	4,056

Other deductions include allowance for uncollectible amounts and cash discounts. The Company maintains an allowance for doubtful accounts for estimated losses resulting from amounts deemed to be uncollectible from its customers, with such allowances for specific amounts on certain accounts. The Company recorded an allowance for uncollectible amounts of $301,000 and $828,000 at September 30, 2009 and December 31, 2008, respectively.

6. INVENTORY

Inventory, net at September 30, 2009 and December 31, 2008 consisted of the following:

		September 30,				December 31,
(in $000’s)		2009				2008
Raw materials		$	23,818			$	16,940
Work in process			2,028				1,397
Finished goods			16,229				16,504
Total inventory, net		$	42,075			$	34,841
Less: Non-current inventory, net			(3,164	)			(2,536	)
Total inventory-current, net		$	38,911			$	32,305

The Company recorded inventory reserves of $4,643,000 and $4,405,000 at September 30, 2009 and December 31, 2008, respectively.

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

When the Company concludes Food and Drug Administration (“FDA”) approval is expected within approximately six months, the Company will generally begin to schedule manufacturing process validation studies as required by the FDA to demonstrate the production process can be scaled up to manufacture commercial batches. Consistent with industry practice, the Company may build quantities of pre-launch inventories of certain products pending required final FDA approval and /or resolution of patent infringement litigation, when, in the Company’s assessment, such action is appropriate to increase the commercial opportunity, FDA approval is expected in the near term, and /or the litigation will be resolved in the Company’s favor.

The 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 $2,260,000 and $1,368,000 at September 30, 2009 and December 31, 2008, respectively.

The capitalization of unapproved pre-launch inventory involves risks, including, among other items, FDA approval of product may not occur; approvals may require additional or different testing and /or specifications than used for unapproved inventory, and, in cases where the unapproved inventory is for a product subject to litigation, the litigation may not be resolved or settled in favor of the Company. If any of these risks were to materialize and the launch of the unapproved product delayed or prevented, then the net carrying value of unapproved inventory may be partially or fully reserved. Generally, the selling price of a generic pharmaceutical product is at discount from the corresponding brand product selling price. Typically, a generic drug is easily substituted for the corresponding brand product, and once a generic product is approved, the pre-launch inventory is typically sold within the next three months. If the market prices become lower than the product inventory carrying costs, then the pre-launch inventory value is reduced to such lower market value. If the inventory produced exceeds the estimated market acceptance of the generic product and becomes short-dated, a carrying value reserve will be recorded. In all cases, the carrying value of the Company’s pre-launch product inventory, is lower than the respective estimated net selling prices.

7. PROPERTY, PLANT AND EQUIPMENT

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

		September 30,				December 31,
(in $000’s)		2009				2008
Land		$	2,270			$	2,270
Buildings and improvements			58,103				55,310
Equipment			54,872				49,983
Office furniture and equipment			7,320				6,733
Construction-in-progress			20,912				21,019
Property, plant and equipment, gross		$	143,477			$	135,315
Less: Accumulated depreciation			(47,020	)			(39,686	)
Property, plant and equipment, net		$	96,457			$	95,629

Depreciation expense was $2,614,000 and $2,350,000 for the three months ended September 30, 2009 and 2008, respectively, and $7,806,000 and $6,791,000 for the nine months ended September 30, 2009 and 2008, respectively.

8. ACCRUED EXPENSES

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

		September 30,				December 31,
(in $000’s)		2009				2008
Payroll-related expenses		$	13,835			$	15,147
Product returns			19,290				13,675
Income taxes payable			9,745				—
Shelf stock price protection			187				572
Medicaid rebates			857				584
Royalty expense			340				259
Physician detailing sales force fees			1,864				2,279
Legal and professional fees			5,979				2,087
Litigation settlements			—				4,526
Other			3,702				2,231
Total accrued expenses		$	55,799			$	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 agreed to dismiss the actions with prejudice, and defendants, including the Company, without admitting the allegations or any liability, agreed to pay the plaintiff class $9.0 million, of which the Company paid approximately $3.4 million in January 2009, with the balance paid by the Company’s 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, the Rx Partner, and the OTC Partners alliance agreements generally are not subject to returns. A roll forward of the return reserve activity for the nine months ended September 30, 2009 and the year ended December 31, 2008 is as follows:

(in $000’s)		September 30,				December 31,
Returns Reserve		2009				2008
(in $000’s)
Beginning balance		$	13,675			$	14,261
Provision related to sales recorded in the period			8,386				5,719
Credits issued during the period			(2,771	)			(6,305	)
Ending balance		$	19,290			$	13,675

9. INCOME TAXES

The Company calculates its interim income tax provision in accordance with FASB ASC Topics 270 and 740. At the end of each interim period, the Company makes an estimate of the annual expected effective tax rate and applies the estimated effective rate to its ordinary year-to-date 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 estimated effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year, projections of the proportion of income (or loss) earned and taxed in 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 estimated effective tax rate includes modifications, which were projected for the year, for share based compensation, the domestic manufacturing deduction, and state research and development credits, among others. During the year ended December 31, 2008, we recorded a valuation allowance related to the net operating losses generated by our wholly-owned subsidiary, Impax Laboratories (Taiwan), Inc. In the nine months ended September 30, 2009, we reversed the valuation allowance related to these net operating losses as a result of retroactive changes in Taiwan tax law published in the second quarter of 2009. Based upon the changes in Taiwan tax law, we determined it was more likely than not the results of future operations of the wholly-owned subsidiary will generate sufficient taxable income to realize the deferred tax assets related to its net operating loss carry forward.

The Company recorded a tax provision of $6,373,000 and $5,761,000, during the nine months ended September 30, 2009 and 2008, respectively, for federal and state income taxes and foreign taxes, which includes an accrual for uncertain tax positions of $676,000 and $0, respectively. The total amount of unrecognized tax benefits was $8,522,000 at September 30, 2009.

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. There were no amounts outstanding under the revolving credit facility as of September 30, 2009 and December 31, 2008, respectively.

Effective March 31, 2009, the Company entered into a third amendment to the Credit Agreement, which, among other matters, extended for one year the termination date to March 31, 2010; 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; 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 the Company’s net cash position was less than $50.0 million. In connection with the execution of the third amendment, the Company paid Wachovia Bank a commitment fee of $100,000. All other material terms of the Credit Agreement remained in full force and effect. During the nine months ended September 30, 2009 and 2008, the Company paid to Wachovia Bank unused line fees of $128,000 and $68,000, respectively.

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 Bank waived the Company’s failure to (i) timely deliver annual financial statements for the years ended December 31, 2004 to 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.

The Credit Agreement contains various financial covenants, the most significant of which include a “fixed charge coverage ratio” and a capital expenditure limitation. The fixed charge coverage ratio, applicable only for periods during which the Company’s net cash position is less than $50.0 million, requires EBITDA less cash paid for taxes, dividends, and certain capital expenditures, to be not less than 1.25 to 1.00 as compared to scheduled principal payments coming due in the next 12 months plus cash interest paid during the applicable period. The Company 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 September 30, 2009, the Company was in compliance with the various financial and information reporting covenants contained in the Credit Agreement.

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 Company’s $ 95,000,000 in aggregate principal amount of its 1.25% convertible senior subordinated debentures due 2024.

Each 3.5% Debenture was issued at a price of $1,000 and was convertible into Company common stock at an initial conversion price of $20.69 per share. The 3.5% Debentures were senior subordinated, unsecured obligations of the Company and ranked pari passu with the Company’s accounts payable and other liabilities, and were subordinate to certain senior indebtedness, including the Company’s credit agreement with Wachovia Bank. The 3.5% Debentures bore interest at the rate of 3.5% per annum. Interest on the 3.5% Debentures was payable on June 15 and December 15 of each year, beginning December 15, 2005.

While the 3.5% Debentures had a contractual maturity date of June 15, 2012 and could not be redeemed by the Company prior to maturity, holders of the 3.5% Debentures had 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.

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 Company’s short-term investments.

On June 15, 2009, at the request of the holders, the Company repurchased the remaining $ 12,750,000 principal amount of the 3.5% Debentures at 100% of face value plus accrued interest. Accordingly, as all of the 3.5% Debentures had been repurchased by the Company, there was no amount outstanding as of September 30, 2009.

11. LONG-TERM DEBT (continued)

Adoption of FASB ASC Topic 470

In May 2008, the FASB issued an accounting standard related to convertible debt instruments which may be settled in cash upon conversion (including partial cash settlement), referred to as FASB ASC Topic 470. The FASB ASC Topic 470 requires the issuing entity of such instruments to separately account for the liability and equity components to represent the issuing entity’s nonconvertible debt borrowing interest rate when interest charges are recognized in subsequent periods. The provisions of FASB ASC Topic 470 must be applied retrospectively for all periods presented even if the instrument has matured, has been extinguished, or has been converted as of its effective date.

Under FASB ASC Topic 470, interest expense is computed on the basis of the Company’s borrowing rate on debt without the conversion feature. The provisions of FASB ASC Topic 470 are applicable to the Company’s 3.5% Debentures as they have a cash settlement feature. The Company adopted FASB ASC Topic 470 on January 1, 2009, and applied its provisions to the consolidated financial statements on a retrospective basis, with the restatement of all reporting periods beginning January 1, 2007.

As noted above, the provisions of FASB ASC Topic 470 require issuers of debt securities to separate affected securities into two accounting components, including (i) the debt component, representing the issuer’s contractual obligation to pay principal and interest, and (ii) the equity component, representing the holder’s 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 FASB ASC Topic 470, 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 total value allocated to the conversion option as a component of stockholder’s equity was $11,170,000.

Notwithstanding their stated June 2012 maturity date, at their June 2005 issuance date, the Company had expected the 3.5% Debentures to actually mature on 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.

11. LONG-TERM DEBT (continued)

The Company amortized the $11,513,000 discount on the 3.5% Debentures over the expected life of 48 months using the effective interest method; accordingly, the discount was fully amortized as of June 15, 2009. The following table summarizes the amount of interest cost recognized for the three and nine months ended September 30, 2009 and 2008:

		Three Months Ended:								Nine Months Ended:
		September 30,				September 30,				September 30,				September 30,
(in $000’s)		2009				2008				2009				2008
Contractual interest		$	—			$	456			$	202			$	1,956
Discount amortization			—				460				241				1,946
Deferred financing cost amortization			—				87				61				319
Total interest cost		$	—			$	1,003			$	504			$	4,221
Effective interest rate on 3.5% Debentures			—	%			8.4	%			8.6	%			8.4	%

The following table summarizes the net carrying value of the Company’s long-term debt:

		September 30,				December 31,
(in $000’s)		2009				2008
3.5% Debentures face value		$	—			$	12,750
Unamortized discount			—				(241	)
3.5% Debentures net carrying amount			—				12,509
Subordinated promissory note — (1)			—				7,760
Vendor financing agreement (2)			—				137
Total Debt		$	—			$	20,406
Less: Current portion			—				(14,416	)
Long-term portion		$	—			$	5,990

12. ALLIANCE AND COLLABORATION AGREEMENTS

Strategic Alliance Agreement with Teva

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

		Nine Months				Inception
		Ended				Through
(in $000’s)		September 30,				Dec 31,
Deferred revenue		2009				2008
Beginning balance		$	200,608			$	—
Additions:
Cost-sharing			525				5,953
Product-related deferrals			34,026				376,071
Sub-total			34,551				382,024
Exclusivity charges			—				(50,600	)
Forgiveness of advance deposit			—				6,000
Forgiveness of interest			—				4,370
Stock repurchase			—				2,157
Total additions		$	34,551			$	343,951
Less: amounts recognized:
Forgiveness of advance deposit		$	(249	)		$	(2,499	)
Forgiveness of interest			(183	)			(1,823	)
Stock repurchase			(90	)			(899	)
Cost-sharing			(489	)			(2,481	)
Product-related revenue			(29,159	)			(135,641	)
Total amount recognized			(30,170	)			(143,343	)
Total deferred revenue		$	204,989			$	200,608

		Nine Months				Inception
(in $000’s)		Ended				Through
Deferred product		September 30,				Dec 31,
manufacturing costs		2009				2008
Beginning balance		$	88,361			$	—
Additions			19,053				151,476
Less amounts amortized			(15,044	)			(63,115	)
Total deferred product manufacturing costs		$	92,370			$	88,361

12. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

OTC Partners Alliance Agreements

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

		Nine Months				Inception
		Ended				Through
(in $000’s)		September 30,				Dec 31,
Deferred revenue		2009				2008
Beginning balance		$	21,044			$	—
Additions:
Upfront fees and milestone payments			—				8,436
Cost-sharing and other			—				1,642
Product-related deferrals			1,787				81,866
Total additions		$	1,787			$	91,944
Less: amount recognized:
Upfront fees and milestone payments			(207	)			(7,469	)
Cost-sharing and other			(84	)			(1,438	)
Product-related revenue			(4,964	)			(61,993	)
Total amount recognized			(5,255	)			(70,900	)
Total deferred revenue		$	17,576			$	21,044

		Nine Months				Inception
(in $000’s)		Ended				Through
Deferred product		September 30,				Dec 31,
manufacturing costs		2009				2008
Beginning balance		$	18,361			$	—
Additions:			1,800				75,941
Less: amount amortized:			(4,706	)			(57,580	)
Total deferred product manufacturing costs		$	15,455			$	18,361

12. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

Supply and Distribution Agreement with DAVA Pharmaceuticals, Inc.

On March 30, 2007, the Company entered into an agreement settling Purdue’s 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 Company’s 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
		Through
(in $000’s)		April
Deferred revenue		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		$	—

		Inception
(in $000’s)		Through
Deferred product		April
manufacturing costs		2008
Beginning balance		$	—
Additions:			29,044
Less: amount amortized:			(29,044	)
Total deferred product manufacturing costs		$	—

12. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

Joint Development Agreement with Medicis Pharmaceutical Corporation

The Joint Development Agreement provides for the Company and Medicis to collaborate in the development of a total of five dermatological products. The Company received a $40,000,000 upfront payment, paid by Medicis in December 2008. The Company has also received two $5,000,000 milestone payments, paid by Medicis in March 2009 and September 2009, and has the potential to receive up to $13,000,000 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:

		Nine Months				Inception
		Ended				Through
(in $000’s)		September 30,				Dec 31,
Deferred revenue		2009				2008
Beginning balance		$	39,167			$	—
Additions:
Upfront fees and milestone payments			10,000				40,000
Product-related deferrals			—				—
Total additions		$	10,000			$	40,000
Less: amounts recognized:
Upfront fees and milestone payments			(8,406	)			(833	)
Product-related revenue			—				—
Total amount recognized			(8,406	)			(833	)
Total deferred revenue		$	40,761			$	39,167

12. ALLIANCE AND COLLABORATION 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 Shire’s Carbatrol product. The Company was obligated to perform the detailing sales calls for a period of three years which began on July 1, 2006 and ended on June 30, 2009. The Shire Agreement required Shire to pay the Company a sales force fee of up to $200,000 annually for each of as many as 66 sales force members. The Company recognized $ 6,508,000 and $9,728,000 in sales force fee revenue for the nine months ended September 30, 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.

12. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

Agreements with Wyeth

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 commenced on July 1, 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 Company’s sales force. Wyeth owns the product and is responsible for all pricing and marketing literature as well as product manufacture and fulfillment. The Company recognizes 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. The Company recognized $3,499,000 and $0 in sales force fee revenue for the nine months ended September 30, 2009 and 2008, respectively, under the Co-Promotion Agreement, with such amounts presented in the captioned line item “Promotional Partner” under revenues on the statement of operations.

Settlement and Release Agreement

In June 2008, the Company entered into a Settlement and Release Agreement (“Settlement Agreement”) with Wyeth. 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 Company’s ANDA for generic venlafaxine hydrochloride capsules, (ii) provided a date certain for the manufacture and launch of its generic venlafaxine product, and (iii) provided for a $1,000,000 payment by Wyeth to the Company as reimbursement for legal fees associated with the patent infringement lawsuit. The Company recorded the $1,000,000 legal fee reimbursement received from Wyeth as a reduction of its patent litigation operating expense on the consolidated statement of operations during the fourth quarter of 2008.

License Agreement

In June 2008, the Company and Wyeth also entered into a License Agreement whereby Wyeth granted to the Company a non-exclusive license, allowing the Company the right (but not the obligation) to manufacture and market the Company’s generic venlafaxine product in the United States of America. The license effective date is expected to be on or about June 1, 2011. The Company will pay Wyeth a royalty fee on the sale of its generic venlafaxine product under the license, computed as a percentage of gross profits, as defined in the License Agreement. The license royalty fee term begins with the license effective date and ends on the expiration of the Wyeth patents covered by the License Agreement. The Company is solely responsible for manufacturing and marketing its generic venlafaxine product. If the Company chooses to manufacture its generic product, sales of such generic venlafaxine 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 Company’s 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 September 30, 2009, the Company had not commenced sales of its generic venlafaxine product.

12. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

Exclusive License, Development and Supply Agreement with Putney

On July 31, 2007, the Company, and Putney Inc. (“Putney”), entered into an Exclusive License, Development and Supply Agreement (“Agreement”). Under the Agreement, the Company and Putney agreed to collaborate on the development and commercialization of a generic equivalent of the Rimadyl^®. chewable tablets in 25mg, 75mg, and/or 100mg dosage strengths.

In May 2009, the Company received a $50,000 milestone payment from Putney upon completion of successful pivotal bioequivalence studies. The Company has the potential to receive a $50,000 contingent additional milestone payment upon final FDA approval of an Abbreviated New Animal Drug Application (“ANADA”). To the extent the ANADA is approved by the FDA, the Company will be the exclusive manufacturer of the product, while Putney will have exclusive rights to market and sell the product in the United States. Putney will pay the Company a profit share on any sales of the new product.

The term of the Agreement is a period of six years from the date of first commercial sale. At this time, the Company estimates a June 2010 FDA ANADA approval and product launch. Accordingly, the life of the Agreement with Putney is currently estimated to be a period of 107 months beginning on the July 31, 2007 signing date, and ending on June 30, 2016.

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 Company’s Amended and Restated 2002 Equity Incentive Plan (“2002 Plan”) vest over a three or four year period and have a term of ten years.

Total share-based compensation expense recognized in the consolidated statement of operations was as follows:

		Three Months Ended:								Nine Months Ended:
		September 30,				September 30,				September 30,				September 30,
(in $000’s)		2009				2008				2009				2008
Manufacturing expenses		$	409			$	352			$	1,145			$	1,202
Research and development			655				541				1,906				1,713
Selling, general & administrative			922				485				2,128				1,543
Total		$	1,986			$	1,378			$	5,179			$	4,458

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			1,803,196			$	6.06
Options exercised			(1,068,177	)		$	3.32
Options forfeited			(1,337,827	)		$	13.85
Outstanding at September 30, 2009			7,677,432			$	9.90
Vested and expected to vest at September 30, 2009			7,659,816			$	10.02
Options exercisable at September 30, 2009			4,456,968			$	11.29

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 Company’s common stock over the period commensurate with the expected term of the stock options. The expected term calculation is based on the “simplified” method described in SAB No. 107, Share-Based Payment and SAB No. 110, Share-Based Payment. 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 Company’s 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			629,152			$	6.03
Vested			(42,800	)		$	9.08
Forfeited			(18,598	)		$	7.77
Non-vested at September 30, 2009			967,470			$	7.53

13. SHARE-BASED COMPENSATION (continued)

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

As of September 30, 2009, the Company had total unrecognized share-based compensation expense, net of estimated forfeitures, of $18,830,000 related to all of its share-based awards, which will be recognized over a weighted average period of 2.4 years. The intrinsic value of options exercised during the nine months ended September 30, 2009 and 2008 was $2,970,000 and $1,742,000, respectively. The total fair value of restricted shares which vested during the nine months ended September 30, 2009 and 2008 was $389,000 and $0, respectively. In May 2009, the Company’s stockholders approved an increase of 1,900,000 in the number of shares available for issuance of equity incentive awards including, stock options, restricted stock awards, and stock appreciation rights under the Company’s 2002 Plan. As of September 30, 2009, the Company had 2,279,954 shares available for issuance of equity incentive awards.

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 Company’s common stock. During the nine months ended September 30, 2009 and 2008, the Company did not issue any preferred stock.

Common Stock

The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 90,000,000 shares of common stock with $0.01 par value.

Shareholders Rights Plan

On January 20, 2009, the Board of Directors approved the adoption of a shareholder rights plan and declared a dividend of one preferred share purchase right for each outstanding share of common stock of the Company. Under certain circumstances, if a person or group acquires, or announces its intention to acquire, beneficial ownership of 20% or more of the Company’s outstanding common stock, each holder of such right (other than the third party triggering such exercise), would be able to purchase, upon exercise of the right at a $15 exercise price, subject to adjustment, the number of shares of the Company’s common stock having a market value of two times the exercise price of the right. Subject to certain exceptions, if the Company is consolidated with, or merged into, another entity and the Company is not the surviving entity in such transaction or shares of the Company’s outstanding common stock are exchanged for securities of any other person, cash or any other property, or more than 50% of the Company’s assets or earning power is sold or transferred, then each holder of the rights would be able to purchase, upon the exercise of the right at a $15 exercise price, subject to adjustment, the number of shares of common stock of the third party acquirer having a market value of two times the exercise price of the right. The rights 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.

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 and nine months ended September 30, 2009 and 2008 was as follows:

		Three Months Ended:								Nine Months Ended:
		September 30,				September 30,				September 30,				September 30,
(in $000’s except per share amounts)		2009				2008				2009				2008
Numerator:
Net income (loss)		$	6,685			$	(10,530	)		$	11,917			$	7,018
Denominator:
Weighted average common shares outstanding			60,559,064				59,166,319				60,130,608				58,993,633
Effect of dilutive options and common stock purchase warrants			688,636				—				536,619				1,820,074
Diluted weighted average common shares outstanding			61,247,700				59,166,319				60,667,227				60,813,707
Basic net income per share		$	0.11			$	(0.18	)		$	0.20			$	0.12
Diluted net income per share		$	0.11			$	(0.18	)		$	0.20			$	0.12

For the three months ended September 30, 2009 and 2008, the Company excluded 5,859,308 and 5,544,901, respectively, and for the nine months ended September 30, 2009 and 2008, the Company excluded 7,133,607 and 5,440,101, respectively, of stock options from the computation of diluted net income per common share as the effect of these options would have been anti-dilutive.

FASB ASC Topic 260 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 Company’s 3.5% Debentures, however, as the principal portion must be paid in cash, FASB ASC Topic 260 prohibits the use of the “if-converted” method, 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 FASB ASC Topic 260, diluted earnings per share is computed 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 Company’s 3.5% Debentures potential conversion premium, the 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 Company’s 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.

16. COMPREHENSIVE INCOME

		Three Months Ended:								Nine Months Ended:
		September 30,				September 30,				September 30,				September 30,
(in $000’s)		2009				2008				2009				2008
Net income (loss)		$	6,685			$	(10,530	)		$	11,917			$	7,018
Currency translation adjustments			351				(905	)			380				(659	)
Comprehensive income			7,036				(11,435	)			12,297				6,359
Comprehensive income attributable to the noncontrolling interest			—				—				—				—
Comprehensive income attributable to Impax Laboratories, Inc.		$	7,036			$	(11,435	)		$	12,297			$	6,359

17. SEGMENT INFORMATION

The Company has two reportable segments, the “Global Pharmaceuticals Division” (“Global Division”) and the “Impax Pharmaceuticals Division” (“Impax Division”). The Company currently markets and sells product within the continental United States 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 theses services through the research and development group in its Global Division.

The Impax Division is engaged in the development of proprietary brand pharmaceutical products through improvements to already-approved pharmaceutical products to address central nervous system (“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 Company’s chief operating decision maker evaluates the financial performance of the Company’s segments based upon segment Income (loss) before income taxes. Items below Income (loss) from operations are not reported by segment, except litigation settlements, since they are excluded from the measure of segment profitability reviewed by the Company’s chief operating decision maker. Additionally, general and administrative expenses, certain selling expenses, certain litigation settlements, and non-operating income and expenses are included in “Corporate and Other.” The Company does not report balance sheet information by segment since it is not reviewed by the Company’s chief operating decision maker. Accounting policies for the Company’s segments are the same as those described above in the discussion of “Revenue Recognition” and in the “Summary of Significant Accounting Policies” in the Company’s Form 10K for the year ended December 31, 2008. The Company has no inter-segment revenue.

17. SEGMENT INFORMATION (continued)

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 $000’s)		Global				Impax				Corporate				Total
Three Months Ended September 30, 2009		Division				Division				and Other				Company
Revenue, net		$	61,447			$	3,499			$	—			$	64,946
Cost of revenue			25,098				2,957				—				28,055
Research and development			8,909				6,334				—				15,243
Patent Litigation			1,647				—				—				1,647
Income (loss) before provision for income taxes		$	23,232			$	(6,553	)		$	(6,499	)		$	10,180

(in $000’s)		Global				Impax				Corporate				Total
Three Months Ended September 30, 2008		Division				Division				and Other				Company
Revenue, net		$	33,536			$	3,238			$	—			$	36,774
Cost of revenue			19,296				3,000				—				22,296
Research and development			12,253				3,935				—				16,188
Patent Litigation			1,876				—				—				1,876
Income (loss) before provision for income taxes		$	(4,246	)		$	(4,235	)		$	(9,899	)		$	(18,380	)

(in $000’s)		Global				Impax				Corporate				Total
Nine Months Ended September 30, 2009		Division				Division				and Other				Company
Revenue, net		$	172,268			$	10,007			$	—			$	182,275
Cost of revenue			72,339				9,250				—				81,589
Research and development			28,761				17,983				—				46,744
Patent Litigation			4,058				—				—				4,058
Income (loss) before provision for income taxes		$	59,482			$	(19,754	)		$	(21,438	)		$	18,290