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		(I.R.S. Employer Identification No.)
incorporation or organization)
30831 Huntwood Avenue, Hayward, CA		94544
(Address of principal executive offices)		(Zip Code)

(510) 476-2000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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):

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 1, 2010, there were 64,242,134 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, 2010 (unaudited) and December 31, 2009			3
- Consolidated Statements of Operations for each of the three and nine months ended September 30, 2010 and 2009 (unaudited)			4
- Consolidated Statements of Cash Flows for each of the nine months ended September 30, 2010 and 2009 (unaudited)			5
- Notes to Consolidated Financial Statements (unaudited)			7
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			44
Item 3: Quantitative and Qualitative Disclosures About Market Risk			74
Item 4: Controls and Procedures			74
PART II: OTHER INFORMATION
Item 1: Legal Proceedings			75
Item 1A: Risk Factors			78
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds			79
Item 3: Defaults Upon Senior Securities			80
Item 4: (Removed and Reserved)			80
Item 5: Other Information			80
Item 6: Exhibits			81
SIGNATURES			82
EXHIBIT INDEX			83
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

Impax Laboratories, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

		September 30,				December 31,
		2010				2009
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	165,772			$	31,770
Short-term investments			192,579				58,599
Accounts receivable, net			95,567				185,854
Inventory, net			42,036				49,130
Current portion of deferred product manufacturing costs-alliance agreements			3,006				11,624
Current portion of deferred income taxes			37,114				32,286
Prepaid expenses and other current assets			2,958				4,748
Total current assets			539,032				374,011
Property, plant and equipment, net			103,066				101,650
Deferred product manufacturing costs-alliance agreements			8,231				96,619
Deferred income taxes, net			1,396				48,544
Other assets			25,587				12,358
Goodwill			27,574				27,574
Total assets		$	704,886			$	660,756
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	19,156			$	23,295
Accrued expenses			82,083				62,055
Accrued income taxes payable			32,942				31,627
Accrued profit sharing and royalty expenses			15,235				53,695
Current portion of deferred revenue-alliance agreements			19,438				33,196
Total current liabilities			168,854				203,868
Deferred revenue-alliance agreements			36,773				224,522
Other liabilities			13,645				10,139
Total liabilities		$	219,272			$	438,529
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred Stock, $0.01 par value, 2,000,000 shares authorized, 0 shares outstanding at September 30, 2010 and December 31, 2009		$	—			$	—
Common stock, $0.01 par value, 90,000,000 shares authorized and 63,800,776 and 62,210,089 shares issued at September 30, 2010 and December 31, 2009, respectively			638				622
Additional paid-in capital			247,764				223,239
Treasury stock — 243,729 shares			(2,157	)			(2,157	)
Accumulated other comprehensive income (loss)			366				(524	)
Retained earnings			238,824				828
			485,435				222,008
Noncontrolling interest			179				219
Total stockholders’ equity			485,614				222,227
Total liabilities and stockholders’ equity		$	704,886			$	660,756

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,
		2010				2009				2010				2009
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Revenues:
Global Product sales, net		$	91,051			$	46,636			$	537,794			$	123,144
Private Label Product sales			528				1,752				1,539				5,269
Rx Partner			202,800				8,328				213,504				30,183
OTC Partner			2,365				1,769				6,439				5,255
Research Partner			3,714				2,962				10,593				8,406
Promotional Partner			3,535				3,499				10,538				10,077
Other			—				—				—				11
Total revenues			303,993				64,946				780,407				182,275
Cost of revenues			143,122				28,055				291,589				81,589
Gross profit			160,871				36,891				488,818				100,686
Operating expenses:
Research and development			23,846				15,243				63,264				46,744
Patent litigation			1,033				1,647				4,786				4,058
Litigation settlement			—				818				—				1,674
Selling, general and administrative			12,632				9,020				37,136				29,926
Total operating expenses			37,511				26,728				105,186				82,402
Income from operations			123,360				10,163				383,632				18,284
Other (expense) income, net			(91	)			(6	)			(134	)			52
Interest income			405				180				680				636
Interest expense			(38	)			(185	)			(108	)			(735	)
Income before income taxes			123,636				10,152				384,070				18,237
Provision for income taxes			48,501				3,495				146,114				6,373
Net income before noncontrolling interest			75,135				6,657				237,956				11,864
Add back loss attributable to noncontrolling interest			28				28				40				53
Net income		$	75,163			$	6,685			$	237,996			$	11,917
Net Income per share:
Basic		$	1.20			$	0.11			$	3.85			$	0.20
Diluted		$	1.15			$	0.11			$	3.65			$	0.20
Weighted average common shares outstanding:
Basic			62,435,116				60,559,064				61,778,465				60,130,608
Diluted			65,470,341				61,247,700				65,171,055				60,667,227

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

Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

		Nine Months Ended
		September 30,				September 30,
		2010				2009
		(unaudited)				(unaudited)
Cash flows from operating activities:
Net income		$	237,996			$	11,917
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation			9,066				7,806
Amortization of 3.5% Debentures discount and deferred financing costs			—				301
Amortization of Credit Agreement deferred financing costs			25				50
Accretion of interest income on short-term investments			(374	)			(424	)
Deferred income taxes (benefit)			46,657				(9,430	)
Provision for uncertain tax positions			35				695
Tax benefit related to the exercise of employee stock options			(4,337	)			—
Deferred revenue-Alliance Agreements			22,947				36,388
Deferred product manufacturing costs-Alliance Agreements			(9,739	)			(20,853	)
Recognition of deferred revenue-Alliance Agreements			(224,454	)			(43,844	)
Amortization of deferred product manufacturing costs-Alliance Agreements			106,746				29,750
Accrued profit sharing and royalty expense			86,985				523
Payments of profit sharing and royalty expense			(125,445	)			(455	)
Payments of exclusivity period fees			—				(6,000	)
Payments of accrued litigation settlements			(5,865	)			(8,037	)
Share-based compensation expense			7,706				5,179
Bad debt expense			215				131
Changes in certain assets and liabilities:
Accounts receivable			90,072				(18,368	)
Inventory			7,094				(6,606	)
Prepaid expenses and other assets			(11,225	)			1,346
Accounts payable, accrued expenses and income taxes payable			22,349				14,824
Other liabilities			3,431				2,740
Net cash provided by (used in) operating activities		$	259,885			$	(2,367	)
Cash flows from investing activities:
Purchase of short-term investments			(306,784	)			(49,563	)
Maturities of short-term investments			173,178				47,748
Purchases of property, plant and equipment			(10,541	)			(8,405	)
Net cash (used in) investing activities		$	(144,147	)		$	(10,220	)
Cash flows from financing activities:
Repayment of long-term debt			—				(12,887	)
Tax benefit related to the exercise of employee stock options			4,337				—
Proceeds from exercise of stock options and ESPP			13,927				3,776
Net cash provided by (used in) financing activities		$	18,264			$	(9,111	)
Net increase (decrease) in cash and cash equivalents		$	134,002			$	(21,698	)
Cash and cash equivalents, beginning of period		$	31,770			$	69,275
Cash and cash equivalents, end of period		$	165,772			$	47,577

Supplemental disclosure of non-cash investing and financing activities:

		Nine Months Ended
		September 30,				September 30,
		2010				2009
(in $000s)
Cash paid for interest		$	108			$	597
Cash paid for income taxes		$	98,201			$	187

Accrued vendor invoices of approximately $4,022,000 and $1,391,000 at September 30, 2010 and September 30, 2009, respectively, are excluded from the purchase of property, plant, and equipment and the change in accounts payable and accrued expenses.

The accompanying notes are an integral part of these 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.

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, 2010. 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, 2010.

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, 2009 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 of equity incentive awards issued to employees and directors, and estimates used in applying the Company’s revenue recognition policy including those related to accrued chargebacks, rebates, product returns, Medicare, Medicaid, and other government rebate programs, shelf-stock adjustments, and the timing and amount of deferred and recognized revenue and deferred and amortized manufacturing costs under the Company’s several alliance and collaboration agreements. Actual results may differ from estimated results. Certain prior year amounts have been reclassified to conform to the current year presentation.

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

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, additionally: 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 both of the following criteria are met, including: the delivered item has value to the customer on a stand alone basis; and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. Under FASB ASC Topic 605, 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 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. A summary of each of these deductions is as follows:

Chargebacks — The Company’s chargeback is the difference between the Company’s invoice price to a wholesaler and the final price paid by the wholesaler. The final price paid by the wholesaler can be lower than the Company’s invoice price based upon the customer to whom the wholesaler sells the Company’s products. The chargeback generally takes the form of a credit against the invoiced gross sales amount charged to the wholesaler. A provision for chargeback deductions is estimated and recorded in the same period the revenue is recognized based upon the terms of the various chargeback arrangements in effect at the time of product shipment. The Company monitors actual chargebacks granted and compares them to the estimated provision for chargebacks to assess the reasonableness of the chargebacks reserve at each balance sheet date on a quarterly basis.

Rebates — The Company maintains various rebate programs with its Global products customers. The rebate programs are integral to the Company’s effort to maintain a competitive position in its marketplace, as well as to promote greater product sales along with customer loyalty. The rebates generally take the form of a credit against the invoiced gross sales amount charged to a customer for products shipped. A provision for rebate deductions is estimated and recorded in the same period when revenue is recognized based upon the terms of the various rebate programs in effect at the time of product shipment. The Company monitors actual rebates granted and compares them to the estimated provision for rebates to assess the reasonableness of the rebates reserve at each balance sheet date on a quarterly basis.

2. REVENUE RECOGNITION (continued)

Returns — The Company allows its customers to return product (i) if approved by authorized personnel in writing or by telephone with the lot number and expiration date accompanying any request and (ii) if such products are returned within six months prior to or until twelve months following, the products’ expiration date. The Company estimates a provision for product returns as a percentage of gross sales based upon historical experience of Global product sales. The sales return reserve is estimated using a historical lag period — which is the time between when the product is sold and when it is ultimately returned, as determined from the Company’s system generated lag period report — and return rates, adjusted by estimates of the future return rates based on various assumptions, which may include changes to internal policies and procedures, changes in business practices, and commercial terms with customers, competitive position of each product, amount of inventory in the wholesaler supply chain, the introduction of new products, and changes in market sales information. The Company considers other factors when estimating its current period returns provision, including significant market changes which may impact future expected returns, and actual product returns. The Company monitors actual returns on a quarterly basis and may record specific provisions for returns it believes are not covered by historical percentages.

Medicaid Rebate — As required by law, the Company provides a rebate on drugs dispensed under the Medicaid program. The Company determines its estimated Medicaid rebate accrual primarily based on historical experience of claims submitted by the various states and any new information regarding changes in the Medicaid program which may impact the Company’s estimate of Medicaid rebates. In determining the appropriate accrual amount, the Company considers historical payment rates and processing lag for outstanding claims and payments. The Medicaid rebate accrual for the nine months ended September 30, 2010 includes the effect of the increase in the Medicaid rebate rates, which were effective on a retroactive basis to January 1, 2010, resulting from the March 2010 enactment into law of the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act (the “Acts”). The change in the Medicaid rebate rates resulting from the Acts did not have a material impact on the Company’s results of operations. The Company records estimates for Medicaid rebates as a deduction from gross sales, with corresponding adjustments to accrued liabilities.

Shelf-Stock Adjustment — The Company will occasionally reduce the selling price of certain products. The Company may issue a credit against the sales amount to customers based upon their remaining inventory of the product in question, provided the customer continues to make future purchases of product from the Company. This type of customer credit is referred to as a shelf-stock adjustment, which is the difference between the sales price and the revised lower sales price, multiplied by an estimate of the number of product units on hand at a given date. Decreases in selling prices are discretionary decisions made by the Company in response to market conditions, including estimated launch dates of competing products and estimated declines in market price.

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

2. REVENUE RECOGNITION (continued)

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, product returns, 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.

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 unrelated third-party pharmaceutical companies. The Company has entered into these alliance agreements to develop marketing and /or distribution relationships with its partners to fully leverage its technology platform.

The Rx Partners and OTC Partners alliance agreements obligate the Company to deliver multiple goods and/or services over extended periods. Such deliverables include manufactured pharmaceutical products, exclusive and semi-exclusive marketing rights, distribution licenses, and research and development services, among others. In exchange for these deliverables, the Company receives payments from its alliance agreement partners for product shipments, and may also receive royalty, profit sharing, and/or upfront or periodic milestone payments. Revenue received from the alliance agreement partners for product shipments under these agreements is not subject to deductions for chargebacks, rebates, product returns, and other pricing adjustments. Royalty and profit sharing amounts the Company receives under these agreements are calculated by the respective alliance agreement partner, with such royalty and profit share amounts generally based upon estimates of net product sales or gross profit which include estimates of deductions for chargebacks, rebates, product returns, and other adjustments the alliance agreement partners may negotiate with their customers. The Company records the alliance agreement partner’s adjustments to such estimated amounts in the period the alliance agreement partner reports the amounts to the Company.

The Company applied the updated guidance of ASC 605-25 “Multiple Element Arrangements” to the Strategic Alliance Agreement with Teva (“Teva Agreement”) during the three months ended September 30, 2010 — see Note 11 Alliance and Collaboration Agreements for a detailed discussion of the application of the updated guidance to the Teva Agreement. Rx Partner revenue is related to the Teva Agreement. All consideration received under the Teva Agreement is contingent, and therefore can not be allocated to the deliverables. The Company looks to the underlying delivery of goods and /or services which give rise to the payment of consideration under the Teva Agreement to determine the appropriate revenue recognition. Consideration received as a result of research and development-related activities performed under the Teva Agreement are initially deferred and recorded as a liability captioned “Deferred revenue-alliance agreements”. The Company recognizes the deferred revenue on a straight-line basis over the Company’s expected period of performance of such services. Consideration received as a result of the manufacture and delivery of products under the Teva Agreement is recognized at the time title and risk of loss passes to the customer — generally when product is received by Teva. The Company recognizes profit share as current period revenue when earned.

OTC Partner revenue is related to the Company’s alliance agreements with Merck (formerly Shering-Plough) and Pfizer (formerly Wyeth) with respect to supply of over-the-counter pharmaceutical products and related research and development services. The Company initially defers all revenue earned under its 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 OTC Partners. These deferred product manufacturing costs are recorded as an asset captioned “Deferred product manufacturing costs — alliance agreements.” The product manufacturing costs in excess of amounts reimbursable by the OTC Partners are recognized as current period cost of revenue. The Company recognizes revenue as OTC Partner revenue and amortizes deferred product manufacturing costs as cost of revenues — as the Company fulfills its contractual obligations. Revenue is recognized and associated costs are amortized over the respective alliance agreements’ term of the arrangement or the Company’s expected period of performance, using a modified proportional performance method. Under the modified proportional performance method of revenue recognition utilized by the Company, the amount recognized in the period of initial recognition is based upon the number of years elapsed under the 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 recognized is limited to the extent of cash collected and /or the fair value received. The result of the Company’s modified proportional performance method is a greater portion of the revenue is recognized in the initial period with the remaining balance being recognized ratably over either the remaining life of the arrangement or the Company’s expected period of performance of each respective alliance agreement.

Research Partner:

The “Research Partner” line item of the statement of operations includes revenue recognized under development agreements with other unrelated third-party pharmaceutical companies. The development agreements generally obligate the Company to provide research and development services over multiple periods. In exchange for this service, the Company received upfront payments upon signing of each development agreement and is eligible to receive contingent milestone payments, based upon the achievement of contractually specified events. Additionally, the Company may also receive royalty payments from the sale, if any, of a successfully developed and commercialized product under one of these development agreements. Revenue received from the 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. Royalty fee income, if any, will be recognized by the Company as current period revenue when earned. The Company determined these agreements do 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 unrelated third-party pharmaceutical companies. The promotional services agreements obligate the Company to provide physician detailing sales calls to promote its partners’ branded drug products over multiple periods. In exchange for this service, the Company has received fixed fees generally based on either the number of sales force representatives utilized in providing the services, or the number of sales calls made (up to contractual maximum amounts). The Company recognizes revenue from providing physician detailing services as those services are provided and as performance obligations are met and contingent payments, if any, at the time when they are earned. The Company determined these agreements do not include multiple deliverables under FASB ASC Topic 605.

Shipping and Handling Fees and Costs

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

3. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2009, the FASB approved an update to the accounting standard related to multiple-element revenue arrangements currently within the scope of FASB ASC Topic 605-25. The updated ASC 605-25 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 adopted the updated guidance of ASC 605-25 in the three months ended September 30, 2010. As required, the Company applied the updated guidance of ASC 605-25 retrospectively from the beginning of the Company’s fiscal year of adoption as of January 1, 2010. Accordingly, the updated guidance of ASC 605-25 will apply to all multiple-element revenue arrangements entered into or materially modified from January 1, 2010 forward. The application of the updated guidance did not have any impact on the Company’s revenue recognition during the three and six months ended June 30, 2010. The updated guidance of ASC 605-25 was applied to the Teva Agreement during the three months ended September 30, 2010. For a discussion of the impact of FASB ASC Topic 605-25 on the Teva Agreement, see “Part I: Financial Information — Item 1. Financial Statements — Footnote 11, Alliance and Collaboration Agreements — Strategic Alliance Agreement with Teva.”

In January 2010, the FASB issued Accounting Standards Update No. 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary — a Scope Clarification. This update provides amendments to Subtopic 810-10, and related guidance within US GAAP, to clarify the scope of the decrease in ownership provisions. For those entities that have already adopted Statement 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted Statement 160. Upon becoming effective this update did not have an impact on the Company’s consolidated financial statements.

In March 2010, the FASB issued Accounting Standards Update No. 2010-17, Revenue Recognition-Milestone Method of Revenue Recognition (Topic 605), which addresses accounting for arrangements in which a vendor satisfies its performance obligations over time, with all or a portion of the consideration contingent on future events, referred to as “milestones.” The Milestone Method of Revenue Recognition is limited to arrangements which involve research or development activities. A milestone is defined as an event for which, at the date the arrangement is entered into, there is substantive uncertainty whether the event will be achieved, and the achievement of the event is based in whole or in part on either the vendor’s performance or a specific outcome resulting from the vendor’s performance. In addition, the achievement of the event would result in additional payments being due to the vendor. The Milestone Method of Revenue Recognition allows a vendor to adopt an accounting policy to recognize arrangement consideration that is contingent on the achievement of a substantive milestone in its entirety in the period the milestone is achieved. The Milestone Method of Revenue Recognition is effective on a prospective basis, with an option for retrospective application for milestones achieved in fiscal years and interim periods within those fiscal years beginning on or after June 15, 2010. Early adoption is permitted. If an entity elects early application in a period that is not the first reporting period of its fiscal year, then the guidance must be applied retrospectively from the beginning of that fiscal year. The Company will determine the impact of the new accounting standard as it achieves milestones, and earns payments under either new or existing revenue arrangements.

4. INVESTMENTS

Investments consist of commercial paper, corporate bonds, and medium-term notes, government enterprise obligations, and /or 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, 2010 and December 31, 2009 follows:

						Gross				Gross
(in $000’s)		Amortized				Unrecognized				Unrecognized				Fair
September 30, 2010		Cost				Gains				Losses				Value
Commercial paper		$	106,656			$	47			$	(8	)		$	106,695
Government sponsored enterprise obligations			75,994				75				—				76,069
Corporate bonds			9,688				12				—				9,700
Certificates of deposit			241				—				—				241
Total short-term investments		$	192,579			$	134			$	(8	)		$	192,705

						Gross				Gross
(in $000’s)		Amortized				Unrecognized				Unrecognized				Fair
December 31, 2009		Cost				Gains				Losses				Value
Commercial paper		$	13,387			$	4			$	(1	)		$	13,390
Government sponsored enterprise obligations			41,953				32				(1	)			41,984
Corporate bonds			3,021				1				(1	)			3,021
Certificates of deposit			238				—				—				238
Total short-term investments		$	58,599			$	37			$	(3	)		$	58,633

5. ACCOUNTS RECEIVABLE

The composition of accounts receivable, net is as follows:

		September 30,				December 31,
(in $000’s)		2010				2009
Gross accounts receivable		$	138,128			$	254,094
Less: Chargeback reserve			(17,298	)			(21,448	)
Less: Rebate reserve			(16,993	)			(37,781	)
Less: Other deductions			(8,270	)			(9,011	)
Accounts receivable, net		$	95,567			$	185,854

A roll forward of the chargeback and rebate reserves activity for the nine months ended September 30, 2010 and the year ended December 31, 2009 is as follows:

(in $000’s)		September 30,				December 31,
Chargeback reserve		2010				2009
Beginning balance		$	21,448			$	4,056
Provision recorded during the period			141,653				126,105
Credits issued during the period			(145,803	)			(108,713	)
Ending balance		$	17,298			$	21,448

(in $000’s)		September 30,				December 31,
Rebate reserve		2010				2009
Beginning balance		$	37,781			$	4,800
Provision recorded during the period			73,397				72,620
Credits issued during the period			(94,185	)			(39,639	)
Ending balance		$	16,993			$	37,781

Other deductions include allowance for uncollectible amounts and cash discounts. The Company maintains an allowance for uncollectible amounts 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 $566,000 and $372,000 at September 30, 2010 and December 31, 2009, respectively.

6. INVENTORY

Inventory, net at September 30, 2010 and December 31, 2009 consisted of the following:

		September 30,				December 31,
(in $000’s)		2010				2009
Raw materials		$	30,789			$	30,758
Work in process			3,064				2,768
Finished goods			15,828				17,051
Total inventory, net		$	49,680			$	50,577
Less: Non-current inventory, net			(7,644	)			(1,447	)
Total inventory-current, net		$	42,036			$	49,130

The balance of inventory carrying value reserves were $5,274,000 and $4,646,000 at September 30, 2010 and December 31, 2009, 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 United States 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 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 $1,958,000 and $8,702,000 at September 30, 2010 and December 31, 2009, 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)		2010				2009
Land		$	2,270			$	2,270
Buildings and improvements			81,093				77,778
Equipment			65,938				59,612
Office furniture and equipment			8,118				7,425
Construction-in-progress			4,867				4,880
Property, plant and equipment, gross		$	162,286			$	151,965
Less: Accumulated depreciation			(59,220	)			(50,315	)
Property, plant and equipment, net		$	103,066			$	101,650

Depreciation expense was $2,998,000 and $2,614,000 for the three months ended September 30, 2010 and 2009, respectively, and $9,066,000 and $7,806,000 for the nine months ended September 30, 2010 and 2009, respectively.

8. ACCRUED EXPENSES

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

		September 30				December 31
(in $000’s)		2010				2009
Payroll-related expenses		$	15,235			$	15,274
Product returns			39,478				22,114
Shelf stock adjustments			614				225
Medicaid rebates			14,913				9,759
Physician detailing sales force fees			2,330				2,449
Legal and professional fees			4,651				3,660
Litigation settlements			—				5,865
Other			4,862				2,709
Total accrued expenses		$	82,083			$	62,055

Accrued Litigation Settlement Expenses

In January 2010, the Company entered into an agreement to settle a suit related to the Company’s Lipram UL products. Under the terms of this agreement, the Company agreed to reimburse the plaintiff for litigation costs, which was paid by the Company in January 2010. The Company recorded an accrued expense for this payment in the year ended December 31, 2009, along with corresponding incurred legal and professional fees, as litigation settlement expense in the consolidated statement of operations.

On January 28, 2009, the Company entered into an agreement settling the securities class actions pending in the United States 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.

Taiwan Facility Construction

The Company has constructed a facility in Jhunan Taiwan, R.O.C., currently utilized for manufacturing, research and development, warehouse, and administrative space. In conjunction with the construction of this facility, as of September 30, 2010, the Company entered into several contracts aggregating approximately $16,653,000, of which approximately $1,144,000 of remaining obligations are included in the other line in the table above. The Company cumulatively capitalized interest expense of $596,000 in conjunction with the construction of the Taiwan facility.

8. ACCRUED EXPENSES (continued)

Product Returns

The Company maintains a product return policy to allow customers to return product within specified guidelines. At the time of sale, the Company estimates a provision for product returns based upon historical experience for sales made through its Global Products sales channel. Sales of product under the Private Label, the Rx Partner, and the OTC Partners alliance agreements generally are not subject to returns. A roll forward of the product return reserve for the nine months ended September 30, 2010 and the year ended December 31, 2009, is as follows:

		September 30,				December 31,
Product Return Reserve		2010				2009
(in $000’s)
Beginning balance		$	22,114			$	13,675
Provision related to sales recorded in the period			20,340				11,847
Credits issued during the period			(2,976	)			(3,408	)
Ending balance		$	39,478			$	22,114

As of September 30, 2010, the Company had approximately $23,387,000 of open purchase order commitments, primarily for raw materials. The terms of these purchase order commitments are less than one year in duration.

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 taxable 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 such 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 United States, and the various state and local tax jurisdictions, as well as tax jurisdictions outside the United States, along with 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 nine months ended September 30, 2010, the Company recorded a tax provision of $146,114,000 for United States domestic income taxes and for foreign income taxes. The nine months ended September 30, 2010 tax provision also included an accrual for uncertain tax positions of $35,000. In the nine months ended September 30, 2009, the Company recorded a tax provision of $6,373,000 for United States domestic income taxes and for foreign income taxes. The nine months ended September 30, 2009 tax provision also included an accrual for uncertain tax positions of $676,000. The increase in the tax provision was driven by higher income before taxes in the nine months ended September 30, 2010. The tax provision for the nine months ended September 30, 2010 does not include the effect of the federal research and development tax credit which expired on December 31, 2009, and as of the September 30, 2010 balance sheet date, has not been reinstated. The tax provision for the nine months ended September 30, 2009 included the effect of the federal research and development tax credit.

10. REVOLVING LINE OF CREDIT

The Company has a $35,000,000 revolving credit facility under a credit agreement with Wells Fargo Bank, N.A. (“Credit Agreement”), with a January 31, 2011 expiration date, effective with a sixth amendment to the Credit Agreement executed in September 2010. 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, 2010 and December 31, 2009, respectively.

The interest rate for the revolving credit facility is set 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. The Company is required to pay an unused line fee of 50 basis points per annum and a servicing fee of $1,500 during any month in which no revolver loans are outstanding. During the nine months ended September 30, 2010 and 2009, the Company paid unused line fees of $133,000 and $128,000, respectively.

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 is limited to capital expenditures of no more than $25.0 million for each calendar year. The Credit Agreement also provides for certain information reporting covenants, including a requirement to provide certain periodic financial information. At September 30, 2010, the Company was in compliance with the various financial and information reporting covenants contained in the Credit Agreement.

11. ALLIANCE AND COLLABORATION AGREEMENTS

License and Distribution Agreement with Shire

In January 2006, the Company entered into a License and Distribution Agreement with an affiliate of Shire Laboratories, Inc. (“Shire License and Distribution Agreement”), under which the Company received a non-exclusive license to market and sell an authorized generic of Shire’s Adderall XR® product (“AG Product”) subject to certain conditions, but in any event by no later than January 1, 2010. The Company commenced sales of the AG Product in October 2009. Under the terms of the Shire License and Distribution Agreement, Shire is responsible for manufacturing the AG Product, and the Company is responsible for marketing and sales of the AG Product. The Company is required to pay a profit share to Shire on sales of the AG Product, of which the Company accrued a profit share payable to Shire of $86,755,000 and $0 on sales of the AG Product during the nine months ended September 30, 2010 and 2009, respectively, with a corresponding charge included in the cost of revenues line on the consolidated statement of operations.

11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

Strategic Alliance Agreement with Teva

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

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

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

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

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

	•		Research and development related activities (the Combined Unit) — Consideration received as a result of research and development related activities performed under the Teva Agreement will be deferred and recognized on the straight-line method over the Company’s expected period of performance of the research and development related services, which is estimated to be from July 2001 (following the June 2001 commencement of the Teva Agreement) to October 2014 (with FDA approval of the ANDA for the final product under the Teva Agreement).
	•		Manufacture and delivery of 10 products — Consideration received as a result of the manufacture and delivery of 10 products under the Teva Agreement will be recognized under the Company’s revenue recognition policy, as proscribed by SAB 104, as follows:

	•		Product shipments — The Company will account for the shipment of products under the Teva Agreement as current period revenue in accordance with its revenue recognition policy applicable to its Global products.
	•		Profit share — The Company will recognize profit share, if any, as current period revenue when earned.

•

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

The Company applied the updated guidance of ASC 605-25 to the Teva Agreement on a prospective basis beginning in the quarter ended September 30, 2010. In the three months and nine months ended September 30, 2010, the application of the updated guidance of ASC 605-25 had the effect of increasing Rx Partner revenue by $196,440,000, and increasing cost of revenues by $95,426,000, and correspondingly, basic earnings per share increased by approximately $0.98 and $1.01 for the three and nine months ended September 30, 2010, respectively. The increase in Rx Partner revenue as a result of applying the updated guidance of ASC 605-25 in the three months ended September 30, 2010, represents the recognition of previously deferred revenue which would otherwise have been recognized, under the previous accounting standards, over the remaining life of the Teva Agreement, using a modified proportional performance method. Under the previous accounting standards, in the three and nine months ended September 30, 2010, Rx Partner revenue would have been $5,922,000 and $16,627,000, respectively, cost of revenues would have been $47,998,000 and $196,466,000, respectively, and basic earnings per share would have been $0.21 and $2.85, respectively.

The Company previously determined, under the previous accounting standards, no single deliverable represented a separate unit of accounting as there was not sufficient objective and reliable evidence of the fair value of any single deliverable. As such, under the previous accounting standards, the Company was required to account for the entirety of the Teva Agreement as a single unit of accounting, resulting in the Company previously deferring revenue earned and product manufacturing costs incurred under the Teva Agreement and then recognizing such deferred revenue and amortizing such deferred manufacturing costs over the estimated life of the Teva Agreement utilizing a modified proportional performance method.

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

		Nine Months
		Ended				Inception
(in $000’s)		September 30,				Through
Deferred revenue		2010				Dec 31, 2009
Beginning balance		$	202,032			$	—
Additions:
Product-related and cost sharing			10,084				417,269
Exclusivity charges			—				(50,600	)
All other			—				12,527
Total additions		$	10,084			$	379,196
Less:
Amount recognized			(10,978	)			(177,164	)
Accounting adjustment			(196,440	)			—
Total deferred revenue		$	4,698			$	202,032

		Nine Months
(in $000’s)		Ended				Inception
Deferred product		September 30,				Through
manufacturing costs		2010				Dec 31, 2009
Beginning balance		$	94,040			$	—
Additions			7,416				175,565
Less:
Amount recognized			(6,030	)			(81,525	)
Accounting adjustment			(95,426	)			—
Total deferred product manufacturing costs		$	—			$	94,040

11. 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
		Ended				Inception
(in $000’s)		September 30				Through
Deferred revenue		2010				Dec 31, 2009
Beginning balance		$	16,162			$	—
Additions:
Upfront fees and milestone payments			—				8,436
Cost-sharing and other			—				1,642
Product-related deferrals			2,863				83,826
Total additions		$	2,863			$	93,904
Less: amount recognized			(6,438	)			(77,742	)
Total deferred revenue		$	12,587			$	16,162

		Nine Months
(in $000’s)		Ended				Inception
Deferred product		September 30,				Through
manufacturing costs		2010				Dec 31, 2009
Beginning balance		$	14,203			$	—
Additions			2,323				77,870
Less: amount recognized			(5,289	)			(63,667	)
Total deferred product manufacturing costs		$	11,237			$	14,203

11. 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 dermatology products, including four of the Company’s generic products and one branded advanced form of Medicis’s SOLODYN® product. Under the provisions of The Joint Development Agreement the Company received a $40,000,000 upfront payment, paid by Medicis in December 2008. The Company has also received an aggregate $12,000,000 in milestone payments composed of two $5,000,000 milestone payments, paid by Medicis in March 2009 and September 2009, and a $2,000,000 milestone payment received in December 2009. The Company has the potential to receive up to an additional $11,000,000 of contingent milestone payments upon achievement of certain contractually specified clinical and regulatory milestones, as well as the potential to receive royalty payments from sales, if any, by Medicis of its advanced form SOLODYN® brand product. Finally, to the extent the Company commercializes any of its four generic dermatology products covered by the Joint Development Agreement, the Company will pay to Medicis a 50% gross profit share on sales, if any, of such products.

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
		Ended				Inception
(in $000’s)		September 30,				Through
Deferred revenue		2010				Dec 31, 2009
Beginning balance		$	39,487			$	—
Additions:
Upfront fees and milestone payments			—				52,000
Product-related deferrals			—				—
Total additions		$	—			$	52,000
Less: amount recognized			(10,153	)			(12,513	)
Total deferred revenue		$	29,334			$	39,487

11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

Development and Co-Promotion Agreement with Endo Pharmaceuticals Inc.

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

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

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

11. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

Co-Promotion Agreement with Pfizer

In March 2010, the Company and Pfizer, Inc. (“Pfizer”) entered into the First Amendment to the Co-Promotion Agreement (originally entered into with Wyeth, now a wholly owned subsidiary of Pfizer) (“Pfizer Co-Promotion Agreement”). Under the terms of the Pfizer Co-Promotion Agreement, effective April 1, 2010, the Company provides physician detailing sales call services for Pfizer’s Lyrica® product to neurologists. The Company receives a fixed fee, effective January 1, 2010, subject to annual cost adjustment, for providing such physician detailing sales calls within a contractually defined range of an aggregate number of physician detailing sales calls rendered, determined on a quarterly basis. There is no opportunity for the Company to earn incentive fees under the terms of the Pfizer Co-Promotion Agreement. Pfizer is responsible for providing sales training to the Company’s physician detailing sales force personnel. Pfizer owns the product and is responsible for all pricing and marketing literature as well as product manufacture and fulfillment. The Company recognizes the physician detailing sales force fee revenue as the related services are performed and the performance obligations are met. The Company recognized $3,535,000 and $3,499,000 in the three months ended September 30, 2010 and 2009, respectively, and $10,538,000 and $3,499,000 in the nine months ended September 30, 2010 and 2009, respectively, under the Pfizer Co-Promotion Agreement, with such amounts presented in the captioned line item “Promotional Partner” revenue on the consolidated statement of operations.

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

Promotional Services Agreement with Shire

In January 2006, the Company entered into a three year Promotional Services Agreement with an affiliate of Shire Laboratories, Inc. (“Shire Co-Promotion Agreement”), under which the Company was engaged to perform physician detailing sales calls services in support of Shire’s Carbatrol® product, from July 1, 2006 to June 30, 2009. The Company recognized $0 in sales force fee revenue in each of the three months ended September 30, 2010 and 2009, and $0 and $6,508,000 in sales force fee revenue for the nine months ended September 30, 2010 and 2009, respectively, under the (expired) Shire Co-Promotion Agreement, with such amounts presented in the captioned line item “Promotional Partner” under revenues on the consolidated statement of operations.

12. SHARE-BASED COMPENSATION

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

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

		Three Months Ended:								Nine Months Ended:
		September 30,				September 30,				September 30,				September 30,
(in $000’s)		2010				2009				2010				2009
Manufacturing expenses		$	482			$	409			$	1,841			$	1,145
Research and development			797				655				2,535				1,906
Selling, general & administrative			1,194				922				3,330				2,128
Total		$	2,473			$	1,986			$	7,706			$	5,179

The following table summarizes stock option activity:

						Weighted Average
		Number of Shares				Exercise Price
		Under Option				per Share
Outstanding at December 31, 2009			8,229,818			$	9.87
Options granted			349,000			$	20.06
Options exercised			(1,481,766	)		$	8.75
Options forfeited			(122,342	)		$	9.55
Outstanding at September 30, 2010			6,974,710			$	10.63
Vested and expected to vest at September 30, 2010			6,918,474			$	10.64
Options exercisable at September 30, 2010			3,923,311			$	11.55

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, as the Company has limited historical experience of option exercise activity. 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, 2009			1,152,923			$	7.72
Granted			167,800			$	18.65
Vested			(234,219	)		$	7.67
Forfeited			(45,161	)		$	8.95
Non-vested at September 30, 2010			1,041,343			$	9.44

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

12. SHARE-BASED COMPENSATION (continued)

As of September 30, 2010, the Company had total unrecognized share-based compensation expense, net of estimated forfeitures, of $21,079,000 related to all of its share-based awards, which will be recognized over a weighted average period of 2.06 years. The intrinsic value of stock options exercised during the nine months ended September 30, 2010 and 2009 was $14,172,000 and $2,970,000, respectively. The total fair value of restricted stock awards which vested during the nine months ended September 30, 2010 and 2009 was $1,796,000 and $389,000, respectively. In May 2010, the Company’s stockholders approved an increase of 2,000,000 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, 2010, the Company had 3,114,817 shares of common stock available for issuance of stock options, restricted stock awards or stock appreciation rights.

13. STOCKHOLDERS’ EQUITY

Preferred Stock

Pursuant to its certificate of incorporation, the Company is authorized to issue 2,000,000 shares, $0.01 par value per share, “blank check” preferred stock, which enables the Board of Directors, from time to time, to create one or more new series of preferred stock. Each series of preferred stock issued can have the rights, preferences, privileges and restrictions designated by the Board of Directors. The issuance of any new series of preferred stock could affect, among other things, the dividend, voting, and liquidation rights of the Company’s common stock. During the nine months ended September 30, 2010 and 2009, the Company did not issue any preferred stock.

Common Stock

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

Shareholders Rights Plan

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

14. EARNINGS PER SHARE

The company’s earnings per share (EPS) includes basic net income per share, computed by dividing net income (as presented on the consolidated statement of operations), by the weighted-average number of common shares outstanding for the period, along with diluted earnings per share, 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 net income per common share for the three and nine months ended September 30, 2010 and 2009 was as follows:

		Three Months Ended:								Nine Months Ended:
		September 30,				September 30,				September 30,				September 30,
(in $000’s except per share amounts)		2010				2009				2010				2009
Numerator:
Net income		$	75,163			$	6,685			$	237,996			$	11,917
Denominator:
Weighted average common shares outstanding			62,435,116				60,559,064				61,778,465				60,130,608
Effect of dilutive options and common stock purchase warrants			3,035,225				688,636				3,392,590				536,619
Diluted weighted average common shares outstanding			65,470,341				61,247,700				65,171,055				60,667,227
Basic net income per share		$	1.20			$	0.11			$	3.85			$	0.20
Diluted net income per share		$	1.15			$	0.11			$	3.65			$	0.20

For the three months ended September 30, 2010 and 2009, the Company excluded 1,123,516 and 5,859,308, respectively and for the nine months ended September 30, 2010 and 2009, the Company excluded 1,121,991 and 7,133,607, 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.

15. COMPREHENSIVE INCOME

		Three Months Ended:								Nine Months Ended:
		September 30,				September 30,				September 30,				September 30,
(in $000’s)		2010				2009				2010				2009
Net income		$	75,163			$	6,685			$	237,996			$	11,917
Currency translation adjustments			(127	)			351				890				380
Comprehensive income			75,036				7,036				238,886				12,297
Comprehensive income attributable to the noncontrolling interest			—				—				—				—
Comprehensive income attributable to Impax Laboratories, Inc.		$	75,036			$	7,036			$	238,886			$	12,297

16. 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 its Global Division products within the continental United States of America 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 prescription products, directly to wholesalers, large retail drug chains, and others; the Private Label Product sales channel, for generic pharmaceutical over-the-counter and prescription products sold to unrelated third-party customers, who in-turn sell the products to third-parties under their own label; the Rx Partner sales channel, for generic prescription products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements; and the OTC Partner sales channel, for over-the-counter products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements. The Company also generates revenue in its Global Division from research and development services provided under a joint development agreement with another unrelated third-party pharmaceutical company, and reports such revenue under the caption “Research Partner” revenue on the consolidated statement of operations.

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

The Company’s chief operating decision maker evaluates the financial performance of the Company’s segments based upon segment income (loss) before income taxes. Items below income (loss) from operations are not reported by segment, except litigation settlements, since they are excluded from the measure of segment profitability reviewed by the Company’s chief operating decision maker. Additionally, general and administrative expenses, certain selling expenses, certain litigation settlements, and non-operating income and expenses are included in “Corporate and Other.” The Company does not report balance sheet information by segment since it is not reviewed by the Company’s chief operating decision maker. The accounting policies for the Company’s segments are the same as those described above in the discussion of “Revenue Recognition” and in the “Summary of Significant Accounting Policies” in the Company’s Form 10-K for the year ended December 31, 2009. The Company has no inter-segment revenue.

16. SEGMENT INFORMATION (continued)

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

(in $000’s)		Global				Impax				Corporate				Total
Three Months Ended September 30, 2010		Division				Division				and Other				Company
Revenue, net		$	300,128			$	3,865			$	—			$	303,993
Cost of revenue			140,279				2,843				—				143,122
Research and development			12,819				11,027				—				23,846
Patent Litigation			1,033				—				—				1,033
Income (loss) before provision for income taxes		$	141,870			$	(10,935	)		$	(7,299	)		$	123,636

(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				6,337				—				15,243
Patent Litigation			1,647				—				—				1,647
Income (loss) before provision for income taxes		$	23,232			$	(6,553	)		$	(6,527	)		$	10,152

(in $000’s)		Global				Impax				Corporate				Total
Nine Months Ended September 30, 2010		Division				Division				and Other				Company
Revenue, net		$	769,429			$	10,978			$	—			$	780,407
Cost of revenue			282,309				9,280				—				291,589
Research and development			32,608				30,656				—				63,264
Patent Litigation			4,786				—				—				4,786
Income (loss) before provision for income taxes		$	438,577			$	(31,436	)		$	(23,071	)		$	384,070

(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	)		$	(21,493	)		$	18,237

17. 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 products for which the Company is developing generic versions.

Under federal law, when a drug developer files an ANDA for a generic drug, seeking approval before expiration of a patent, which has been listed with the FDA as covering the brand name product, the developer must certify its product will not infringe the listed patent(s) and/or the listed patent is invalid or unenforceable (commonly referred to as a “Paragraph IV” certification). Notices of such certification must be provided to the patent holder, who may file a suit for patent infringement within 45 days of the patent holder’s receipt of such notice. If the patent holder files suit within the 45 day period, the FDA can review and tentatively approve the ANDA, but is prevented from granting final marketing approval of the product until a final judgment in the action has been rendered in favor of the generic, or 30 months from the date the notice was received, whichever is sooner. Lawsuits have been filed against the Company in connection the Company’s Paragraph IV certifications.

Should a patent holder commence a lawsuit with respect to an alleged patent infringement by the Company, the uncertainties inherent in patent litigation make the outcome of such litigation difficult to predict. The delay in obtaining FDA approval to market the Company’s product candidates as a result of litigation, as well as the expense of such litigation, whether or not the Company is ultimately successful, could have a material adverse effect on the Company’s results of operations and financial position. In addition, there can be no assurance any patent litigation will be resolved prior to the end of the 30-month period. As a result, even if the FDA were to approve a product upon expiration of the 30-month period, the Company may elect to not commence marketing the product if patent litigation is still pending.

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 generic pharmaceutical products covered by the Teva Agreement. With respect to 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; with respect to two of the products with ANDAs filed since the Teva Agreement was signed, Teva is required to pay 45% of the fees and costs; and with respect to the remaining two products, Teva is required to pay 50% of the fees and costs. The Company is responsible for the remaining fees and costs relating to the generic pharmaceutical products covered by the Teva Agreement.

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.

17. 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 Company’s submission of an ANDA seeking FDA permission to market Omeprazole Delayed Release Capsules, 10mg, 20mg and 40mg, constituted infringement of AstraZeneca’s 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 Company’s ANDA, and the Company and its alliance agreement partner, Teva, commenced commercial sales of the Company’s 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 AstraZeneca’s patents and these patents were not invalid. The court ordered FDA approval of the Company’s 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 court’s decision of infringement and validity. In January, 2010, AstraZeneca, Teva and the Company entered into a settlement agreement and the suits against both Teva and the Company were dismissed.

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 Company’s 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 Company’s motion for summary judgment of non-infringement with respect to two of the patents. 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 Teva’s sales based on four of the patents in suit, which patents are common to the Allegra® and Allegra-D® litigations. The district court denied Aventis’s 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.

17. LEGAL AND REGULATORY MATTERS (continued)

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 of the Company’s Paragraph IV Notices with respect to the Company’s 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 Company’s amended ANDA, which added 7.5mg, 15mg and 30mg strengths of the product. The cases were subsequently transferred to the U.S. District Court for the District of New Jersey. The Company filed an answer and counterclaims. Discovery was completed. The court issued its Markman decision and final pretrial orders in March 2010. The Company and Endo entered into a Settlement and License Agreement, and this matter was dismissed, on June 15, 2010.

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 Company’s filing of an ANDA relating to Tolterodine Tartrate Extended Release Capsules, 4 mg, generic to Detrol® LA, infringes three Pfizer patents. The Company filed an answer and counterclaims seeking declaratory judgment of non-infringement, invalidity, or unenforceability with respect to the patents in suit. In April 2008, the case was transferred to the U.S. District Court for the District of New Jersey. On September 3, 2008, an amended complaint was filed alleging infringement based on the Company’s ANDA amendment adding a 2mg strength. For one of the patents-in-suit, U.S. Patent No. 5,382,600, expiring on September 25, 2012 with pediatric exclusivity, the Company agreed by stipulation to be bound by the decision in Pfizer Inc. et al. v. Teva Pharmaceuticals USA, Inc., Case No. 04-1418 (D. N.J.). After the Pfizer court conducted a bench trial, it found the ‘600 patent not invalid on January 20, 2010, and that decision is on appeal to the U.S. Court of Appeals for the Federal Circuit. Discovery is proceeding in the Company’s case, 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 conducted hearings on claim construction in May 2009, and summary judgment in June 2009. In October 2009, the parties announced they had entered a settlement agreement allowing the Company to launch its product no later than March 2, 2010. A stipulated consent judgment was entered by the Court and the case was dismissed.

17. LEGAL AND REGULATORY MATTERS (continued)

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 Company’s 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 Company’s amended ANDA, which added 200 mg and 300 mg strengths of the product. The Company filed answers and counterclaims to those complaints. In August 2009, one of the patents-in-suit, U.S. Patent No. 6,254,887, was found invalid in another ANDA case relating to Ultram® ER, Purdue Pharma Products L.P. et al, v. Par Pharmaceutical, Inc. et al., Case No. 07-255 (D. Del.) (“Par action”) The Par action is now on appeal to the U. S. Court of Appeals for the Federal Circuit. On November 16, 2009, the Company and Purdue agreed by stipulation to stay the case until the earlier of the following two events: (a) the Federal Circuit issues a mandate in the Par action or that action is otherwise disposed of, or (b) an undisclosed event. The Federal Circuit affirmed the decision of invalidity in the Par action on June 3, 2010. On September 2, 2010, this matter was dismissed with prejudice.

Eli Lilly and Company v. Impax Laboratories, Inc. (Duloxetine)

In November 2008, Eli Lilly and Company filed suit against the Company in the U.S. District Court for the Southern District of Indiana, alleging patent infringement for the filing of the Company’s ANDA relating to Duloxetine Hydrochloride Delayed Release Capsules, 20 mg, 30 mg, and 60 mg, generic to Cymbalta®. In February 2009, the parties agreed to be bound by the final judgment concerning infringement, validity and enforceability of the patent at issue in cases brought by Eli Lilly and Company against other generic drug manufacturers that have filed ANDAs relating to this product and proceedings in this case were stayed.

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 Company’s ANDA relating to Doxycycline Hyclate Delayed Release Tablets, 75 mg and 100 mg, generic to Doryx®. The Company filed an answer and counterclaim. Thereafter, in March 2009, Warner Chilcott filed another lawsuit in the same jurisdiction, alleging patent infringement for the filing of the Company’s ANDA for the 150 mg strength. Discovery is proceeding, fact discovery closes on December 17, 2010, 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 Company’s ANDA relating to Cyclobenzaprine Hydrochloride Extended Release Capsules, 15 mg and 30 mg, generic to Amrix®. The Company has filed an answer and counterclaim. This matter was settled and dismissed on October 11, 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 Company’s ANDA relating to Sevelamer Hydrochloride Tablets, 400 mg and 800 mg, generic to Renagel®. The Company has filed an answer and counterclaim. Fact discovery closes on December 3, 2010, the Markman hearing is set for January 21, 2011, and trial is scheduled for September 27, 2012.

17. LEGAL AND REGULATORY MATTERS (continued)

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 Company’s ANDA relating to Sevelamer Carbonate Tablets, 800 mg, generic to Renvela®. The Company has filed an answer and counterclaim. Fact discovery closes on December 3, 2010, the Markman hearing is set for January 21, 2011, and trial is scheduled for September 27, 2012.

The Research Foundation of State University of New York et al. v. Impax Laboratories, Inc. (Doxycycline Monohydrate)

In September 2009, The Research Foundation of State University of New York; New York University; Galderma Laboratories Inc.; and Galderma Laboratories, L.P. (collectively, “Galderma”) filed suit against the Company in the U.S. District Court for the District of Delaware alleging patent infringement for the filing of the Company’s ANDA relating to Doxycycline Monohydrate Delayed-Release Capsules, 40 mg, generic to Oracea®. The Company filed an answer and counterclaim. In October 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 Galderma against another generic drug manufacturer that has filed an ANDA relating to this product and proceedings in this case were stayed. In June 2010, Galderma moved for a preliminary injunction to bar sales by the other generic manufacturer based on two of the patents in suit, which motion was granted by the magistrate judge in a decision finding Galderma had shown a likelihood of success on the merits. In July, 2010 the generic manufacturer filed a motion for reargument of Galderma’s motion for preliminary injunction and temporary restraining order. The motion is pending.

Elan Pharma International Ltd. and Fournier Laboratories Ireland Ltd. v. Impax Laboratories, Inc. Abbott Laboratories and Laboratoires Fournier S.A. v. Impax Laboratories, Inc. (Fenofibrate)

In October 2009, Elan Pharma International Ltd. with Fournier Laboratories Ireland Ltd. and Abbott Laboratories with Laboratories Fournier S.A. filed separate suits against the Company in the U.S. District Court for the District of New Jersey alleging patent infringement for the filing of the Company’s ANDA relating to Fenofibrate Tablets, 48 mg and 145 mg, generic to Tricor®. The Company has filed an answer and counterclaim. In September 2010, the Court vacated the schedule and ordered a stay in the two matters related to the Company.

Daiichi Sankyo, Inc. et al. v. Impax Laboratories, Inc. (Colesevelam)

In January 2010, Daiichi Sankyo, Inc. and Genzyme Corporation (together, “Genzyme”) filed suit against the Company in the U.S. District Court for the District of Delaware alleging patent infringement for the filing of the Company’s ANDA relating to Colesevelam Hydrochloride Tablets, 625 mg, generic to Welchol®. The Company has filed an answer and counterclaim. Fact discovery closes June 30, 2011, and no trial date has been scheduled.

Abbott Laboratories, et al. v. Impax Laboratories, Inc. (Choline Fenofibrate)

In March 2010, Abbott Laboratories and Fournier Laboratories Ireland Ltd. (together, “Abbott”) filed suit against the Company in the U.S District Court for the District of New Jersey alleging patent infringement for the filing of the Company’s ANDA related to Choline Fenofibrate Delayed Release Capsules, 45 mg and 135 mg, generic of Trilipix®. The Company has filed an answer. Discovery is proceeding, fact discovery closes February 4, 2011, and no trial date has been scheduled.

Shionogi Pharma, Inc. and LifeCycle Pharma A/S v. Impax Laboratories, Inc. (Fenofibrate)

In April 2010, Shionogi Pharma, Inc. and LifeCycle Pharma A/S filed suit against the Company in the U.S. District Court for the District of Delaware alleging patent infringement for the filing of the Company’s ANDA relating to Fenofibrate Tablets, 40 and 120 mg, generic to Fenoglide®. The Company has filed its answer.

17. LEGAL AND REGULATORY MATTERS (continued)

Genzyme Corp. v. Impax Laboratories, Inc. (Sevelamer Carbonate Powder)

In July 2010, Genzyme Corporation filed suit against the Company in the U.S. District Court for the District of Maryland, alleging patent infringement for the filing of the Company’s ANDA relating to Sevelamer Carbonate Powder, 2.4 g and 0.8 g packets, generic to Renvela® powder. The Company has filed an answer and counterclaim. Fact discovery closes on December 3, 2010, the Markman hearing is set for January 21, 2011, and trial is scheduled for September 27, 2012.

Schering Corporation, et al. v. Impax Laboratories, Inc. (Ezetimibe/Simvastatin)

In August 2010, Schering Corporation and MSP Singapore Company LLC filed suit against the Company in the U.S. District Court for the District of New Jersey alleging patent infringement for the filing of the Company’s ANDA relating to Ezetimibe/Simvastatin Tablets, 10 mg/80 mg, generic to Vytorin ®. The Company has filed an answer and counterclaim.

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 Company’s 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 Company’s 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. On January 5, 2010, the parties settled the case and the case was subsequently dismissed with prejudice.

Budeprion XL Litigation

In June 2009, the Company was named a co-defendant in class action lawsuits filed in California state court in an action titled Kelly v. Teva Pharmaceuticals Indus. Ltd, et al., No. BC414812 (Calif. Superior Crt. L.A. County). Subsequently, additional class action lawsuits were filed in Louisiana (Morgan v. Teva Pharmaceuticals Indus. Ltd, et al., No. 673880 (24th Dist Crt., Jefferson Parish, LA.)), North Carolina (Weber v. Teva Pharmaceuticals Indus., Ltd., et al., No. 07 CV5002556, (N.C. Superior Crt., Hanover County)), Pennsylvania (Rosenfeld v. Teva Pharmaceuticals USA, Inc.. et al., No. 2:09-CV-2811 (E.D. Pa.)), Florida (Henchenski and Vogel v. Teva Pharmaceuticals Industries Ltd., et al., No. 2:09-CV-470-FLM-29SPC (M.D. Fla.)), Texas (Anderson v. Teva Pharmaceuticals Indus., Ltd., et al., No. 3-09CV1200-M (N.D. Tex.)), Oklahoma (Brown et al. v. Teva Pharmaceuticals Inds., Ltd., et al., No. 09-cv-649-TCK-PJC (N.D. OK)), Ohio (Latvala et al. v. Teva Pharmaceuticals Inds., Ltd., et al., No. 2:09-cv-795 (S.D. OH)), Alabama (Jordan v. Teva Pharmaceuticals Indus. Ltd et al., No. CV09-709 (Ala. Cir. Crt. Baldwin County)), and Washington (Leighty v. Teva Pharmaceuticals Indus. Ltd et al., No. CV09-01640 (W. D. Wa.)). All of the complaints involve Budeprion XL, a generic version of Wellbutrin XL® that is manufactured by the Company and marketed by Teva, and allege that, contrary to representations of Teva, Budeprion XL is less effective in treating depression, and more likely to cause dangerous side effects, than Wellbutrin XL. The actions are brought on behalf of purchasers of Budeprion XL and assert claims such as unfair competition, unfair trade practices and negligent misrepresentation under state law. Each lawsuit seeks damages in an unspecified amount consisting of the cost of Budeprion XL paid by class members, as well as any applicable penalties imposed by state law, and disclaims damages for personal injury. The state court cases have been removed to federal court, and a petition for multidistrict litigation to consolidate the cases in federal court has been granted. These cases and any subsequently filed cases will be heard under the consolidated action entitled In re: Budeprion XL Marketing Sales Practices, and Products Liability Litigation, MDL No. 2107, in the United States District Court for the Eastern District of Pennsylvania. The Company filed a motion to dismiss and a motion to certify that order for interlocutory appeal, both of which were denied. Discovery is proceeding, and no trial date has been scheduled.

Impax Laboratories, Inc. v. Shire LLC and Shire Laboratories, Inc. (generic Adderall XR)

On November 1, 2010, the Company filed suit against Shire LLC and Shire Laboratories, Inc. (collectively “Shire”) in the Supreme Court of the State of New York, alleging breach of contract and other related claims due to Shire’s failure to fill the Company’s orders for the generic Adderall XR product as required by the parties’ Settlement Agreement and License and Distribution Agreement, signed in January 2006. In addition, the Company has filed a motion for a preliminary injunction and a temporary restraining order seeking to require Shire to fill product orders placed by the Company.

18. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)

Selected (unaudited) financial information for the quarterly period noted is as follows:

		2010 Quarters Ended:
(in $000’s except per share amounts)		March 31				June 30				September 30
Revenue:
Global Product sales, gross		$	425,986			$	224,318			$	167,759
Less:
Chargebacks			56,168				49,420				36,065
Rebates			29,425				16,739				21,630
Product Returns			7,400				4,596				8,344
Other credits			23,888				15,925				10,669
Global Product sales, net			309,105				137,638				91,051
Private Label Product sales			672				339				528
Rx Partner			4,903				5,802				202,799
OTC Partner			1,765				2,309				2,365
Research Partner			3,385				3,494				3,714
Promotional Partner			3,503				3,500				3,535
Other			—				—				—
Total revenues			323,333				153,082				303,992
Gross profit			243,757				84,190				160,871
Net income		$	131,485			$	31,348			$	75,163
Net income per share (basic)		$	2.16			$	0.51			$	1.20
Net income per share (diluted)		$	2.06			$	0.48			$	1.15
Weighted Average:
common shares outstanding:
Basic			61,008,015				61,876,599				62,435,116
Diluted			63,865,678				65,538,805				65,470,341

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.

18. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited) (continued)

Selected (unaudited) financial information for the quarterly period noted is as follows:

		2009 Quarters Ended:
(in $000’s except per share amounts)		March 31				June 30				September 30
Revenues:
Global Product sales, gross		$	78,696			$	81,764			$	82,514
Less:
Chargebacks			22,638				24,844				21,265
Rebates			10,819				13,425				9,411
Product Returns			3,256				3,100				2,030
Other credits			2,862				3,008				3,172
Global Product sales, net			39,121				37,387				46,636
Private Label Product sales			1,297				2,220				1,752
Rx Partner			10,736				11,119				8,328
OTC Partner			1,858				1,628				1,769
Research Partner			2,611				2,833				2,962
Promotional Partner			3,284				3,224				3,499
Other			6				5				—
Total revenues			58,913				58,416				64,946
Gross profit			32,663				31,132				36,891
Net income		$	2,219			$	3,013			$	6,685
Net income per share (basic)		$	0.04			$	0.05			$	0.11
Net income per share (diluted)		$	0.04			$	0.05			$	0.11
Weighted average
common shares outstanding:
Basic			59,711,133				60,112,308				60,559,064
Diluted			60,222,215				60,552,344				61,247,700