Impax Laboratories Reports Third Quarter 2013 Results

Impax Laboratories, Inc. (NASDAQ: IPXL) today reported third quarter 2013 adjusted net income of $16.6 million, or $0.25 per diluted share, compared to adjusted net income of $33.0 million, or $0.48 per diluted share in the prior year period. On a GAAP basis, the Company recorded a net loss of $0.2 million or ($0.00) per diluted share for the third quarter 2013, compared to net income of $20.0 million, or $0.29 per diluted share in the prior year period.

The decline in adjusted net income and earnings per diluted share was primarily due to the loss of exclusivity in mid-May 2013 of branded Zomig® tablet and orally disintegrating tablet (ZMT) products resulting in significantly lower profits in the third quarter 2013, compared to the prior year period. The net loss on a GAAP basis in the third quarter 2013 was primarily due to the inclusion of intangible asset impairment charges of $13.9 million and an $8.1 million increase in remediation costs related to the Hayward facility from $2.6 million in the prior year period. These items, as well as others, have been excluded from the current quarter’s adjusted net income and earnings per share. Refer to the attached “Non-GAAP Financial Measures” for a reconciliation of GAAP to non-GAAP items.

“We were able to reduce some of the third quarter 2013 decline by capturing sales with our authorized generic Trilipix® products, which we launched in mid-July. In addition, new competition on a few generic products had a less than expected impact on this quarter’s sales,” said Larry Hsu, Ph.D., president and chief executive officer of Impax Laboratories. “However, we anticipate that our fourth quarter revenues may very well be negatively impacted by this additional competition and lower authorized generic Trilipix product sales following our strong launch, compared to this quarter.”

In late October 2013, at the U.S. Food and Drug Administration’s (FDA) request, the Company participated in a regulatory meeting with representatives of the FDA to provide additional information and clarifications on the Company’s responses and updates related to the Form 483 issued in 2013. The Company will continue to provide information to the agency about its quality and manufacturing improvement programs and has committed to answering any questions FDA might have on any applications or programs. The Company believes that a satisfactory re-inspection of the Company’s Hayward manufacturing facility would be required to close out the warning letter and resolve the 2013 Form 483 observations. The FDA did not notify the Company at the meeting of any additional enforcement actions; however, no assurance can be given as to whether the FDA will take any further actions.

“We continue to spend to improve our manufacturing and quality systems and advance our Quality Improvement Program. Despite our recent challenges, we have the financial resources to invest internally and externally to execute on our growth strategy,” concluded Dr. Hsu.

For the third quarter 2013, total revenues were $132.6 million, compared to $145.6 million in the prior year period. The current quarter decline was primarily due to lower Zomig tablet and ZMT product sales as noted above, and lower sales of the Company’s authorized generic Adderall XR® products and generic fenofibrate products due to additional generic competition. The third quarter 2013 revenue decline was partially offset by sales of new products launched in 2013, including the mid-July 2013 launch of authorized generic Trilipix delayed release capsules, the early January 2013 launch of non-AB rated generic oxymorphone hydrochloride extended-release tablets, and the mid-May 2013 launch of authorized generic Zomig tablet and ZMT products.

Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) was $34.2 million in the third quarter 2013, compared to $57.3 million in the prior year period.

Cash and short-term investments increased $137.7 million to $436.6 million as of September 30, 2013, compared to $298.9 million as of December 31, 2012. The increase was primarily due to the receipt of a pre-tax payment of $102.0 million from Endo Pharmaceuticals in connection with a previously announced settlement and license agreement, and $48.0 million from Shire LLC in connection with the settlement of litigation relating to supply of authorized generic Adderall XR products to the Company under the terms of the License and Supply Agreement with Shire.

Business Segment Information

The Company has two reportable segments, the Global Pharmaceuticals Division (generic products and services) and the Impax Pharmaceuticals Division (brand products and services) and does not allocate general corporate services to either segment. All information presented is on a GAAP basis unless otherwise noted as on an adjusted basis.

In the third quarter 2013, Global Product sales, net, increased to $111.7 million, compared to $99.5 million in the prior year period. The increase was primarily due to sales of new generic products launched during the first nine months of 2013 as noted above, partially offset by lower sales of authorized generic Adderall XR products and generic fenofibrate products as a result of additional competition.

Rx Partner revenues in the third quarter 2013 increased to $3.0 million, compared to a loss of $0.8 million in the prior year period. The third quarter 2012 included a charge of $2.0 million for the Company’s voluntary withdrawal of bupropion XL 300mg from the market for which there was no similar charge in the current quarter. The revenue increase in the third quarter 2013 also reflects an increase in profit-sharing revenue received from Teva Pharmaceuticals Industries Limited (Teva), under our Strategic Alliance Agreement with Teva Pharmaceuticals Curacao N.V., a subsidiary of Teva.

Gross profit in the third quarter 2013 was $38.7 million and gross margin was 33.4%, compared to gross profit of $56.3 million and gross margin of 56.1% in the prior year period. The decrease in gross profit and gross margin primarily reflects the impact of a $13.2 million intangible asset impairment charge and the $8.1 million increase in remediation costs related to the Hayward facility as noted above, as well as reduced operating efficiencies due to lower manufacturing production levels at the Hayward facility.

Adjusted gross profit in the third quarter 2013 increased to $62.9 million, compared to adjusted gross profit of $59.4 million in the prior year period. The increase in adjusted gross profit is due to sales of authorized generic Trilipix delayed release capsules launched in July 2013, partially offset by reduced manufacturing operating efficiencies as noted above. Adjusted gross margin was 54.3% for the third quarter 2013, compared to adjusted gross margin of 59.1% in the prior year period, with the decline primarily due to lower sales of higher margin products and reduced operating efficiencies as noted above.

Total Global Pharmaceuticals operating expenses in the third quarter 2013 increased to $19.1 million, compared to $15.8 million in the prior year period. The prior year period includes the receipt of $5.0 million for reimbursement of legal fees received pursuant to the settlement of patent litigation.

In the third quarter 2013, Impax Product sales, net, decreased to $16.6 million, compared to $43.3 million in the prior year period, due to lower U.S. sales of Zomig tablet and ZMT products. The U.S. exclusivity on Zomig tablet and ZMT products expired on May 14, 2013. Following the loss of exclusivity, several generic competitors launched products that have significantly impacted sales of these two dosage forms. Impax Pharmaceuticals continues to commercialize the Zomig nasal spray which has U.S. patents expiring as late as May 2021.

Gross profit in the third quarter 2013 decreased to $9.7 million, compared to $21.7 million in the prior year period, primarily due to lower U.S. sales of Zomig tablet and ZMT products as noted above. Gross margin in the third quarter 2013 increased to 57.3%, compared to 48.1% in the prior year period, primarily due to significantly lower amortization and acquisition related costs incurred, compared to the prior year period.

Adjusted gross profit in the third quarter 2013 was $10.4 million and gross margin was 61.6%, compared to adjusted gross profit of $43.3 million and gross margin of 96.0% in the prior year period. The decline in adjusted gross profit and gross margin was due to lower U.S. sales of Zomig tablet and ZMT products and the payment of royalties to AstraZeneca beginning January 1, 2013 on sales of Zomig products under the terms of the AstraZeneca Agreement.

Total operating expenses in the third quarter 2013 decreased to $15.2 million, compared to $20.1 million in the prior year period, due to lower research and development (R&D) and selling, general and administrative (SG&A) expenses. The decline in R&D expenses was primarily the result of the Company’s decision to terminate development of one of its branded product candidates for epilepsy as a result of technical and competitive factors. The decrease in SG&A expenses was primarily due to lower advertising and promotional spending on Zomig products and pre-launch support for RYTARYTM, as well as reduced sales force expenses.

General and administrative expenses in the third quarter 2013 increased to $14.2 million, compared to $12.7 million in the prior year period, primarily due to higher incentive compensation and employee recruiting fees.

2013 Financial Guidance

Impax’s estimates are based on the actual results for the first nine months ended September 30, 2013, and management’s current belief about prescription trends, pricing levels, inventory levels, and the anticipated timing of future product launches and events. The Company updated its estimated adjusted 2013 financial guidance as noted below.

• UPDATED – Gross margins as a percent of total revenues is expected to be approximately 50% (previously mid to upper 40% range).
• UPDATED – Total R&D expenses across the generic and brand divisions of approximately $70.0 million to $72.0 million (previously $80.0 million to $87.0 million); generic R&D expenses of approximately $43.0 million to $44.0 million (previously $45.0 million to $49.0 million) and brand R&D expenses of approximately $27.0 million to $28.0 million (previously $35.0 million to $38.0 million).
• UPDATED – Patent litigation expenses of approximately $15.0 million to $16.0 million (previously $12.0 million to $15.0 million).
• UPDATED – SG&A expenses of approximately $113.0 million to $115.0 million (previously $113.0 million to $118.0 million).
• Amortization expense of approximately $14.0 million. Approximately $1.0 million for fourth quarter 2013.
• UPDATED – Hayward facility remediation costs of approximately $30.0 million (previously $10.0 to $15.0 million), due to work to be performed in the fourth quarter of 2013 that had been previously planned to occur in the first half of 2014.
• Effective tax rate of approximately 32% to 34% on a GAAP basis. The Company anticipates that its non-GAAP effective tax rate may experience volatility as the Company’s tax benefits may be high compared to the Company’s operating income or loss.

Conference Call Information

The Company will host a conference call on November 4, 2013 at 4:30 p.m. EST to discuss its results. The call can also be accessed via a live Webcast through the Investor Relations section of the Company’s Web site, www.impaxlabs.com. The number to call from within the United States is (877) 356-3814 and (706) 758-0033 internationally. The conference ID is 77523621. A replay of the conference call will be available shortly after the call for a period of seven days. To access the replay, dial (855) 859-2056 (in the U.S.) and (404) 537-3406 (international callers).

About Impax Laboratories, Inc.

Impax Laboratories, Inc. (Impax) is a technology based specialty pharmaceutical company applying its formulation expertise and drug delivery technology to the development of controlled-release and specialty generics in addition to the development of central nervous system disorder branded products. Impax markets its generic products through its Global Pharmaceuticals division and markets its branded products through the Impax Pharmaceuticals division. Additionally, where strategically appropriate, Impax develops marketing partnerships to fully leverage its technology platform and pursues partnership opportunities that offer alternative dosage form technologies, such as injectables, nasal sprays, inhalers, patches, creams, and ointments. For more information, please visit the Company's Web site at: www.impaxlabs.com.

"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995:

To the extent any statements made in this news release contain information that is not historical; these statements are forward-looking in nature and express the beliefs and expectations of management. Such statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the Company’s future results, performance, or achievements to differ significantly from the results, performance, or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to: the effect of current economic conditions on the Company’s industry, business, financial position, and results of operations; fluctuations in revenues and operating income; the Company’s ability to promptly correct the issues raised in the warning letter and Form 483 observations received from the FDA; the Company’s ability to successfully develop and commercialize pharmaceutical products in a timely manner; reductions or loss of business with any significant customer; the impact of consolidation of the Company’s customer base; the impact of competition; the Company’s ability to sustain profitability and positive cash flows; any delays or unanticipated expenses in connection with the operation of the Company’s Taiwan facility; the effect of foreign economic, political, legal, and other risks on the Company’s operations abroad; the uncertainty of patent litigation; the increased government scrutiny on the Company’s agreements with brand pharmaceutical companies; consumer acceptance and demand for new pharmaceutical products; the impact of market perceptions of the Company and the safety and quality of the Company’s products; the difficulty of predicting FDA filings and approvals; the Company’s ability to achieve returns on its investments in research and development activities; the Company’s inexperience in conducting clinical trials and submitting new drug applications; the Company’s ability to successfully conduct clinical trials; the Company’s reliance on third parties to conduct clinical trials and testing; impact of illegal distribution and sale by third parties of counterfeits or stolen products; the availability of raw materials and impact of interruptions in the Company’s supply chain; the use of controlled substances in the Company’s products; disruptions or failures in the Company’s information technology systems and network infrastructure; the Company’s reliance on alliance and collaboration agreements; the Company’s dependence on certain employees; the Company’s ability to comply with legal and regulatory requirements governing the healthcare industry; the regulatory environment; the Company’s ability to protect its intellectual property; exposure to product liability claims; changes in tax regulations; the Company’s ability to manage growth, including through potential acquisitions; the restrictions imposed by the Company’s credit facility; uncertainties involved in the preparation of the Company’s financial statements; the Company’s ability to maintain an effective system of internal control over financial reporting; the effect of terrorist attacks on the Company’s business; the location of the Company’s manufacturing and research and development facilities near earthquake fault lines and other risks described in the Company’s periodic reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as to the date on which they are made, and the Company undertakes no obligation to update publicly or revise any forward-looking statement, regardless of whether new information becomes available, future developments occur or otherwise.