IMPAX LABORATORIES INC, 10-Q filed on 5/5/2011
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2011
May 02, 2011
Jun. 30, 2010
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
IMPAX LABORATORIES INC 
 
 
Entity Central Index Key
0001003642 
 
 
Document Type
10-Q 
 
 
Document Period End Date
2011-03-31 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
Q1 
 
 
Current Fiscal Year End Date
12/31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
1,008,664,000 
Entity Common Stock, Shares Outstanding
 
65,281,606 
 
Consolidated Balance Sheets (USD $)
In Thousands
3 Months Ended
Mar. 31, 2011
Year Ended
Dec. 31, 2010
Current assets:
 
 
Cash and cash equivalents
$ 140,731 
$ 91,796 
Short-term investments
209,225 
256,605 
Accounts receivable, net
94,280 
82,054 
Inventory, net
48,840 
44,549 
Deferred product manufacturing costs-alliance agreements
1,334 
2,012 
Deferred income taxes
39,333 
39,271 
Prepaid expenses and other current assets
3,763 
4,407 
Total current assets
537,506 
520,694 
Property, plant and equipment, net
109,173 
106,280 
Deferred product manufacturing costs-alliance agreements
8,022 
8,223 
Deferred income taxes, net
8,466 
5,069 
Other assets
26,934 
25,478 
Goodwill
27,574 
27,574 
Total assets
717,675 
693,318 
Current liabilities
 
 
Accounts payable
16,014 
18,812 
Accrued expenses
69,347 
72,788 
Accrued income taxes payable
9,641 
2,393 
Accrued profit sharing and royalty expenses
17,127 
14,147 
Deferred revenue-alliance agreements
23,229 
18,276 
Total current liabilities
135,358 
126,416 
Deferred revenue-alliance agreements
32,769 
44,195 
Other liabilities
16,656 
14,558 
Total liabilities
184,783 
185,169 
Commitments and contingencies (Note 8)
 
 
Stockholders' equity:
 
 
Preferred Stock, $0.01 par value, 2,000,000 shares authorized, 0 shares outstanding at March 31, 2011 and December 31, 2010
Common stock, $0.01 par value, 90,000,000 shares authorized and 65,323,182 and 64,721,041 shares issued at March 31, 2011 and December 31, 2010, respectively
653 
647 
Additional paid-in capital
266,745 
255,440 
Treasury stock - 243,729 shares
(2,157)
(2,157)
Accumulated other comprehensive income
2,385 
2,811 
Retained earnings
265,109 
251,246 
Stockholders' equity
532,735 
507,987 
Noncontrolling interest
157 
162 
Total stockholders' equity
532,892 
508,149 
Total liabilities and stockholders' equity
$ 717,675 
$ 693,318 
Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 31, 2011
Dec. 31, 2010
Stockholders' equity:
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
2,000,000 
2,000,000 
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
90,000,000 
90,000,000 
Common stock, shares issued
65,323,182 
64,721,041 
Treasury stock, shares
243,729 
 
Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Share data
3 Months Ended
Mar. 31,
2011
2010
Revenues:
 
 
Global Product sales, net
$ 91,946 
$ 309,105 
Private Label Product sales
392 
672 
Rx Partner
4,120 
4,903 
OTC Partner
1,943 
1,765 
Research Partner
6,715 
3,385 
Promotional Partner
3,535 
3,503 
Total revenues
108,651 
323,333 
Cost of revenues
50,114 
79,576 
Gross profit
58,537 
243,757 
Operating expenses:
 
 
Research and development
19,490 
18,309 
Patent litigation
1,774 
1,984 
Selling, general and administrative
16,579 
12,485 
Total operating expenses
37,843 
32,778 
Income from operations
20,694 
210,979 
Other (expense) income, net
(18)
Interest income
321 
82 
Interest expense
(16)
(46)
Income before income taxes
21,002 
210,997 
Provision for income taxes
7,144 
79,484 
Net income before noncontrolling interest
13,858 
131,513 
Add back loss (gain) attributable to noncontrolling interest
(28)
Net income
13,863 
131,485 
Net Income per share:
 
 
Basic
0.22 
2.16 
Diluted
$ 0.21 
$ 2.06 
Weighted average common shares outstanding:
 
 
Basic
63,390,527 
61,008,015 
Diluted
67,044,266 
63,865,678 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands
3 Months Ended
Mar. 31,
2011
2010
Cash flows from operating activities:
 
 
Net income
$ 13,863 
$ 131,485 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
3,457 
2,946 
Amortization of Credit Agreement deferred financing costs
25 
Accretion of interest income on short-term investments
(245)
(64)
Deferred income taxes (benefit)
(1,106)
1,889 
Provision for uncertain tax positions
40 
12 
Tax benefit related to the exercise of employee stock options
(2,353)
(738)
Deferred revenue-Alliance Agreements
910 
5,495 
Deferred product manufacturing costs-Alliance Agreements
(478)
(3,427)
Recognition of deferred revenue-Alliance Agreements
(7,384)
(10,053)
Amortization of deferred product manufacturing costs-Alliance Agreements
1,357 
4,249 
Accrued profit sharing and royalty expense
17,090 
41,307 
Payments of profit sharing and royalty expense
(14,139)
(53,695)
Payments of accrued litigation settlements
 
(5,865)
Share-based compensation expense
2,887 
2,873 
Bad debt expense
62 
91 
Changes in certain assets and liabilities:
 
 
Accounts receivable
(12,288)
(138,929)
Inventory
(4,291)
(2,885)
Prepaid expenses and other assets
(949)
(3,870)
Accounts payable, accrued expenses and income taxes payable
2,518 
64,678 
Other liabilities
2,055 
2,088 
Net cash provided by operating activities
1,011 
37,612 
Cash flows from investing activities:
 
 
Purchase of short-term investments
(87,783)
(23,055)
Maturities of short-term investments
135,408 
35,103 
Purchases of property, plant and equipment
(8,723)
(3,116)
Net cash provided by investing activities
38,902 
8,932 
Cash flows from financing activities:
 
 
Tax benefit related to the exercise of employee stock options
2,353 
738 
Proceeds from exercise of stock options and ESPP
6,669 
4,695 
Net cash provided by financing activities
9,022 
5,433 
Net increase in cash and cash equivalents
48,935 
51,977 
Cash and cash equivalents, beginning of period
91,796 
31,770 
Cash and cash equivalents, end of period
140,731 
83,747 
Supplemental disclosure of non-cash investing and financing activities:
 
 
Cash paid for interest
130 
46 
Cash paid for income taxes
$ 974 
$ 30,710 
Consolidated Statements of Cash Flows (Unaudited) (Parenthetical) (USD $)
3 Months Ended
Mar. 31,
2011
2010
Supplemental disclosure of non-cash investing and financing activities:
 
 
Accrued vendor invoices excluded from the purchase of property, plant, and equipment and the change in accounts payable and accrued expenses
$ 1,040,000 
$ 4,898,000 
Depreciation expense
$ 3,289,000 
$ 2,946,000 
The Company and Basis of Presentation
THE COMPANY AND BASIS OF PRESENTATION
1. THE COMPANY & BASIS OF PRESENTATION
Impax Laboratories, Inc. (“Impax” or “Company”) is a technology-based, specialty pharmaceutical company. The Company has two reportable segments, referred to as the “Global Pharmaceuticals Division”, (“Global Division”) and the “Impax Pharmaceuticals Division”, (“Impax Division”).
The Global Division develops, manufactures, sells, and distributes generic pharmaceutical products primarily through four sales channels: the “Global products” sales channel, for generic pharmaceutical prescription products the Company sells directly to wholesalers, large retail drug chains, and others; the “Private Label” sales channel, for generic pharmaceutical over-the-counter (“OTC”) and prescription products the Company sells to unrelated third-party customers who in-turn sell the product to third parties under their own label; the “Rx Partner” sales channel, for generic prescription products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements; and the “OTC Partner” sales channel, for sales of generic pharmaceutical OTC products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements. The Company also generates revenue from research and development services provided under a joint development agreement with an unrelated third party pharmaceutical company, and reports such revenue under the caption “Research partner” revenue on the consolidated statement of operations. The Company provides these services through the research and development group in the Global Division.
The Company’s Impax Division is engaged in the development of proprietary brand pharmaceutical products through improvements to already approved pharmaceutical products to address central nervous system (“CNS”) disorders. The Impax Division is also engaged in the co-promotion of pharmaceutical products developed by other unrelated third-party pharmaceutical entities through a direct sales force focused on marketing to physicians, primarily in the CNS community.
In California, the Company utilizes a combination of owned and leased facilities mainly located in Hayward. The Company’s primary properties in California consist of a leased office building used as the Company’s corporate headquarters, in addition to three properties it owns, including two research and development center facilities, and a manufacturing facility. Additionally, the Company leases three facilities in Hayward, and Fremont, utilized for additional research and development, administrative services, and equipment storage. In Pennsylvania, the Company owns a packaging, warehousing, and distribution center located in Philadelphia, and leases a facility in New Britain used for sales and marketing, finance, and administrative personnel, as well as providing additional warehouse space. Outside the Unites States, in Taiwan, the Company owns a manufacturing facility.
The accompanying unaudited interim consolidated financial statements of 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 57.54% majority ownership interest at March 31, 2011. 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, 2011. 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, 2010 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 accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (SEC) requires the use of estimates and assumptions, based on complex judgments considered reasonable, affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the 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 related to 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 product manufacturing costs related to 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.
Revenue Recognition
REVENUE RECOGNITION
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, there is persuasive evidence a revenue arrangement exists, delivery of goods or services has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.
The Company accounts for revenue arrangements with multiple deliverables in accordance with FASB ASC Topic 605-25, 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 the delivered item meets both of the following criteria: 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 605-25, if both of these criteria are not met, 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 basis. Prior to the application of the updated guidance of FASB ASC Topic 605-25 for multiple element arrangements in 2010, (see the “Alliance and Collaboration Agreements” footnote below for a detailed discussion) delivered items within the Company’s arrangements were not considered a separate unit of accounting as the fair value of the undelivered elements could not be objectively or reliably determined.
The Company accounts for milestones related to research and development activities in accordance with the milestone method of revenue recognition of FASB ASC Topic 605-28, under which consideration contingent on the achievement of a substantive milestone is recognized in its entirety in the period when the milestone is achieved. A milestone is considered to be substantive when it meets all of the following criteria: the milestone is commensurate with either the performance required to achieve the milestone or the enhancement of the value of the delivered items resulting from the performance required to achieve the milestone; the milestone relates solely to past performance; and, the milestone is reasonable relative to all of the deliverables and payment terms within the agreement.
Global Product sales, net:
The “Global Product sales, net” line item of the statement of operations, includes revenue recognized related to shipments of generic pharmaceutical products to the Company’s customers, primarily drug wholesalers and retail chains. Gross sales revenue is recognized at the time title and risk of loss passes to the customer — generally when product is received by the customer. Included in Global Product sales, net revenue are deductions from the gross selling price related to estimates for chargebacks, rebates, product returns, shelf-stock, and other pricing adjustments. The Company records an estimate for these deductions in the same period when the gross sales revenue is recognized. A summary of each of these deductions is as follows:
Chargebacks
The Company has agreements establishing contract prices for certain products with certain indirect customers, such as managed care organizations, hospitals and government agencies who purchase products from drug wholesalers. The contract prices are lower than the prices the customer would otherwise pay to the wholesaler, and the price difference is referred to as a chargeback, which generally takes the form of a credit memo issued by the Company to reduce the invoiced gross selling price charged to the wholesaler. A provision for chargeback deductions is estimated and recorded at the time of product shipment. The primary factors considered when estimating the provision for chargebacks are the average historical chargeback credits given, the mix of products shipped, and the amount of inventory on hand at the major drug wholesalers with whom the Company does business. The Company also monitors aggregate actual chargebacks granted and compares them to the estimated provision for chargebacks to assess the reasonableness of the chargeback reserve at each quarterly balance sheet date.
Rebates
The Company maintains various rebate programs with its Global Division Global Products sales channel customers in an effort to maintain a competitive position in the marketplace and to promote sales and customer loyalty. The rebates generally take the form of a credit memo to reduce the invoiced gross selling price charged to a customer for products shipped. A provision for rebate deductions is estimated and recorded at the time of product shipment. The primary factors the Company considers when estimating the provision for rebates are the average historical experience of aggregate credits issued, the mix of products shipped and the historical relationship of rebates as a percentage of total gross Global Product sales, the contract terms and conditions of the various rebate programs in effect at the time of shipment, and the amount of inventory on hand at the major drug wholesalers with whom the Company does business. The Company also monitors aggregate actual rebates granted and compares them to the estimated provision for rebates to assess the reasonableness of the rebate reserve at each quarterly balance sheet date.
Returns
The Company allows its customers to return product if approved by authorized Company personnel in writing or by telephone with the lot number and expiration date accompanying any request and if such products are returned either within six months prior to or until twelve months after, the products’ expiration date. The Company estimates a provision for product returns as a percentage of gross sales based upon historical experience of Global Division Global Product sales. The product 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 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 also considers other factors, 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 and /or any of the other aforementioned factors.
Shelf-Stock Adjustments
Based upon competitive market conditions, the Company may reduce the selling price of particular products to particular customers for certain future product shipments. The Company may issue a credit against the sales amount to a customer based upon their remaining inventory of the product in question, provided the customer agrees to continue to make future purchases of product from the Company. This type of selling price credit memo is referred to as a shelf-stock adjustment, which is the difference between the original selling price and the revised selling price, multiplied by an estimate of the number of product units on hand at a given date. These selling price reductions 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. The Company records an estimate for shelf-stock adjustments in the period it incurs the cost of the selling price reductions, which is generally the date on which the Company has agreed to grant an estimated credit memo to a particular customer for a certain product.
Medicaid
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 other jurisdictions 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 Company records estimates for Medicaid rebates as a deduction from gross sales revenue, with corresponding adjustment to the accrued Medicaid reserve liability.
Cash Discounts
The Company offers cash discounts to its customers, generally 2% of the gross selling 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 gross sales revenue is recognized.
Private Label Product sales
The Company recognizes revenue from Private Label Product sales in accordance with SAB 104. Revenue from direct product sales is recognized at the time title and risk of loss pass to customers. Revenue received from Private Label product sales is not subject to deductions for chargebacks, rebates, returns, shelf-stock adjustments, and other pricing adjustments. Additionally, Private Label product sales do not have upfront, milestone, or lump-sum payments and do not contain multiple deliverables under 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 and collaboration agreements between the Company and unrelated third-parties, generally other pharmaceutical companies. The Company has entered into these alliance and collaboration 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, development, commercialization, and /or distribution licenses, and research and development services, among others. In exchange for these deliverables, the Company receives payments from its alliance and collaboration agreement partners for product shipments and /or the provision of research and development services, and may also receive royalty, profit sharing, and/or upfront or periodic milestone payments. Revenue received from the alliance and collaboration 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 and collaboration agreement partners may negotiate with their respective customers. The Company records the alliance agreement partner’s adjustments to such estimated amounts as incurred, which is generally 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 Pharmaceuticals Curacao N.V., a subsidiary of Teva Pharmaceutical Industries Limited (“Teva Agreement”) during the year ended December 31, 2010. All consideration received under the Teva Agreement is contingent, and therefore cannot 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 revenue in the period it is earned.
OTC Partner revenue is related to the Company’s supply of over-the-counter pharmaceutical products and related research and development services under alliance agreements with Pfizer Inc. (formerly Wyeth) and previously with Merck & Co., Inc. (formerly Schering-Plough Corporation) (“OTC Partner alliance agreements”). The Company initially defers all revenue earned under its OTC Partner 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 cost of revenue in the period incurred. 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 which 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, resulting in an amount of revenue recognized in the year of initial recognition being 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 unrelated third-parties, generally other 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 milestone payments received before January 1, 2011, are deferred and recognized on a straight line basis over the expected period of performance of the research and development services. Revenue received from the achievement of contingent research and development milestones, if any, after January 1, 2011, will be recognized in its entirety in the period when such payment is earned. Royalty fee income, if any, will be recognized by the Company in the period when the revenue is earned.
Promotional Partner:
The “Promotional Partner” line item of the statement of operations includes revenue recognized under a promotional services agreement with an unrelated third-party pharmaceutical company. The promotional services agreement obligates the Company to provide physician detailing sales calls services to promote its promotional partner’s branded drug products over multiple periods. In exchange for this service, the Company receives 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 sales calls services as the services are provided and as performance obligations are met and contingent payments, if any, in the period when they are earned.
Shipping and Handling Fees and Costs
Shipping and handling fees related to sales transactions are recorded as selling expense.
Recent Accounting Pronouncements
RECENT ACCOUNTING PRONOUNCEMENTS
3. RECENT ACCOUNTING PRONOUNCEMENTS
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. The Company recognized $3.0 million of revenue for a research and development milestone achieved during the three months ended March 31, 2011 pursuant to the terms of the Joint Development Agreement with Medicis Pharmaceutical Corporation.
In December 2010, the FASB issued Accounting Standards Update No. 2010-27, Fees Paid to the Federal Government by Pharmaceutical Manufacturers (Subtopic 720-50), which provides guidance on the annual fee paid by pharmaceutical manufacturers to the U.S. Treasury in accordance with the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (the “Acts”). The Acts impose an annual fee on the pharmaceutical manufacturing industry for each calendar year beginning on or after January 1, 2011. An entity’s portion of the annual fee is payable no later than September 30 of the applicable calendar year and is not tax deductible. The annual fee ranges from $2.5 billion to $4.1 billion in total, a portion of which will be allocated to individual entities on the basis of the amount of their branded prescription drug sales for the preceding year as a percentage of the industry’s branded prescription drug sales for the same period. An entity’s portion of the annual fee becomes payable to the U.S. Treasury once a pharmaceutical manufacturing entity has a gross receipt from branded prescription drug sales to any specified government program or in accordance with coverage under any government program for each calendar year beginning on or after January 1, 2011. The liability related to the annual fee imposed by the Acts shall be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The guidance in Subtopic 720-50 becomes effective for calendar years beginning after December 31, 2010. Upon becoming effective this update did not have a material impact on the Company’s consolidated financial statements.
Investments
INVESTMENTS
4. INVESTMENTS
Investments consist of commercial paper, corporate bonds, medium-term notes, government sponsored enterprise obligations and certificates of deposit. The Company’s policy is to invest in only high quality “AAA-rated” or investment-grade securities. Investments in debt securities are accounted for as held-to-maturity and are recorded at amortized cost, which approximates fair value, generally based upon observable market values of similar securities. 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 March 31, 2011 and December 31, 2010 follows:
                                 
            Gross     Gross        
(in $000’s)   Amortized     Unrecognized     Unrecognized     Fair  
March 31, 2011   Cost     Gains     Losses     Value  
Commercial paper
  $ 96,253     $ 26     $ (1 )   $ 96,278  
Government sponsored enterprise obligations
    55,190       24             55,214  
Corporate bonds
    39,596       4       (15 )     39,585  
Certificates of deposit
    18,186       13       (2 )     18,197  
 
                       
Total short-term investments
  $ 209,225     $ 67     $ (18 )   $ 209,274  
 
                       
                                 
            Gross     Gross        
(in $000’s)   Amortized     Unrecognized     Unrecognized     Fair  
December 31, 2010   Cost     Gains     Losses     Value  
Commercial paper
  $ 168,260     $ 36     $ (7 )   $ 168,289  
Government sponsored enterprise obligations
    56,866       40       (1 )     56,905  
Corporate bonds
    18,316       15       (13 )     18,318  
Certificates of deposit
    13,163       13             13,176  
 
                       
Total short-term investments
  $ 256,605     $ 104     $ (21 )   $ 256,688  
 
                       
Accounts Receivable
ACCOUNTS RECEIVABLE
5. ACCOUNTS RECEIVABLE
The composition of accounts receivable, net is as follows:
                 
    March 31,     December 31,  
(in $000’s)   2011     2010  
Gross accounts receivable
  $ 125,945     $ 123,941  
Less: Chargeback reserve
    (9,743 )     (14,918 )
Less: Rebate reserve
    (16,174 )     (20,892 )
Less: Other deductions
    (5,748 )     (6,077 )
 
           
Accounts receivable, net
  $ 94,280     $ 82,054  
 
           
A roll forward of the chargeback and rebate reserves activity for the three months ended March 31, 2011 and the year ended December 31, 2010 is as follows:
                 
(in $000’s)   March 31,     December 31,  
Chargeback reserve   2011     2010  
Beginning balance
  $ 14,918     $ 21,448  
Provision recorded during the period
    35,216       181,566  
Credits issued during the period
    (40,391 )     (188,096 )
 
           
Ending balance
  $ 9,743     $ 14,918  
 
           
                 
(in $000’s)   March 31,     December 31  
Rebate reserve   2011     2010  
Beginning balance
  $ 20,892     $ 37,781  
Provision recorded during the period
    12,709       91,064  
Credits issued during the period
    (17,427 )     (107,953 )
 
           
Ending balance
  $ 16,174     $ 20,892  
 
           
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 customer accounts. The Company recorded an allowance for uncollectible amounts of $599,000 and $539,000 at March 31, 2011 and December 31, 2010, respectively.
Inventory
INVENTORY
6. INVENTORY
Inventory, net at March 31, 2011 and December 31, 2010 consisted of the following:
                 
    March 31,     December 31,  
(in $000’s)   2011     2010  
Raw materials
  $ 27,609     $ 27,871  
Work in process
    3,174       2,575  
Finished goods
    23,482       20,545  
 
           
Total inventory, net
  $ 54,265     $ 50,991  
Less: Non-current inventory, net
    (5,425 )     (6,442 )
 
           
Total inventory-current, net
  $ 48,840     $ 44,549  
 
           
The inventory carrying value reserves included in the inventory, net presented above amounted to $8,225,000 and $5,344,000 at March 31, 2011 and December 31, 2010, 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 classified as non-current inventory and is included as a component of other assets in the consolidated balance sheets. Amounts classified as non-current inventory consist of raw materials, net of carrying value 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 $2,004,000 and $2,117,000 at March 31, 2011 and December 31, 2010, 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 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.
Property, Plant and Equipment
PROPERTY, PLANT AND EQUIPMENT
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consisted of the following:
                 
    March 31,     December 31,  
(in $000’s)   2011     2010  
Land
  $ 3,670     $ 2,270  
Buildings and improvements
    83,913       82,836  
Equipment
    70,610       70,785  
Office furniture and equipment
    9,188       9,077  
Construction-in-progress
    7,083       3,958  
 
           
Property, plant and equipment, gross
  $ 174,463     $ 168,926  
 
Less: Accumulated depreciation
    (65,290 )     (62,646 )
 
           
Property, plant and equipment, net
  $ 109,173     $ 106,280  
 
           
Accrued Expenses, Commitments and Contingencies
ACCRUED EXPENSES, COMMITMENTS AND CONTINGENCIES
8. ACCRUED EXPENSES, COMMITMENTS AND CONTINGENCIES
The following table sets forth the Company’s accrued expenses:
                 
    March 31,     December 31  
(in $000’s)   2011     2010  
Payroll-related expenses
  $ 11,179     $ 16,796  
Product returns
    30,275       33,755  
Medicaid rebates
    10,812       12,475  
Physician detailing sales force fees
    1,625       2,308  
Legal and professional fees
    6,033       3,143  
Shelf stock adjustments
    1,328       281  
Other
    8,095       4,030  
 
           
Total accrued expenses
  $ 69,347     $ 72,788  
 
           
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 are generally not subject to returns. A roll forward of the product return reserve for the three months ended March 31, 2011 and the year ended December 31, 2010, is as follows:
                 
    March 31,     December 31,  
Product Return Reserve   2011     2010  
(in $000’s)                
Beginning balance
  $ 33,755     $ 22,114  
Provision related to sales recorded in the period
    2,706       15,821  
Credits issued during the period
    (6,186 )     (4,180 )
 
           
Ending balance
  $ 30,275     $ 33,755  
 
           
Taiwan Facility Construction
The Company has entered into several contracts relating to ongoing construction at its manufacturing facility located in Jhunan, Taiwan, R.O.C. As of March 31, 2011, the Company had remaining obligations under these contracts of approximately $1,023,000.
Purchase Order Commitments
As of March 31, 2011, the Company had approximately $22,558,000 of open purchase order commitments, primarily for raw materials. The terms of these purchase order commitments are less than one year in duration.
Income Taxes
INCOME TAXES
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 year-to-date taxable income 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. 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 three months ended March 31, 2011, the Company recorded an aggregate tax provision of $7,144,000 for United States domestic income taxes and for foreign income taxes. In the three months ended March 31, 2010, the Company recorded an aggregate tax provision of $79,484,000 for United States domestic income taxes and for foreign income taxes. The decrease in the tax provision resulted from lower income before taxes in the three months ended March 31, 2011 as compared to the same period in the prior year. The tax provision for the three months ended March 31, 2011 includes the effect of the federal research and development tax credit, enacted on December 17, 2010 for a two-year period, retroactive to January 1, 2010. Conversely, the tax provision for the three months ended March 31, 2010 does not include the effect of the federal research and development tax credit which had expired on December 31, 2009.
Revolving Line of Credit
REVOLVING LINE OF CREDIT
10. REVOLVING LINE OF CREDIT
On February 11, 2011, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (Wells Fargo Bank), as a lender and as administrative agent (the “Administrative Agent”). The Credit Agreement provides the Company with a revolving line of credit in the aggregate principal amount of up to $50,000,000 (the “Revolving Credit Facility”). Under the Revolving Credit Facility, up to $10,000,000 is available for letters of credit, the outstanding face amounts of which reduce availability under the Revolving Credit Facility on a dollar for dollar basis. Proceeds under the Credit Agreement may be used for working capital, general corporate and other lawful purposes. The Company has not yet borrowed any amounts under the Revolving Credit Facility.
The Company’s borrowings under the Credit Agreement are secured by substantially all of the personal property assets of the Company pursuant to a Security Agreement (the “Security Agreement”) entered into by the Company and the Administrative Agent. As further security, the Company also pledged to the Administrative Agent, 65% of the Company’s equity interest in its wholly-owned subsidiary Impax Laboratories (Taiwan), Inc. and must similarly pledge all or a portion of its equity interest in future subsidiaries. Under the Credit Agreement, among other things:
    The outstanding principal amount of all revolving credit loans, together with accrued and unpaid interest thereon, will be due and payable on the maturity date, which will occur four years following the February 11, 2011 closing date.
    Borrowings under the Revolving Credit Facility will bear interest, at the Company’s option, at either an Alternate Base Rate (as defined in the Credit Agreement) plus the applicable margin in effect from time to time ranging from 0.5% to 1.5%, or a LIBOR Rate (as defined in the Credit Agreement) plus the applicable margin in effect from time to time ranging from 1.5% to 2.5%. The Company is also required to pay an unused commitment fee ranging from 0.25% to 0.45% per annum based on the daily average undrawn portion of the Revolving Credit Facility. The applicable margin described above and the unused commitment fee in effect at any given time will be determined based on the Company’s Total Net Leverage Ratio (as defined in the Credit Agreement), which is based upon the Company’s consolidated total debt, net of unrestricted cash in excess of $100 million, compared to Consolidated EBITDA (as defined in the Credit Agreement) for the immediately preceding four quarters.
    The Company may prepay any outstanding loan under the Revolving Credit Facility without premium or penalty.
    The Company is required under the Credit Agreement and the Security Agreement to comply with a number of affirmative, negative and financial covenants. Among other things, these covenants (i) require the Company to provide periodic reports, notices of material events and information regarding collateral, (ii) restrict the Company’ ability, subject to certain exceptions and baskets, to incur additional indebtedness, grant liens on assets, undergo fundamental changes, change the nature of its business, make investments, undertake acquisitions, sell assets, make restricted payments (including the ability to pay dividends and repurchase stock) or engage in affiliate transactions, and (iii) require the Company to maintain a Total Net Leverage Ratio (which is, generally, total funded debt, net of unrestricted cash in excess of $100 million, over EBITDA for the preceding four quarters) of less than 3.75 to 1.00, a Senior Secured Leverage Ratio (which is, generally, total senior secured debt over EBITDA for the preceding four quarters) of less than 2.50 to 1.00 and a Fixed Charge Coverage Ratio (which is, generally, EBITDA for the preceding four quarters over the sum of cash interest expense, cash tax payments, scheduled funded debt payments and capital expenditures during such four quarter period) of at least 2.00 to 1.00 (with each such ratio as more particularly defined as set forth in the Credit Agreement). As of March 31, 2011, the Company was in compliance with the various covenants contained in the Credit Agreement and the Security Agreement.
    The Credit Agreement contains customary events of default (subject to customary grace periods, cure rights and materiality thresholds), including, among others, failure to pay principal, interest or fees, violation of covenants, material inaccuracy of representations and warranties, cross-default and cross-acceleration of material indebtedness and other obligations, certain bankruptcy and insolvency events, certain judgments, certain events related to the Employee Retirement Income Security Act of 1974, as amended, and a change of control.
    Following an event of default under the Credit Agreement, the Administrative Agent would be entitled to take various actions, including the acceleration of amounts due under the Credit Agreement and seek other remedies that may be taken by secured creditors.
Effective with the February 11, 2011 execution of the Credit Agreement discussed above, the Company’s former credit agreement under the Amended and Restated Loan and Security Agreement, dated as of December 15, 2005, as amended, between the Company and the Administrative Agent (as successor by merger to Wachovia Bank, National Association), and its corresponding commitments were terminated. There were no amounts outstanding under the former credit agreement as of February 11, 2011. During the three months ended March 31, 2011 and 2010, unused line fees incurred under each of the aforementioned respective credit agreements were $50,000 and $44,000, respectively.
Alliance and Collaboration Agreements
ALLIANCE AND COLLABORATION AGREEMENTS
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 $16,977,000 and $41,228,000 on sales of the AG Product during the three months ended March 31, 2011 and 2010, respectively, with a corresponding charge included in the cost of revenues line on the consolidated statement of operations.
Strategic Alliance Agreement with Teva
The following tables show the additions to and deductions from the deferred revenue and deferred product manufacturing costs under the Teva Agreement:
                 
    Three Months        
    Ended     Inception  
(in $000’s)   March 31,     Through  
Deferred revenue   2011     Dec 31, 2010  
Beginning balance
  $ 4,410     $  
Additions:
               
Product-related and cost sharing
          427,365  
Exclusivity charges
          (50,600 )
All other
          12,527  
 
           
Total additions
  $     $ 389,292  
 
           
 
Less:
               
Amount recognized
    (288 )     (188,442 )
Accounting adjustment
          (196,440 )
 
           
Total deferred revenue
  $ 4,122     $ 4,410  
 
           
                 
    Three Months        
(in $000’s)   Ended     Inception  
Deferred product   March 31,     Through  
manufacturing costs   2011     Dec 31, 2010  
Beginning balance
  $     $  
Additions
          182,981  
 
Less:
               
Amount recognized
          (87,555 )
Accounting adjustment
          (95,426 )
 
           
Total deferred product manufacturing costs
  $     $  
 
           
OTC Partners Alliance Agreements
The following table shows the additions to and deductions from deferred revenue and deferred product manufacturing costs under the OTC Agreements:
                 
    Three Months        
    Ended     Inception  
(in $000’s)   March 31,     Through  
Deferred revenue   2011     Dec 31, 2010  
Beginning balance
  $ 11,382     $  
Additions:
               
Upfront fees and milestone payments
          8,436  
Cost-sharing and other
          1,642  
Product-related deferrals
    910       87,934  
 
           
Total additions
  $ 910     $ 98,012  
 
           
 
Less: amount recognized
    (1,943 )     (86,630 )
 
           
Total deferred revenue
  $ 10,349     $ 11,382  
 
           
                 
    Three Months        
(in $000’s)   Ended     Inception  
Deferred product   March 31,     Through  
manufacturing costs   2011     Dec 31, 2010  
Beginning balance
  $ 10,235     $  
Additions
    478       81,093  
Less: amount recognized
    (1,357 )     (70,858 )
 
           
Total deferred product manufacturing costs
  $ 9,356     $ 10,235  
 
           
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 of $15,000,000 in milestone payments composed of two $5,000,000 milestone payments, paid by Medicis in March 2009 and September 2009, a $2,000,000 milestone payment received in December 2009, and a $3,000,000 milestone payment received in March 2011. The Company has the potential to receive up to an additional $8,000,000 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 gross profit share on sales, if any, of such products.
License, Development and Commercialization Agreement & Supply Agreement with Glaxo Group Limited
In December 2010, the Company entered into a License, Development and Commercialization Agreement (“License Agreement”) and a related Supply Agreement with Glaxo Group Limited (“GSK”). The License Agreement and the Supply Agreement are accounted for as a single contractual arrangement under FASB ASC 605-25. Under the terms of the License Agreement, the Company granted GSK exclusive development and commercial licenses to the Company’s lead-branded-product candidate known as IPX066, and certain follow-on products at the option of GSK, for all worldwide jurisdictions, except those in the United States of America and Taiwan, R.O.C. Under the Supply Agreement, the Company is required to manufacture IPX066 for GSK’s use in its development and commercial activities, for which GSK will pay a transfer price computed under the terms of the Supply Agreement. Under the License Agreement, the Company received an initial $11,500,000 up-front payment in December 2010 (“the License Agreement up-front payment”). The Company has the potential to receive up to $175,000,000 of additional contingent payments upon the achievement of certain specified development, clinical, regulatory, and /or commercialization milestones. The consideration, including the License Agreement up-front payment, during the development period will be deferred and recognized on a straight-line basis over the Company’s expected period of performance during the development period, which is currently estimated to be the 24 month period ending December 31, 2012. The research and development milestone payments, if any, will be accounted for according to FASB ASC 605-28, Milestone Method, wherein they will be recognized as revenue in the period earned, provided the criteria of ASC 605-28 are met at the time of such respective milestone payments. The Company may also receive royalty payments on any sales of IPX066 by GSK, which will be recognized as revenue in the period earned. Upon exercise of its option for the follow-on product, GSK is required to pay a fee to the Company, of which the Company will defer such payment and recognize revenue over the expected period of performance of the follow-on product development period. The Company and GSK are each generally responsible for costs incurred to complete their respective development activities, except in limited circumstances as specified in the License Agreement. The License Agreement and Supply Agreement will continue until GSK no longer has any royalty payment obligations to the Company, or if the License Agreement and Supply Agreement are terminated earlier in accordance with their contractual terms. The License Agreement and Supply Agreement may be terminated by GSK for convenience upon 90 days prior written notice, and may also be terminated under certain other circumstances, including material breach, as set forth in the respective agreements.
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.
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. Effective January 1, 2010, the Company receives a fixed fee, subject to annual cost adjustment, for providing such physician detailing sales call services 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 $3,503,000 in the three months ended March 31, 2011 and 2010, respectively, under the Pfizer Co-Promotion Agreement, with such amounts presented in the line item “Promotional Partner” revenue on the consolidated statement of operations.
Share-Based Compensation
SHARE-BASED COMPENSATION
12. SHARE-BASED COMPENSATION
The Company recognizes the grant date fair value of each stock option and restricted stock award 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:  
    March 31,     March 31,  
(in $000’s)   2011     2010  
 
Manufacturing expenses
  $ 515     $ 898  
Research and development
    953       898  
Selling, general & administrative
    1,419       1,077  
 
           
Total
  $ 2,887     $ 2,873  
 
           
The following table summarizes stock option activity:
                 
            Weighted Average  
    Number of Shares     Exercise Price  
    Under Option     per Share  
Outstanding at December 31, 2010
    6,514,676     $ 10.84  
 
             
Options granted
        $  
Options exercised
    (738,660 )   $ 11.19  
Options forfeited
    (74,413 )   $ 9.45  
 
             
Outstanding at March 31, 2011
    5,701,603     $ 10.82  
 
             
Vested and expected to vest at March 31, 2011
    6,307,281     $ 10.70  
 
             
Options exercisable at March 31, 2011
    3,358,091     $ 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 result of the simplified method provides a reasonable estimate in comparison to actual experience. 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, 2010
    1,434,759     $ 12.93  
Granted
    18,850     $ 20.60  
Vested
    (64,645 )   $ 6.23  
Forfeited
    (55,231 )   $ 14.30  
 
             
Non-vested at March 31, 2011
    1,333,733     $ 13.39  
 
             
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.
As of March 31, 2011, the Company had total unrecognized share-based compensation expense, net of estimated forfeitures, of $24,637,000 related to all of its share-based awards, which will be recognized over a weighted average period of 2.11 years. The intrinsic value of stock options exercised during the three months ended March 31, 2011 and 2010 was $8,942,000 and $3,730,000, respectively. The total fair value of restricted stock awards which vested during the three months ended March 31, 2011 and 2010 was $403,000 and $910,000, respectively. As of March 31, 2011, the Company had 2,810,345 shares of common stock available for issuance of stock options, restricted stock awards or stock appreciation rights.
Stockholders' Equity
STOCKHOLDERS' EQUITY
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 three months ended March 31, 2011 and 2010, 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.
Earnings Per Share
EARNINGS PER SHARE
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 shares of common stock outstanding for the period, along with diluted earnings per share, computed by dividing net income by the weighted-average number of shares of common stock adjusted for the dilutive effect of common stock equivalents outstanding during the period. A reconciliation of basic and diluted net income per share of common stock for the three months ended March 31, 2011 and 2010 was as follows:
                 
    Three Months Ended:  
    March 31,     March 31,  
(in $000’s except per share amounts)   2011     2010  
 
               
Numerator:
               
Net income
  $ 13,863     $ 131,485  
 
           
 
               
Denominator:
               
Weighted average common shares outstanding
    63,390,527       61,008,015  
 
               
Effect of dilutive options and common stock purchase warrants
    3,653,739       2,857,663  
 
           
 
               
Diluted weighted average common shares outstanding
    67,044,266       63,865,678  
 
               
Basic net income per share
  $ 0.22     $ 2.16  
 
           
Diluted net income per share
  $ 0.21     $ 2.06  
 
           
For the three months ended March 31, 2011 and 2010, the Company excluded 687,482 and 1,034,741, 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.
Comprehensive Income
COMPREHENSIVE INCOME
15. COMPREHENSIVE INCOME
                 
    Three Months Ended:  
    March 31,     March 31,  
(in $000’s)   2011     2010  
 
               
Net income
  $ 13,863     $ 131,485  
Currency translation adjustments
    (426 )     347  
 
           
Comprehensive income
    13,437       131,832  
 
               
Comprehensive income attributable to the noncontrolling interest
           
 
           
 
               
Comprehensive income attributable to Impax Laboratories, Inc.
  $ 13,437     $ 131,832  
 
           
Segment Information
SEGMENT INFORMATION
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 and collaboration 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. Additionally, the Company 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 in the line item “Research Partner” on the consolidated statement of operations; and the Company generates revenue in its Impax Division under a License, Development and Commercialization Agreement with another unrelated third-party pharmaceutical company, and reports such revenue in the line item “Rx Partner” 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, 2010. The Company has no inter-segment revenue.
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 March 31, 2011   Division     Division     and Other     Company  
Revenue, net
  $ 103,348     $ 5,303     $     $ 108,651  
Cost of revenue
    47,174       2,940             50,114  
Research and development
    9,776       9,714             19,490  
Patent Litigation
    1,774                   1,774  
Income (loss) before provision for income taxes
  $ 41,693     $ (8,458 )   $ (12,233 )   $ 21,002  
                                 
(in $000’s)   Global     Impax     Corporate     Total  
Three Months Ended March 31, 2010   Division     Division     and Other     Company  
Revenue, net
  $ 319,830     $ 3,503     $     $ 323,333  
Cost of revenue
    76,432       3,144             79,576  
Research and development
    9,435       8,874             18,309  
Patent Litigation
    1,984                   1,984  
Income (loss) before provision for income taxes
  $ 228,645     $ (9,324 )   $ (8,324 )   $ 210,997  
Foreign Operations
The Company’s wholly-owned subsidiary, Impax Laboratories (Taiwan) Inc., is constructing a manufacturing facility in Jhunan, Taiwan R.O.C. which is utilized for manufacturing, research and development, warehouse, and administrative functions, with approximately $39,250,000 of net carrying value of assets, composed principally of a building and equipment, included in the Company’s consolidated balance sheet at March 31, 2011.
Legal and Regulatory Matters
LEGAL AND REGULATORY MATTERS
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 controlled release products for which the Company is developing generic versions.
Under federal law, when a drug developer files an Abbreviated New Drug Application (“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 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 products covered by the Teva Agreement. For the six products with ANDAs already filed with the FDA at the time the Teva Agreement was signed, Teva is required to pay 50% of the fees and costs in excess of $7,000,000; for three of the products with ANDAs filed since the Teva Agreement was signed, Teva is required to pay 45% of the fees and costs; and for the remaining three products, Teva is required to pay 50% of the fees and costs. The Company is responsible for the remaining fees and costs relating to these products.
The Company is generally responsible for all of the patent litigation fees and costs associated with current and future products not covered by the Teva Agreement. The company has agreed to share legal expenses under the terms of certain of the alliance and collaboration agreements it has entered into. The Company records the costs of patent litigation as expense when incurred for products it has developed, as well as for products which are the subject of an alliance or collaboration agreement with a third-party.
Although the outcome and costs of the asserted and unasserted claims is difficult to predict, the Company does not expect the ultimate liability, if any, for such matters to have a material adverse effect on its financial condition, results of operations, or cash flows.
Patent Infringement Litigation
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 and, in May 2005, granted summary judgment of invalidity with respect to a third patent. The Company will have the opportunity to file additional summary judgment motions in the future and to assert both non-infringement and invalidity of the remaining patents (if necessary) at trial. No trial date has yet been set. In September 2005, Teva Pharmaceuticals, USA 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 complete and summary judgment motions have been filed. On March 29, 2011, the district court entered an Order of Dismissal based upon the parties agreement on settlement terms, with the parties having the right to reopen the case in the event a settlement is not consummated within 60 days.
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 (“2008 Action”). 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.
In December 2010, the Company filed a separate declaratory judgment action against Pfizer in the U.S. District Court for the District of New Jersey, requesting the district court to declare one of the patents-in-suit, U.S. Patent No. 6,911,217, listed in the FDA’s publication Approved Drug Products with Therapeutic Equivalence Evaluations (commonly referred to as the “Orange Book”) for Detrol LA® is invalid. Pfizer filed a motion to dismiss the declaratory action for lack of subject matter jurisdiction or, alternatively, because the Company’s sole claim should have been brought as a compulsory counterclaim in the 2008 action. The parties are awaiting a decision on Pfizer’s motion.
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 against other generic drug manufacturers that have filed ANDAs relating to this product and proceedings in this case were stayed. In March 2011, a stipulated final judgment of patent infringement and validity was entered against Wockhardt Limited. On April 27, 2011, a stipulated order was entered, enjoining Impax from selling or offering to sell its ANDA product before the expiration of U.S. Patent No. 5,023,269 (“the ‘269 patent”) and requiring Impax to convert its Paragraph IV Certification to a Paragraph III Certification with respect to the ‘269 patent.
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. Markman briefing is completed, and discovery is proceeding. No trial date has been set.
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. Discovery is proceeding, and trial is scheduled for September 27, 2012.
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. Discovery is proceeding, 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.
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 district 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 July 29, 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, 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.
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. Discovery is proceeding, 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 (together, “Schering”) 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, 10/80 mg, generic to Vytorin ®. The Company has filed an answer and counterclaim. In December 2010, the parties agreed to be bound by the final judgment concerning validity and enforceability of the patents at issue in cases brought by Schering against other generic drug manufacturers that have filed ANDAs relating to this product and proceedings in this case were stayed.
Abbott Laboratories, et al. v. Impax Laboratories, Inc. (Niacin-Simvastatin)
In November 2010, Abbott Laboratories and Abbott Respiratory LLC 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 Niacin-Simvastatin Tablets, 1000/20 mg, generic to Simcor®. The Company has filed an answer and counterclaim.
Alza Corp., et al. v. Impax Laboratories, Inc., et al. (Methylphenidate)
In November 2010, Alza Corp., Ortho-McNeil-Janssen Pharmaceuticals, Inc. (together, “Alza”) 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 Methylphenidate Hydrochloride Tablets, 54 mg, generic to Concerta®. The Company has filed its answer. In March 2011, the case was stayed until the earlier of six months from the stay date, or, the date the district court issues an opinion on the motion for summary judgment of patent invalidity filed in Alza Corp. v. Kremers Urban, LLC, Case No. 10-00023 (D. Del.).
      Daiichi Sankyo, Inc. et al. v. Impax Laboratories, Inc. (Colesevelam Powder)
In November 2010, Daiichi Sankyo, Inc. and Genzyme Corporation (together, “Daiichi”) 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 Powder, 1.875 gm/packet and 3.75 gm/packet, generic to Welchol® for Oral Suspension. The Company has filed an answer and counterclaim. Fact discovery closes July 29, 2011 and no trial date has been scheduled.
Shire LLC, et al. v. Impax Laboratories, Inc., et al. (Guanfacine)
In December 2010, Shire LLC, Supernus Pharmaceuticals, Inc., Amy F.T. Arnsten, Ph.D., Pasko Rakic, M.D., and Robert D. Hunt, M.D. (together, “Shire”) filed suit against the Company in the U.S. District Court for the Northern District of California alleging patent infringement for the filing of the Company’s ANDA relating to Guanfacine Hydrochloride Tablets, 4 mg, generic to Intuniv®. In January, 2011 Shire amended its complaint to add the 1 mg, 2 mg, and 3 mg strengths. The Company has filed its answer and counterclaims.
Takeda Pharmaceutical Co., Ltd, et al. v. Impax Laboratories, Inc, (Dexlansoprazole)
In April 2011, Takeda Pharmaceutical Co., Ltd., Takeda Pharmaceuticals North America, Inc., Takeda Pharmaceuticals LLC, and Takeda Pharmaceuticals America, Inc. (collectively, “Takeda”) filed suit against the Company in the U.S. District Court for the Northern District of California alleging patent infringement for the filing of the Company’s ANDA relating to Dexlansoprazole Delayed Release Capsules, 30 and 60 mg, generic to Dexilant®.
Purdue Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals L.P., Rhodes Technologies, Board of Regents of the University of Texas System, and Grunenthal GmbH v. Impax Laboratories, Inc. (Oxycodone)
In April 2011, Purdue Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals L.P., Rhodes Technologies, Board of Regents of the University of Texas System, and Grunenthal GmbH (collectively “Purdue”) filed suit against the Company in the U.S. District Court for the Southern District of New York alleging patent infringement based on the filing of the Company’s ANDA relating to Oxycodone Hydrochloride, Controlled Release tablets, 10, 15, 20, 30, 40, 60 and 80 mg, generic to Oxycontin®.
Other Litigation Related to the Company’s Business
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. Plaintiffs have filed a motion for class certification and the Company has filed an opposition to that motion. The class certification hearing is set for May 17, 2011, and expert discovery closes on May 27, 2011. 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, each 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. The case was removed to the U.S. District Court for the Southern District of New York by Shire based on diversity jurisdiction. Discovery is proceeding and no trial date has been scheduled.
Supplementary Financial Information (unaudited)
SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)
18. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)
Selected (unaudited) financial information for the quarterly period noted is as follows:
         
    Quarter Ended:  
(in $000’s except per share amounts)   March 31, 2011  
Revenue:
       
Global Product sales, gross
  $ 151,440  
Less:
       
Chargebacks
    35,216  
Rebates
    12,709  
Product Returns
    2,706  
Other credits
    8,863  
 
     
Global Product sales, net
    91,946  
 
     
 
       
Private Label Product sales
    392  
Rx Partner
    4,120  
OTC Partner
    1,943  
Research Partner
    6,715  
Promotional Partner
    3,535  
 
     
Total revenues
    108,651  
 
     
 
       
Gross profit
    58,537  
 
       
Net income
  $ 13,863  
 
     
 
       
Net income per share (basic)
  $ 0.22  
 
     
Net income per share (diluted)
  $ 0.21  
 
     
 
       
Weighted Average:
       
common shares outstanding:
       
Basic
    63,390,527  
 
     
Diluted
    67,044,266  
 
     
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.
Selected (unaudited) financial information for the quarterly period noted is as follows:
         
    Quarter Ended:  
(in $000’s except per share amounts)   March 31, 2010  
Revenue:
       
Global Product sales, gross
  $ 425,986  
Less:
       
Chargebacks
    56,168  
Rebates
    29,425  
Product Returns
    7,400  
Other credits
    23,888  
 
     
Global Product sales, net
    309,105  
 
     
 
       
Private Label Product sales
    672  
Rx Partner
    4,903  
OTC Partner
    1,765  
Research Partner
    3,385  
Promotional Partner
    3,503  
 
     
Total revenues
    323,333  
 
     
 
       
Gross profit
    243,757  
 
       
Net income
  $ 131,485  
 
     
 
       
Net income per share (basic)
  $ 2.16  
 
     
Net income per share (diluted)
  $ 2.06  
 
     
 
       
Weighted Average:
       
common shares outstanding:
       
Basic
    61,008,015  
 
     
Diluted
    63,865,678  
 
     
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.