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1. THE COMPANY
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 through a direct sales force focused on marketing to physicians, primarily in the CNS community, pharmaceutical products developed by other unrelated third-party pharmaceutical entities.
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 five 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.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
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 & 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.
Principles of Consolidation
The 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 December 31, 2011. All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all short-term investments with maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which, for cash equivalents, approximates fair value due to their short-term maturity. The Company is potentially subject to financial instrument concentration of credit risk through its cash and cash equivalents. The Company maintains cash and cash equivalents with several major financial institutions. Such amounts frequently exceed Federal Deposit Insurance Corporation (“FDIC”) limits.
Short-Term Investments
Short-term investments represent investments in fixed rate financial instruments with maturities of greater than three months but less than 12 months at the time of purchase. The Company’s short-term investments are held in U.S. Treasury securities, corporate bonds, and high grade commercial paper, which are not insured by the FDIC. They are stated at amortized cost, which approximates fair value due to their short-term maturity, generally based upon observable market values of similar securities.
Fair Value of Financial Instruments
The Company’s deferred compensation liability is carried at the value of the amount owed to participants, and is derived from observable market data by reference to hypothetical investments. The carrying values of other financial assets and liabilities such as accounts receivable, accounts payable and accrued expenses approximate their fair values due to their short-term nature.
Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, covering a wide range of matters, including, among others, patent litigation, shareholder lawsuits, and product liability. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification TM (“ASC”) Topic 450, “Contingencies”, the Company records accruals for such loss contingencies when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company, in accordance with FASB ASC Topic 450, does not recognize gain contingencies until realized. The Company records an accrual for legal costs in the period incurred. A discussion of contingencies is included in the “Commitments and Contingencies,” and “Legal and Regulatory Matters” footnotes below.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from amounts deemed to be uncollectible from its customers; these allowances are for specific amounts on certain accounts based on facts and circumstances determined on a case-by-case basis.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, cash equivalents, short-term investments, and accounts receivable. The Company limits its credit risk associated with cash, cash equivalents and short-term investments by placing its investments with high quality money market funds, corporate debt, and short-term commercial paper and in securities backed by the U.S. Government. The Company limits its credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary. The Company does not require collateral to secure amounts owed to it by its customers.
The following tables present the percentage of total accounts receivable and gross revenues represented by the Company’s five largest customers as of and for the years ended December 31, 2011, 2010 and 2009:
Percent of Total Accounts Receivable |
2011 | 2010 | 2009 | |||||||||
Customer #1 |
30.4 | % | 15.0 | % | 43.8 | % | ||||||
Customer #2 |
25.7 | % | 28.3 | % | 19.9 | % | ||||||
Customer #3 |
12.9 | % | 18.4 | % | 18.7 | % | ||||||
Customer #4 |
8.6 | % | 13.5 | % | 3.6 | % | ||||||
Customer #5 |
— | % | 2.9 | % | 2.7 | % | ||||||
Customer #6 |
2.5 | % | — | % | — | % | ||||||
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Total Five largest customers |
80.1 | % | 78.1 | % | 88.7 | % | ||||||
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Percent of Gross Revenues |
2011 | 2010 | 2009 | |||||||||
Customer #1 |
19.6 | % | 14.1 | % | 26.5 | % | ||||||
Customer #2 |
19.4 | % | 14.2 | % | 15.3 | % | ||||||
Customer #3 |
15.9 | % | 19.9 | % | 22.2 | % | ||||||
Customer #4 |
12.4 | % | 6.5 | % | 3.9 | % | ||||||
Customer #5 |
— | % | — | % | — | % | ||||||
Customer #6 |
— | % | — | % | — | % | ||||||
Customer #7 |
— | % | — | % | 5.7 | % | ||||||
Customer #8 |
2.4 | % | 3.4 | % | — | % | ||||||
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Total Five largest customers |
69.7 | % | 58.1 | % | 73.6 | % | ||||||
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During the years ended December 31, 2011, 2010 and 2009, the Company’s top ten products accounted for 76%, 83% and 70%, respectively, of Global Product sales, net.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using a standard cost method, and the cost flow assumption is first in, first out (“FIFO”) flow of goods. Standard costs are revised annually, and significant variances between actual costs and standard costs are apportioned to inventory and cost of goods sold based upon inventory turnover. Costs include materials, labor, quality control, and production overhead. Inventory is adjusted for short-dated, unmarketable inventory equal to the difference between the cost of inventory and the estimated value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Consistent with industry practice, the Company may build pre-launch inventories of certain products which are pending required FDA approval and/or resolution of patent infringement litigation, when, in the Company’s assessment, such action is appropriate to increase the commercial opportunity and FDA approval is expected in the near term and/or the litigation will be resolved in the Company’s favor. The Company accounts for all costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) as a current period charge in accordance with GAAP.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred and costs of improvements and renewals are capitalized. Costs incurred in connection with the construction or major renovation of facilities, including interest directly related to such projects, are capitalized as construction in progress. Depreciation is recognized using the straight-line method based on the estimated useful lives of the related assets, which are 40 years for buildings, 15 years for building improvements, 7 to 10 years for equipment, and 3 to 7 years for office furniture and equipment. Land and construction-in-progress are not depreciated.
Goodwill
In accordance with FASB ASC Topic 350, “Goodwill and Other Intangibles”, rather than recording periodic amortization, goodwill is subject to an annual assessment for impairment by applying a fair value based test. Under FASB ASC Topic 350, if the fair value of the reporting unit exceeds the reporting unit’s carrying value, including goodwill, then goodwill is considered not impaired, making further analysis not required. The Company considers the Global Division and the Impax Division operating segments to each be a reporting unit. The Company attributes the entire carrying amount of goodwill to the Global Division.
The Company concluded the carrying value of goodwill was not impaired as of December 31, 2011 and 2010 as the fair value of the Global Division exceeded its carrying value at each date. The Company performs its annual goodwill impairment test in the fourth quarter of each year. The Company estimated the fair value of the Global Division using a discounted cash flow model for both the reporting unit and the enterprise. In addition, on a quarterly basis, the Company performs a review of its business operations to determine whether events or changes in circumstances have occurred which could have a material adverse effect on the estimated fair value of the reporting unit, and thus indicate a potential impairment of the goodwill carrying value. If such events or changes in circumstances were deemed to have occurred, the Company would perform an interim impairment analysis, which may include the preparation of a discounted cash flow model, or consultation with one or more valuation specialists, to determine the impact, if any, on the Company’s assessment of the reporting unit’s fair value. The Company has not to date deemed there to have been any significant adverse changes in the legal, regulatory, or general economic environment in which the Company conducts its business operations.
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 both of the following criteria are met:
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the delivered item has value to the customer on a stand-alone basis; and |
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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 the criteria above 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 recognized generally over the greater of the term of the arrangement or the expected period of performance, either on a straight-line basis or on a modified proportional performance method.
The Company accounts for milestones related to research and development activities in accordance with FASB ASC Topic 605-28, milestone method of revenue recognition. FASB ASC Topic 605-28 allows for the recognition of consideration, which is contingent on the achievement of a substantive milestone, in its entirety in the period the milestone is achieved. A milestone is considered to be substantive if all of the following criteria are met:, including the milestone is commensurate with either: (1) the performance required to achieve the milestone, or (2) 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 payment 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 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, which is generally when product is received by the customer. Included in Global Product revenue are deductions from the gross sales price, including deductions related to estimates for chargebacks, rebates, returns, shelf-stock, and other pricing adjustments. The Company records an estimate for these deductions in the same period when revenue is recognized. A summary of each of these deductions is as follows:
Chargebacks
The Company 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. An estimated accrued provision for chargeback deductions is recognized 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 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. An estimated accrued provision for rebate deductions is recognized 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 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 personnel in writing or by telephone with the lot number and expiration date accompanying any request and if such products are returned within six months prior to or until twelve months following, the products’ expiration date. The Company estimates and recognizes an accrued 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 estimated return rates which may be adjusted based on various assumptions including 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.
Shelf-Stock Adjustments
Based upon competitive market conditions, the Company may reduce the selling price of certain products. The Company may issue a credit against the sales amount to customers based upon their remaining inventory of the product in question, provided the customer agrees to continue to make future purchases of product from the Company. This type of customer credit is referred to as a shelf-stock adjustment, which is the difference between the sales price and the revised lower sales price, multiplied by an estimate of the number of product units on hand at a given date. Decreases in selling prices are discretionary decisions made by the Company in response to market conditions, including estimated launch dates of competing products and estimated declines in market price. The Company records an estimate for shelf-stock adjustments in the period it agrees to grant such a credit to a customer.
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 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, with corresponding adjustments to accrued liabilities.
Cash Discounts
The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for paying within invoice terms, which generally range from 30 to 90 days. An estimate of cash discounts is recorded in the same period when revenue is recognized.
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-party pharmaceutical companies. The Company has entered into these alliance agreements to develop marketing and/or distribution relationships with its partners to fully leverage its technology platform.
The Rx Partners and OTC Partners alliance agreements obligate the Company to deliver multiple goods and/or services over extended periods. Such deliverables include manufactured pharmaceutical products, exclusive and semi-exclusive marketing rights, distribution licenses, and research and development services, among others. In exchange for these deliverables, the Company receives payments from its alliance agreement partners for product shipments, and may also receive royalty, profit sharing, and/or upfront or periodic milestone payments. Revenue received from the alliance agreement partners for product shipments under these agreements is not subject to deductions for chargebacks, rebates, product returns, and other pricing adjustments. Royalty and profit sharing amounts the Company receives under these agreements are calculated by the respective alliance agreement partner, with such royalty and profit share amounts generally based upon estimates of net product sales or gross profit which include estimates of deductions for chargebacks, rebates, product returns, and other adjustments the alliance agreement partners may negotiate with their customers. The Company records the alliance agreement partner’s adjustments to such estimated amounts in the period the alliance agreement partner reports the amounts to the Company.
The Company applies 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”). 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. The Company initially defers the consideration received as a result of research and development-related activities performed under the Teva Agreement. 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 which is generally when product is received by Teva. The Company recognizes profit share revenue in the period earned.
OTC Partner revenue is related to an agreement with Pfizer Inc. (formerly Wyeth) with respect to supply of over-the-counter pharmaceutical products and related research and development services. The Company initially defers all revenue earned under the OTC Partner agreement. The Company also defers direct product manufacturing costs to the extent such costs are reimbursable by the OTC Partner. The product manufacturing costs in excess of amounts reimbursable by the OTC Partner are recognized as current period cost of revenue. The Company recognizes revenue as OTC Partner revenue and amortizes deferred product manufacturing costs as cost of revenues as it fulfills contractual obligations. Revenue is recognized and associated costs are amortized over the agreement’s term of the arrangement or the expected period of performance, using a modified proportional performance method. Under the modified proportional performance method of revenue recognition utilized by the Company, the amount recognized in the period of initial recognition is based upon the number of years elapsed under the alliance and collaboration agreement relative to the estimated total length of the recognition period. Under this method, the amount of revenue recognized in the year of initial recognition is determined by multiplying the total amount realized by a fraction, the numerator of which is the then current year of the alliance and collaboration agreement and the denominator of which is the total estimated life of the alliance and collaboration agreement. The amount recognized as revenue 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 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 expected period of performance of the alliance and collaboration agreement.
Research Partner:
The “Research Partner” line item of the statement of operations includes revenue recognized under development agreements with unrelated third-party pharmaceutical companies. The development agreements generally obligate the Company to provide research and development services over multiple periods. In exchange for this service, the Company received upfront payments upon signing of each development agreement and is eligible to receive contingent milestone payments, based upon the achievement of contractually specified events. Additionally, the Company may also receive royalty payments from the sale, if any, of a successfully developed and commercialized product under one of these development agreements. Revenue received from the achievement of contingent research and development milestones, if any, 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 promotional services agreements with unrelated third-party pharmaceutical companies. The promotional services agreements obligate the Company to provide physician detailing sales calls to promote its partners’ branded drug products over multiple periods. In exchange for this service, the Company has received fixed fees generally based on either the number of sales force representatives utilized in providing the services, or the number of sales calls made (up to contractual maximum amounts). The Company recognizes revenue from providing physician detailing services as those services are provided and as performance obligations are met and contingent payments, if any, at the time when they are earned.
Shipping and Handling Fees and Costs
Shipping and handling fees related to sales transactions are recorded as selling expense. Shipping costs were $ 1,341,000, $ 1,741,000 and $ 647,000 for the years ended December 31, 2011, 2010 and 2009, respectively.
Research and Development
Research and development activities are expensed as incurred and consist of self-funded research and development costs and costs associated with work performed by other participants under collaborative research and development agreements.
Derivatives
The Company does not engage in hedging transactions for trading or speculative purposes or to hedge exposure to currency or interest rate fluctuations. From time to time, the Company may engage in transactions that result in embedded derivatives (e.g. convertible debt securities). In accordance with FASB ASC Topic 815, derivatives and hedging, the Company records the embedded derivative at fair value on the balance sheet and records any related gains or losses in current earnings in the statement of operations.
Share-Based Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with provisions of FASB ASC Topic 718, stock compensation. Under FASB ASC Topic 718, the Company recognizes the grant date fair value of stock-based employee compensation as expense on a straight-line basis over the vesting period of the grant. The Company uses the Black Scholes option pricing model to determine the grant date fair value of employee stock options; the fair value of restricted stock awards is equal to the closing price of the Company’s stock on the date such award was granted.
Income Taxes
The Company provides for income taxes using the asset and liability method as required by FASB ASC Topic 740, income taxes. This approach recognizes the amount of federal, state, local taxes, and foreign taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequences of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates in the period during which they are signed into law. Under FASB ASC Topic 740, a valuation allowance is required when it is more likely than not all or some portion of the deferred tax assets will not be realized through generating sufficient future taxable income.
FASB ASC Topic 740, Sub-topic 10, tax positions, defines the criterion an individual tax position must meet for any part of the benefit of the tax position to be recognized in financial statements prepared in conformity with generally accepted accounting principles. Under FASB ASC Topic 740, Sub-topic 10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the tax position. The tax benefits recognized in the financial statements from such a tax position should be measured based on the largest benefit having a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Additionally, FASB ASC Topic 740, Sub-topic 10 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In accordance with the disclosure requirements of FASB ASC Topic 740, Sub-topic 10, the Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of total interest expense and other expense, respectively.
Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares adjusted for the dilutive effect of common stock equivalents outstanding during the period.
Other Comprehensive Income
The Company follows the provisions of FASB ASC Topic 220, comprehensive income, which establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined to include all changes in equity during a period except those resulting from investments by owners and distributions to owners. However, effective with its majority equity investment in Prohealth Biotech, Inc. and the formation of its wholly owned subsidiary Impax Laboratories (Taiwan) Inc., the Company recorded foreign currency translation gains and losses, which are reported as comprehensive income. Foreign currency translation gains (losses) gains for the years ended December 31, 2011, 2010 and 2009 were $ (1,087,000), $ 3,335,000 and $ 471,000, respectively.
Deferred Financing Costs
The Company capitalizes direct costs incurred with obtaining debt financing, which are included in other assets on the consolidated balance sheet. Deferred financing costs, including costs incurred in obtaining debt financing, are amortized to interest expense over the term of the underlying debt on a straight-line basis, which approximates the effective interest method. The Company recognized amortized deferred financing costs of $ 28,000, $ 25,000 and $135,000, in the years ended December 31, 2011, 2010, and 2009, respectively.
Foreign Currency Translation
The Company translates the assets and liabilities of the Taiwan dollar functional currency of its majority-owned affiliate Prohealth Biotechnology, Inc. and its wholly-owned subsidiary Impax Laboratories (Taiwan), Inc. into the U.S. dollar reporting currency using exchange rates in effect at the end of each reporting period. The revenue and expense of these entities are translated using an average of the rates in effect during the reporting period. Gains and losses from these translations are recorded as currency translation adjustments included in the consolidated statements of comprehensive income and the consolidated statements of changes in shareholders’ equity.
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3. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2011, the FASB amended its guidance about fair value measurement and disclosure. The new guidance was issued in conjunction with a new International Financial Reporting Standards (“IFRS”) fair value measurement standard aimed at updating IFRS to conform to U.S. GAAP. The new FASB guidance will result in some additional disclosure requirements; however, it does not result in significant modifications to existing FASB guidance with respect to fair value measurement and disclosure. The Company is required to adopt this guidance on January 1, 2012. The Company is in the process of evaluating this guidance.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (Topic 220), in order to increase the prominence of items reported in other comprehensive income. The amendments provide an entity with the option to present the components of net income, other comprehensive income and total comprehensive income, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, regardless of which option the entity chooses, the entity is required to present, on the face of the consolidated financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The requirement of this update to present the components of net income, other comprehensive income and total comprehensive income, either in a single continuous statement of comprehensive income or in two separate but consecutive statements is effective for fiscal years beginning after December 15, 2011. In December 2011, the requirement to present reclassification adjustments on the face of the consolidated financial statements was deferred indefinitely. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.
In September 2011, the FASB issued its updated guidance for the testing of goodwill for impairment. The update allows the Company the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing qualitative factors it is determined that it is more likely than not the fair value of the reporting unit is less than its carrying amount, the Company will need to perform a more detailed goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. The objective of this new approach is to simplify how entities test goodwill for impairment. The Company is in the process of evaluating this guidance.
In December 2011, the FASB issued its updated guidance on balance sheet offsetting. This new standard provides guidance to determine when offsetting in the balance sheet is appropriate. The guidance is designed to enhance disclosures by requiring improved information about financial instruments and derivative instruments. The goal is to provide users of the financial statements the ability to evaluate the effect or potential effect of netting arrangements on an entity’s statement of financial position. This guidance will only impact the disclosures within an entity’s financial statements and notes to the financial statements and does not result in a change to the accounting treatment of financial instruments and derivative instruments. The Company is required to adopt this guidance on January 1, 2013. The Company is in the process of evaluating this guidance.
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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 December 31, 2011 and December 31, 2010 follows:
(in $000’s) December 31, 2011 |
Amortized Cost |
Gross Unrecognized Gains |
Gross Unrecognized Losses |
Fair Value | ||||||||||||
Commercial paper |
$ | 69,341 | $ | 17 | $ | (5 | ) | $ | 69,353 | |||||||
Government sponsored enterprise obligations |
100,928 | 32 | (13 | ) | 100,947 | |||||||||||
Corporate bonds |
58,219 | 5 | (33 | ) | 58,191 | |||||||||||
Certificates of deposit |
13,507 | 1 | (1 | ) | 13,507 | |||||||||||
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Total short-term investments |
$ | 241,995 | $ | 55 | $ | (52 | ) | $ | 241,998 | |||||||
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(in $000’s) December 31, 2010 |
Amortized Cost |
Gross Unrecognized Gains |
Gross Unrecognized Losses |
Fair 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 | |||||||
|
|
|
|
|
|
|
|
|
5. ACCOUNTS RECEIVABLE
The composition of accounts receivable, net is as follows:
December 31, | December 31, | |||||||
(in $000’s) | 2011 | 2010 | ||||||
Gross accounts receivable |
$ | 210,557 | $ | 123,941 | ||||
Less: Rebate reserve |
(25,244 | ) | (20,892 | ) | ||||
Less: Chargeback reserve |
(22,161 | ) | (14,918 | ) | ||||
Less: Other deductions |
(9,379 | ) | (6,077 | ) | ||||
|
|
|
|
|||||
Accounts receivable, net |
$ | 153,773 | $ | 82,054 | ||||
|
|
|
|
A roll forward of the chargeback and rebate reserves activity for the years ended December 31, 2011, 2010 and 2009 is as follows:
(in $000’s) Rebate reserve |
December 31, | December 31, | December 31, | |||||||||
2011 | 2010 | 2009 | ||||||||||
Beginning balance |
$ | 20,892 | $ | 37,781 | $ | 4,800 | ||||||
Provision recorded during the period |
69,173 | 91,063 | 72,620 | |||||||||
Credits issued during the period |
(64,821 | ) | (107,952 | ) | (39,639 | ) | ||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 25,244 | $ | 20,892 | $ | 37,781 | ||||||
|
|
|
|
|
|
(in $000’s) Chargeback reserve |
December 31, | December 31, | December 31, | |||||||||
2011 | 2010 | 2009 | ||||||||||
Beginning balance |
$ | 14,918 | $ | 21,448 | $ | 4,056 | ||||||
Provision recorded during the period |
166,504 | 181,566 | 126,105 | |||||||||
Credits issued during the period |
(159,261 | ) | (188,096 | ) | (108,713 | ) | ||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 22,161 | $ | 14,918 | $ | 21,448 | ||||||
|
|
|
|
|
|
Other deductions include allowance for uncollectible amounts and cash discounts. The Company maintains an allowance for doubtful accounts for estimated losses resulting from amounts deemed to be uncollectible from its customers, with such allowances for specific amounts on certain accounts. The Company recorded an allowance for uncollectible amounts of $ 612,000 and $ 539,000 at December 31, 2011 and 2010, respectively.
|
6. INVENTORY
Inventory, net of carrying value reserves at December 31, 2011 and 2010 consisted of the following:
(in $000’s) | December 31, 2011 |
December 31, 2010 |
||||||
Raw materials |
$ | 32,454 | $ | 27,871 | ||||
Work in process |
5,046 | 2,575 | ||||||
Finished goods |
24,947 | 20,545 | ||||||
|
|
|
|
|||||
Total inventory |
62,447 | 50,991 | ||||||
Less: Non-current inventory |
8,270 | 6,442 | ||||||
|
|
|
|
|||||
Total inventory-current |
$ | 54,177 | $ | 44,549 | ||||
|
|
|
|
Inventory carrying value reserves were $ 5,533,000 and $ 5,294,000 at December 31, 2011 and 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 included as a component of other non-current assets. Amounts classified as non-current inventory consist of raw materials, net of valuation reserves. Raw materials generally have a shelf life of approximately three to five years, while finished goods generally have a shelf life of approximately two years.
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 $ 3,726,000 and $ 2,117,000 at December 31, 2011 and 2010, respectively. When the Company concludes FDA approval is expected within approximately six months, the Company will generally begin to schedule manufacturing process validation studies as required by the FDA to demonstrate the production process can be scaled up to manufacture commercial batches. Consistent with industry practice, the Company may build quantities of pre-launch inventories of certain products pending required final FDA approval and /or resolution of patent infringement litigation, when, in the Company’s assessment, such action is appropriate to increase the commercial opportunity, FDA approval is expected in the near term, and/or the litigation will be resolved in the Company’s favor. The capitalization of unapproved pre-launch inventory involves risks, including, among other items, FDA approval of product may not occur; approvals may require additional or different testing and/or specifications than used for unapproved inventory, and, in cases where the unapproved inventory is for a product subject to litigation, the litigation may not be resolved or settled in favor of the Company. If any of these risks were to materialize and the launch of the unapproved product delayed or prevented, then the net carrying value of unapproved inventory may be partially or fully reserved. Generally, the selling price of a generic pharmaceutical product is at discount from the corresponding brand product selling price. Typically, a generic drug is easily substituted for the corresponding brand product, and once a generic product is approved, the pre-launch inventory is typically sold within the next three months. If the market prices become lower than the product inventory carrying costs, then the pre-launch inventory value is reduced to such lower market value. If the inventory produced exceeds the estimated market acceptance of the generic product and becomes short-dated, a carrying value reserve will be recorded. In all cases, the carrying value of the Company’s pre-launch product inventory is lower than the respective estimated net selling prices.
|
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consisted of the following:
(in $000’s) | December 31, 2011 |
December 31, 2010 |
||||||
Land |
$ | 5,773 | $ | 2,270 | ||||
Buildings and improvements |
86,084 | 82,836 | ||||||
Equipment |
75,589 | 70,785 | ||||||
Office furniture and equipment |
8,910 | 9,077 | ||||||
Construction-in-progress |
16,602 | 3,958 | ||||||
|
|
|
|
|||||
Property, plant and equipment, gross |
$ | 192,958 | $ | 168,926 | ||||
Less: Accumulated depreciation |
(74,800 | ) | (62,646 | ) | ||||
|
|
|
|
|||||
Property, plant and equipment, net |
$ | 118,158 | $ | 106,280 | ||||
|
|
|
|
Depreciation expense was $ 14,911,000, $ 12,649,000 and $ 11,266,000 for the years ended December 31, 2011, 2010 and 2009, respectively.
|
8. ACCRUED EXPENSES
The following table sets forth the Company’s accrued expenses:
December 31, | December 31, | |||||||
(in $000’s) | 2011 | 2010 | ||||||
Payroll-related expenses |
$ | 16,975 | $ | 16,796 | ||||
Product returns |
24,101 | 33,755 | ||||||
Medicaid rebates |
17,479 | 12,475 | ||||||
Physician detailing sales force fees |
1,655 | 2,308 | ||||||
Legal and professional fees |
5,071 | 3,143 | ||||||
Income taxes payable |
1,126 | 2,393 | ||||||
Shelf stock price protection |
684 | 281 | ||||||
Other |
3,025 | 4,030 | ||||||
|
|
|
|
|||||
Total accrued expenses |
$ | 70,116 | $ | 75,181 | ||||
|
|
|
|
Product Returns
The Company maintains a return policy to allow customers to return product within specified guidelines. The Company estimates a provision for product returns as a percentage of gross sales based upon historical experience for sales made through its Global Products sales channel. Sales of product under the Private Label, the Rx Partner, and the OTC Partner alliance and collaboration agreements generally are not subject to returns. A roll forward of the return reserve activity for the years ended December 31, 2011, 2010 and 2009 is as follows:
(in $000’s) | December 31, | December 31, | December 31, | |||||||||
Returns Reserve |
2011 | 2010 | 2009 | |||||||||
Beginning balance |
$ | 33,755 | $ | 22,114 | $ | 13,675 | ||||||
Provision related to sales recorded in the period |
688 | 15,821 | 11,847 | |||||||||
Credits issued during the period |
(10,342 | ) | (4,180 | ) | (3,408 | ) | ||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 24,101 | $ | 33,755 | $ | 22,114 | ||||||
|
|
|
|
|
|
|
9. INCOME TAXES
The Company is subject to federal, state and local income taxes in the United States and income taxes in Taiwan, R.O.C. The provision for income taxes is comprised of the following:
For the Years Ended December 31, | ||||||||||||
(in $000’s) | 2011 | 2010 | 2009 | |||||||||
Current: |
||||||||||||
Federal taxes |
$ | 23,500 | $ | 96,560 | $ | 29,550 | ||||||
State taxes |
1,034 | 10,471 | 1,715 | |||||||||
Foreign taxes |
1,154 | 0 | 0 | |||||||||
|
|
|
|
|
|
|||||||
Total current tax expense |
25,688 | 107,031 | 31,265 | |||||||||
|
|
|
|
|
|
|||||||
Deferred: |
||||||||||||
Federal taxes |
$ | 5,646 | $ | 27,138 | $ | (11,520 | ) | |||||
State taxes |
592 | 9,140 | 1,995 | |||||||||
Foreign taxes |
690 | 212 | (734 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total deferred tax expense (benefit) |
6,928 | 36,490 | (10,259 | ) | ||||||||
|
|
|
|
|
|
|||||||
Provision for income taxes |
$ | 32,616 | $ | 143,521 | $ | 21,006 | ||||||
|
|
|
|
|
|
A reconciliation of the difference between the tax provision at the federal statutory rate and actual income taxes on income before income taxes, which includes federal, state, and other income taxes, is as follows:
For the Years Ended December 31, | ||||||||||||||||||||||||
(in $000’s) | 2011 | 2010 | 2009 | |||||||||||||||||||||
Income before income taxes |
$ | 98,014 | $ | 393,879 | $ | 70,977 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Tax provision at the federal statutory rate |
34,305 | 35.0 | % | 137,858 | 35.0 | % | 24,842 | 35.0 | % | |||||||||||||||
Increase (decrease) in tax rate resulting from: |
||||||||||||||||||||||||
State and local taxes, net of federal benefit |
3,721 | 3.8 | % | 12,873 | 3.3 | % | 3,628 | 5.1 | % | |||||||||||||||
Foreign rate differential |
(948 | ) | (1.0 | )% | 0 | 0.0 | % | 0 | 0.0 | % | ||||||||||||||
Research and development credits |
(3,378 | ) | (3.4 | )% | (2,700 | ) | (0.7 | )% | (2,546 | ) | (3.6 | )% | ||||||||||||
Share-based compensation |
92 | 0.1 | % | 979 | 0.2 | % | 1,824 | 2.6 | % | |||||||||||||||
Domestic manufacturing deduction |
(2,187 | ) | (2.2 | )% | (6,563 | ) | (1.7 | )% | (700 | ) | (1.0 | )% | ||||||||||||
Provision for uncertain tax positions |
178 | 0.2 | % | 203 | 0.1 | % | (6,084 | ) | (8.6 | )% | ||||||||||||||
Other, net |
833 | 0.8 | % | 871 | 0.2 | % | 294 | 0.4 | % | |||||||||||||||
Change in valuation allowance |
— | — | % | — | — | % | (252 | ) | (0.3 | )% | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Provision for income taxes |
$ | 32,616 | 33.3 | % | $ | 143,521 | 36.4 | % | $ | 21,006 | 29.6 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes result from temporary differences between the financial statement carrying values and the tax bases of the Company’s assets and liabilities. Deferred tax assets principally result from deferred revenue related to certain of the Company’s alliance and collaboration agreements (see “Note 11 – Alliance and Collaboration Agreements” below for a discussion of the Company’s alliance and collaboration agreements), certain accruals and reserves currently not deductible for tax purposes, and state net operating loss carryforwards. Deferred tax liabilities principally result from deferred product manufacturing costs related to the OTC Partners alliance agreements and the use of accelerated depreciation methods for income tax purposes. The components of the Company’s deferred tax assets and liabilities are as follows:
December 31, | ||||||||
(in $000’s) | 2011 | 2010 | ||||||
Deferred tax assets: |
||||||||
Deferred revenues |
$ | 13,225 | $ | 15,970 | ||||
Accrued expenses |
27,382 | 28,752 | ||||||
Inventory reserves |
2,439 | 2,874 | ||||||
Net operating loss carryforwards |
372 | 1,317 | ||||||
Depreciation and amortization |
340 | 458 | ||||||
Other |
2,923 | 4,212 | ||||||
|
|
|
|
|||||
Deferred tax assets |
$ | 46,681 | $ | 53,583 | ||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Tax depreciation and amortization in excess of book amounts |
$ | 4,697 | $ | 3,862 | ||||
Deferred manufacturing costs |
3,872 | 3,916 | ||||||
Other |
700 | 1,465 | ||||||
|
|
|
|
|||||
Deferred tax liabilities |
$ | 9,269 | $ | 9,243 | ||||
|
|
|
|
|||||
Deferred tax assets, net |
$ | 37,412 | $ | 44,340 | ||||
|
|
|
|
The breakdown between current and long-term deferred tax assets and tax liabilities is as follows:
December 31, | ||||||||
(in $000’s) | 2011 | 2010 | ||||||
Current deferred tax assets |
$ | 39,104 | $ | 41,506 | ||||
Current deferred tax liabilities |
(1,251 | ) | (2,235 | ) | ||||
|
|
|
|
|||||
Current deferred tax assets, net |
37,853 | 39,271 | ||||||
|
|
|
|
|||||
Non-current deferred tax assets |
7,577 | 12,077 | ||||||
Non-current deferred tax liabilities |
(8,018 | ) | (7,008 | ) | ||||
|
|
|
|
|||||
Non-current deferred tax (liabilities) assets, net |
(441 | ) | 5,069 | |||||
|
|
|
|
|||||
Deferred tax assets, net |
$ | 37,412 | $ | 44,340 | ||||
|
|
|
|
The Company had foreign net operating loss (NOL) carryforwards of approximately $ 3,700,000 as of December 31, 2010, with a ten year carryforward period. There were no foreign NOL carryforwards as of December 31, 2011. There were state net operating loss (NOL) carryforwards of $ 5,288,000 and $ 9,228,000 as of December 31, 2011 and 2010, respectively, with a twenty year carryforward period as of December 31, 2011, and utilization expiration dates occurring between the years 2022 and 2023, summarized as follows:
(in $000’s) | ||||
Year |
Amount | |||
2022 |
$ | 1,513 | ||
2023 |
3,775 | |||
|
|
|||
Total |
$ | 5,288 | ||
|
|
FASB ASC 740 provides for a single comprehensive model to address uncertain tax positions by establishing the minimum recognition threshold and a measurement attribute for the financial statement impact of tax positions taken or expected to be taken on an entity’s income tax returns. A reconciliation of the accrued reserve for uncertain tax positions is as follows:
(in $000’s) | ||||
Balance at January 1, 2011 |
$ | 1,580 | ||
Increase based on prior year tax positions |
24 | |||
Increase based on current year tax positions |
154 | |||
Interest expense |
84 | |||
|
|
|||
Balance at December 31, 2011 |
$ | 1,842 | ||
|
|
The Company has recognized a tax provision for uncertain tax positions related to federal and state research and development tax credits and inter-company loan interest income. The Company recognizes interest and penalties related to income tax matters as a part of total interest expense and other expense, respectively. At December 31, 2011, the Company had $ 300,000 of accrued interest expense related to its accrued reserve for uncertain tax positions. The Company did not accrue penalties as of December 31, 2011 as it has taken the appropriate steps to mitigate exposure to penalties related to its uncertain tax positions. The Company is currently under audit by the United States Internal Revenue Service for the tax years ended December 31, 2009 and 2008 and by the State of California Franchise Tax Board for the tax years ended December 31, 2009, 2008, 2007, 2006 and 2005.
No provision has been made for U.S. federal deferred income taxes on accumulated earnings on foreign subsidiaries since it is the intention of management to indefinitely reinvest the undistributed earnings in the foreign subsidiary.
|
10. REVOLVING LINE OF CREDIT
On February 11, 2011, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, N. A., 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 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, our total funded debt, net of unrestricted cash in excess of $ 100 million, over our EBITDA for the preceding four quarters) of less than 3.75 to 1.00, a Senior Secured Leverage Ratio (which is, generally, our total senior secured debt over our EBITDA for the preceding four quarters) of less than 2.50 to 1.00 and a Fixed Charge Coverage Ratio (which is, generally, our 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 December 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 years ended December 31, 2011 and 2010, unused line fees incurred under each of the credit agreements were $ 144,000 and $ 177,000, respectively.
|
11. ALLIANCE AND COLLABORATION AGREEMENTS
The Company has entered into several alliance, collaboration, license and distribution agreements, and similar agreements with respect to certain of its products and services, with unrelated third-party pharmaceutical companies. The “Rx Partner” and “OTC Partner” line items of the statement of operations include revenue recognized under agreements the Company has entered into to develop marketing and/or distribution relationships with its partners to fully leverage its technology platform. The “Research Partner” line item of the statement of operations includes revenue recognized under development agreements which generally obligate the Company to provide research and development services over multiple periods. The “Promotional Partner” line item of the statement of operations includes revenue recognized under a promotional services agreement which obligates the Company to provide physician detailing sales calls services to promote its promotional partner’s branded drug products over multiple periods.
The Company’s alliance and collaboration agreements often include milestones and provide for milestone payments upon achievement of these milestones. Generally, the milestone events contained in the Company’s alliance and collaboration agreements coincide with the progression of the Company’s products and technologies from pre-commercialization to commercialization.
The Company groups pre-commercialization milestones in its alliance and collaboration agreements into clinical and regulatory categories, each of which may include the following types of events:
Clinical Milestone Events:
• |
Designation of a development candidate. Following the designation of a development candidate, generally, IND-enabling animal studies for a new development candidate take 12 to 18 months to complete. |
• |
Initiation of a Phase I clinical trial. Generally, Phase I clinical trials take one to two years to complete. |
• |
Initiation or completion of a Phase II clinical trial. Generally, Phase II clinical trials take one to three years to complete. |
• |
Initiation or completion of a Phase III clinical trial. Generally, Phase III clinical trials take two to four years to complete. |
• |
Completion of a bioequivalence study. Generally, bioequivalence studies take three months to one year to complete. |
Regulatory Milestone Events:
• |
Filing or acceptance of regulatory applications for marketing approval such as a New Drug Application in the United States or Marketing Authorization Application in Europe. Generally, it takes six to twelve months to prepare and submit regulatory filings and approximately two months for a regulatory filing to be accepted for substantive review. |
• |
Marketing approval in a major market, such as the United States or Europe. Generally it takes one to three years after an application is submitted to obtain approval from the applicable regulatory agency. |
• |
Marketing approval in a major market, such as the United States or Europe, for a new indication of an already-approved product. Generally it takes one to three years after an application for a new indication is submitted to obtain approval from the applicable regulatory agency. |
Commercialization milestones in the Company’s alliance and collaboration agreements may include the following types of events:
• |
First commercial sale in a particular market, such as in the United States or Europe. |
• |
Product sales in excess of a pre-specified threshold, such as annual sales exceeding $ 100 million. The amount of time to achieve this type of milestone depends on several factors including but not limited to the dollar amount of the threshold, the pricing of the product and the pace at which customers begin using the product. |
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 $ 107,145,000 and $ 100,611,000 on sales of the AG Product during the years ended December 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 Company entered into a Strategic Alliance Agreement with Teva Pharmaceuticals Curacao N.V., a subsidiary of Teva Pharmaceutical Industries Limited, in June 2001 (“Teva Agreement”). The Teva Agreement commits the Company to develop and manufacture, and Teva to distribute, a specified number controlled release generic pharmaceutical products (“generic products”), each for a 10-year period. The Company identified the following deliverables under the Teva Agreement: (i) the manufacture and delivery of generic products; (ii) the provision of research and development activities (including regulatory services) related to each product; and (iii) market exclusivity associated with the products.
In July 2010, the Teva Agreement was amended to terminate the provisions of the Teva Agreement with respect to the Omeprazole 10mg, 20mg and 40mg products. Additionally, in exchange for the return of product rights, the Company agreed to pay to Teva a profit share on future sales of the fexofenadine HCI/psuedoephedrine product, if any, but in no event will such profit share payments exceed an aggregate amount of $ 3,000,000. The significant rights and obligations under the Teva Agreement are as follows:
Product Development, Manufacture and Sales: The Company is required to develop the products, obtain FDA approval to market the products, and manufacture and deliver the products to Teva. The product-linked revenue the Company earns under the Teva Agreement consists of Teva’s reimbursement of all of the Company’s manufacturing costs plus a fixed percentage of defined profits on Teva’s sales to its customers. Manufacturing costs are direct cost of materials plus actual direct manufacturing costs, including packaging material, not to exceed specified limits. The Company invoices Teva for the manufacturing costs when products are shipped to Teva, and Teva is required to pay the invoiced amount within 30 days. Teva has the exclusive right to determine all terms and conditions of the product sales to its customers. Within 30 days of the end of each calendar quarter, Teva is required to provide the Company with a report of its net sales and profits during the quarter and to pay the Company its share of the profits resulting from those sales on a quarterly basis. Net sales are Teva’s gross sales less discounts, rebates, chargebacks, returns, and other adjustments, all of which are based upon fixed percentages, except chargebacks, which are estimated by Teva and subject to a true-up reconciliation.
Cost Sharing: The Teva Agreement required Teva to pay the Company $ 300,000 at the inception of the Teva Agreement for reimbursement of regulatory expenses previously incurred, and thereafter to pay specified percentages of ongoing regulatory costs incurred in connection with obtaining and maintaining FDA approval, patent infringement litigation and regulatory litigation.
Sale of Common Stock: The Teva Agreement required Teva to purchase $ 15,000,000 of the Company’s common stock in four equal quarterly installments beginning September 15, 2001.
Advance Deposit: Teva agreed to provide the Company with a $ 22,000,000 advance deposit payable for the contingent purchase of exclusive marketing rights for the products. The advance deposit included debt-like terms to facilitate repayment to Teva to the extent the contingencies did not occur. Specifically, the advance deposit payable accrued interest at an 8.0% annual rate from the June 2001 Teva Agreement inception date, and required the Company to repay the advance deposit payable no later than January 15, 2004.
Other Provisions: The Teva Agreement also provides for other deliverables by the Company, consisting of research and development activities, including regulatory services.
As the July 2010 amendment materially modified the Teva Agreement, the Company elected to apply the updated guidance of FASB ASC 605-25 Multiple Element Arrangements (“ASC 605-25”) to the amended Teva Agreement beginning in the three months ended September 30, 2010.
There are two criteria under the updated guidance of ASC 605-25 for determining if deliverables shall be considered separate units of accounting, including: (i) the deliverable has value to the customer on a standalone basis, and (ii) if the arrangement has a general right of return relative to delivered items, delivery or performance of the undelivered items is considered probable and substantially in the control of the vendor. The Company evaluated the deliverables of the amended Teva Agreement under the updated guidance of ASC 605-25 and determined there are two units of accounting, including: a combined unit consisting of research and development activities plus market exclusivity, and the manufacture and delivery of 10 products (i.e. contract manufacturing). The market exclusivity deliverable does not meet the first criteria for separation as it does not have standalone value to Teva. As the products contemplated by the Teva Agreement were to be developed by the Company, the market exclusivity has no value to Teva without the research and development services needed to complete the products. The contract manufacturing deliverable has standalone value to Teva as it is able to resell the delivered items (i.e. finished product) to third-parties.
The consideration received by the Company from Teva under the Teva Agreement is contingent upon future performance, as such the Company was unable to allocate any of the consideration received to delivered items, and therefore the Company looked to the underlying services which gave rise to the payment of consideration by Teva to determine the appropriate recognition of revenue as follows:
— | Research and development related activities (the Combined Unit) – Consideration received as a result of research and development related activities performed under the Teva Agreement will initially be deferred and recognized on the straight-line method over the Company’s expected period of performance of the research and development related services, estimated to be from July 2001 (following the June 2001 effective date of the Teva Agreement) to October 2014 (with FDA approval of the ANDA for the final product under the Teva Agreement). |
— | Manufacture and delivery of the products – Consideration received as a result of the manufacture and delivery of the products under the Teva Agreement is recognized under the Company’s revenue recognition policy, as proscribed by SAB 104, as follows: |
— | Product shipments – The Company accounts for the shipment of products under the Teva Agreement as current period revenue in accordance with its revenue recognition policy applicable to its Global products. |
— | Profit share – The Company recognizes profit share, if any, as current period revenue when earned. |
— | Gain on the repurchase of Company stock – This represents additional profit share revenue resulting from the successful December 2006 commercial sale of a Tier 2 or Tier 3 product, and was recognized as revenue in the period earned. |
The Company applied the updated guidance of ASC 605-25 to the Teva Agreement on a prospective basis beginning in the quarter ended September 30, 2010. In the year ended December 31, 2010, the application of the updated guidance of ASC 605-25 had the effect of increasing Rx Partner revenue by $ 196,440,000, and increasing cost of revenues by $ 95,426,000, and correspondingly, basic earnings per share increased by approximately $ 1.03. The increase in Rx Partner revenue as a result of applying the updated guidance of ASC 605-25 in the year ended December 31, 2010, represents the recognition of previously deferred revenue which would otherwise have been recognized, under the previous accounting standards, over the remaining life of the Teva Agreement, using a modified proportional performance method. Under the previous accounting standards, Rx Partner revenue would have been $ 22,255,000, cost of revenues would have been $ 244,964,000, and basic earnings per share would have been $ 2.97 in the year ended December 31, 2010, please refer to Note 20. Supplementary Financial Information for a summary of this information on a quarterly basis.
The following tables show the additions to and deductions from the deferred revenue and deferred product manufacturing costs under the Teva Agreement:
(in $000’s) | For the Years Ended December 31, | Inception Through Dec 31, 2008 |
||||||||||||||
Deferred revenue |
2011 | 2010 | 2009 | |||||||||||||
Beginning balance |
$ | 4,410 | $ | 202,032 | $ | 200,608 | $ | — | ||||||||
Additions: |
||||||||||||||||
Product related and cost sharing |
551 | 10,096 | 35,245 | 382,024 | ||||||||||||
Exclusivity charges |
— | — | — | (50,600 | ) | |||||||||||
Other |
— | — | — | 12,527 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total additions |
551 | 10,096 | 35,245 | 343,951 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Less: Amount recognized |
(1,256 | ) | (11,278 | ) | (33,821 | ) | (143,343 | ) | ||||||||
Accounting adjustment |
— | (196,440 | ) | — | — | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deferred revenue |
$ | 3,705 | $ | 4,410 | $ | 202,032 | $ | 200,608 | ||||||||
|
|
|
|
|
|
|
|
For the Years Ended December 31, | Inception Through Dec 31, 2008 |
|||||||||||||||
(in $000’s) | ||||||||||||||||
Deferred product manufacturing costs |
2011 | 2010 | 2009 | |||||||||||||
Beginning balance |
$ | — | $ | 94,040 | $ | 88,361 | $ | — | ||||||||
Additions |
— | 7,416 | 24,089 | 151,476 | ||||||||||||
Less: Amount recognized |
— | (6,030 | ) | (18,410 | ) | (63,115 | ) | |||||||||
Accounting adjustment |
— | (95,426 | ) | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deferred product manufacturing costs |
$ | — | $ | — | $ | 94,040 | $ | 88,361 | ||||||||
|
|
|
|
|
|
|
|
The following schedule shows the expected recognition of deferred revenue and amortization of deferred product manufacturing costs, for transactions recorded through December 31, 2011, for the next five years and thereafter under the Teva Agreement:
(in $000s) | Deferred Revenue Recognition |
|||
2012 |
$ | 1,309 | ||
2013 |
1,309 | |||
2014 |
1,087 | |||
2015 |
— | |||
2016 |
— | |||
Thereafter |
— | |||
|
|
|||
Totals |
$ | 3,705 | ||
|
|
OTC Partner Alliance Agreement
The Company has two OTC Partner alliance agreements with unrelated third-party pharmaceutical companies (“OTC Agreements”). The OTC Agreements cover the manufacture, distribution, and marketing of OTC pharmaceutical products. The two OTC Agreements, whose terms are approximately 9 years and 15 years, each commit the Company to manufacture, and the OTC Agreements’ marketing partners to distribute, a single specified generic pharmaceutical product. Both of the OTC Agreements obligate the Company to grant a license to the respective OTC Partner to market the product. Revenue under these OTC Agreements consists of payments upon contract signing, reimbursement of product manufacturing costs or other agreed upon amounts when the Company delivers the product, profit-share or royalty payments based upon the respective OTC Partner’s’ product sales, and, specified milestone payments tied to product development services.
As each of these OTC Agreements contain multiple deliverables the Company applied its accounting policy to determine whether the multiple deliverables within each of the OTC Partner alliance agreements should be accounted for as separate units of accounting or as a single unit of accounting. The Company determined no single deliverable represented a separate unit of accounting given there was not sufficient objective and reliable evidence of the fair value of any single deliverable. When the fair value of a deliverable cannot be determined, it is not possible for the Company to determine whether consideration given by an OTC Partner is in exchange for a given deliverable. The Company concluded the multiple deliverables under each of the OTC Partner alliance agreements represented a single unit of accounting for each agreement.
All revenue under the OTC Agreements is deferred and recognized over the life of the respective OTC Agreement under the modified proportional performance method. Deferred revenue is recorded as a liability captioned “Deferred revenue.” The modified proportional performance method better aligns revenue recognition with performance under a long-term arrangement as compared to a straight-line method. Revenue is recognized only to the extent of cumulative cash collected being greater than cumulative revenue recognized.
The Company begins to recognize payments at the inception of the respective OTC Agreement, milestone payments at the time they are earned, reimbursement of product manufacturing costs at the time of product shipment to the respective OTC Partners, and profit-share and royalty payments at the time they are reported to the Company.
The Company also defers its product manufacturing costs to the extent reimbursable by the respective OTC Partner and recognizes them in the same manner as it recognizes the related product revenue. Additionally, under the Teva Agreement, the Company is obligated to share with Teva the profits from the sale of the over-the-counter products sold under the OTC Agreements — up to a maximum of 50%. These deferred direct product manufacturing costs are recorded as an asset captioned “Deferred product manufacturing costs.”
A summary description of each OTC Partner Alliance Agreement noted above is as follows:
In June 2002, the Company entered into a Development, License and Supply Agreement with Pfizer Inc. (formerly Wyeth) relating to the Company’s Loratadine and Pseudoephedrine Sulfate 5 mg/120 mg 12-hour Extended Release Tablets and Loratadine and Pseudoephedrine Sulfate 10 mg/240 mg 24-hour Extended Release Tablets for the OTC market under the Alavert® brand. The Company is responsible for developing and manufacturing the products, while Pfizer is responsible for product marketing and sale. The structure of the agreement includes payment upon achievement of milestones and royalties paid to the Company on Pfizer’s sales on a quarterly basis. Pfizer launched this product in May 2003 as Alavert® D-12 Hour. In February 2005, the agreement was partially cancelled with respect to the 24-hour Extended Release Product due to lower than planned sales volume.
In June 2002, the Company entered into a non-exclusive Licensing, Contract Manufacturing and Supply Agreement with Merck & Co., Inc. (formerly Schering-Plough Corporation) relating to the Company’s Loratadine and Pseudoephedrine Sulfate 5 mg/120 mg 12-hour Extended Release Tablets for the OTC market under the Claritin-D 12-hour brand. The structure of the agreement included milestone payments by Merck and an agreed upon transfer price. Shipments under the agreement commenced at the end of January 2003, and Merck launched the product as its OTC Claritin-D 12-hour in March 2003. The Company’s product supply obligations under the agreement ended on December 31, 2008, after which Merck has manufactured the product. The agreement terminated two years after our product supply obligations concluded, during which Merck paid the Company a royalty on sales of their manufactured product.
The following table shows the additions to and deductions from deferred revenue and deferred product manufacturing costs under the OTC Agreements:
(in $000’s) | For the Years Ended December 31, | Inception Through |
||||||||||||||
Deferred revenue |
2011 | 2010 | 2009 | Dec 31, 2008 | ||||||||||||
Beginning balance |
$ | 11,382 | $ | 16,162 | $ | 21,044 | $ | — | ||||||||
Additions |
2,018 | 4,108 | 1,960 | 91,944 | ||||||||||||
Less: amounts recognized |
(3,717 | ) | (8,888 | ) | (6,842 | ) | (70,900 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deferred revenue |
$ | 9,683 | $ | 11,382 | $ | 16,162 | $ | 21,044 | ||||||||
|
|
|
|
|
|
|
|
(in $000’s) | For the Years Ended December 31, | Inception Through |
||||||||||||||
Deferred product manufacturing costs |
2011 | 2010 | 2009 | Dec 31, 2008 | ||||||||||||
Beginning balance |
$ | 10,235 | $ | 14,203 | $ | 18,361 | $ | — | ||||||||
Additions |
1,721 | 3,223 | 1,929 | 75,941 | ||||||||||||
Less: amount recognized |
(3,110 | ) | (7,191 | ) | (6,087 | ) | (57,580 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deferred product manufacturing costs |
$ | 8,846 | $ | 10,235 | $ | 14,203 | $ | 18,361 | ||||||||
|
|
|
|
|
|
|
|
The following schedule shows the expected recognition of deferred revenue and amortization deferred product manufacturing costs, for transactions recorded through December 31, 2011, for the next five years and thereafter under the OTC Agreements:
(in $000s) | Deferred Revenue Recognition |
Deferred Product Manufacturing Costs Amortization |
||||||
2012 |
$ | 1,541 | $ | 1,413 | ||||
2013 |
1,541 | 1,413 | ||||||
2014 |
1,541 | 1,413 | ||||||
2015 |
1,541 | 1,413 | ||||||
2016 |
1,541 | 1,413 | ||||||
Thereafter |
1,978 | 1,781 | ||||||
|
|
|
|
|||||
Total |
$ | 9,683 | $ | 8,846 | ||||
|
|
|
|
Agreements with Medicis Pharmaceutical Corporation
In November 2008, the Company and Medicis Pharmaceutical Corporation (“Medicis”), entered into a Joint Development Agreement and a License and Settlement Agreement (“License Agreement”).
Joint Development Agreement
The Joint Development Agreement provides for the Company and Medicis to collaborate in the development of a total of four dermatology products, including three 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 paid by Medicis in December 2009, and a $ 3,000,000 milestone payment paid by Medicis in March 2011. The Company has the potential to receive up to an additional $ 8,000,000 of contingent regulatory milestone payments each of which the Company believes to be substantive, 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 of such products. The Company began commercializing one of the four generic dermatology products during the year ended December 31, 2011.
The Joint Development Agreement results in three items of revenue for the Company, as follows:
1. Research & Development Services
Revenue received from the provision of research and development services including the $ 40,000,000 upfront payment and the $ 12,000,000 of milestone payments received prior to January 1, 2011, have been deferred and are being recognized on a straight-line basis over the expected period of performance of the research and development services. The Company estimates its expected period of performance to provide research and development services is 48 months starting in December 2008 and ending in November 2012. Revenue from the remaining $ 11,000,000 of contingent milestone payments, including the $ 3,000,000 received from Medicis in March 2011, will be recognized using the Milestone Method of accounting. Deferred revenue is recorded as a liability captioned “Deferred revenue.” Revenue recognized under the Joint Development Agreement is reported on the consolidated statement of operations, in the line item captioned Research Partner. The Company determined the straight-line method better aligns revenue recognition with performance as the level of research and development services delivered under the Joint Development Agreement are expected to be provided on a relatively constant basis over the period of performance.
2. Royalty Fees Earned — Medicis’s Sale of Advanced Form SOLODYN® (Brand) Product
Under the Joint Development Agreement, the Company grants Medicis a license for the advanced form of the SOLODYN® product, with the Company receiving royalty fee income under such license for a period ending eight years after the first commercial sale of the advanced form SOLODYN® product. Commercial sales of the new SOLODYN® product, if any, are expected to commence upon FDA approval of Medicis’s NDA. The royalty fee income, if any, from the new SOLODYN® product, will be recognized by the Company as current period revenue when earned.
3. Accounting for Sales of the Company’s Four Generic Dermatology Products
Upon FDA approval of the Company’s ANDA for each of the four generic products covered by the Joint Development Agreement, the Company will have the right (but not the obligation) to begin manufacture and sale of its four generic dermatology products. The Company sells its manufactured generic products to all Global Division customers in the ordinary course of business through its Global Product sales channel. The Company accounts for the sale, if any, of the generic products covered by the Joint Development Agreement as current period revenue according to the Company’s revenue recognition policy applicable to its Global products. To the extent the Company sells any of the four generic dermatology products covered by the Joint Development Agreement, the Company pays Medicis a gross profit share, with such profit share payments accounted for as a current period cost of goods sold.
The following table shows the additions to and deductions from deferred revenue under the Joint Development Agreement with Medicis:
(in $000’s) | Years Ended December 31, | Inception Through Dec 31, 2008 |
||||||||||||||
Deferred revenue |
2011 | 2010 | 2009 | |||||||||||||
Beginning balance |
$ | 25,948 | $ | 39,487 | $ | 39,167 | $ | — | ||||||||
Additions: |
||||||||||||||||
Up-front fees and milestone payments |
— | — | 12,000 | 40,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total additions |
— | — | 12,000 | 40,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Less: amount recognized |
(13,538 | ) | (13,539 | ) | (11,680 | ) | (833 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deferred revenue |
$ | 12,410 | $ | 25,948 | $ | 39,487 | $ | 39,167 | ||||||||
|
|
|
|
|
|
|
|
The following schedule shows the expected recognition of deferred revenue, for transactions recorded through December 31, 2011, for the next five years and thereafter under the Joint Development Agreement with Medicis:
(in $000s) | Deferred Revenue Recognition |
|||
2012 |
$ | 12,410 | ||
2013 |
— | |||
2014 |
— | |||
2015 |
— | |||
2016 |
— | |||
Thereafter |
— | |||
|
|
|||
Total |
$ | 12,410 | ||
|
|
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 $ 30,000,000 of contingent milestone payments which includes $ 15,000,000 contingent upon the achievement of clinical events, $ 5,000,000 contingent upon the achievement of regulatory events, and $ 10,000,000 upon the achievement of commercialization events. The Company believes all milestones under the Endo Agreement are substantive. 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 Company is recognizing the $ 10,000,000 up-front payment as revenue on a straight-line basis over a period of 91 months, which is the estimated expected period of performance of research and development activities under the Endo Agreement, 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.” 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.
License, Development and Commercialization Agreement with Glaxo Group Limited
In December 2010, the Company entered into a License, Development and Commercialization Agreement with Glaxo Group Limited (“GSK”). Under the terms of the agreement with GSK, GSK received an exclusive license to develop and commercialize IPX066 throughout the world, except in the U.S. and Taiwan, and certain follow on products at the option of GSK. GSK paid an $ 11,500,000 up-front payment in December 2010, and the Company has the potential to receive up to $ 169,000,000 of contingent milestone payments which includes $ 10,000,000 contingent upon the achievement of clinical events, $ 29,000,000 contingent upon the achievement of regulatory events, and $ 130,000,000 contingent upon the achievement of commercialization events. The Company believes all milestones under the agreement with GSK are substantive. The up-front payment has been deferred and is being recognized as revenue on a straight-line basis over the Company’s expected period of performance to provide research and development services which is estimated to be the 24 month period ending December 31, 2012. The Company will also receive royalty payments on any sales of IPX066 by GSK. The Company and GSK will generally each bear its own development costs associated with its activities under the License, Development and Commercialization Agreement, except that certain development costs, including with respect to follow on products, will be shared, as set forth in the agreement. The agreement with GSK also gives GSK the option to obtain development and commercialization rights to a future product for a one-time payment to the Company of $ 10,000,000. The License, Development and Commercialization Agreement will continue until GSK no longer has any royalty payment obligations, or if the agreement is terminated earlier in accordance with its terms. The License, Development and Commercialization 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 agreement.
Co-Promotion Agreement with Pfizer
In March 2010, the Company and Pfizer, Inc. (“Pfizer”) entered into the First Amendment to the Co-Promotion Agreement (originally entered into with Wyeth, now a wholly owned subsidiary of Pfizer) (“Pfizer Co-Promotion Agreement”). Under the terms of the Pfizer Co-Promotion Agreement, effective April 1, 2010, the Company provides physician detailing sales call services for Pfizer’s Lyrica® product to neurologists. The Company receives a fixed fee, effective January 1, 2010, subject to annual cost adjustment, for providing such physician detailing sales calls within a contractually defined range of an aggregate number of physician detailing sales calls rendered, determined on a quarterly basis. There is no opportunity for the Company to earn incentive fees under the terms of the Pfizer Co-Promotion Agreement. Pfizer is responsible for providing sales training to the Company’s physician detailing sales force personnel. Pfizer owns the product and is responsible for all pricing and marketing literature as well as product manufacture and fulfillment. The Company recognizes the physician detailing sales force fee revenue as the related services are performed and the performance obligations are met. The Company recognized $ 14,140,000, $ 14,073,000 and $ 6,940,000 in the years ended December 31, 2011, 2010 and 2009, respectively, under the Pfizer Co-Promotion Agreement, with such amounts presented in the captioned line item “Promotional Partner” revenue on the consolidated statement of operations.
As noted above, the Company previously entered into a three year Co-Promotion Agreement with Wyeth, an unrelated third-party pharmaceutical company, prior to Wyeth becoming a wholly-owned subsidiary of Pfizer, under which the Company performed physician detailing sales calls for the Wyeth Pristiq® product to neurologists, with such services commencing on July 1, 2009, and ending in connection with the Pfizer Co-Promotion Agreement described above. Wyeth paid the Company a service fee, subject to an annual cost adjustment, for each physician detailing sales call. During the term of the (former Wyeth) Co-Promotion Agreement, the Company was required to complete a minimum and maximum number of physician detailing sales calls. Wyeth was responsible for providing sales training to the Company’s sales force. Wyeth owned the product and was responsible for all pricing and marketing literature as well as product manufacture and fulfillment. The Company recognized service fee revenue as the related physician detailing sales call services were performed and the performance obligations were met. The Company did not earn any incentive fee revenue under the terms of the (former Wyeth) Co-Promotion Agreement.
Promotional Services Agreement with Shire
In January 2006, the Company entered into a three year Promotional Services Agreement with an affiliate of Shire Laboratories, Inc. (“Shire Co-Promotion Agreement”), under which the Company was engaged to perform physician detailing sales calls services in support of Shire’s Carbatrol® product, from July 1, 2006 to June 30, 2009. The Company recognized $ 6,508,000 in sales force fee revenue for the year ended December 31, 2009, under the Shire Co-Promotion Agreement with such amounts presented in the captioned line item “Promotional Partner” under revenues on the consolidated statement of operations.
|
12. EMPLOYEE BENEFIT PLANS
401(k) Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan covering all employees. Participants are permitted to contribute up to 25% of their eligible annual pre-tax compensation up to established federal limits on aggregate participant contributions. The Company matches 50% of the employee contributions up to a maximum of 3% of employee compensation. Discretionary profit-sharing contributions made by the Company, if any, are determined annually by the Board of Directors. Participants are 100% vested in discretionary profit-sharing and matching contributions made by the Company after three years of service, and are 25% and 50% vested after one and two years of service, respectively. There were approximately $ 1,254,000, $ 1,162,000 and $ 1,156,000 in matching contributions and no discretionary profit-sharing contributions made under this plan for the years ended December 31, 2011, 2010 and 2009, respectively.
Employee Stock Purchase Plan
In February 2001, the Board of Directors of the Company approved the 2001 Non-Qualified Employee Stock Purchase Plan (“ESPP”), with a 500,000 share reservation. The purpose of the ESPP is to enhance employee interest in the success and progress of the Company by encouraging employee ownership of common stock of the Company. The ESPP provides the opportunity to purchase the Company’s common stock at a 15% discount to the market price through payroll deductions or lump sum cash investments. Under the ESPP plan, for the years ended December 31, 2011, 2010 and 2009, the Company sold shares of its common stock to its employees in the amount of 47,128, 79,560 and 72,752, respectively, for net proceeds of approximately $ 887,000, $ 1,082,000 and $ 560,000, respectively.
Deferred Compensation Plan
In February 2002, the Board of Directors of the Company approved the Executive Non-Qualified Deferred Compensation Plan (“ENQDCP”) effective August 15, 2002 covering executive level employees of the Company as designated by the Board of Directors. Participants can defer up to 75% of their base salary and quarterly sales bonus and up to 100% of their annual performance based bonus. The Company matches 50% of employee deferrals up to 10% of base salary and bonus compensation. The maximum total match by the company cannot exceed 5% of total base and bonus compensation. Participants are vested in the employer match contribution at 20% each year, with 100% vesting after five years of employment. Participants can earn a return on their deferred compensation based on hypothetical investments in investment funds. Changes in the market value of the participant deferrals and earnings thereon are reflected as an adjustment to the liability for deferred compensation with an offset to compensation expense. There were approximately $ 589,000, $ 525,000 and $ 529,000 in matching contributions under the ENQDCP for the years ended December 31, 2011, 2010 and 2009, respectively.
The deferred compensation liability is a non-current liability recorded at the value of the amount owed to the ENQDCP participants, with changes in the value of such amounts recognized as a compensation expense in the consolidated statement of operations. The calculation of the deferred compensation obligation is derived from observable market data by reference to hypothetical investments selected by the participants. The Company invests in corporate owned life insurance (“COLI”) policies, of which the cash surrender value is included in the caption line item “Other assets” on the consolidated balance sheet. As of December 31, 2011 and 2010, the Company had a cash surrender value asset of $ 14,547,000 and $ 12,264,000, respectively, and a deferred compensation liability of $ 14,535,000 and $ 12,978,000, respectively.
|
13. SHARE-BASED COMPENSATION:
The Company recognizes the grant date fair value of each option and restricted share over its vesting period. Options and restricted shares granted under the Company’s Amended and Restated 2002 Equity Incentive Plan (“2002 Plan”) generally vest over a three or four year period and options have a term of ten years.
Impax Laboratories, Inc. 1999 Equity Incentive Plan
In October 2000, the Company’s stockholders approved an increase in the aggregate number of shares of common stock to be issued pursuant to the Company’s 1999 Equity Incentive Plan from 2,400,000 to 5,000,000 shares. Under the 1999 Equity Incentive Plan, 379,872, 664,947, and 1,286,811 stock options were outstanding at December 31, 2011, 2010 and 2009, respectively.
Impax Laboratories, Inc. Amended and Restated 2002 Equity Incentive Plan
Under the Company’s 2002 Plan, the aggregate number of shares of common stock for issuance pursuant to stock option grants and restricted stock awards was increased by the Company’s Board of Directors from 9,800,000 to 11,800,000 during 2010 and was approved by the Company’s stockholders. Under the 2002 Plan, stock options outstanding were 4,693,225, 5,849,729 and 6,943,007 at December 31, 2011, 2010 and 2009, respectively, and unvested restricted stock awards outstanding were 1,663,911, 1,434,759 and 1,152,923 at December 31, 2011, 2010 and 2009, respectively.
The stock option activity for all of the Company’s equity compensation plans noted above is summarized as follows:
Stock Options |
Number of Shares Under Option |
Weighted- Average Exercise Price per Share |
||||||
Outstanding at December 31, 2008 |
8,280,240 | $ | 10.53 | |||||
Options granted |
2,489,141 | 6.96 | ||||||
Options exercised |
(1,175,897 | ) | 3.69 | |||||
Options forfeited |
(1,363,666 | ) | 13.86 | |||||
|
|
|||||||
Outstanding at December 31, 2009 |
8,229,818 | 9.87 | ||||||
Options granted |
405,600 | 20.22 | ||||||
Options exercised |
(1,900,549 | ) | 8.62 | |||||
Options forfeited |
(220,193 | ) | 11.03 | |||||
|
|
|||||||
Outstanding at December 31, 2010 |
6,514,676 | 10.84 | ||||||
Options granted |
424,000 | 24.78 | ||||||
Options exercised |
(1,605,043 | ) | 11.02 | |||||
Options forfeited |
(260,536 | ) | 9.73 | |||||
|
|
|||||||
Outstanding at December 31, 2011 |
5,073,097 | 11.76 | ||||||
|
|
|||||||
Options exercisable at December 31, 2011 |
3,345,263 | $ | 11.30 | |||||
|
|
As of December 31, 2011, stock options outstanding and exercisable had average remaining contractual lives of 5.97 years and 4.54 years, respectively. Also, as of December 31, 2011, stock options outstanding and exercisable each had aggregate intrinsic values of $ 44,685,000 and $ 30,673,000, respectively. As of December 31, 2011, the Company estimated 4,491,177 stock options and 1,473,049 restricted shares granted to employees which were vested or expected to vest.
The Company grants restricted stock to certain eligible employees as a component of its long-term incentive compensation program. The restricted stock award grants are made in accordance with the Company’s 2002 Plan. A summary of the non-vested restricted stock awards is as follows:
Restricted Stock Awards | Non-Vested Restricted Stock Awards |
Weighted- Average Grant Date Fair Value |
||||||
Non-vested at December 31, 2008 |
399,716 | $ | 10.30 | |||||
Granted |
886,969 | 6.99 | ||||||
Vested |
(113,204 | ) | 10.25 | |||||
Forfeited |
(20,558 | ) | 7.87 | |||||
|
|
|||||||
Non-vested at December 31, 2009 |
1,152,923 | 7.72 | ||||||
Granted |
727,556 | 18.87 | ||||||
Vested |
(368,825 | ) | 8.61 | |||||
Forfeited |
(76,895 | ) | 10.17 | |||||
|
|
|||||||
Non-vested at December 31, 2010 |
1,434,759 | 12.93 | ||||||
Granted |
868,549 | 20.73 | ||||||
Vested |
(452,861 | ) | 11.81 | |||||
Forfeited |
(186,536 | ) | 13.71 | |||||
|
|
|||||||
Non-vested at December 31, 2011 |
1,663,911 | $ | 17.20 | |||||
|
|
As of December 31, 2011, the Company had 1,990,349 shares available for issuance of either stock options or restricted stock awards, including 1,706,553 shares from the 2002 Plan, and 283,796 shares from the 1999 Plan.
As of December 31, 2011, the Company had total unrecognized share-based compensation expense, net of estimated forfeitures, of $ 35,587,000 related to all of its share-based awards, which will be recognized over a weighted average period of 2.47 years. The intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $ 19,192,000, $ 19,038,000 and $ 3,407,000, respectively. The total fair value of restricted shares which vested during the years ended December 31, 2011, 2010 and 2009 was $ 5,347,000, $ 3,175,000 and $ 1,538,000, respectively.
The Company estimated the fair value of each stock option award on the grant date using the Black-Scholes option pricing model with the following assumptions:
For the Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Volatility (range) |
50.7%-52.7% | 55.1%-56.4% | 58.3%-64.2% | |||||||||
Volatility (weighted average) |
52.3% | 55.9% | 60.4% | |||||||||
Risk-free interest rate (range) |
1.5%-2.3% | 1.5%-3.1% | 2.1%-2.9% | |||||||||
Risk-free interest rate (weighted average) |
2.1% | 2.3% | 2.6% | |||||||||
Dividend yield |
0% | 0% | 0% | |||||||||
Expected life (years) |
6.20 | 6.21 | 6.25 | |||||||||
Weighted average grant date fair value |
$12.85 | $11.08 | $4.07 |
The Company estimated the fair value of each stock option award on the grant date using the Black-Scholes option pricing model, wherein: expected volatility is based on historical volatility of the Company’s common stock, and of a peer group for the period of time the Company’s common stock was deregistered as described below, 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 at the date 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. Options granted under each of the above plans generally vest from three to four years and have a term of ten years. With limited exceptions, the Company’s shares of common stock traded on the “Pink Sheets” beginning in August 2005 through May 2008. Subsequent to the Company’s May 2008 deregistration, and before its stock was re-listed in March 2009, the Company granted stock options and restricted stock awards. As there were no quoted market prices during the period when the Company’s shares of common stock was not publicly traded, the Company engaged a valuation firm to assist with its determination of the fair value of the shares of common stock at the stock option and restricted stock award grant dates. In this regard, the methods used to arrive at the fair value of the underlying stock price included a regression analysis, along with market multiples and discounted net cash flow analyses. The resulting fair value on each respective grant date was used to establish the stock option exercise price and the fair value of the restricted stock.
The amount of share-based compensation expense recognized by the Company is as follows:
For the Years Ended December 31, | ||||||||||||
(in $000’s) | 2011 | 2010 | 2009 | |||||||||
Cost of revenues |
$ | 1,917 | $ | 2,377 | $ | 1,600 | ||||||
Research and development |
4,119 | 3,466 | 2,677 | |||||||||
Selling, general and administrative |
6,649 | 4,871 | 3,114 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 12,685 | $ | 10,714 | $ | 7,391 | ||||||
|
|
|
|
|
|
The after tax impact of recognizing the share-based compensation expense related to FASB ASC Topic 718 on basic earnings per common share was $ 0.15, $ 0.14 and $ 0.11 for the years ended December 31, 2011, 2010 and 2009, respectively and diluted earnings per common share was $ 0.14, $ 0.14 and $ 0.11 for the years ended December 31, 2011, 2010 and 2009, respectively. The Company recognized a deferred tax benefit of $ 3,078,000, $ 1,719,000 and $ 899,000 in 2011, 2010 and 2009, respectively; related to share-based compensation expense recorded for non-qualified employee stock options and restricted stock awards.
The Company’s policy is to issue new shares to satisfy stock option exercises and to grant restricted share awards. There were no modifications to any stock options during the years ended December 31, 2011, 2010 or 2009.
|
14. 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 of the Company, 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 Company’s 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 years ended December 31, 2011, 2010 and 2009, the Company did not issue any preferred stock.
Common Stock
The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 90,000,000 shares of common stock with $ 0.01 par value.
Shareholders Rights Plan
On January 20, 2009, the Board of Directors approved the adoption of a shareholder rights plan and declared a dividend of one preferred share purchase right for each outstanding share of common stock of the Company. Under certain circumstances, if a person or group acquires, or announces its intention to acquire, beneficial ownership of 20% or more of the Company’s outstanding common stock, each holder of such right (other than the third party triggering such exercise), would be able to purchase, upon exercise of the right at a $ 15 exercise price, subject to adjustment, the number of shares of the Company’s common stock having a market value of two times the exercise price of the right. Subject to certain exceptions, if the Company is consolidated with, or merged into, another entity and the Company is not the surviving entity in such transaction or shares of the Company’s outstanding common stock are exchanged for securities of any other person, cash or any other property, or more than 50% of the Company’s assets or earning power is sold or transferred, then each holder of the rights would be able to purchase, upon the exercise of the right at a $ 15 exercise price, subject to adjustment, the number of shares of common stock of the third party acquirer having a market value of two times the exercise price of the right. The rights expired on January 20, 2012.
In connection with the shareholder rights plan, the Board of Directors designated 100,000 shares of series A junior participating preferred stock.
|
15. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted earnings per common share is computed by dividing net income by the weighted average common shares outstanding adjusted for the dilutive effect of stock options, restricted stock awards, stock purchase warrants and convertible debt, excluding anti-dilutive shares.
A reconciliation of basic and diluted earnings per share is as follows:
For the Years Ended December 31, | ||||||||||||
(in $000’s, except share and per share amounts) | 2011 | 2010 | 2009 | |||||||||
Numerator: |
||||||||||||
Net income |
$ | 65,495 | $ | 250,418 | $ | 50,061 | ||||||
|
|
|
|
|
|
|||||||
Denominator: |
||||||||||||
Weighted average common shares outstanding |
64,126,855 | 62,037,908 | 60,279,602 | |||||||||
Effect of dilutive options and common stock purchase warrants |
3,193,134 | 3,527,224 | 800,582 | |||||||||
|
|
|
|
|
|
|||||||
Diluted weighted average common shares outstanding |
67,319,989 | 65,565,132 | 61,080,184 | |||||||||
|
|
|
|
|
|
|||||||
Basic net income per share |
$ | 1.02 | $ | 4.04 | $ | 0.83 | ||||||
|
|
|
|
|
|
|||||||
Diluted net income per share |
$ | 0.97 | $ | 3.82 | $ | 0.82 | ||||||
|
|
|
|
|
|
For the years ended December 31, 2011, 2010 and 2009, the Company excluded 1,244,493, 1,024,466 and 6,620,769, 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.
|
16. SEGMENT INFORMATION
The Company has two reportable segments, the Global Division and the Impax Division. The Global Division develops, manufactures, sells, and distributes generic pharmaceutical products, primarily through the following sales channels: the Global Products sales channel, for sales of generic prescription products, directly to wholesalers, large retail drug chains, and others; the Private Label Product sales channel, for generic pharmaceutical over-the-counter and prescription products sold to unrelated third-party customers, who in-turn sell the products to third-parties under their own label; the Rx Partner sales channel, for generic prescription products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements; and the OTC Partner sales channel, for over-the-counter products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements. Revenues from the “Global Products” sales channel and the “Private Label” sales channel are reported under the caption “Global Product sales, net” on the consolidated statement of operations. 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 “Note 2. Summary of Significant Accounting Policies – Revenue Recognition.” The Company has no inter-segment revenue.
The tables below present segment information reconciled to total Company financial results, with segment operating income or loss including gross profit less direct research and development expenses, and direct selling expenses as well as any litigation settlements, to the extent specifically identified by segment:
(in $000’s) Year Ended December 31, 2011 |
Global Division |
Impax Division |
Corporate and Other |
Total Company |
||||||||||||
Revenues, net |
$ | 491,710 | $ | 21,209 | $ | — | $ | 512,919 | ||||||||
Cost of revenues |
242,713 | 11,911 | — | 254,624 | ||||||||||||
Research and development |
46,169 | 36,532 | — | 82,701 | ||||||||||||
Patent Litigation |
7,506 | — | — | 7,506 | ||||||||||||
Income (loss) before income taxes |
$ | 182,165 | $ | (34,669) | $ | (49,482) | $ | 98,014 |
Year Ended December 31, 2010 |
Global Division |
Impax Division |
Corporate and Other |
Total Company |
||||||||||||
Revenues, net |
$ | 864,667 | $ | 14,842 | $ | — | $ | 879,509 | ||||||||
Cost of revenues |
328,163 | 12,083 | — | 340,246 | ||||||||||||
Research and development |
44,311 | 41,912 | — | 86,223 | ||||||||||||
Patent Litigation |
6,384 | — | — | 6,384 | ||||||||||||
Income (loss) before income taxes |
$ | 470,405 | $ | (42,663) | $ | (33,863) | $ | 393,879 |
Year Ended December 31, 2009 |
Global Division |
Impax Division |
Corporate and Other |
Total Company |
||||||||||||
Revenues, net |
$ | 344,961 | $ | 13,448 | $ | — | $ | 358,409 | ||||||||
Cost of revenues |
158,270 | 12,043 | — | 170,313 | ||||||||||||
Research and development |
38,698 | 24,576 | — | 63,274 | ||||||||||||
Patent Litigation |
5,379 | — | — | 5,379 | ||||||||||||
Income (loss) before income taxes |
$ | 131,723 | $ | (26,640) | $ | (34,106) | $ | 70,977 |
Foreign Operations
The Company’s wholly-owned subsidiary, Impax Laboratories (Taiwan) Inc., has constructed a facility in Taiwan which is utilized for manufacturing, research and development, warehouse, and administrative functions, with approximately $ 56,827,000, and $ 38,805,000 of net carrying value of assets, composed principally of a building and equipment, included in the Company’s consolidated balance sheet at December 31, 2011 and 2010, respectively.
|
17. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, warehouse and laboratory facilities under non-cancelable operating leases expiring between May 2012 and December 2015. Rent expense for the years ended December 31, 2011, 2010 and 2009 was $ 1,691,000, $ 1,715,000 and $ 1,893,000, respectively. The Company recognizes rent expense on a straight-line basis over the lease period. The Company also leases certain equipment under various non-cancelable operating leases with various expiration dates between April 2012 and December 2016. Future minimum lease payments under the non-cancelable operating leases are as follows:
(in $000s) | Years Ended December 31, | |||
2012 |
$ | 1,591 | ||
2013 |
1,495 | |||
2014 |
1,268 | |||
2015 |
568 | |||
2016 |
60 | |||
Thereafter |
— | |||
|
|
|||
Total minimum lease payments |
$ | 4,982 | ||
|
|
Purchase Order Commitments
As of December 31, 2011, the Company had approximately $ 32,613,000 of open purchase order commitments, primarily for raw materials. The terms of these purchase order commitments are generally less than one year in duration.
Taiwan Facility
The Company has entered into several contracts related to ongoing expansion activities at its Taiwan facility. As of December 31, 2011, the Company had remaining obligations under these contracts of approximately $ 8,267,000.
|
18. 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 seeking an order delaying the approval of the Company’s ANDA until expiration of the patent(s) at issue in the litigation.
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.
The Company is generally responsible for all of the patent litigation fees and costs associated with current and future products not covered by its alliance and collaboration agreements. The Company has agreed to share legal expenses with respect to third-party and Company products under the terms of certain of the alliance and collaboration agreements. 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. One product under the Teva Agreement currently remains in litigation (the methylphenidate matter described below), the litigation costs of which the parties share equally. In addition to the Teva Agreement, the Company is sharing litigation costs with respect to three products under the terms of two separate agreements. The Company records the costs of patent litigation as expense in the period 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
Pfizer Inc., et aI. v. Impax Laboratories, Inc. (Tolterodine LA)
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 (the “600 patent”), 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.) (“Pfizer”). After the Pfizer court conducted a bench trial, in January 2010, it found the 600 patent not invalid. That decision was appealed to the U.S. Court of Appeals for the Federal Circuit, and in July 2011 the appeal was withdrawn, making the trial court decision final and binding on the Company. Discovery is proceeding in the Company’s case with respect to the other patents. Trial is set for September 4, 2012.
Pfizer Inc., et aI. v. Impax Laboratories, Inc. (Tolterodine IR)
In May 2011, 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 District of New Jersey, alleging the Company’s filing of an ANDA relating to Tolterodine Tartrate Capsules, 1 and 2 mg, generic to Detrol®, infringes U.S. Patent No. 5,382,600 (the “600 patent”), expiring on September 25, 2012 with pediatric exclusivity. The Company filed an answer and counterclaim. In January 2010, the ‘600 patent was found not to be invalid in Pfizer Inc. et al. v. Teva Pharmaceuticals USA, Inc., Case No. 04-1418 (D. N.J.). That decision was appealed to the U.S. Court of Appeals for the Federal Circuit, and in July 2011 the appeal was withdrawn, making the trial court decision final. As a result, a consent judgment dismissing this case was entered in October 2011.
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, including Wockhardt Limited, that have filed ANDAs relating to this product and proceedings in the case against the Company 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 the Company 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 the Company to convert its Paragraph IV Certification to a Paragraph III Certification with respect to the ‘269 patent.
Warner Chilcott Company, LLC. et.al. v. Impax Laboratories, Inc. (Doxycycline Hyclate)
In December 2008, Warner Chilcott Company, LLC, Warner Chilcott (US), LLS 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. A Markman hearing was held and a decision was issued in July 2011. A bench trial was conducted on February 1, 2012, and the Court’s decision is pending.
Genzyme Corporation 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 filed an answer and counterclaim. Discovery is closed, and trial is scheduled for September 27, 2012.
Genzyme Corporation 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 filed an answer and counterclaim. Discovery is closed, and trial is scheduled for September 27, 2012.
Genzyme Corporation 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 filed an answer and counterclaim. Discovery is closed, and trial is scheduled for September 27, 2012.
The Research Foundation of State University of New York et al. v. Impax Laboratories, Inc.; Galderma Laboratories Inc. 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®. In May 2011, Galderma Laboratories Inc., Galderma Laboratories, L.P. and Supernus Pharmaceuticals, Inc. filed a second lawsuit in Delaware alleging infringement of an additional patent related to Oracea®. The Company filed an answer and counterclaims in both matters. In October 2009 for the first lawsuit and in July 2011 for the second lawsuit, the parties agreed to be bound by the final judgment concerning infringement, validity and enforceability of the patents at issue in an earlier-filed case brought by Galderma and Supernus against another generic drug manufacturer. Proceedings in the lawsuits involving the Company were stayed pending resolution of the related matter. In July 2011, a four-day trial was held in the case involving the other generic manufacturer in the U.S. District Court for the District of Delaware on the issues of patent infringement and validity. In August 2011, the Court issued its decision finding four of the five patents invalid and/or not infringed, and the fifth patent, which expires in December 2027, infringed and not invalid. The decision of the District Court will be binding on the Company unless reversed or modified on appeal or in subsequent litigation.
Elan Pharma International Ltd. and Fournier Laboratories Ireland Ltd. v. Impax Laboratories, Inc. Abbott Laboratories and Laboratories 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 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. In June 2011, the parties entered into Settlement and License Agreements and the cases were dismissed.
Daiichi Sankyo, Inc. et al. v. Impax Laboratories, Inc. (Colesevelam)
In January 2010, Daiichi Sankyo, Inc. and Genzyme Corporation 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®. In June 2011, the parties entered into a Settlement Agreement and the case was dismissed.
Daiichi Sankyo, Inc. et al. v. Impax Laboratories, Inc. (Colesevelam Powder)
In November 2010, Daiichi Sankyo, Inc. and Genzyme Corporation 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 filed an answer and counterclaim. In June 2011, the parties entered into a Settlement Agreement and the case was dismissed.
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. A Markman hearing was held in May 2011, and a decision was issued in July 2011. In October 2011, the parties entered into a Settlement and License Agreement and the case was dismissed.
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 filed an answer and counterclaims. On November 17, 2011, the Court issued an Order substituting Shore Therapeutics, Inc. for Shionogi Pharma, Inc. as plaintiff. In December 2011, the parties entered into Settlement and License Agreements and the case was dismissed in February 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 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 the Company’s case were stayed. A bench trial was conducted in those other proceedings in December 2011, and the Court’s decision is pending.
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 filed an answer and counterclaim. Discovery is proceeding. A final pretrial conference and Markman hearing are set for February 22, 2013. Discovery is proceeding, and no trial date has been set.
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®. Another complaint was subsequently filed to allege infringement of the 18, 27 and 36 mg strengths, based on the Company amending its ANDA to include those additional strengths. The Company has filed its answers to both complaints. The parties have entered a stipulation staying the Company’s litigations until April 9, 2012.
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, based on the Company amending its ANDA to include those additional strengths. The Company filed its answer and counterclaims. In September 2011, the Court amended its Scheduling Order setting the Markman hearing for May 30, 2012. No trial date has been scheduled.
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 based on the filing of the Company’s ANDA relating to Dexlansoprazole Delayed Release Capsules, 30 and 60 mg, generic to Dexilant®. The Company filed an answer and counterclaims, including a claim relating to false marking of an expired patent. Takeda filed a motion to dismiss the Company’s false marking counterclaim. Following the enactment of the America Invents Act, the parties stipulated to dismissal of the false marking claim. Discovery is ongoing, and a Markman decision is pending after a hearing on February 16, 2012. No trial date has been set.
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®. The Company filed an answer and counterclaims.
Avanir Pharmaceuticals, Inc. et al. v. Impax Laboratories, Inc. (Dextromethorphan/Quinidine)
In August 2011, Avanir Pharmaceuticals, Inc., Avanir Holding Co., and Center for Neurological Study (collectively “Avanir”) filed suit against the Company in the U.S. District Court for the District of Delaware alleging patent infringement based on the filing of the Company’s ANDA relating to Dextromethorphan/Quinidine Capsules, 20 mg/10 mg, generic of Nuedexta®. The Company filed an answer and counterclaims. Discovery is proceeding, and trial is set for September 2013.
GlaxoSmithKline LLC, et al. v. Impax Laboratories, Inc., et al. (Dutasteride/Tamsulosin)
In September 2011, GlaxoSmithKline LLC and SmithKline Beecham Corp. filed suit against the Company in the U.S. District Court for the District of Delaware alleging patent infringement based on the filing of the Company’s ANDA relating to Dutasteride/Tamsulosin Capsules, 0.5 mg/0.4 mg, generic of Jalyn®. The Company filed an answer and counterclaim. Discovery is proceeding, and trial is set for October 22, 2012.
Cephalon, Inc. et al. v. Impax Laboratories, Inc. (Fentanyl Citrate)
In November 2011, Cephalon, Inc. and CIMA Labs, Inc. (together “Cephalon”) filed suit against the Company in the U.S. District Court for the District of Delaware, alleging patent infringement for the filing of the Company’s ANDA relating to Fentanyl Citrate Buccal Tablets, 100, 200, 400, 600, and 800 mcg, generic to Fentora®. The Company filed an answer and counterclaims, as well as a declaratory judgment action to include two other patents (U.S. Patent Nos. 6,264,981 and 8,092,832). In response, Cephalon alleged infringement of those two patents against the Company. Discovery is ongoing, and trial is set for June 24, 2013.
Other Litigation Related to Our 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 were removed to federal court, and a petition for multidistrict litigation to consolidate the cases in federal court was 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 filed a motion for class certification and the Company filed an opposition to that motion. The class certification hearing was held on May 17, 2011. In September 2011, the Company filed a summary judgment motion on the grounds of plaintiffs’ claims are preempted under federal law based on the United States Supreme Court decision in PLIVA v. Mensing. On January 6, 2012, the Company and co-defendant Teva entered into a classwide settlement agreement for all the actions included in the multidistrict litigation. Pursuant to that settlement, the Company has agreed to take certain actions related to the subject product, to pay for class notice and settlement administration, and to reimburse any attorney’s fees or costs awarded by the Court to plaintiffs’ up to a capped amount. The Company has accrued estimated costs related to the settlement of this matter as of December 31, 2011. The settlement was preliminarily approved by the Court on February 1, 2012 and remains subject to final approval following notice to the class.
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 filed a motion for a preliminary injunction and a temporary restraining order seeking to require Shire to fill product orders placed by the Company. In November 2010, 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 closed, and trial is set for April 10, 2012.
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19. SUBSEQUENT EVENTS
Zomig Distribution, License, Development and Supply Agreement with AstraZeneca
On January 31, 2012, the Company signed an agreement to license from AstraZeneca the exclusive U.S. commercial rights to Zomig® (zolmitriptan) tablet, orally disintegrating tablet, and nasal spray formulations. As part of a Distribution, License, Development and Supply Agreement, the Company will also have non-exclusive rights to develop new products containing zolmitriptan and to exclusively commercialize these products in the U.S. in connection with the Zomig® brand. Under terms of the agreement, the Company will pay AstraZeneca quarterly payments totaling $ 130,000,000 during 2012, and thereafter, the Company will pay AstraZeneca tiered royalties on future sales of zolmitriptan products.
FDA Acceptance of NDA Filing for IPX066 for the Treatment of Idiopathic Parkinson’s Disease
The FDA has accepted for filing the Company’s NDA for IPX066 for the treatment of idiopathic Parkinson’s disease submitted to the Agency on December 21, 2011. The Prescription Drug User Fee Date (“PDUFA”) for a decision by the FDA is October 21, 2012. IPX066 has been licensed to GlaxoSmithKline for territories outside the U.S. and Taiwan for development and marketing.
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20. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)
Selected financial information for the quarterly periods noted is as follows:
2011 Quarters Ended: | ||||||||||||||||
(in $000’s except shares and per share amounts) | March 31 | June 30 | September 30 | December 31 | ||||||||||||
Revenue: |
||||||||||||||||
Global Product sales, gross |
$ | 151,832 | $ | 181,972 | $ | 169,519 | $ | 225,122 | ||||||||
Less: |
||||||||||||||||
Chargebacks |
35,216 | 39,395 | 39,690 | 52,203 | ||||||||||||
Rebates |
12,709 | 17,392 | 18,014 | 21,058 | ||||||||||||
Product Returns |
2,706 | 1,799 | 552 | (4,369 | ) | |||||||||||
Other credits |
8,863 | 12,261 | 13,602 | 13,536 | ||||||||||||
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|
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|
|
|
|
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Global Product sales, net |
92,338 | 111,125 | 97,661 | 142,694 | ||||||||||||
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|
|
|
|
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Rx Partner |
4,120 | 6,303 | 14,059 | 7,601 | ||||||||||||
OTC Partner |
1,943 | 1,184 | 879 | 1,015 | ||||||||||||
Research Partner |
6,715 | 3,713 | 3,715 | 3,714 | ||||||||||||
Promotional Partner |
3,535 | 3,535 | 3,535 | 3,535 | ||||||||||||
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|
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Total revenues |
108,651 | 125,860 | 119,849 | 158,559 | ||||||||||||
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|
|
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Gross profit |
58,537 | 59,702 | 62,654 | 77,402 | ||||||||||||
Net income |
$ | 13,863 | $ | 12,550 | $ | 17,220 | $ | 21,862 | ||||||||
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Net income per share (basic) |
$ | 0.22 | $ | 0.20 | $ | 0.27 | $ | 0.34 | ||||||||
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Net income per share (diluted) |
$ | 0.21 | $ | 0.19 | $ | 0.26 | $ | 0.33 | ||||||||
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Weighted Average: |
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common shares outstanding: |
||||||||||||||||
Basic |
63,390,527 | 64,024,483 | 64,387,413 | 64,687,753 | ||||||||||||
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Diluted |
67,044,266 | 67,654,047 | 66,986,758 | 67,029,407 | ||||||||||||
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Quarterly computations of 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.
The Company recorded a reduction to its reserve for product returns of $ 5.7 million in the fourth quarter of 2011 based upon actual prescription data related to its generic Adderall XR® products. Additionally, the Company recorded a reduction to its reserve for product returns of $ 2.0 million in the fourth quarter of 2011 related to all Global Products other than its generic Adderall XR® products as a result of continued improvement in the Company’s historical experience of actual return credits processed.
Selected financial information for the quarterly periods noted is as follows:
2010 Quarters Ended: | ||||||||||||||||
(in $000’s except shares and per share amounts) | March 31 | June 30 | September 30 | December 31 | ||||||||||||
Revenue: |
||||||||||||||||
Global Product sales, gross |
$ | 426,658 | $ | 224,657 | $ | 168,287 | $ | 148,234 | ||||||||
Less: |
||||||||||||||||
Chargebacks |
56,168 | 49,420 | 36,065 | 39,913 | ||||||||||||
Rebates |
29,425 | 16,739 | 21,630 | 17,666 | ||||||||||||
Product Returns |
7,400 | 4,596 | 8,344 | (4,519 | ) | |||||||||||
Other credits |
23,888 | 15,925 | 10,669 | 9,544 | ||||||||||||
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Global Product sales, net |
309,777 | 137,977 | 91,579 | 85,630 | ||||||||||||
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Rx Partner |
4,903 | 5,802 | 202,799 | 3,773 | ||||||||||||
OTC Partner |
1,765 | 2,309 | 2,365 | 2,449 | ||||||||||||
Research Partner |
3,385 | 3,494 | 3,714 | 3,715 | ||||||||||||
Promotional Partner |
3,503 | 3,500 | 3,535 | 3,535 | ||||||||||||
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Total revenues |
323,333 | 153,082 | 303,992 | 99,102 | ||||||||||||
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|
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Gross profit |
243,757 | 84,190 | 160,871 | 50,445 | ||||||||||||
Net income |
$ | 131,485 | $ | 31,348 | $ | 75,163 | 12,422 | |||||||||
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|
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Net income per share (basic) |
$ | 2.16 | $ | 0.51 | $ | 1.20 | $ | 0.20 | ||||||||
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|
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Net income per share (diluted) |
$ | 2.06 | $ | 0.48 | $ | 1.15 | $ | 0.19 | ||||||||
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Weighted Average: |
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common shares outstanding: |
||||||||||||||||
Basic |
61,008,015 | 61,876,599 | 62,435,116 | 62,807,768 | ||||||||||||
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Diluted |
63,865,678 | 65,538,805 | 65,470,341 | 66,210,101 | ||||||||||||
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|
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Quarterly computations of 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.
The Company recorded a reduction to its reserve for product returns of $ 4.1 million in the fourth quarter of 2010 as a result of actual prescription data showing exclusivity period sales of its tamsulosin products had been fully prescribed to patients. Additionally, the Company recorded a reduction to its reserve for product returns of $ 3.7 million in the fourth quarter of 2010 related to all Global Products other than its tamsulosin and generic Adderall XR® products as a result of continued improvement in the Company’s historical experience of actual return credits processed.
The table below presents a comparison of certain consolidated statement of operations financial reporting captions under the pre-amendment and post-amendment accounting principles of ASC 605-25 for each of the three months ended March 31, 2010, June 30, 2010, September 30, 2010, and December 31, 2010 and for the year ended December 31, 2010, as follows:
Three Months Ended: | Twelve Months Ended |
|||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | December 31, | ||||||||||||||||
(in $000’s except per share amounts) | 2010 | 2010 | 2010 | 2010 | 2010 | |||||||||||||||
RX Partner revenue |
||||||||||||||||||||
Pre-amendment principles |
$ | 4,903 | $ | 5,802 | $ | 5,922 | $ | 5,628 | $ | 22,255 | ||||||||||
Change |
(802 | ) | 407 | 437 | (1,855 | ) | (1,813 | ) | ||||||||||||
Post-amendment principles |
$ | 4,101 | $ | 6,209 | $ | 6,359 | $ | 3,773 | $ | 20,442 | ||||||||||
Cost of revenues |
||||||||||||||||||||
Pre-amendment principles |
$ | 79,576 | $ | 68,892 | $ | 47,998 | $ | 48,498 | $ | 244,964 | ||||||||||
Change |
282 | 1,104 | (302 | ) | 159 | 1,243 | ||||||||||||||
Post-amendment principles |
$ | 79,858 | $ | 69,996 | $ | 47,696 | $ | 48,657 | $ | 246,207 | ||||||||||
Income before income taxes |
||||||||||||||||||||
Pre-amendment principles |
$ | 210,997 | $ | 49,438 | $ | 21,882 | $ | 11,823 | $ | 294,140 | ||||||||||
Change |
(1,084 | ) | (697 | ) | 739 | (2,014 | ) | (3,056 | ) | |||||||||||
Post-amendment principles |
$ | 209,913 | $ | 48,741 | $ | 22,621 | $ | 9,809 | $ | 291,084 | ||||||||||
Net income |
||||||||||||||||||||
Pre-amendment principles |
$ | 131,485 | $ | 31,348 | $ | 13,908 | $ | 7,515 | $ | 184,256 | ||||||||||
Change |
(689 | ) | (443 | ) | 470 | (1,280 | ) | (1,942 | ) | |||||||||||
Post-amendment principles |
$ | 130,796 | $ | 30,905 | $ | 14,378 | $ | 6,235 | $ | 182,314 | ||||||||||
Earnings per share-basic |
||||||||||||||||||||
Pre-amendment principles |
$ | 2.16 | $ | 0.51 | $ | 0.22 | $ | 0.12 | $ | 2.97 | ||||||||||
Change |
(0.02 | ) | (0.01 | ) | 0.01 | (0.02 | ) | (0.03 | ) | |||||||||||
Post-amendment principles |
$ | 2.14 | $ | 0.50 | $ | 0.23 | $ | 0.10 | $ | 2.94 |
Refer to Note 11— Alliance and Collaboration Agreements for more information regarding the accounting for the Teva Agreement.
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SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 2009
(in $000’s)
Column A |
Column B | Column C | Column D | Column E | ||||||||||||||||
Balance at | Charge to | Charge to | Balance at | |||||||||||||||||
Beginning of | Costs and | Other | End of | |||||||||||||||||
Description |
Period | Expenses | Accounts | Deductions | Period | |||||||||||||||
Deferred tax asset valuation |
||||||||||||||||||||
Allowance |
$ | 333 | $ | (333 | ) | $ | — | $ | — | $ | — | |||||||||
Reserve for bad debts |
828 | 229 | — | (685 | ) | 372 |
For the Year Ended December 31, 2010 | ||||||||||||||||||||
(in $000’s) | ||||||||||||||||||||
Column A |
Column B | Column C | Column D | Column E | ||||||||||||||||
Balance at | Charge to | Charge to | Balance at | |||||||||||||||||
Beginning of | Costs and | Other | End of | |||||||||||||||||
Description |
Period | Expenses | Accounts | Deductions | Period | |||||||||||||||
Deferred tax asset valuation |
||||||||||||||||||||
Allowance |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Reserve for bad debts |
372 | 277 | — | (110 | ) | 539 |
For the Year Ended December 31, 2011 | ||||||||||||||||||||
(in $000’s) | ||||||||||||||||||||
Column A |
Column B | Column C | Column D | Column E | ||||||||||||||||
Balance at | Charge to |
Charge to | Balance at | |||||||||||||||||
Beginning of | Costs and | Other | End of | |||||||||||||||||
Description |
Period | Expenses | Accounts | Deductions | Period | |||||||||||||||
Deferred tax asset valuation |
||||||||||||||||||||
Allowance |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Reserve for bad debts |
539 | 163 | — | (90 | ) | 612 |
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Use of Estimates
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 & 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.
Principles of Consolidation
The 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 December 31, 2011. All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all short-term investments with maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which, for cash equivalents, approximates fair value due to their short-term maturity. The Company is potentially subject to financial instrument concentration of credit risk through its cash and cash equivalents. The Company maintains cash and cash equivalents with several major financial institutions. Such amounts frequently exceed Federal Deposit Insurance Corporation (“FDIC”) limits.
Short-Term Investments
Short-term investments represent investments in fixed rate financial instruments with maturities of greater than three months but less than 12 months at the time of purchase. The Company’s short-term investments are held in U.S. Treasury securities, corporate bonds, and high grade commercial paper, which are not insured by the FDIC. They are stated at amortized cost, which approximates fair value due to their short-term maturity, generally based upon observable market values of similar securities.
Fair Value of Financial Instruments
The Company’s deferred compensation liability is carried at the value of the amount owed to participants, and is derived from observable market data by reference to hypothetical investments. The carrying values of other financial assets and liabilities such as accounts receivable, accounts payable and accrued expenses approximate their fair values due to their short-term nature.
Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, covering a wide range of matters, including, among others, patent litigation, shareholder lawsuits, and product liability. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification TM (“ASC”) Topic 450, “Contingencies”, the Company records accruals for such loss contingencies when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company, in accordance with FASB ASC Topic 450, does not recognize gain contingencies until realized. The Company records an accrual for legal costs in the period incurred. A discussion of contingencies is included in the “Commitments and Contingencies,” and “Legal and Regulatory Matters” footnotes below.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from amounts deemed to be uncollectible from its customers; these allowances are for specific amounts on certain accounts based on facts and circumstances determined on a case-by-case basis.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, cash equivalents, short-term investments, and accounts receivable. The Company limits its credit risk associated with cash, cash equivalents and short-term investments by placing its investments with high quality money market funds, corporate debt, and short-term commercial paper and in securities backed by the U.S. Government. The Company limits its credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary. The Company does not require collateral to secure amounts owed to it by its customers.
The following tables present the percentage of total accounts receivable and gross revenues represented by the Company’s five largest customers as of and for the years ended December 31, 2011, 2010 and 2009:
Percent of Total Accounts Receivable |
2011 | 2010 | 2009 | |||||||||
Customer #1 |
30.4 | % | 15.0 | % | 43.8 | % | ||||||
Customer #2 |
25.7 | % | 28.3 | % | 19.9 | % | ||||||
Customer #3 |
12.9 | % | 18.4 | % | 18.7 | % | ||||||
Customer #4 |
8.6 | % | 13.5 | % | 3.6 | % | ||||||
Customer #5 |
— | % | 2.9 | % | 2.7 | % | ||||||
Customer #6 |
2.5 | % | — | % | — | % | ||||||
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Total Five largest customers |
80.1 | % | 78.1 | % | 88.7 | % | ||||||
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Percent of Gross Revenues |
2011 | 2010 | 2009 | |||||||||
Customer #1 |
19.6 | % | 14.1 | % | 26.5 | % | ||||||
Customer #2 |
19.4 | % | 14.2 | % | 15.3 | % | ||||||
Customer #3 |
15.9 | % | 19.9 | % | 22.2 | % | ||||||
Customer #4 |
12.4 | % | 6.5 | % | 3.9 | % | ||||||
Customer #5 |
— | % | — | % | — | % | ||||||
Customer #6 |
— | % | — | % | — | % | ||||||
Customer #7 |
— | % | — | % | 5.7 | % | ||||||
Customer #8 |
2.4 | % | 3.4 | % | — | % | ||||||
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Total Five largest customers |
69.7 | % | 58.1 | % | 73.6 | % | ||||||
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During the years ended December 31, 2011, 2010 and 2009, the Company’s top ten products accounted for 76%, 83% and 70%, respectively, of Global Product sales, net.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using a standard cost method, and the cost flow assumption is first in, first out (“FIFO”) flow of goods. Standard costs are revised annually, and significant variances between actual costs and standard costs are apportioned to inventory and cost of goods sold based upon inventory turnover. Costs include materials, labor, quality control, and production overhead. Inventory is adjusted for short-dated, unmarketable inventory equal to the difference between the cost of inventory and the estimated value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Consistent with industry practice, the Company may build pre-launch inventories of certain products which are pending required FDA approval and/or resolution of patent infringement litigation, when, in the Company’s assessment, such action is appropriate to increase the commercial opportunity and FDA approval is expected in the near term and/or the litigation will be resolved in the Company’s favor. The Company accounts for all costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) as a current period charge in accordance with GAAP.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred and costs of improvements and renewals are capitalized. Costs incurred in connection with the construction or major renovation of facilities, including interest directly related to such projects, are capitalized as construction in progress. Depreciation is recognized using the straight-line method based on the estimated useful lives of the related assets, which are 40 years for buildings, 15 years for building improvements, 7 to 10 years for equipment, and 3 to 7 years for office furniture and equipment. Land and construction-in-progress are not depreciated.
Goodwill
In accordance with FASB ASC Topic 350, “Goodwill and Other Intangibles”, rather than recording periodic amortization, goodwill is subject to an annual assessment for impairment by applying a fair value based test. Under FASB ASC Topic 350, if the fair value of the reporting unit exceeds the reporting unit’s carrying value, including goodwill, then goodwill is considered not impaired, making further analysis not required. The Company considers the Global Division and the Impax Division operating segments to each be a reporting unit. The Company attributes the entire carrying amount of goodwill to the Global Division.
The Company concluded the carrying value of goodwill was not impaired as of December 31, 2011 and 2010 as the fair value of the Global Division exceeded its carrying value at each date. The Company performs its annual goodwill impairment test in the fourth quarter of each year. The Company estimated the fair value of the Global Division using a discounted cash flow model for both the reporting unit and the enterprise. In addition, on a quarterly basis, the Company performs a review of its business operations to determine whether events or changes in circumstances have occurred which could have a material adverse effect on the estimated fair value of the reporting unit, and thus indicate a potential impairment of the goodwill carrying value. If such events or changes in circumstances were deemed to have occurred, the Company would perform an interim impairment analysis, which may include the preparation of a discounted cash flow model, or consultation with one or more valuation specialists, to determine the impact, if any, on the Company’s assessment of the reporting unit’s fair value. The Company has not to date deemed there to have been any significant adverse changes in the legal, regulatory, or general economic environment in which the Company conducts its business operations.
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 both of the following criteria are met:
• |
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 the criteria above 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 recognized generally over the greater of the term of the arrangement or the expected period of performance, either on a straight-line basis or on a modified proportional performance method.
The Company accounts for milestones related to research and development activities in accordance with FASB ASC Topic 605-28, milestone method of revenue recognition. FASB ASC Topic 605-28 allows for the recognition of consideration, which is contingent on the achievement of a substantive milestone, in its entirety in the period the milestone is achieved. A milestone is considered to be substantive if all of the following criteria are met:, including the milestone is commensurate with either: (1) the performance required to achieve the milestone, or (2) 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 payment 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 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, which is generally when product is received by the customer. Included in Global Product revenue are deductions from the gross sales price, including deductions related to estimates for chargebacks, rebates, returns, shelf-stock, and other pricing adjustments. The Company records an estimate for these deductions in the same period when revenue is recognized. A summary of each of these deductions is as follows:
Chargebacks
The Company 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. An estimated accrued provision for chargeback deductions is recognized 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 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. An estimated accrued provision for rebate deductions is recognized 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 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 personnel in writing or by telephone with the lot number and expiration date accompanying any request and if such products are returned within six months prior to or until twelve months following, the products’ expiration date. The Company estimates and recognizes an accrued 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 estimated return rates which may be adjusted based on various assumptions including 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.
Shelf-Stock Adjustments
Based upon competitive market conditions, the Company may reduce the selling price of certain products. The Company may issue a credit against the sales amount to customers based upon their remaining inventory of the product in question, provided the customer agrees to continue to make future purchases of product from the Company. This type of customer credit is referred to as a shelf-stock adjustment, which is the difference between the sales price and the revised lower sales price, multiplied by an estimate of the number of product units on hand at a given date. Decreases in selling prices are discretionary decisions made by the Company in response to market conditions, including estimated launch dates of competing products and estimated declines in market price. The Company records an estimate for shelf-stock adjustments in the period it agrees to grant such a credit to a customer.
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 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, with corresponding adjustments to accrued liabilities.
Cash Discounts
The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for paying within invoice terms, which generally range from 30 to 90 days. An estimate of cash discounts is recorded in the same period when revenue is recognized.
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-party pharmaceutical companies. The Company has entered into these alliance agreements to develop marketing and/or distribution relationships with its partners to fully leverage its technology platform.
The Rx Partners and OTC Partners alliance agreements obligate the Company to deliver multiple goods and/or services over extended periods. Such deliverables include manufactured pharmaceutical products, exclusive and semi-exclusive marketing rights, distribution licenses, and research and development services, among others. In exchange for these deliverables, the Company receives payments from its alliance agreement partners for product shipments, and may also receive royalty, profit sharing, and/or upfront or periodic milestone payments. Revenue received from the alliance agreement partners for product shipments under these agreements is not subject to deductions for chargebacks, rebates, product returns, and other pricing adjustments. Royalty and profit sharing amounts the Company receives under these agreements are calculated by the respective alliance agreement partner, with such royalty and profit share amounts generally based upon estimates of net product sales or gross profit which include estimates of deductions for chargebacks, rebates, product returns, and other adjustments the alliance agreement partners may negotiate with their customers. The Company records the alliance agreement partner’s adjustments to such estimated amounts in the period the alliance agreement partner reports the amounts to the Company.
The Company applies 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”). 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. The Company initially defers the consideration received as a result of research and development-related activities performed under the Teva Agreement. 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 which is generally when product is received by Teva. The Company recognizes profit share revenue in the period earned.
OTC Partner revenue is related to an agreement with Pfizer Inc. (formerly Wyeth) with respect to supply of over-the-counter pharmaceutical products and related research and development services. The Company initially defers all revenue earned under the OTC Partner agreement. The Company also defers direct product manufacturing costs to the extent such costs are reimbursable by the OTC Partner. The product manufacturing costs in excess of amounts reimbursable by the OTC Partner are recognized as current period cost of revenue. The Company recognizes revenue as OTC Partner revenue and amortizes deferred product manufacturing costs as cost of revenues as it fulfills contractual obligations. Revenue is recognized and associated costs are amortized over the agreement’s term of the arrangement or the expected period of performance, using a modified proportional performance method. Under the modified proportional performance method of revenue recognition utilized by the Company, the amount recognized in the period of initial recognition is based upon the number of years elapsed under the alliance and collaboration agreement relative to the estimated total length of the recognition period. Under this method, the amount of revenue recognized in the year of initial recognition is determined by multiplying the total amount realized by a fraction, the numerator of which is the then current year of the alliance and collaboration agreement and the denominator of which is the total estimated life of the alliance and collaboration agreement. The amount recognized as revenue 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 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 expected period of performance of the alliance and collaboration agreement.
Research Partner:
The “Research Partner” line item of the statement of operations includes revenue recognized under development agreements with unrelated third-party pharmaceutical companies. The development agreements generally obligate the Company to provide research and development services over multiple periods. In exchange for this service, the Company received upfront payments upon signing of each development agreement and is eligible to receive contingent milestone payments, based upon the achievement of contractually specified events. Additionally, the Company may also receive royalty payments from the sale, if any, of a successfully developed and commercialized product under one of these development agreements. Revenue received from the achievement of contingent research and development milestones, if any, 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 promotional services agreements with unrelated third-party pharmaceutical companies. The promotional services agreements obligate the Company to provide physician detailing sales calls to promote its partners’ branded drug products over multiple periods. In exchange for this service, the Company has received fixed fees generally based on either the number of sales force representatives utilized in providing the services, or the number of sales calls made (up to contractual maximum amounts). The Company recognizes revenue from providing physician detailing services as those services are provided and as performance obligations are met and contingent payments, if any, at the time when they are earned.
Shipping and Handling Fees and Costs
Shipping and handling fees related to sales transactions are recorded as selling expense. Shipping costs were $ 1,341,000, $ 1,741,000 and $ 647,000 for the years ended December 31, 2011, 2010 and 2009, respectively.
Research and Development
Research and development activities are expensed as incurred and consist of self-funded research and development costs and costs associated with work performed by other participants under collaborative research and development agreements.
Derivatives
The Company does not engage in hedging transactions for trading or speculative purposes or to hedge exposure to currency or interest rate fluctuations. From time to time, the Company may engage in transactions that result in embedded derivatives (e.g. convertible debt securities). In accordance with FASB ASC Topic 815, derivatives and hedging, the Company records the embedded derivative at fair value on the balance sheet and records any related gains or losses in current earnings in the statement of operations.
Share-Based Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with provisions of FASB ASC Topic 718, stock compensation. Under FASB ASC Topic 718, the Company recognizes the grant date fair value of stock-based employee compensation as expense on a straight-line basis over the vesting period of the grant. The Company uses the Black Scholes option pricing model to determine the grant date fair value of employee stock options; the fair value of restricted stock awards is equal to the closing price of the Company’s stock on the date such award was granted.
Income Taxes
The Company provides for income taxes using the asset and liability method as required by FASB ASC Topic 740, income taxes. This approach recognizes the amount of federal, state, local taxes, and foreign taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequences of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates in the period during which they are signed into law. Under FASB ASC Topic 740, a valuation allowance is required when it is more likely than not all or some portion of the deferred tax assets will not be realized through generating sufficient future taxable income.
FASB ASC Topic 740, Sub-topic 10, tax positions, defines the criterion an individual tax position must meet for any part of the benefit of the tax position to be recognized in financial statements prepared in conformity with generally accepted accounting principles. Under FASB ASC Topic 740, Sub-topic 10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based solely on the technical merits of the tax position. The tax benefits recognized in the financial statements from such a tax position should be measured based on the largest benefit having a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Additionally, FASB ASC Topic 740, Sub-topic 10 provides guidance on measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In accordance with the disclosure requirements of FASB ASC Topic 740, Sub-topic 10, the Company’s policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of total interest expense and other expense, respectively.
Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares adjusted for the dilutive effect of common stock equivalents outstanding during the period.
Other Comprehensive Income
The Company follows the provisions of FASB ASC Topic 220, comprehensive income, which establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined to include all changes in equity during a period except those resulting from investments by owners and distributions to owners. However, effective with its majority equity investment in Prohealth Biotech, Inc. and the formation of its wholly owned subsidiary Impax Laboratories (Taiwan) Inc., the Company recorded foreign currency translation gains and losses, which are reported as comprehensive income. Foreign currency translation gains (losses) gains for the years ended December 31, 2011, 2010 and 2009 were $ (1,087,000), $ 3,335,000 and $ 471,000, respectively.
Deferred Financing Costs
The Company capitalizes direct costs incurred with obtaining debt financing, which are included in other assets on the consolidated balance sheet. Deferred financing costs, including costs incurred in obtaining debt financing, are amortized to interest expense over the term of the underlying debt on a straight-line basis, which approximates the effective interest method. The Company recognized amortized deferred financing costs of $ 28,000, $ 25,000 and $135,000, in the years ended December 31, 2011, 2010, and 2009, respectively.
Foreign Currency Translation
The Company translates the assets and liabilities of the Taiwan dollar functional currency of its majority-owned affiliate Prohealth Biotechnology, Inc. and its wholly-owned subsidiary Impax Laboratories (Taiwan), Inc. into the U.S. dollar reporting currency using exchange rates in effect at the end of each reporting period. The revenue and expense of these entities are translated using an average of the rates in effect during the reporting period. Gains and losses from these translations are recorded as currency translation adjustments included in the consolidated statements of comprehensive income and the consolidated statements of changes in shareholders’ equity.
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The following tables present the percentage of total accounts receivable and gross revenues represented by the Company’s five largest customers as of and for the years ended December 31, 2011, 2010 and 2009:
Percent of Total Accounts Receivable |
2011 | 2010 | 2009 | |||||||||
Customer #1 |
30.4 | % | 15.0 | % | 43.8 | % | ||||||
Customer #2 |
25.7 | % | 28.3 | % | 19.9 | % | ||||||
Customer #3 |
12.9 | % | 18.4 | % | 18.7 | % | ||||||
Customer #4 |
8.6 | % | 13.5 | % | 3.6 | % | ||||||
Customer #5 |
— | % | 2.9 | % | 2.7 | % | ||||||
Customer #6 |
2.5 | % | — | % | — | % | ||||||
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Total Five largest customers |
80.1 | % | 78.1 | % | 88.7 | % | ||||||
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Percent of Gross Revenues |
2011 | 2010 | 2009 | |||||||||
Customer #1 |
19.6 | % | 14.1 | % | 26.5 | % | ||||||
Customer #2 |
19.4 | % | 14.2 | % | 15.3 | % | ||||||
Customer #3 |
15.9 | % | 19.9 | % | 22.2 | % | ||||||
Customer #4 |
12.4 | % | 6.5 | % | 3.9 | % | ||||||
Customer #5 |
— | % | — | % | — | % | ||||||
Customer #6 |
— | % | — | % | — | % | ||||||
Customer #7 |
— | % | — | % | 5.7 | % | ||||||
Customer #8 |
2.4 | % | 3.4 | % | — | % | ||||||
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Total Five largest customers |
69.7 | % | 58.1 | % | 73.6 | % | ||||||
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A summary of short-term investments as of December 31, 2011 and December 31, 2010 follows:
(in $000’s) December 31, 2011 |
Amortized Cost |
Gross Unrecognized Gains |
Gross Unrecognized Losses |
Fair Value | ||||||||||||
Commercial paper |
$ | 69,341 | $ | 17 | $ | (5 | ) | $ | 69,353 | |||||||
Government sponsored enterprise obligations |
100,928 | 32 | (13 | ) | 100,947 | |||||||||||
Corporate bonds |
58,219 | 5 | (33 | ) | 58,191 | |||||||||||
Certificates of deposit |
13,507 | 1 | (1 | ) | 13,507 | |||||||||||
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Total short-term investments |
$ | 241,995 | $ | 55 | $ | (52 | ) | $ | 241,998 | |||||||
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(in $000’s) December 31, 2010 |
Amortized Cost |
Gross Unrecognized Gains |
Gross Unrecognized Losses |
Fair 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 | ||||||||||||
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Total short-term investments |
$ | 256,605 | $ | 104 | $ | (21 | ) | $ | 256,688 | |||||||
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The composition of accounts receivable, net is as follows:
December 31, | December 31, | |||||||
(in $000’s) | 2011 | 2010 | ||||||
Gross accounts receivable |
$ | 210,557 | $ | 123,941 | ||||
Less: Rebate reserve |
(25,244 | ) | (20,892 | ) | ||||
Less: Chargeback reserve |
(22,161 | ) | (14,918 | ) | ||||
Less: Other deductions |
(9,379 | ) | (6,077 | ) | ||||
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|
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Accounts receivable, net |
$ | 153,773 | $ | 82,054 | ||||
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A roll forward of the chargeback and rebate reserves activity for the years ended December 31, 2011, 2010 and 2009 is as follows:
(in $000’s) Rebate reserve |
December 31, | December 31, | December 31, | |||||||||
2011 | 2010 | 2009 | ||||||||||
Beginning balance |
$ | 20,892 | $ | 37,781 | $ | 4,800 | ||||||
Provision recorded during the period |
69,173 | 91,063 | 72,620 | |||||||||
Credits issued during the period |
(64,821 | ) | (107,952 | ) | (39,639 | ) | ||||||
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Ending balance |
$ | 25,244 | $ | 20,892 | $ | 37,781 | ||||||
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(in $000’s) Chargeback reserve |
December 31, | December 31, | December 31, | |||||||||
2011 | 2010 | 2009 | ||||||||||
Beginning balance |
$ | 14,918 | $ | 21,448 | $ | 4,056 | ||||||
Provision recorded during the period |
166,504 | 181,566 | 126,105 | |||||||||
Credits issued during the period |
(159,261 | ) | (188,096 | ) | (108,713 | ) | ||||||
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Ending balance |
$ | 22,161 | $ | 14,918 | $ | 21,448 | ||||||
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Inventory, net of carrying value reserves at December 31, 2011 and 2010 consisted of the following:
(in $000’s) | December 31, 2011 |
December 31, 2010 |
||||||
Raw materials |
$ | 32,454 | $ | 27,871 | ||||
Work in process |
5,046 | 2,575 | ||||||
Finished goods |
24,947 | 20,545 | ||||||
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Total inventory |
62,447 | 50,991 | ||||||
Less: Non-current inventory |
8,270 | 6,442 | ||||||
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Total inventory-current |
$ | 54,177 | $ | 44,549 | ||||
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Property, plant and equipment, net consisted of the following:
(in $000’s) | December 31, 2011 |
December 31, 2010 |
||||||
Land |
$ | 5,773 | $ | 2,270 | ||||
Buildings and improvements |
86,084 | 82,836 | ||||||
Equipment |
75,589 | 70,785 | ||||||
Office furniture and equipment |
8,910 | 9,077 | ||||||
Construction-in-progress |
16,602 | 3,958 | ||||||
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Property, plant and equipment, gross |
$ | 192,958 | $ | 168,926 | ||||
Less: Accumulated depreciation |
(74,800 | ) | (62,646 | ) | ||||
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Property, plant and equipment, net |
$ | 118,158 | $ | 106,280 | ||||
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The following table sets forth the Company’s accrued expenses:
December 31, | December 31, | |||||||
(in $000’s) | 2011 | 2010 | ||||||
Payroll-related expenses |
$ | 16,975 | $ | 16,796 | ||||
Product returns |
24,101 | 33,755 | ||||||
Medicaid rebates |
17,479 | 12,475 | ||||||
Physician detailing sales force fees |
1,655 | 2,308 | ||||||
Legal and professional fees |
5,071 | 3,143 | ||||||
Income taxes payable |
1,126 | 2,393 | ||||||
Shelf stock price protection |
684 | 281 | ||||||
Other |
3,025 | 4,030 | ||||||
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|
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Total accrued expenses |
$ | 70,116 | $ | 75,181 | ||||
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A roll forward of the return reserve activity for the years ended December 31, 2011, 2010 and 2009 is as follows:
(in $000’s) | December 31, | December 31, | December 31, | |||||||||
Returns Reserve |
2011 | 2010 | 2009 | |||||||||
Beginning balance |
$ | 33,755 | $ | 22,114 | $ | 13,675 | ||||||
Provision related to sales recorded in the period |
688 | 15,821 | 11,847 | |||||||||
Credits issued during the period |
(10,342 | ) | (4,180 | ) | (3,408 | ) | ||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 24,101 | $ | 33,755 | $ | 22,114 | ||||||
|
|
|
|
|
|
|
The provision for income taxes is comprised of the following:
For the Years Ended December 31, | ||||||||||||
(in $000’s) | 2011 | 2010 | 2009 | |||||||||
Current: |
||||||||||||
Federal taxes |
$ | 23,500 | $ | 96,560 | $ | 29,550 | ||||||
State taxes |
1,034 | 10,471 | 1,715 | |||||||||
Foreign taxes |
1,154 | 0 | 0 | |||||||||
|
|
|
|
|
|
|||||||
Total current tax expense |
25,688 | 107,031 | 31,265 | |||||||||
|
|
|
|
|
|
|||||||
Deferred: |
||||||||||||
Federal taxes |
$ | 5,646 | $ | 27,138 | $ | (11,520 | ) | |||||
State taxes |
592 | 9,140 | 1,995 | |||||||||
Foreign taxes |
690 | 212 | (734 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total deferred tax expense (benefit) |
6,928 | 36,490 | (10,259 | ) | ||||||||
|
|
|
|
|
|
|||||||
Provision for income taxes |
$ | 32,616 | $ | 143,521 | $ | 21,006 | ||||||
|
|
|
|
|
|
A reconciliation of the difference between the tax provision at the federal statutory rate and actual income taxes on income before income taxes, which includes federal, state, and other income taxes, is as follows:
For the Years Ended December 31, | ||||||||||||||||||||||||
(in $000’s) | 2011 | 2010 | 2009 | |||||||||||||||||||||
Income before income taxes |
$ | 98,014 | $ | 393,879 | $ | 70,977 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Tax provision at the federal statutory rate |
34,305 | 35.0 | % | 137,858 | 35.0 | % | 24,842 | 35.0 | % | |||||||||||||||
Increase (decrease) in tax rate resulting from: |
||||||||||||||||||||||||
State and local taxes, net of federal benefit |
3,721 | 3.8 | % | 12,873 | 3.3 | % | 3,628 | 5.1 | % | |||||||||||||||
Foreign rate differential |
(948 | ) | (1.0 | )% | 0 | 0.0 | % | 0 | 0.0 | % | ||||||||||||||
Research and development credits |
(3,378 | ) | (3.4 | )% | (2,700 | ) | (0.7 | )% | (2,546 | ) | (3.6 | )% | ||||||||||||
Share-based compensation |
92 | 0.1 | % | 979 | 0.2 | % | 1,824 | 2.6 | % | |||||||||||||||
Domestic manufacturing deduction |
(2,187 | ) | (2.2 | )% | (6,563 | ) | (1.7 | )% | (700 | ) | (1.0 | )% | ||||||||||||
Provision for uncertain tax positions |
178 | 0.2 | % | 203 | 0.1 | % | (6,084 | ) | (8.6 | )% | ||||||||||||||
Other, net |
833 | 0.8 | % | 871 | 0.2 | % | 294 | 0.4 | % | |||||||||||||||
Change in valuation allowance |
— | — | % | — | — | % | (252 | ) | (0.3 | )% | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Provision for income taxes |
$ | 32,616 | 33.3 | % | $ | 143,521 | 36.4 | % | $ | 21,006 | 29.6 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The components of the Company’s deferred tax assets and liabilities are as follows:
December 31, | ||||||||
(in $000’s) | 2011 | 2010 | ||||||
Deferred tax assets: |
||||||||
Deferred revenues |
$ | 13,225 | $ | 15,970 | ||||
Accrued expenses |
27,382 | 28,752 | ||||||
Inventory reserves |
2,439 | 2,874 | ||||||
Net operating loss carryforwards |
372 | 1,317 | ||||||
Depreciation and amortization |
340 | 458 | ||||||
Other |
2,923 | 4,212 | ||||||
|
|
|
|
|||||
Deferred tax assets |
$ | 46,681 | $ | 53,583 | ||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Tax depreciation and amortization in excess of book amounts |
$ | 4,697 | $ | 3,862 | ||||
Deferred manufacturing costs |
3,872 | 3,916 | ||||||
Other |
700 | 1,465 | ||||||
|
|
|
|
|||||
Deferred tax liabilities |
$ | 9,269 | $ | 9,243 | ||||
|
|
|
|
|||||
Deferred tax assets, net |
$ | 37,412 | $ | 44,340 | ||||
|
|
|
|
The breakdown between current and long-term deferred tax assets and tax liabilities is as follows:
December 31, | ||||||||
(in $000’s) | 2011 | 2010 | ||||||
Current deferred tax assets |
$ | 39,104 | $ | 41,506 | ||||
Current deferred tax liabilities |
(1,251 | ) | (2,235 | ) | ||||
|
|
|
|
|||||
Current deferred tax assets, net |
37,853 | 39,271 | ||||||
|
|
|
|
|||||
Non-current deferred tax assets |
7,577 | 12,077 | ||||||
Non-current deferred tax liabilities |
(8,018 | ) | (7,008 | ) | ||||
|
|
|
|
|||||
Non-current deferred tax (liabilities) assets, net |
(441 | ) | 5,069 | |||||
|
|
|
|
|||||
Deferred tax assets, net |
$ | 37,412 | $ | 44,340 | ||||
|
|
|
|
There were state net operating loss (NOL) carryforwards of $ 5,288,000 and $ 9,228,000 as of December 31, 2011 and 2010, respectively, with a twenty year carryforward period as of December 31, 2011, and utilization expiration dates occurring between the years 2022 and 2023, summarized as follows:
(in $000’s) | ||||
Year |
Amount | |||
2022 |
$ | 1,513 | ||
2023 |
3,775 | |||
|
|
|||
Total |
$ | 5,288 | ||
|
|
A reconciliation of the accrued reserve for uncertain tax positions is as follows:
(in $000’s) | ||||
Balance at January 1, 2011 |
$ | 1,580 | ||
Increase based on prior year tax positions |
24 | |||
Increase based on current year tax positions |
154 | |||
Interest expense |
84 | |||
|
|
|||
Balance at December 31, 2011 |
$ | 1,842 | ||
|
|
|
The following tables show the additions to and deductions from the deferred revenue and deferred product manufacturing costs under the Teva Agreement:
(in $000’s) | For the Years Ended December 31, | Inception Through Dec 31, 2008 |
||||||||||||||
Deferred revenue |
2011 | 2010 | 2009 | |||||||||||||
Beginning balance |
$ | 4,410 | $ | 202,032 | $ | 200,608 | $ | — | ||||||||
Additions: |
||||||||||||||||
Product related and cost sharing |
551 | 10,096 | 35,245 | 382,024 | ||||||||||||
Exclusivity charges |
— | — | — | (50,600 | ) | |||||||||||
Other |
— | — | — | 12,527 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total additions |
551 | 10,096 | 35,245 | 343,951 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Less: Amount recognized |
(1,256 | ) | (11,278 | ) | (33,821 | ) | (143,343 | ) | ||||||||
Accounting adjustment |
— | (196,440 | ) | — | — | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deferred revenue |
$ | 3,705 | $ | 4,410 | $ | 202,032 | $ | 200,608 | ||||||||
|
|
|
|
|
|
|
|
For the Years Ended December 31, | Inception Through Dec 31, 2008 |
|||||||||||||||
(in $000’s) | ||||||||||||||||
Deferred product manufacturing costs |
2011 | 2010 | 2009 | |||||||||||||
Beginning balance |
$ | — | $ | 94,040 | $ | 88,361 | $ | — | ||||||||
Additions |
— | 7,416 | 24,089 | 151,476 | ||||||||||||
Less: Amount recognized |
— | (6,030 | ) | (18,410 | ) | (63,115 | ) | |||||||||
Accounting adjustment |
— | (95,426 | ) | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deferred product manufacturing costs |
$ | — | $ | — | $ | 94,040 | $ | 88,361 | ||||||||
|
|
|
|
|
|
|
|
The following schedule shows the expected recognition of deferred revenue and amortization of deferred product manufacturing costs, for transactions recorded through December 31, 2011, for the next five years and thereafter under the Teva Agreement:
(in $000s) | Deferred Revenue Recognition |
|||
2012 |
$ | 1,309 | ||
2013 |
1,309 | |||
2014 |
1,087 | |||
2015 |
— | |||
2016 |
— | |||
Thereafter |
— | |||
|
|
|||
Totals |
$ | 3,705 | ||
|
|
The following table shows the additions to and deductions from deferred revenue and deferred product manufacturing costs under the OTC Agreements:
(in $000’s) | For the Years Ended December 31, | Inception Through |
||||||||||||||
Deferred revenue |
2011 | 2010 | 2009 | Dec 31, 2008 | ||||||||||||
Beginning balance |
$ | 11,382 | $ | 16,162 | $ | 21,044 | $ | — | ||||||||
Additions |
2,018 | 4,108 | 1,960 | 91,944 | ||||||||||||
Less: amounts recognized |
(3,717 | ) | (8,888 | ) | (6,842 | ) | (70,900 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deferred revenue |
$ | 9,683 | $ | 11,382 | $ | 16,162 | $ | 21,044 | ||||||||
|
|
|
|
|
|
|
|
(in $000’s) | For the Years Ended December 31, | Inception Through |
||||||||||||||
Deferred product manufacturing costs |
2011 | 2010 | 2009 | Dec 31, 2008 | ||||||||||||
Beginning balance |
$ | 10,235 | $ | 14,203 | $ | 18,361 | $ | — | ||||||||
Additions |
1,721 | 3,223 | 1,929 | 75,941 | ||||||||||||
Less: amount recognized |
(3,110 | ) | (7,191 | ) | (6,087 | ) | (57,580 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deferred product manufacturing costs |
$ | 8,846 | $ | 10,235 | $ | 14,203 | $ | 18,361 | ||||||||
|
|
|
|
|
|
|
|
The following schedule shows the expected recognition of deferred revenue and amortization deferred product manufacturing costs, for transactions recorded through December 31, 2011, for the next five years and thereafter under the OTC Agreements:
(in $000s) | Deferred Revenue Recognition |
Deferred Product Manufacturing Costs Amortization |
||||||
2012 |
$ | 1,541 | $ | 1,413 | ||||
2013 |
1,541 | 1,413 | ||||||
2014 |
1,541 | 1,413 | ||||||
2015 |
1,541 | 1,413 | ||||||
2016 |
1,541 | 1,413 | ||||||
Thereafter |
1,978 | 1,781 | ||||||
|
|
|
|
|||||
Total |
$ | 9,683 | $ | 8,846 | ||||
|
|
|
|
The following table shows the additions to and deductions from deferred revenue under the Joint Development Agreement with Medicis:
(in $000’s) | Years Ended December 31, | Inception Through Dec 31, 2008 |
||||||||||||||
Deferred revenue |
2011 | 2010 | 2009 | |||||||||||||
Beginning balance |
$ | 25,948 | $ | 39,487 | $ | 39,167 | $ | — | ||||||||
Additions: |
||||||||||||||||
Up-front fees and milestone payments |
— | — | 12,000 | 40,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total additions |
— | — | 12,000 | 40,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Less: amount recognized |
(13,538 | ) | (13,539 | ) | (11,680 | ) | (833 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deferred revenue |
$ | 12,410 | $ | 25,948 | $ | 39,487 | $ | 39,167 | ||||||||
|
|
|
|
|
|
|
|
The following schedule shows the expected recognition of deferred revenue, for transactions recorded through December 31, 2011, for the next five years and thereafter under the Joint Development Agreement with Medicis:
(in $000s) | Deferred Revenue Recognition |
|||
2012 |
$ | 12,410 | ||
2013 |
— | |||
2014 |
— | |||
2015 |
— | |||
2016 |
— | |||
Thereafter |
— | |||
|
|
|||
Total |
$ | 12,410 | ||
|
|
|
The stock option activity for all of the Company’s equity compensation plans noted above is summarized as follows:
Stock Options |
Number of Shares Under Option |
Weighted- Average Exercise Price per Share |
||||||
Outstanding at December 31, 2008 |
8,280,240 | $ | 10.53 | |||||
Options granted |
2,489,141 | 6.96 | ||||||
Options exercised |
(1,175,897 | ) | 3.69 | |||||
Options forfeited |
(1,363,666 | ) | 13.86 | |||||
|
|
|||||||
Outstanding at December 31, 2009 |
8,229,818 | 9.87 | ||||||
Options granted |
405,600 | 20.22 | ||||||
Options exercised |
(1,900,549 | ) | 8.62 | |||||
Options forfeited |
(220,193 | ) | 11.03 | |||||
|
|
|||||||
Outstanding at December 31, 2010 |
6,514,676 | 10.84 | ||||||
Options granted |
424,000 | 24.78 | ||||||
Options exercised |
(1,605,043 | ) | 11.02 | |||||
Options forfeited |
(260,536 | ) | 9.73 | |||||
|
|
|||||||
Outstanding at December 31, 2011 |
5,073,097 | 11.76 | ||||||
|
|
|||||||
Options exercisable at December 31, 2011 |
3,345,263 | $ | 11.30 | |||||
|
|
A summary of the non-vested restricted stock awards is as follows:
Restricted Stock Awards | Non-Vested Restricted Stock Awards |
Weighted- Average Grant Date Fair Value |
||||||
Non-vested at December 31, 2008 |
399,716 | $ | 10.30 | |||||
Granted |
886,969 | 6.99 | ||||||
Vested |
(113,204 | ) | 10.25 | |||||
Forfeited |
(20,558 | ) | 7.87 | |||||
|
|
|||||||
Non-vested at December 31, 2009 |
1,152,923 | 7.72 | ||||||
Granted |
727,556 | 18.87 | ||||||
Vested |
(368,825 | ) | 8.61 | |||||
Forfeited |
(76,895 | ) | 10.17 | |||||
|
|
|||||||
Non-vested at December 31, 2010 |
1,434,759 | 12.93 | ||||||
Granted |
868,549 | 20.73 | ||||||
Vested |
(452,861 | ) | 11.81 | |||||
Forfeited |
(186,536 | ) | 13.71 | |||||
|
|
|||||||
Non-vested at December 31, 2011 |
1,663,911 | $ | 17.20 | |||||
|
|
The Company estimated the fair value of each stock option award on the grant date using the Black-Scholes option pricing model with the following assumptions:
For the Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Volatility (range) |
50.7%-52.7% | 55.1%-56.4% | 58.3%-64.2% | |||||||||
Volatility (weighted average) |
52.3% | 55.9% | 60.4% | |||||||||
Risk-free interest rate (range) |
1.5%-2.3% | 1.5%-3.1% | 2.1%-2.9% | |||||||||
Risk-free interest rate (weighted average) |
2.1% | 2.3% | 2.6% | |||||||||
Dividend yield |
0% | 0% | 0% | |||||||||
Expected life (years) |
6.20 | 6.21 | 6.25 | |||||||||
Weighted average grant date fair value |
$12.85 | $11.08 | $4.07 |
The amount of share-based compensation expense recognized by the Company is as follows:
For the Years Ended December 31, | ||||||||||||
(in $000’s) | 2011 | 2010 | 2009 | |||||||||
Cost of revenues |
$ | 1,917 | $ | 2,377 | $ | 1,600 | ||||||
Research and development |
4,119 | 3,466 | 2,677 | |||||||||
Selling, general and administrative |
6,649 | 4,871 | 3,114 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 12,685 | $ | 10,714 | $ | 7,391 | ||||||
|
|
|
|
|
|
|
A reconciliation of basic and diluted earnings per share is as follows:
For the Years Ended December 31, | ||||||||||||
(in $000’s, except share and per share amounts) | 2011 | 2010 | 2009 | |||||||||
Numerator: |
||||||||||||
Net income |
$ | 65,495 | $ | 250,418 | $ | 50,061 | ||||||
|
|
|
|
|
|
|||||||
Denominator: |
||||||||||||
Weighted average common shares outstanding |
64,126,855 | 62,037,908 | 60,279,602 | |||||||||
Effect of dilutive options and common stock purchase warrants |
3,193,134 | 3,527,224 | 800,582 | |||||||||
|
|
|
|
|
|
|||||||
Diluted weighted average common shares outstanding |
67,319,989 | 65,565,132 | 61,080,184 | |||||||||
|
|
|
|
|
|
|||||||
Basic net income per share |
$ | 1.02 | $ | 4.04 | $ | 0.83 | ||||||
|
|
|
|
|
|
|||||||
Diluted net income per share |
$ | 0.97 | $ | 3.82 | $ | 0.82 | ||||||
|
|
|
|
|
|
|
The tables below present segment information reconciled to total Company financial results, with segment operating income or loss including gross profit less direct research and development expenses, and direct selling expenses as well as any litigation settlements, to the extent specifically identified by segment:
(in $000’s) Year Ended December 31, 2011 |
Global Division |
Impax Division |
Corporate and Other |
Total Company |
||||||||||||
Revenues, net |
$ | 491,710 | $ | 21,209 | $ | — | $ | 512,919 | ||||||||
Cost of revenues |
242,713 | 11,911 | — | 254,624 | ||||||||||||
Research and development |
46,169 | 36,532 | — | 82,701 | ||||||||||||
Patent Litigation |
7,506 | — | — | 7,506 | ||||||||||||
Income (loss) before income taxes |
$ | 182,165 | $ | (34,669) | $ | (49,482) | $ | 98,014 |
Year Ended December 31, 2010 |
Global Division |
Impax Division |
Corporate and Other |
Total Company |
||||||||||||
Revenues, net |
$ | 864,667 | $ | 14,842 | $ | — | $ | 879,509 | ||||||||
Cost of revenues |
328,163 | 12,083 | — | 340,246 | ||||||||||||
Research and development |
44,311 | 41,912 | — | 86,223 | ||||||||||||
Patent Litigation |
6,384 | — | — | 6,384 | ||||||||||||
Income (loss) before income taxes |
$ | 470,405 | $ | (42,663) | $ | (33,863) | $ | 393,879 |
Year Ended December 31, 2009 |
Global Division |
Impax Division |
Corporate and Other |
Total Company |
||||||||||||
Revenues, net |
$ | 344,961 | $ | 13,448 | $ | — | $ | 358,409 | ||||||||
Cost of revenues |
158,270 | 12,043 | — | 170,313 | ||||||||||||
Research and development |
38,698 | 24,576 | — | 63,274 | ||||||||||||
Patent Litigation |
5,379 | — | — | 5,379 | ||||||||||||
Income (loss) before income taxes |
$ | 131,723 | $ | (26,640) | $ | (34,106) | $ | 70,977 |
|
Future minimum lease payments under the non-cancelable operating leases are as follows:
(in $000s) | Years Ended December 31, | |||
2012 |
$ | 1,591 | ||
2013 |
1,495 | |||
2014 |
1,268 | |||
2015 |
568 | |||
2016 |
60 | |||
Thereafter |
— | |||
|
|
|||
Total minimum lease payments |
$ | 4,982 | ||
|
|
|
Selected financial information for the quarterly periods noted is as follows:
2011 Quarters Ended: | ||||||||||||||||
(in $000’s except shares and per share amounts) | March 31 | June 30 | September 30 | December 31 | ||||||||||||
Revenue: |
||||||||||||||||
Global Product sales, gross |
$ | 151,832 | $ | 181,972 | $ | 169,519 | $ | 225,122 | ||||||||
Less: |
||||||||||||||||
Chargebacks |
35,216 | 39,395 | 39,690 | 52,203 | ||||||||||||
Rebates |
12,709 | 17,392 | 18,014 | 21,058 | ||||||||||||
Product Returns |
2,706 | 1,799 | 552 | (4,369 | ) | |||||||||||
Other credits |
8,863 | 12,261 | 13,602 | 13,536 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Global Product sales, net |
92,338 | 111,125 | 97,661 | 142,694 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Rx Partner |
4,120 | 6,303 | 14,059 | 7,601 | ||||||||||||
OTC Partner |
1,943 | 1,184 | 879 | 1,015 | ||||||||||||
Research Partner |
6,715 | 3,713 | 3,715 | 3,714 | ||||||||||||
Promotional Partner |
3,535 | 3,535 | 3,535 | 3,535 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
108,651 | 125,860 | 119,849 | 158,559 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
58,537 | 59,702 | 62,654 | 77,402 | ||||||||||||
Net income |
$ | 13,863 | $ | 12,550 | $ | 17,220 | $ | 21,862 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income per share (basic) |
$ | 0.22 | $ | 0.20 | $ | 0.27 | $ | 0.34 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income per share (diluted) |
$ | 0.21 | $ | 0.19 | $ | 0.26 | $ | 0.33 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted Average: |
||||||||||||||||
common shares outstanding: |
||||||||||||||||
Basic |
63,390,527 | 64,024,483 | 64,387,413 | 64,687,753 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
67,044,266 | 67,654,047 | 66,986,758 | 67,029,407 | ||||||||||||
|
|
|
|
|
|
|
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Quarterly computations of 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.
The Company recorded a reduction to its reserve for product returns of $ 5.7 million in the fourth quarter of 2011 based upon actual prescription data related to its generic Adderall XR® products. Additionally, the Company recorded a reduction to its reserve for product returns of $ 2.0 million in the fourth quarter of 2011 related to all Global Products other than its generic Adderall XR® products as a result of continued improvement in the Company’s historical experience of actual return credits processed.
Selected financial information for the quarterly periods noted is as follows:
2010 Quarters Ended: | ||||||||||||||||
(in $000’s except shares and per share amounts) | March 31 | June 30 | September 30 | December 31 | ||||||||||||
Revenue: |
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Global Product sales, gross |
$ | 426,658 | $ | 224,657 | $ | 168,287 | $ | 148,234 | ||||||||
Less: |
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Chargebacks |
56,168 | 49,420 | 36,065 | 39,913 | ||||||||||||
Rebates |
29,425 | 16,739 | 21,630 | 17,666 | ||||||||||||
Product Returns |
7,400 | 4,596 | 8,344 | (4,519 | ) | |||||||||||
Other credits |
23,888 | 15,925 | 10,669 | 9,544 | ||||||||||||
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Global Product sales, net |
309,777 | 137,977 | 91,579 | 85,630 | ||||||||||||
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Rx Partner |
4,903 | 5,802 | 202,799 | 3,773 | ||||||||||||
OTC Partner |
1,765 | 2,309 | 2,365 | 2,449 | ||||||||||||
Research Partner |
3,385 | 3,494 | 3,714 | 3,715 | ||||||||||||
Promotional Partner |
3,503 | 3,500 | 3,535 | 3,535 | ||||||||||||
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Total revenues |
323,333 | 153,082 | 303,992 | 99,102 | ||||||||||||
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Gross profit |
243,757 | 84,190 | 160,871 | 50,445 | ||||||||||||
Net income |
$ | 131,485 | $ | 31,348 | $ | 75,163 | 12,422 | |||||||||
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Net income per share (basic) |
$ | 2.16 | $ | 0.51 | $ | 1.20 | $ | 0.20 | ||||||||
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Net income per share (diluted) |
$ | 2.06 | $ | 0.48 | $ | 1.15 | $ | 0.19 | ||||||||
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Weighted Average: |
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common shares outstanding: |
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Basic |
61,008,015 | 61,876,599 | 62,435,116 | 62,807,768 | ||||||||||||
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Diluted |
63,865,678 | 65,538,805 | 65,470,341 | 66,210,101 | ||||||||||||
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The table below presents a comparison of certain consolidated statement of operations financial reporting captions under the pre-amendment and post-amendment accounting principles of ASC 605-25 for each of the three months ended March 31, 2010, June 30, 2010, September 30, 2010, and December 31, 2010 and for the year ended December 31, 2010, as follows:
Three Months Ended: | Twelve Months Ended |
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March 31, | June 30, | September 30, | December 31, | December 31, | ||||||||||||||||
(in $000’s except per share amounts) | 2010 | 2010 | 2010 | 2010 | 2010 | |||||||||||||||
RX Partner revenue |
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Pre-amendment principles |
$ | 4,903 | $ | 5,802 | $ | 5,922 | $ | 5,628 | $ | 22,255 | ||||||||||
Change |
(802 | ) | 407 | 437 | (1,855 | ) | (1,813 | ) | ||||||||||||
Post-amendment principles |
$ | 4,101 | $ | 6,209 | $ | 6,359 | $ | 3,773 | $ | 20,442 | ||||||||||
Cost of revenues |
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Pre-amendment principles |
$ | 79,576 | $ | 68,892 | $ | 47,998 | $ | 48,498 | $ | 244,964 | ||||||||||
Change |
282 | 1,104 | (302 | ) | 159 | 1,243 | ||||||||||||||
Post-amendment principles |
$ | 79,858 | $ | 69,996 | $ | 47,696 | $ | 48,657 | $ | 246,207 | ||||||||||
Income before income taxes |
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Pre-amendment principles |
$ | 210,997 | $ | 49,438 | $ | 21,882 | $ | 11,823 | $ | 294,140 | ||||||||||
Change |
(1,084 | ) | (697 | ) | 739 | (2,014 | ) | (3,056 | ) | |||||||||||
Post-amendment principles |
$ | 209,913 | $ | 48,741 | $ | 22,621 | $ | 9,809 | $ | 291,084 | ||||||||||
Net income |
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Pre-amendment principles |
$ | 131,485 | $ | 31,348 | $ | 13,908 | $ | 7,515 | $ | 184,256 | ||||||||||
Change |
(689 | ) | (443 | ) | 470 | (1,280 | ) | (1,942 | ) | |||||||||||
Post-amendment principles |
$ | 130,796 | $ | 30,905 | $ | 14,378 | $ | 6,235 | $ | 182,314 | ||||||||||
Earnings per share-basic |
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Pre-amendment principles |
$ | 2.16 | $ | 0.51 | $ | 0.22 | $ | 0.12 | $ | 2.97 | ||||||||||
Change |
(0.02 | ) | (0.01 | ) | 0.01 | (0.02 | ) | (0.03 | ) | |||||||||||
Post-amendment principles |
$ | 2.14 | $ | 0.50 | $ | 0.23 | $ | 0.10 | $ | 2.94 |
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