The following discussion and analysis, as well as other sections in this
Quarterly Report on Form 10-Q, should be read in conjunction with the unaudited
interim consolidated financial statements and related notes to the unaudited
interim consolidated financial statements included elsewhere herein.
Statements included in this Quarterly Report on Form 10-Q not related to present
or historical conditions are "forward-looking statements." Such forward-looking
statements involve risks and uncertainties which could cause results or outcomes
to differ materially from those expressed in the forward-looking statements.
Forward-looking statements may include statements relating to our plans,
strategies, objectives, expectations and intentions. Words such as "believes,"
"forecasts," "intends," "possible," "estimates," "anticipates," "plans," "will,"
"should," "could" and similar expressions are intended to identify
forward-looking statements. Our ability to predict results or the effect of
events on our operating results is inherently uncertain. Forward-looking
statements involve a number of risks, uncertainties and other factors that could
cause actual results to differ materially from those discussed in this Quarterly
Report on Form 10-Q. Such risks and uncertainties include the effect of current
economic conditions on our industry, business, financial position and results of
operations, fluctuations in our revenues and operating income, our ability to
successfully develop and commercialize pharmaceutical products, reductions or
loss of business with any significant customer, the impact of consolidation of
our customer base, the impact of competition, our ability to sustain
profitability and positive cash flows, any delays or unanticipated expenses in
connection with the operation of our Taiwan facility, the effect of foreign
economic, political, legal and other risks on our operations abroad, the
uncertainty of patent litigation, increased government scrutiny on our
agreements with brand pharmaceutical companies, consumer acceptance and demand
for new pharmaceutical products, the difficulty of predicting Food and Drug
Administration filings and approvals, our inexperience in conducting clinical
trials and submitting new drug applications, our ability to successfully conduct
clinical trials, our reliance on third parties to conduct clinical trials and
testing, the availability of raw materials and impact of interruptions in our
supply chain, the use of controlled substances in our products, disruptions or
failures in our information technology systems and network infrastructure, our
reliance on alliance and collaboration agreements, our dependence on certain
employees, our ability to comply with legal and regulatory requirements
governing the healthcare industry, the regulatory environment, our ability to
protect our intellectual property, exposure to product liability claims, changes
in tax regulations, our ability to manage our growth, including through
potential acquisitions, the restrictions imposed by our credit facility,
uncertainties involved in the preparation of our financial statements, our
ability to maintain an effective system of internal control over financial
reporting, any manufacturing difficulties or delays, the effect of terrorist
attacks on our business, the location of our manufacturing and research and
development facilities near earthquake fault lines, and other risks described
herein and in our Annual Report on Form 10-K for the year ended December 31,
2011. You should not place undue reliance on forward-looking statements. Such
statements speak only as to the date on which they are made, and we undertake no
obligation to update or revise any forward-looking statement, regardless of
future developments or availability of new information, except to the extent
required by applicable law.
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Overview
We are a technology-based, specialty pharmaceutical company applying formulation
and development expertise, as well as our drug delivery technology, to the
development, manufacture and marketing of bioequivalent pharmaceutical products,
commonly referred to as "generics," in addition to the development of branded
products. We operate in two segments, referred to as the "Global Pharmaceuticals
Division" ("Global Division") and the "Impax Pharmaceuticals Division" ("Impax
Division"). The Global Division concentrates its efforts on the development,
manufacture, sale and distribution of our generic products, which are the
pharmaceutical and therapeutic equivalents of brand-name drug products and are
usually marketed under their established nonproprietary drug names rather than
by a brand name. The Impax Division is currently focused on the development of
proprietary brand pharmaceutical products for the treatment of central nervous
system ("CNS") disorders and the promotion and sale of third-party branded
pharmaceutical products through our direct sales force, such as the sale and
distribution of Zomig (zolmitriptan) products, indicated for the treatment of
migraine headaches, under the terms of a Distribution, License, Development and
Supply Agreement with AstraZeneca in the United States and in certain U.S.
territories. Each of the Global Division and the Impax Division also generates
revenue from research and development services provided to unrelated third-party
pharmaceutical entities.
We plan to continue to expand our Global Division through targeted ANDAs and a
first-to-file and first-to-market strategy. We focus our efforts on developing,
manufacturing, selling and distributing controlled-release generic versions of
selected brand-name pharmaceuticals covering a broad range of therapeutic areas
and having technically challenging drug-delivery mechanisms or limited
competition. We employ our technologies and formulation expertise to develop
generic products that reproduce brand-name products' physiological
characteristics but do not infringe any valid patents relating to such
brand-name products. Generic products contain the same active ingredient and are
of the same route of administration, dosage form, strength and indication(s) as
brand-name products already approved for use in the United States by the FDA. We
generally focus our generic product development on brand-name products as to
which the patents covering the active pharmaceutical ingredient have expired or
are near expiration, and we employ our proprietary formulation expertise to
develop controlled-release technologies that do not infringe patents covering
the brand-name products' controlled-release technologies. We also develop,
manufacture, sell and distribute specialty generic pharmaceuticals that we
believe present one or more barriers to entry by competitors, such as difficulty
in raw materials sourcing, complex formulation or development characteristics or
special handling requirements. Our Global Division also generates revenues from
research and development services provided under a joint development agreement
with an unrelated third-party pharmaceutical entity.
We sell and distribute generic pharmaceutical products primarily through four
sales channels:
? the "Global Product" sales channel: generic pharmaceutical prescription
products we sell directly to wholesalers, large retail drug chains, and
others;
? the "Private Label" sales channel: generic pharmaceutical over-the-counter
("OTC") and prescription products we sell to unrelated third parties who
in-turn sell the product under their own label;
? the "Rx Partner" sales channel: generic prescription products sold through
unrelated third-party pharmaceutical entities pursuant to alliance and
collaboration agreements; and
? the "OTC Partner" sales channel: sales of generic pharmaceutical OTC
products sold through unrelated third-party pharmaceutical entities
pursuant to alliance and collaboration agreements.
As of July 27, 2012, we marketed 107 generic pharmaceutical products
representing dosage variations of 30 different pharmaceutical compounds through
our Global Division, and 17 other generic pharmaceutical products, representing
dosage variations of four different pharmaceutical compounds, through our
alliance and collaboration agreement partners. In addition to a product pipeline
of 46 pending applications at the FDA (including applications jointly filed with
our alliance and collaboration agreement partners) as of July 27, 2012, we are
continuing to evaluate and pursue external growth initiatives including
acquisitions and partnerships.
The Impax Division is focused on developing proprietary branded pharmaceuticals
products for the treatment of CNS disorders, which include epilepsy, migraine,
multiple sclerosis, Parkinson's disease and Restless Legs Syndrome, and the
promotion and sale of branded pharmaceutical products through our specialty
sales force. We believe that we have the research, development and formulation
expertise to develop branded products that will deliver significant improvements
over existing therapies.
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Our branded pharmaceutical product portfolio consists of commercial CNS products
and development stage projects. In January 2012, we licensed 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, we 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. With the
addition of Zomig to the promotional product portfolio, we have expanded our
specialty sales team during 2012. In addition to Zomig, we co-promoted
Lyrica(pregabalin) CV to neurologists for Pfizer under an amended agreement
that expired at the end of June 2012.
In the development of our pipeline products, we apply formulation and
development expertise to develop differentiated, modified, or controlled-release
versions of drug substances that are currently marketed either in the U.S. or
outside the U.S. We currently have one late-stage branded pharmaceutical product
candidate, IPX066, for which an NDA for the treatment of idiopathic Parkinson's
disease ("PD") was accepted for filing by the FDA in February 2012. The
Prescription Drug User Fee Date ("PDUFA") for a decision by the FDA is October
2012. In addition, we have a second branded pharmaceutical program, IPX159,
which is currently in a Phase IIb clinical study in patients with moderate to
severe Restless Legs Syndrome ("RLS"), which was initiated in December 2011.
IPX159 is an oral controlled-release formulation of a small molecule that has an
established pharmacological and safety profile for non-RLS use outside the U.S.
and may represent a novel mechanism of action in RLS. We have previously
completed a proof of concept study with the compound for IPX159 in RLS. We also
have multiple research projects in early stages of development. We intend to
expand our portfolio of branded pharmaceutical products through internal
development and through licensing and acquisition.
We have entered into several alliance and collaboration agreements with respect
to certain of our products and services and may enter into similar agreements in
the future. These agreements typically obligate us 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. Our alliance and
collaboration agreements often include milestones and provide for milestone
payments upon achievement of these milestones. For more information about the
types of milestone events in our agreements and how we categorize them, see
"Item 1. Financial Statements - Note 13 to Interim Consolidated Financial
Statements."
Pursuant to a license and distribution agreement, we are dependent on a
third-party pharmaceutical company to supply us with our authorized generic
Adderall XR, which we market and sell. We have experienced disruptions related
to the supply of our authorized generic Adderall XR from this third-party
pharmaceutical company during 2011 and 2012. In November 2010, we filed suit
against the third-party supplier of our authorized generic of Adderall XR for
breach of contract and other related claims due to a failure to fill our orders
as required by the license and distribution agreement. If we suffer supply
disruptions related to our authorized generic Adderall XR product in the
future, our revenues and relationships with our customers may be materially
adversely affected. Further, we may enter into similar license and distribution
agreements in the future.
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Quality Control
In June 2011, we received a warning letter from the FDA related to an on-site
FDA inspection of our Hayward, California manufacturing facility conducted
between December 13, 2010 and January 21, 2011. In the warning letter, the FDA
cited deviations from current Good Manufacturing Practices (cGMP), which are
extensive regulations governing manufacturing processes, stability testing,
record keeping and quality standards. In summary, the FDA observations set forth
in the warning letter related to sampling and testing of in-process materials
and drug products, production record review, and our process for investigating
the failure of certain manufacturing batches (or portions of batches) to meet
specifications. The FDA observations do not place restrictions on our ability to
manufacture and ship our products.
From late June 2011 through the end of 2011, we filed our response and
subsequent updates with the FDA and have continued to cooperate with the FDA to
resolve the FDA observations. In December 2011, we received an acknowledgement
letter from the FDA stating that it had received a complete response from us to
the warning letter. During the quarter ended March 31, 2012, the FDA completed a
re-inspection of our Hayward manufacturing facility in connection with the
warning letter and in addition, a general GMP inspection. As a result of the
general GMP inspection of our Hayward operations, the FDA issued a Form 483,
with observations primarily relating to our Quality Control Laboratory. We have
been notified by the FDA that a satisfactory re-inspection of our Hayward
manufacturing facility is required to close out the warning letter and such
re-inspection by the FDA has not occurred to date.
We have taken a number of steps to thoroughly review our quality control and
manufacturing systems and standards and are working with several third-party
experts to assist us with our review. This work is ongoing and we are committed
to improving our quality control and manufacturing practices. We cannot be
assured, however, that the FDA will be satisfied with our corrective actions and
as such, we cannot be assured of when the warning letter will be closed out.
Unless and until the warning letter is closed out, it is possible we may be
subject to additional regulatory action by the FDA as a result of the current or
future FDA observations, including, among others, monetary sanctions or
penalties, product recalls or seizure, injunctions, total or partial suspension
of production and/or distribution, and suspension or withdrawal of regulatory
approvals. Additionally, the FDA has withheld and may continue to withhold
approval of pending drug applications listing our Hayward, California facility
as a manufacturing location of finished dosage forms until these FDA
observations are resolved. If we are unable to promptly correct the issues
raised in the warning letter, our business, consolidated results of operations
and consolidated financial condition could be materially adversely affected.
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Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with
accounting principles generally accepted in the United States (GAAP) and the
rules and regulations of the U.S. Securities & Exchange Commission (SEC) require
the use of estimates and assumptions, based on complex judgments considered
reasonable, and affect the reported amounts of assets and liabilities and
disclosure of contingent assets and contingent liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant judgments are
employed in estimates used in determining values of tangible and intangible
assets, legal contingencies, tax assets and tax liabilities, fair value of
share-based compensation 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, distribution
service fees, product returns, Medicare, Medicaid, and other government rebate
programs, shelf-stock adjustments, and the timing and amount of deferred and
recognized revenue and deferred and amortized manufacturing costs under the
Company's several alliance and collaboration agreements. Actual results may
differ from estimated results. Certain prior year amounts have been reclassified
to conform to the current year presentation.
Although we believe our estimates and assumptions are reasonable when made, they
are based upon information available to us at the time they are made. We
periodically review the factors having an influence on our estimates and, if
necessary, adjust such estimates. Although historically our estimates have
generally been reasonably accurate, due to the risks and uncertainties involved
in our business and evolving market conditions, and given the subjective element
of the estimates made, actual results may differ from estimated results. This
possibility may be greater than normal during times of pronounced economic
volatility.
Global Product sales, net, and Impax Product sales, net. We recognize revenue
from direct sales in accordance with SEC Staff Accounting Bulletin No. 104,
Topic 13 "Revenue Recognition" ("SAB 104"). We recognize revenue from direct
product sales at the time title and risk of loss pass to customers. We provide
for accrued provisions for estimated chargebacks, rebates, distribution service
fees, product returns, and other pricing adjustments in the period we record the
related sales.
Consistent with industry practice, we record an accrued provision for estimated
deductions for chargebacks, rebates, product returns, Medicare, Medicaid, and
other government rebate programs, shelf-stock adjustments, and other pricing
adjustments, in the same period when revenue is recognized. The objective of
recording provisions for these deductions at the time of sale is to provide a
reasonable estimate of the aggregate amount we expect to ultimately credit our
customers. Since arrangements giving rise to the various sales credits are
typically time driven (i.e. particular promotions entitling customers who make
purchases of our products during a specific period of time, to certain levels of
rebates or chargebacks), these deductions represent important reductions of the
amounts those customers would otherwise owe us for their purchases of those
products. Customers typically process their claims for deductions in a
reasonably timely manner, usually within the established payment terms. We
monitor actual credit memos issued to our customers and compare actual amounts
to the estimated provisions, in the aggregate, for each deduction category to
assess the reasonableness of the various reserves at each quarterly balance
sheet date. Differences between our estimated provisions and actual credits
issued have not been significant, and are accounted for in the current period as
a change in estimate in accordance with GAAP. We do not have the ability to
specifically link any particular sales credit to an exact sales transaction and
since there have been no material differences, we believe our systems and
procedures are adequate for managing our business. An event such as the failure
to report a particular promotion could result in a significant difference
between the estimated amount accrued and the actual amount claimed by the
customer, and, while there have been none to date, we would evaluate the
particular events and factors giving rise to any such significant difference in
determining the appropriate accounting.
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Chargebacks. We have agreements establishing contract prices for specified
products with some of our indirect customers, such as managed care
organizations, hospitals, and government agencies who purchase our products from
drug wholesalers. The contract prices are lower than the prices the customer
would otherwise pay to the wholesaler, and the difference is referred to as a
chargeback, which generally takes the form of a credit memo issued by us to
reduce the gross sales amount we invoiced to our wholesaler customer. We
recognize an estimated accrued provision for chargeback deductions at the time
we ship the products to our wholesaler customers. The primary factors we
consider when estimating the accrued 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 we do business. We
monitor aggregate actual chargebacks granted and compare them to the estimated
accrued provision for chargebacks to assess the reasonableness of the chargeback
reserve at each quarterly balance sheet date. The following table is a
roll-forward of the activity in the Global Products chargeback reserve for the
six months ended June 30, 2012 and the year ended December 31, 2011:
June 30, December 31,
2012 2011
($ in 000's)
Chargeback reserve
Beginning balance $ 22,161 $ 14,918
Provision recorded during the period 89,825
166,504
Credits issued during the period (92,722 ) (159,261 )
Ending balance $ 19,264 $ 22,161
Provision as a percent of gross Global Product sales 22 %
23 %
The slight decrease in chargebacks as a percent of gross Global Product sales in
the six months ended June 30, 2012 as compared to year ended December 31, 2011
was principally the result of relatively higher levels of sales of our
authorized generic Adderall XR products in the current year period. Sales of
our authorized generic Adderall XR products generally carry lower average
chargebacks than our other Global Products.
Rebates. In an effort to maintain a competitive position in the marketplace and
to promote sales and customer loyalty, we maintain various rebate programs with
our customers to whom we market our products through our Global Division Global
Products sales channel. The rebates generally take the form of a credit memo to
reduce the invoiced gross sales amount charged to a customer for products
shipped. We recognize an estimated accrued provision for rebate deductions at
the time of product shipment. The primary factors we consider 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 which we
do business. We also monitor aggregate actual rebates granted and compare them
to the estimated aggregate provision for rebates to assess the reasonableness of
the aggregate rebate reserve at each quarterly balance sheet date. The following
table is a roll-forward of the activity in the Global Products rebate reserve
for the six months ended June 30, 2012 and the year ended December 31, 2011:
June 30, December 31,
2012 2011
($ in 000's)
Rebate reserve
Beginning balance $ 29,164 $ 23,547
Provision recorded during the period 47,436
79,697
Credits issued during the period (46,905 ) (74,080 )
Ending balance $ 29,695 $ 29,164
Provision as a percent of gross Global Product sales 12 %
11 %
As noted in the table above, the provision for rebates, as a percent of gross
Global Product sales remained relatively consistent period-over-period.
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Returns. We allow our customers to return product (i) if approved by authorized
personnel in writing or by telephone with the lot number and expiration date
accompanying any request and (ii) if such products are returned within six
months prior to, or until twelve months following, the products' expiration
date. We estimate and recognize an accrued provision for product returns as a
percentage of gross sales based upon historical experience of Global Division
Global Product sales. We estimate the product return reserve using a historical
lag period, which is the time between when the product is sold and when it is
ultimately returned, and return rates, adjusted by estimates of the future
return rates based on various assumptions, which may include changes to internal
policies and procedures, changes in business practices, and commercial terms
with customers, competitive position of each product, amount of inventory in the
wholesaler supply chain, the introduction of new products and changes in market
sales information. We also consider other factors, including significant market
changes which may impact future expected returns, and actual product returns. We
monitor aggregate actual product returns on a quarterly basis and we may record
specific provisions for product returns we believe are not covered by historical
percentages. The following table is a roll-forward of the activity in the Global
Products returns reserve for the six months ended June 30, 2012 and the year
ended December 31, 2011:
June 30, December 31,
2012 2011
($ in 000's)
Returns reserve
Beginning balance $ 24,101 $ 33,755
Provision related to sales recorded in the period 619
688
Credits issued during the period (2,041 ) (10,342 )
Ending balance $ 22,679 $ 24,101
Provision as a percent of gross Global Product sales 0.2 %
0.1 %
The provision for returns as a percent of gross Global Product sales remained
low during the six month period ended June 30, 2012 primarily as the result of
favorable historical experience of actual return credits processed. Our
historical experience for returns continues to improve due to strong sales in
recent years of our authorized generic Adderall XR and fenofibrate products.
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Medicaid Rebate. As required by law, we provide a rebate payment on drugs
dispensed under the Medicaid program. We determine our estimate of the accrued
Medicaid rebate reserve primarily based on historical experience of claims
submitted by the various states, and other jurisdictions, and any new
information regarding changes in the Medicaid program which may impact our
estimate of Medicaid rebates. In determining the appropriate accrual amount, we
consider historical payment rates and processing lag for outstanding claims and
payments. We record estimates for Medicaid payments as a deduction from gross
sales, with corresponding adjustments to accrued liabilities. The accrual for
Medicaid payments totaled $27,725,000 and $17,479,000 as of June 30, 2012 and
December 31, 2011, respectively.
Shelf-Stock Adjustments. Based upon competitive market conditions, we may reduce
the selling price of some of our products to customers for certain future
product shipments. We may issue a credit against the sales amount to a customer
based upon their remaining inventory of the product in question, provided the
customer agrees to continue to make future purchases of product from us. 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 us in response to market
conditions, including estimated launch dates of competing products and estimated
declines in market price. The accrued reserve for shelf-stock adjustments
totaled $148,000 and $684,000 as of June 30, 2012 and December 31, 2011,
respectively.
Rx Partner and OTC Partner. Each of our Rx Partner and OTC Partner agreements
involves multiple deliverables in the form of products, services and/or licenses
over extended periods. Financial Accounting Standards Board ("FASB") Accounting
Standards Codification TM ("ASC") Topic 605-25 supplemented SAB 104 for
accounting for such multiple-element revenue arrangements. With respect to our
multiple-element revenue arrangements, we determine whether any or all of the
elements of the arrangement should be separated into individual units of
accounting under FASB ASC Topic 605-25. If separation into individual units of
accounting is appropriate, we recognize revenue for each deliverable when the
revenue recognition criteria specified by SAB 104 are achieved for the
deliverable. If separation is not appropriate, we recognize revenue and related
direct manufacturing costs over the estimated life of the agreement or our
estimated expected period of performance using either the straight-line method
or a modified proportional performance method.
The Rx Partners and OTC Partners agreements obligate us to deliver multiple
goods and/or services over extended periods. Such deliverables include
manufactured pharmaceutical products, exclusive and semi-exclusive marketing
rights, distribution licenses, and research and development services. In
exchange for these deliverables, we receive payments from our agreement partners
for product shipments, and may also receive royalty, profit sharing, and/or
upfront or periodic milestone payments. Revenue received from the agreement
partners for product shipments under these agreements is generally not subject
to deductions for chargebacks, rebates, returns, shelf-stock adjustments, and
other pricing adjustments. Royalty and profit sharing amounts we receive under
these agreements are calculated by the respective 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, returns, shelf stock adjustments and other adjustments the alliance
agreement partners may negotiate with their customers. We record the agreement
partner's adjustments to such estimated amounts in the period the agreement
partner reports the amounts to us.
We applied the 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 Ltd. ("Teva Agreement") during the
year ended December 31, 2010. We look to the underlying delivery of goods and/or
services which give rise to the payment of consideration under the Teva
Agreement to determine the appropriate revenue recognition. Consideration
received as a result of research and development-related activities performed
under the Teva Agreement is initially deferred and recorded as a liability
captioned "Deferred revenue". We recognize the deferred revenue on a
straight-line basis over our expected period of performance for 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. We
recognize profit share revenue in the period earned.
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OTC Partner revenue is related to our alliance and collaboration agreement with
Pfizer Inc. (formerly Wyeth) with respect to supply of over-the-counter
pharmaceutical products and related research and development services. We
initially defer all revenue earned under our OTC Partner alliance and
collaboration agreement. We also defer direct product manufacturing costs to the
extent these costs are reimbursable by the OTC Partner. We recognize the product
manufacturing costs in excess of amounts reimbursable by the OTC Partner as
current period cost of revenue. We recognize revenue as OTC Partner revenue and
amortize deferred product manufacturing costs as cost of revenues - as we
fulfill our contractual obligations. Revenue is recognized and associated costs
are amortized over the alliance and collaboration agreement's term of the
arrangement or our expected period of performance, using a modified proportional
performance method. Under the modified proportional performance method of
revenue recognition utilized by us, the amount we recognize 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 we recognize 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. We have entered into development agreements with unrelated
third-party pharmaceutical companies under which we are collaborating in the
development of four dermatological products, including three generic products
and one branded dermatological product, and one branded CNS product. Under each
of the development agreements, we received an upfront fee with the potential to
receive additional milestone payments upon completion of contractually specified
clinical and regulatory milestones. Additionally, we may also receive royalty
payments from the sale, if any, of a successfully developed and commercialized
branded product under one of the development agreements. We deferred and
recognize revenue received from the provision of research and development
services, including the upfront payment and the milestone payments received
before January 1, 2011 on a straight line basis over the expected period of
performance of the research and development services. We will recognize revenue
received from the achievement of contingent research and development milestones,
if any, after January 1, 2011 currently in the period such payment is earned. We
will recognize royalty fee income, if any, as current period revenue when
earned.
Promotional Partner. We entered into a promotional services agreement with an
unrelated third-party pharmaceutical company under which we provided physician
detailing sales calls services to promote certain of the unrelated third-party
company's branded drug products. We received service fee revenue in exchange for
providing this service. We recognized revenue from the provision of physician
detailing sales calls as such services were rendered. Our obligations to provide
physician detailing sales calls under the promotional services agreement ended
on June 30, 2012.
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Estimated Lives of Alliance and Collaboration Agreements. The revenue we receive
under our alliance and collaboration agreements is not subject to adjustment for
estimated chargebacks, rebates, product returns and other pricing adjustments as
such adjustments are included in the amounts we receive from our alliance
partners. However, because we recognize revenue we receive under our alliance
agreements, which is required to be deferred, over the estimated life of the
related agreement or our expected performance utilizing either the straight-line
method or a modified proportional performance method, we are required to
estimate the recognition period under each such agreement in order to determine
the amount of revenue to be recognized in the current period. Sometimes this
estimate is based solely on the fixed term of the particular alliance agreement.
In other cases the estimate may be based on more subjective factors as noted in
the following paragraphs. While changes to the estimated recognition periods
have been infrequent, such changes, should they occur, may have a significant
impact on our consolidated financial statements.
As an illustration, the consideration received from the provision of research
and development services under the License, Development and Commercialization
Agreement with Glaxo Group Limited ("GSK"), including the up-front fee and
payments received for manufacturing clinical supplies, have been initially
deferred and are being recognized as revenue on a straight-line basis over our
expected period of performance during the development period, which is currently
estimated to be the 24 month period ending December 31, 2012. If the expected
period of performance is different from our estimate, then the revenue
recognition period will be adjusted on a prospective basis. In this regard, if
we were to estimate our period of performance to require significantly more
time, then the License, Development and Commercialization Agreement revenue
recognition period would be increased on a prospective basis, resulting in a
reduced periodic amount of revenue recognized in current and future periods.
Additionally, for example, the consideration received from the provision of
research and development services under the Joint Development Agreement with
Medicis, including the up-front fee and milestone payments received before
January 1, 2011, have been initially deferred and are being recognized as
revenue on a straight-line basis over our expected period of performance to
provide research and development services under the Joint Development Agreement
which is estimated to be a 48 month period, starting in December 2008 (upon
receipt of the $40.0 million upfront payment) and ending in November 2012. The
completion of the final Joint Development Agreement deliverable represents the
end of our estimated expected period of performance, as we will have no further
contractual obligation to perform research and development services under the
Joint Development Agreement, and therefore the earnings process will be
complete. If the timing of the completion of the final Joint Development
Agreement deliverable is different from our estimate, the revenue recognition
period will change on a prospective basis at such time the event occurs. While
no such change in the estimated life of the Medicis Joint Development Agreement
has occurred to date, if we were to conclude significantly more time will be
required to fulfill our contractual obligations, then we would increase our
estimate of the revenue recognition period under the Joint Development
Agreement, resulting in a reduced periodic amount of revenue recognized
prospectively in current and future periods.
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Third-Party Research and Development Agreements. In addition to our own research
and development resources, we may use unrelated third-party vendors, including
universities and independent research companies, to assist in our research and
development activities. These vendors provide a range of research and
development services to us, including clinical and bio-equivalency studies. We
generally sign agreements with these vendors which establish the terms of each
study performed by them, including, among other things, the technical
specifications of the study, the payment schedule, and timing of work to be
performed. Third-party researchers generally earn payments either upon the
achievement of a milestone, or on a pre-determined date, as specified in each
study agreement. We account for third-party research and development expenses as
they are incurred according to the terms and conditions of the respective
agreement for each study performed, with an accrued expense at each balance
sheet date for estimated fees and charges incurred by us, but not yet billed to
us. We monitor aggregate actual payments and compare them to the estimated
provisions to assess the reasonableness of the accrued expense balance at each
quarterly balance sheet date. Differences between our estimates and actual
payments made have not been significant.
Share-Based Compensation. We recognize the grant date fair value of each option
and restricted share over its vesting period. Options and restricted shares
granted under the 2002 Plan vest over a three or four year period and have a
term of ten years. We estimate the fair value of each stock option award on the
grant date using the Black-Scholes-Merton option-pricing model, wherein:
expected volatility is based on historical volatility of our common stock, and
of a peer group for the period of time our common stock was deregistered, over
the period commensurate with the expected term of the stock options. We base the
expected term calculation on the "simplified" method described in SAB No. 107,
Share-Based Payment and SAB No. 110, Share-Based Payment, because it provides a
reasonable estimate in comparison to our actual experience. We base the
risk-free interest rate on the U.S. Treasury yield in effect at the time of
grant for an instrument with a maturity that is commensurate with the expected
term of the stock options. The dividend yield is zero as we have never paid cash
dividends on our common stock, and have no present intention to pay cash
dividends.
Income Taxes. We are subject to U.S. federal, state and local income taxes and
Taiwan R.O.C. income taxes. We create a deferred tax asset, or a deferred tax
liability, when we have temporary differences between the financial statement
carrying values (GAAP) and the tax bases of our assets and liabilities.
We calculate our interim income tax provision in accordance with FASB ASC Topics
270 and 740. At the end of each interim period, we make an estimate of the
annual U.S. domestic and foreign jurisdictions' expected effective tax rates and
apply these rates to their respective year-to-date taxable income or loss. The
computation of the annual estimated effective tax rates at each interim period
requires certain estimates and assumptions including, but not limited to, the
expected operating income for the year, projections of the proportion of income
(or loss) earned and taxed in United States, and the various state and local tax
jurisdictions, as well as tax jurisdictions outside the United States, along
with permanent differences, and the likelihood of deferred tax asset
utilization. The accounting estimates used to compute the provision for income
taxes may change as new events occur, more experience is acquired, or additional
information is obtained. The computation of the annual estimated effective tax
rates includes modifications, which were projected for the year, for share-based
compensation charges, the domestic manufacturing deduction, and federal and
state research and development credits, among others. In addition, we recognize
the effect of changes in enacted tax laws, rates, or tax status in the interim
period in which such change occurs.
Fair Value of Financial Instruments. Our cash and cash equivalents include a
portfolio of high-quality credit securities, including U.S. Government sponsored
entity securities, treasury bills, corporate bonds, short-term commercial paper,
and/or high rated money market funds. Our entire portfolio matures in less than
one year. The carrying value of the portfolio approximated the market value at
June 30, 2012. We carry our deferred compensation liability at fair value, based
upon observable market values. We had no debt outstanding as of June 30, 2012.
Our only remaining debt instrument at June 30, 2012 was our credit facility with
Wells Fargo Bank, N.A., which would be subject to variable interest rates and
principal payments should we decide to borrow under it.
Contingencies. In the normal course of business, we are subject to loss
contingencies, such as legal proceedings and claims arising out of our business,
covering a wide range of matters, including, among others, patent litigation,
shareholder lawsuits, and product and clinical trial liability. In accordance
with FASB ASC Topic 450-Contingencies, we record accrued loss contingencies when
it is probable a liability will be incurred and the amount of loss can be
reasonably estimated and we do not recognize gain contingencies until realized.
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Goodwill-In accordance with FASB ASC Topic 350, "Goodwill and Other
Intangibles", rather than recording periodic amortization of goodwill, 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. We consider each
of our Global Division and Impax Division operating segments to be a reporting
unit, as this is the lowest level for each of which discrete financial
information is available. We attribute the entire carrying amount of goodwill to
the Global Division. We concluded the carrying value of goodwill was not
impaired as of December 31, 2011, as the fair value of the Global Division
exceeded its carrying value. We perform our annual goodwill impairment test in
the fourth quarter of each year. We estimate the fair value of the Global
Division using a discounted cash flow model for both the reporting unit and the
enterprise, as well as earnings and revenue multiples per common share
outstanding for enterprise fair value. In addition, on a quarterly basis, we
perform a review of our business operations to determine whether events or
changes in circumstances have occurred that 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, we 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 analyze the
impact, if any, on our assessment of the reporting unit's fair value. We have
not to date deemed there to be any significant adverse changes in the legal,
regulatory or business environment in which we conduct our operations.
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Results of Operations
Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30,
2011
Overview:
The following table sets forth our summarized, consolidated results of
operations for the three month period ended June 30, 2012 and 2011:
Three Months Ended
June 30, June 30, Increase/
2012 2011 (Decrease)
(in $000's) (unaudited) (unaudited)
$ %
Total revenues $ 166,460 $ 125,860 $ 40,600 32 %
Gross profit 77,823 59,702 18,121 30 %
Income from operations 30,170 18,006 12,164 68 %
Income before income taxes 29,896 17,740
12,156 69 %
Provision for income taxes 11,262 5,214
6,048 116 %
18,634 12,526
6,108 49 %
Non-controlling interest 38 24
14 58 %
Net income $ 18,672 $ 12,550 $ 6,122 49 %
Net income for the three month period ended June 30, 2012 was $18.7 million, an
increase of $6.1 million as compared to $12.6 million for the three month period
ended June 30, 2011, primarily attributable to higher Global Product sales, as
well as sales of Impax-labeled Zomig tablets which we began selling during the
three month period ended June 30, 2012. The higher sales during the three months
ended June 30, 2012 were partially offset by higher patent litigation costs,
selling, general and administrative expenses and income taxes. We continued to
earn significant revenues and gross profit from sales of our authorized generic
Adderall XR products and fenofibrate products during the three month period
ended June 30, 2012. With respect to our authorized generic Adderall XR
products, we are dependent on a third-party pharmaceutical company to supply us
with the finished product we market and sell through our Global Division. We
have experienced disruptions related to the supply of our authorized generic
Adderall XR from this third-party pharmaceutical company. Delays or
interruptions in whole or part in the supply of our authorized generic Adderall
XR products from the third-party pharmaceutical company could curtail or delay
our product shipments and adversely affect our consolidated revenues, as well as
jeopardize our relationships with our customers. In June 2012, a competitor
product to our authorized generic Adderall XR was approved for sale by the FDA.
Although we are currently unable to predict the impact this competitor product
will have on our business, any significant diminution in the consolidated
revenue and/or gross profit of our authorized generic Adderall XR and
fenofibrate products, or any of our other products, due to competition and/or
product supply disruptions or any other reasons in future periods may materially
and adversely affect our consolidated results of operations in such future
periods.
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Global Division
The following table sets forth results of operations for the Global Division for
the three month period ended June 30, 2012 and 2011:
Three Months Ended
June 30, June 30, Increase/
2012 2011 (Decrease)
(in $000's) (unaudited) (unaudited)
$ %
Revenues:
Global Product sales, net $ 126,435 $ 111,125 $ 15,310 14 %
Rx Partner 2,466 4,866 (2,400 ) (49 )%
OTC Partner 783 1,184 (401 ) (34 )%
Research Partner 3,384 3,384 - - %
Total revenues 133,068 120,559 12,509 10 %
Cost of revenues 70,478 63,257 7,221 11 %
Gross profit 62,590 57,302 5,288 9 %
Operating expenses:
Research and development 12,136 13,466 (1,330 ) (10 )%
Patent litigation 2,914 2,209 705 32 %
Selling, general and administrative 3,319 2,579 740 29 %
Total operating expenses 18,369 18,254 115 1 %
Income from operations $ 44,221 $ 39,048 $ 5,173 13 %
Revenues
Total revenues for the Global Division for the three month period ended June 30,
2012, were $133.1 million, an increase of 10% over the same period in 2011,
principally resulting from the increase in Global Product sales, net and as
discussed below.
Global Product sales, net, were $126.4 million for the three month period ended
June 30, 2012, an increase of 14% over the same period in 2011, primarily as a
result of higher sales of our authorized generic Adderall XR and fenofibrate
products. With respect to sales of our authorized generic Adderall XR products,
the increase principally resulted from higher product sales due to customer
buying patterns and increased deliveries of generic Adderall XR from our third
party supplier compared to the prior year period. Inventory levels of our
authorized generic Adderall XR products remain, however, lower than required to
meet our current customer demand. With respect to sales of our fenofibrate
products, we experienced an increase resulting from overall market growth during
the three months ended June 30, 2012.
Rx Partner revenues were $2.5 million for the three month period ended June 30,
2012, a decrease of $2.4 million from the prior year period resulting from lower
sales of our generic products marketed through our Strategic Alliance Agreement
with Teva.
OTC Partner revenues were $0.8 million for the three month period ended June 30,
2012, with the decrease of $0.4 million from the prior year period resulting
from lower sales of our product marketed under our OTC Partner alliance
agreement with Pfizer.
Research Partner revenues were $3.4 million for each of the three month periods
ended June 30, 2012 and 2011.
Cost of Revenues
Cost of revenues was $70.5 million for the three month period ended June 30,
2012 and $63.3 million for the prior year period. Cost of revenues increased
$7.2 million primarily as a result of higher sales of our Global Products.
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Gross Profit
Gross profit for the three month period ended June 30, 2012 was $62.6 million,
or approximately 47% of total revenues, as compared to $57.3 million, or
approximately 48% of total revenue, in the prior year period. Gross profit in
the current year period decreased, on a percentage basis, when compared to gross
profit in the prior year period due primarily to higher sales of our authorized
generic Adderall XR.
Research and Development Expenses
Total research and development expenses for the three month period ended
June 30, 2012 were $12.1 million, a decrease of 10%, as compared to the same
period of the prior year. Generic research and development expenses decreased
$1.3 million primarily as a result of a reduction of $1.1 million of
depreciation expense from the prior year period related to fully depreciated
equipment used in research and development activities.
Patent Litigation Expenses
Patent litigation expenses for the three month period ended June 30, 2012 and
2011 were $2.9 million and $2.2 million, respectively, with the increase
resulting from legal activity related to several cases which were not present in
the prior year period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three month period ended
June 30, 2012 were $3.3 million, a 29% increase over the same period in 2011.
The increase resulted primarily from $0.5 million in higher executive-level
compensation costs as a result of vacancies during the prior year period and
$0.2 million in increased business development activity.
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Impax Division
The following table sets forth results of operations for the Impax Division for
the three month period ended June 30, 2012 and 2011:
Three Months Ended
June 30, June 30, Increase/
2012 2011 (Decrease)
(in $000's) (unaudited) (unaudited)
$ %
Revenues:
Impax Product sales, net $ 28,091 $
- $ 28,091 nm
Rx Partner 1,437 1,437 - -
Promotional Partner 3,535 3,535 - -
Research Partner 329 329 - -
Total revenues 33,392 5,301 28,091 530 %
Cost of revenues 18,159 2,901 15,258 526 %
Gross profit 15,233 2,400 12,833 535 %
Operating expenses:
Research and development 7,733 10,512 (2,779 ) (26 )%
Selling, general and administrative 6,707 1,377 5,330 387 %
Total operating expenses 14,440 11,889 2,551 21 %
Income (loss) from operations $ 793 $ (9,489 ) $ 10,282 nm
nm-not meaningful
Revenues
Total revenues were $33.4 million for the three month period ended June 30,
2012, an increase of $28.1 million over the same period in the prior year due to
sales of our Impax-labeled Zomig tablets which we began selling during the
three month period ended June 30, 2012. Rx Partner revenue includes the
recognition of the $11.5 million up-front payment received under our License,
Development and Commercialization Agreement with GSK which we are recognizing as
revenue on a straight-line basis over our expected period of performance during
the development period currently estimated to be the 24 month period ending
December 2012. In addition, under a Development and Co-Promotion Agreement with
Endo Pharmaceuticals, Inc. we received an initial $10.0 million up-front payment
which we are recognizing as Research Partner revenue on a straight-line basis
over our expected period of performance during the development period, which we
currently estimate to be the 91 month period ending December 2017.
Cost of Revenues
Cost of revenues was $18.2 million for the three month period ended June 30,
2012, and increased $15.3 million over the prior year period primarily as a
result of the commencement of sales of our Impax-labeled Zomigtablets during
the three month period ended June 30, 2012.
Gross Profit
Gross profit for the three month period ended June 30, 2012 was $15.2 million,
an increase of $12.8 million over the prior year period primarily resulting from
the commencement of sales of our Impax-labeled Zomig tablets during the three
month period ended June 30,
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