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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended December 31, 2002

or

For the transition period from                              to                             

Commission file number 0-25323

Albany Molecular Research, Inc.
(Exact name of registrant as specified in its charter)

(518) 464-0279
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý    No o

        The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant on June 28, 2002 was approximately $507.0 million based upon the closing price per share of the Registrant's Common Stock as reported on the Nasdaq National Market on June 28, 2002. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        As of March 14, 2003, there were 32,024,328 outstanding shares of the Registrant's Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the following document are incorporated by reference into Part III of this Report on Form 10-K:

(1)

The Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 21, 2003.

ALBANY MOLECULAR RESEARCH, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K

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        This Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our actual results could differ materially from those projected in the forward-looking statements and therefore, prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, the factors set forth under "Risk Factors and Certain Factors Affecting Forward-Looking Statements," the discussion set forth below and the matters set forth in this Form 10-K generally. We do not undertake any obligation to update our forward-looking statements, except as required by applicable law.

PART I

ITEM 1. BUSINESS.

Overview

        We are a leading chemistry-based drug discovery and development company focused on applications for new small molecule prescription drugs. We conduct research and development projects and collaborate with many leading pharmaceutical, biotechnology and genomics companies, and are developing new chemistry technology for potential pharmaceutical products. We engage in chemistry research, from lead discovery, optimization and development to commercial manufacturing. We believe we are the only company providing contract chemistry services to customers across the entire product development cycle from lead discovery to commercial manufacturing. Most of the services we offer have been traditionally provided by chemistry divisions within pharmaceutical and biotechnology companies, including drug discovery, medicinal chemistry, chemical development, analytical chemistry services and small-scale and pilot-plant manufacturing. In December 1999, we expanded our service offerings to include commercial manufacturing through our strategic relationship with and investment in Organichem Corporation. In February of 2003 we completed the acquisition of Organichem which is now our wholly-owned subsidiary. Organichem is a full service, cGMP custom manufacturer specializing in process development, pilot to commercial scale synthesis, high potency, low temperature and controlled substance manufacturing. The Organichem facility has manufactured ethical and over-the- counter drugs for more than 100 years. We have designed our services to permit our customers to reduce overall drug development time and cost and to pursue simultaneously a greater number of drug discovery and development opportunities.

        In addition to our chemistry research services, we also conduct proprietary research and development to discover new lead compounds with commercial potential. We anticipate that we would then license these compounds to third parties in return for up-front service fees and milestone payments as well as recurring royalty payments if these compounds are developed into new commercial drugs. In 1995, our proprietary research and development activities led to the development and patenting of a substantially pure form of, and a manufacturing process for, the active ingredient in the non-sedating antihistamine fexofenadine HCl marketed by Aventis S.A. as Allegra in the Americas and as Telfast elsewhere. Pursuant to a licensing agreement with Aventis, we have earned a total of $166.7 million in milestones and royalties from the beginning of the contract in 1995 through December 31, 2002 and are entitled to receive ongoing royalties from Aventis based upon a percentage of sales of Allegra. In addition, many of our discovery technology contracts provide for us to receive licensing, milestone and royalty payments for discoveries that lead to commercial products.

        We were originally incorporated in 1991 under the laws of New York and were reincorporated under the laws of Delaware in 1998.

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Industry Overview

        The pace of drug discovery has accelerated significantly in recent years. Fueled by advances in disciplines such as molecular biology, high-throughput synthesis and screening and, in particular, human genomics research, opportunities to develop therapeutics for previously unmet or undermet medical needs are greater than ever before. We believe that human genomics research will lead to a dramatic increase in the number of newly identified biological targets over the next few years. In addition, pharmaceutical and biotechnology companies are under pressure to deliver new drugs to market and reduce the time required for drug development. This pressure has come about, in part, as a result of the significant number of current drug products on the market for which patent protection has or will soon expire.

        In order to take advantage of these opportunities and to respond to these pressures, many pharmaceutical and biotechnology companies have augmented their internal research and development capacity through contract services.

Drug Discovery, Development and Manufacturing Process

        Although many scientific disciplines are required for new drug discovery and development, chemistry and biology are at the center of this process. Chemists and biologists typically work together to prepare and deliver new chemical substances, develop laboratory models of disease, test compounds to identify agents that demonstrate the desired activity and finally create a marketable drug. The drug discovery and development process includes the following steps:

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lead discovery—the identification of a compound that may be developed into a new drug;

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lead optimization—an iterative process of modifying the structure of a lead compound to optimize its therapeutic properties;

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preclinical testing—the testing of the compound in increasingly complex animal models;

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clinical trials—the multi-phase testing of the compound for safety and efficacy in humans; and

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product commercialization—the manufacture, marketing and sale of commercial quantities of the approved drug.

The Importance of Chemistry in the Drug Discovery and Development Process

        Lead Discovery.    The first major hurdle in drug discovery is the identification of one or more lead compounds that interact with a biological target, such as an enzyme, receptor or other protein, that may be associated with a disease. A biological test, or assay, based on the target is developed and used to test or "screen" chemical compounds. Medicinal chemistry is used to synthesize these compounds rapidly and study the interaction between the three-dimensional molecular structures of the compounds and biological targets. The objective of lead discovery is to identify a lead compound for further research and development.

        Lead Optimization.    Once a lead compound has been identified, medicinal chemistry is used to optimize that lead compound by modifying and synthesizing analogs of active lead candidates with improved potency, selectivity and/or pharmacokinetics (improved absorption, solubility, half-life and metabolism) in order to identify a more promising drug candidate. This iterative process involves the synthesis of compounds for biological testing, the analysis of the screening results and the further design and synthesis of additional compounds based upon the analysis of structure-activity relationships. During lead optimization, specialists in chemical development perform the scale-up synthesis of a lead compound as that compound is advanced through the drug discovery and development process. These scientists are experts in the preparation of chemicals on a larger scale and focus on the efficiency, economics, simplicity and safety of the preparation of such chemicals. Chemical development is also an iterative process which may require progressive improvements in chemical synthesis as subsequent

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repeat batches are prepared. In addition to providing repeat synthesis, significant process research may be required to refine existing or develop new synthesis processes. Also during the lead optimization stage, analytical chemistry services are required for identity and purity testing and method development.

        Preclinical Testing.    Following the development of a lead compound during the lead optimization stage, advanced preclinical testing is conducted in order to evaluate the efficacy and safety of the lead compound prior to initiating human clinical trials. The lead compound must demonstrate a scientifically proven benefit in controlled and well-defined biological tests in animal models, and must exhibit this benefit at doses much lower than those at which side effects would occur. During the lead optimization and preclinical testing phases, scientists continue the synthesis of additional analogs of the lead compound using medicinal chemistry. Often a second compound, referred to as a backup compound or second generation analog, is synthesized and enters the drug development cycle. In addition, continued synthesis is desirable in order to prepare compounds of significant diversity to broaden potential patent coverage. As a result, the advancement of a lead compound into preclinical testing is often a catalyst which increases, rather than decreases, the need for additional medicinal chemical synthesis. During this phase, specialists in chemical development continue to conduct significant process research to optimize the production of a compound.

        Clinical Trials.    During clinical trials, several phases of studies are conducted to test the safety and efficacy of a drug candidate. As study populations increase and trial durations lengthen, larger quantities of the active ingredient are required. The bulk active ingredient, and the formulated drug product, must be prepared under current good manufacturing practices, commonly referred to as cGMP, guidelines. Analytical chemistry services are critical to cGMP manufacturing. Additional preparations provide an opportunity to further refine the manufacturing process, with the ultimate goal of maximizing the cost effectiveness and safety of the synthesis prior to commercialization.

Trends Toward Contracting for Chemistry Services

        While contract services have traditionally been limited to the later stages of drug development, such as clinical trial management and manufacturing, many pharmaceutical and biotechnology companies are utilizing contract chemistry service providers to complement or, in some cases supplement, internal chemistry expertise. Currently, only a few companies provide chemistry services for drug discovery, development and manufacturing, and these companies have typically focused only on certain stages of the drug development process. We believe the following trends have led and will continue to lead to an increase in contract chemistry services in drug discovery, development and manufacturing:

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development of new technologies that have increased the number of targets and accelerated the identification of active compounds;


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pressure to develop new lead compounds due to the near-term loss of patent protection for many drug products;


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increased pressure to reduce the time spent in drug discovery and development to bring drugs to market sooner and maximize patent life;


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increased focus on converting fixed costs to variable costs and streamlining operations by contracting for research and development services;


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heightened regulatory environment and increased complexity that has made the internal management of complicated discovery, development and manufacturing projects more difficult and costly; and


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biotechnology and emerging pharmaceutical companies, in many cases, lack the required in-house drug discovery and development expertise.

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        We believe that significant opportunities exist for a company that provides a comprehensive range of contract chemistry services throughout the drug discovery, development and manufacturing process.

Our Capabilities

        We have a broad range of high-quality drug discovery and development, chemistry research and manufacturing capabilities. The problem-solving abilities of our scientists provide added value throughout the drug discovery, development and manufacturing process. We offer proprietary discovery technologies as well as chemistry services on a contract basis that have traditionally required significant time and capital investment to create internally. Our comprehensive suite of services allows our customers to contract with a single vendor, eliminating the time and cost of transitioning projects among multiple vendors.

Service Offerings

Drug Lead Discovery and Technologies

        We provide chemistry services and proprietary drug discovery technologies used to identify new lead compounds. We have developed biocatalysis technology that assists in the creation of combinatorial chemistry libraries. Biocatalysis technology uses enzymes and microbial cell systems to synthesize new compounds. Additional discovery technologies that we provide include isolation, purification, structure elucidation and the supply of natural products libraries from microbial and botanical sources, computational chemistry, virtual screening, pharmaco-and toxicogenomics, microbiology, fermentation, asymmetric synthesis and high throughput metabolic screening.

        As part of our acquisition of New Chemical Entities in January 2001, we acquired an extensive collection of over 100,000 diverse compounds and natural products libraries. In February 2003, we obtained Eli Lilly and Co.'s collection of natural product libraries including source materials, purified screening library samples, chemical analytical data and chemistry database tools. As part of our collaboration with Eli Lilly we have also initiated efforts to significantly enhance our biological screening capabilities.

        We have also begun to develop and market specialized compound libraries. During 2002, our combinatorial chemists synthetically created a library of approximately 30,000 unique, small molecule compounds which are not otherwise available commercially. We are also currently developing a novel chemical sample screening library of approximately 100,000 diverse compounds.

        We seek to bundle our drug discovery technologies and offerings in a strategic alliance to cost effectively identify new drug candidates with selected partners. As part of a strategic alliance we would seek to leverage or bundle our natural product libraries, natural product chemistry, biological screening, biocatalysis, small molecule libraries, computer aided drug design capabilities, medicinal chemistry, combinatorial chemistry, optimization, and other chemistry capabilities. In return, we would expect to receive a combination of fee for service, milestone and royalty payments based on the success of the drug candidate.

        We also seek to sell or license our natural product and chemical libraries, or subsets, to customers for near term revenue through a combination of up-front revenue, fee for service, milestone and royalty terms.

        Our drug discovery technologies complement our medicinal chemistry services as additional methods of developing and screening large numbers of compounds against drug targets to generate new drug leads. These drug discovery technologies give us the capability to:

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improve chemical compounds for currently marketed drugs;


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develop lead extensions from unsuccessful Phase II or Phase III clinical trials;


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improve solubility and/or bioavailability of drug compounds;

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create libraries of potential lead compounds;


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identify active metabolites;


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widen patent coverage; and


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perform process research, consisting of the improvement or modification of existing processes.

Medicinal Chemistry

        The chemistry functions associated with the identification and optimization of a lead compound are handled by chemists specializing in medicinal chemistry. The role of the medicinal chemist is to synthesize small quantities of new and potentially patentable compounds for biological testing. Our medicinal chemistry group assists our customers in the pursuit of new drug leads as well as in lead development and optimization using modern structure-based drug design. Our medicinal chemistry group uses tools such as computational and combinatorial chemistry in conjunction with the traditional techniques of medicinal drug development. Medicinal chemistry services that we provide include:

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design and synthesis of potential lead compounds;


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design, modification and synthesis of lead compounds with improved potency, selectivity and pharmacokinetics;


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development and synthesis of analogs of lead compounds to broaden patent protection; and


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resynthesis and expansion of customers' chemistry libraries by employing combinatorial and computational chemistry.

Chemical Development

        Chemical development involves the scale-up synthesis of a lead compound. Processes developed for small scale production of a compound may not be suitable for larger scale production because they may be too expensive, environmentally unacceptable or present safety concerns. Our chemical development scientists design novel or improved methods and processes suitable for medium to large scale production. Our chemical development scientists possess expertise in a broad range of structural classes of molecules and are able to address a wide variety of chemical synthesis and production problems. Chemical development services that we provide include:

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process research, consisting of the improvement or modification of existing processes;


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discovery and development of new product methodologies to prepare products;


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process development and production of single-isomer molecules; and


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development of practical purification techniques.

Analytical Chemistry Services

        Our analytical chemistry services include identity and purity testing, method development and validation, and stability testing. We also provide regulatory consulting services, including the preparation of regulatory filings, chemistry manufacturing and control documentation and testing, and scientific and technical writing. The cGMP guidelines mandated by the Food and Drug Administration ("FDA") necessitate employing analytical support for drugs under development, as well as for drugs already on the market. Our analytical services are designed to support our customers' compliance with these guidelines. We typically provide these services at several stages throughout the drug discovery, development and manufacturing process starting with lead optimization. Analytical services that we provide include:

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test method development and validation;


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quality control and release testing;

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high performance liquid and/or gas chromatography (including purity assessment), separation of enantiomers and identification of impurities;


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polymorph studies, crystal habits, salt screening;


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stability studies for bulk active ingredients and formulated drug products; and


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preparation of regulatory documentation, including chemistry manufacturing and control sections of investigational new drug applications, new drug applications and drug master files.

cGMP Manufacturing Services

        We provide chemical synthesis and manufacturing services for our customers under cGMP guidelines. All facilities and manufacturing techniques used in the manufacture of products for clinical use or for sale in the United States must be operated in conformity with cGMP guidelines as established by the FDA. Our Albany facility has production facilities and quarantine and restricted access storage necessary for conducting cGMP manufacturing in quantities sufficient for conducting Phase I clinical trials (up to approximately 10 kilograms. Our customers can also obtain from us product quantities sufficient to conduct Phase II and Phase III clinical trials (between 10 and 100 kilograms) as well as commercial product quantities (greater than 100 kilograms).

Large Scale Manufacturing

        At our Organichem facility, we are able to provide large scale chemical synthesis and manufacturing to our customers. Organichem's production facilities adhere to cGMP manufacturing and provide the capability for larger scale chemical synthesis of active drug products and intermediates for use in human clinical trials as well as for products on the market.

Consulting Services

        We provide to our customers, in particular our biotechnology customers, consulting services across all chemistry phases of drug discovery, development and manufacturing.

Proprietary Research and Development

        We conduct proprietary research and development on promising drug candidates utilizing our medicinal chemistry tools as well as our discovery technologies, which consist of our biocatalysis technology, our technology for the synthesis of combinatorial libraries, our natural products related technologies as well as our microbiology, fermentation and asymmetric synthesis technologies. We are currently pursuing opportunities for applying our discovery technologies to promising drug candidates about which information is publicly available. In the event that we discover promising drug targets, we anticipate that we would license them to third parties in return for licensing, milestone and royalty payments.

Allegra/Telfast Licensing Agreement

        Our proprietary research and development efforts to date have contributed to the discovery and development of one product that has reached the market. We discovered a new process to prepare a metabolite known as terfenadine carboxylic acid, or TAM, in a purer form. The purer form of TAM is a non-sedating antihistamine known as fexofenadine HCl, which is sold by Aventis under the name Allegra in the Americas and as Telfast elsewhere. We have been issued several United States and foreign patents relating to TAM and the process chemistry by which TAM is produced. Subject to payment of government annuities and maintenance fees, our issued patents relating to TAM expire between 2013 and 2016.

        In March 1995, we entered into a license agreement with Aventis. Under the terms of the license agreement, we granted Aventis an exclusive, worldwide license to any patents issued to us related to

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our original TAM patent applications. Since the beginning of the agreement through December 31, 2002, we have earned $7.4 million in milestone payments and $159.3 million in royalties under this license agreement. Aventis is obligated under the license agreement to pay ongoing royalties to us based upon sales of Allegra/Telfast. We are not entitled, however, to receive any additional milestone payments under the license agreement. Sales of Allegra/Telfast worldwide were approximately $1.92 billion for the year ended December 31, 2002, $1.56 billion for the year ended December 31, 2001 and approximately $1.07 billion for the year ended December 31, 2000.

Customers

        Our customers include pharmaceutical companies and biotechnology companies and, to a limited extent, agricultural companies, fine chemical companies and contract chemical manufacturers. For the year ended December 31, 2002, contract revenue from our three largest customers represented 12%, 12% and 7% of our contract revenue. For the year ended December 31, 2001, contract revenue from our three largest customers respectively represented approximately 18%, 14% and 10% of our contract revenue. No customer accounted for more than 10% of our total revenue for the year ended December 31, 2002. Contract revenue from Bristol-Myers Squibb, including contract revenue from Dupont Pharmaceuticals Company which was acquired by Bristol-Meyers Squibb in October 2001, accounted for 12% of our total revenue for the year ended December 31, 2001. No other customer accounted for more than 10% of our total revenue for the year ended December 31, 2001.

Marketing

        Our senior management and dedicated business development personnel are primarily responsible for marketing our services. Because our customers are typically highly skilled scientists, our use of technical experts in marketing has allowed us to establish strong customer relationships. In addition to our internal marketing efforts, we also rely on the marketing efforts of consultants, both in the United States and abroad. We market our services directly to customers through targeted mailings, meetings with senior management of pharmaceutical and biotechnology companies, maintenance of an extensive Internet web site, participation in trade conferences and shows, and advertisements in scientific and trade journals. We also receive a significant amount of business from customer referrals and through expansion of existing contracts.

Employees

        We believe that the successful recruitment and retention of qualified Ph.D., masters and bachelor level scientists is a key element in achieving our strategic goals. We believe that as competitive pressures in the pharmaceutical and biotechnology industries increase, the recruitment and retention of chemists will become increasingly competitive. In order to meet this challenge, we actively recruit scientists at colleges and universities, through third-party recruitment firms and through contacts of our employees. We believe the sophisticated chemistry performed in the course of our business will assist us in attracting and retaining qualified scientists. We offer competitive salaries and benefits to our scientists. As an incentive directed toward the recruitment and retention of highly skilled scientists, we have a program which provides that any scientist or scientists employed by us named as an inventor on a patent not obtained in connection with a customer contract will receive a percentage of any net licensing, milestone and royalty revenues received by us with respect to the patent. Under this program, Thomas E. D'Ambra, Ph.D., our Chairman and Chief Executive Officer, receives payments as the sole inventor on the patents for fexofenadine HCl. Dr. D'Ambra earned $5.1 million in 2002, $4.2 million in 2001 and $2.9 million 2000 under this program.

        As of February 28, 2003, we had 860 employees. Organichem's hourly work force of 109 employees is covered by a collective bargaining agreement with the International Chemical Workers Union. We consider our relations with our employees and the union to be good. None of our other employees are covered by a collective bargaining agreement.

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Competition

        We face competition based on a number of factors, including size, relative expertise and sophistication, speed and costs of identifying and optimizing potential lead compounds and of developing and optimizing chemical processes. We compete with the research departments of pharmaceutical companies, biotechnology companies, combinatorial chemistry companies, contract research companies, contract drug manufacturing companies and research and academic institutions. Many of these competitors have greater financial and other resources and more experience in research and development than we do. Smaller companies may also prove to be significant competitors, particularly through arrangements with large corporate collaborators.

        Historically, pharmaceutical companies have maintained close control over their research and development activities, including the synthesis, screening and optimization of chemical compounds and the development of chemical processes. Many of these companies, which represent a significant potential market for our products and services, are developing or already possess in-house technologies and services offered by us. Academic institutions, governmental agencies and other research organizations are also conducting research in areas in which we provide services either on their own or through collaborative efforts.

        We anticipate that we will face increased competition in the future as new companies enter the market and advanced technologies become available. Our services and expertise may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. The existing approaches of our competitors or new approaches or technologies developed by our competitors may be more effective than those developed by us. We cannot assure you that our competitors will not develop more effective or more affordable technologies or services, thus rendering our technologies and/or services obsolete, uncompetitive or uneconomical.

Patents and Proprietary Rights

        Our success will depend, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties when necessary, and conduct our business without infringing the proprietary rights of others. The patent positions of pharmaceutical, medical products and biotechnology firms can be uncertain and involve complex legal and factual questions. We cannot assure you that any patent applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or commercial advantage, or will not be circumvented by others. In the event a third party has also filed one or more patent applications for inventions which conflict with one of ours, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in the loss of any opportunity to secure patent protection for the inventions and the loss of any right to use the inventions. Even if the eventual outcome is favorable to us, these proceedings could result in substantial cost to us. The filing and prosecution of patent applications, litigation to establish the validity and scope of patents, assertion of patent infringement claims against others and the defense of patent infringement claims by others can be expensive and time consuming. We cannot assure you that in the event that any claims with respect to any of our patents, if issued, are challenged by one or more third parties, that any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation could cause us to lose exclusivity afforded by the disputed rights. If a third party is found to have rights covering products or processes used by us, we could be forced to cease using the technologies covered by such rights, could be subject to significant liability to the third party, and could be required to license technologies from the third party. Furthermore, even if our patents are determined to be valid, enforceable, and broad in scope, we cannot assure you that competitors will not be able to design around such patents and compete with us and our licensees using the resulting alternative technology.

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        We have a policy of seeking patent protection for patentable aspects of our proprietary technology. We have been issued twelve United States patents, five New Zealand patents, five Australian patents, three Canadian patents, three Norwegian patents, two Japanese patents, one Finnish patent and one European patent collectively covering fexofenadine HCl and certain related manufacturing processes. Subject to payment of government annuities and maintenance fees, our United States patents expire between 2013 and 2015, our Canadian, European, Finnish and Japanese patents expire in 2014 and our New Zealand, Australian and Norwegian patents expire between 2014 and 2016. Through our acquisition of EnzyMed, we obtained an exclusive license to one United States patent relating to a process of reacting enzymes in a non-aqueous solvent. Subject to payment of government annuities and maintenance fees, this patent expires in 2012. Through our acquisition of New Chemical Entities, we obtained an exclusive license to one United States Patent relating to a method of purifying and identifying a large multiplicity of chemical reaction products simultaneously. Subject to payment of government annuities and maintenance fees, this patent expires in 2018.

        We seek patent protection with respect to products and processes developed in the course of our activities when we believe such protection is in our best interest and when the cost of seeking such protection is not inordinate. However, we cannot assure you that any patent application will be filed, that any filed applications will result in issued patents or that any issued patents will provide us with a competitive advantage or will not be successfully challenged by third parties. The protections afforded by patents will depend upon their scope and validity, and others may be able to design around our patents.

        We may also enter into collaborations or other arrangements whereby we retain certain ownership rights or may be entitled to receive milestones and royalties with respect to proprietary technology developed by us. On March 15, 2002, we signed an agreement with Bristol-Meyers Squib Company, which includes the transfer of ownership to us of three patent applications related to Attention Deficit Hyperactivity Disorder and central nervous system indications. We intend to seek a third party licensee to develop this technology. Many of our other current contracts with our customers provide that ownership of proprietary technology developed by us in the course of work performed under the contract is vested in the customer, and we retain little or no ownership interest.

        We also rely upon trade secrets and proprietary know-how for certain unpatented aspects of our technology. To protect such information, we require all employees, consultants and licensees to enter into confidentiality agreements limiting the disclosure and use of such information. We cannot assure you that these agreements provide meaningful protection or that they will not be breached, that we would have adequate remedies for any such breach, or that our trade secrets, proprietary know-how, and technological advances will not otherwise become known to others. In addition, we cannot assure you that, despite precautions taken by us, others have not and will not obtain access to our proprietary technology. Further, we cannot assure you that third parties will not independently develop substantially equivalent or better technology.

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Government Regulation

        Although the sale of our services is not subject to significant government regulation, the manufacture, transportation and storage of our products are subject to certain laws and regulations. However, our future profitability is indirectly dependent on the sales of pharmaceuticals and other products developed by our customers. Regulation by governmental entities in the United States and other countries will be a significant factor in the production and marketing of any pharmaceutical products that may be developed by our customers. The nature and the extent to which such regulation may apply to our customers will vary depending on the nature of any such pharmaceutical products. Virtually all pharmaceutical products developed by our customers will require regulatory approval by governmental agencies prior to commercialization. Human pharmaceutical products are subject to rigorous preclinical and clinical testing and other approval procedures by the FDA and by foreign regulatory authorities. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time consuming and require the expenditure of substantial resources.

        Generally, in order to gain FDA approval, a company first must conduct preclinical studies in the laboratory and in animal models to gain preliminary information on a compound's efficacy and to identify any safety problems. The results of these studies are submitted as a part of an investigational new drug application, or IND, that the FDA must review before human clinical trials of an investigational drug can start. In order to commercialize any products, we or our customer will be required to sponsor and file an IND and will be responsible for initiating and overseeing the clinical studies to demonstrate the safety and efficacy that are necessary to obtain FDA approval of any such products. Clinical trials are normally done in three phases and generally take two to five years, but may take longer, to complete. After completion of clinical trials of a new product, FDA and foreign regulatory authority marketing approval must be obtained. If the product is classified as a new drug, we or our customer will be required to file a new drug application, or NDA, and receive approval before commercial marketing of the drug. The testing and approval processes require substantial time, effort and expense, and we cannot assure you that any approval will be granted on a timely basis, if at all. NDAs submitted to the FDA can take several years to obtain approval. Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. For marketing outside the United States, we will also be subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country.

        All facilities and manufacturing techniques used in the manufacture of products for clinical use or for sale in the United States must be operated in conformity with cGMP guidelines as established by the FDA. Our facilities are subject to scheduled periodic regulatory inspections to ensure compliance with cGMP requirements. Failure on our part to comply with applicable requirements could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. A finding that we had materially violated cGMP requirements could result in additional regulatory sanctions and, in severe cases, could result in a mandated closing of our facilities, which would materially and adversely affect our business, financial condition and results of operations.

        Our research and development processes involve the controlled use of hazardous materials. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although we believe that our activities currently comply with the standards prescribed by such laws and regulations, the risk of

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accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources. In addition, we cannot assure you that we will not be required to incur significant costs to comply with environmental laws and regulations in the future.

Internet Website

        We maintain a website on the World Wide Web at www.albmolecular.com. We make available, free of charge, on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonable practicable after such reports are electronically filed with, or furnished to, the SEC. Our report filed with, or furnished to, the SEC are also available at the SEC's website at www.sec.gov.

ITEM 2. PROPERTIES.

        We lease a two-story 90,500 square foot facility in Albany, New York. The lease for this facility expires on December 31, 2013, although we have an option to renew this lease for eight additional five-year periods at our option. This Albany facility has nine medicinal chemistry laboratories, five chemical development laboratories, two analytical laboratories, three analytical instrumentation rooms, seven dedicated cGMP manufacturing suites and two areas for stability chambers.

        We lease approximately 43,615 square feet of laboratory and office space in a building adjacent to our Albany facility and are currently renovating an additional 15,578 square feet of space in the building. This facility presently has 68 scientific workstations. Construction recently began on of the additional space in of this facility which will provide an additional 56 scientific workstations. The lease for this facility expires on December 31, 2012, although we may renew the lease for four additional ten-year periods at our option.

        Construction of our new 55,000 square foot corporate headquarters is also underway. This new facility will house the Company corporate administration departments, an auditorium for scientific seminars as well as support facilities for our Albany staff.

        We also lease approximately 40,000 square feet of laboratory space in Rensselaer, New York at our East Campus. The lease for these laboratories expires November 30, 2009, although we may renew the lease for eight additional five-year periods at our option. This facility has eleven medicinal chemistry, and three combinatorial chemistry laboratories. During 2000, we constructed a 23,600 square foot state-of-the-art biotechnology development center with 33 scientific workstations at our East Campus. We have entered into a ten-year lease for this facility, although we may renew the lease for eight additional five-year periods at our option.

        We own a 28,000 square foot facility near Syracuse, New York, which includes forty scientific workstations. The purchase and renovation of this facility was financed through an industrial revenue bond.

        We lease approximately 23,700 square feet of primarily research and development space in Bothell, Washington under a lease that expires in October 2007, although we may renew the lease for four additional four year-periods at our option.

        In September 2001, we acquired an 88,000 square foot facility as part of our $10.0 million purchase of a Great Lakes Chemical Corporation research and development facility in Mt. Prospect, Illinois. This facility includes 55 fully equipped scientific workstations as well as a two-bay, non-GMP chemical pilot plant, research fermentation labs and supporting office space.

        For the year-ended December 31, 2002, we had total operating lease costs of $1.9 million.

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ITEM 3. LEGAL PROCEEDINGS.

        We, from time to time, may be involved in various claims and legal proceedings arising in the ordinary course of our business. We are not currently a party to any such claims or proceedings which, if decided adversely to us, would either individually or in the aggregate have a material adverse effect on our business, financial condition, results of operations or cash flows.

        Aventis Pharmaceuticals, the U.S. pharmaceutical business of Aventis S.A., is currently involved in legal proceedings with Barr Laboratories, Inc. regarding an Abbreviated New Drug Application (ANDA) filed by Barr Laboratories with the U.S. Food and Drug Administration seeking authorization to produce and market a generic version of Allegra. Aventis Pharmaceuticals has filed three patent infringement suits against Barr in August and September of 2001 and in January 2002 against Barr alleging infringement of certain U.S. patents related to fexofenadine HCl 60 mg capsules, 30, 60, and 180 mg tablets of fexofenadine HCl, and Allegra-D, an extended-release tablet for oral administration. A trial date has been set for September 2004. In addition, Aventis filed a patent infringement lawsuit against Impax Laboratories in March 2002 after Impax filed an ANDA to produce and market a generic version of Allegra-D. In late 2002 and early 2003, three other generic companies filed ANDAs for Allegra products. Aventis has either brought a patent infringement lawsuit or is evaluating its legal options with respect to these additional filings. In the U.S. Aventis holds multiple method of use, formulation, process and composition patents with respect to Allegra. Under our arrangements with Aventis, we will receive royalties until expiration of our underlying patents or until they are earlier determined to be invalid and/or unenforceable. Under applicable federal law, marketing of an FDA-approved generic capsule or tablet at minimum may not commence unless and until a decision favorable to a generic challenger is rendered in the patent litigation or until 30 months have elapsed, whichever comes first. Aventis is taking the lead in preparing and executing a strategy to defend and enforce the intellectual property rights that exist with respect to Allegra.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through solicitation of proxies or otherwise.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        (a)  Market Information. The Common Stock of the Company is traded on the Nasdaq National Market ("Nasdaq") under the symbol "AMRI." The following table sets forth the high and low closing prices for our Common Stock as reported by Nasdaq for the periods indicated:

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        (b)  Holders. The number of record holders of the our Common Stock as of March 14, 2003 was approximately 187. We believe that the number of beneficial owners of our Common Stock at that date was substantially greater.

        (c)  Dividends. We have not declared any cash dividends on our Common Stock since our inception in 1991. We currently intend to retain our earnings for future growth and, therefore, do not anticipate paying cash dividends in the foreseeable future. Under Delaware law, we are permitted to pay dividends only out of our surplus, or, if there is no surplus, out of our net profits. Although our current bank credit facility permits us to pay cash dividends, subject to certain limitations, the payment of cash dividends may be prohibited under agreements governing debt which we may incur in the future.

        (d)  Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.

        None.

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ITEM 6. SELECTED FINANCIAL DATA.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

        The following discussion of the results of our operations and financial condition should be read in conjunction with the accompanying Consolidated Financial Statements and the Notes thereto included within this report.

Overview

        We are a leading chemistry-based drug discovery and development company, focused on applications for new small molecule prescription drugs. We engage in comprehensive chemistry research from lead discovery, optimization and development to commercial manufacturing. We perform chemistry research for many of the leading pharmaceutical and biotechnology companies and for our own internal research and development.

Critical Accounting Policies And Estimates

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, unbilled revenue, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

        As part of our strategy to provide a comprehensive offering of natural product and chemical lead finding discovery services and technologies to our customers, we have acquired natural product libraries and related assets and are producing novel compound libraries and chemical screening libraries. We have estimated the fair value of our natural product libraries obtained as part of our acquisition of New Chemical Entities in January 2001 and have included their value in our inventory. We are also capitalizing the cost of internally producing our novel compound and screening libraries in our inventory. In February 2003, we obtained Eli Lilly's & Co.'s collection of natural product libraries including source materials, purified screening library samples, chemical analytical data and chemistry database tools. As part of our collaboration with Eli Lilly we have also initiated efforts to significantly enhance our biological screening. We expect our investment in biological screening to be operational by the end of 2003. The combination of these investments should enhance our ability to market and sell our libraries, sales of which to date have not been significant. Total chemical library and natural products related assets recorded on our balance sheet as of December 31, 2002 were $13.3 million. If we are unable to successfully execute our business plan, or if actual market conditions are less favorable than those projected by management, we may be required to write-down the value of these assets, resulting in a charge to operations.

        We have equity investments in companies that have operations in areas within our strategic focus. We record an impairment charge when we believe an investment has experienced a decline in value

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that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in their current carrying value, thereby possibly requiring an impairment charge in the future.

        Our intangible assets are amortized on a straight-line basis over five to fifteen years. We review our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. A determination of impairment is made based on estimates of future cash flows. If such assets are considered to be impaired the amount of the impairment would be based on the excess of the carrying value over the fair value of the assets.

        We perform an annual assessment of the carrying value of our goodwill for potential impairment. A determination of impairment is made based upon the estimated future cash flows of the operations associated with goodwill. If goodwill is determined to be impaired in the future we would be required to record a charge to our results of operations.

Contract Revenue

        Our contract revenue consists primarily of fees earned under contracts with third-party customers. In general, we provide services to our customers on the following basis:

•

a full-time equivalent basis that establishes the number of full-time equivalents contracted for a project or a series of projects, the duration of the contract period, the fixed price per full-time equivalent, plus an allowance for out-of-pocket expenses, which may or may not be incorporated in the full-time equivalent rate;



•

a time and materials basis under which we charge our customers based on an hourly rate plus out-of-pocket expenses; or



•

to a lesser extent, a fixed-price basis.

        Typically, our full-time equivalent contracts have terms of six months or longer and our time and materials contracts have terms of one to twelve months. Fixed-price contracts are entered into for much shorter periods of time, generally two to six months. Because our fixed-price contracts relate to projects that are generally limited in scope and are of short duration, we have not historically experienced any material cost overruns under these contracts. Our full-time equivalent contracts provide for annual adjustments in billing rates for the scientists assigned to the contract. Generally, our contracts may be terminated by the customer upon 30 days' to one-year's prior notice, depending on the size of the contract. The Company recognizes revenue under full-time equivalent contracts on a monthly basis as work is performed based on the terms of the contract. Time and material contract revenues are recognized based on the number of hours devoted to the project multiplied by the customer's billing rates plus the material costs incurred. Fixed fee contract revenue is recognized by the Company as projects are completed and delivered. Cost of revenue consists primarily of compensation and associated fringe benefits for employees and other direct project-related costs.

Licensing Fees, Milestones and Royalties

        We seek to include provisions in our contracts for our discovery services which contain licensing, milestone and royalty payments should our proprietary technology and expertise lead to the discovery of new products that reach the market. To date, we have received substantially all of our milestone and royalty payments under these arrangements from Aventis with respect to Allegra. Generally, the provisions for licensing, milestone and royalty payments included in our contracts are related to the occurrence of specific identifiable events. We will recognize revenue upon the occurrence of one of these events, such as the successful completion of a clinical trial phase or the sale of a product

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containing licensed technology, and the resolution of any uncertainties or contingencies regarding potential collection of the related payment.

        Non-recurring Licensing Fees, Milestones and Royalties.    Although we entered into a license agreement with Aventis in 1995, we began to recognize royalty revenue related to sales in the United States under that agreement in February 1998. This delay was due to the significant time expended for issuance of our patents and the resolution of related patent interference claims by Aventis.

        Recurring Royalties.    Recurring royalties consist of royalties from Aventis under a license agreement based on sales of fexofenadine HCl, marketed as Allegra in the Americas and Telfast elsewhere. Royalty payments are due within 45 days after each calendar quarter and are determined based on sales of Allegra/Telfast in that quarter.

Costs and Expenses

        Cost of Contract Revenue.    Our cost of contract revenue, from which we derive gross profit from net contract revenue, consists primarily of compensation and associated fringe benefits for employees and other direct and indirect project-related costs.

        Technology Incentive Award.    We maintain a Technology Development Incentive Plan designed to stimulate and encourage novel technology development by our employees. This plan allows eligible participants to share in a percentage of the net revenue earned by us relating to patented technology with respect to which the eligible participant is named as an inventor. Under our Technology Development Incentive Plan, Thomas E. D'Ambra, our Chairman and Chief Executive Officer, receives payments as the sole inventor of the patents for fexofenadine HCl equal to 10% of the total payments received by us with respect to those patents.

        Research and Development.    Research and development expense consists of payments in connection with collaborations with academic institutions, compensation and benefits for scientific personnel for work performed on proprietary research projects and costs of supplies and related chemicals as well as indirect costs. We are funding several internal research and development programs to discover new compounds with commercial potential. We would then seek to license these compounds to a third party in return for up-front license service fees and milestone payments as well as recurring royalty payments if these compounds are successfully developed into new drugs and reach the market. We utilize our expertise in biocatalysis, natural products and small molecule chemistry to perform our internal research and development projects. Included in our internal research and development projects is a Cooperative Research and Development Agreement with the National Cancer Institute to develop anti-cancer compounds, as well as other projects in the oncology and immunosuppression therapeutic areas.

        Selling, General and Administrative.    Selling, general and administrative expense consists of compensation and related fringe benefits for marketing and administrative employees, professional services, marketing costs and all costs related to facilities and information services.

        Other Income (Expense).    Other income (expense) consists of interest income, interest expense, our equity in our unconsolidated affiliates, Organichem and Fluorous Technologies, realized gains or losses on sales of investment securities and other non-operating expenses.

Results of Operations

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

        Contract Revenue.    Contract revenue increased 19% to $71.7 million for the year ended December 31, 2002, compared to