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

 

Form 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2015

OR 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________

 

Commission file number: 001-34263

 

Impax Laboratories, Inc.
(Exact name of registrant as specified in its charter)
Delaware		65-0403311
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
30831 Huntwood Avenue, Hayward, CA		94544
(Address of principal executive offices)		(Zip Code)

 

                                   (510) 240-6000                                   

(Registrant’s telephone number, including area code)

 

                                                           Not Applicable                                                        

(Former name, former address and former fiscal year, if changed since last report)

 

 

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 ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

As of August 3, 2015, there were 72,304,661 shares of the registrant’s common stock outstanding.

 

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Impax Laboratories, Inc.

 

INDEX 

 

 

PART I: FINANCIAL INFORMATION
Item 1:	Financial Statements (unaudited)	3
- Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014		3
- Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014		4
- Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014		5
- Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2015		6
- Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014		7
- Notes to Interim Consolidated Financial Statements		9
Item 2:	Management’s Discussion and Analysis of Results of Operations and Financial Condition	56
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	80
Item 4:	Controls and Procedures	81
PART II: OTHER INFORMATION
Item 1:	Legal Proceedings	82
Item 1A:	Risk Factors	82
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	84
Item 3:	Defaults Upon Senior Securities	85
Item 4:	Mine Safety Disclosures	85
Item 5:	Other Information	85
Item 6:	Exhibits	86
SIGNATURES		87
EXHIBIT INDEX		88

    

 

PART I: FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS

 Impax Laboratories, Inc.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share and per share data) 

 (unaudited)

		June 30, 2015				December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents		$	190,291			$	214,873
Short-term investments			---				199,983
Accounts receivable, net			241,720				146,490
Inventory, net			123,433				80,570
Deferred income taxes			84,157				54,825
Prepaid expenses and other current assets			63,416				33,710
Total current assets			703,017				730,451
Property, plant and equipment, net			214,630				188,169
Derivative asset			147,000				---
Other assets			69,809				64,455
Deferred income taxes			133				41,837
Intangible assets, net			740,453				26,711
Goodwill			157,267				27,574
Total assets		$	2,032,309			$	1,079,197
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	29,874			$	31,976
Accrued expenses			154,139				110,470
Accrued profit sharing and royalty expenses			41,655				15,346
Current portion of deferred revenue			907				907
Total current liabilities			226,575				158,699
Long-term debt			414,391				---
Derivative liability			167,000				---
Deferred revenue			2,949				3,403
Deferred tax liability			196,745				---
Other liabilities			36,964				29,218
Total liabilities			1,044,624				191,320
Commitments and contingencies (Notes 12 and 20)
Stockholders’ equity:
Preferred stock, $0.01 par value, 2,000,000 shares authorized, no shares outstanding at June 30, 2015 and December 31, 2014			---				---
Common stock, $0.01 par value, 90,000,000 shares authorized and 72,031,480 and 71,470,802 shares issued at June 30, 2015 and December 31, 2014, respectively			720				714
Additional paid-in capital			468,506				364,103
Treasury stock - 243,729 shares			(2,157	)			(2,157	)
Accumulated other comprehensive loss			(2,425	)			(6,009	)
Retained earnings			523,041				531,226
Total stockholders’ equity			987,685				887,877
Total liabilities and stockholders’ equity		$	2,032,309			$	1,079,197

 The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 

Impax Laboratories, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except share and per share data)

(unaudited)

 

		Three Months Ended								Six Months Ended
		June 30, 2015				June 30, 2014				June 30, 2015				June 30, 2014
Revenues:
Impax Generics Division revenues, net		$	174,679			$	176,394			$	303,420			$	285,534
Impax Specialty Pharma Division revenues, net			39,503				11,727				53,858				21,305
Total revenues			214,182				188,121				357,278				306,839
Cost of revenues			129,331				78,349				213,193				139,445
Gross profit			84,851				109,772				144,085				167,394
Operating expenses:
Research and development			16,995				21,252				31,957				42,993
Patent litigation expense			1,494				1,767				2,454				3,940
Selling, general and administrative			48,309				32,817				98,469				58,294
Total operating expenses			66,798				55,836				132,880				105,227
Income from operations			18,053				53,936				11,205				62,167
Other income, net			961				31				795				107
Loss on debt extinguishment			(16,903	)			---				(16,903	)			---
Interest income			294				365				578				753
Interest expense			(6,953	)			93				(10,928	)			28
(Loss) income before income taxes			(4,548	)			54,425				(15,253	)			63,055
(Benefit) provision for income taxes			(2,696	)			19,354				(7,068	)			21,559
Net (loss) income		$	(1,852	)		$	35,071			$	(8,185	)		$	41,496
Net (loss) income per share:
Basic		$	(0.03	)		$	0.52			$	(0.12	)		$	0.61
Diluted		$	(0.03	)		$	0.50			$	(0.12	)		$	0.59
Weighted average common shares outstanding:
Basic			69,338,789				68,095,159				69,154,357				67,899,894
Diluted			69,338,789				70,313,491				69,154,357				70,195,329

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 

Impax Laboratories, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands)

(unaudited)

 

		Three Months Ended								Six Months Ended
		June 30, 2015				June 30, 2014				June 30, 2015				June 30, 2014
Net (loss) income		$	(1,852	)		$	35,071			$	(8,185	)		$	41,496
Currency translation adjustments			684				2,420				3,584				(15	)
Comprehensive (loss) income		$	(1,168	)		$	37,491			$	(4,601	)		$	41,481

           

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 

 

Impax Laboratories, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(amounts in thousands)

(unaudited)

 

																		Accumulated
										Additional								Other
		Common Stock								Paid-In				Treasury				Comprehensive				Retained
Stockholders’ Equity		Shares				Par Value				Capital				Stock				(Loss)				Earnings				Total
Balance at December 31, 2014			71,228			$	714			$	364,103			$	(2,157	)		$	(6,009	)		$	531,226			$	887,877
Sale of warrants			---				---				88,320				---				---				---				88,320
Exercise of stock options, issuance of restricted stock and sale of common stock under ESPP			560				6				(1,795	)			---				---				---				(1,789	)
Share-based compensation expense			---				---				13,559				---				---				---				13,559
Tax benefit related to exercise of stock options and restricted stock			---				---				4,319				---				---				---				4,319
Currency translation adjustments			---				---				---				---				3,584				---				3,584
Net loss			---				---				---				---				---				(8,185	)			(8,185	)
Balance at June 30, 2015			71,788			$	720			$	468,506			$	(2,157	)		$	(2,425	)		$	523,041			$	987,685

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 

Impax Laboratories, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

		Six Months Ended June 30,
		2015				2014
Cash flows from operating activities:
Net (loss) income		$	(8,185	)		$	41,496
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization			30,714				16,303
Loss on early extinguishment of debt			16,903				---
Charge for licensing agreement			---				2,000
Intangible asset impairment charge			---				2,876
Provision for inventory reserves			(6,597	)			10,320
Accretion of interest income on short-term investments			(81	)			(421	)
Deferred income taxes – net and uncertain tax positions			(9,464	)			(4,786	)
Tax impact related to the exercise of employee stock options and restricted stock			(4,319	)			(1,507	)
Deferred revenue			(454	)			(2,100	)
Accrued profit sharing and royalty expense			62,193				23,582
Payments of profit sharing and royalty expense			(41,957	)			(22,063	)
Share-based compensation expense			13,559				9,520
Changes in certain assets and liabilities:
Accounts receivable			(37,638	)			(50,903	)
Inventory			(6,146	)			(25,400	)
Prepaid expenses and other assets			(19,774	)			5,671
Accounts payable and accrued expenses			(20,108	)			6,273
Other liabilities			(1,231	)			1,559
Net cash (used in) provided by operating activities			(32,585	)			12,420
Cash flows from investing activities:
Payment for acquisition, net of cash acquired			(697,183	)			---
Purchase of short-term investments			---				(235,388	)
Maturities of short-term investments			200,064				210,442
Purchases of property, plant and equipment			(8,482	)			(18,271	)
Proceeds from sale of assets			4,000				---
Payments for licensing agreements and acquisitions			(5,550	)			(3,000	)
Net cash used in investing activities			(507,151	)			(46,217	)
Cash flows from financing activities:
Proceeds from issuance of term loan, gross			435,000				---
Repayment of term loan			(435,000	)
Payment of deferred financing fees			(36,440	)			---
Proceeds from sale of convertible notes, net of issuance costs			600,000				---
Purchase of bond hedge derivative asset			(147,000	)			---
Proceeds from sale of warrants			88,320				---
Tax impact related to the exercise of employee stock options and restricted stock			4,319				1,507
Proceeds from exercise of stock options and ESPP			5,383				7,660
Net cash provided by financing activities			514,582				9,167
Effect of exchange rate changes on cash and cash equivalents			572				(843	)
Net decrease in cash and cash equivalents			(24,582	)			(25,473	)
Cash and cash equivalents, beginning of period			214,873				184,612
Cash and cash equivalents, end of period		$	190,291			$	159,139

   

 

Supplemental disclosure of non-cash investing and financing activities:

 

		Six Months Ended
(in $000's)		June 30, 2015				June 30, 2014
Cash paid for interest		$	9,828			$	16
Cash paid for income taxes		$	24,422			$	28,955

  

Accrued vendor invoices of approximately $1,299,000 and $2,282,000 at June 30, 2015 and 2014, respectively, are excluded from the purchase of property, plant, and equipment and the change in accounts payable and accrued expenses and prepaid and other assets. Depreciation expense was $10,617,000 and $10,027,000 for the six months ended June 30, 2015 and 2014, respectively.

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.  

 

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

1. THE COMPANY & BASIS OF PRESENTATION

 

Impax Laboratories, Inc. (“Impax” or the “Company”) is a specialty pharmaceutical company that focuses on developing, manufacturing, marketing and distributing generic and branded pharmaceutical products. The Company has two reportable segments, referred to as “Impax Generics” and “Impax Specialty Pharma.” The Impax Generics division focuses on a broad range of therapeutic areas, including products having technically challenging drug-delivery mechanisms or unique product formulations. In addition to developing solid oral dosage products, the Impax Generic division’s portfolio includes alternative dosage form products, primarily through alliance and collaboration agreements with third parties. The Company’s Impax Specialty Pharma division is focused on the development and promotion, through the Company’s specialty sales force, of proprietary branded pharmaceutical products for the treatment of central nervous system (“CNS”) disorders and other select specialty segments. As described in detail below, in March 2015, the Company renamed its operating and reporting structure into its current structure; prior to such time, the Impax Generics division was referred to as “Global Pharmaceuticals” and the Impax Specialty Pharma division was referred to as “Impax Pharmaceuticals.”

 

Acquisition of Tower Holdings, Inc. (“Tower”) and Lineage Therapeutics Inc. (“Lineage”)

 

On March 9, 2015, Impax completed its acquisition of Tower, including its operating subsidiaries CorePharma LLC (“CorePharma”) and Amedra Pharmaceuticals LLC (“Amedra Pharmaceuticals”), and Lineage for a purchase price of approximately $700 million in cash, subject to customary adjustments for working capital, net debt and transaction expenses (the “Transaction”). The privately-held companies specialized in the development, manufacture and commercialization of complex generic and branded pharmaceutical products. For additional information on the acquisition and the related financing of the acquisition, refer to “Note 10 – Business Acquisitions” and “Note 14 – Debt.”

 

In connection with the Transaction, the Company recorded an accrual for severance and related termination costs of $2.4 million in the six month period ended June 30, 2015 related to the elimination of approximately 10 positions at the acquired companies. As of June 30, 2015, $0.9 million has been paid and the Company currently expects the remainder of this balance to be paid by December 31, 2015.

 

Revised Operating and Reporting Structure

 

In connection with the closing of the Transaction, Impax renamed the operating and reporting structure of its two divisions into Impax Generics and Impax Specialty Pharma. Impax Generics includes the Company’s legacy Global Pharmaceuticals business as well as the acquired CorePharma and Lineage businesses. Impax Specialty Pharma includes the legacy Impax Pharmaceuticals business as well as the acquired Amedra Pharmaceuticals business.

 

Impax Generics develops, manufactures, sells, and distributes generic pharmaceutical products primarily through the following four sales channels: the “Impax Generics” sales channel, for generic pharmaceutical prescription products the Company sells directly to wholesalers, large retail drug chains, and others; the “Private Label” sales channel, for generic pharmaceutical over-the-counter (“OTC”) and prescription products the Company sells to unrelated third-party customers who, in turn, sell the product to third parties under their own label; the “Rx Partner” sales channel, for generic prescription products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements; and the “OTC Partner” sales channel, for generic pharmaceutical OTC products sold through unrelated third-party pharmaceutical entities under their own labels pursuant to alliance and supply agreements. Revenues from the “Impax Generics” sales channel and the “Private Label” sales channel are reported under the caption “Impax Generics sales, net” in “Note 21 – Supplementary Financial Information.” The Company also generates revenue in Impax Generics from research and development services provided under a joint development agreement with another unrelated third-party pharmaceutical company, and reports such revenue under the caption “Other Revenues” in “Note 21 – Supplementary Financial Information.” The Company provides these services through the research and development group in Impax Generics. Revenues from the “OTC Partner” sales channel are also reported under the caption “Other Revenues” in “Note 21 – Supplementary Financial Information.”

 

Impax Specialty Pharma is engaged in the development of proprietary brand pharmaceutical products that the Company believes represent improvements to already-approved pharmaceutical products addressing CNS disorders and other select specialty segments. Impax Specialty Pharma currently has one internally developed branded pharmaceutical product, RYTARY® (IPX066), an extended release oral capsule formulation of carbidopa-levodopa for the treatment of Parkinson’s disease, post-encephalitic parkinsonism, and parkinsonism that may follow carbon monoxide intoxication and/or manganese intoxication, which was approved by the FDA on January 7, 2015 and which the Company began marketing in the United States (“U.S.”) in April 2015. The Company has also filed the required documents for a Market Authorization Application to the European Medicines Agency (EMA) for IPX066 on November 5, 2014 and the filing was accepted by the EMA on November 26, 2014. Impax Specialty Pharma is also engaged in the sale and distribution of four other branded products; the more significant include Zomig® (zolmitriptan) products, indicated for the treatment of migraine headaches, under the terms of a Distribution, License, Development and Supply Agreement (“AZ Agreement”) with AstraZeneca UK Limited (“AstraZeneca”) in the United States and in certain U.S. territories, and Albenza®, indicated for the treatment of tapeworm infections. Revenues from Impax-labeled branded products are reported under the caption “Impax Specialty Pharma sales, net” in “Note 21 – Supplementary Financial Information.” Finally, the Company generates revenue in Impax Specialty Pharma from research and development services provided under a development and license agreement with another unrelated third-party pharmaceutical company, and reports such revenue under the caption “Other Revenues” in “Note 21 – Supplementary Financial Information.” Impax Specialty Pharma also has a number of product candidates that are in varying stages of development.

 

 

  

In California, the Company utilizes a combination of owned and leased facilities mainly located in Hayward. The Company’s primary properties in California consist of a leased office building used as the Company’s corporate headquarters, in addition to five properties it owns, including a research and development center facility and a manufacturing facility. Additionally, the Company leases three facilities in Hayward, utilized for additional research and development, administrative services, equipment storage and quality assurance support. In Pennsylvania, the Company owns a packaging, warehousing, and distribution center located in Philadelphia and leases a facility in New Britain used for sales and marketing, finance, and administrative personnel, as well as providing additional warehouse space. In connection with the closing of the Transaction, the Company acquired leased manufacturing and warehousing facilities in Middlesex, New Jersey and leased office space utilized for administrative services in Horsham, Pennsylvania. The Company also leases office space in Bridgewater, New Jersey. Outside the United States, in Taiwan, Republic of China (“R.O.C.”), the Company owns a manufacturing facility.

 

The accompanying unaudited interim consolidated financial statements of the Company, have been prepared based upon United States Securities and Exchange Commission (“SEC”) rules permitting reduced disclosure for interim periods, and include all adjustments necessary for a fair presentation of statements of operations, statements of comprehensive income, statements of cash flows, statement of changes in stockholders’ equity and financial condition for the interim periods shown, including normal recurring accruals and other items, noted below. While certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to SEC rules and regulations, the Company believes the disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements of the Company include the accounts of the operating parent company, Impax Laboratories, Inc., its wholly owned subsidiaries, including Impax Laboratories (Taiwan), Inc., Impax Laboratories USA, LLC, ThoRx Laboratories, Inc., Impax International Holding, Inc., Impax Holdings, LLC, Impax Laboratories (Netherlands) BV and Impax Laboratories (Netherlands) CV, Lineage Therapeutics Inc. and Tower, including operating subsidiaries CorePharma, Amedra Pharmaceuticals, Mountain, LLC and Trail Services, Inc., in addition to an equity investment in Prohealth Biotech, Inc. (“Prohealth”), in which the Company held a 57.54% majority ownership interest at June 30, 2015. All significant intercompany accounts and transactions have been eliminated.

 

The unaudited results of operations and cash flows for the interim period are not necessarily indicative of the expected results of the Company’s operations for any other interim period or for the full year ending December 31, 2015. The unaudited interim consolidated financial statements and footnotes should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the SEC, wherein a more complete discussion of significant accounting policies and certain other information can be found.

 

The preparation of financial statements in conformity with GAAP and the rules and regulations of the SEC requires the use of estimates and assumptions, based on complex judgments considered reasonable, which 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, fair value of derivative assets and liabilities and estimates used in applying the Company’s revenue recognition policy including those related to accrued chargebacks, rebates, product returns, Medicare, Medicaid, and other government rebate programs, shelf-stock adjustments, and the timing and amount of deferred and recognized revenue and deferred and amortized product manufacturing costs related to alliance and collaboration agreements. Actual results may differ from estimated results.

 

 

 

In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, covering a wide range of matters, including, among others, patent litigation, and product and clinical trial liability. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 450, “Contingencies,” the Company records accrued loss contingencies when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company, in accordance with FASB ASC Topic 450, does not recognize gain contingencies until realized.

 

Restructuring of Packaging and Distribution Operations

 

On June 30, 2015, the Company committed to a restructuring of its packaging and distribution operations. As a result of this restructuring, the Company will be closing its Philadelphia packaging site and all Company-wide distribution operations will be outsourced to United Parcel Services (UPS). In conjunction with the restructuring, approximately 93 positions will be eliminated. The Company recorded an accrual for severance and related termination costs of $2.6 million in the three month period ended June 30, 2015. No payments were made during the three months ended June 30, 2015 and the Company currently expects the remainder of this balance to be paid before December 31, 2015.

 

Update to Significant Accounting Policies

 

Derivatives

 

The Company generally does not use derivative instruments or engage in hedging activities in its ordinary course of business. Prior to June 30, 2015, the Company had no derivative assets or liabilities and did not engage in any hedging activities. As a result of the Company’s June 30, 2015 issuance of the convertible senior notes described in “Note 14 – Debt”, the conversion option of the notes met the criteria for an embedded derivative liability which required bifurcation and separate accounting. Contemporaneously with the issuance of the notes, the Company entered into a series of convertible note hedge and warrant transactions which in combination are designed to reduce the potential dilution to the Company’s stockholders and/or offset the cash payments the Company is required to make in excess of the principal amount upon conversion of the notes. See “Note 5 – Derivatives” and “Note 17 – Stockholders’ Equity” for additional information regarding the note hedge transactions and warrant transactions. While the warrants sold were classified as equity and recorded in additional paid-in capital, the call options purchased were classified as a bond hedge derivative asset on the Company’s consolidated balance sheet. The Company engages a third-party valuation firm with expertise in valuing financial instruments to determine the fair value of the bond hedge derivative asset and conversion option derivative liability at each reporting period. The Company’s consolidated balance sheet reflects the fair value of the derivative asset and liability as of the reporting date, and changes in the fair value are reflected in current period earnings in other income or expense, as appropriate.

 

 

2. REVENUE RECOGNITION

 

The Company recognizes revenue when the earnings process is complete, which under SEC Staff Accounting Bulletin No. 104, Topic No. 13, “Revenue Recognition” (“SAB 104”), is when revenue is realized or realizable and earned, there is persuasive evidence a revenue arrangement exists, delivery of goods or services has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.

 

The Company accounts for revenue arrangements with multiple deliverables in accordance with FASB ASC Topic 605-25, revenue recognition for arrangements with multiple elements, which addresses the determination of whether an arrangement involving multiple deliverables contains more than one unit of accounting. A delivered item within an arrangement is considered a separate unit of accounting only if both of the following criteria are met:

 

●

the delivered item has value to the customer on a stand-alone basis; and

●

if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor.

 

Under FASB ASC Topic 605-25, if both of the criteria above are not met, then separate accounting for the individual deliverables is not appropriate. Revenue recognition for arrangements with multiple deliverables constituting a single unit of accounting is recognized generally over the greater of the term of the arrangement or the expected period of performance, either on a straight-line basis or on a modified proportional performance basis.

 

The Company accounts for milestones related to research and development activities in accordance with FASB ASC Topic 605-28, milestone method of revenue recognition. FASB ASC Topic 605-28 allows for the recognition of consideration, which is contingent on the achievement of a substantive milestone, in its entirety in the period the milestone is achieved. A milestone is considered to be substantive if all of the following criteria are met: the milestone is commensurate with either: (1) the performance required to achieve the milestone, or (2) the enhancement of the value of the delivered items resulting from the performance required to achieve the milestone; the milestone relates solely to past performance; and, the milestone is reasonable relative to all of the deliverables and payment terms within the agreement.

 

Impax Generics sales, net, and Impax Specialty Pharma sales, net

Impax Generics sales, net and Impax Specialty Pharma sales, net include revenue recognized related to shipments of generic and branded pharmaceutical products to the Company’s customers, primarily drug wholesalers and retail chains. Gross sales revenue is recognized at the time title and risk of loss passes to the customer, which is generally when product is received by the customer. Impax Generics and Impax Specialty Pharma revenue, net may include deductions from the gross sales price related to estimates for chargebacks, rebates, distribution service fees, returns, shelf-stock, and other pricing adjustments. The Company records an estimate for these deductions in the same period when the revenue is recognized. A summary of each of these deductions is as follows:

 

Chargebacks

The Company has agreements establishing contract prices for certain products with certain indirect customers, such as managed care organizations, hospitals and government agencies who purchase products from drug wholesalers. The contract prices are lower than the prices the customer would otherwise pay to the wholesaler, and the price difference is referred to as a chargeback, which generally takes the form of a credit memo issued by the Company to reduce the invoiced gross selling price charged to the wholesaler. An estimated accrued provision for chargeback deductions is recognized at the time of product shipment. The primary factors considered when estimating the provision for chargebacks are the average historical chargeback credits given, the mix of products shipped, and the amount of inventory on hand at the major drug wholesalers with whom the Company does business. The Company also monitors actual chargebacks granted and compares them to the estimated provision for chargebacks to assess the reasonableness of the chargeback reserve at each quarterly balance sheet date.  

 

 

 

2. REVENUE RECOGNITION (continued)

 

Rebates

The Company maintains various rebate programs with its customers in an effort to maintain a competitive position in the marketplace and to promote sales and customer loyalty. The rebates generally take the form of a credit memo to reduce the invoiced gross selling price charged to a customer for products shipped. An estimated accrued provision for rebate deductions is recognized at the time of product shipment. The primary factors the Company considers when estimating the provision for rebates are the average historical experience of aggregate credits issued, the mix of products shipped and the historical relationship of rebates as a percentage of total gross product sales, the contract terms and conditions of the various rebate programs in effect at the time of shipment, and the amount of inventory on hand at the major drug wholesalers with whom the Company does business. The Company also monitors actual rebates granted and compares them to the estimated provision for rebates to assess the reasonableness of the rebate reserve at each quarterly balance sheet date.

 

Distribution Service Fees

The Company pays distribution service fees to several of its wholesaler customers related to sales of its Impax products. The wholesalers are generally obligated to provide the Company with periodic outbound sales information as well as inventory levels of the Company’s products held in their warehouses. Additionally, the wholesalers have agreed to manage the variability of their purchases and inventory levels within specified days on hand limits. An accrued provision for distribution service fees is recognized at the time products are shipped to wholesalers.

 

Returns

The Company allows its customers to return product if approved by authorized personnel in writing or by telephone with the lot number and expiration date accompanying any request and if such products are returned within six months prior to or until twelve months following the products’ expiration date. The Company estimates and recognizes an accrued provision for product returns as a percentage of gross sales based upon historical experience. The product return reserve is estimated using a historical lag period, which is the time between when the product is sold and when it is ultimately returned and estimated return rates which may be adjusted based on various assumptions including changes to internal policies and procedures, changes in business practices, and commercial terms with customers, competitive position of each product, amount of inventory in the wholesaler supply chain, the introduction of new products, and changes in market sales information. The Company also considers other factors, including significant market changes which may impact future expected returns, and actual product returns. The Company monitors actual returns on a quarterly basis and may record specific provisions for returns it believes are not covered by historical percentages.

 

Shelf-Stock Adjustments

Based upon competitive market conditions, the Company may reduce the selling price of certain Impax Generics products. The Company may issue a credit against the sales amount to a customer based upon their remaining inventory of the product in question, provided the customer agrees to continue to make future purchases of product from the Company. This type of customer credit is referred to as a shelf-stock adjustment, which is the difference between the original selling price and the revised lower sales price, multiplied by an estimate of the number of product units on hand at a given date. Decreases in selling prices are discretionary decisions made by the Company in response to market conditions, including estimated launch dates of competing products and declines in market price. The Company records an estimate for shelf-stock adjustments in the period it agrees to grant such a credit memo to a customer.

 

Medicaid and Other Government Pricing Programs

As required by law, the Company provides a rebate on drugs dispensed under the Medicaid program, Medicare Part D, TRICARE, and other United States government pricing programs. The Company determines its estimated government rebate accrual primarily based on historical experience of claims submitted by the various states and other jurisdictions and any new information regarding changes in the various programs which may impact the Company’s estimate of government rebates. In determining the appropriate accrual amount, the Company considers historical payment rates and processing lag for outstanding claims and payments. The Company records estimates for government rebates as a deduction from gross sales, with corresponding adjustment to accrued liabilities.  

   

 

 

2. REVENUE RECOGNITION (continued) 

 

Cash Discounts

The Company offers cash discounts to its customers, generally 2% of the gross selling price, as an incentive for paying within invoice terms, which generally range from 30 to 90 days. An estimate of cash discounts is recorded in the same period when revenue is recognized.

 

Rx Partner and OTC Partner

The Rx Partner and OTC Partner contracts include revenue recognized under alliance and collaboration agreements between the Company and unrelated third-party pharmaceutical companies. The Company has entered into these alliance agreements to develop marketing and/or distribution relationships with its partners to fully leverage its technology platform.

 

The Rx Partners and OTC Partners alliance agreements obligate the Company to deliver multiple goods and/or services over extended periods. Such deliverables include manufactured pharmaceutical products, exclusive and semi-exclusive marketing rights, distribution licenses, and research and development services. In exchange for these deliverables, the Company receives payments from its agreement partners for product shipments and research and development services, and may also receive other payments including royalty, profit sharing, upfront, and periodic milestone payments. Revenue received from the alliance agreement partners for product shipments under these agreements is not subject to deductions for chargebacks, rebates, product returns, and other pricing adjustments. Royalty and profit sharing amounts the Company receives under these agreements are calculated by the respective agreement partner, with such royalty and profit share amounts generally based upon estimates of net product sales or gross profit which include estimates of deductions for chargebacks, rebates, product returns, and other adjustments the alliance agreement partners may negotiate with their respective customers. The Company records the alliance agreement partner's adjustments to such estimated amounts in the period the agreement partner reports the amounts to the Company.

 

The Company applies the updated guidance of ASC 605-25 “Multiple Element Arrangements” to the Strategic Alliance Agreement with Teva Pharmaceuticals Curacao N.V., a subsidiary of Teva Pharmaceutical Industries Limited (“Teva Agreement”). The Company looks to the underlying delivery of goods and/or services which give rise to the payment of consideration under the Teva Agreement to determine the appropriate revenue recognition. The Company initially defers consideration received as a result of research and development-related activities performed under the Teva Agreement. The Company recognizes deferred revenue on a straight-line basis over the Company’s expected period of performance of such services. The Company recognizes revenue received as a result of the manufacture and delivery of products under the Teva Agreement at the time title and risk of loss passes to the customer which is generally when product is received by Teva. The Company recognizes profit share revenue in the period earned.

 

OTC Partner revenue is related to agreements with Pfizer Inc. (formerly Wyeth) and L. Perrigo Company with respect to the supply of over-the-counter pharmaceutical products. The OTC Partner sales channel is no longer a core area of the business, and the over-the-counter pharmaceutical products the Company sells through this sales channel are older products which are only sold to Pfizer and Perrigo, and which are currently sold at a loss, on a fully absorbed basis. The Company is currently only required to manufacture the over-the-counter pharmaceutical products under its agreements with Pfizer and Perrigo. The Company recognizes profit share revenue in the period earned.

 

 

 

2. REVENUE RECOGNITION (continued)

 

Research Partner

The Research Partner contracts include revenue recognized under development agreements with unrelated third-party pharmaceutical companies. The development agreements generally obligate the Company to provide research and development services over multiple periods. In exchange for this service, the Company received upfront payments upon signing of each development agreement and is eligible to receive contingent milestone payments, based upon the achievement of contractually specified events. Additionally, the Company may also receive royalty payments from the sale, if any, of a successfully developed and commercialized product under one of these development agreements. The Company recognizes 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. The Company recognizes revenue received from the achievement of contingent research and development milestones after January 1, 2011 in the period such payment is earned. Royalty fee income, if any, will be recognized by the Company in the period when the revenue is earned.

 

Shipping and Handling Fees and Costs

Shipping and handling fees related to sales transactions are recorded as selling expense.  

 

 

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the FASB issued updated guidance regarding the accounting for and disclosures of revenue recognition, with an effective date for annual and interim periods beginning after December 15, 2016. The update provides a single comprehensive model for accounting for revenue from contracts with customers. The model requires that revenue recognized reflect the actual consideration to which the entity expects to be entitled in exchange for the goods or services defined in the contract, including in situations with multiple performance obligations. This guidance will be the same for both U.S. GAAP and International Financial Reporting Standards (IFRS). In July 2015, the FASB deferred the effective date by one year. The guidance will be effective for annual and interim periods beginning after December 15, 2017. The Company is currently evaluating the effect that this guidance may have on its consolidated financial statements.

 

In April 2015, the FASB issued updated guidance on the presentation requirements for debt issuance costs and debt discount and premium. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance. The updated guidance is effective for annual and interim periods beginning after December 15, 2015 and early adoption is permitted for financial statements that have not been previously issued. The Company adopted this guidance in the three month period ended March 31, 2015 and it did not have a material impact on the Company's results of operations.

 

 

  

4. INVESTMENTS

 

Investments consist of commercial paper and corporate bonds. The Company’s policy is to invest in only high quality “AAA-rated” or investment-grade securities. Investments in debt securities are accounted for as “held-to-maturity” and are recorded at amortized cost, which approximates fair value, generally based upon observable market values of similar securities. The Company has historically held all investments in debt securities until maturity, and has the ability and intent to continue to do so. All of the Company’s investments have remaining contractual maturities of less than 12 months and are classified as short-term. Upon maturity, the Company uses a specific identification method.

 

There were no short-term investments outstanding as of June 30, 2015. A summary of short-term investments as of December 31, 2014 is as follows:  

 

(in $000’s) December 31, 2014		Amortized Cost				Gross Unrecognized Gains				Gross Unrecognized Losses				Fair Value
Commercial paper		$	68,972			$	17			$	--			$	68,989
Corporate bonds			131,011				--				(101	)			130,910
Total short-term investments		$	199,983			$	17			$	(101	)		$	199,899

 

 

During the three month period ended March 31, 2015, the Company liquidated its entire portfolio of short-term investments to fund the purchase price of its March 9, 2015 acquisition of Tower and Lineage.

 

 

 

5. DERIVATIVES 

  

As discussed in “Note 14 – Debt”, on June 30, 2015, the Company issued an aggregate principal amount of $600.0 million of 2.00% Convertible Senior Notes due June 2022 in a private placement offering (the “Notes”). The net proceeds from the offering, after deducting transaction costs, were approximately $581.4 million.

 

The conversion rate for the Notes is initially set at 15.7858 shares per $1,000 of principal amount, which is equivalent to an initial conversion price of $63.35 per share of the Company’s common stock. The Notes will mature on June 15, 2022, unless earlier redeemed, repurchased or converted and will bear interest at a rate of 2.00% per year payable semiannually in arrears on June 15 and December 15 of each year, beginning December 15, 2015.

 

Concurrently with the issuance of the Notes, the Company entered into convertible note hedge transactions with a financial institution (the “Note Hedge Transactions”), which are generally expected to reduce the potential dilution to the Company’s stockholders and/or offset the cash payments the Company is required to make in excess of the principal amount upon conversion of the Notes. The Company also entered into separate warrant transactions with such financial institution in which it sold net-share-settled (or, at the Company’s election subject to certain conditions, cash-settled) warrants to the financial institution initially relating to the same number of shares of the Company’s common stock initially underlying the Notes, subject to customary anti-dilution adjustments (together, the “Warrant Transactions”). The strike price of the warrants will initially be $81.2770 per share (subject to adjustment). The Warrant Transactions could have a dilutive effect to the Company’s stockholders to the extent that the market price per share of the Company’s common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants.

 

Derivative Asset

 

Pursuant to the Note Hedge Transactions, the Company purchased from the financial institution approximately 0.6 million call options on the Company’s common stock (the “Bond Hedge Derivative Asset”), for which it paid consideration of $147.0 million. Each call option entitles the Company to purchase 15.7858 shares of the Company’s common stock at an exercise price of $63.35 per share, is immediately exercisable, and has an expiration date of June 15, 2022, subject to earlier exercise. Taken together, the Note Hedge Transaction and the Warrant Transactions are intended to offset any actual dilution from the conversion of the Notes and to effectively increase the overall conversion price from $63.35 per share (the conversion price of the Notes and the exercise price of the call options) to $81.277 (the exercise price of the warrants). The Company received proceeds of approximately $88.3 million from the sale of the warrants.

 

The fair value of the Bond Hedge Derivative Asset at June 30, 2015 was $147.0 million, which is shown as a long-term asset on the Company’s consolidated balance sheet. The fair value was determined by a model-derived valuation utilizing Level 2 inputs which are observable or whose significant value drivers are observable. The following table summarizes the inputs and assumptions used in the Black-Scholes model to calculate the fair value of Bond Hedge Derivative Asset as of June 30, 2015:

 

Common stock price		$	45.92
Exercise price		$	63.35
Risk-free interest rate			2.06	%
Volatility			39	%
Dividend yield			0	%
Remaining contractual term (in years)			7.0

 

Derivative Liability

 

As of the June 30, 2015 issuance date of the Notes, the Company did not have the necessary number of authorized but unissued shares of its common stock available to share-settle the conversion option of the Notes. Until the Company’s stockholders approve a sufficient increase in the authorized number of shares of the Company’s common stock, the Company is required to settle the principal amount and conversion spread of the Notes in cash. Therefore, in accordance with guidance found in ASC 470-20 and ASC 815-15, the conversion option of the Notes was deemed an embedded derivative that must be bifurcated from the Notes (host contract) and accounted for separately as a derivative liability. This derivative liability will be remeasured at fair value at each reporting period, and changes in fair value will be charged to other income or expense, as appropriate.

 

 

 

The fair value of the conversion option derivative liability at June 30, 2015 was $167.0 million, which is shown as a long-term liability on the Company’s consolidated balance sheet. The fair value was determined by a model-derived valuation utilizing Level 2 inputs which are observable or whose significant value drivers are observable. The following table summarizes the inputs and assumptions used in the binomial lattice model to calculate the fair value as of June 30, 2015:

 

Common stock price		$	45.92
Exercise price		$	63.35
Risk-free interest rate			2.06	%
Volatility			35	%
Annual coupon rate			2	%
Remaining contractual term (in years)			7.0

 

 

 

6. FAIR VALUE MEASUREMENT AND FINANCIAL INSTRUMENTS

 

 

The carrying values of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, and accounts payable in the Company’s consolidated balance sheets approximated their fair values as of June 30, 2015 and December 31, 2014 due to their short-term nature.

 

Certain of the Company’s financial instruments are measured at fair value using a three-level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

●

Level 1 - Inputs are quoted prices for identical instruments in active markets.

 

 

●

Level 2 - Inputs are quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

 

●

Level 3 - Inputs are unobservable and reflect the Company's own assumptions, based on the best information available, including the Company's own data.

 

The carrying amounts and fair values of the Company’s financial instruments at June 30, 2015 and December 31, 2014 are indicated below (in thousands):

 

		As of June 30, 2015 (Unaudited)
										Fair Value Measurement Based on
		Carrying Amount				Fair Value				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Bond hedge derivative asset		$	147,000			$	147,000			$	-			$	147,000			$	-
Deferred compensation plan (1)		$	26,891			$	26,891			$	-			$	26,891			$	-
Liabilities
2% convertible senior notes due June 2022		$	414,391			$	600,000			$	600,000			$	-			$	-
Conversion option derivative liability		$	167,000			$	167,000			$	-			$	167,000			$	-
Deferred compensation plan (1)		$	27,039			$	27,039			$	-			$	27,039			$	-

 

 

 

		As of December 31, 2014
										Fair Value Measurement Based on
		Carrying Amount				Fair Value				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Short-term investments		$	199,983			$	199,899			$	199,899			$	-			$	-
Deferred compensation plan (1)		$	29,241			$	29,241			$	-			$	29,241			$	-
Liabilities
Deferred compensation plan (1)		$	25,837			$	25,837			$	-			$	25,837			$	-

 

 

(1)

The deferred compensation liability is a non-current liability recorded at the value of the amount owed to the plan participants, with changes in value recognized as a compensation expense in the Company’s consolidated statements of operations. The calculation of the deferred compensation obligation is derived from observable market data by reference to hypothetical investments selected by the participants and is included in the line items captioned “Other liabilities” on the Company’s consolidated balance sheets. The Company invests in corporate-owned life insurance (“COLI”) policies, of which the cash surrender value is included in the line item captioned “Other assets” on the Company’s consolidated balance sheets.

 

 

 

7. ACCOUNTS RECEIVABLE

 

The composition of accounts receivable, net is as follows:

 

(in $000’s)		June 30, 2015				December 31, 2014
Gross accounts receivable		$	584,082			$	287,362
Less: Rebate reserve			(233,653	)			(88,812	)
Less: Chargeback reserve			(83,788	)			(43,125	)
Less: Other deductions			(24,921	)			(8,935	)
Accounts receivable, net		$	241,720			$	146,490

    

A roll forward of the rebate and chargeback reserves activity for the six months ended June 30, 2015 and the year ended December 31, 2014 is as follows:

 

(in $000’s) Rebate reserve		June 30, 2015				December 31, 2014
Beginning balance		$	88,812			$	88,449
Acquired balances			77,640				--
Provision recorded during the period			227,709				260,747
Credits issued during the period			(160,508	)			(260,384	)
Ending balance		$	233,653			$	88,812

 

(in $000’s) Chargeback reserve		June 30, 2015				December 31, 2014
Beginning balance		$	43,125			$	37,066
Acquired balances			24,532				--
Provision recorded during the period			365,597				487,377
Credits issued during the period			(349,466	)			(481,318	)
Ending balance		$	83,788			$	43,125

   

Other deductions include allowance for uncollectible amounts and cash discounts. The Company maintains an allowance for doubtful accounts for estimated losses resulting from amounts deemed to be uncollectible from its customers, with such allowances for specific amounts on certain accounts. The Company had an allowance for uncollectible amounts of $1,207,000 and $515,000 at June 30, 2015 and December 31, 2014, respectively.  

 

  

 

8. INVENTORY

 

Inventory is stated at the lower of cost or market. Cost is determined using a standard cost method, and the cost flow assumption is first in, first out (“FIFO”) flow of goods. Standard costs are revised annually, and significant variances between actual costs and standard costs are apportioned to inventory and cost of goods sold based upon inventory turnover. Costs include materials, labor, quality control, and production overhead. Inventory is adjusted for short-dated, unmarketable inventory equal to the difference between the cost of inventory and the estimated value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Consistent with industry practice, the Company may build pre-launch inventories of certain products which are pending required approval from the FDA and/or resolution of patent infringement litigation, when, in the Company’s assessment, such action is appropriate to increase the commercial opportunity and FDA approval is expected in the near term and/or the litigation will be resolved in the Company’s favor. The Company accounts for all costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) as a current period charge in accordance with GAAP.

 

Inventory, net of carrying value reserves at June 30, 2015 and December 31, 2014 consisted of the following: 

 

(in $000’s)		June 30, 2015				December 31, 2014
Raw materials		$	59,232			$	34,681
Work in process			5,360				2,447
Finished goods			74,833				55,102
Total inventory			139,425				92,230
Less: Non-current inventory			15,992				11,660
Total inventory-current		$	123,433			$	80,570

   

In connection with the Transaction, the Company acquired $34.0 million in inventory, including approximately $3.0 million of non-current inventory included in “Other Non-current Assets” on the Company’s consolidated balance sheets.

 

Inventory carrying value reserves were $25,759,000 and $25,639,000 at June 30, 2015 and December 31, 2014, respectively. The carrying value of unapproved inventory less reserves was $5,815,000 and $7,312,000 at June 30, 2015 and December 31, 2014, respectively.

 

The Company recognizes pre-launch inventories at the lower of its cost or the expected net selling price. Cost is determined using a standard cost method, which approximates actual cost, and assumes a FIFO flow of goods. Costs of unapproved products are the same as approved products and include materials, labor, quality control, and production overhead. When the Company concludes that FDA approval is expected within approximately six months for a drug product candidate, the Company may begin to schedule manufacturing process validation studies as required by the FDA to demonstrate the production process can be scaled up to manufacture commercial batches. Consistent with industry practice, the Company may build quantities of unapproved product inventory pending final FDA approval and/or resolution of patent infringement litigation, when, in the Company’s assessment, such action is appropriate to increase its commercial product opportunity, and FDA approval is expected in the near term, and/or the litigation will be resolved in the Company’s favor. The capitalization of unapproved pre-launch inventory involves risks, including, among other items, FDA approval may not occur; approvals may require additional or different testing and/or specifications than used for unapproved inventory, and in cases where the unapproved inventory is for a product subject to litigation, the litigation may not be resolved or settled in the Company’s favor. If any of these risks materialize and the launch of the unapproved product inventory is delayed or prevented, then the net carrying value of unapproved inventory may be partially or fully reserved. Generally, the selling price of a generic pharmaceutical product is at a discount from the corresponding brand product selling price. Typically, a generic drug is easily substituted for the corresponding brand product, and once a generic product is approved, the pre-launch inventory is typically sold within the next three months. If the market prices become lower than the product inventory carrying costs, then the pre-launch inventory value is reduced to such lower market value. If the inventory produced exceeds the estimated market acceptance of the generic product and becomes short-dated, a carrying value reserve will be recorded. In all cases, the carrying value of the Company's pre-launch product inventory is lower than the respective estimated net selling prices.

   

To the extent inventory is not scheduled to be utilized in the manufacturing process and/or sold within 12 months of the balance sheet date, it is included as a component of other non-current assets. Amounts classified as non-current inventory consist of raw materials, net of valuation reserves. Raw materials generally have a shelf life of approximately three to five years, while finished goods generally have a shelf life of approximately two years.

 

 

 

9. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment, net consisted of the following:

 

(in $000’s)		June 30, 2015				December 31, 2014
Land		$	5,773			$	5,773
Buildings and improvements			171,586				154,374
Equipment			138,963				122,184
Office furniture and equipment			14,861				12,623
Construction-in-progress			11,617				9,404
Property, plant and equipment, gross		$	342,800			$	304,358
Less: Accumulated depreciation			(128,170	)			(116,189	)
Property, plant and equipment, net		$	214,630			$	188,169

  

 

In connection with the Transaction, the Company acquired $27.5 million in property, plant and equipment.

 

In connection with the Company’s restructuring of its packaging and distribution operations discussed in “Note 1 – The Company & Basis of Presentation”, the Company currently intends to accelerate depreciation of certain buildings, leasehold improvements and machinery and equipment during the third quarter of 2015 in an aggregate amount of approximately $3.1 million.

 

 

 

10. BUSINESS ACQUISITIONS

 

On March 9, 2015, the Company completed its previously announced acquisition of all of the outstanding shares of common stock of Tower and Lineage, pursuant to the Stock Purchase Agreement dated as of October 8, 2014, by and among the Company, Tower, Lineage, Roundtable Healthcare Partners II, L.P., Roundtable Healthcare Investors II, L.P., and the other parties thereto, including holders of certain options and warrants to acquire the common stock of Tower or Lineage. In connection with the Transaction, options and warrants of Tower and Lineage were cancelled. The aggregate consideration for Tower and Lineage was approximately $700 million, which included the repayment of indebtedness of Tower and Lineage, and an additional amount for cash acquired and other working capital adjustments at closing of approximately $39 million, all of which were subject to post-closing adjustments. The Company financed the Transaction from cash on hand and the full amount of borrowings available under a $435 million senior secured term loan pursuant to a credit agreement dated as of March 9, 2015, by and among the Company, the lenders party thereto from time to time and Barclays Bank plc, as administrative and collateral agent (the “Barclays Credit Agreement”). Pursuant to the Barclays Credit Agreement, the Company also entered into a new $50 million senior secured revolving credit facility. As a result of the Transaction, Tower and Lineage became wholly owned subsidiaries of the Company. The Barclays Credit Agreement was subsequently terminated in accordance with its terms on June 30, 2015 after the Company used a portion of the proceeds from its offering of the 2.00% Convertible Senior Notes due 2022 (as described below under “Note 14 – Debt”) to repay all of the outstanding indebtedness under the Barclays Credit Agreement. The revolving credit facility under the Barclays Credit Agreement was voluntarily terminated by the Company on June 30, 2015. The Company incurred acquisition-related costs related to the Transaction of approximately $9.0 million, of which approximately $6.0 million are included in selling, general and administrative expenses in the Company’s consolidated statement of operations for the six months ended June 30, 2015.

 

The Transaction allows the Company to expand its commercialized generic and branded product portfolios; the Company also uses its sales and marketing organization to promote the marketed products acquired in the Transaction.

 

Consideration

 

The Company has accounted for the Transaction as a business combination under the acquisition method of accounting. The Company has preliminarily allocated the purchase price for the Transaction based upon the estimated fair value of net assets acquired and liabilities assumed at the date of acquisition. Accordingly, the preliminary purchase price allocation described below is subject to change. The Company expects to finalize the allocation of the purchase price upon receipt of final valuations for the intangible assets, final resolution of post-closing working capital adjustments and certain tax accounts that are based on the best estimates of management. The completion and filing of federal and state tax returns for the various purchased entities of the Transaction may result in adjustments to the carrying value of assets and liabilities. Any adjustments to the preliminary fair values will be made as soon as practicable but no later than one year from the March 9, 2015 acquisition date.

 

Recognition and Measurement of Assets Acquired and Liabilities Assumed at Fair Value

 

The following tables summarize the preliminary fair values of the tangible and identifiable intangible assets acquired and liabilities assumed in the Transaction at the acquisition date, updated as of June 30, 2015, net of cash acquired of approximately $41 million:

 

(in $000’s)
Accounts receivable(1)		$	57,585
Inventory			31,021
Income tax receivable and other prepaid expenses			11,690
Deferred income taxes			37,716
Property, plant and equipment			27,539
Intangible assets			725,100
Assets held for sale			4,000
Goodwill			129,693
Other non-current assets			7,362
Total assets assumed			1,031,706
Current liabilities			65,672
Other non-current liabilities			7,799
Deferred tax liability			261,052
Total liabilities assumed			334,523
Cash paid, net of cash acquired		$	697,183

 

(1)

The accounts receivable acquired in the Transaction had a fair value of approximately $57 million, including an allowance for doubtful accounts of approximately $9 million, which represents the Company’s best estimate on March 9, 2015 (the closing date of the Transaction) of the contractual cash flows not expected to be collected by the acquired companies in the Transaction.

 

 

 

Intangible Assets

 

The following table identifies the Company’s preliminary allocations of purchase price to intangible assets including the weighted average amortization period in total and by major intangible asset class:

 

(in $000’s)		Estimated Fair Value				Weighted Average Estimated Useful Life (in years)
Currently marketed products		$	380,700				13
Royalties and contract manufacturing relationships			80,800				12
In-process research and development			263,600				n/a
Total intangible assets		$	725,100				12

 

The estimated fair value of the in-process research and development and identifiable intangible assets was determined using the “income approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each asset or product (including net revenues, cost of sales, research and development costs, selling and marketing costs and working capital/asset contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, competitive trends impacting the asset and each cash flow stream as well as other factors. The discount rates used to arrive at the present value at the acquisition date of currently marketed products was 15% and for in-process research and development was 16% to reflect the internal rate of return and incremental commercial uncertainty in the cash flow projections. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results.

 

Goodwill

 

The Company recorded approximately $130 million of goodwill in connection with the Transaction, some of which will not be tax-deductible. Approximately $40 million of this goodwill was assigned to the Impax Specialty Pharma segment and approximately $90 million was assigned to the Impax Generics segment. Factors that contributed to the Company’s preliminary recognition of goodwill include the Company’s intent to expand its generic and branded pharmaceutical product portfolios and to acquire certain benefits from the Tower and Lineage product pipelines in addition to the anticipated synergies that the Company expects to generate from the acquisition.

 

Revenues and Earnings from Tower and Lineage for the Three and Six Months Ended June 30, 2015

 

Included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2015 were revenues of approximately $58 million and $72 million, respectively, and income before income taxes of approximately $4 million and loss before income taxes of approximately $1 million, respectively, representing the results of operations of Tower and Lineage and their subsidiaries.

 

 

 

Unaudited Pro Forma Results of Operations

 

The unaudited pro forma combined results of operations for the three and six months ended June 30, 2015 and 2014 (assuming the closing of the acquisition of Tower and Lineage occurred on January 1, 2014) are as follows:

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
(in $000’s)
Total revenues		$	214,182			$	243,904			$	389,715			$	417,971
Net income (loss)			5,349				36,425				(6,158	)			27,319

 

 

The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the closing of the Transaction taken place on January 1, 2014. Furthermore, the pro forma results do not purport to project the future results of operations of the Company.

 

The unaudited pro forma information reflects primarily the following adjustments:

 

•

Adjustments to amortization expense related to identifiable intangible assets acquired;

 

•

Adjustments to depreciation expense related to property, plant and equipment acquired;

 

•

Adjustments to interest expense to reflect the long-term debt held by Tower and Lineage paid out and eliminated at the closing and the Barclays Senior Secured Credit Facilities (described in detail in “Note 14. – Debt” below);

 

•

Adjustments to cost of revenues related to the fair value adjustments in inventory sold including elimination of approximately $4 million and $5 million for the three and six months ended June 30, 2015, respectively, and additional costs of approximately $2 million and $6 million for the three and six months ended June 30, 2014, respectively;

 

•

Adjustments to selling, general and administrative expense related to severance and retention costs of approximately $3 million incurred as part of the Transaction.  These costs were eliminated in the pro forma results for the six months ended June 30, 2015 and included in the corresponding comparative period;

 

•

Adjustments to selling, general and administrative expense related to transaction costs directly attributable to the Transaction include the elimination of $12 million of charges in the six month period ended June 30, 2015 which have been included in the six month period ended June 30, 2014 and $4 million of charges incurred in the second half of fiscal year 2014 which have been included in the six month period ended June 30, 2015; and

 

•

Adjustments to reflect the elimination of approximately $2.3 million in commitment fees related to its $435 million term loan with Barclays that were incurred during the six months ended June 30, 2015 and inclusion in the corresponding comparative period.

 

  

All of the above adjustments were adjusted for the applicable tax impact.

 

 

 

11. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill (including goodwill in connection with the Transaction) was $157,267,000 at June 30, 2015 and $27,574,000 at December 31, 2014. In connection with the Transaction, the Company recorded approximately $130 million of goodwill. As of June 30, 2015, the Company attributes $117 million of goodwill to Impax Generics and $40 million to Impax Specialty Pharma. Goodwill is tested at least annually for impairment or whenever events or changes in circumstances have occurred which could have a material adverse effect on the estimated fair value of the reporting unit, and thus indicate a potential impairment of the goodwill carrying value. The Company concluded the carrying value of goodwill was not impaired as of December 31, 2014.

 

Intangible assets consisted of the following:

 

(in $000’s) June 30, 2015		Initial Cost				Accumulated Amortization				Impairment				Carrying Value
Amortized intangible assets:
Tower currently marketed products		$	380,700			$	(10,376	)		$	---			$	370,324
Tower in-process research and development			263,600				---				---				263,600
Tower royalties and contract manufacturing relationships			80,800				(58	)			---				80,742
Zomig® product rights			41,783				(33,022	)			---				8,761
Tolmar product rights			38,450				(15,348	)			(16,032	)			7,070
Perrigo product rights			1,500				(320	)			---				1,180
Acquired generics product rights			8,000				(774	)			---				7,226
Other product rights			1,550				---				---				1,550
Total intangible assets		$	816,383			$	(59,898	)		$	(16,032	)		$	740,453

                                                        

 

(in $000’s) December 31, 2014		Initial Cost				Accumulated Amortization				Impairment				Carrying Value
Amortized intangible assets:
Zomig® product rights		$	41,783			$	(31,561	)		$	---			$	10,222
Tolmar product rights			33,450				(10,801	)			(16,032	)			6,617
Perrigo product rights			1,000				(297	)			---				703
Ursodiol product rights			3,000				(331	)			---				2,669
Other product rights			7,250				---				(750	)			6,500
Total intangible assets		$	86,483			$	(42,990	)		$	(16,782	)		$	26,711

 

 

In connection with the Transaction, the Company acquired approximately $725 million of intangible assets (“Tower products”).

 

 

  

The Zomig^® product rights under the Distribution, License, Development and Supply Agreement (“AZ Agreement”) with AstraZeneca UK Limited (“AstraZeneca”) were amortized on a straight-line basis over a period of 14 months starting in April 2012 and ending upon the expiration of the underlying patent for the tablet and over a period of 11 months starting in July 2012 and ending upon the expiration of the underlying patent for the orally disintegrating tablet. The Zomig^® product rights under the AZ Agreement are also being amortized over a period of 72 months starting in July 2012 for the nasal spray. In June 2012, the Company entered into a Development, Supply and Distribution Agreement (the “Tolmar Agreement”) with TOLMAR, Inc. (“Tolmar”). Under the terms of the Tolmar Agreement, Tolmar granted to the Company an exclusive license to commercialize up to 11 generic topical prescription drug products, including ten currently approved products and one product pending approval at the FDA, in the United States and its territories. Under the terms of the Tolmar Agreement, Tolmar is responsible for developing and manufacturing the products, and the Company is responsible for the marketing and sale of the products. During the three month period ended September 30, 2013, as a result of the most recent market share data obtained by the Company and the Company’s revised five year projections for the Tolmar product lines, the Company performed an intangible asset impairment test on the Tolmar products. Based on the results of the impairment analysis, the Company recorded a $13.2 million impairment charge to cost of revenues for Impax Generics in the three month period ended September 30, 2013. During the three month period ended March 31, 2014, as a result of a further decline in pricing, the Company revised its projections and performed an intangible asset impairment analysis. Based on the results of this analysis, the Company recorded a $2.9 million charge to cost of revenues for Impax Generics, which was 100% of the remaining net book value of this asset. The remaining carrying value of the Tolmar product rights are being amortized over the remaining estimated useful lives of the underlying products over a period ranging from five to 12 years, starting upon commencement of commercialization activities by the Company during the year ended December 31, 2012. Information concerning the AZ Agreement and the Tolmar Agreement can be found in “Note 15 - Alliance and Collaboration Agreements.” During the three month period ended June 30, 2014, the Company paid a $1.0 million milestone payment to Perrigo Company, plc (“Perrigo”) in conjunction with its launch of a generic version of Astepro^® nasal spray pursuant to a development agreement between the Company and an affiliate of Perrigo. The milestone was capitalized as an intangible asset acquisition and will be amortized over the expected cash flows of the product. During the three month period ended September 30, 2014, the Company acquired from Actavis two generic products including one product marketed under an existing Abbreviated New Drug Application (“ANDA”), the Ursodiol tablet, and one approved product that was not yet then marketed, the Lamotrigine orally disintegrating tablet. The entire purchase price was allocated to identifiable intangible assets and the Ursodiol intangible will be amortized over an eight year period. The Lamotrigine product was considered in-process research and development. The Company received FDA approval of the Lamotrigine tablet in blister packaging in January 2015 and launched the product in early April 2015. The Company began amortizing the Lamotrigine intangible asset during the three month period ended June 30, 2015. During the quarter ended June 30, 2015, the Company paid a $5.0 million milestone related to certain Topical Products pursuant to the Tolmar Agreement. Other product rights consist of ANDAs which have been filed with the FDA. For the remaining ANDAs, the Company will either commence amortization upon FDA approval and commercialization over the estimated useful life of the product rights, or will expense the related costs immediately upon failure to obtain FDA approval. Amortization expense is included as a component of cost of revenues on the consolidated statements of operations and was $12,623,000 and $2,594,000 for the three month periods ended June 30, 2015 and 2014, respectively, and $16,909,000 and $5,024,000 for the six month periods ended June 30, 2015 and 2014, respectively.

 

The following schedule shows the expected amortization of the Tower, Zomig^®, Tolmar, Perrigo and Acquired generics product rights as of June 30, 2015 for the next five years and thereafter: 

 

(in $000s)		Amortization Expense
2015		$	20,681
2016			22,854
2017			23,882
2018			33,945
2019			38,196
Thereafter			335,745
Totals		$	475,303

 

 

 

12. ACCRUED EXPENSES, COMMITMENTS AND CONTINGENCIES

 

The following table sets forth the Company’s accrued expenses:  

       

(in $000’s)		June 30, 2015				December 31, 2014
Payroll-related expenses		$	26,063			$	33,812
Product returns			51,610				27,174
Government rebates			40,411				18,272
Legal and professional fees			11,169				9,497
Income taxes payable			1,296				40
Physician detailing sales force fees			2,057				2,336
Litigation accrual			12,750				12,750
Other			8,783				6,589
Total accrued expenses		$	154,139			$	110,470

  

Product Returns

The Company maintains a return policy to allow customers to return product within specified guidelines. At the time of sale, the Company estimates a provision for product returns based upon historical experience for sales made through Impax Generics and Impax Specialty Pharma sales channels. Sales of product under the Private Label, Rx Partner and OTC Partner alliance and collaboration agreements are generally not subject to returns. A roll forward of the product returns reserve for the six month period ended June 30, 2015 and for the year ended December 31, 2014 is as follows:

  

(in $000’s) Returns Reserve		June 30, 2015				December 31, 2014
Beginning balance		$	27,174			$	28,089
Acquired balances			18,949				--
Provision related to sales recorded in the period			23,340				12,016
Credits issued during the period			(17,853	)			(12,931	)
Ending balance		$	51,610			$	27,174

 

Litigation Accrual

Included in accrued expenses is a $12,750,000 liability related to two consolidated securities class action settlements, as disclosed in “Note 20 - Legal and Regulatory Matters.” The settlement amounts will be paid for and covered by the Company's insurance policy; therefore, there is a corresponding $12,750,000 asset recorded in “Prepaid Expenses and Other Current Assets” on the consolidated balance sheets as of June 30, 2015 and December 31, 2014.

 

Taiwan Facility Construction

The Company has entered into several contracts relating to ongoing construction at its manufacturing facility located in Jhunan, Taiwan, R.O.C. As of June 30, 2015, the Company had remaining obligations under these contracts of approximately $738,000.

 

Purchase Order Commitments

As of June 30, 2015, and excluding the Taiwan Facility Construction, the Company had $49,051,000 of open purchase order commitments, primarily for raw materials. The terms of these purchase order commitments are generally less than one year in duration.

 

 

 

13. INCOME TAXES

 

The Company calculates its interim income tax provision in accordance with FASB ASC Topics 270 and 740. At the end of each interim period, the Company makes an estimate of the annual United States domestic and foreign jurisdictions’ expected effective tax rates and applies these rates to its 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 the 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 rate includes modifications, which were projected for the year, for share-based compensation and state research and development credits, among others. In addition, the effect of changes in enacted tax laws, rates, or tax status is recognized in the interim period in which the respective change occurs.

 

During the six month period ended June 30, 2015, the Company recognized an aggregate consolidated tax benefit of $7,068,000 for U.S. domestic and foreign income taxes. In the six month period ended June 30, 2014, the Company recognized an aggregate consolidated tax provision of $21,559,000 for U.S. domestic and foreign income taxes. The decrease in the tax provision during the current period resulted from lower consolidated income before taxes in the six month period ended June 30, 2015, as compared to the same period in the prior year. The effective tax rate of 46% for the six month period ended June 30, 2015 was higher than the effective tax rate of 34% for the prior year period as a result of a change in the timing and mix of U.S. and foreign income, and a higher add back for non-deductible executive compensation limited by section 162(m) of the Internal Revenue Code, which prohibits publicly held corporations from deducting more than $1 million per year in compensation paid to each of certain covered employees. The Company is closely monitoring the events and circumstances that determine the need for a valuation allowance related to state research and development tax credit carryforwards and have determined that it would be premature to set up the valuation allowance at this time.

 

  

  

14. DEBT

 

2% Convertible Senior Notes due June 2022

 

On June 30, 2015, the Company issued an aggregate principal amount of $600.0 million of 2.00% Convertible Senior Notes due June 2022 (the “Notes”) in a private placement offering, which are the Company’s senior unsecured obligations. The Notes were issued pursuant to an Indenture dated June 30, 2015 (the “Indenture”) between the Company and Wilmington Trust, N.A. as trustee. The Indenture includes customary covenants and sets forth certain events of default after which the Notes may be due and payable immediately. The Notes will mature on June 15, 2022, unless earlier redeemed, repurchased or converted. The Notes bear interest at a rate of 2.00% per year, and interest is payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2015.

 

The conversion rate for the Notes is initially set at 15.7858 shares per $1,000 of principal amount, which is equivalent to an initial conversion price of $63.35 per share of the Company’s common stock. If a Make-Whole Fundamental Change (as defined in the Indenture) occurs or becomes effective prior to the maturity date and a holder elects to convert its Notes in connection with the Make-Whole Fundamental Change, the Company is obligated to increase the conversion rate for the Notes so surrendered by a number of additional shares of the Company’s common stock as prescribed in the Indenture. Additionally, the conversion rate is subject to adjustment in the event of an equity restructuring transaction such as a stock dividend, stock split, spinoff, rights offering, or recapitalization through a large, nonrecurring cash dividend (“standard antidilution provisions,” per ASC 815-40 – Contracts in Entity’s Own Equity).

 

The Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding December 15, 2021 only under the following circumstances:

 

(i)

If during any calendar quarter commencing after the quarter ending September 30, 2015 (and only during such calendar quarter) the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; or

 

(ii)

If during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 of principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last report sale price of the Company’s common stock and the conversion rate on each such trading day; or

 

(iii)

Upon the occurrence of corporate events specified in the Indenture.

 

On or after December 15, 2021 until the close of business on the second scheduled trading day immediately preceding the maturity date, the holders may convert their Notes at any time, regardless of the foregoing circumstances. The Company may satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election and in the manner and subject to the terms and conditions provided in the Indenture.

 

Concurrently with the offering of the Notes and using a portion of the proceeds from the sale of the Notes, the Company entered into a series of convertible note hedge and warrant transactions (the “Note Hedge Transactions” and “Warrant Transactions”) which are designed to reduce the potential dilution to the Company’s stockholders and/or offset the cash payments the Company is required to make in excess of the principal amount upon conversion of the Notes. The Note Hedge Transactions and Warrant Transactions are separate transactions, in each case, entered into by the Company with a financial institution and are not part of the terms of the Notes. These transactions will not affect any holder’s rights under the Notes, and the holders of the Notes have no rights with respect to the Note Hedge Transactions and Warrant Transactions. See “Note 5 – Derivatives” and “Note 17 – Stockholders’ Equity” for additional information.

 

As of the June 30, 2015 issuance date of the Notes, the Company did not have the necessary number of authorized but unissued shares of its common available to settle the conversion option of the Notes in shares of the Company’s common stock. Unless and until the Company’s stockholders approve a sufficient increase in the authorized share count, the Company is required to settle the principal amount and conversion spread of the Notes in cash. Therefore, in accordance with guidance found in ASC 470-20 – Debt with Conversion and Other Options (“ASC 470-20”) and ASC 815-15 – Embedded Derivatives (“ASC 815-15”), the conversion option of the Notes was deemed an embedded derivative which must be bifurcated from the Notes (host contract) and accounted for separately as a derivative liability. The fair value of the conversion option derivative liability at June 30, 2015 was approximately $167.0 million, which was recorded with an offsetting debit to the book value of the debt. This debt discount will be amortized to interest expense over the term of the debt using the effective interest method.

 

 

In connection with the issuance of the Notes, the Company incurred approximately $18.6 million of debt issuance costs for banking, legal and accounting fees and other expenses. This was also recorded on the Company’s balance sheet as a debt discount, in accordance with the Company’s early adoption of Accounting Standards Update (“ASU”) No. 2015-03 – Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), and will be amortized to interest expense over the term of the debt using the effective interest method.

 

As the private offering closed on the last day of the quarter ended June 30, 2015, there was no related interest expense recorded for the quarter, and there was no accrued interest payable balance on the Notes as of June 30, 2015. As the Notes mature in 2022, they have been classified as long-term debt on the Company’s balance sheet, with a book balance of approximately $414.4 million as of June 30, 2015.

 

Loss on Early Extinguishment of Debt – Barclays $435.0 Million Term Loan

 

In connection with the acquisition of Tower during the first quarter of 2015, the Company entered into a $435.0 million senior secured term loan facility (the “Term Loan”) and a $50.0 million senior secured revolving credit facility (the “Barclays Revolver” and collectively with the Term Loan, the “Barclays Senior Secured Credit Facilities”), pursuant to a credit agreement, dated as of March 9, 2015, by and among the Company, the lenders party thereto from time to time and Barclays Bank PLC, as administrative and collateral agent (the “Barclays Credit Agreement”). In connection with the Barclays Senior Secured Credit Facilities, the Company incurred debt issuance costs of approximately $17.8 million, which were previously reflected as a debt discount on the Company’s balance sheet in accordance with ASU 2015-03. Prior to repayment of the Term Loan on June 30, 2015, these debt issuance costs were to be amortized to interest expense over the term of the loan using the effective interest rate method.

 

On June 30, 2015, the Company used approximately $436.4 million of the proceeds from the sale of the Notes to repay the $435.0 million of principal and approximately $1.4 million of accrued interest due on its Term Loan under the Barclays Credit Agreement. In connection with this repayment of the loan, the Company recorded a loss on early extinguishment of debt of approximately $16.9 million related to the unamortized portion of the deferred debt issuance costs during the quarter ended June 30, 2015.

 

For the three months ended June 30, 2015, the Company incurred total interest expense on the Term Loan of approximately $6.8 million, of which $6.0 million was cash and $0.8 million was non-cash amortization of the deferred debt issuance costs. For the six months ended June 30, 2015, the Company incurred total interest expense on the Term Loan of approximately $10.7 million, of which $9.8 million was cash and $0.9 million was non-cash amortization of the deferred debt issuance costs. Included in the year-to-date cash interest expense of $9.8 million is approximately $2.3 million related to a ticking fee paid to Barclays during the first quarter of 2015, prior to the funding of the Senior Secured Credit Facilities on March 9, 2015, to lock in the financing terms from the lenders’ commitment of the Term Loan until the actual allocation of the loan occurred.

 

Closure of Credit Facility – Barclays $50.0 Million Revolver

 

On June 30, 2015, in connection with the repayment of the Term Loan, the Company voluntarily terminated the Barclays Revolver. There were no borrowings during the time the facility was in place.

 

For the three months ended June 30, 2015, the Company incurred unused line fees of approximately $67,000. For the six months ended June 30, 2015, the Company incurred unused line fees of approximately $82,000. All fees were paid in full as of June 30, 2015 as a condition to closing the Barclays Senior Secured Credit Facilities.

 

As a result of the repayment of the Barclays Senior Secured Credit Facilities described above, liens and other security interest held by the lenders on certain of the Company’s properties and assets were released and the Barclays Credit Agreement was terminated in accordance with its terms on June 30, 2015.

  

Closure of Credit Facility – Wells Fargo $50.0 Million Revolver

 

As of December 31, 2014, the Company was a party to a Credit Agreement, as amended, with Wells Fargo Bank, N.A. as lender and administrative agent (the “Wells Fargo Credit Facility”) which provided the Company with a revolving line of credit in the aggregate principal amount of up to $50.0 million. The Wells Fargo Credit Facility matured in accordance with the terms therein on February 11, 2015 and was not renewed. There were no borrowings under this facility during the time it was available to the Company.

  

New Revolving Credit Facility

 

See “Note 22 – Subsequent Events” for information on the Company’s credit facility with Royal Bank of Canada dated as of August 4, 2015.

 

 

15. ALLIANCE AND COLLABORATION AGREEMENTS

 

The Company has entered into several alliance, collaboration, license and distribution agreements, and similar agreements with respect to certain of its products and services, with unrelated third-party pharmaceutical companies. The consolidated statements of operations include revenue recognized under agreements the Company has entered into to develop marketing and/or distribution relationships with its partners to fully leverage its technology platform and revenue recognized under development agreements which generally obligate the Company to provide research and development services over multiple periods.

 

The Company’s alliance and collaboration agreements often include milestones and provide for milestone payments upon achievement of these milestones. Generally, the milestone events contained in the Company’s alliance and collaboration agreements coincide with the progression of the Company’s products and technologies from pre-commercialization to commercialization.

 

The Company groups pre-commercialization milestones in its alliance and collaboration agreements into clinical and regulatory categories, each of which may include the following types of events:

 

Clinical Milestone Events:

	●	Designation of a development candidate. Following the designation of a development candidate, generally, IND-enabling animal studies for a new development candidate take 12 to 18 months to complete.
	●	Initiation of a Phase I clinical trial. Generally, Phase I clinical trials take one to two years to complete.
	●	Initiation or completion of a Phase II clinical trial. Generally, Phase II clinical trials take one to three years to complete.
	●	Initiation or completion of a Phase III clinical trial. Generally, Phase III clinical trials take two to four years to complete.
	●	Completion of a bioequivalence study. Generally, bioequivalence studies take three months to one year to complete.

  

Regulatory Milestone Events:

	●	Filing or acceptance of regulatory applications for marketing approval such as a New Drug Application in the United States or Marketing Authorization Application in Europe. Generally, it takes six to 12 months to prepare and submit regulatory filings and approximately two months for a regulatory filing to be accepted for substantive review.
	●	Marketing approval in a major market, such as the United States or Europe. Generally it takes one to three years after an application is submitted to obtain approval from the applicable regulatory agency.
	●	Marketing approval in a major market, such as the United States or Europe for a new indication of an already-approved product. Generally it takes one to three years after an application for a new indication is submitted to obtain approval from the applicable regulatory agency.

 

Commercialization milestones in the Company’s alliance and collaboration agreements may include the following types of events:

 

●

First commercial sale in a particular market, such as in the United States or Europe.

 

●

Product sales in excess of a pre-specified threshold, such as annual sales exceeding $100 million. The amount of time to achieve this type of milestone depends on several factors including but not limited to the dollar amount of the threshold, the pricing of the product and the pace at which customers begin using the product.

 

 

 

15. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

 

License and Distribution Agreement with Shire

 

In January 2006, the Company entered into a License and Distribution Agreement with an affiliate of Shire Laboratories, Inc., which was subsequently amended (“Prior Shire Agreement”), under which the Company received a non-exclusive license to market and sell an authorized generic of Shire’s Adderall XR^® product (“AG Product”) subject to certain conditions, but in any event by no later than January 1, 2010. The Company commenced sales of the AG Product in October 2009. On February 7, 2013, the Company entered into an Amended and Restated License and Distribution Agreement with Shire (the “Amended and Restated Shire Agreement”), which amended and restated the Prior Shire Agreement. The Amended and Restated Shire Agreement was entered into by the parties in connection with the settlement of the Company’s litigation with Shire relating to Shire’s supply of the AG Product to the Company under the Prior Shire Agreement. Under the Amended and Restated Shire Agreement Shire was required to supply the AG Product and the Company was responsible for marketing and selling the AG Product subject to the terms and conditions thereof until the earlier of (i) the first commercial sale of the Company’s generic equivalent product to Adderall XR® and (ii) September 30, 2014 (the “Supply Term”), subject to certain continuing obligations of the parties upon expiration or early termination of the Supply Term, including Shire’s obligation to deliver AG Products still owed to the Company as of the end of the Supply Term. The Company is required to pay a profit share to Shire on sales of the AG Product of which the company owed a profit share payable to Shire of $11,339,000 and $10,160,000 on sales of the AG Product during the six month periods ended June 30, 2015 and 2014, respectively, with a corresponding charge included in the cost of revenues line on the consolidated statements of operations. Although the Supply Term expired on September 30, 2014, the Company is permitted to sell any AG Products in its inventory or owed to the Company by Shire under the Amended and Restated Shire Agreement until all such products are sold; the Company will pay a profit share to Shire on sales of such products.

 

Development, Supply and Distribution Agreement with TOLMAR, Inc.

 

In June 2012, the Company entered into the Tolmar Agreement with Tolmar. Under the terms of the Tolmar Agreement, Tolmar granted to the Company an exclusive license to commercialize up to 11 generic topical prescription drug products, including ten currently approved products and one product pending approval at the FDA, in the United States and its territories. Under the terms of the Tolmar Agreement, Tolmar is responsible for developing and manufacturing the products, and the Company is responsible for marketing and sale of the products. The Company is required to pay a profit share to Tolmar on sales of each product commercialized pursuant to the terms of the Tolmar Agreement. The Company paid Tolmar a $21,000,000 upfront payment upon signing of the agreement and a $1,000,000 milestone payment in the year ended December 31, 2012. During the fourth quarter of 2013, the Company made a $12,000,000 payment to Tolmar upon Tolmar’s achievement of a regulatory milestone event in accordance with the terms of the agreement. The upfront payment for the Tolmar product rights has been allocated to the underlying topical products based upon the relative fair value of each product and is being amortized over the remaining estimated useful life of each underlying product, ranging from five to 12 years, starting upon commencement of commercialization activities by the Company during the second half of 2012. The amortization of the Tolmar product rights has been included as a component of cost of revenues on the consolidated statements of operations. The Company initially allocated $1,550,000 of the upfront payment to two products which are still in development and recorded such amount as in-process research and development expense in its results of operations for the year ended December 31, 2012. The Company similarly recorded the $1,000,000 milestone paid in the year ended December 31, 2012 as a research and development expense. The Company is required to pay a profit share to Tolmar on sales of the products, of which the Company owed a profit share payable to Tolmar of $18,125,000 and $6,402,000 on sales of the products during the six month periods ended June 30, 2015 and 2014, respectively, with a corresponding charge included in the cost of revenues line on the consolidated statements of operations. Under the Tolmar Agreement, the Company has the potential to pay up to an aggregate of $5,000,000 in additional contingent milestone payments if certain commercialization events occur.

 

Contingent milestone payments will be initially recognized in the period the triggering event occurs. Milestone payments which are contingent upon commercialization events will be accounted for as an additional cost of acquiring the product license rights. Milestone payments that are contingent upon regulatory approval events will be capitalized and amortized over the remaining estimated useful life of the approved product. During the fourth quarter of 2014, the Company paid a $2.0 million milestone related to the Diclofenac Sodium Gel 3% or Solaraze product to Tolmar pursuant to the Tolmar Agreement. During the quarter ended June 30, 2015, the Company paid a $5.0 million milestone related to certain Topical Products pursuant to the Tolmar Agreement.

 

 

 

The Company entered into a Loan and Security Agreement with Tolmar in March 2012 (the “Tolmar Loan Agreement”), under which the Company has agreed to lend to Tolmar one or more loans through December 31, 2014, in an aggregate amount not to exceed $15,000,000. As of June 30, 2015, Tolmar has borrowed the full amount of $15,000,000 under the Tolmar Loan Agreement. The outstanding principal amount of, including any accrued and unpaid interest on, the loans under the Tolmar Loan Agreement are payable by Tolmar beginning from March 31, 2017 through March 31, 2020 or the maturity date, in accordance with the terms therein. Tolmar may prepay all or any portion of the outstanding balance of the loans prior to the maturity date without penalty or premium.

 

Strategic Alliance Agreement with Teva

 

The Company entered into a Strategic Alliance Agreement with Teva Pharmaceuticals Curacao N.V., a subsidiary of Teva Pharmaceuticals Industries Limited, in June 2001 (“Teva Agreement”). The Teva Agreement commits the Company to develop and manufacture, and Teva to distribute, a specified number of controlled release generic pharmaceutical products (“generic products”), each for a 10-year period.

 

The Company identified the following deliverables under the Teva Agreement: (i) the manufacture and delivery of generic products; (ii) the provision of research and development activities (including regulatory services) related to each product; and (iii) market exclusivity associated with the products.

 

As of June 30, 2015, the Company was supplying Teva with oxybutynin extended release tablets (Ditropan XL® 5, 10 and 15 mg extended release tablets) and has agreed to supply another product (currently under development) to Teva; the other products under the Teva Agreement have either been returned to the Company, are being manufactured by Teva at its election, were voluntarily withdrawn from the market or the Company’s obligations to supply such product had expired or were terminated in accordance with the agreement.

 

OTC Partners Alliance Agreement

 

In June 2002, the Company entered into a Development, License and Supply Agreement with Pfizer, Inc., formerly Wyeth LLC (“Pfizer”), for a term of approximately 15 years, relating to the Company’s Loratadine and Pseudoephedrine Sulfate 5 mg/120 mg 12-hour Extended Release Tablets and Loratadine and Pseudoephedrine Sulfate 10 mg/240 mg 24-hour Extended Release Tablets for the OTC market. The Company previously developed the products, and is currently only responsible for manufacturing the products, and Pfizer is responsible for marketing and sale. The agreement included payments to the Company upon achievement of development milestones, as well as royalties paid to the Company by Pfizer on its sales of the product. Pfizer launched this product in May 2003 as Alavert® D-12 Hour. In February 2005, the agreement was partially cancelled with respect to the 24-hour Extended Release Product due to lower than planned sales volume. In December 2011, Pfizer and the Company entered into an agreement with L. Perrigo Company (“Perrigo”), which was subsequently amended whereby the parties agreed that the Company would supply the Company’s Loratadine and Pseudoephedrine Sulfate 5 mg/120 mg 12-hour Extended Release Tablets to Perrigo in the United States and its territories. The agreements with Pfizer and Perrigo are no longer a core area of the Company’s business, and the over-the-counter pharmaceutical products the Company sells to Pfizer and Perrigo under the agreements are older products which are only sold to Pfizer and to Perrigo. As noted above, the Company is currently only required to manufacture the products under its agreements with Pfizer and Perrigo. The Company recognizes profit share revenue in the period earned.

 

Joint Development Agreement with Valeant Pharmaceuticals International, Inc.

 

In November 2008, the Company and Valeant Pharmaceuticals International, Inc., formerly Medicis Pharmaceutical Corporation (“Valeant”), entered into a Joint Development Agreement and a License and Settlement Agreement (“Joint Development Agreement”).The Joint Development Agreement provides for the Company and Valeant to collaborate in the development of a total of five dermatology products, including four of the Company’s generic products and one branded advanced form of Valeant’s SOLODYN^® product. Under the provisions of the Joint Development Agreement the Company received a $40,000,000 upfront payment, paid by Valeant in December 2008. The Company has also received an aggregate of $15,000,000 in milestone payments composed of two $5,000,000 milestone payments, paid by Valeant in March 2009 and September 2009, a $2,000,000 milestone payment paid by Valeant in December 2009, and a $3,000,000 milestone payment paid by Valeant in March 2011. The Company has the potential to receive up to an additional $8,000,000 of contingent regulatory milestone payments each of which the Company believes to be substantive, as well as the potential to receive royalty payments from sales, if any, by Valeant of its advanced form SOLODYN^® brand product. Finally, to the extent the Company commercializes any of its four generic dermatology products covered by the Joint Development Agreement, the Company will pay to Valeant a gross profit share on sales of such products. The Company began selling one of the four dermatology products during the year ended December 31, 2011. As of December 31, 2014, the full amount of deferred revenue under the Joint Development Agreement was recognized.

   

 

 

Distribution, License, Development and Supply Agreement with AstraZeneca UK Limited

 

In January 2012, the Company entered into the AZ Agreement with AstraZeneca. Under the terms of the AZ Agreement, AstraZeneca granted to the Company an exclusive license to commercialize the tablet, orally disintegrating tablet and nasal spray formulations of Zomig® (zolmitriptan) products for the treatment of migraine headaches in the United States and in certain United States territories, except during an initial transition period when AstraZeneca fulfilled all orders of Zomig® products on the Company’s behalf and AstraZeneca paid to the Company the gross profit on such Zomig® products. The Company is obligated to fulfill certain minimum requirements with respect to the promotion of currently approved Zomig® products as well as other dosage strengths of such products approved by the FDA in the future. The Company may, but has no obligation to, develop and commercialize additional products containing zolmitriptan and additional indications for Zomig®, subject to certain restrictions as set forth in the AZ Agreement. The Company will be responsible for conducting clinical studies and preparing regulatory filings related to the development of any such additional products and would bear all related costs. During the term of the AZ Agreement, AstraZeneca will continue to be the holder of the NDA for existing Zomig® products, as well as any future dosage strengths thereof approved by the FDA, and will be responsible for certain regulatory and quality-related activities for such Zomig® products. AstraZeneca will manufacture and supply Zomig® products to the Company and the Company will purchase its requirements of Zomig® products from AstraZeneca until a date determined in the AZ Agreement. Thereafter, AstraZeneca may terminate its supply obligations upon certain advance notice to the Company, in which case the Company would have the right to manufacture or have manufactured its own requirements for the applicable Zomig® product.

 

Under the terms of the AZ Agreement, AstraZeneca was required to make payments to the Company representing 100% of the gross profit on sales of AstraZeneca-labeled Zomig® products during the specified transition period. The Company received transition payments from AstraZeneca aggregating $43,564,000 during 2012. The Company accounted for these payments as a reduction of the related receivable that was recorded in the initial purchase price allocation. The Company allocated $45,096,000 to an intangible asset, and the remaining $41,340,000 to prepaid royalty expense related to sales of Impax-labeled Zomig® products during 2012, with such royalty expense included in cost of revenues on the consolidated statements of operations. Beginning in January 2013, the Company was obligated to pay AstraZeneca tiered royalties on net sales of branded Zomig® products, depending on brand exclusivity and subject to customary reductions and other terms and conditions set forth in the AZ Agreement. The Company is also obligated to pay AstraZeneca royalties after a certain specified date based on gross profit from sales of authorized generic versions of the Zomig® products subject to certain terms and conditions set forth in the AZ Agreement. In May 2013, the Company’s exclusivity period for branded Zomig® tablets and orally disintegrating tablets expired and the Company launched authorized generic versions of those products in the United States. The Company owed a royalty payable to AstraZeneca of $7,851,000 and $6,420,000 during the six month periods ended June 30, 2015 and 2014, respectively, with a corresponding charge included in the cost of revenues line on the consolidated statements of operations.

 

 

 

15. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

 

Development and Co-Promotion Agreement with Endo Pharmaceuticals, Inc.

 

In June 2010, the Company and Endo Pharmaceuticals, Inc. ("Endo") entered into a Development and Co-Promotion Agreement (“Endo Agreement”) under which the Company and Endo have agreed to collaborate in the development and commercialization of a next-generation advanced form of the Company’s lead brand product candidate ("Endo Agreement Product"). Under the provisions of the Endo Agreement, in June 2010, Endo paid to the Company a $10,000,000 upfront payment. The Company has the potential to receive up to an additional $30,000,000 of contingent milestone payments, which includes $15,000,000 contingent upon the achievement of clinical events, $5,000,000 contingent upon the achievement of regulatory events, and $10,000,000 contingent upon the achievement of commercialization events. The Company believes all milestones under the Endo Agreement are substantive. Upon commercialization of the Endo Agreement Product in the United States, Endo will have the right to co-promote such product to non-neurologists, which will require the Company to pay Endo a co-promotion service fee of up to 100% of the gross profits attributable to prescriptions for the Endo Agreement Product which are written by the non-neurologists.

 

The Company is recognizing the $10,000,000 upfront payment as revenue on a straight-line basis over a period of 112 months, which is the estimated expected period of performance of research and development activities under the Endo Agreement, commencing with the June 2010 effective date of the Endo Agreement and ending in September 2019, the estimated date of FDA approval of the Company's NDA. The FDA approval of the Endo Agreement Product NDA represents the end of the Company’s expected period of performance, as the Company will have no further contractual obligation to perform research and development activities under the Endo Agreement, and therefore the earnings process will be completed. Deferred revenue is recorded as a liability captioned “Deferred revenue” on the consolidated balance sheet and deferred revenue under the Endo Agreement was $3,856,000 as of June 30, 2015. Revenue recognized under the Endo Agreement is reported in the line item “Other Revenues” in “Note 21 - Supplementary Financial Information.” The Company determined the straight-line method aligns revenue recognition with performance as the level of research and development activities performed under the Endo Agreement are expected to be performed on a ratable basis over the Company’s estimated expected period of performance. Upon FDA approval of the Company’s Endo Agreement Product NDA, the Company will have the right (but not the obligation) to begin manufacture and sale of such product. The Company will sell its manufactured branded product to customers in the ordinary course of business through Impax Specialty Pharma. The Company will account for any sale of the product covered by the Endo Agreement as current period revenue. The co-promotion service fee paid to Endo, as described above, if any, will be accounted for as a current period selling expense as incurred.

 

The Company and Endo also entered into a Settlement and License Agreement in June 2010 (the “Endo Settlement Agreement”) pursuant to which Endo agreed to make a payment to the Company should prescription sales of Opana® ER (as defined in the Endo Settlement Agreement) fall below a predetermined contractual threshold in the quarter immediately prior to the Company launching a generic version of Opana® ER.

 

Agreement with DURECT Corporation

 

During the three month period ended March 31, 2014, the Company entered into an agreement with DURECT Corporation (“Durect”) granting the Company the exclusive worldwide rights to develop and commercialize DURECT’s investigational transdermal bupivacaine patch for the treatment of pain associated with post-herpetic neuralgia (PHN), referred to by the Company as IPX239. The Company paid Durect a $2,000,000 up-front payment upon signing of the agreement which was recognized immediately as research and development expense. The Company has the potential to pay up to $61,000,000 in additional contingent milestone payments upon the achievement of predefined development and commercialization milestones. If IPX239 is commercialized, Durect would also receive a tiered royalty on product sales.

   

Product Acquisition Agreement with Teva Pharmaceuticals USA, Inc.

 

In August 2013, the Company, through its Amedra Pharmaceuticals subsidiary, entered into a product acquisition agreement (the “Teva Product Acquisition Agreement”) with Teva Pharmaceuticals USA, Inc. (“Teva”) pursuant to which the Company acquired the assets (including the ANDA and other regulatory materials) and related liabilities related to Teva’s mebendazole tablet product in all dosage forms (the “Mebendazole Tablet”). The Company has the potential to pay up to $3,500,000 in additional contingent milestone payments upon the achievement of predefined regulatory and commercialization milestones. The Company is also obligated to pay Teva a royalty payment based on net sales of the Mebendazole Tablet, including a specified annual minimum royalty payment, subject to customary reductions and the other terms and conditions set forth in the Teva Product Acquisition Agreement.

 

 

 

Master Development Agreement with RiconPharma LLC

 

In June 2013, the Company, through its Amedra Pharmaceuticals subsidiary, entered into a development agreement (the “Albendazole Agreement”) with RiconPharma LLC (“RiconPharma”). Under the terms of the Albendazole Agreement, RiconPharma is responsible for the development of Albendazole 400 mg tablets (the “Albendazole Tablet”) and the Company is responsible for the marketing and sale of the Albendazole Tablets. The Company made an incentive cash payment of $225,000 to RiconPharma during the fourth quarter of 2014 upon the achievement of a specified development milestone. The Company is also obligated to pay RiconPharma tiered royalty payments based on net sales of the Albendazole Tablet, subject to customary reductions and the other terms and conditions set forth in the agreement.

 

Master Development Agreement with RiconPharma LLC

 

In May 2011, the Company, through its CorePharma subsidiary, entered into an amended and restated master development Agreement with RiconPharma LLC (the “Amended and Restated Development Agreement”) which amended and restated the development agreement between the parties dated September 21, 2009, as amended. Under the Amended and Restated Development Agreement, RiconPharma is responsible for exclusively developing and manufacturing, on a non-exclusive basis, for the Company and the Company is responsible for commercializing Griseofulvin Ultra-microcrystalline 125 mg and 250 mg tablets. The Company has the potential to pay up to $500,000 in contingent milestone payments upon the achievement of certain specified commercialization milestones for each product, as specified in the agreement. The Company is also obligated to pay RiconPharma tiered profit share payments based on net sales of the products, subject to customary reductions and the other terms and conditions set forth in the agreement.

 

Product Agreement with Pfizer Inc.

 

In January 2008, the Company, through its CorePharma subsidiary, entered into a Product Agreement (the “Pfizer Product Agreement”) with Pfizer, formerly King Pharmaceuticals, Inc. (“Pfizer”), under which the Company received the non-exclusive right to manufacture, market and sell an authorized generic of Pfizer’s Skelaxin® 800 mg product (the “Pfizer AG Product”). The Company is obligated to pay Pfizer a distribution fee based on net sales of the Pfizer AG Product, subject to terms and conditions set forth in the Pfizer Product Agreement. Pursuant to a Manufacturing and Supply Agreement dated as of August 29, 2013 with Pfizer, the Company is also obligated to manufacture and supply the branded Skelaxin® 800 mg product to Pfizer in accordance with the terms of such agreement.

 

License, Supply and Distribution Agreement with Micro Labs Limited

 

In June 2012, the Company, through its CorePharma subsidiary, entered into a License, Supply and Distribution Agreement (“Micro Labs Agreement”) with Micro Labs Limited (“Micro Labs”), under which the Company received an exclusive license to commercialize and distribute a generic equivalent of Arthrotec® tablets (the “Diclofenac Sodium and Misoprostol Product”) in the U.S. and its possessions and territories, and Micro Labs agreed to exclusively supply such the Diclofenac Sodium and Misoprostol Product to the Company for the U.S. and its possessions and territories, in each case subject to the terms and conditions in the agreement. The Company has the potential to pay up to $750,000 in contingent milestone payments upon the achievement of predefined development milestones. The Company is also obligated to pay Micro Labs a profit share based on net sales of the Diclofenac Sodium and Misoprostol Product, subject to the terms and conditions set forth in the agreement.

 

 

 

16. SHARE-BASED COMPENSATION

 

The Company recognizes the grant date fair value of each stock option and restricted stock award over its vesting period. Stock options and restricted stock awards are granted under the Company’s Second Amended and Restated 2002 Equity Incentive Plan (“2002 Plan”) and generally vest over a three or four year period and have a term of ten years. Total share-based compensation expense recognized in the consolidated statements of operations during the three and six month periods ended June 30, 2015 and 2014 was as follows:  

 

		Three Months Ended June 30,								Six Months Ended June 30,
(in $000’s)		2015				2014				2015				2014
Manufacturing expenses		$	1,192			$	597			$	2,238			$	1,492
Research and development			1,367				1,379				2,732				2,781
Selling, general and administrative			4,512				3,158				8,589				5,247
Total		$	7,071			$	5,134			$	13,559			$	9,520

 

The following table summarizes stock option activity during the six month period ended June 30, 2015:  

 

		Number of Shares Under Option				Weighted Average Exercise Price per Share
Outstanding at December 31, 2014			3,042,180			$	12.89
Options granted			398,850			$	41.32
Options exercised			(375,508	)		$	12.51
Options forfeited			---			$	---
Outstanding at June 30, 2015			3,065,522			$	18.52
Options exercisable at June 30, 2015			2,281,325			$	13.79

  

The Company estimated the fair value of each stock option award on the grant date using the Black-Scholes option pricing model. Expected volatility is based solely on historical volatility of the Company’s common stock. The expected term calculation is based on the “simplified” method described in SAB No. 107, Share-Based Payment and SAB No. 110, Share-Based Payment, as the result of the simplified method provides a reasonable estimate in comparison to the Company’s actual experience. The risk-free interest rate is based on the U.S. Treasury yield at the date of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The dividend yield of zero is based on the fact that the Company has never paid cash dividends on its common stock, and has no present intention to pay cash dividends.

 

A summary of the Company’s non-vested restricted stock awards activity during the six month period ended June 30, 2015 is presented below:  

 

Restricted Stock Awards		Number of Restricted Stock Awards				Weighted Average Grant Date Fair Value
Non-vested at December 31, 2014			2,327,176			$	23.61
Granted			405,885			$	42.80
Vested			(367,799	)		$	21.93
Forfeited			(82,010	)		$	26.96
Non-vested at June 30, 2015			2,283,252			$	27.16

 

The Company grants restricted stock awards to certain eligible employees and directors as a component of its long-term incentive compensation program. The restricted stock award grants are made in accordance with the Company’s 2002 Plan, and typically specify that the shares of common stock underlying the restricted stock awards are not issued until they vest. The restricted stock awards generally vest ratably over a three or four year period from the date of grant.  

 

 

 

As of June 30, 2015, the Company had total unrecognized share-based compensation expense, net of estimated forfeitures, of $58,299,000 related to all of its share-based awards, which will be recognized over a weighted-average period of 2.09 years. As of June 30, 2015, the Company estimated 2,713,885 stock options and 2,021,347 shares of restricted stock awards granted to employees which were vested or expected to vest. The intrinsic value of stock options exercised during the six month periods ended June 30, 2015 and 2014 was $9,644,403 and $5,005,000, respectively. The total fair value of restricted stock awards which vested during the six month periods ended June 30, 2015 and 2014 was $8,065,020 and $3,865,000, respectively. As of June 30, 2015, the Company had 2,127,879 shares of common stock available for issuance of stock options, restricted stock awards, and/or stock appreciation rights.

  

  

 

17. STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

Pursuant to its Restated Certificate of Incorporation (the “Certificate of Incorporation”), the Company is authorized to issue 2,000,000 shares of “blank check” preferred stock, $0.01 par value per share, which enables the Board of Directors, from time to time, to create one or more new series of preferred stock. Each series of preferred stock issued can have the rights, preferences, privileges and restrictions designated by the Board of Directors. The issuance of any new series of preferred stock could affect, among other things, the dividend, voting, and liquidation rights of the Company’s common stock. The Company had no preferred stock issued or outstanding as of June 30, 2015.

 

Common Stock

 

Pursuant to its Certificate of Incorporation, the Company is authorized to issue 90,000,000 shares of common stock, $0.01 par value per share, of which 72,031,480 shares have been issued and 71,787,751 are outstanding as of June 30, 2015. In addition, the Company has reserved for issuance the following amounts of shares of its common stock for the purposes described below as of June 30, 2015:

 

(amount in millions)
Non-vested restricted stock grants(1)			2.28
Stock options outstanding(1)			3.07
Warrants outstanding (see below)			9.47
Total common shares reserved for issuance			14.82

 

(1)

See “Note 16 – Share-based Compensation.”

 

As of the June 30, 2015 issuance date of the Notes described in “Note 14 – Debt”, the Company did not have the necessary number of authorized but unissued shares of its common stock required to settle the conversion option of the Notes in shares of the Company’s common stock. Until the Company’s stockholders approve a sufficient increase in the authorized share count, the Company is required to settle the principal amount and conversion spread of the Notes in cash. The Notes are initially convertible into 9,471,480 shares of the Company’s common stock, based on an initial conversion price of $63.35 per share.

 

Warrants

 

As discussed in “Note 14 – Debt”, on June 30, 2015, the Company entered into a series of Note Hedge Transactions and Warrant Transactions with a financial institution which are designed to reduce the potential dilution to the Company’s stockholders and/or offset the cash payments the Company is required to make in excess of the principal amount upon conversion of the Notes. Pursuant to the Warrant Transactions, the Company sold to a financial institution approximately 9.47 million warrants to purchase the Company’s common stock, for which it received proceeds of approximately $88.3 million. The warrants have an exercise price of $81.277 per share (subject to adjustment), are immediately exercisable, and have an expiration date of September 15, 2022.

 

 

 

18. EARNINGS PER SHARE

 

The Company's earnings per share (EPS) includes basic net income per share, computed by dividing net (loss) income (as presented on the consolidated statements of operations), by the weighted average number of shares of common stock outstanding for the period, along with diluted net (loss) income per share, computed by dividing net income by the weighted average number of shares of common stock adjusted for the dilutive effect of common stock equivalents outstanding during the period. A reconciliation of basic and diluted net income per share of common stock for the three and six month periods ended June 30, 2015 and 2014 was as follows:  

 

		Three Months Ended June 30,								Six Months Ended June 30,
(in $000’s except share and per share amounts)		2015				2014				2015				2014
Numerator:
Net (loss) income		$	(1,852	)		$	35,071			$	(8,185	)		$	41,496
Denominator:
Weighted average common shares outstanding			69,338,789				68,095,159				69,154,357				67,899,894
Effect of dilutive stock options and restricted stock awards			---				2,218,332				---				2,295,435
Diluted weighted average common shares outstanding			69,338,789				70,313,491				69,154,357				70,195,329
Basic net (loss) income per share		$	(0.03	)		$	0.52			$	(0.12	)		$	0.61
Diluted net (loss) income per share		$	(0.03	)		$	0.50			$	(0.12	)		$	0.59

 

  

For the three and six month periods ended June 30, 2015, the Company had a net loss. Only the weighted average of common shares outstanding has been used to calculate both basic earnings per share and diluted earnings per share for the three and six month periods ended June 30, 2015, as inclusion of the potential common shares would have been anti-dilutive. Shares issuable which could potentially dilute future period earnings include 3.1 million stock options outstanding, 2.3 million non-vested restricted stock awards, 9.5 million shares issuable upon conversion of the Notes described in “Note 14 – Debt” and 9.5 million warrants.

 

For the three and six month periods ended June 30, 2014, the Company excluded 909,100 and 921,100, respectively, of shares issuable upon the exercise of stock options and unvested restricted stock awards from the computation of diluted net income per common share as the effect of these options and unvested restricted stock awards would have been anti-dilutive. Quarterly computations of net income (loss) per share amounts are made independently for each quarterly reporting period, and the sum of the per share amounts for the quarterly reporting periods may not equal the per share amounts for the year-to-date reporting period.   

 

 

19. SEGMENT INFORMATION

 

The Company has two reportable segments, Impax Generics and Impax Specialty Pharma. Impax Generics develops, manufactures, sells, and distributes generic pharmaceutical products, primarily through the following sales channels: the Impax Generics sales channel for sales of generic prescription products directly to wholesalers, large retail drug chains, and others; the Private Label Product sales channel for generic over-the-counter and prescription products sold to unrelated third-party customers who, in turn, sell the products under their own label; the Rx Partner sales channel for generic prescription products sold through unrelated third-party pharmaceutical entities under their own label pursuant to alliance agreements; and the OTC Partner sales channel for over-the-counter products sold through unrelated third-party pharmaceutical entities under their own labels pursuant to alliance and supply agreements. Revenues from the “Impax Generics” sales channel and the “Private Label” sales channel are reported under the caption “Impax Generics sales, net” in “Note 21 – Supplementary Financial Information.” The Company also generates revenue in Impax Generics from research and development services provided under a joint development agreement with another unrelated third-party pharmaceutical company, and reports such revenue under the caption “Other Revenues” revenue in “Note 21 – Supplementary Financial Information.” Revenues from the “OTC Partner” sales channel are also reported under the caption “Other Revenues” in “Note 21 – Supplementary Financial Information.”

  

Impax Specialty Pharma is engaged in the development of proprietary brand pharmaceutical products that the Company believes represent improvements to already-approved pharmaceutical products addressing central nervous system (“CNS”) disorders and other select specialty segments. Impax Specialty Pharma currently has one internally developed branded pharmaceutical product, RYTARY® (IPX066), an extended release oral capsule formulation of carbidopa-levodopa for the treatment of Parkinson’s disease, post-encephalitic parkinsonism, and parkinsonism that may follow carbon monoxide intoxication and/or manganese intoxication, which was approved by the FDA on January 7, 2015. The Company has also filed the required documents for a Market Authorization Application to the European Medicines Agency (EMA) for IPX066 on November 5, 2014 and the filing was accepted by the EMA on November 26, 2014. Impax Specialty Pharma is also engaged in the sale and distribution of four other branded products including Zomig® (zolmitriptan) products, indicated for the treatment of migraine headaches, under the terms of a Distribution, License, Development and Supply Agreement (“AZ Agreement”) with AstraZeneca UK Limited (“AstraZeneca”) in the United States and in certain U.S. territories, and Albenza®, indicated for the treatment of tapeworm infections. Revenues from Impax-labeled branded products are reported under the caption “Impax Specialty Pharma sales, net” in “Note 21 – Supplementary Financial Information.” Finally, the Company generates revenue in Impax Specialty Pharma from research and development services provided under a development and license agreement with another unrelated third-party pharmaceutical company, and reports such revenue under the caption “Other Revenues” in “Note 21 – Supplementary Financial Information.” Impax Specialty Pharma also has a number of product candidates that are in varying stages of development. Revenues from Impax-labeled branded products are reported under the caption “Impax Specialty Pharma sales, net” in “Note 21 – Supplementary Financial Information.” Finally, the Company generates revenue in Impax Specialty Pharma from research and development services provided under a development and license agreement with another unrelated third-party pharmaceutical company, and reports such revenue under the caption “Other Revenues” in “Note 21 – Supplementary Financial Information.” Impax Specialty Pharma also has a number of product candidates that are in varying stages of development.

 

The Company’s chief operating decision maker evaluates the financial performance of the Company’s segments based upon segment income (loss) before income taxes. Items below income (loss) from operations are not reported by segment, since they are excluded from the measure of segment profitability reviewed by the Company’s chief operating decision maker. Additionally, general and administrative expenses, certain selling expenses, certain litigation settlements, and non-operating income and expenses are included in “Corporate and Other.” The Company does not report balance sheet information by segment since it is not reviewed by the Company’s chief operating decision maker. The accounting policies for the Company’s segments are the same as those described above in the discussion of "Revenue Recognition" and in the “Summary of Significant Accounting Policies” in the Company's Form 10-K for the year ended December 31, 2014. The Company has no inter-segment revenue.  

 

 

 

19. SEGMENT INFORMATION (continued)

 

The tables below present segment information reconciled to total Company consolidated financial results, with segment operating income or loss including gross profit less direct research and development expenses and direct selling expenses as well as any litigation settlements, to the extent specifically identified by segment:  

 

(in $000’s) Three Months Ended June 30, 2015		Impax Generics				Impax Specialty Pharma				Corporate and Other				Total Company
Revenues, net		$	174,679			$	39,503			$	---			$	214,182
Cost of revenues			110,767				18,564				---				129,331
Research and development			12,891				4,104				---				16,995
Patent litigation expense			1,332				162				---				1,494
Selling, general and administrative			7,284				12,912				28,113				48,309
Income (loss) before provision for income taxes		$	42,405			$	3,761			$	(50,714	)		$	(4,548	)

 

(in $000’s) Three Months Ended June 30, 2014		Impax Generics				Impax Specialty Pharma				Corporate and Other				Total Company
Revenues, net		$	176,394			$	11,727			$	---			$	188,121
Cost of revenues			69,872				8,477				---				78,349
Research and development			10,745				10,507				---				21,252
Patent litigation expense			1,767				---				---				1,767
Selling, general and administrative			4,572				11,734				16,511				32,817
Income (loss) before provision for income taxes		$	89,438			$	(18,991	)		$	(16,022	)		$	54,425

 

(in $000’s) Six Months Ended June 30, 2015		Impax Generics				Impax Specialty Pharma				Corporate and Other				Total Company
Revenues, net		$	303,420			$	53,858			$	---			$	357,278
Cost of revenues			186,880				26,313				---				213,193
Research and development			23,754				8,203				---				31,957
Patent litigation expense			2,110				344				---				2,454
Selling, general and administrative			11,570				27,768				59,131				98,469
Income (loss) before provision for income taxes		$	79,106			$	(8,770	)		$	(85,589	)		$	(15,253	)

 

(in $000’s) Six Months Ended June 30, 2014		Impax Generics				Impax Specialty Pharma				Corporate and Other				Total Company
Revenues, net		$	285,534			$	21,305			$	---			$	306,839
Cost of revenues			126,894				12,551				---				139,445
Research and development			21,962				21,031				---				42,993
Patent litigation expense			3,940				---				---				3,940
Selling, general and administrative			6,955				20,955				30,384				58,294
Income (loss) before provision for income taxes		$	125,783			$	(33,232	)		$	(29,496	)		$	63,055

 

 

Foreign Operations

 

The Company’s wholly owned subsidiary, Impax Laboratories (Taiwan) Inc., is constructing a manufacturing facility in Jhunan, Taiwan R.O.C. which is utilized for manufacturing, research and development, warehouse, and administrative functions, with approximately $135,986,000 of net carrying value of assets, composed principally of a building and equipment, included in the Company's consolidated balance sheet at June 30, 2015.  

 

 

 

20. LEGAL AND REGULATORY MATTERS

 

Patent Litigation

 

There is substantial litigation in the pharmaceutical, biological, and biotechnology industries with respect to the manufacture, use, and sale of new products which are the subject of conflicting patent and intellectual property claims. One or more patents typically cover most of the brand name controlled release products for which the Company is developing generic versions.

 

Under federal law, when a drug developer files an ANDA for a generic drug seeking approval before expiration of a patent, which has been listed with the FDA as covering the brand name product, the developer must certify its product will not infringe the listed patent(s) and/or the listed patent is invalid or unenforceable (commonly referred to as a “Paragraph IV” certification). Notices of such certification must be provided to the patent holder, who may file a suit for patent infringement within 45 days of the patent holder’s receipt of such notice. If the patent holder files suit within the 45 day period, the FDA can review and approve the ANDA, but is prevented from granting final marketing approval of the product until a final judgment in the action has been rendered in favor of the generic drug developer, or 30 months from the date the notice was received, whichever is sooner. Lawsuits have been filed against the Company in connection with the Company’s Paragraph IV certifications seeking an order delaying the approval of the Company’s ANDA until expiration of the patent(s) at issue in the litigation.

 

Should a patent holder commence a lawsuit with respect to an alleged patent infringement by the Company, the uncertainties inherent in patent litigation make the outcome of such litigation difficult to predict. The delay in obtaining FDA approval to market the Company’s product candidates as a result of litigation, as well as the expense of such litigation, whether or not the Company is ultimately successful, could have a material adverse effect on the Company’s results of operations and financial position. In addition, there can be no assurance that any patent litigation will be resolved prior to the end of the 30-month period. As a result, even if the FDA were to approve a product upon expiration of the 30-month period, the Company may elect to not commence marketing the product if patent litigation is still pending.

 

The Company is generally responsible for all of the patent litigation fees and costs associated with current and future products not covered by its alliance and collaboration agreements. The Company has agreed to share legal expenses with respect to third-party and Company products under the terms of certain of the alliance and collaboration agreements. The Company records the costs of patent litigation as expense in the period when incurred for products it has developed, as well as for products which are the subject of an alliance or collaboration agreement with a third-party.

 

Although the outcome and costs of the asserted and unasserted claims is difficult to predict, the Company does not expect the ultimate liability, if any, for such matters to have a material adverse effect on its financial condition, results of operations, or cash flows.  

 

  

 

20. LEGAL AND REGULATORY MATTERS (continued)

 

Patent Infringement Litigation

  

Endo Pharmaceuticals Inc. and Grunenthal GmbH v. Impax Laboratories, Inc. and ThoRx Laboratories, Inc. (Oxymorphone hydrochloride); Endo Pharmaceuticals Inc. and Grunenthal GmbH v. Impax Laboratories, Inc. (Oxymorphone hydrochloride)

 

In November 2012, Endo Pharmaceuticals, Inc. and Grunenthal GmbH (collectively, “Endo”) filed suit against ThoRx Laboratories, Inc., a wholly owned subsidiary of the Company (“ThoRx”), and the Company in the U.S. District Court for the Southern District of New York alleging patent infringement based on the filing of ThoRx’s ANDA relating to Oxymorphone hydrochloride, Extended Release tablets, 5, 7.5, 10, 15, 20, 30 and 40 mg, generic to Opana ER®. In January 2013, Endo filed a separate suit against the Company in the U.S. District Court for the Southern District of New York alleging patent infringement based on the filing of the Company’s ANDA relating to the same products. ThoRx and the Company filed an answer and counterclaims to the November 2012 suit and the Company filed an answer and counterclaims with respect to the January 2013 suit. A bench trial was completed in April 2015. No decision has been received. In November 2014, Endo Pharmaceuticals Inc. and Mallinckrodt LLC filed suit against the Company in the U.S. District Court for the District of Delaware making additional allegations of patent infringement based on the filing of the Company’s Oxymorphone hydrochloride ANDA described above. Also in November 2014, Endo and Mallinckrodt filed a separate suit in the U.S. District Court for the District of Delaware making additional allegations of patent infringement based on the filing of the ThoRx Oxymorphone hydrochloride ANDA described above. ThoRx and the Company filed an answer and counterclaim to those suits in which they are named as a defendant. The cases are currently pending.

 

UCB Inc., et al. v. CorePharma LLC (Methylphenidate)

 

In March 2014, UCB Inc. and UCB Manufacturing (collectively, “UCB”) filed suit against CorePharma LLC, a wholly-owned subsidiary of the Company, in the United States District Court for the District of New Jersey alleging patent infringement based on the filing of CorePharma’s ANDA relating to methylphenidate hydrochloride extended-release capsules, 10 mg, 20 mg, 30 mg, 40 mg, 50 mg and 60 mg, generic to Metadate CD®. On May 27, 2014, CorePharma filed an answer and counterclaims. Discovery is proceeding. A trial date has not been set.

 

Impax Laboratories Inc., et al. v. Lannett Holdings, Inc. and Lannett Company (Zomig®)

 

In July 2014, the Company filed suit against Lannett Holdings, Inc. and Lannett Company (collectively, “Lannett”) in the United States District Court for the District of Delaware, alleging patent infringement based on the filing of the Lannett ANDA relating to Zolmitriptan Nasal Spray, 5mg, generic to Zomig® Nasal Spray. Lannett filed an answer and counterclaims alleging non-infringement and invalidity in September 2014, and the Company filed an answer to the counterclaims in October 2014. Discovery is proceeding, and trial is set for September 6, 2016. On July 28, 2015, Lannett filed a petition for Inter Partes Review of U.S. Patent Nos. 6,750,237 and 7,220,767 related to the product in the U.S. Patent and Trademark Office before the Patent Trial and Appeal Board.

 

Shire LLC v. CorePharma LLC (Mixed Amphetamines)

 

In September 2014, Shire LLC (“Shire”) filed suit against CorePharma LLC, a wholly-owned subsidiary of the Company, in the United States District Court for the District of New Jersey alleging patent infringement based on the filing of CorePharma’s ANDA relating to dextroamphetamine sulfate, dextroamphetamine saccharate, amphetamine aspartate monohydrate, amphetamine sulfate extended-release capsules, 5 mg, 10 mg, 15 mg, 20 mg, 25 mg and 30 mg, generic to Adderall XR®. On November 14, 2014, CorePharma filed an answer and counterclaims. Discovery is proceeding. A trial date has not been set.

 

 

 

Other Litigation Related to the Company’s Business

 

Civil Investigative Demand from the FTC (Minocycline Hydrochloride)

 

On May 2, 2012, the Company received a Civil Investigative Demand (“CID”) from the United States Federal Trade Commission (“FTC”) concerning its investigation into the drug SOLODYN® and its generic equivalents. According to the FTC, the investigation relates to whether Medicis Pharmaceutical Corporation, now a wholly owned subsidiary of Valeant Pharmaceuticals International, Inc. (“Medicis”), the Company, and six other companies have engaged or are engaged in unfair methods of competition in or affecting commerce by (i) entering into agreements regarding SOLODYN® or its generic equivalents and/or (ii) engaging in other conduct regarding the sale or marketing of SOLODYN® or its generic equivalents. The Company is cooperating with the FTC in producing documents, information and witnesses in response to the investigation. To the knowledge of the Company, no FTC proceedings have been initiated against the Company to date, however no assurance can be given as to the timing or outcome of this investigation.  

 

Solodyn® Antitrust Class Actions

 

From July 2013 to April 2015, 15 class action complaints were filed against manufacturers of the brand drug Solodyn® and its generic equivalents, including the Company.

 

On July 22, 2013, Plaintiff United Food and Commercial Workers Local 1776 & Participating Employers Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

 

On July 23, 2013, Plaintiff Rochester Drug Co-Operative, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

   

On August 1, 2013, Plaintiff International Union of Operating Engineers Local 132 Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of California on behalf of itself and others similarly situated. On August 29, 2013, this Plaintiff withdrew its complaint from the United States District Court for the Northern District of California, and on August 30, 2013, re-filed the same complaint in the United States Court for the Eastern District of Pennsylvania, on behalf of itself and others similarly situated.

 

On August 9, 2013, Plaintiff Local 274 Health & Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

 

On August 12, 2013, Plaintiff Sheet Metal Workers Local No. 25 Health & Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

 

On August 27, 2013, Plaintiff Fraternal Order of Police, Fort Lauderdale Lodge 31, Insurance Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

 

On August 29, 2013, Plaintiff Heather Morgan, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

 

 

  

20. LEGAL AND REGULATORY MATTERS (continued)

 

On August 30, 2013, Plaintiff Plumbers & Pipefitters Local 178 Health & Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

 

On September 9, 2013, Plaintiff Ahold USA, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated.

 

On September 24, 2013, Plaintiff City of Providence, Rhode Island, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Arizona on behalf of itself and others similarly situated.

 

On October 2, 2013, Plaintiff International Union of Operating Engineers Stationary Engineers Local 39 Health & Welfare Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated.

 

On October 7, 2013, Painters District Council No. 30 Health and Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated.

 

On October 25, 2013, Plaintiff Man-U Service Contract Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated. 

 

On March 13, 2014, Plaintiff Allied Services Division Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated.

 

On March 19, 2014, Plaintiff NECA-IBEW Welfare Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the District of Massachusetts on behalf of itself and others similarly situated.

 

 On February 25, 2014, the United States Judicial Panel on Multidistrict Litigation ordered the pending actions transferred to the District of Massachusetts for coordinated pretrial proceedings, as In Re Solodyn (Minocycline Hydrochloride) Antitrust Litigation.

 

On March 26, 2015, Walgreen Co., The Kruger Co., Safeway Inc., HEB Grocery Company L.P., Albertson’s LLC, direct purchasers, filed a separate complaint in the United States District Court for the Middle District of Pennsylvania. On April 8, 2015, the Judicial Panel on Multi-District Litigation ordered the action be transferred to the District of Massachusetts, to be coordinated or consolidated with the coordinated proceedings.

 

On April 16, 2015, Rite Aid Corporation and Rite Aid Hdqtrs. Corp, direct purchasers, filed a separate complaint in the United States District Court for the Middle District of Pennsylvania. On May 1, 2015, the Judicial Panel on Multi-District Litigation ordered the action be transferred to the District of Massachusetts, to be coordinated or consolidated with the coordinated proceedings.

 

The consolidated amended complaints allege that Medicis engaged in anticompetitive schemes by, among other things, filing frivolous patent litigation lawsuits, submitting frivolous Citizen Petitions, and entering into anticompetitive settlement agreements with several generic manufacturers, including the Company, to delay generic competition of Solodyn® and in violation of state and federal antitrust laws. Plaintiffs seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. Oral argument on defendants’ motion to dismiss the consolidated amended complaints took place on March 12, 2015, and the motion remains under submission.

 

Civil Investigative Demand from the FTC (Oxymorphone Hydrochloride)

 

On February 25, 2014, the Company received a CID from the FTC concerning its investigation into the drug Opana® ER and its generic equivalents. According to the FTC, the investigation relates to whether Endo Pharmaceuticals, Inc. (“Endo”), the Company have engaged or are engaged in unfair methods of competition in or affecting commerce by (i) entering into agreements regarding Opana® ER or its generic equivalents and/or (ii) engaging in other conduct regarding the regulatory filings, sale or marketing of Opana® ER or its generic equivalents. The Company is cooperating with the FTC in producing documents, information and witnesses in response to the CID. To the knowledge of the Company, no proceedings by the FTC have been initiated against the Company at this time, however no assurance can be given as to the timing or outcome of this investigation.

 

 

 

Opana ER® Antitrust Class Actions

 

From June 2014 to April 2015, 14 class action complaints were filed against the manufacturer of the brand drug Opana ER® and the Company.

 

On June 4, 2014, Plaintiff Fraternal Order of Police, Miami Lodge 20, Insurance Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

 

On June 4, 2014, Plaintiff Rochester Drug Co-Operative, Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

 

On June 6, 2014, Plaintiff Value Drug Company, a direct purchaser, filed a class action complaint in the United States District Court for the Northern District of California on behalf of itself and others similarly situated. On June 26, 2014, this Plaintiff withdrew its complaint from the United States District Court for the Northern District of California, and on July 16, 2014, re-filed the same complaint in the United States District Court for the Northern District of Illinois, on behalf of itself and others similarly situated.

 

On June 19, 2014, Plaintiff Wisconsin Masons’ Health Care Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated.

 

On July 17, 2014, Plaintiff Massachusetts Bricklayers, an indirect purchaser, filed a class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of itself and others similarly situated.

 

On August 11, 2014, Plaintiff Pennsylvania Employees Benefit Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated.

 

On September 19, 2014, Plaintiff Meijer Inc., a direct purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated.

 

On October 3, 2014, Plaintiff International Union of Operating Engineers, Local 138 Welfare Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated.

 

On November 17, 2014, Louisiana Health Service & Indemnity Company d/b/a Blue Cross and Blue Shield of Louisiana, an indirect purchaser, filed a class action complaint in the United Stated District Court for the Middle District of Louisiana on behalf of itself and others similarly situated.

 

On December 19, 2014, Plaintiff Kim Mahaffay, an indirect purchaser, filed a class action complaint in the Superior Court of the State of California, Alameda County, on behalf of herself and others similarly situated. On January 27, 2015, the Defendants removed the action to the United States District Court for the Northern District of California.

 

On January 12, 2015, Plaintiff Plumbers & Pipefitters Local 178 Health & Welfare Trust Fund, an indirect purchaser, filed a class action complaint in the United States District Court for the Northern District of Illinois on behalf of itself and others similarly situated.

 

 On December 12, 2014, the United States Judicial Panel on Multidistrict Litigation ordered the pending actions transferred to the Northern District of Illinois for coordinated pretrial proceedings, as In Re Opana ER Antitrust Litigation.

 

On March 26, 2015 Walgreen Co., The Kruger Co., Safeway Inc., HEB Grocery Company L.P., Albertson’s LLC, direct purchasers, filed a separate complaint in the United States District Court for the Northern District of Illinois.

 

 

 

On April 23, 2015, Rite Aid Corporation and Rite Aid Hdqtrs. Corp, direct purchasers, filed a separate complaint in the United States District Court for the Northern District of Illinois.

 

In each case, the complaints allege that Endo engaged in an anticompetitive scheme by, among other things, entering into an anticompetitive settlement agreement with the Company to delay generic competition of Opana ER® and in violation of state and federal antitrust laws. Plaintiffs seek, among other things, unspecified monetary damages and equitable relief, including disgorgement and restitution. Consolidated amended complaints were filed on May 4, 2015. Defendants filed motions to dismiss the complaints on July 3, 2015. Plaintiffs’ oppositions to the motions to dismiss are due August 14, 2015. Oral argument on the motions to dismiss has not been scheduled.

 

Civil Investigation Demand from the Attorney General of the State of Alaska

 

On February 10, 2015, the Company received three CIDs from the Office of the Attorney General of the State of Alaska (“Alaska AG”) concerning its investigations into the drugs Adderall XR^®, Effexor XR^® and Opana^® ER (each a “Product” and collectively, the “Products”) and their generic equivalents. According to the Alaska AG, the investigation is to determine whether the Company may have violated Alaskan state law by entering into settlement agreements with the respective brand name manufacturer for each of the foregoing Products that delayed generic entry of such Product into the marketplace.  The Company intends to cooperate with the Alaska AG in producing documents and information in response to the CIDs. To the knowledge of the Company, no proceedings have been initiated against the Company at this time, however no assurance can be given as to the timing or outcome of this investigation.

 

United States Department of Justice Investigations

 

Previously on November 6, 2014, the Company disclosed that one of its sales representatives received a grand jury subpoena from the Antitrust Division of the United States Justice Department (the “Justice Department”). In connection with this same investigation, on March 13, 2015, the Company received a grand jury subpoena from the Justice Department requesting the production of information and documents regarding the sales, marketing, and pricing of certain generic prescription medications. In particular, the Justice Department’s investigation currently focuses on four generic medications: digoxin tablets, terbutaline sulfate tablets, prilocaine/lidocaine cream, and calcipotriene topical solution. The Company has been cooperating and intends to continue cooperating with the investigation. However, no assurance can be given as to the timing or outcome of the investigation.

 

Securities and Derivative Class Actions

 

On March 7, 2013 and April 8, 2013, two class action complaints were filed against the Company and certain current and former officers and directors of the Company in the United States District Court for the Northern District of California by Denis Mulligan, individually and on behalf of others similarly situated, and Haverhill Retirement System, individually and on behalf of others similarly situated, respectively (“Securities Class Actions”), alleging that the Company and those named officers and directors violated the federal securities law by making materially false and misleading statements and/or failed to disclose material adverse facts to the public in connection with manufacturing deficiencies at the Hayward, California manufacturing facility, including but not limited to the impact the deficiencies would have on the Company’s ability to gain approval from the FDA for the Company’s branded product candidate, RYTARY® and its generic version of Concerta®. These two Securities Class Actions were subsequently consolidated, assigned to the same judge, and lead plaintiff has been chosen. The plaintiff’s consolidated amended complaint was filed on September 13, 2013. The Company filed a motion to dismiss the consolidated amended complaint on November 14, 2013. On April 18, 2014, the Court denied the Company’s motion to dismiss. On September 22, 2014, the Company, together with certain current and former officers and directors of the Company, agreed to settle this consolidated securities class action, without any admission or concession of wrongdoing or liability by the Company or the other defendants. Pursuant to the settlement, the Company will pay $8.0 million for a full and complete release of all claims that were or could have been asserted against the Company or other defendants in this action. On January 16, 2015, the Court granted preliminary approval of the settlement and on July 23, 2015, the Court granted final approval of the settlement. The Company did not take any charges for the settlement as the settlement amount was paid for and covered by the Company’s insurance policies. The settlement does not resolve the related shareholder derivative litigations discussed below.

 

 

 

 

  On March 19, 2013, Virender Singh, derivatively on behalf of the Company, filed a state court action against certain current and former officers and directors for breach of fiduciary duty and unjust enrichment in the Superior Court of the State of California County of Santa Clara, asserting similar allegations as those in the Securities Class Actions. On November 6, 2014, plaintiff Singh filed a First Amended Complaint, adding allegations similar to those in the Aruliah Class Action (as described below). The parties have agreed to a settlement in this matter, which settlement the court preliminarily approved on July 8, 2015. The settlement remains subject to final court approval and certain other conditions.

  

On August 13, 2014, a class action complaint was filed against the Company and certain current and former officers and directors of the Company in the United States District Court for the Northern District of California by Linus Aruliah, individually and on behalf of all others similarly situated (“Aruliah Class Action”). The complaint alleged that the Company and those named officers and directors violated the federal securities laws by making materially false and misleading statements and/or failed to disclose material adverse facts to the public in connection with manufacturing deficiencies at the Company’s Taiwan manufacturing facility, including but not limited to the impact the deficiencies would have on the Company’s ability to gain approval from the FDA for the Company’s then branded product candidate, RYTARY® (which was subsequently approved by the FDA on January 7, 2015). On January 13, 2015, the Company, together with certain current and former officers and directors of the Company, agreed to settle this securities class action, without any admission or concession of wrongdoing or liability by the Company or the other defendants. Pursuant to the settlement, the Company will pay $4.75 million for a full and complete release of all claims that were or could have been asserted against the Company or other defendants in this action. On June 22, 2015, the Court granted preliminary approval of the settlement. The Company will not be taking any charges for the settlement as the settlement amount will be paid for and covered by the Company’s insurance policies. The settlement remains subject to final court approval and certain other conditions and does not resolve the related shareholder derivative litigations.

 

On September 22, 2014, Randall Wickey, derivatively on behalf of the Company, filed an action against certain current and former officers and directors of the Company in the United States District for the Northern District of California, alleging breaches of fiduciary duty in connection with the Company’s response to various FDA notices and warnings regarding problems in the manufacturing and quality control processes at the Company’s Hayward, California and Taiwan manufacturing facilities. On November 10, 2014, International Union of Operating Engineers Local 478, derivatively on behalf of the Company, filed an action against certain current and former officers and directors of the Company in the United States District for the Northern District of California, asserting similar allegations as those by Randall Wickey. These two derivative actions were consolidated on February 5, 2015 and a consolidated complaint was filed on February 20, 2015.

 

Attorney General of the State of Connecticut Interrogatories and Subpoena Duces Tecum

 

On July 14, 2014, the Company received a subpoena and interrogatories (the “Subpoena”) from the State of Connecticut Attorney General (“Connecticut AG”) concerning its investigation into sales of the Company’s generic product, digoxin. According to the Connecticut AG, the investigation is to determine whether anyone engaged in a contract, combination or conspiracy in restraint of trade or commerce which has the effect of (i) fixing, controlling or maintaining prices or (ii) allocating or dividing customers or territories relating to the sale of digoxin in violation of Connecticut state antitrust law. The Company intends to cooperate with the Connecticut AG in producing documents and information in response to the Subpoena. To the knowledge of the Company, no proceedings by the Connecticut AG have been initiated against the Company at this time, however no assurance can be given as to the timing or outcome of this investigation.

 

 

 

21. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)

 

Selected financial information for the quarterly period noted is as follows:

 

		2015 Quarters Ended:
(in $000’s except shares and per share amounts)		March 31				June 30
Revenue:
Impax Generic Product sales, gross		$	355,321			$	572,079
Less:
Chargebacks			126,607				228,977
Rebates			83,130				139,477
Product Returns			6,427				7,528
Other credits			13,198				24,824
Impax Generic Product sales, net			125,959				171,273
Rx Partner			2,239				2,579
Other Revenues			543				827
Impax Generic Division revenues, net			128,741				174,679
Impax Specialty Pharma Product sales, gross			29,219				65,269
Less:
Chargebacks			5,561				4,452
Rebates			2,132				2,970
Product Returns			2,620				6,763
Other credits			4,778				11,809
Impax Specialty Pharma Product sales, net			14,128				39,275
Other Revenues			227				228
Impax Specialty Pharma Division revenues, net			14,355				39,503
Total revenues			143,096				214,182
Gross profit			59,234				84,851
Net loss		$	(6,333	)		$	(1,852	)
Net loss per share (basic)		$	(0.09	)		$	(0.03	)
Net loss per share (diluted)		$	(0.09	)		$	(0.03	)
Weighted average: common shares outstanding:
Basic			68,967,875				69,338,789
Diluted			68,967,875				69,338,789

   

 

Quarterly computations of net income per share amounts are made independently for each quarterly reporting period, and the sum of the per share amounts for the quarterly reporting periods may not equal the per share amounts for the year-to-date reporting period.

 

 

 

21. SUPPLEMENTARY FINANCIAL INFORMATION (unaudited) (continued)

 

Selected financial information for the quarterly period noted is as follows:  

 

		2014 Quarters Ended:
(in $000’s except shares and per share amounts)		March 31				June 30
Revenue:
Impax Generics Product sales, gross		$	265,850			$	375,269
Less:
Chargebacks			95,714				110,518
Rebates			52,054				74,079
Product Returns			1,294				5,140
Other credits			10,671				21,571
Impax Generics Product sales, net			106,117				163,961
Rx Partner			2,435				9,204
Other Revenues			589				3,229
Impax Generics Division revenues, net			109,141				176,394
Impax Specialty Pharma Product sales, gross			20,643				24,375
Less:
Chargebacks			8,230				10,107
Rebates			1,070				938
Product Returns			181				216
Other credits			1,853				1,654
Impax Specialty Pharma Product sales, net			9,309				11,460
Other Revenues			268				267
Impax Specialty Pharma Division revenues, net			9,577				11,727
Total revenues			118,718				188,121
Gross profit			57,622				109,772
Net income		$	6,425			$	35,071
Net income per share (basic)		$	0.09			$	0.52
Net income per share (diluted)		$	0.09			$	0.50
Weighted average common shares outstanding:
Basic			67,702,296				68,095,159
Diluted			69,938,872				70,313,491

   

 

Quarterly computations of net income per share amounts are made independently for each quarterly reporting period, and the sum of the per share amounts for the quarterly reporting periods may not equal the per share amounts for the year-to-date reporting period.

 

 

22. SUBSEQUENT EVENTS

  

Senior Secured Revolving Credit Facility

 

On August 4, 2015, the Company entered into a senior secured revolving credit facility (the “Revolving Credit Facility”) of up to $100 million, pursuant to a credit agreement, by and among the Company, the lenders party thereto from time to time and Royal Bank of Canada, as administrative agent and collateral agent (the “Revolving Credit Facility Agreement”). The Revolving Credit Facility is available for working capital and other general corporate purposes. Borrowings under the Revolving Credit Facility will accrue interest at a rate equal to LIBOR or the base rate, plus an applicable margin. The applicable margin may be increased or reduced by 0.75% based on the Company’s total net leverage ratio. The Revolving Credit Facility will mature on August 4, 2020. No borrowings have been drawn from the Revolving Credit Facility to date.

 

The Revolving Credit Facility is guaranteed by each of the Company’s current and future direct and indirect wholly owned material domestic subsidiaries (the “Guarantors”), other than certain subsidiaries as specified in the agreement, and is secured by a first priority security interest (subject to permitted liens and certain other exceptions), on substantially all of the Company’s and the Guarantors’ assets. The Company may reduce the unutilized portion of the Revolving Credit Facility in whole or in part without premium or penalty, subject to redeployment costs in the case of prepayment of LIBOR borrowings other than on the last day of any relevant interest period. The Revolving Credit Facility Agreement contains certain negative covenants (subject to exceptions, materiality thresholds and other allowances) including, without limitation, negative covenants that limit the Company’s and its restricted subsidiaries’ ability to incur additional debt, guarantee other obligations, grant liens on assets, make loans, acquisitions or other investments, dispose of assets, make optional payments in connection with or modify certain debt instruments, pay dividends or make other payments on capital stock, engage in mergers or consolidations, enter into arrangements that restrict the Company’s and its restricted subsidiaries’ ability to pay dividends or grant liens, engage in transactions with affiliates, or change its fiscal year. The Revolving Credit Facility Agreement also includes a financial maintenance covenant whereby the Company must not permit its total net leverage ratio in any 12-month period to exceed 5.00:1.00, as tested at the end of each fiscal quarter commencing with the fiscal quarter ending December 31, 2015.   The Revolving Credit Facility Agreement contains specified events of default and upon the occurrence of certain events of default, the obligations under the Revolving Credit Facility Agreement may be accelerated and any remaining commitments thereunder may be terminated.

 

Paragraph IV Certification

 

On August 5, 2015, the Company received notice of a Paragraph IV certification filed by Actavis Laboratories FL, Inc. in connection with its submission of an Abbreviated New Drug Application (“ANDA”) for RYTARY® (carbidopa and levodopa) extended release capsules, 23.75 mg/95 mg, 36.25 mg/145 mg, 48.75 mg/195 mg, and 61.25 mg/245 mg, to the FDA. The Company is currently evaluating the Paragraph IV notice.

 

Sale of Daraprim® 

 

On August 7, 2015, the Company sold its U.S. rights to the Daraprim® brand to Turing Pharmaceuticals AG for approximately $55 million. The Company acquired Daraprim® as part of the Company’s acquisition of Tower which was completed on March 9, 2015.

 

 

ITEM 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

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 that do not relate to present or historical conditions are “forward-looking statements.” Such forward-looking statements involve risks and uncertainties that 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,” and “plans” 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 fluctuations in our revenues and operating income, our ability to promptly correct the issues raised in the warning letter and Form 483 observations we received from the FDA, our ability to successfully develop and commercialize pharmaceutical products in a timely manner, reductions or loss of business with any significant customer, the substantial portion of our total revenues derived from sales of a limited number of products, 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 manufacturing facilities, the effect of foreign economic, political, legal and other risks on our operations abroad, the uncertainty of patent litigation and other legal proceedings, the increased government scrutiny on our agreements with brand pharmaceutical companies, product development risks and the difficulty of predicting FDA filings and approvals, consumer acceptance and demand for new pharmaceutical products, the impact of market perceptions of us and the safety and quality of our products, our determinations to discontinue the manufacture and distribution of certain products, our ability to achieve returns on our investments in research and development activities, our ability to receive a return on our capital on our development of generic drugs, our ability to achieve expected results in our research and development efforts in our branded pharmaceutical products, changes to FDA approval requirements, our ability to successfully conduct clinical trials, our reliance on third parties to conduct clinical trials and testing, our lack of a license partner for commercialization of IPX066 outside of the United States, impact of illegal distribution and sale by third parties of counterfeits or stolen products, the availability of raw materials and impact of interruptions in our supply chain, our policies regarding returns, rebates, allowances and chargebacks, the use of controlled substances in our products, the effect of current economic conditions on our industry, business, results of operations and financial condition, disruptions or failures in our information technology systems and network infrastructure caused by third party breaches or other events, our reliance on alliance and collaboration agreements, our reliance on licenses to proprietary technologies, our dependence on certain employees, our ability to comply with legal and regulatory requirements governing the healthcare industry, the regulatory environment, the effect of certain provisions in our government contracts, our ability to protect our intellectual property, exposure to product liability claims, risks relating to goodwill and intangibles, changes in tax regulations, our ability to manage our growth, including through potential acquisitions and investments, the integration of the acquired businesses of Tower Holdings Inc. and Lineage Therapeutics being more difficult, time-consuming or costly than expected, operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers) being greater than expected following the Tower and Lineage acquisition, the retention of certain key employees of the acquired business being difficult, the acquired business's expected or targeted future financial and operating performance and results, the combined company’s capacity to bring new products to market, and the possibility that we may be unable to achieve expected synergies and operating efficiencies in connection with the Tower and Lineage acquisition within the expected time-frames or at all, the restrictions imposed by our credit facility and indenture, our level of indebtedness and liabilities and the potential impact on cash flow available for our operations; uncertainties involved in the preparation of our financial statements, our ability to maintain an effective system of internal control over financial reporting, the effect of terrorist attacks on our business, the location of our manufacturing and research and development facilities near earthquake fault lines, expansion of social media platforms and other risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2014. 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.    

 

RYTARY® is a registered trademark of Impax Laboratories, Inc. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners.

 

 

 

Overview

 

We are a specialty pharmaceutical company that focuses on developing, manufacturing, marketing and distributing generic and branded products. We operate in two segments, referred to as “Impax Generics” and “Impax Specialty Pharma”. Impax Generics concentrates its efforts on 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. Impax Specialty Pharma utilizes its specialty sales force to market proprietary branded pharmaceutical products for the treatment of central nervous system (“CNS”) disorders and other select specialty segments. Both Impax Generics and Impax Specialty Pharma generate revenue from research and development services provided to unrelated third-party pharmaceutical entities.

 

We plan to continue to expand Impax Generics through targeted Abbreviated New Drug Applications (“ANDAs”) and a first-to-file and first-to-market strategy and to continue to evaluate and pursue external growth initiatives, including acquisitions and partnerships. We focus our efforts on a broad range of therapeutic areas including products that have technically challenging drug-delivery mechanisms or unique product formulations. 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 competitive advantages, such as difficulty in raw materials sourcing, complex formulation or development characteristics or special handling requirements. Impax Generics also generates revenues from research and development services provided under a joint development agreement with an unrelated third-party pharmaceutical entity. In addition to our focus on solid oral dosage products, we have expanded our generic pharmaceutical products portfolio to include alternative dosage form products, primarily through alliance and collaboration agreements with third parties, such as our development, supply and distribution agreement with TOLMAR, Inc. (“Tolmar”) pursuant to which we received an exclusive license to commercialize up to 11 generic topical prescription drug products, including ten currently approved products and one product pending at the FDA, in the United States and its territories.

 

We sell and distribute generic pharmaceutical products primarily through four sales channels:

 

	●	the “Impax Generics” 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, collaboration and supply agreements.

  

As of August 3, 2015, we marketed 134 generic pharmaceutical products representing dosage variations of 43 different pharmaceutical compounds through Impax Generics, and five other generic pharmaceutical products, representing dosage variations of two different pharmaceutical compounds, through our alliance and collaboration agreement partners. As of August 3, 2015, our marketed generic products include, but are not limited to, authorized generic Adderall XR®, fenofibrate (generic to Lofibra®), oxymorphone hydrochloride extended release tablets (AB rated to original OPANA® ER) and the authorized generic epinephrine auto-injector product Adrenaclick®.

 

Impax Specialty Pharma is focused on developing proprietary branded pharmaceuticals products for the treatment of CNS disorders, which include migraine, multiple sclerosis, Parkinson’s disease and post herpetic neuralgia, as well as developing other select specialty products. Impax Specialty Pharma in involved in 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.

 

 

 

Our branded pharmaceutical product portfolio consists of commercial CNS and other select specialty products, as well as development stage projects. In February 2012, we licensed from AstraZeneca the exclusive U.S. commercial rights to Zomig® (zolmitriptan) tablet, orally disintegrating tablet and nasal spray formulations pursuant to the terms of the AZ Agreement and began sales of the Zomig® products under our label during the year ended December 31, 2012 through our specialty sales force. In May 2013, our exclusivity period for branded Zomig® tablets and orally disintegrating tablets expired and we launched authorized generic versions of those products in the United States. In June 2015, the FDA approved the Zomig® nasal spray for use in pediatric patients 12 years of age or older for the acute treatment of migraine with or without aura.

 

Our branded products portfolio also includes Albenza® for invasive tapeworm infections, and two additional marketed products, all acquired in our acquisition of Tower and Lineage.

 

We currently market one internally developed branded pharmaceutical product, RYTARY® (IPX066) for the treatment of Parkinson’s disease, post-encephalitic parkinsonism, and parkinsonism that may follow carbon monoxide intoxication and/or manganese intoxication, which was approved by the FDA on January 7, 2015. We launched our sales and marketing efforts for the product in the United States in April 2015. As a result, we increased our Neurology sales team to 77 representatives. We filed the required documents for a Market Authorization Application to the European Medicines Agency (EMA) for IPX066 (RYTARY®) on November 5, 2014 and the filing was accepted by the EMA on November 26, 2014.

 

We have a number of product candidates that are in varying stages of development and currently 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 15. Alliance and Collaboration Agreements.”

 

We are dependent on third-party pharmaceutical companies to supply us with some of our products and have experienced some disruptions in supply of certain of such products. If we suffer supply disruptions related to our products, our revenues and relationships with our customers may be materially adversely affected.

 

 

 

Quality Control 

 

In late May 2011, we received a warning letter from the FDA related to an on-site FDA inspection of our Hayward, California manufacturing facility citing deviations from current Good Manufacturing Practices (cGMP), which are extensive regulations governing manufacturing practices for finished pharmaceutical products and which establish requirements for manufacturing processes, stability testing, record keeping and quality standards and controls. 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.

  

During the quarters ended March 31, 2012, March 31, 2013 and September 30, 2014, the FDA conducted inspections of our Hayward manufacturing facility and at the conclusion of each inspection, we received a Form 483. The Form 483 issued during the quarter ended March 31, 2012 contained observations primarily relating to our Quality Control Laboratory, the Form 483 issued during the quarter ended March 31, 2013 contained several observations pertaining to the operations of the Hayward facility, three of which were designated by the FDA as repeat observations from inspections that occurred prior to the warning letter, and the Form 483 issued during the quarter ending September 30, 2014 contained seven inspectional observations, two of which were designated by the FDA as repeat observations from the inspection that occurred in 2013. On May 8, 2015, we received a Form 483 with three inspectional observations following the FDA’s inspection of our Hayward manufacturing facility beginning from early April through early May 2015. The May 2015 inspection included a general cGMP inspection as well as pre approval inspections (PAI) for multiple pending products at the FDA. At the time of the inspection, the FDA did not provide any status or classification to these observations and, pursuant to its established regulatory process, would defer classification until it has reviewed our response to each observation. We were, however, able to confirm that the FDA’s inspection at our Hayward facility in 2014 was officially classified as Voluntary Action Indicated (VAI). We have provided the FDA with what we believe to be our complete written responses relating to the observations from the May 2015 inspection. To date, we have not been informed by the FDA as to whether a satisfactory re-inspection of our Hayward manufacturing facility will be required to close out the warning letter on our Hayward manufacturing facility.

 

In July 2014, the FDA conducted an inspection of our Taiwan manufacturing facility and at the conclusion of the inspection, we received a Form 483 with ten observations. We received and responded to a request for additional information from the FDA regarding our Taiwan facility in December 2014. On January 7, 2015, we received approval from the FDA for RYTARY™, our first internally developed branded product for the treatment of Parkinson’s disease, which is manufactured in our Taiwan facility. In March 2015, we received correspondence from the FDA classifying our Taiwan manufacturing facility as acceptable.

 

On March 11, 2015, we received a Form 483 with two observations regarding adverse event reporting and annual report submissions in Horsham, Pennsylvania (one of the sites we acquired in the Tower and Lineage acquisition). We provided the FDA with what we believe to be our complete written responses relating to the observations in the Form 483 at the end of March 2015 and are awaiting classification of the inspection from the Agency.

 

We are currently cooperating with the FDA to close out the warning letter and resolve the Form 483 observations. We have taken a number of steps to review our quality control and manufacturing systems and standards and are working with third-party experts to assist us with our review and in enhancing such systems and standards. 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 and the Form 483 observations resolved, it is possible we may be subject to additional regulatory action by the FDA as a result of 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. The warning letter and Form 483 observations do not currently place restrictions on our ability to manufacture and ship our existing products, however 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 the warning letter is closed out and the Form 483 observations on our Hayward facility are resolved. Further, other federal agencies, our customers and partners in our alliance, development, collaboration and other partnership agreements with respect to our products and services may take the warning letter and Form 483 observations into account when considering the award of contracts or the continuation or extension of such partnership agreements. If we are unable promptly to correct the issues raised in the warning letter and Form 483 observations, our business, consolidated results of operations and consolidated financial condition could be materially and adversely affected.

 

   

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 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.

 

Impax Generics sales, net, and Impax Specialty Pharma sales, net. Revenue from the sale of products is recognized when title and risk of loss of the product is transferred to the customer and the sales price is fixed and determinable. We provide for provisions for discounts, early payments, rebates, sales returns and distributor chargebacks under terms customary in the industry in the same period the related sales are recorded. We record estimated reductions to revenue at the time of the initial sale and base and these estimates on the sales terms, historical experience and trend analysis.

 

Gross to Net Sales Accruals. We base our sales returns allowance on estimated on-hand inventories at our customers, measured end-customer demand as reported by third-party sources, actual returns history and other factors, such as the trend experience for lots where product is still being returned or inventory centralization and rationalization initiatives conducted by major pharmacy chains, as applicable. If the historical data we use to calculate these estimates do not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. Under this methodology, we track actual returns by individual production lots. Returns on closed lots, that is, lots no longer eligible for return credits, are analyzed to determine historical returns experience. Returns on open lots, that is, lots still eligible for return credits, are monitored and compared with historical return trend rates. We consider any changes from the historical trend rates in determining the current sales return allowance.

 

We base sales discount accruals on payment terms extended to customers.

 

We base government rebate accruals on estimated payments due to governmental agencies for purchases made by third parties under various governmental programs. We generally base U.S. Medicaid rebate accruals on historical payment data and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. The Medicaid rebate percentage was increased and extended to Medicaid Managed Care Organizations in March 2010. We calculate the accrual of the rebates associated with Medicaid Managed Care Organizations based on actual billings received from the states. We adjust the rebate accruals as more information becomes available and to reflect actual claims experience. Effective January 1, 2011, manufacturers of pharmaceutical products are responsible for 50% of the patient’s cost of branded prescription drugs related to the Medicare Part D Coverage Gap. In order to estimate the cost to us of this coverage gap responsibility, we analyze the historical invoices. We recognize this expense throughout the year as costs are incurred.

 

 

 

We offer rebates or administrative fees to certain customers, group purchasing organizations and pharmacy benefit managers, consistent with pharmaceutical industry practices. Settlement of rebates and fees may generally occur from one to 15 months from the date of sale. We provide a provision for rebates at the time of sale based on contracted rates and historical redemption rates. Assumptions used to establish the provision include level of customer inventories, contract sales mix and average contract pricing. We regularly review the information related to these estimates and adjust the provision accordingly.

 

We base chargeback accruals on the differentials between product acquisition prices paid by wholesalers and lower contract pricing paid by eligible customers.

 

We base distributor service fee accruals on contractual fees to be paid to the wholesale distributor for services provided. TRICARE is a health care program of the U.S. Department of Defense Military Health System that provides civilian health benefits for military personnel, military retirees and their dependents. TRICARE rebate accruals are included in chargeback accruals and are based on estimated Department of Defense eligible sales multiplied by the TRICARE rebate formula.

 

A significant majority of our gross to net accruals are the result of chargebacks and rebates, with the majority of those programs having an accrual to payment cycle of approximately three months. In addition to this relatively short accrual to payment cycle, we receive monthly information from the wholesalers regarding their sales of our products and actual on hand inventory levels of our products. The three large wholesalers account for approximately 97% of our chargebacks and approximately 80% of our indirect sales rebates. This enables us to execute accurate provisioning procedures. Consistent with the pharmaceutical industry, the accrual to payment cycle for returns is longer and can take several years depending on the expiration of the related products. However, returns represent the smallest gross to net adjustment. We have not experienced any significant changes in our estimates as it relates to our chargebacks, rebates or returns in each of the years in the three year period ended December 31, 2014.

 

The following tables are roll-forwards of the activity in the reserves for the six months ended June 30, 2015 and the year ended December 31, 2014 with an explanation for any significant changes in the accrual percentages:

 

		June 30, 2015				December 31, 2014
		($ in 000’s)
Chargeback reserve
Beginning balance		$	43,125			$	37,066
Acquired balances			24,532				--
Provision recorded during the period			365,597				487,377
Credits issued during the period			(349,466	)			(481,318	)
Ending balance		$	83,788			$	43,125
Provision as a percent of gross product sales			36	%			35	%

 

As noted in the table above, the provision for chargebacks, as a percent of gross product sales, increased slightly from 35% during the year ended December 31, 2014 to 36% during the six months ended June 30, 2015.

 

 

 

		June 30, 2015				December 31, 2014
		($ in 000’s)
Rebate reserve
Beginning balance		$	88,812			$	88,449
Acquired balances			77,640				--
Provision recorded during the period			227,709				260,747
Credits issued during the period			(160,508	)			(260,384	)
Ending balance		$	233,653			$	88,812
Provision as a percent of gross product sales			22	%			19	%

  

As noted in the table above, the provision for rebates, as a percent of gross product sales, increased from 19% during the year ended December 31, 2014 to 22% during the six months ended June 30, 2015 as a result of product sales mix, the formation of alliances between major wholesalers and major retailers and the inclusion of product sales from the Tower acquisition which carried a higher rebate rate.

  

 

		June 30, 2015				December 31, 2014
		($ in 000’s)
Returns reserve
Beginning balance		$	27,174			$	28,089
Acquired balances			18,949				--
Provision related to sales recorded in the period			23,340				12,016
Credits issued during the period			(17,853	)			(12,931	)
Ending balance		$	51,610			$	27,174
Provision as a percent of gross product sales			2.3	%			1.0	%

  

As noted in the table above, the provision for returns as a percent of gross product sales increased from 1.0% during the year ended December 31, 2014 to 2.3% during the six months ended June 30, 2015 as a result of the Tower acquisition whose products carry a higher historical returns experience, higher than anticipated returns volume resulting from the loss of exclusivity on certain Zomig® products and higher returns accruals due to price increases on certain generic products.

 

Medicaid and Other Government Pricing Programs. As required by law, we provide a rebate payment on drugs dispensed under the Medicaid, Medicare Part D, TRICARE, and other U.S. government pricing programs. We determine our estimate of the accrued rebate reserve for government programs primarily based on historical experience of claims submitted by the various states, and other jurisdictions, as well as any new information regarding changes in the pricing programs that may impact our estimate of rebates. In determining the appropriate accrual amount, we consider historical payment rates and processing lag for outstanding claims and payments. We record estimates for government rebate payments as a deduction from gross sales, with corresponding adjustments to accrued liabilities. The accrual for payments under government pricing programs totaled $40,411,000 (which includes $28,126,000 of acquired balances) and $18,272,000 as of June 30, 2015 and December 31, 2014, 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 its 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 $1,306,000 and $1,852,000 as of June 30, 2015 and December 31, 2014, respectively.

 

 

 

Estimated Lives of Alliance and Collaboration Agreements. The revenues we receive under our alliance and collaboration agreements are 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 may defer revenue we receive under our alliance agreements, and recognize it over the estimated life of the related agreement, or our expected period of performance, we are required to estimate the recognition period under each such agreement in order to determine the amount of revenue to be recognized in each period. Sometimes this estimate is based 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 paragraph. 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 Joint Development Agreement with Valeant Pharmaceuticals International, Inc., formerly Medicis Pharmaceutical Corporation (“Valeant Agreement”), including the upfront fee and milestone payments received before January 1, 2011, has been initially deferred and is being recognized as revenue on a straight-line basis over our expected period of performance to provide research and development services under the Valeant Agreement. The completion of the final deliverable under the Valeant Agreement 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 Valeant Agreement, and therefore the earnings process will be complete. The expected period of performance was initially 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. During the year ended December 31, 2012, we extended the end of the revenue recognition period for the Valeant Agreement from November 2012 to November 2013 and during the three month period ended March 31, 2013, we further extended the end of the revenue recognition period for the agreement from November 2013 to December 2014 due to changes in the estimated timing of completion of certain research and development activities under the agreement.

 

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 generally 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. We determine expected volatility based on historical volatility of our common stock. 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 United States 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 the 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 rate includes modifications, which were projected for the year, for share-based compensation charges 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 the respective change occurs.

   

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.

 

 

 

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 Impax Generics and Impax Specialty Pharma 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 Impax Generics. We concluded the carrying value of goodwill was not impaired as of December 31, 2014, as the fair value of Impax Generics exceeded its carrying value. We perform our annual goodwill impairment test in the fourth quarter of each year. We estimate the fair value of Impax Generics 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. To date, we have not deemed there to be any significant adverse changes in the legal, regulatory or business environment in which we conduct our operations. 

  

Derivatives. We generally do not use derivative instruments or engage in hedging activities in our ordinary course of business. Prior to June 30, 2015, we had no derivative assets or liabilities and did not engage in any hedging activities. As a result of our June 30, 2015 issuance of the convertible senior notes described in “Note 14 – Debt”, the conversion option of the notes met the criteria for an embedded derivative liability which required bifurcation and separate accounting. Contemporaneously with the issuance of the notes, we entered into a series of convertible note hedge and warrant transactions which in combination are designed to reduce the potential dilution to our stockholders and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the notes. See “Note 5 – Derivatives” and “Note 17 – Stockholders’ Equity” for additional information regarding the note hedge transactions and warrant transactions. While the warrants sold were classified as equity and recorded in additional paid-in capital, the call options purchased were classified as a bond hedge derivative asset on our consolidated balance sheet. We engage a third-party valuation firm with expertise in valuing financial instruments to determine the fair value of the bond hedge derivative asset and conversion option derivative liability at each reporting period. Our consolidated balance sheet reflects the fair value of the derivative asset and liability as of the reporting date, and changes in the fair value are reflected in current period earnings in other income or expense, as appropriate.

 

  

Results of Operations

Three Months Ended June 30, 2015 Compared to the Three Months Ended June 30, 2014

 

Overview:

 

The following table sets forth our summarized, consolidated results of operations for the three month periods ended June 30, 2015 and 2014: 

 

		Three Months Ended
		June 30, 2015				June 30, 2014				Increase/ (Decrease)
(in $000’s)		(unaudited)
											$			%
Total revenues		$	214,182			$	188,121			$	26,061				14	%
Gross profit			84,851				109,772				(24,921	)			(23	)%
Income from operations			18,053				53,936				(35,883	)			(67	)%
(Loss) income before income taxes			(4,548	)			54,425				(58,973	)		nm
(Benefit) provision for income taxes			(2,696	)			19,354				(22,050	)		nm
Net (loss) income		$	(1,852	)		$	35,071			$	(36,923	)		nm

 

 *nm-not meaningful

 

Consolidated total revenues for the three month period ended June 30, 2015 increased by $26.1 million to $214.2 million, or 14%, as compared to the same period in 2014. Of the $214.2 million in consolidated total revenues for the three month period ended June 30, 2015, $58.5 million in revenues were from the Tower acquisition. The increase in revenues in the current year period from the Tower acquisition were largely offset by the loss of revenues from sales of our authorized generic Renvela® tablets during the current period. We received approximately $49.1 million in revenues from our launch of the specified allotment of the authorized generic Renvela® product during the prior year period. New product launches increased revenues during the three month period ended June 30, 2015 by $24.6 million, or 13%, compared to the prior year period, primarily related to sales of RYTARY® and Lamotrigine orally disintegrating tablets (ODT). Increased product volumes (including product volumes from the acquisition) increased revenues during the three month period ended June 30, 2015 by $22.2 million, or 12%, compared to the prior year period. The increase in consolidated total revenues from new product launches and product volumes were partially offset in the current period by decreased revenues of $20.7 million, or 11%, as compared to the prior year period, resulting from unfavorable product selling price and product mix.

 

Revenues from our Impax Generics division decreased by $1.7 million during the three month period ended June 30, 2015, as compared to the prior year period, driven primarily by the loss of sales of authorized generic Renvela® during the current period partially offset by revenues from the Tower acquisition. Revenues from Impax Specialty Pharma division increased $27.8 million during the three month period ended June 30, 2015 as compared to the same period in 2014, as a result of the launch of RYTARY® as well as the addition of sales volumes from the acquired companies.

 

Net loss for the three month period ended June 30, 2015 was $1.9 million, a decrease of $37.0 million as compared to net income of $35.1 million for the three month period ended June 30, 2014. The decrease was primarily attributable to lower margins from product sales and higher operating expenses in each case compared to the prior year period. We also had higher amortization and costs during the current year period related to the fair value of inventory of approximately $10.0 million and $4.2 million, respectively, related to the Tower acquisition, which were partially offset by lower Hayward facility remediation costs of $5.9 million. In addition, we had a loss on debt extinguishment of $16.9 million related to the payoff of our term loan with Barclays.

 

 

 

Impax Generics

 

The following table sets forth results of operations for Impax Generics for the three month periods ended June 30, 2015 and 2014:

 

		Three Months Ended
		June 30,				June 30,				Increase/
		2015				2014				(Decrease)
(in $000’s)		(unaudited)
											$			%
Revenues:
Impax Generics sales, net		$	171,273			$	163,961			$	7,312				4	%
Rx Partner			2,579				9,204				(6,625	)			(72	)%
Other Revenues			827				3,229				(2,402	)			(74	)%
Total revenues			174,679				176,394				(1,715	)			(1	)%
Cost of revenues			110,767				69,872				40,895				59	%
Gross profit			63,912				106,522				(42,610	)			(40	)%
Operating expenses:
Research and development			12,891				10,745				2,146				20	%
Patent litigation expense			1,332				1,767				(435	)			(25	)%
Selling, general and administrative			7,284				4,572				2,712				59	%
Total operating expenses			21,507				17,084				4,423				26	%
Income from operations		$	42,405			$	89,438			$	(47,033	)			(53	)%

  

Revenues

Total revenues for Impax Generics for the three month period ended June 30, 2015, were $174.7 million, a decrease of 1% over the same period in 2014, principally resulting from the loss of sales of authorized generic Renvela® during the current period, largely offset by the addition of $44.3 million in revenue from the Tower acquisition.

 

Cost of Revenues

Cost of revenues was $110.8 million for the three month period ended June 30, 2015, an increase of $40.9 million compared to the prior year period. Other than increased costs related to higher product sales, cost of revenues in the current period increased due to higher product amortization and costs related to the step-up to fair value of inventory in connection with the Tower acquisition, as well as higher severance costs related to the reorganization of our packaging and distribution operations. This increase was partially offset by lower remediation costs, as compared to the prior year period.

 

Gross Profit

Gross profit for the three month period ended June 30, 2015 was $63.9 million, or approximately 37% of total revenues, as compared to $106.5 million, or approximately 60% of total revenues, in the prior year period. The loss of sales of authorized generic Renvela® during the current year period, a high margin product, was the primary driver for the reduced gross profit compared to the prior year period.

 

Research and Development Expenses

Total research and development expenses for the three month period ended June 30, 2015 were $12.9 million, an increase of 20%, as compared to $10.7 million in the prior year period primarily due to the addition of research and development projects from the Tower acquisition.

 

Patent Litigation Expenses

Patent litigation expenses for the three month period ended June 30, 2015 were $1.3 million, as compared to $1.8 million for the three month period ended June 30, 2014. The decrease in patent litigation expenses of $0.5 million compared to the prior year period was the result of legal activity related to several cases in the prior year period for which there was no corresponding activity in the current year period.

 

 

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three month period ended June 30, 2015 were $7.3 million, as compared to $4.6 million for the three month period ended June 30, 2014. The increase of $2.7 million compared to the prior year period was primarily the result of an increase in penalties paid to customers for delays or failures to supply product and the addition of the selling, general and administrative expenses from the Tower acquisition. 

 

 

Impax Specialty Pharma

 

The following table sets forth results of operations for Impax Specialty Pharma for the three month periods ended June 30, 2015 and 2014:

 

		Three Months Ended
		June 30,				June 30,				Increase/
		2015				2014				(Decrease)
(in $000’s)		(unaudited)
											$			%
Revenues:
Impax Specialty Pharma sales, net		$	39,275			$	11,460			$	27,815			nm
Other Revenues			228				267				(39	)			(15	)%
Total revenues			39,503				11,727				27,776			nm
Cost of revenues			18,564				8,477				10,087			nm
Gross profit			20,939				3,250				17,689			nm
Operating expenses:
Research and development			4,104				10,507				(6,403	)			(61	)%
Patent litigation expense			162				---				162			nm
Selling, general and administrative			12,912				11,734				1,178				10	%
Total operating expenses			17,178				22,241				(5,063	)			(23	)%
Loss from operations		$	3,761			$	(18,991	)		$	22,752			nm

  

*nm-not meaningful

 

Revenues

Total revenues for Impax Specialty Pharma were $39.5 million for the three month period ended June 30, 2015, an increase of $27.8 million over the same period in the prior year, due to the launch of RYTARY® and $14.2 million in revenues from the Tower acquisition.

 

Cost of Revenues

Cost of revenues was $18.6 million for the three month period ended June 30, 2015, an increase of $10.1 million over the prior year period. In addition to increased costs related to increased product sales, cost of revenues increased during the current period due to higher amortization costs of $6.7 million and an increase of $3.5 million compared to the prior period related to the step-up to fair value of inventory, each in connection with the Tower acquisition. This increase compared to the prior year period was partially offset by a $3.6 million reserve included in the cost of revenues during the three months ended June 30, 2014 for pre-launch inventory related to RYTARY® as a result of a Complete Response Letter received in 2014 for which there was no similar amounts included in cost of revenues in the current year period.

 

Gross Profit

Gross profit for the three month period ended June 30, 2015 was $20.9 million, or approximately 53% of total revenues, as compared to $3.2 million, or approximately 28% of total revenues, in the prior year period. The revenue from RYTARY® was a primary driver for the increase in gross profit compared to the prior year period.

  

Research and Development Expenses

Total research and development expenses for the three month period ended June 30, 2015 were $4.1 million, a decrease of $6.4 million as compared to $10.5 million in the prior year period. The decrease was primarily driven by a reduction in research and development expenses related to our branded initiatives and decreased personnel costs of $2.5 million compared to the prior year period due to the restructuring and related reduction in workforce primarily in our research and development organization during the fourth quarter ended December 31, 2014.

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $12.9 million for the three month period ended June 30, 2015, an increase of $1.2 million as compared to $11.7 million in the prior year period. The increase was primarily driven by an increase in advertising and promotion expenses to support the launch of RYTARY® and related salesforce expansion. 

  

 

 

Corporate and Other

 

The following table sets forth corporate general and administrative expenses, as well as other items of income and expense presented below income or loss from operations for the three month periods ended June 30, 2015 and 2014:

 

		Three Months Ended
		June 30,				June 30,				Increase/
		2015				2014				(Decrease)
(in $000’s)		(unaudited)
											$			%
General and administrative expenses		$	28,113			$	16,511			$	11,602				70	%
Loss from operations			(28,113	)			(16,511	)			(11,602	)			(70	)%
Other income, net			961				31				930			nm
Loss on debt extinguishment			(16,903	)			---				(16,903	)		nm
Interest income			294				365				(71	)			(19	)%
Interest expense			(6,953	)			93				(7,046	)		nm
Loss before income taxes			(50,714	)			(16,022	)			(34,692	)		nm
(Benefit) provision for income taxes		$	(2,696	)		$	19,354			$	(22,050	)		nm

 

*nm-not meaningful

 

General and Administrative Expenses

General and administrative expenses for the three month period ended June 30, 2015 were $28.1 million, an $11.6 million increase over the same period in 2014. The increase was principally driven by higher business development expenses of $5.3 million (of which $3.9 million were transaction and/or integration-related activities related to the Tower acquisition), the inclusion of general and administrative expenses from the Tower acquisition of $1.9 million, increased information technology expenses of $1.9 million, increased legal expenses of $1.1 million and higher equity based compensation of $1.4 million. 

 

Other Income, net

Other income, net in the three month period ended June 30, 2015 was $1.0 million, as compared to less than $0.1 million in the three month period ended June 30, 2014, primarily related to our sale of an ANDA during the current year period for $1.0 million.

 

Loss on extinguishment of debt

During the three month period ended June 30, 2015, we recognized a $16.9 million loss on extinguishment related to the repayment of our term loan with Barclays.

 

Interest Income

Interest income in the three month period ended June 30, 2015 was $0.3 million, and was relatively consistent with the same period in 2014.

 

Interest Expense

Interest expense in the three month period ended June 30, 2015 was $7.0 million, an increase of $7.0 million as compared to the prior year period, primarily related to borrowings under our $435 million senior secured term loan with Barclays (which was subsequently repaid in its entirety and terminated on June 30, 2015). Interest expense in the three month period ended June 30, 2015 included $6.0 million in interest expense incurred on the term loan as well as $0.7 million in amortization of deferred financing costs.

 

Income Taxes

During the three month period ended June 30, 2015, we recognized an aggregate consolidated tax benefit of $2.7 million for U.S. domestic and foreign income taxes. In the three month period ended June 30, 2014, we recognized an aggregate consolidated tax provision of $19.4 million for U.S. domestic and foreign income taxes. The decrease in the tax provision resulted from lower consolidated income before taxes in the three month period ended June 30, 2015, as compared to the same period in the prior year. The effective tax rate of 59% for the three month period ended June 30, 2015 was higher than the effective tax rate of 36% for the prior year period primarily as a result of a change in the timing and mix of U.S. and foreign income. Other contributing factors to the rate fluctuation included a larger add-back for non-deductible executive compensation limited by section 162(m) of the Internal Revenue Code, which prohibits publicly held corporations from deducting more than $1 million per year in compensation paid to each of certain covered employees, and an increase in the deferred tax asset related to a state research and development tax credit carryforward in a state with indefinite carryforwards.

 

  

 

Results of Operations

Six Months Ended June 30, 2015 Compared to the Six Months Ended June 30, 2014

 

Overview:

 

The following table sets forth our summarized, consolidated results of operations for the six month periods ended June 30, 2015 and 2014: 

 

		Six Months Ended
		June 30, 2015				June 30, 2014				Increase/ (Decrease)
(in $000’s)		(unaudited)
											$			%
Total revenues		$	357,278			$	306,839			$	50,439				16	%
Gross profit			144,085				167,394				(23,309	)			(14	)%
Income from operations			11,205				62,167				(50,962	)			(82	)%
(Loss) income before income taxes			(15,253	)			63,055				(78,308	)			nm
(Benefit) provision for income taxes			(7,068	)			21,559				(28,627	)			nm
Net (loss) income		$	(8,185	)		$	41,496			$	(49,681	)			nm

 

 *nm-not meaningful

 

Consolidated total revenues for the six month period ended June 30, 2015 increased by $50.4 million to $357.3 million, or 16%, as compared to the same period in 2014. Of the $357.3 million in consolidated total revenues for the six month period ended June 30, 2015, $72.1 million in revenues were from the Tower acquisition. New product launches increased revenues during the six month period ended June 30, 2015 by $25.8 million, or 8%, compared to the prior year period, primarily related to sales of RYTARY® and Lamotrigine ODT. Increased product volumes (including product volumes from the acquisition) increased revenues during the six month period ended June 30, 2015 by $53.2 million, or 17%, compared to the prior year period, while selling price and product mix decreased revenues by $28.5 million, or 9%, compared to the prior year period.

 

Revenues from our Impax Generics division increased by $17.9 million during the six month period ended June 30, 2015, as compared to the prior year period, driven primarily by the increase in revenues from the Tower acquisition, offset by decreased sales of authorized generic Renvela® during the current period. Revenues from the Impax Specialty Pharma division increased $32.6 million during the six month period ended June 30, 2015 as compared to the same period in 2014, as a result of the launch of RYTARY® as well as product volumes from the acquired companies.

 

Net loss for the six month period ended June 30, 2015 was $8.2 million, a decrease of $49.7 million as compared to net income of $41.5 million for the six month period ended June 30, 2014. The decrease was primarily attributable to lower margins from product sales and higher operating expenses, in each case compared to the prior year period. We also had higher amortization and costs related to the fair value of inventory of approximately $11.9 million and $5.4 million, respectively, related to the Tower acquisition, partially offset by reduced Hayward facility remediation costs of $11.3 million during the current year period. In addition, we had a loss on debt extinguishment of $16.9 million, related to the payoff of our term loan with Barclays.

 

 

Impax Generics

 

The following table sets forth results of operations for Impax Generics for the six month periods ended June 30, 2015 and 2014:

 

		Six Months Ended
		June 30,				June 30,				Increase/
		2015				2014				(Decrease)
(in $000’s)		(unaudited)
											$			%
Revenues:
Impax Generics sales, net		$	297,232			$	270,078			$	27,154				10	%
Rx Partner			4,818				11,639				(6,821	)			(59	)%
Other Revenues			1,370				3,817				(2,447	)			(64	)%
Total revenues			303,420				285,534				17,886				6	%
Cost of revenues			186,880				126,894				59,986				47	%
Gross profit			116,540				158,640				(42,100	)			(27	)%
Operating expenses:
Research and development			23,754				21,962				1,792				8	%
Patent litigation expense			2,110				3,940				(1,830	)			(46	)%
Selling, general and administrative			11,570				6,955				4,615				66	%
Total operating expenses			37,434				32,857				4,577				14	%
Income from operations		$	79,106			$	125,783			$	(46,677	)			(37	)%

  

Revenues

Total revenues for Impax Generics for the six month period ended June 30, 2015, were $303.4 million, an increase of 6% over the same period in 2014, principally resulting from the addition of $56.6 million in revenue from the Tower acquisition as well as increased sales from Diclofenac Sodium and Lamotrigine ODT, offset by decreased revenues from sales of authorized generic Renvela® during the current period.

 

Cost of Revenues

Cost of revenues was $186.9 million for the six month period ended June 30, 2015, an increase of $60.0 million compared to the prior year period. Other than increased costs related to higher product sales, cost of revenues in the current period increased due to higher product amortization and costs related to the step-up to fair value of inventory in connection with the Tower acquisition, as well as higher severance costs related to the reorganization of our packaging and distribution operations. This increase was partially offset by lower remediation costs, as compared to the prior year period.

 

Gross Profit

Gross profit for the six month period ended June 30, 2015 was $116.5 million, or approximately 38% of total revenues, as compared to $158.6 million, or approximately 56% of total revenues, in the prior year period. The decrease in sales of authorized generic Renvela® during the current year period, previously a high margin product, was the primary driver for the reduced gross profit compared to the prior year period, as well as unfavorable product mix.

 

Research and Development Expenses

Total research and development expenses for the six month period ended June 30, 2015 were $23.8 million, an increase of 8%, as compared to $22.0 million in the prior year period. Generic research and development expenses increased by $1.8 million, as compared to the prior year period, primarily due to the addition of research and development projects from the Tower acquisition.

 

Patent Litigation Expenses

Patent litigation expenses for the six month period ended June 30, 2015 were $2.1 million, as compared to $3.9 million for the six month period ended June 30, 2014. The decrease in patent litigation expenses of $1.8 million compared to the prior year period was the result of legal activity related to several cases in the prior year period for which there was no corresponding activity in the current year period.

 

 

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six month period ended June 30, 2015 were $11.6 million, as compared to $7.0 million for the six month period ended June 30, 2014. The increase of $4.6 million compared to the prior year period was primarily the result of an increase in penalties paid to customers for delays or failures to supply product and the addition of the selling, general and administrative expenses from the Tower acquisition. 

 

 

 

Impax Specialty Pharma

 

The following table sets forth results of operations for Impax Specialty Pharma for the six month periods ended June 30, 2015 and 2014:

 

		Six Months Ended
		June 30,				June 30,				Increase/
		2015				2014				(Decrease)
(in $000’s)		(unaudited)
											$			%
Revenues:
Impax Specialty Pharma sales, net		$	53,403			$	20,769			$	32,634			nm
Other Revenues			455				536				(81	)			(15	)%
Total revenues			53,858				21,305				32,553			nm
Cost of revenues			26,313				12,551				13,762			nm
Gross profit			27,545				8,754				18,791			nm
Operating expenses:
Research and development			8,203				21,031				(12,828	)			(61	)%
Patent litigation expense			344				---				344			nm
Selling, general and administrative			27,768				20,955				6,813				33	%
Total operating expenses			36,315				41,986				(5,671	)			(14	)%
Loss from operations		$	(8,770	)		$	(33,232	)		$	24,462				74	%

  

*nm-not meaningful

 

Revenues

Total revenues for Impax Specialty Pharma were $53.9 million for the six month period ended June 30, 2015, an increase of $32.6 million over the same period in the prior year, due to the launch of RYTARY® and $15.6 million in revenues from the Tower acquisition during the current period.

 

Cost of Revenues

Cost of revenues was $26.3 million for the six month period ended June 30, 2015, an increase of $13.8 million over the prior year period. In addition to increased costs related to increased product sales, cost of revenues increased in the six month period ended June 30, 2015 due to higher amortization and costs of $4.4 million related to the step-up to fair value of inventory, each incurred in connection with the Tower acquisition. This increase was partially offset by a $3.6 million reserve included in the cost of revenues during the six months ended June 30, 2014 for pre-launch inventory related to RYTARY® as a result of a Complete Response Letter received in 2014, for which there was no similar amounts included in cost of revenues in the current year period.

 

Gross Profit

Gross profit was $27.5 million for the six month period ended June 30, 2015, an increase of $18.8 million over the same period in the prior year, due to the launch of RYTARY® and increased profit from the Tower acquisition. 

 

Research and Development Expenses

Total research and development expenses for the six month period ended June 30, 2015 were $8.2 million, a decrease of $12.8 million as compared to $21.0 million in the prior year period. The decrease was primarily driven by a reduction in research and development expenses related to our branded initiatives and decreased personnel costs of $4.1 million compared to the prior year period due to the restructuring and related reduction in workforce primarily in our research and development organization during the fourth quarter ended December 31, 2014. In addition, research and development expense during the prior year period included a $2.0 million upfront fee paid to DURECT Corporation (“Durect”) under an agreement to acquire the exclusive worldwide rights to develop and commercialize Durect’s investigational transdermal bupivacaine patch for the treatment of pain associated with post-herpetic neuralgia, for which there was no comparable fee paid in the current period.

 

 

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $27.8 million for the six month period ended June 30, 2015, an increase of $6.8 million as compared to $21.0 million in the prior year period. The increase was primarily driven by an increase in advertising and promotion expenses to support the launch of RYTARY® and related salesforce expansion.

 

 

 

Corporate and Other

 

The following table sets forth corporate general and administrative expenses, as well as other items of income and expense presented below income or loss from operations for the six month periods ended June 30, 2015 and 2014:

 

		Six Months Ended
		June 30,				June 30,				Increase/
		2015				2014				(Decrease)
(in $000’s)		(unaudited)
											$			%
General and administrative expenses		$	59,131			$	30,384			$	28,747				95	%
Loss from operations			(59,131	)			(30,384	)			(28,747	)			(95	)%
Other income, net			795				107				688			nm
Loss on debt extinguishment			(16,903	)			---				(16,903	)		nm
Interest income			578				753				(175	)			(23	)%
Interest expense			(10,928	)			28				(10,956	)		nm
Loss before income taxes			(85,589	)			(29,496	)			(56,093	)		nm
(Benefit) provision for income taxes		$	(7,068	)		$	21,559			$	(28,627	)		nm

 

*nm-not meaningful

 

General and Administrative Expenses

General and administrative expenses for the six month period ended June 30, 2015 were $59.1 million, a $28.7 million increase over the same period in 2014. The increase was principally driven by higher business development expenses of $13.8 million of which $11.3 million were transaction and/or integration-related activities related to the Tower acquisition, the inclusion of general and administrative expenses from the Tower acquisition of $5.1 million, increased technology expenses of $3.5 million, increased legal expenses of $1.5 million and higher equity based compensation of $4.0 million and net other costs of $0.8 million. The $5.1 million of Tower related general and administrative expenses included $2.4 million in employee severance costs related to the acquisition.

 

Other Income, net

Other income, net in the six month period ended June 30, 2015 was $0.8 million, as compared to less than $0.1 million in the six month period ended June 30, 2014, primarily related to our sale of an ANDA by the Company for $1.0 million during the current year period.

 

Loss on debt extinguishment

During the six month period ended June 30, 2015, we recognized a $16.9 million loss on the extinguishment related to the repayment of our term loan with Barclays.

 

Interest Income

Interest income in the six month period ended June 30, 2015 was $0.6 million, and was relatively consistent with the same period in 2014.

 

Interest Expense

Interest expense in the six month period ended June 30, 2015 was $10.9 million, an increase of $10.9 million as compared to the prior year period, primarily related to borrowings under our $435 million senior secured term loan with Barclays (which was subsequently repaid in its entirety and terminated on June 30, 2015). Interest expense in the six month period ended June 30, 2015 included $2.3 million in commitment fees incurred prior to the closing of the Tower acquisition, $7.5 million in interest expense incurred on the term loan as well as approximately $1.0 million in amortization of deferred financing costs.

 

Income Taxes

During the six month period ended June 30, 2015, we recognized an aggregate consolidated tax benefit of $7.1 million for U.S. domestic and foreign income taxes. During the six month period ended June 30, 2014, we recognized an aggregate consolidated tax provision of $21.6 million for U.S. domestic and foreign income taxes. The decrease in the tax provision resulted from lower consolidated income before taxes in the six month period ended June 30, 2015, as compared to the same period in the prior year. The effective tax rate of 46% for the six month period ended June 30, 2015 was higher than the effective tax rate of 34% for the prior year period primarily as a result of a change in the timing and mix of U.S. and foreign income. Other contributing factors to the rate fluctuation included a larger add-back for non-deductible executive compensation limited by section 162(m) of the Internal Revenue Code, which prohibits publicly held corporations from deducting more than $1 million per year in compensation paid to each of certain covered employees, and an increase in the deferred tax asset related to a state research and development tax credit carryforward in a state with indefinite carryforwards.

 

 

 

Liquidity and Capital Resources

 

We have historically funded our operations with the proceeds from the sale of debt and equity securities and with cash from operations. Currently, our principal source of liquidity is cash from operations, consisting of the proceeds from the sales of our products and the provision of services.

  

We expect to incur significant operating expenses, including research and development activities and patent litigation expenses, for the foreseeable future. In addition, we are generally required to make cash expenditures to manufacture and/or acquire finished product inventory in advance of selling the finished product to our customers and collecting payment for such product sales, which may result in a significant use of cash. We believe our existing cash and cash equivalents, together with cash expected to be generated from operations, and our revolving line of credit pursuant to our revolving credit facility entered into on August 4, 2015, will be sufficient to meet our cash requirements through the next 12 months. We may seek additional financing through alliance, collaboration, and licensing agreements, as well as from the debt or equity capital markets to fund the planned capital expenditures, our research and development plans, potential acquisitions, and potential revenue shortfalls due to delays in new product introductions. We cannot assure that such financing will be available on favorable terms, or at all.

 

Cash and Cash Equivalents

At June 30, 2015, we had $190.3 million in cash and cash equivalents, a decrease of $24.6 million as compared to December 31, 2014. As more fully discussed below, the decrease in cash and cash equivalents during the six month period ended June 30, 2015 was primarily driven by $507.2 million of net cash used in investing activities and $32.6 million of net cash used in operating activities, partially offset by $514.6 million of cash provided by financing activities and a $0.6 million increase related to the effect of exchange rate changes on cash.

 

Cash Flows

Six Month Period Ended June 30, 2015 Compared to the Six Month Period Ended June 30, 2014

 

Net cash used in operating activities for the six month period ended June 30, 2015 was $32.6 million, a decrease of $45.0 million as compared to the prior year period of $12.4 million net cash provided by operating activities. The period over period decrease in net cash provided by operating activities principally resulted from the Company’s reduced net income. The reduction in net income compared to the prior year period was largely driven by the loss on sales of authorized generic Renvela® during the current year period. The increase in net working capital was largely offset by higher amortization and profit sharing accruals. The increase in working capital was largely due to the timing of income tax payments.

 

Net cash used in investing activities for the six month period ended June 30, 2015, was $507.2 million, an increase of $460.9 million compared to $46.2 million of net cash used in investing activities in the prior year period. The period over period increase in net cash used was due primarily to cash used to fund the Tower acquisition purchase price of $697.2 million (net of cash acquired in the acquisition), partially offset by a change in purchases of short-term investments and maturities of investments of $225.0 million with those cash proceeds used in part to fund the Tower acquisition.

 

Net cash provided by financing activities for the six month period ended June 30, 2015 was $514.6 million, representing an increase of $505.4 million as compared to $9.2 million of net cash provided by financing activities in the prior year period. The period over period increase in net cash provided by financing activities was due to the sale of our convertible notes.  Please refer to “Outstanding Debt Obligations” below for details regarding our debt obligations.

  

 

 

Outstanding Debt Obligations 

 

2% Convertible Senior Notes due June 2022

 

On June 30, 2015, we issued an aggregate principal amount of $600.0 million of 2.00% Convertible Senior Notes due June 2022 (the “Notes”) in a private placement offering, which are our senior unsecured obligations. The Notes were issued pursuant to an Indenture dated June 30, 2015 (the “Indenture”) between us and Wilmington Trust, N.A. as trustee. The Indenture includes customary covenants and sets forth certain events of default after which the Notes may be due and payable immediately. The Notes will mature on June 15, 2022, unless earlier redeemed, repurchased or converted. The Notes bear interest at a rate of 2.00% per year, and interest is payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2015.

 

The conversion rate for the Notes is initially set at 15.7858 shares per $1,000 of principal amount, which is equivalent to an initial conversion price of $63.35 per share of our common stock. If a Make-Whole Fundamental Change (as defined in the Indenture) occurs or becomes effective prior to the maturity date and a holder elects to convert its Notes in connection with the Make-Whole Fundamental Change, we are obligated to increase the conversion rate for the Notes so surrendered by a number of additional shares of our common stock as prescribed in the Indenture. Additionally, the conversion rate is subject to adjustment in the event of an equity restructuring transaction such as a stock dividend, stock split, spinoff, rights offering, or recapitalization through a large, nonrecurring cash dividend (“standard antidilution provisions,” per ASC 815-40 – Contracts in Entity’s Own Equity).

 

The Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding December 15, 2021 only under the following circumstances:

 

(i)

If during any calendar quarter commencing after the quarter ending September 30, 2015 (and only during such calendar quarter) the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on each applicable trading day; or

 

(ii)

If during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 of principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last report sale price of our common stock and the conversion rate on each such trading day; or

 

(iii)

Upon the occurrence of corporate events specified in the Indenture

 

On or after December 15, 2021 until the close of business on the second scheduled trading day immediately preceding the maturity date, the holders may convert their Notes at any time, regardless of the foregoing circumstances. We may satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock, at the Company’s election and in the manner and subject to the terms and conditions provided in the Indenture.

 

Concurrently with the offering of the Notes and using a portion of the proceeds from the sale of the Notes, we entered into a series of convertible note hedge and warrant transactions (the “Note Hedge Transactions” and “Warrant Transactions”) which are designed to reduce the potential dilution to our stockholders and/or offset the cash payments we are required to make in excess of the principal amount upon conversion of the Notes. The Note Hedge Transactions and Warrant Transactions are separate transactions, in each case, entered into by us with a financial institution and are not part of the terms of the Notes. These transactions will not affect any holder’s rights under the Notes, and the holders of the Notes have no rights with respect to the Note Hedge Transactions and Warrant Transactions. See “Note 5 – Derivatives” and “Note 17 – Stockholders’ Equity” for additional information.

 

As of the June 30, 2015 issuance date of the Notes, we did not have the necessary number of authorized but unissued shares of its common available to settle the conversion option of the Notes in shares of our common stock. Unless and until our stockholders approve a sufficient increase in the authorized share count, we are required to settle the principal amount and conversion spread of the Notes in cash. Therefore, in accordance with guidance found in ASC 470-20 – Debt with Conversion and Other Options (“ASC 470-20”) and ASC 815-15 – Embedded Derivatives (“ASC 815-15”), the conversion option of the Notes was deemed an embedded derivative which must be bifurcated from the Notes (host contract) and accounted for separately as a derivative liability. The fair value of the conversion option derivative liability at June 30, 2015 was approximately $167.0 million, which was recorded with an offsetting debit to the book value of the debt. This debt discount will be amortized to interest expense over the term of the debt using the effective interest method.

 

 

 

In connection with the issuance of the Notes, we incurred approximately $18.6 million of debt issuance costs for banking, legal, and accounting fees and other expenses. This was also recorded on our balance sheet as a debt discount, in accordance with our early adoption of Accounting Standards Update (“ASU”) No. 2015-03 – Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), and will be amortized to interest expense over the term of the debt using the effective interest method.

 

As the private offering closed on the last day of the quarter ended June 30, 2015, there was no related interest expense recorded for the quarter, and there was no accrued interest payable balance on the Notes as of June 30, 2015. As the Notes mature in 2022, they have been classified as long-term debt on our balance sheet, with a book balance of approximately $414.4 million as of June 30, 2015.

 

Loss on Early Extinguishment of Debt – Barclays $435.0 Million Term Loan

  

In connection with the acquisition of Tower during the first quarter of 2015, we entered into a $435.0 million senior secured term loan facility (the “Term Loan”) and a $50.0 million senior secured revolving credit facility (the “Barclays Revolver” and together with the Term Loan, the “Barclays Senior Secured Credit Facilities”), pursuant to a credit agreement, dated as of March 9, 2015, by and among us, the lenders party thereto from time to time and Barclays Bank PLC, as administrative and collateral agent (the “Barclays Credit Agreement”). In connection with the Barclays Senior Secured Credit Facilities, we incurred debt issuance costs of approximately $17.8 million, which were previously reflected as a debt discount on our balance sheet in accordance with ASU 2015-03. Prior to repayment of the Term Loan on June 30, 2015, these debt issuance costs were amortized to interest expense over the term of the loan using the effective interest rate method.

 

On June 30, 2015, we used approximately $436.4 million of the proceeds from the sale of the Notes to repay the $435.0 million of principal and approximately $1.4 million of accrued interest due on our Term Loan under the Barclays Credit Agreement. In connection with this repayment of the loan, we recorded a loss on early extinguishment of debt of approximately $16.9 million related to the unamortized portion of the deferred debt issuance costs during the quarter ended June 30, 2015.

 

For the three months ended June 30, 2015, we incurred total interest expense on the Term Loan of approximately $6.8 million, of which $6.0 million was cash and $0.8 million was non-cash amortization of the deferred debt issuance costs. For the six months ended June 30, 2015, we incurred total interest expense on the Term Loan of approximately $10.7 million, of which $9.8 million was cash and $0.9 million was non-cash amortization of the deferred debt issuance costs. Included in the year-to-date cash interest expense of $9.8 million is approximately $2.3 million related to a ticking fee paid to Barclays during the first quarter of 2015, prior to the funding of the Senior Secured Credit Facilities on March 9, 2015, to lock in the financing terms from the lenders’ commitment of the Term Loan until the actual allocation of the loan occurred.

 

Closure of Credit Facility – Barclays $50.0 Million Revolver

 

On June 30, 2015, in connection with the repayment of the Term Loan, we voluntarily terminated our Barclays Revolver. There were no borrowings during the time the facility was in place.

 

For the three months ended June 30, 2015, we incurred unused line fees of approximately $67,000. For the six months ended June 30, 2015, we incurred unused line fees of approximately $82,000. All fees were paid in full as of June 30, 2015 as a condition to closing the facility.

 

As a result of the repayment of the Barclays Senior Secured Credit Facilities described above, liens and other security interest held by the lenders on certain of our properties and assets were released and the Barclays Credit Agreement was terminated in accordance with its terms on June 30, 2015.

  

 

 

Closure of Credit Facility – Wells Fargo $50.0 Million Revolver

 

As of December 31, 2014, we were a party to a Credit Agreement, as amended, with Wells Fargo Bank, N.A. as lender and administrative agent (the “Wells Fargo Credit Facility”) which provided us with a revolving line of credit in the aggregate principal amount of up to $50.0 million. The Wells Fargo Credit Facility matured in accordance with the terms therein on February 11, 2015 and was not renewed. There were no borrowings under this facility during the time it was available to us. 

  

New Revolving Credit Facility

 

See “Note 22 – Subsequent Events” for information on our credit facility with Royal Bank of Canada dated August 4, 2015.

 

Off-Balance Sheet Arrangements 

 

We did not have any off-balance sheet arrangements as of June 30, 2015.

 

Contractual Obligations

 

As of June 30, 2015, there were no significant changes to our contractual obligations as set forth in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Recent Accounting Pronouncements 

 

 In May 2014, the FASB issued updated guidance regarding the accounting for and disclosures of revenue recognition, with an effective date for annual and interim periods beginning after December 15, 2016. The update provides a single comprehensive model for accounting for revenue from contracts with customers. The model requires that revenue recognized reflect the actual consideration to which the entity expects to be entitled in exchange for the goods or services defined in the contract, including in situations with multiple performance obligations. This guidance will be the same for both U.S. GAAP and International Financial Reporting Standards (IFRS). In July 2015, the FASB deferred the effective date by one year. The guidance will be effective for annual and interim periods beginning after December 15, 2017. We are currently evaluating the effect that this guidance may have on our consolidated financial statements.

 

In April 2015, the FASB issued updated guidance on the presentation requirements for debt issuance costs and debt discount and premium. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance. The updated guidance is effective for annual and interim periods beginning after December 15, 2015 and early adoption is permitted for financial statements that have not been previously issued. We adopted this guidance during the three month period ended March 31, 2015 and it did not have a material impact on our results of operations.

 

 

 

ITEM 3.     Quantitative and Qualitative Disclosures About Market Risk

 

Our cash equivalents and short-term investments included a portfolio of high credit quality securities, including U.S. government securities, treasury bills, short-term commercial paper, and highly-rated money market funds. As a result, the portfolio was subject to interest rate risk. Based on the average duration of our investments as of December 31, 2014, an increase of one percentage point in interest rates would have resulted in an increase in interest income of approximately $2.4 million. The carrying value of the portfolio approximates the market value at December 31, 2014.

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, short-term investments and accounts receivable. We limit our credit risk associated with cash equivalents and short-term investments by placing investments with high credit quality securities, including U.S. government securities, treasury bills, corporate debt, short-term commercial paper and highly-rated money market funds. We limit our credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary. We do not require collateral to secure amounts owed to us by our customers.

 

Prior to June 30, 2015, we had no derivative assets or liabilities and did not engage in any hedging activities. As a result of our June 30, 2015 issuance of the Notes described in “Item 1. Financial Statements - Note 5. Derivatives”, the conversion option of the Notes met the criteria for an embedded derivative liability that required bifurcation and separate accounting. Contemporaneously with the issuance of the Notes, we entered into a series of convertible note hedge and warrant transactions, resulting in a derivative asset for the call options purchased. These derivative instruments are subject to remeasurement at each reporting period, with changes in fair value reflected in current period earnings. The variability in the fair value of the derivative instruments results from changes in inputs such as our stock price, our stock price volatility, and risk- free interest rates, which are subject to market volatility and are outside of the our control.

 

We do not use derivative financial instruments or engage in hedging activities in our ordinary course of business and have no material foreign currency exchange exposure or commodity price risks. See “Item 15. Exhibits and Financial Statement Schedules – Note 17. Segment Information” for more information regarding the value of our investment in Impax Laboratories (Taiwan), Inc., as filed on the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

We do not believe that inflation has had a significant impact on our revenues or operations to date.   

 

 

 

ITEM 4.     Controls and Procedures

 

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, were effective as of June 30, 2015 at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2015, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) which materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

Systems of disclosure controls and internal controls over financial reporting and their associated policies and procedures, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance the objectives of the system of control are achieved. Further, the design of a control system must be balanced against resource constraints, and therefore the benefits of controls must be considered relative to their costs. Given the inherent limitations in all systems of controls, no evaluation of controls can provide absolute assurance all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Accordingly, given the inherent limitations in a cost-effective system of internal control, financial statement misstatements due to error or fraud may occur and may not be detected. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives. We conduct periodic evaluations of our systems of controls to enhance, where necessary, our control policies and procedures.  

 

 

 

PART II.     Other Information

 

Item 1.        Legal Proceedings

Information pertaining to legal proceedings can be found in “Item 1. Financial Statements – Note 20. Legal and Regulatory Matters” and is incorporated by reference herein.

 

Item 1A.     Risk Factors

 

During the quarter ended June 30, 2015, except as set forth below, there were no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which could materially affect our business, consolidated financial condition or consolidated results of operations. The risks described herein, and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 are not the only risks we face. Additional risks and uncertainties not currently known to us or which we currently deem to be immaterial may also materially adversely affect our business, consolidated financial condition and/or consolidated results of operations.

 

 

The terms of our senior secured credit facility and the indenture governing our 2.00% Convertible Senior Notes Due June 2022 impose financial and operating restrictions on us.

 

We have a $100.0 million senior secured revolving credit facility (the “Senior Secured Credit Facility”) pursuant to a credit agreement, dated as of August 4, 2015, by and among us, the lenders party thereto from time to time and Royal Bank of Canada, as administrative agent and collateral agent, and an indenture dated June 30, 2015 between us and Wilmington Trust, National Association (the “Indenture”) governing our 2.00% Convertible Senior Notes Due 2022 (the “Notes”). Our Senior Secured Credit Facility and Indenture contain a number of negative covenants that limit our ability to engage in activities. These covenants limit or restrict, among other things, our ability to:

 

•

incur additional debt, guarantee other obligations or grant liens on our assets;

•

make certain loans or investments;

•

undertake certain acquisitions, mergers or consolidations, or dispose of assets;

•

make optional payments or modify certain debt instruments;

•

pay dividends or other payments on our capital stock, enter into arrangements that restrict our and our restricted subsidiaries’ ability to pay dividends or grant liens; or

•

engage in certain transactions with our affiliates.

 

The terms of our Senior Secured Credit Facility also include a financial covenant which requires us to maintain a certain total net leverage ratio. These limitations and restrictions may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our best interests.  If we breach any of the covenants in our Senior Secured Credit Facility or Indenture, we may be in default and our borrowings under the facility and the Notes could be declared due and payable, including accrued interest and other fees, which could have a material adverse effect on our business, results of operations and financial condition.

 

Our level of indebtedness and liabilities could limit cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations under our convertible notes and other debt instruments.

 

At June 30, 2015, our total consolidated liabilities were $1.04 billion, including $600 million of outstanding convertible notes. We may also incur additional indebtedness to meet future financing needs. Our indebtedness could have significant negative consequences for our business, results of operations and financial condition, including:

 

	•	increasing our vulnerability to adverse economic and industry conditions;
	•	limiting our ability to obtain additional financing;
	•	requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash flow available for other purposes;
	•	limiting our flexibility in planning for, or reacting to, changes in our business;
	•	dilution experienced by our existing stockholders as a result of the conversion of the convertible notes into shares of common stock; and
	•	placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.

 

 

 

We cannot assure you that we will be able to continue to maintain sufficient cash reserves or continue to generate cash flow from operations at levels sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, or that our cash needs will not increase. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of our indebtedness then outstanding, we would be in default, which would permit the holders of the affected indebtedness to accelerate the maturity of such indebtedness and could cause defaults under our other indebtedness. Any default under any indebtedness could have a material adverse effect on our business, results of operations and financial condition.

  

We have received a warning letter and Form 483 observations from the FDA. If we are unable to promptly correct the issues raised in the warning letter and/or Form 483 observations, our business, results of operations and financial condition could be materially and adversely affected.

 

In late May 2011, we received a warning letter from the FDA related to an on-site FDA inspection of our Hayward, California manufacturing facility citing deviations from current Good Manufacturing Practices (cGMP), which are extensive regulations governing manufacturing practices for finished pharmaceutical products and which establish requirements for manufacturing processes, stability testing, record keeping and quality standards and controls. 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.

 

During the quarters ended March 31, 2012, March 31, 2013 and September 30, 2014, the FDA conducted inspections of our Hayward manufacturing facility and at the conclusion of each inspection, we received a Form 483. The Form 483 issued during the quarter ended March 31, 2012 contained observations primarily relating to our Quality Control Laboratory, the Form 483 issued during the quarter ended March 31, 2013 contained several observations pertaining to the operations of the Hayward facility, three of which were designated by the FDA as repeat observations from inspections that occurred prior to the warning letter and the Form 483 issued during the quarter ending September 30^, 2014 contained seven inspectional observations, two of which were designated by the FDA as repeat observations from the inspection that occurred in 2013. On May 8, 2015, we received a Form 483 with three inspectional observations following the FDA’s inspection of our Hayward manufacturing facility beginning from early April through early May 2015. The May 2015 inspection included a general cGMP inspection as well as pre approval inspections (PAI) for multiple pending products at the FDA. At the time of the inspection, the FDA did not provide any status or classification to these observations and, pursuant to its established regulatory process, would defer classification until it has reviewed our response to each observation. We were, however, able to confirm that the FDA’s inspection at our Hayward facility in 2014 was officially classified as Voluntary Action Indicated (VAI). We have provided the FDA with what we believe to be our complete written responses relating to the observations from the May 2015 inspection. To date, we have not been informed by the FDA as to whether a satisfactory re-inspection of our Hayward manufacturing facility will be required to close out the warning letter on our Hayward manufacturing facility.

 

In July 2014, the FDA conducted an inspection of our Taiwan manufacturing facility and at the conclusion of the inspection, we received a Form 483 with ten observations. We received and responded to a request for additional information from the FDA regarding our Taiwan facility in December 2014. On January 7, 2015, we received approval from the FDA for RYTARY™, our first internally developed branded product for the treatment of Parkinson’s disease, which is manufactured in our Taiwan facility. In March 2015, we received correspondence from the FDA classifying our Taiwan manufacturing facility as acceptable.

 

On March 11, 2015, we received a Form 483 with two observations regarding adverse event reporting and annual report submissions in Horsham, Pennsylvania (one of the sites we acquired in the Tower and Lineage acquisition). We provided the FDA with what we believe to be our complete written responses relating to the observations in the Form 483 at the end of March 2015 and are awaiting classification of the inspection from the Agency.

 

We are currently cooperating with the FDA to close out the warning letter and resolve the Form 483 observations. We have taken a number of steps to review our quality control and manufacturing systems and standards and are working with third-party experts to assist us with our review and in enhancing such systems and standards. 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 and the Form 483 observations resolved, it is possible we may be subject to additional regulatory action by the FDA as a result of 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. The warning letter and Form 483 observations do not currently place restrictions on our ability to manufacture and ship our existing products, however 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 the warning letter is closed out and the Form 483 observations on our Hayward facility are resolved. Further, other federal agencies, our customers and partners in our alliance, development, collaboration and other partnership agreements with respect to our products and services may take the warning letter and Form 483 observations into account when considering the award of contracts or the continuation or extension of such partnership agreements. If we are unable promptly to correct the issues raised in the warning letter and Form 483 observations, our business, consolidated results of operations and consolidated financial condition could be materially and adversely affected.

 

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information regarding the purchases of our equity securities by us during the three months ended June 30, 2015.

 

Period		Total Number of Shares (or Units) Purchased(1)			Average Price Paid Per Share (or Unit)					Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs				Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 1, 2015 to April 30, 2015		127,969 shares of common stock			$		46.69				—				—
May 1, 2015 to May 31, 2015A		19,247 shares of common stock			$		45.00				—				—
June 1, 2015 to June 30, 2015		-- shares of common stock			$		--				—				—

 

(1)	Represents shares of our common stock that we accepted during the indicated periods as a tax withholding from certain of our employees in connection with the vesting of shares of restricted stock pursuant to the terms of our 2002 Plan.

  

 

 

 

ITEM 3.     Defaults Upon Senior Securities.

Not Applicable.

 

ITEM 4.     Mine Safety Disclosures.

Not Applicable.

 

ITEM 5.     Other Information.

Not Applicable.  

 

 

 

ITEM 6.

Exhibits

 

Exhibit No.		Description of Document
3.1.1		Amendment No. 2 to Amended and Restated Bylaws of Impax Laboratories, Inc.
3.1.2		Amendment No. 1 to Amended and Restated Bylaws of Impax Laboratories, Inc.
3.1.3		Amended and Restated Bylaws of Impax Laboratories, Inc., effective May 14, 2014.
4.1		Indenture, dated as of June 30, 2015, between Impax Laboratories, Inc., and Wilmington Trust, National Association, as trustee. (1)
10.1		Letter Agreement, dated June 25, 2015, between RBC Capital Markets LLC and Impax Laboratories, Inc., regarding the Base Warrants. (1)
10.2		Letter Agreement, dated June 25, 2015, between RBC Capital Markets LLC and Impax Laboratories, Inc., regarding the Base Call Option Transaction. (1)
10.3		Letter Agreement, dated June 26, 2015, between RBC Capital Markets LLC and Impax Laboratories, Inc., regarding the Additional Warrants. (1)
10.4		Letter Agreement, dated June 26, 2015, between RBC Capital Markets LLC and Impax Laboratories, Inc., regarding the Additional Call Option Transaction. (1)
10.5		Credit Agreement dated as of August 4, 2015, by and among Impax Laboratories, Inc., the lenders party thereto from time to time and Royal Bank of Canada, as administrative agent and collateral agent. (2)
11.1		Statement re computation of per share earnings (incorporated by reference to Note 18 in the Notes to the unaudited interim Consolidated Financial Statements in this Quarterly Report on Form 10-Q).
31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014, (ii) Consolidated Statements of Operations for each of the three and six months ended June 30, 2015 and 2014, (iii) Consolidated Statements of Comprehensive Income for each of the three and six months ended June 30, 2015 and 2014, (iv) Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2015, (v) Consolidated Statements of Cash Flows for each of the six months ended June 30, 2015 and 2014 and (vi) Notes to Interim Consolidated Financial Statements.

 

 

	(1)	Incorporated by reference to the Company’s Current Report on Form 8-K filed on June 30, 2015.
	(2)	Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 5, 2015.

  

  

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

Date: August 10, 2015		Impax Laboratories, Inc.
	By:	/s/ Fred Wilkinson
		Name: Fred Wilkinson
		Title: President and Chief Executive Officer (Principal Executive Officer)
	By:	/s/ Bryan M. Reasons
		Name: Bryan M. Reasons
		Title: Chief Financial Officer and Senior Vice President, Finance (Principal Financial and Accounting Officer)

 

 

 

 

		EXHIBIT INDEX
Exhibit No.		Description of Document
3.1.1		Amendment No. 2 to Amended and Restated Bylaws of Impax Laboratories, Inc.
3.1.2		Amendment No. 1 to Amended and Restated Bylaws of Impax Laboratories, Inc.
3.1.3		Amended and Restated Bylaws of Impax Laboratories, Inc., effective May 14, 2014
4.1		Indenture, dated as of June 30, 2015, between Impax Laboratories, Inc., and Wilmington Trust, National Association, as trustee. (1)
10.1		Letter Agreement, dated June 25, 2015, between RBC Capital Markets LLC and Impax Laboratories, Inc., regarding the Base Warrants. (1)
10.2		Letter Agreement, dated June 25, 2015, between RBC Capital Markets LLC and Impax Laboratories, Inc., regarding the Base Call Option Transaction. (1)
10.3		Letter Agreement, dated June 26, 2015, between RBC Capital Markets LLC and Impax Laboratories, Inc., regarding the Additional Warrants. (1)
10.4		Letter Agreement, dated June 26, 2015, between RBC Capital Markets LLC and Impax Laboratories, Inc., regarding the Additional Call Option Transaction. (1)
10.5		Credit Agreement dated as of August 4, 2015, by and among Impax Laboratories, Inc., the lenders party thereto from time to time and Royal Bank of Canada, as administrative agent and collateral agent. (2)
11.1		Statement re computation of per share earnings (incorporated by reference to Note 18 in the Notes to the unaudited interim Consolidated Financial Statements in this Quarterly Report on Form 10-Q).
31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014, (ii) Consolidated Statements of Operations for each of the three and six months ended June 30, 2015 and 2014, (iii) Consolidated Statements of Comprehensive Income for each of the three and six months ended June 30, 2015 and 2014, (iv) Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2015, (v) Consolidated Statements of Cash Flows for each of the three and six months ended June 30, 2015 and 2014 and (vi) Notes to Interim Consolidated Financial Statements.

  

 

 

	(1)	Incorporated by reference to the Company’s Current Report on Form 8-K filed on June 30, 2015.
	(2)	Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 5, 2015.

     

 

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