IPXL Impax Laboratories, Inc. (delisted)

Impax Laboratories, Inc. (NASDAQ: IPXL) today reported third quarter ended September 30, 2011 financial results.

• Adjusted net income, increased 26% to $20.0 million or $0.30 per diluted share, compared to adjusted net income of $15.8 million or $0.24 per diluted share in the prior year period.
• Unadjusted net income was $17.2 million, or $0.26 per diluted share, compared to $75.2 million, or $1.15 per diluted share in the prior year period. The decline was primarily attributable to the change in accounting for the Teva Agreement as further described below.
• Total revenues of $119.8 million increased $12.2 million, compared to adjusted revenue of $107.6 million in the prior year period. Third quarter 2010 revenue of $304.0 million excludes $196.4 million of generic Rx Partner revenue due to the change in accounting for the Teva Agreement.
• Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), was $32.5 million compared to $27.8 million in the prior year period.

Please refer to “Non-GAAP Financial Measures” below for a reconciliation of GAAP to non-GAAP items.

“During the third quarter, we continued to make significant quality improvements and are diligently working to resolve the manufacturing observations raised in the June warning letter. These efforts remain a top priority throughout the Company. However, it has not distracted us from continuing to focus on our business as evidenced by our profitable results in the third quarter or hindered our investments in new product opportunities,” said Larry Hsu, Ph.D., president and CEO, Impax Laboratories, Inc.

Dr. Hsu continued, “We have provided the U.S. Food and Drug Administration (FDA) with updates on our progress with quality improvements and established dialogue with the agency. We have implemented a global quality improvement program with the assistance of our external consultants. Our focus remains on working expeditiously to meet our internal goal of closing out the warning letter by the end of February 2012, the timing of which is dependent upon the FDA’s availability to re-inspect our Hayward facility.”

Dr. Hsu concluded, “Throughout this process we have continued to focus on growth initiatives. Our generic pipeline of 47 products pending approval has never been larger and continues to expand as we have already filed 10 new product applications in 2011. Within our brand division, we remain on track to file a New Drug Application for IPX066, our leading brand product candidate for Parkinson’s Disease, by the end of this year. In addition, we continue to pursue internally developed products and business development candidates that are consistent with our stated objectives of high growth and high margin opportunities.”

Segment Information – Third Quarter 2011

The Company has two reportable segments, the Global Pharmaceuticals Division (generic products & services) and the Impax Pharmaceuticals Division (brand products & services) and does not allocate general corporate services to either segment.

Global Pharmaceuticals Division Information

    Three Months Ended     Nine Months Ended September 30, September 30, (unaudited, amounts in thousands) 2011     2010 2011     2010 Revenues: Global Product sales, net $ 97,661 $ 91,579 $ 301,124 $ 539,333 Rx Partner (a) 12,621 202,799 20,169 213,504 OTC Partner 879 2,365 4,006 6,439 Research Partner   3,385   3,384   13,154   10,153 Total revenues (a) 114,546 300,127 338,453 769,429 Cost of revenues (a)   54,196   140,278   164,627   282,309 Gross profit (a)   60,350   159,849   173,826   487,120 Operating expenses: Research and development 11,487 12,819 34,728 32,608 Patent litigation 2,114 1,033 6,097 4,786 Selling, general and administrative   4,069   4,127   9,938   11,149 Total operating expenses   17,670   17,979   50,763   48,543 Income from operations (a) $ 42,680 $ 141,870 $ 123,063 $ 438,577

(a) In the third quarter 2010, the Company materially modified its Strategic Alliance Agreement with Teva and applied the revised revenue recognition standards of FASB ASC 605-25 Multiple Element Arrangements. Application of the revised standards resulted in the recognition of previously deferred net revenue that would have been recognized over the remaining life of the Teva agreement under the prior standards. The following table reflects the impact on the Global Pharmaceuticals Division results due to the change in revenue recognition.

(unaudited amounts in

    Three Months Ended     Nine Months Ended thousands) September 30, 2010 September 30, 2010                

AsReported

Impact ofchange

AsReported

Impact ofchange

Adjusted Adjusted Rx Partner $ 202,799 $ 196,440 $ 6,359 $ 213,504 $ 196,440 $ 17,064 Total revenues 300,127 196,440 103,687 769,429 196,440 572,989 Cost of revenues 140,278 95,426 44,852 282,309 95,426 186,883 Gross profit 159,849 101,014 58,835 487,120 101,014 386,106 Income from operations $ 141,870 $ 101,014 $ 40,856 $ 438,577 $ 101,014 $ 337,563

Excluding the third quarter 2010 change in revenue recognition under the Teva Agreement, Global Pharmaceuticals Division revenues increased $10.8 million to $114.5 million in the third quarter 2011, compared to $103.7 million in the prior year period, due to higher Global Product sales, net, and Rx Partner sales.

For the third quarter 2011, Global Product sales, net, were $97.7 million, up $6.1 million from the prior year period due to higher sales of authorized generic Adderall XR® products ($46.9 million in the third quarter 2011 compared to $32.0 million in the prior year period). Sales of generic Adderall XR® in the third quarter 2011 were mitigated due to ongoing supply issues from the Company’s supplier, resulting in insufficient supply to satisfy customer demand. For the fourth quarter 2011, the Company currently estimates generic Adderall XR® sales similar to those in the third quarter 2011 based on estimates of shipments from the Company’s supplier. This forecast includes estimated deliveries throughout the fourth quarter, including those expected in late December. Consistent with prior quarters, the Company’s expectations are subject to receipt of expected quantities.

Partially offsetting the increase in generic Adderall XR® product sales were lower sales of certain Global Products principally due to the slowdown in manufacturing production levels earlier in the year as the Company implemented manufacturing and quality process improvements. The slowdown resulted in delays in the release of certain products which caused the loss of some third quarter 2011 orders. The Company is now producing product at a normal pace and does not currently plan to reduce its manufacturing of finished product.

Rx Partner revenue, excluding the third quarter 2010 change in accounting for the Teva agreement as noted above, increased $6.3 million to $12.6 million, compared to the prior year period. The increase was due to the receipt of $7.4 million from Teva representing an adjustment to previous estimates of profit share earned by the Company under the Teva Agreement.

Gross profit of $60.4 million represents a 53% gross margin in the third quarter 2011, and was lower than the adjusted gross margin of 57% (excludes the change in revenue recognition as noted above) for the prior year period primarily due to lower sales of certain higher margin products in the third quarter 2011.

Total generic operating expenses of $17.7 million in the third quarter 2011 decreased slightly over the prior year period primarily due to lower spending on research and development partially offset by higher spending on patent litigation.

Impax Pharmaceuticals Division Information

Three Months Ended     Nine Months Ended September 30, September 30, (unaudited, amounts in thousands) 2011     2010 2011     2010 Revenues: Rx Partner $ 1,438 $ - $ 4,313 $ - Promotional Partner 3,535 3,535 10,605 10,538 Research Partner   330   330   989   440 Total revenues 5,303 3,865 15,907 10,978 Cost of revenues   2,999   2,843   8,840   9,280 Gross profit   2,304   1,022   7,067   1,698 Operating expenses: Research and development 7,352 11,027 27,580 30,656 Selling, general and administrative   1,632   930   4,116   2,478 Total operating expenses   8,984   11,957   31,696   33,134 Loss from operations $ (6,680 ) $ (10,935 ) $ (24,629 ) $ (31,436 )

Impax Pharmaceuticals Division revenues in the third quarter 2011 increased $1.4 million to $5.3 million over the prior year period due to the addition of Rx Partner revenues.

In the third quarter 2011, the Company recognized $1.4 million of Rx Partner revenue related to the $11.5 million up-front payment (recognized over 24 months) received under the License, Development and Commercialization Agreement with Glaxo Group Limited which was entered into in December 2010.

The loss from operations in the third quarter 2011 was a result of the Company’s strategy to invest in research and development to develop brand products which provide longer product life cycles and the potential for significantly higher profit margins than generic products.

Corporate and Other

    Three Months Ended     Nine Months Ended September 30, September 30, (unaudited, amounts in thousands) 2011     2010 2011     2010 General and administrative expenses $ 10,617 $ 7,575 $ 34,352 $ 23,509 Loss from operations $ (10,617 ) $ (7,575 ) $ (34,352 ) $ (23,509 )

General and administrative expenses in the third quarter 2011 increased $3.0 million compared to the prior year period primarily due to an increase in legal fees.

Cash and short-term investments were $359.8 million as of September 30, 2011, as compared to $348.4 million as of December 31, 2010.

2011 Financial Outlook

The Company updated its full year 2011 financial outlook as noted below.

• Positive cash flows from operating activities, less capital expenditures (Free Cash Flow).
• Gross margins as a percent of total revenues of approximately 50%.
• Total research and development (R&D) expenses across the generic and brand divisions to approximate $87 million with generic R&D of approximately $47 million and brand R&D of approximately $40 million.
• Patent litigation expenses of approximately $10 million. (Updated Nov. 1, 2011)
• Selling, general and administrative expenses of approximately $65 million.
• Effective tax rate of approximately 34% to 36%.
• Capital expenditures of approximately $50 million. (Updated Nov. 1, 2011)

Conference Call Information

The Company will host a conference call on November 1, 2011 at 11:00 a.m. EDT to discuss its results. The number to call from within the United States is (877) 356-3814 and (706) 758-0033 internationally. The call can also be accessed via a live Webcast through the Investor Relations section of the Company’s Web site, www.impaxlabs.com. A replay of the conference call will be available shortly after the call for a period of seven days. To access the replay, dial (855) 859-2056 (in the U.S.) and (404) 537-3406 (international callers). The access conference code is 18040631.

About Impax Laboratories, Inc.

Impax Laboratories, Inc. is a technology based specialty pharmaceutical company applying its formulation expertise and drug delivery technology to the development of controlled-release and specialty generics in addition to the development of branded products. Impax markets its generic products through its Global Pharmaceuticals Division and markets third-party branded products through the Impax Pharmaceuticals Division. Additionally, where strategically appropriate, Impax has developed marketing partnerships to fully leverage its technology platform. Impax Laboratories is headquartered in Hayward, California, and has a full range of capabilities in its Hayward, Philadelphia and Taiwan facilities. For more information, please visit the Company's Web site at: www.impaxlabs.com.

"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995:

To the extent any statements made in this news release contain information that is not historical, including the statements under the heading “2011 Financial Outlook,” these statements are forward-looking in nature and express the beliefs and expectations of management. Such statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the Company’s future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to, the effect of current economic conditions on the Company’s industry, business, financial position and results of operations, the ability to maintain an effective system of internal control over financial reporting, fluctuations in revenues and operating income, the ability to successfully develop and commercialize pharmaceutical products, reductions or loss of business with any significant customer or a reduction in sales of any significant product, the impact of competition, the ability to sustain profitability and positive cash flows, any delays or unanticipated expenses in connection with the operation of the Taiwan facility, the effect of foreign economic, political, legal and other risks on operations abroad, the uncertainty of patent litigation, consumer acceptance and demand for new pharmaceutical products, the difficulty of predicting Food and Drug Administration filings and approvals, the inexperience of the Company in conducting clinical trials and submitting new drug applications, the ability to successfully conduct clinical trials, reliance on alliance and collaboration agreements, the availability of raw materials, the ability to comply with legal and regulatory requirements governing the pharmaceuticals and healthcare industries, the regulatory environment, the ability to protect the Company’s intellectual property, exposure to product liability claims and other risks described in the Company’s periodic reports filed with the Securities and Exchange Commission. Forward-looking statements speak only as to the date on which they are made, and Impax undertakes no obligation to update publicly or revise any forward-looking statement, regardless of whether new information becomes available, future developments occur or otherwise.

Impax Laboratories, Inc. Consolidated Statements of Operations

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

        Three Months Ended Nine Months Ended September 30, September 30, 2011     2010 2011     2010 Revenues: Global Pharmaceuticals Division $ 114,546 $ 300,127 $ 338,453 $ 769,429 Impax Pharmaceuticals Division   5,303   3,865   15,907   10,978 Total revenues 119,849 303,992 354,360 780,407   Cost of revenues   57,195   143,121   173,467   291,589 Gross profit   62,654   160,871   180,893   488,818 Operating expenses: Research and development 18,839 23,846 62,308 63,264 Patent litigation 2,114 1,033 6,097 4,786 Selling, general and administrative   16,318   12,632   48,406   37,136 Total operating expenses   37,271   37,511   116,811   105,186 Income from operations 25,383 123,360 64,082 383,632 Other income (expense), net 69 (91 ) (470 ) (134 ) Interest income 268 405 879 680 Interest expense   (53 )   (38 )   (81 )   (108 ) Income before income taxes 25,667 123,636 64,410 384,070 Provision for income taxes   8,486   48,501   20,844   146,114 Net income before noncontrolling interest 17,181 75,135 43,566 237,956 Add back loss attributable to noncontrolling interest   39   28   67   40 Net Income $ 17,220 $ 75,163 $ 43,633 $ 237,996   Net Income per share: Basic $ 0.27 $ 1.20 $ 0.68 $ 3.85 Diluted $ 0.26 $ 1.15 $ 0.65 $ 3.65   Weighted average common shares outstanding: Basic 64,387,413 62,435,116 63,937,796 61,778,465 Diluted 66,986,758 65,470,341 67,318,658 65,171,055 Impax Laboratories, Inc. Condensed Consolidated Balance Sheets

(unaudited, amounts in thousands)

        September 30, December 31, 2011 2010 Assets Current assets: Cash and cash equivalents $ 138,210 $ 91,796 Short-term investments 221,595 256,605 Accounts receivable, net 106,003 82,054 Inventory, net 50,126 44,549 Deferred product manufacturing costs 1,385 2,012 Deferred income taxes 40,650 39,271 Prepaid expenses and other current assets   2,914   4,407 Total current assets   560,883   520,694 Property, plant and equipment, net 114,607 106,280 Deferred product manufacturing costs 7,631 8,223 Deferred income taxes, net 5,454 5,069 Other assets 36,209 25,478 Goodwill   27,574   27,574 Total assets $ 752,358 $ 693,318   Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 17,309 $ 18,812 Accrued expenses 74,307 72,788 Accrued income taxes payable 226 2,393 Accrued profit sharing and royalty expenses 22,602 14,147 Deferred revenue   23,432   18,276 Total current liabilities   137,876   126,416 Deferred revenue 21,753 44,195 Other liabilities   15,959   14,558 Total liabilities 175,588 185,169 Total stockholders' equity   576,770   508,149 Total liabilities and stockholders' equity $ 752,358 $ 693,318 Impax Laboratories, Inc. Consolidated Statements of Cash Flows

(unaudited, amounts in thousands)

    Nine Months Ended September 30, 2011     2010 Cash flows from operating activities: Net income $ 43,633 $ 237,996 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 11,883 9,066 Amortization of Credit Agreement deferred financing costs 20 25 Accretion of interest income on short-term investments (665 ) (374 ) Deferred income taxes 4,322 46,657 Provision for uncertain tax positions 142 35 Tax benefit related to the exercise of employee stock options (6,086 ) (4,337 ) Deferred revenue 2,182 22,947 Deferred product manufacturing costs (1,275 ) (9,739 ) Recognition of deferred revenue (19,489 ) (224,454 ) Amortization deferred product manufacturing costs 2,494 106,746 Accrued profit sharing and royalty expense 67,210 86,985 Payments of profit sharing and royalty expense (58,759 ) (125,445 ) Payments of accrued litigation settlements - (5,865 ) Share-based compensation expense 9,632 7,706 Bad debt expense 163 215 Changes in assets and liabilities: Accounts receivable (24,112 ) 90,072 Inventory (5,577 ) 7,094 Prepaid expenses and other assets (9,606 ) (11,225 ) Accounts payable, accrued expenses and income taxes payable (6,871 ) 22,349 Other liabilities   1,213   3,431 Net cash provided by operating activities   10,454   259,885   Cash flows from investing activities: Purchase of short-term investments (280,602 ) (306,784 ) Maturities of short-term investments 316,277 173,178 Purchases of property, plant and equipment   (18,433 )   (10,541 ) Net cash provided by (used in) investing activities   17,242   (144,147 )   Cash flows from financing activities: Tax benefit related to the exercise of employee stock options 6,086 4,337 Proceeds from exercise of stock options and ESPP   12,632   13,927 Net cash provided by financing activities   18,718   18,264   Net increase in cash and cash equivalents 46,414 134,002 Cash and cash equivalents, beginning of period   91,796   31,770 Cash and cash equivalents, end of period $ 138,210 $ 165,772

Impax Laboratories, Inc.Third Quarter 2011Non-GAAP Financial Measures

Total adjusted revenues, adjusted net income, adjusted net income per diluted share and adjusted EBITDA, are not measures of financial performance under generally accepted accounting principles (GAAP) and should not be construed as substitutes for, or superior to, GAAP revenues, net income, and net income per diluted share as a measure of financial performance. However, management uses both GAAP financial measures and the disclosed non-GAAP financial measures internally to evaluate and manage the Company’s operations and to better understand its business. Further, management believes the inclusion of non-GAAP financial measures provides meaningful supplementary information to and facilitates analysis by investors in evaluating the Company’s financial performance, results of operations and trends. The Company’s calculation of total adjusted revenues, adjusted net income, adjusted net income per diluted share and adjusted EBITDA, may not be comparable to similarly designated measures reported by other companies, since companies and investors may differ as to what type of events warrant adjustment.

The following table reconciles reported total revenues to total adjusted revenues.

    Three Months Ended     Nine Months Ended (unaudited, amounts in thousands) September 30, September 30, 2011     2010 2011     2010 Total revenues $ 119,849 $ 303,992 $ 354,360 $ 780,407 Change in accounting principle – Teva Agreement (a)   -   (196,440 )   -   (196,440 ) Total adjusted revenues $ 119,849 $ 107,552 $ 354,360 $ 583,967

The following table reconciles reported net income to adjusted net income.

    Three months ended     Nine months ended (unaudited, amounts in millions, except per share data) September 30, September 30, 2011     2010 2011     2010 Net income $ 17.2 $ 75.2 $ 43.6 $ 238.0 Adjusted to add (deduct): Share-based compensation 3.5 2.5 9.6 7.7 Employee severance - - 0.8 - Change in accounting principle (a) - (101 ) - (101 ) Income tax effect   (0.8 )   39.2   (2.1 )   38.4 Adjusted net income $ 19.9 $ 15.8 $ 51.9 $ 183.1   Adjusted net income per diluted share $ 0.30 $ 0.24 $ 0.77 $ 2.81 Net income per diluted share $ 0.26 $ 1.15 $ 0.65 $ 3.65

Impax Laboratories, Inc.

Third Quarter 2011 Non-GAAP Financial Measures  

The following table reconciles reported net income to adjusted EBITDA.

   

Three months ended

    Nine months ended

September 30,

September 30, 2011     2010 2011     2010 Net income $ 17.2 $ 75.2 $ 43.6 $ 238.0 Adjusted to add (deduct):

 

Interest income (0.3 ) (0.4 ) (0.9 ) (0.7 ) Interest expense 0.1 0.0 0.1 0.1 Depreciation and amortization 3.5 3.0 11.9 9.1 Income taxes   8.5   48.5   20.8   146.1 EBITDA   29.0   126.3   75.6   392.6   Adjusted to add (deduct): Share-based compensation 3.5 2.5 9.6 7.7 Employee severance - - 0.8 - Change in accounting principle (a)   -   (101.0 )   -   (101.0 ) Adjusted EBITDA $ 32.5 $ 27.8 $ 86.0 $ 299.3

(a) Material Modification to Teva AgreementIn July 2010, the Company entered into a material modification of its Strategic Alliance Agreement with Teva, and as a result the Company will apply the revised accounting standards of FASB ASC 605-25 Multiple Element Arrangements (“ASC 605-25”) which became effective for agreements entered into or materially modified on or after June 15, 2010, to its recognition of revenue under the Teva Agreement. The Company applied the accounting principles of ASC 605-25 on a prospective basis beginning in the quarter ended September 30, 2010. For the three months and nine months ended September 30, 2010, the application of ASC 605-25 resulted in recognition in the quarter ended September 30, 2010 of previously deferred revenue and related costs, with the effect of increasing RX Partner revenue by $196.4 million and increasing cost of revenues by $95.4 million. Basic earnings per share increased by approximately $0.98 and $0.99 for the three and nine months ended September 30, 2010, respectively, as a result of the prospective application of ASC 605-25.