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

“Our second quarter 2011 revenues and earnings were lower than the prior year period primarily due to higher second quarter 2010 sales from the remaining exclusive period of generic Flomax® . However, our second quarter 2011 revenues improved sequentially over the first quarter 2011 revenues and exceeded our expectations,” said Larry Hsu, Ph.D., president and CEO, Impax Laboratories, Inc. “The sequential improvement was primarily due to the late April receipt of our supplier’s initial product shipment from 2011 quota of generic Adderall XR® which resulted in second quarter generic Adderall XR® product sales of $58.2 million, as compared to $36.1 million in the first quarter of 2011.”

Dr. Hsu continued, “We began to receive generic Adderall XR® product supply from our supplier’s 2011 quota during the quarter, although below our request for quantities sufficient to satisfy strong customer demand. The supply helped us alleviate some of the customer backorder for the product. Nonetheless, our second quarter 2011 sales of the product were still lower than the prior year period and customer demand for generic Adderall XR ® continues to exceed available supply. We continue to pursue every available means to acquire sufficient product to meet this demand. In the third quarter of 2011, assuming continued receipt of scheduled shipments, our generic Adderall XR® sales could be similar to second quarter 2011 levels, while fourth quarter expectations will depend on additional updated shipment information from our supplier in August and September 2011.”

Second Quarter 2011 Results
(unaudited, amounts in millions)     Three Months Ended June 30,

Revenues

2011
   

2010
   

$ change
   

% change
Generic and brand products and services $ 64.0 $ 62.3 $ 1.7 3 %
Generic Adderall XR ® 58.2 63.3

(5.1
) (8 %)
Generic Flomax®   3.7       27.4       (23.7 )     (87 %)
Total Revenues $ 125.9     $ 153.0     $ (27.1 )     (18 %)
  • Total revenue was $125.9 million compared to $153.0 million in the prior year period primarily due to higher second quarter 2010 sales from the remaining exclusive period of generic Flomax®, whereby the Company had contractual market exclusivity starting on March 2, 2010 and continuing for the succeeding eight week period. The entry of competing generic versions of Flomax® into the market in late April 2010 resulted in both price erosion and reduction in the Company’s market share.
  • Earnings before interest, taxes, depreciation and amortization (EBITDA), excluding adjusted items, was $25.6 million compared to $54.8 million in the prior year period (generic Flomax® contributed $22.3 million to the second quarter 2010 EBITDA, excluding adjusted items).
  • Net income, excluding adjusted items, was $15.1 million compared to $32.8 million in the prior year period (generic Flomax® contributed $14.1 million to the second quarter 2010 net income, excluding adjusted items).
  • Net income per diluted share, excluding adjusted items, was $0.22 compared to $0.50 in the prior year period (generic Flomax® contributed $0.22 to the second quarter 2010 net income per diluted share, excluding adjusted items).
  • Net income was $12.6 million, or $0.19 per diluted share, compared to $31.3 million, or $0.48 per diluted share in the prior year period.

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

Dr. Hsu further stated, “We are working expeditiously to resolve the manufacturing observations raised in the warning letter to the satisfaction of the U.S. Food and Drug Administration (FDA). In late June 2011, we submitted our warning letter response and will continue to cooperate with the FDA to resolve the observations. We have already made significant manufacturing and quality control systems improvements and believe we have addressed a number of the FDA’s observations. Upon our internal completion, we will request a re-inspection of our Hayward facility by the FDA, the timing of which is wholly dependent upon the FDA’s availability. Based on our most recent estimate, we expect to incur charges of approximately $10.0 million in 2011 related to the development and implementation of manufacturing and quality control systems improvements associated with our response to the observations raised in the warning letter.”

“This current interruption has not impacted our ability to execute our long-term growth strategy. We have a significant pipeline of generic products pending at the FDA and continue to file Abbreviated New Drug Applications which we believe will create additional product launch opportunities. Regarding our brand business, we remain on schedule to file a New Drug Application for IPX066, our leading brand product candidate for Parkinson’s Disease, in the fourth quarter of 2011. We also remain active pursuing external opportunities with the potential to further drive future growth,” concluded Dr. Hsu.

Segment Information – Second 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
(unaudited, amounts in thousands)

Three Months EndedJune 30,
 

Six Months EndedJune 30,
2011   2010 2011   2010
Revenues:
Global Product sales, net $ 111,125 $ 137,977 $ 203,463 $ 447,754
RX Partner 4,866 5,802 7,548 10,705
OTC Partner 1,184 2,309 3,127 4,074
Research Partner   3,384   3,384   9,769   6,769
Total Revenues 120,559 149,472 223,907 469,302
Cost of revenues   63,257   65,599   110,431   142,031
Gross profit   57,302   83,873   113,476   327,271
Operating expenses:
Research and development 13,466 10,354 23,242 19,789
Patent litigation 2,209 1,769 3,983 3,753
Selling, general and administrative   2,938   3,688   5,870   7,023
Total operating expenses   18,613   15,811   33,095   30,565
Income from operations $ 38,689 $ 68,062 $ 80,381 $ 296,706

Global Pharmaceuticals Division revenues in the second quarter of 2011 were $120.6 million compared to $149.5 million in the prior year period, the reduction in revenues were driven by a decrease in Global Product sales, net, as discussed below.

For the second quarter of 2011, Global Product sales, net, were $111.1 million, down $26.9 million from the prior year period due to a $23.8 million decline in sales of generic Flomax® as noted above, and a $5.1 million decline in sales of authorized generic Adderall XR® products, partially offset by higher sales of our fenofibrate products. The decrease in sales of authorized generic Adderall XR® was principally the result of product supply disruptions.

Gross profit of $57.3 million represents a 48% gross margin in the second quarter of 2011, and was lower than the 56% gross margin for the prior year period primarily due to higher sales of our generic Flomax® products in the second quarter of 2010 which carried a higher average gross margin during the contractual market exclusivity period.

Total generic operating expenses of $18.6 million in the second quarter of 2011 increased $2.8 million over the prior year period primarily due to higher spending on research and development.

Impax Pharmaceuticals Division Information
(unaudited, amounts in thousands)  

Three Months EndedJune 30,
 

Six Months EndedJune 30,
  2011       2010     2011       2010  
Revenues:
Rx Partner $ 1,437 $ - $ 2,875 $ -
Promotional Partner 3,535 3,500 7,070 7,003
Research Partner   329     110     659     110  
Total revenues 5,301 3,610 10,604 7,113
Cost of revenues   2,901     3,293     5,841     6,437  
Gross profit   2,400     317     4,763     676  
Operating expenses:
Research and development 10,512 10,755 20,227 19,629
Selling, general and administrative   1,377     738     2,483     1,547  
Total operating expenses   11,889     11,493     22,710     21,176  
Loss from operations $ (9,489 ) $ (11,176 ) $ (17,947 ) $ (20,500 )

Impax Pharmaceuticals Division revenues in the second quarter of 2011 increased $1.7 million to $5.3 million over the prior year period due to the addition of Rx Partner revenues.

In the second quarter of 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 second quarter of 2011 is 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   Six Months Ended
(unaudited, amounts in thousands) June 30, June 30,
2011   2010 2011   2010
General and administrative expenses $ 11,194   $ 7,592   $ 23,735   $ 15,934  
Loss from operations $ (11,194 ) $ (7,592 ) $ (23,735 ) $ (15,934 )

Corporate general and administrative expenses in the second quarter of 2011 increased $3.6 million compared to the prior year period primarily due to an increase in legal fees.

Cash and short-term investments were $335.5 million as of June 30, 2011, as compared to $348.4 million as of December 31, 2010. The decline is primarily due to capital expenditures during the six month period ended June 30, 2011.

2011 Financial Outlook

The Company updated its full year 2011 financial outlook as noted below.
  • Cash flows from operating activities, less capital expenditures (Free Cash Flow), planned to be positive.
  • Gross margins as a percent of total revenues of approximately 50%.
  • Total research and development 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 $13 million.
  • Selling, general and administrative expenses of approximately $65 million.
  • Updated August 2011 - Effective tax rate of approximately 34% to 36%.
  • Capital expenditures to be approximately $69 million.

Conference Call Information

The Company will host a conference call today 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 83298478.

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, 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 Six Months Ended
June 30, June 30,
  2011       2010     2011       2010  
Revenues:
Global Pharmaceuticals Division $ 120,559 $ 149,472 $ 223,907 $ 469,302
Impax Pharmaceuticals Division   5,301     3,610     10,604     7,113  
Total Revenues 125,860 153,082 234,511 476,415
 
Cost of revenues   66,158     68,892     116,272     148,468  
Gross profit   59,702     84,190     118,239     327,947  
 
Operating expenses:
Research and development 23,978 21,109 43,469 39,418
Patent litigation 2,209 1,769 3,983 3,753
Selling, general and administrative   15,509     12,018     32,088     24,504  
Total operating expenses   41,696     34,896     79,540     67,675  
Income from operations 18,006 49,294 38,699 260,272
Other expense, net (545 ) (25 ) (540 ) (42 )
Interest income 290 192 611 274
Interest expense   (11 )   (23 )   (28 )   (70 )
Income before income taxes 17,740 49,438 38,742 260,434
Provision for income taxes   5,214     18,130     12,358     97,613  
Net income before noncontrolling interest 12,526 31,308 26,384 162,821
Add back loss attributable to

noncontrolling interest
  24     40     29     12  
Net Income $ 12,550   $ 31,348   $ 26,413   $ 162,833  
 
Net Income per share:
Basic $ 0.20   $ 0.51   $ 0.41   $ 2.65  
Diluted $ 0.19   $ 0.48   $ 0.39   $ 2.51  
 
Weighted average common shares outstanding:
Basic 64,024,483 61,876,599 63,709,258 61,444,707
Diluted 67,654,047 65,538,805 67,401,018 64,887,770
Impax Laboratories, Inc.
Condensed Consolidated Balance Sheets
(unaudited, amounts in thousands)
   
June 30, December 31,
2011 2010
Assets
Current assets:
Cash and cash equivalents $ 138,182 $ 91,796
Short-term investments 197,342 256,605
Accounts receivable, net 121,070 82,054
Inventory, net 46,038 44,549
Deferred product manufacturing costs 1,371 2,012
Deferred income taxes 40,465 39,271
Prepaid expenses and other current assets   10,060   4,407
Total current assets   554,528   520,694
Property, plant and equipment, net 111,413 106,280
Deferred product manufacturing costs 7,900 8,223
Deferred income taxes, net 6,470 5,069
Other assets 35,689 25,478
Goodwill   27,574   27,574
Total assets $ 743,574 $ 693,318
 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 18,484 $ 18,812
Accrued expenses 73,048 72,788
Accrued income taxes payable - 2,393
Accrued profit sharing and royalty expenses 27,818 14,147
Deferred revenue   23,413   18,276
Total current liabilities   142,763   126,416
Deferred revenue 27,484 44,195
Other liabilities   17,152   14,558
Total liabilities 187,399 185,169
Total stockholders’ equity   556,175   508,149
Total liabilities and stockholders’ equity $ 743,574 $ 693,318
Impax Laboratories, Inc.
Consolidated Statements of Cash Flows
(unaudited, amounts in thousands)
 
Six Months Ended June 30,
2011   2010
Cash flows from operating activities:
Net income $ 26,413 $ 162,833
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization 8,338 6,068
Amortization of Credit Agreement deferred financing costs 13 25
Accretion of interest income on short-term investments (461 ) (168 )
Deferred income taxes 3,046 7,026
Provision for uncertain tax positions 79 24
Tax benefit related to the exercise of employee stock options (5,641 ) (4,329 )
Deferred revenue 1,887 21,764
Deferred product manufacturing costs (1,061 ) (8,791 )
Recognition of deferred revenue (13,461 ) (21,658 )
Amortization deferred product manufacturing costs 2,026 9,425
Accrued profit sharing and royalty expense 44,789 71,902
Payments of profit sharing and royalty expense (31,121 ) (94,925 )
Payments of accrued litigation settlements - (5,865 )
Share-based compensation expense 6,133 5,234
Bad debt expense 125 153
Changes in assets and liabilities:
Accounts receivable (39,141 ) 49,686
Inventory (1,489 ) 6,554
Prepaid expenses and other assets (15,389 ) (7,852 )
Accounts payable, accrued expenses and income taxes payable (2,815 ) 29,151
Other liabilities   2,487     1,859  
Net cash (used in) provided by operating activities   (15,243 )   228,116  
 
Cash flows from investing activities:
Purchase of short-term investments (180,274 ) (195,450 )
Maturities of short-term investments 239,998 103,551
Purchases of property, plant and equipment   (14,569 )   (7,690 )
Net cash provided by (used in) investing activities   45,155     (99,589 )
 
Cash flows from financing activities:
Tax benefit related to the exercise of employee stock options 5,641 4,329
Proceeds from exercise of stock options and ESPP   10,833     12,818  
Net cash provided by financing activities   16,474     17,147  
 
Net increase in cash and cash equivalents 46,386 145,674
Cash and cash equivalents, beginning of period   91,796     31,770  
Cash and cash equivalents, end of period $ 138,182   $ 177,444  

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

Net income excluding adjusted items, net income per diluted share excluding adjusted items, and EBITDA excluding adjusted items, are not measures of financial performance under generally accepted accounting principles (GAAP) and should not be construed as substitutes for, or superior to, 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 net income excluding adjusted items, net income per diluted share excluding adjusted items and EBITDA excluding adjusted items, 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 net income to net income excluding adjusted items.

  Three months ended   Six months ended
(Unaudited, in millions, except per share amounts) June 30, June 30,
2011   2010 2011   2010
Net income $ 12.6 $ 31.3 $ 26.4 $ 162.8
Adjusted to add (deduct):
Share-based compensation 3.2 2.4 6.0 5.2
Employee severance - - 0.8 -
Income tax effect   (0.7 )   (0.9 )   (1.3 )   (2.0 )
Net income excluding adjusted items $ 15.1   $ 32.8   $ 32.0   $ 166.1  
 
Net income excluding adjusted items per diluted share $ 0.22 $ 0.50 $ 0.45 $ 2.56
Net income per diluted share $ 0.19 $ 0.48 $ 0.38 $ 2.51

The following table reconciles reported net income to EBITDA excluding adjusted items.
  Three months ended   Six months ended
(Unaudited, amounts in millions) June 30, June 30,
2011   2010 2011   2010
Net income $ 12.6 $ 31.3 $ 26.4 $ 162.8
Adjusted to add (deduct):
Interest income (0.3 ) (0.2 ) (0.6 ) (0.3 )
Interest expense 0.0 0.0 0.0 0.1
Depreciation and amortization 4.9 3.1 8.3 6.1
Income taxes   5.2     18.1     12.4     97.6  
EBITDA   22.4     52.4     46.5     266.3  
 
Adjusted to add:
Share-based compensation 3.2 2.4 6.0 5.2
Severance   -     -     0.8     -  
EBITDA excluding adjusted items $ 25.6   $ 54.8   $ 53.4   $ 271.5  

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