Impax Laboratories Reports Second Quarter 2012 Adjusted EPS Increased To $0.60; GAAP EPS Increased To $0.27

Impax Laboratories, Inc. (NASDAQ: IPXL) today reported second quarter 2012 financial results.
  • Adjusted net income increased $28.4 million to $41.0 million in the second quarter 2012, or $0.60 per diluted share, compared to $12.6 million, or $0.19 per diluted share, in the prior year period, primarily attributable to the benefit of the revenue and gross profit earned from United States (U.S.) Zomig® sales pursuant to the previously disclosed License Agreement with AstraZeneca UK Limited (AstraZeneca License Agreement) and higher generic Adderall XR® sales. Adjusted results exclude certain items related to recent third-party business development transactions.
  • GAAP net income increased 49% to $18.7 million in the second quarter 2012, or $0.27 per diluted share, compared to $12.6 million, or $0.19 per diluted share, in the prior year period, primarily due to U.S. Zomig® tablet sales by the Company’s brand division and higher generic Adderall XR® sales.
  • Total revenues increased 32% to $166.5 million in the second quarter 2012, compared to $125.9 million in the prior year period, primarily due to U.S. Zomig® tablet sales and higher generic Adderall XR® sales. Second quarter 2012 revenues exclude U.S. Zomig® orally disintegrating and nasal spray formulation sales by AstraZeneca, although the Company received the benefit of the gross profit ($16.2 million) from these sales during the specified transition period pursuant to the AstraZeneca License Agreement.
  • Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA), increased to $72.6 million in the second quarter 2012, compared to $24.9 million in the prior year period, primarily attributable to the items noted above.

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

“The positive second quarter results reflect our Zomig® tablets sales in the U.S. utilizing our expanded neurology focused brand sales force, as well as increased receipt of shipments of generic Adderall XR® from our third-party supplier which led to higher sales in the quarter,” said Larry Hsu, Ph.D., president and CEO, Impax Laboratories, Inc. “We are excited that our brand sales force began promoting and sampling Zomig® tablets in the U.S. on April 1. This product will support the growth of our commercial organization as we prepare for the potential launch of Rytary TM, our first internally developed brand product for Parkinson’s Disease.”

“The U.S. Food and Drug Administration (FDA) recently completed a preapproval inspection for Rytary TM and an undisclosed generic product at our Taiwan facility and there were no Form 483 observations. We continue to work at resolving the recent observation made by the FDA in Hayward and have been notified that a satisfactory re-inspection will be necessary to close out the warning letter,” Dr. Hsu continued.

“Our generic business pipeline has 46 pending ANDAs with more than 40 internally developed or partnered products, including many alternative dosage form products. We remain focused on pursuing strategic opportunities that are aimed at advancing our generic and brand businesses beyond our internal efforts. So far in 2012, our business development activities include the in-licensing of Zomig® on the brand side, and the acquisition of alternative dosage form generic products and a co-development, supply and distribution agreement with TOLMAR, Inc. on the generics side. With more than $354 million in cash and short-term investments and no debt, our business development activities will continue to focus on delivering growth from high-value products, technologies, and businesses in complementary dosage forms,” Dr. Hsu concluded.

Segment Information

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 Ended

June 30,
 

Six Months Ended

June 30,
2012   2011 2012   2011
Revenues:
Global product sales, net $ 126,435 $ 111,125 $ 242,646 $ 203,463
Rx Partner 2,466 4,866 5,444 7,548
OTC Partner 783 1,184 1,474 3,127
Research Partner   3,384   3,384   6,769   9,769
Total Revenues 133,068 120,559 256,333 223,907
Cost of revenues   70,478   63,257   133,584   110,431
Gross profit   62,590   57,302   122,749   113,476
Operating expenses:
Research and development 12,136 13,466 22,798 23,242
Patent litigation 2,914 2,209 6,952 3,983
Selling, general and administrative   3,319   2,579   7,692   5,198
Total operating expenses   18,369   18,254   37,442   32,423
Income from operations $ 44,221 $ 39,048 $ 85,307 $ 81,053
 

Global Pharmaceuticals Division revenues in the second quarter 2012 were $133.1 million, up 10% compared to the prior year period, due to higher Global product sales, net, partially offset by lower Rx Partner sales.

For the second quarter 2012, Global product sales, net, were $126.4 million, up 14% from the prior year period, primarily due to higher sales of authorized generic Adderall XR®. Partially offsetting this increase was a $2.4 million decline in Rx Partner revenues due to lower customer demand.

Gross profit of $62.6 million represented a 47% gross margin in the second quarter 2012, and was in-line with the gross margin for the prior year period, primarily due to higher sales of our authorized generic Adderall XR® product.

Total generic operating expenses in the second quarter 2012 increased slightly compared to the prior year period, as higher patent litigation and selling, general and administrative (SG&A) expenses were offset by lower investments in research and development (R&D).

Impax Pharmaceuticals Division Information
(unaudited, amounts in thousands)  

Three Months Ended

June 30,
 

Six Months Ended

June 30,
2012   2011 2012   2011
Revenues:
Impax Pharma product sales, net $ 28,091 $ - $ 28,091 $ -
Rx Partner 1,437 1,437 2,875 2,875
Promotional Partner 3,535 3,535 7,070 7,070
Research Partner   329   329   659   659
Total Revenues 33,392 5,301 38,695 10,604
Cost of revenues   18,159   2,901   21,068   5,841
Gross profit   15,233   2,400   17,627   4,763
Operating expenses:
Research and development 7,733 10,512 15,887 20,227
Selling, general and administrative   6,707   1,377   9,768   2,483
Total operating expenses   14,440   11,889   25,655   22,710
Income (loss) from operations $ 793 $ (9,489) $ (8,028) $ (17,947)
 

Impax Pharmaceuticals Division revenues in the second quarter 2012 increased $28.1 million to $33.4 million, compared to the prior year period, due to U.S. sales of Zomig® tablets pursuant to the AstraZeneca License Agreement for which there was no comparable amount in the prior year period.

Gross profit of $15.2 million increased $12.8 million in the second quarter 2012, due to U.S. Zomig® tablet sales, compared to the prior year period. Gross margin in the second quarter 2012 was 46%, up slightly over the prior year period. The second quarter 2012 gross margin was negatively impacted by the inclusion of $14.3 million in cost of revenues for amortization and acquisition-related costs due to the Zomig® transaction.

Total brand operating expenses in the second quarter 2012 increased $2.6 million, compared to the prior year period, due to higher SG&A expenses resulting from Zomig® marketing costs and the expansion of the Company’s neurology focused sales force, as well as pre-launch planning costs for Rytary TM, partially offset by lower R&D expenses.

Corporate and Other
(unaudited, amounts in thousands)  

Three Months Ended

June 30,
 

Six Months Ended

June 30,
2012   2011 2012   2011
General and administrative expenses $ 14,844 $ 11,553 $ 28,643 $ 24,407
Loss from operations $ (14,844) $ (11,553) $ (28,643) $ (24,407)
 

General and administrative expenses in the second quarter 2012 increased $3.3 million, compared to the prior year period, primarily due to employee severance and increased personnel expenses.

Cash and Short-term Investments

Cash and short-term investments were $354.5 million as of June 30, 2012, as compared to $346.4 million as of December 31, 2011.

2012 Financial Outlook

The Company updated its 2012 financial outlook as noted below.
  • Gross margins as a percent of total revenues of approximately 60%.
  • Total R&D expenses across the generic and brand divisions to approximate $89.0 million with generic R&D of approximately $48.0 million and brand R&D of approximately $41.0 million.
  • UPDATED - Patent litigation expenses of approximately $10.0 to $13.0 million.
  • SG&A expenses of approximately $113.0 million.
  • Effective tax rate of approximately 36%.
  • Capital expenditures of approximately $78.0 million.

Conference Call Information

The Company will host a conference call on July 31, 2012 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 99743725.

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 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, fluctuations in the Company’s revenues and operating income, the Company’s ability to successfully develop and commercialize pharmaceutical products, reductions or loss of business with any significant customer, the impact of consolidation of the Company’s customer base, the impact of competition, the Company’s ability to sustain profitability and positive cash flows, any delays or unanticipated expenses in connection with the operation of the Company’s Taiwan facility, the effect of foreign economic, political, legal and other risks on the Company’s operations abroad, the uncertainty of patent litigation, increased government scrutiny on the Company’s agreements with brand pharmaceutical companies, consumer acceptance and demand for new pharmaceutical products, the difficulty of predicting Food and Drug Administration filings and approvals, the Company’s inexperience in conducting clinical trials and submitting new drug applications, the Company’s ability to successfully conduct clinical trials, the Company’s reliance on third parties to conduct clinical trials and testing, the availability of raw materials and impact of interruptions in the Company’s supply chain, the use of controlled substances in the Company’s products, disruptions or failures in the Company’s information technology systems and network infrastructure, the Company’s reliance on alliance and collaboration agreements, the Company’s dependence on certain employees, the Company’s ability to comply with legal and regulatory requirements governing the healthcare industry, the regulatory environment, the Company’s ability to protect the Company’s intellectual property, exposure to product liability claims, changes in tax regulations, the Company’s ability to manage the Company’s growth, including through potential acquisitions, the restrictions imposed by the Company’s credit facility, uncertainties involved in the preparation of the Company’s financial statements, the Company’s ability to maintain an effective system of internal control over financial reporting, any manufacturing difficulties or delays, the effect of terrorist attacks on the Company’s business, the location of the Company’s manufacturing and research and development facilities near earthquake fault lines 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

June 30,

Six Months Ended

June 30,
2012 2011 2012 2011
Revenues:
Global Pharmaceuticals Division $ 133,068 $ 120,559 $ 256,333 $ 223,907
Impax Pharmaceuticals Division   33,392   5,301   38,695   10,604
Total Revenues 166,460 125,860 295,028 234,511
 
Cost of revenues   88,637   66,158   154,652   116,272
Gross profit   77,823   59,702   140,376   118,239
Operating expenses:
Research and development 19,869 23,978 38,685 43,469
Patent litigation 2,914 2,209 6,952 3,983
Selling, general and administrative   24,870   15,509   46,103   32,088
Total operating expenses   47,653   41,696   91,740   79,540
Income from operations 30,170 18,006 48,636 38,699
Other expense, net (95) (545) (175) (540)
Interest income 244 290 499 611
Interest expense   (423)   (11)   (462)   (28)
Income before income taxes 29,896 17,740 48,498 38,742
Provision for income taxes   11,262   5,214   17,531   12,358
Net income before noncontrolling interest 18,634 12,526 30,967 26,384
Add back loss attributable to noncontrolling interest   38   24   70   29
Net Income $ 18,672 $ 12,550 $ 31,037 $ 26,413
 
Net Income per share:
Basic $ 0.29 $ 0.20 $ 0.48 $ 0.41
Diluted $ 0.27 $ 0.19 $ 0.46 $ 0.39
 
Weighted average common shares outstanding:
Basic 65,482,700 64,024,483 65,289,869 63,709,258
Diluted 67,954,573 67,654,047 68,064,934 67,401,018
 
   

Impax Laboratories, Inc.
Condensed Consolidated Balance Sheets

(unaudited, amounts in thousands)
 
June 30, December 31,
2012 2011
Assets
Current assets:
Cash and cash equivalents $ 184,632 $ 104,419
Short-term investments 169,851 241,995
Accounts receivable, net 143,447 153,773
Inventory, net 63,092 54,177
Prepaid expenses and other assets 46,919 7,718
Current portion deferred tax asset   33,993   37,853
Total current assets   641,934   599,935
Property, plant and equipment, net 136,888 118,158
Other assets 90,359 45,942
Intangible assets, net 61,636 2,250
Goodwill   27,574   27,574
Total assets $ 958,391 $ 793,859
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 131,112 $ 93,071
Accrued profit sharing and royalty expenses 32,984 40,766
Accrued product licensing payments 96,000 -
Deferred revenue   12,743   23,024
Total current liabilities   272,839   156,861
Deferred revenue 15,327 17,131
Other liabilities   20,780   16,861
Total liabilities 308,946 $ 190,853
Total stockholders' equity   649,445   603,006
Total liabilities and stockholders' equity $ 958,391 $ 793,859
 
   

Impax Laboratories, Inc.
Consolidated Statements of Cash Flows

(unaudited, amounts in thousands)
 

Six Months Ended

June 30,
2012 2011
Cash flows from operating activities:
Net income $ 31,037 $ 26,413
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 12,144 8,351
Accretion of interest income on short-term investments (318) (461)
Deferred income taxes (29,486) 3,125
Tax benefit related to the exercise of employee stock options (2,338) (5,641)
Deferred revenue 931 1,887
Deferred product manufacturing costs (1,574) (1,061)
Recognition of deferred revenue (12,320) (13,461)
Amortization of deferred product manufacturing costs 1,709 2,026
Accrued profit sharing and royalty expense 58,445 44,789
Payments of profit sharing and royalty expense (66,226) (31,121)
Share-based compensation expense 8,323 6,133
Bad debt expense - 125
Changes in assets and liabilities:
Accounts receivable 10,326 (39,141)
Inventory (8,915) (1,489)
Prepaid expenses and other assets 36,626 (15,389)
Accounts payable and accrued expenses 37,374 (2,815)
Other liabilities   3,591   2,487
Net cash provided by (used in) operating activities   79,329   (15,243)
 
Cash flows from investing activities:
Purchase of short-term investments (104,869) (180,274)
Maturities of short-term investments 177,331 239,998
Purchases of property, plant and equipment (24,971) (14,569)
Payment for product licensing rights   (55,000)   -
Net cash provided by (used in) investing activities   (7,509)   45,155
 
Cash flows from financing activities:
Tax benefit related to the exercise of employee stock options and restricted stock 2,338 5,641
Proceeds from exercise of stock options and ESPP   6,055   10,833
Net cash provided by financing activities   8,393   16,474
 
Net increase in cash and cash equivalents 80,213 46,386
Cash and cash equivalents, beginning of period   104,419   91,796
Cash and cash equivalents, end of period $ 184,632 $ 138,182
 
 

Impax Laboratories, Inc.

Non-GAAP Financial Measures
 
Total 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 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 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 net income to adjusted net income.
       

(Unaudited, amounts in millions, except per share data)

Three months ended

June 30,

Six months ended

June 30,
2012 2011 2012 2011
Net Income $ 18.7 $ 12.6 $ 31.0 $ 26.4
Adjusted to add (deduct):
Gross profit earned on Zomig® Agreement(a) 16.2 - 46.2 -
Amortization and acquisition-related costs(b) 14.3 - 14.3 -
Acquisition related in-process R&D(c) 1.6 - 1.6 -
Employee severance 1.9 - 1.9 0.8
Inventory adjustment - - 3.5 -
Lower of cost or market charge - - 1.7 -
Income tax effect   (11.7)   -   (24.2)   -

Adjusted net Income
$ 41.0 $ 12.6 $ 76.0 $ 27.2
 
Net Income excluding adjusted items per diluted share $ 0.60 $ 0.19 $ 1.12 $ 0.40
Net Income per diluted share $ 0.27 $ 0.19 $ 0.46 $ 0.39
 
       

Impax Laboratories, Inc.

Non-GAAP Financial Measures
 
The following table reconciles reported net income to adjusted EBITDA.
 
(Unaudited, amounts in millions)

Three months ended

June 30,

Six months ended

June 30,
2012 2011 2012 2011
Net Income $ 18.7 $ 12.6 $ 31.0 $ 26.4
Adjusted to add (deduct):
Interest income (0.2) (0.3) (0.5) (0.6)
Interest expense 0.4 0.0 0.5 0.0
Depreciation and other 3.9 4.2 7.6 8.4
Income taxes   11.3   5.2   17.5   12.4
EBITDA   34.1   21.7   56.1   46.6
 
Adjusted to add:
Gross profit earned on Zomig® Agreement(a) 16.2 - 46.2 -
Amortization and acquisition-related costs(b) 14.3 - 14.3 -
Acquisition related in-process R&D(c) 1.6 - 1.6 -
Employee severance 1.9 - 1.9 0.8
Inventory adjustment - - 3.5 -
Lower of cost or market charge - - 1.7 -
Share-based compensation   4.5   3.2   8.3   6.1
Adjusted EBITDA $ 72.6 $ 24.9 $ 133.6 $ 53.5
 
(a)   On February 1, 2012, the Company announced that it had entered into the AstraZeneca License Agreement. As part of the AstraZeneca License Agreement, AstraZeneca granted to the Company an exclusive license to commercialize the tablet, orally disintegrating and nasal spray formulations of Zomig® (zolmitriptan) products for the treatment of migraine headaches in the United States and in certain U.S. territories. Under the terms of the AstraZeneca License Agreement, the Company agreed to pay AstraZeneca quarterly payments totaling $130.0 million during 2012 of which $30.0 million was paid in the second quarter ($55.0 million for the first six months ended June 30, 2012). During the specified product transition period pursuant to the AstraZeneca License Agreement, the Company will receive the benefit of the gross profit ($16.2 million and $46.2 million for the three months and six months ended June 30, 2012, respectively) from U.S. Zomig® sales by AstraZeneca commencing from January 1, 2012 and ending when the Company commences commercialization of the Zomig® products. The benefit of the gross profit received from AstraZeneca is recorded as a reduction of the $130.0 million to be paid by the Company to AstraZeneca during 2012 and is not reflected within the Company’s income.
 
(b) Amortization and acquisition-related costs from the February 2012 AstraZeneca License Agreement.
 
(c) Acquisition related in-process R&D from the June 2012 Development, Distribution and Supply Agreement with TOLMAR, Inc.
 

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