10-K 1 v305161_10k.htm FORM 10-K

 

 

 

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



 

FORM 10-K



 

 
(Mark One)     
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

or

 
o   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 0-25323



 

Albany Molecular Research, Inc.

(Exact name of registrant as specified in its charter)

 
Delaware   14-1742717
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 
21 Corporate Circle, P.O. Box 15098,
Albany, New York
  12212-5098
(Address of principal executive offices)   (zip code)

(518) 512-2000

(Registrant’s telephone number, including area code)



 

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

 
Title of each class   Name of exchange on which registered
Common Stock, par value $.01 per share   The NASDAQ Stock Market LLC
Preferred Stock Purchase Rights     

Securities registered pursuant to Section 12(g) of the Act:
None

(Title of Each Class)



 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No x

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 x No o

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 x No o

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

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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in 12b-2 of the Exchange Act

     
o Large accelerated filer   x Accelerated filer   o Non-accelerated filer   o Smaller reporting company

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No x

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant on June 30, 2011 was approximately $109 million based upon the closing price per share of the Registrant’s Common Stock as reported on the Nasdaq Global Market on June 30, 2011. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 29, 2012, there were 30,771,733 outstanding shares of the Registrant’s Common Stock, excluding treasury shares of 5,411,372.

DOCUMENTS INCORPORATED BY REFERENCE

The information required pursuant to Part III of this report is incorporated by reference from the Company’s definitive proxy statement, relating to the annual meeting of stockholders to be held on or around June 6, 2012, pursuant to Regulation 14A to be filed with the Securities and Exchange Commission.

 

 


 
 

TABLE OF CONTENTS

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

 
  Page No.
Cover page
        
Part I.
 
Forward-Looking Statements     ii  

Item 1.

Business

    1  

Item 1A.

Risk Factors

    15  

Item 1B.

Unresolved Staff Comments

    23  

Item 2.

Properties

    23  

Item 3.

Legal Proceedings

    23  

Item 4.

Mine Safety Disclosures

    25  
Part II.
 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    26  

Item 6.

Selected Financial Data

    28  

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    29  

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

    43  

Item 8.

Financial Statements and Supplementary Data

    44  

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    44  

Item 9A.

Controls and Procedures

    44  

Item 9B.

Other Information

    45  
Part III.
 

Item 10.

Directors, Executive Officers and Corporate Governance of the Registrant

    46  

Item 11.

Executive Compensation

    46  

Item 12.

Security Ownership of Certain Beneficial Owners and Management

    46  

Item 13.

Certain Relationships, Related Transactions and Director Independence

    46  

Item 14.

Principal Accountant Fees and Services

    46  
Part IV.
 

Item 15.

Exhibits and Financial Statement Schedules

    47  

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Forward-Looking Statements

References throughout this Form 10-K to the “Company”, “we,” “us,” and “our” refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole. This Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by forward-looking words such as “may,” “could,” “should,” “would,” “will,” “intend,” “expect,” “anticipate,” “believe,” and “continue” or similar words, and include, but are not limited to, statements concerning pension and postretirement benefit costs, the Company’s relationship with its largest customers, the Company’s collaboration with Bristol-Myers Squibb (“BMS”), future acquisitions, earnings, contract revenues, costs and margins, royalty revenues, patent protection and the ongoing Allegra® patent infringement litigation, Allegra® royalty revenue, government regulation, retention and recruitment of employees, customer spending and business trends, foreign operations, including increasing options and solutions for customers, business growth and the expansion of the Company’s global market, clinical supply manufacturing, management’s strategic plans, drug discovery, product commercialization, license arrangements, research and development projects and expenses, revenue and expense expectations for future periods, goodwill and long-lived asset impairment, competition and tax rates. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers should review carefully the risks and uncertainties identified below under the caption “Risk Factors and Certain Factors Affecting Forward-Looking Statements” and elsewhere in this 10-K. All forward-looking statements are made as of the date of this report and we do not undertake any obligation to update our forward-looking statements, except as required by applicable law.

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PART I

ITEM 1. BUSINESS.

Overview

Albany Molecular Research, Inc. (the “Company,” “AMRI”, “we,” “us,” and “our”), a Delaware corporation incorporated on June 20, 1991, is a global contract research and manufacturing organization providing customers fully integrated drug discovery, development, and manufacturing services. AMRI supplies a broad range of services and technologies that support the discovery and development of pharmaceutical products and the manufacturing of Active Pharmaceutical Ingredients (“API”) and drug product for existing and experimental new drugs. With locations in the United States, Europe, and Asia, AMRI maintains geographic proximity and flexible cost models. AMRI has also historically leveraged its drug-discovery expertise to execute on several internal drug discovery programs, which have progressed to the development candidate stage and in some cases into Phase I clinical development. AMRI has successfully partnered certain programs and is actively seeking to out-license its remaining programs to strategic partners for further development.

Industry Overview and Trends

Pharmaceutical and biotechnology companies are under increasing pressure to deliver new drugs to market, lower the current high cost of new drug research and development and reduce the time required for drug development. This pressure has come about, in part, as a result of the significant number of current drug products on the market for which patent protection has or will soon expire, as well as a reported drop in productivity from pharmaceutical companies’ internal research pipelines. In addition, Federal government healthcare legislation is expected to put more pressure on pricing for new drugs. Large pharmaceutical companies are facing increased pressures to reduce their fixed cost base and turn to more flexible cost models to address these cost/pricing implications.

In order to respond to these pressures, many pharmaceutical and biotechnology companies have augmented their internal research and development capacity through outsourcing. However, in recent years, many companies reduced their internal R&D projects due to the current economic volatility. In particular, small biotech and pharmaceutical companies have experienced decreases in cash due to tightening of credit policies by banks and other sources of capital.

For a majority of large pharmaceutical companies, 2011 was a year of refocusing their R&D strategy which resulted in large cuts of staff, resources and facilities. While these efforts have been ongoing, spending on R&D, once the growth engine of discovery contract research organizations (“CRO’s”) like AMRI, experienced a period of hiatus within these large pharmaceutical customers. Additionally, market forces continued to adversely affect the small startup and biotech companies that have been anchors for the growth of AMRI’s discovery, development and small scale manufacturing business. Venture funding for new compounds and startups have not recovered to the pre-financial crisis levels, and the same factors affecting pharmaceutical companies’ internal R&D consolidations also led to a weak licensing environment for products coming out of the small and emerging pharmaceutical and biotech companies. As a result, total funding for early stage companies and programs remained down, leading to softer demand for discovery and development services. We believe this was in part a factor in the declining growth of AMRI’s early development and small scale business in 2011. At the same time, these companies focused on their later stage pipelines, which was the primary reason for our U.S. large-scale manufacturing plant having a record year for revenue during 2011. We see strong demand continuing for this same reason in 2012. In addition, several active ingredients that we are making in our Rensselaer, NY facility are awaiting commercial approval in 2012. We are optimistic that commercial approval of these and other active ingredients we already manufacture will lead to a period of stability and continuing growth for our large scale manufacturing business.

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As the industry emerges from this economic downturn, we believe that market pressures will exert an increasing trend toward outsourcing, primarily by large pharmaceutical companies as they seek to reduce their internal R&D resources in favor of a variable cost model that offers lower cost, high quality alternatives to meet their drug discovery and development needs. We believe that announcements coming from several big pharmaceutical companies regarding their reorganization plans and strategy changes point to outsourcing as an increasingly important and strategic part of future R&D efforts as a way to boost productivity and efficiency, and better align cost structure of their R&D organizations.

In addition, we have recently observed an increased involvement by government research entities and non-profit organizations in undertaking drug discovery and development efforts. We believe that due to the lack of internal resources within these groups, outsourcing will be a key strategy in achieving their drug discovery and development objectives.

A new development in the industry is an increasing interest in insourcing models, whereby contract research organizations embed their employees in a client facility. The staff are managed by the contractor but the physical infrastructure is provided by the client; there are indications that this approach will become more widely adopted as pharmaceutical companies recognize the ability to cost-effectively leverage their unused laboratory space.

Business Strategy

AMRI is uniquely positioned in the marketplace to provide a competitive advantage to a diverse group of customers. Our reputation of providing the highest quality service on a global basis with a variety of pricing options provides companies with the security of sourcing discovery, development, small and large scale manufacturing projects throughout our global network of research and manufacturing facilities. We believe we have a unique portfolio of service offerings ranging from early stage discovery through manufacturing and formulation across U.S., Europe and Asia. We believe this product and geographic mix will allow us to increase multi-year strategic relationships and enhance our revenue growth with a variety of customers. With the market of competitors being highly fragmented, we have strategically focused our efforts to strengthen our global service offerings with the intent to improve profitability of these offerings and to drive the Company to be profitable independent of royalties from the sales of Allegra. Our strategy to accomplish this includes the following:

Enhance revenue growth and mix

As market trends point to outsourcing as an increasingly important and strategic part of large pharmaceutical R&D efforts, we believe our ability to offer a hybrid services model, which allows customers to use a combination of our U.S. and international locations, will result in an increase in demand for our services. With our world class expertise in managing high performing groups of scientists, we now offer our customers the option of insourcing, which embeds scientists into the customer’s facility allowing them to cost-effectively leverage their unused laboratory space. We recently signed a large insourcing collaboration agreement for chemistry services.

We are also continuing to focus our efforts on our other important customer segments, small and large biotech companies and non-profit/government entities. We believe that a drive toward equal weighting of our customer portfolio between large pharmaceutical, non-profit/government and biotech companies will spread out customer concentration and reduce risk. During 2011, we received a government contract award from National Institute of Health (“NIH”) to develop pre-clinical drug candidates for diseases of the nervous system and we continue to pursue other contracts of this type.

We continue to make investments to build and recover our formulation business at our Burlington, MA facility. We believe this type of business has significant potential in the drug product world driven by the growth in biologically based compounds which are formulated/manufactured on an aseptic basis. As a result of our investments, there are no current restrictions on the manufacture of clinical or commercial products at this facility.

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Streamline operations to improve margins

The cost bases of our manufacturing and research facilities are largely fixed in nature, however, we continue to seek savings opportunities to minimize this base of fixed costs, with a focus on improving efficiency, cost structure and margin.

During 2011, we announced actions to reduce the Company’s workforce, right size capacity and reduce operating costs in 2012. The actions were taken to better align the business to current and expected market conditions. We remain committed to taking the necessary actions to reduce the Company’s operating expenses to focus on our core contract research and manufacturing business, and most importantly, to achieve profitability. Although our outlook for growth in outsourced contract services by our customers remains positive, as evidenced by our recent strategic deals, we continue to evaluate our global infrastructure and customer trends for additional opportunities to streamline operations.

Due to shifting market preferences related to the preferred co-localization of integrated drug discovery activities, demand for our services at our Hungary facility has decreased. In response, we are in the process of restructuring our European operations focused on a reduction of the workforce and as a result, we anticipate closing or selling our operation in Hungary and transitioning many of the customers and services for this location into our other global locations. We believe this consolidation will improve customer relationships and AMRI’s operating leverage.

Maximize licensing/partnering of proprietary compounds to enhance future cash flow

In 2011 we made a decision to cease activities related to our internal proprietary compound discovery R&D programs. Although we halted our proprietary R&D activities, we continue to believe there are additional opportunities to partner our proprietary compounds or programs to create value, as we have seen a renewed commitment by pharmaceutical companies for innovation both internally and through licensing. Our goal is to partner these programs in return for a combination of up-front license fees, milestone payments and recurring royalty payments if compounds resulting from our intellectual property are successfully developed into new drugs and reach the market.

We are hopeful that one or more of our compounds or programs can reach the same success as our Bristol-Myers Squibb partnership which delivered an additional $3.0 million milestone payment in 2011 and $32.8 million of total revenue since the signing of this agreement in late 2005.

Small Molecule Drug Discovery, Development and Manufacturing Process

Although many scientific disciplines are required for new drug discovery and development, chemistry and biology are core technologies. Chemists and biologists typically work together to develop laboratory models of disease, screen small molecule compounds to identify those that demonstrate desired activity and finally create a marketable drug.

The drug discovery and development process includes the following steps:

Drug Discovery

Lead Discovery.  The first major hurdle in drug discovery is the identification of one or more lead compounds that interact with a biological target, such as an enzyme, receptor or other protein that may be associated with a disease. A biological test, or assay, based on the target is developed and used to test or “screen” chemical compounds. The objective of lead discovery is to identify a lead compound or screening ‘hit’. Validation of a screening hit is performed under the scrutiny of the discovery biologists and medicinal chemists in order to identify the ‘hits’ with the best chance to obtain a drug-like chemical series or lead compound. Early in vitro profiling for metabolic stability, potential unwanted drug-drug interactions and indications of toxic liability are also conducted. The objective of lead discovery is to identify a lead compound that has many of the properties needed in the eventual drug and a good prognosis for further optimization in order to produce a robust clinical development candidate.

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Lead Optimization.  Lead optimization typically involves improving the potency, selectivity, absorption/metabolism and pharmacokinetics of the lead compound, while maintaining, or generating, patentable intellectual property. Optimized lead compounds must demonstrate a scientifically proven benefit in controlled and well-defined biological tests and must exhibit this benefit at doses much lower than those at which side effects would occur. During the lead optimization and preclinical testing phases, scientists continue the synthesis of additional analogs of the lead compound using medicinal chemistry. The compounds are tested in similar biochemical assays as those used during lead discovery but additional profiling of mechanism of action and more sophisticated analysis of metabolic and safety parameters are also introduced. Often a second compound, referred to as a backup compound or second generation analog, is synthesized and enters the drug development cycle. In addition, continued synthesis and testing is desirable in order to prepare compounds of significant diversity to broaden potential patent coverage. As a result, the advancement of a lead compound into preclinical testing is often a catalyst which increases, rather than decreases, the need for additional drug discovery services. During lead optimization most compounds are prepared in milligram to gram quantities.

Drug Development

Preclinical Testing.  Following the advancement of a lead compound to a development candidate, advanced preclinical testing is conducted in order to evaluate the efficacy and safety of the development candidate prior to initiating human clinical trials. During this phase, specialists in chemical development work to identify the preferred route to prepare the drug substance. In addition, efforts are required to determine the best physical form of the compound, selecting appropriate salts and controlling polymorphic form and to begin to improve the process for preparing the candidate in larger quantities, often hundreds of grams. Working with analytical chemists, the development chemists will prepare material of sufficient quality and quantity to be used in IND-enabling toxicity studies. In the United States, prior to continuing on to the human clinical trials stage, an Investigational New Drug application (“IND”) must be filed with the FDA. Once the application is filed, the applicant must wait 30 days for comments from the FDA. If none are received, human clinical trials may commence.
Clinical Trials.  During clinical trials, several phases of studies are conducted to test the safety and efficacy of a drug candidate in humans. The human clinical trials phase is usually costly and time-consuming. As study populations increase and trial durations lengthen, larger quantities of the active ingredient are required. Clinical trials are normally done in three phases prior to submission for regulatory approval and overall generally take at least seven years to complete. During these phases, development work continues in order to provide suitable formulations for clinical testing and for the ultimate commercial product. The API and the formulated drug product must be prepared under cGMP guidelines. Formulations are selected that maximize bioavailability and optimize dosing regimen. Analytical chemistry services are critical to cGMP manufacturing. Additional preparations provide an opportunity to further refine the manufacturing process for the active ingredient, with the ultimate goal of maximizing the cost effectiveness and safety of the synthesis prior to commercialization.
Product Commercialization.  Before approving a drug, the FDA requires that manufacturing procedures and operations conform to cGMP guidelines, International Conference on Harmonization guidance and manufacturing guidelines and guidance published by the FDA. Manufacturing procedures and operations must be in compliance with all regulatory and quality regulations at all times during the manufacture of commercial products and APIs. Once a drug has received all necessary approvals, the manufacture, marketing and sale of commercial quantities of the approved drug may commence.

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Our Capabilities

We perform services including drug discovery, pharmaceutical development, and manufacturing of active ingredients and pharmaceutical intermediates for many of the world’s leading healthcare companies. The problem-solving abilities of our scientists can provide added value throughout the drug discovery, development and manufacturing process. We also offer certain, limited formulation services, including early phase solid dosage capabilities at our Rensselaer, NY facility and aseptic fill finish for both clinical and commercial products at our Burlington, MA location. Our comprehensive suite of services allows our customers to contract with a single partner, eliminating the time and cost of transitioning projects among multiple vendors.

Service Offerings

Drug Discovery Services

The competitive drug discovery industry continues to face many challenges, including a weakening product pipeline, increasing costs, more complex disease targets and regulatory hurdles. These challenges have compelled many companies/research organizations to look outside their own R&D function for contract partners to support research and development from the earliest stages of the drug discovery process.

AMRI performs integrated drug discovery programs, harnessing the capabilities and expertise of specialist teams of scientists from individual disciplines under the coordination of experienced project leaders and key employees with decades of experience. All of the capabilities described below are also offered individually to support customers who have their own capacity in certain areas.

Our Drug Discovery Services include:

Assay Development and Design

We offer custom assay design and development services to clients in the pharmaceutical, biopharmaceutical and agrochemical industries who are starting from a unique target or who are supporting ongoing lead discovery programs. This service can be delivered independently to a client, or integrated with our full range of drug discovery services.

Key features of our Assay Design and Development services include:

Design of assays to meet client objectives, or transfer of customer developed assays
Development of cell-lines and reagents
Developing, optimizing and validating assays for screening
Mechanism of action testing
Extensive assay performance testing

Screening

Our diverse offering of screening capabilities, coupled with access to our range of sample collections, give customers the essential tools to efficiently identify and optimize lead compounds.

Key features of our screening capabilities include:

Availability of high throughput screening for lead-finding, utilizing client or AMRI’s sample collections
Conduct of absolute potency and selectivity screening for lead optimization

Screening Libraries

We have created a series of unique, high purity, cost effective, small molecule synthetic compound libraries and a complementary collection of natural product extracts from marine, plant and microbial sources designed for screening and hit-to-lead programs. We are uniquely positioned to fully support active hits from any of these libraries with lead optimization services, analytical services, custom synthesis and/or small or large scale manufacturing.

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Our libraries include:

Natural Products Libraries
Target focused Discovery Libraries
Commercial Sample Library (“CSL”)
Diverse AMRI Sample Library (“DASL”)
Diverse Fragment Based Library

Natural Product Services

We have a longstanding, well established ability to deliver on natural products discovery programs. Our natural product library and screening capabilities are supported by a team of experts with decades of experience in the field. We have substantial expertise in natural product isolation, structural identification, fermentation development and biotransformations giving us the ability to rapidly advance a natural product from hit to lead to qualified drug candidate.

Medicinal Chemistry

Lead optimization is the complex, iterative process of altering the chemical structure of a confirmed hit to identify an improved drug lead with the goal of progressing to a preclinical candidate. Well-trained, intuitive and knowledgeable, our medicinal chemists have years of experience working with drug-like compounds. Our Medicinal Chemistry capability is fully integrated with our other drug discovery services, allowing for a “one stop shop” approach towards outsourcing lead discovery and optimization efforts, if so desired.

Computer-Aided Drug Discovery (“CADD”)

Our CADD services use sophisticated computational software and techniques to help identify novel hits or leads against selected therapeutic targets, as well as to support medicinal chemistry lead optimization programs. CADD methods can increase the odds of identifying compounds with desirable characteristics, speed up the hit-to-lead process and improve the chances of getting a compound over the many hurdles of preclinical testing.

In vitro ADMET

We conduct in vitro ADMET assays to evaluate and improve metabolism, bioavailability, pharmacology and toxicology of compounds.

Early stage ADMET testing, integrated with Medicinal Chemistry programs, typically include:

Aqueous solubility under physiological conditions
Metabolic and chemical stability
Membrane permeability (PAMPA, Caco-2, etc.)
Inhibition and induction of major metabolic enzymes (CYP450s)

Bioanalytical Services

We develop and execute rapid, sensitive, and robust bioanalytical methods for extraction and quantitation of drug and metabolites in biological fluids and tissues to support preclinical and clinical studies. This service is provided stand-alone or can be coupled directly with services provided by our network of in vivo testing providers.

Network of pharmacology service providers

We have worked in close collaboration with multiple in vivo pharmacology and preclinical safety assessment providers. The strong relationships we have developed with several of these providers allows AMRI to effectively coordinate these external services with our own internal capabilities to deliver a fully integrated drug discovery program.

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Provision of insourced services

We have developed business models whereby any combination of the above capabilities can be established in a client facility with AMRI providing its expertise in managing drug discovery personnel and leading drug discovery activities to leverage with existing client infrastructure.

Chemical Development

Chemical development involves the scale-up synthesis of a lead compound and intermediates. Processes developed for small scale production of a compound may not be suitable for larger scale production because they may be too expensive, environmentally unacceptable or present safety concerns. With chemical development locations around the globe, we have become a top choice for an ever increasing number of pharmaceutical and biotechnology companies seeking a partner for the rapid advancement of their drug candidates. Customers throughout the world rely on our proven technical expertise, commitment to the highest quality and regulatory standards, flexibility, and strong customer focus to advance their lead compounds through the drug development process, from bench scale to commercial production.

Our Chemical Development services include:

Process Research and Development
Custom Synthesis
Process Safety Assessment
Scale-up Capabilities
High Potency and Controlled Substances
Analytical Services
Preformulation Services and Physical Characterization
Preparative Chromatography
IND Support Services
Fermentation Development and Optimization
Building Blocks Collection and Database

cGMP API Manufacturing

We provide chemical synthesis and manufacturing services for our customers in accordance with cGMP regulations. All facilities and manufacturing techniques used for prescribed steps in the manufacture of products for clinical use or for sale in the United States must be operated in conformity with cGMP regulations as established by the FDA. Our Albany, New York location has production facilities and quarantine and restricted access storage necessary to manufacture quantities of drug substances under cGMP regulations sufficient for conducting clinical trials from Phase I through Phase II, and later stages, including commercial API, for selected products, based on volume and other parameters. Our large scale manufacturing facility in Rensselaer, New York is equipped to provide a wide range of custom chemical development and manufacturing capabilities. We conduct commercial cGMP manufacturing of APIs and advanced intermediates. Our large-scale cGMP manufacturing facilities provide synergies with our small-scale development laboratories, offering our customers services at every scale, from bench to production. We have special capabilities in high value-added areas of pharmaceutical development and manufacturing, including High Potency Manufacturing. Cytotoxic and other highly potent compounds present a number of potential challenges in their production and handling. We have extensive experience in the cGMP production of these types of compounds, from grams to hundreds of kilograms per year. Our Rensselaer, NY facility is licensed by the U.S. Drug Enforcement Administration to produce Schedule I, II, III, IV and V controlled substances. For over 50 years, the facility has produced controlled substances such as analgesics, amphetamines, barbiturates, and anabolic steroids. In 2011, our focus on quality was reinforced after a successful FDA inspection at our Albany facility resulted in no issuances of Form FDA 483 Observations of Objectionable Conditions and Practices (“Form FDA 483”). Additionally in 2010, we had two successful FDA inspections, one for our Rensselaer facility, the other for our Albany facility, which resulted in no issuances of Form FDA 483.

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Our manufacturing facility in the UK was issued a GMP certificate from the Medicines and Healthcare Regulatory Agency (“MHRA”) following an inspection in October 2011. The MHRA is the UK regulatory agency and is recognized as one of the leading global authorities on GMP compliance. The certificate covers general GMP manufacturing operations, and laboratory controls designed for the production and release of active pharmaceutical ingredients (“APIs”) and intermediates. The successful audit confirms AMRI’s compliance with European Medicines Agency GMP regulations and further demonstrates the Company’s commitment to operational quality. The MHRA inspection follows a U.S. FDA audit of the facility in June 2011, in which no formal observations were issued. The successful completion of both the US FDA and UK MHRA inspections means that AMRI’s UK facility can now produce registered intermediates and active ingredients for use in humans and expands the range of projects that AMRI can now conduct at this facility.

Our large-scale manufacturing facility in Aurangabad, India was issued a GMP certificate from the Therapeutic Goods Administration (“TGA”) following an inspection in February 2011. The TGA is the Australian Government regulatory agency and is recognized as one of the leading global authorities on GMP compliance. The certificate covers general GMP manufacturing operations, and laboratory controls designed for the production and release of APIs and intermediates. The successful audit confirms AMRI’s compliance with GMP regulations and further demonstrates the Company’s commitment to operational quality. Our Aurangabad facility is an approved facility by Indian FDA and WHO GMP certified with production facilities and quarantine and restricted access storage necessary to manufacture quantities of drug substances under cGMP regulations sufficient for conducting clinical trials and commercial API, for selected products, based on volume and other parameters. In addition our site was approved by various leading global pharmaceutical companies from Europe and Asia as their API vendor for their generics and drug development requirements.

Our manufacturing facilities are strategically situated in various locations in the United States, Europe and Asia. These locations are globally positioned to provide tailored customer solutions and enable the efficient and cost-effective transfer of pre-clinical, clinical and commercial APIs from small-scale to large-scale production. Additionally, these locations easily integrate with our discovery and pharmaceutical development services.

Formulation Development & cGMP Formulation Manufacturing

We have added selected focused formulation capabilities to our portfolio. Our Burlington, MA facility provides high value-added contract manufacturing services in sterile syringe and vial filling using specialized technologies including lyophilization. AMRI Burlington provides these services for both small molecule drug products and biologicals, from clinical phase to commercial scale.

Working in close collaboration with our already established chemical synthesis, analytical development and preformulation groups, we also offer formulation development services for solid dosage, solution, suspension, topicals and injectables, cGMP early clinical phase capsules filling using Xcelodose technology and cGMP early clinical Powder in Bottle (“PIB”) for solution and suspension.

Formulation services include:

Aseptic fill and finish (vials and syringes)
Aseptic lyophilization
Neat API or pharmaceutical blend in capsules
PIB for solution and suspension
Blending and sieving
Milling
Tableting
Rheology
Roller compaction

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Wet granulation
Fluid bed processing, including Wurster coating
All associated analytical testing for dosage formulation products

Analytical Chemistry Services

We provide broad analytical chemistry services for drug discovery, pharmaceutical development and manufacturing. With years of industry experience, state-of-the-art technologies and instrumentation, along with close collaboration with synthesis chemists, our analytical services are designed to ensure that the right tools are used to solve even the most difficult problem.

Analytical services that we provide include:

Impurity identification & structure elucidation
Method development, qualification and validation
Preformulation and physical characterization
Quality control
Stability services
Analytical and preparative Supercritical Fluid Chromatography (“SFC”)
Preparative chromatography
Good Laboratory Practices (“GLP”) bioanalytical services
Regulatory support/quality assurance

Proprietary Research and Development

Leveraging our wide array of drug discovery capabilities, we established several internal drug discovery programs with the goal to discover and develop promising drug candidates and license these candidates in return for upfront fees, milestones and downstream royalty payments for commercialized drug products. We identified lead series by utilizing our high throughput screening capabilities, coupled with our computer assisted drug design capabilities, to assess our diverse range of synthetic, virtual and natural product screening libraries. Applying the expertise of our separate R&D medicinal chemistry group, supported by our own in vitro biology and in vitro metabolism capabilities and a select range of in vivo service providers, we optimized these lead series to development candidate status, in some cases pursuing these into early clinical studies.

Our proprietary research and development efforts to date have contributed to the discovery and development of one product that has reached the market. We discovered a new process to prepare a metabolite known as terfenadine carboxylic acid, or TAM, in a purer form. The purer form of TAM is the active ingredient in the non-sedating antihistamine known as fexofenadine HCl, which is sold by Sanofi under the name Allegra® in the Americas and as Telfast elsewhere. We have been issued several United States and foreign patents relating to TAM and the process chemistry by which TAM is produced. Subject to payment of government annuities and maintenance fees, our issued patents relating to TAM expire between 2013 and 2015.

Recent drug discovery and development projects have been focused on treatments for irritable bowel disease, CNS diseases and obesity. Our R&D efforts benefited from access to a broad array of our scientific services including capabilities in microbial fermentation, molecular biology, cell culture, gene expression and cloning, scale up synthesis of human metabolites, preformulation, chemical development and cGMP synthesis. Additionally, a portion of our R&D efforts focused on improving the manufacturing process for our generic API products. We spent $7.9 million, $11.1 million and $14.5 million on research and development activities in 2011, 2010 and 2009, respectively. In late 2011, we announced that we would cease to invest in most of these internal drug discovery efforts but continue to seek partnership or investment for the advanced programs with the goal of returning value to AMRI. We continue to place some R&D focus on improving manufacturing processes.

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Licensing Agreements

In January 2011, we entered into a research and licensing agreement with Genentech. Under the terms of the agreement, Genentech will receive an exclusive license to develop and commercialize multiple potential products from our proprietary antibacterial program. Additionally, we will collaborate with Genentech in a research program with the objective of identifying novel antibacterial agents. In addition to an upfront license fee and research funding of $1.5 million, we will be eligible to receive development regulatory milestones and will receive royalties from Genentech on worldwide sales of any resulting commercialized compounds.

In October 2005, we licensed the worldwide rights to develop and commercialize potential products from our amine neurotransmitter reuptake inhibitor technology and patents identified in one of our proprietary research programs to Bristol-Myers Squibb Company (“BMS”). In conjunction with the licensing agreement, we received a non-refundable, non-creditable up-front payment of $8.0 million and a total of $10.0 million for research and development services in the first three years of the agreement. The agreement also set forth milestone events that, if achieved by these products, would entitle the Company to non-refundable, non-creditable milestone payments of up to $66.0 million for each of the first and second compounds to achieve these events, and up to $22.0 million for each subsequent product to achieve these events. These milestone events include candidate nomination, IND or equivalent regulatory filings, commencement of middle- and late-stage clinical trials, and regulatory approval of compounds for commercial sale. The agreement also provides for the Company to receive royalty payments on worldwide sales of any such product that is commercialized. From the entry into this agreement through December 31, 2011, we have recorded $14.8 million from achieving certain milestones with BMS.

In March 1995, we entered into a license agreement with Sanofi. Under the terms of the license agreement, we granted Sanofi an exclusive, worldwide license to any patents issued to us related to our original TAM patent applications. From the beginning of the agreement through December 31, 2011, we have had revenues of $7.4 million in milestone payments and approximately $492.9 million in royalties under this license agreement. Sanofi is obligated under the license agreement to pay ongoing royalties to us based upon its sales of Allegra®/Telfast and generic fexofenadine. Additionally during the fourth quarter of 2008, we entered into an amendment to our licensing agreement with Sanofi to allow Sanofi to sublicense patents related to Allegra® and Allegra D-12® to Teva Pharmaceuticals and Barr Laboratories in the United States. Subsequently, Teva Pharmaceuticals acquired Barr Laboratories. As a result of this amendment, we received an upfront sublicense fee from Sanofi of $10.0 million and additionally we will receive royalties from Sanofi on the sale of products in the United States containing fexofenadine hydrochloride and products containing fexofenadine hydrochloride (generic Allegra®) and pseudoephedrine hydrochloride (generic Allegra D-12®) by Teva Pharmaceuticals through 2015, along with additional consideration. We are not entitled, however, to receive any additional milestone payments under the license agreement. Sales of Allegra®/Telfast and generic fexofenadine by Sanofi worldwide were approximately $1.2 billion, $1.1 billion and $1.1 billion for the years ended December 31, 2011, 2010 and 2009, respectively. See “Item 3 — Legal Proceedings” for discussion of current legal proceedings related to Allegra®/Telfast.

Business Segments

We have organized our activities into two distinct segments: Large Scale Manufacturing (“LSM”) and Discovery, Drug Development and Small Scale Manufacturing (“DDS”). Our LSM activities include pilot to commercial scale production of active pharmaceutical ingredients and intermediates, sterile syringe and vial filling, and high potency and controlled substance manufacturing and our remaining activities, including drug lead discovery, optimization, drug development, and small scale commercial manufacturing represent our DDS business segment. See “Item 7 — Management’s Discussion and Analysis” and the notes to the consolidated financial statements for financial information on the Company’s business segments.

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Customers

Our customers include pharmaceutical companies and biotechnology companies and a growing segment of our customer base is government research entities and non-profit organizations, and to a limited extent, agricultural companies, fine chemical companies, contract chemical manufacturers, medical device, flavoring and cosmetic companies. For the year ended December 31, 2011, contract revenue from our three largest customers represented 16%, 9% and 8%, respectively, of our contract revenue. For the year ended December 31, 2010, contract revenue from our three largest customers represented 17%, 10% and 7%, respectively, of our contract revenue. For the year ended December 31, 2009, contract revenue from our three largest customers represented 14%, 12% and 8%, respectively, of our contract revenue. In 2011, the company’s largest customer was GE Healthcare. See Note 17 to the consolidated financial statements for information on geographic and other customer concentrations.

Sales and Marketing

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

Employees

As of January 31, 2012, we had 1,389 employees. Of these employees, 626 are at our international facilities. Our U.S. large-scale manufacturing hourly work force has 86 employees who are subject to a collective bargaining agreement with the International Chemical Workers Union. A 3-year collective bargaining agreement was signed in January 2011 with the union and expires in January 2014. Additionally, we have 79 union employees at our large-scale manufacturing facility at AMRI India that are covered by two collective bargaining agreements. One agreement expires in April 2012 and the other expires in March 2013. We are currently in the process of initiating negotiations with the bargaining unit for the agreement that expires in April 2012. None of our other employees are subject to any collective bargaining agreement. We consider our relations with our employees and the unions to be good.

Competition

While a small number of larger chemistry outsourcing service providers have emerged as leaders within the industry, the outsourcing market for pharmaceutical and biotechnology contract chemistry and biology services remains fragmented. We face competition based on a number of factors, including size, relative expertise and sophistication, quality and costs of identifying and optimizing potential lead compounds and speed and costs of optimizing chemical processes. In many areas of our business we also face foreign competition from companies in regions with lower cost structures. We compete with contract research companies, contract drug manufacturing companies, research and academic institutions and with the internal research departments of biotechnology companies. We have also historically competed with internal research departments of large pharmaceutical companies, however recently, competition in this area has been reduced as these companies have downsized their internal organizations.

We rely on many internal factors that allow us to stay competitive and differentiate us in the marketplace, including:

Our globalization of both research and manufacturing facilities allows us to increase our access to key global markets
Our ability to offer a flexible combination of high quality, cost-effective services
Our comprehensive service offerings allow us to provide our customers a more efficient transition of experimental compounds through the research and development process, ultimately reducing the time and cost involved in bringing these compounds from concept to market

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Patents and Proprietary Rights

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

We have been issued various United States and international patents covering fexofenadine HC1 and certain related manufacturing processes. These United States patents begin to expire in 2013, and the international patents begin to expire in 2014 and most of these patents are covered by our license agreements with Sanofi, described herein. Additionally, our United States patents related to substituted biaryl purines as potent anticancer agents and a series of aryl and heteroaryl tetrahydroisoquinolines related to central nervous system indications begin to expire in 2020.

Many of our current contracts with our customers provide that ownership of proprietary technology developed by us in the course of work performed under the contract is vested in the customer, and we retain little or no ownership interest.

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

Government Regulation

The manufacture, transportation and storage of our products are subject to certain international, Federal, state and local laws and regulations. Our future profitability is indirectly dependent on the sales of pharmaceuticals and other products developed by our customers. Regulation by governmental entities in the United States and other countries will be a significant factor in the production and marketing of any pharmaceutical products that may be developed by us or our customers. The nature and the extent to which such regulation may apply to us or our customers will vary depending on the nature of any such pharmaceutical products. Virtually all pharmaceutical products developed by us or our customers will require

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regulatory approval by governmental agencies prior to commercialization. Human pharmaceutical products are subject to rigorous preclinical and clinical testing and other approval procedures by the FDA and by foreign regulatory authorities. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time consuming and require the expenditure of substantial resources.

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

All facilities and manufacturing techniques used for prescribed steps in the manufacture of API for clinical use or for sale in the United States must be operated in conformity with cGMP guidelines as established by the FDA and International Conference on Harmonization (“ICH”). Our facilities are subject to unscheduled periodic regulatory inspections to ensure compliance with cGMP regulations. Failure on our part to comply with applicable requirements could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. A finding that we had materially violated cGMP requirements could result in additional regulatory sanctions and, in severe cases, could result in a mandated closing of our facilities or significant fines, which would materially and adversely affect our business, financial condition and results of operations. During 2011, an FDA inspection of our cGMP manufacturing facility in Albany was completed, resulting in no issuance of a Form FDA 483.

Our manufacturing facility in the UK was issued a GMP certificate from the MHRA following an inspection in October 2011. The MHRA is the UK regulatory agency and is recognized as one of the leading global authorities on GMP compliance. The certificate covers general GMP manufacturing operations, and laboratory controls designed for the production and release of APIs and intermediates. The successful audit confirms AMRI’s compliance with European Medicines Agency GMP regulations and further demonstrates the Company’s commitment to operational quality. The MHRA inspection follows a U.S. FDA audit of the facility in June 2011, in which no formal observations were issued. The successful completion of both the US FDA and UK MHRA inspections means that AMRI’s UK facility can now produce registered intermediates and active ingredients for use in humans and expands the range of projects that AMRI can now conduct at this facility.

Additionally, our Burlington, MA facility received GMP certification to manufacture investigational medicine products from MHRA in 2010 and in 2011 received GMP certification from the Italian Medicines Agency (“AIFA”) to manufacture commercial injectable products.

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On August 18, 2010, we received a warning letter from the FDA which pertained to its inspection of AMRI Burlington in March 2010 and which identified three significant observations. According to the warning letter, these observations may have caused our drug product(s) to be adulterated in that the methods used in, or the facilities or controls used for, their manufacture, processing, packing or holding did not conform to, or were not operated or administered in conformity with cGMP. A copy of the warning letter is available on the FDA website at www.fda.gov. We acquired the facility on June 14, 2010. The warning letter did not restrict production or shipment of products from the facility, however we voluntarily suspended cGMP production for a period of time while we undertook remediation steps to address the FDA’s observations. Although we resumed cGMP operations in May 2011, the warning letter, subsequent remediation efforts and suspension of production have had a material adverse effect on our business operations and cash flow.

We have been working to resolve the issues identified in the warning letter. In May, 2011, the Company provided the FDA with its final update pertaining to the warning letter. From June 8, 2011 through June 28, 2011, the FDA conducted a re-inspection of the Company’s Burlington facility. On June 28, 2011, the FDA issued a Form 483 report to the Company which included 7 inspectional observations. The Company provided a response to the FDA’s Form 483 report on July 20, 2011. On September 13, 2011, the Company received a letter from the FDA regarding the Company’s response stating that corrective actions proposed by the Company, once fully implemented, should adequately address the observations made by the FDA investigators. The letter also indicated that the Company’s corrective actions will be verified by the FDA at the next facility inspection. The Company believes that the corrective actions have now been fully implemented. The Company will continue the manufacturing operations currently ongoing at the Burlington site, including GMP operations. There can be no assurance that the FDA will be satisfied with our response or will not identify additional issues on re-inspection. Failure to promptly correct these violations as required by the FDA may result in legal action without further notice including, without limitation, seizure and injunction. Other federal agencies may take the FDA warning letter into account when considering the award of contracts. Additionally, the FDA may withhold approval of requests for export certificate, or approval of pending drug applications listing our Burlington facility until the above violations are corrected. In addition, certain customers who claim to be adversely impacted by the FDA warning letter and our inability to fulfill our contractual commitments may bring legal action against us. Any such actions could significantly disrupt our business and operations and have a material adverse impact on our financial position and operating results.

Our manufacturing and research and development processes involve the controlled use of hazardous or potentially hazardous materials and substances. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials, including radioactive compounds and certain waste products. Additionally, we are subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices and emissions and wastewater discharges. Although we believe that our activities currently comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources. In addition, we cannot predict the extent of regulations that might result from any future legislative or administrative actions, therefore we could be required to incur significant costs to comply with environmental laws and regulations and these actions could restrict our operations in the future.

Concentration of Business and Geographic Information

For a description of revenue and long lived assets by geographic region, please see Note 17 to the consolidated financial statements.

Internet Website

We maintain an internet website at www.amriglobal.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available on our website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov.

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ITEM 1A. RISK FACTORS

The following factors should be considered carefully in addition to the other information in this Form 10-K. Except as mentioned under “Item 7A — Quantitative and Qualitative Disclosure About Market Risk” and except for the historical information contained herein, the discussion contained in this Form 10-K contains “forward-looking statements,” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, that involve risks and uncertainties. Our actual results could differ materially from those discussed in this Form 10-K. Important factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein.

Failure to manage the business to profitability without Allegra royalties will have a significant impact on operations and stock value.

The recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our revenue, earnings and operating cash flows. We continue to develop our business and manage our operating costs in order to be in a position to maintain a business that can operate profitably as these royalties begin to diminish in 2014 and 2015. Recurring royalties have a significantly higher gross and operating margin than do our other business activities, resulting in the need to replace a significant amount of margin in order to achieve such profitability. The Company has taken certain cost cutting steps during 2011 and has certain additional steps planned for 2012 in order to right size the business operations to support the profitability that is achievable from our core contract research and manufacturing businesses. In the future, we may need to take additional cost cutting measures if our revenues do not increase or are not profitable enough to support our operations. In addition, if we are not able to increase operating revenue and decrease operating costs in order to replace the Allegra royalty income, there will be a material and adverse impact on our business, including negative impacts on our operating cash flow, access to capital and ability to spend on required capital improvements to our facilities.

Our Burlington, MA facility is subject to an FDA warning letter which has resulted in a significant disruption in our business operations and has had and may continue to have a material adverse effect on our business operations and cash flow.

On August 18, 2010, we received a warning letter from the FDA which pertained to its inspection of AMRI Burlington in March 2010 and which identified three significant observations. According to the warning letter, these observations may have caused our drug product(s) to be adulterated in that the methods used in, or the facilities or controls used for, their manufacture, processing, packing or holding did not conform to, or were not operated or administered in conformity with cGMP. A copy of the warning letter is available on the FDA website at www.fda.gov. We acquired the facility on June 14, 2010. The warning letter did not restrict production or shipment of products from the facility, however we voluntarily suspended cGMP production for a period of time while we undertook remediation steps to address the FDA’s observations. Although we resumed cGMP operations in May 2011, the suspension of production has had a material adverse effect on our business operations and cash flow.

We have been working to resolve the issues identified in the warning letter. In May, 2011, the Company provided the FDA with its final update pertaining to the warning letter. From June 8, 2011 through June 28, 2011, the FDA conducted a re-inspection of the Company’s Burlington facility. On June 28, 2011, the FDA issued a Form 483 report to the Company which included 7 inspectional observations. The Company provided a response to the FDA’s Form 483 report on July 20, 2011. On September 13, 2011, the Company received a letter from the FDA regarding the Company’s response stating that corrective actions proposed by the Company, once fully implemented, should adequately address the observations made by the FDA investigators. The letter also indicated that the Company’s corrective actions will be verified by the FDA at the next facility inspection. The Company believes the corrective actions have now been fully implemented. The Company will continue the manufacturing operations currently ongoing at the Burlington site, including GMP operations. There can be no assurance that the FDA will be satisfied with our response or will not identify additional issues on re-inspection. Failure to promptly correct these violations as required by the FDA may result in legal action without further notice including, without limitation, seizure and injunction. Other federal agencies may take the FDA warning letter into account when considering the award of contracts. Additionally, the FDA may withhold approval of requests for export certificate, or approval of pending drug applications listing our Burlington facility until the above violations are corrected. In addition, certain

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customers who claim to be adversely impacted by the FDA warning letter and our inability to fulfill our contractual commitments may bring legal action against us. Any such actions could significantly disrupt our business and operations and have a material adverse impact on our financial position and operating results.

If we fail to meet our current credit facility’s financial covenants, our business and financial condition could be adversely affected. If we fail to successfully negotiate a new credit agreement as required by the terms of the current credit agreement, our business and financial condition could be materially and adversely affected.

During 2011 we did not meet certain of the obligations under our line of credit agreement with a bank group led by Bank of America. In June 2011, we finalized the renegotiation of such credit agreement which included repayment of $2.7 million of the outstanding line of credit. The remaining $7.0 million of the outstanding line of credit was converted into a term loan with a maturity date of June 2012 with quarterly repayments of $0.4 million and the line of credit currently secures $6.8 million of letters of credit outstanding to certain of the Company’s business partners. Additionally, in connection with our June 2011 agreement, we provided security to the bank group in the form of a security interest in substantially all of our United States assets and certain other collateral. We did not meet all of our obligations under the June 2011 debt agreement, which led to further re-negotiation of this line of credit with the Bank group. On December 1, 2011 we finalized a waiver and amendment which increased the effective interest rate, limited any further borrowings, required that we diligently seek refinancing of this debt agreement with a commitment for such to be obtained by March 31, 2012 and required the further repayment of $3.0 million in December 2011 and another $0.8 million of such obligations in early 2012. In addition, certain of the restrictive covenants were revised and as of such date the Company is only required to comply with certain cash maintenance requirements and to limit its capital expenditures. Covenants related to maintaining earnings levels were removed in the December 2011 amendment. As of December 31, 2011, we had approximately $2.6 million of term debt and $6.8 million of outstanding letters of credit secured by the line of credit. In addition, we maintain an additional credit facility with one bank that secures an individual letter of credit in an amount of approximately $3.0 million, which is cross defaulted to the primary line of credit.

In the event that we do not meet the covenants set forth in the December 2011 amendment to the credit agreement, there is no assurance that we will receive further waivers of covenant noncompliance from the lenders. If at any point, we fail to meet our credit facility’s financial or other covenants, the lenders can demand immediate repayment of our outstanding balance. This could have a negative impact on our liquidity, thereby reducing the availability of cash flow for other purposes. Based on the terms of the December 2011 amendment, we are not able to borrow further amounts under either the term loan or the line of credit. In the event that the bank group demanded immediate repayment of the term debt and cash collateralization of the letters of credit, the Company would require additional financing in order to operate its ongoing business. The Company believes that such financing could be obtained from a variety of sources including borrowing from another lending institution; sale or securitization of assets; or sales by the Company of equity or debt securities, however the cost of obtaining any such financing is likely to be greater than the current interest rate paid under the December 2011 amendment.

We are in the process of negotiating a 4-year credit agreement with a new bank which would serve to replace the current line of credit. While negotiations are proceeding in a positive manner, there is no assurance that we will be able to close this transaction on mutually acceptable terms. We expect that the new agreement will have covenants that require the Company to maintain minimum levels of cash, limit capital expenditures to historical amounts and require the Company to achieve a minimum fixed charge coverage ratio. In the event that the Company is not able to finalize such new agreement, or if we fail to meet the terms of the new agreement, there could be a material and adverse effect on our business and operations.

We may experience disruptions in or the inability to source raw materials to support our production processes or to deliver goods to our customers.

We rely on independent suppliers for key raw materials, consisting primarily of various chemicals. We generally use raw materials available from more than one source. We could experience inventory shortages if we were required to use an alternative manufacturer on short notice, which could lead to raw materials being purchased on less favorable terms than we have with our regular supplier. Additionally, we rely on various third-party delivery services to transport both goods from our vendors and finished products to our customers.

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A disruption in our ability to source or transport materials could delay or halt production and delivery of certain of our products thereby adversely impacting our ability to market and sell such products and our ability to compete.

Our sales forecast and/or revenue projections may not be accurate.

We use a “pipeline” system, a common industry practice, to forecast sales and trends in our business. Our sales personnel monitor the status of proposals, including the date when they estimate a customer will make a purchase decision and the potential size of the order. We aggregate these estimates on a quarterly basis in order to generate a sales pipeline. While the pipeline process provides us with some guidance in business planning and forecasting, it is based on estimates only and is therefore subject to risks and uncertainties. Any variation in the conversion of the pipeline into revenue or the pipeline itself could cause us to improperly plan or budget and thereby adversely affect our business, results of operations and financial condition.

We may lose one or more of our major customers.

During the year ended December 31, 2011, revenues from our largest customer represented approximately 16% of our contract revenue, or 13% of our total revenue. Our existing agreement with this customer extends through 2013. If this customer does not renew the agreement there may be a material decrease in our revenues and operating income. In addition, during the year ended December 31, 2011 sales to another customer represented approximately 9% of our contract revenue, or 7% of our total revenue. In addition, during the year ended December 31, 2011, we provided services to two other major customers representing approximately 13% of our contract revenues or 10% of our total revenue. These customers typically may cancel their contracts with 30 days’ to one-year’s prior notice, depending on the size of the contract, for a variety of reasons, many of which are beyond our control. If any one of our major customers cancels its contract with us, our contract revenues may materially decrease.

If we fail to meet strict regulatory requirements, we could be required to pay fines or even close our facilities.

All facilities and manufacturing techniques used to manufacture drugs in the United States must conform to standards that are established by the FDA. The FDA conducts unscheduled periodic inspections of our facilities to monitor our compliance with regulatory standards. If the FDA finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us or, if the FDA determines that our non-compliance is severe, it may close our facilities. Any adverse action by the FDA could have a material adverse effect on our operations.

Pharmaceutical and biotechnology companies may discontinue or decrease their usage of our services.

We depend on pharmaceutical and biotechnology companies that use our services for a large portion of our revenues. Although there has been a trend among pharmaceutical and biotechnology companies to outsource drug research and development functions, this trend may not continue. We have experienced increasing pressure on the part of our customers to reduce expenses, including the use of our services as a result of negative economic trends generally and more specifically in the pharmaceutical industry.

We may be adversely affected in future periods as a result of general economic and/or pharmaceutical industry downturns which has resulted in a diminished availability of liquidity in the marketplace. If pharmaceutical and biotechnology companies discontinue or decrease their usage of our services, including as a result of a slowdown in the overall global economy, our revenues and earnings could be lower than we currently expect and our revenues may decrease or not grow at historical rates.

We face increased competition.

We compete directly with the in-house research departments of pharmaceutical companies and biotechnology companies, as well as contract research companies, and research and academic institutions. We also experience significant competition from foreign companies operating under lower cost structures, primarily those in China and other Asian countries. While we operate in certain lower relative cost jurisdictions, such as India and Singapore, we do not have operations in China. Many of our competitors have greater financial and other resources than we have. As new companies enter the market and as more advanced

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technologies become available, we currently expect to face increased competition. In the future, any one of our competitors may develop technological advances that render the services that we provide obsolete. While we plan to develop technologies, which will give us competitive advantages, our competitors plan to do the same. We may not be able to develop the technologies we need to successfully compete in the future, and our competitors may be able to develop such technologies before we do or provide those services at a lower cost. Consequently, we may not be able to successfully compete in the future.

We may be required to record additional long-lived asset impairment charges.

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable based on the existence of certain triggering events.

Factors we consider important which could result in a long-lived asset impairment include the following:

a significant change in the extent or manner in which a long-lived asset is being used;
a significant change in the business climate that could affect the value of a long-lived asset; and
a significant decrease in the market value of assets.

In the fourth quarter of 2011, we recorded long-lived asset impairment charges of $4.7 million in our DDS segment associated with the Company’s decision to terminate its lease and exit one of its U.S. facilities as part of the overall initiative to reduce the Company’s workforce, right size capacity, and reduce operating costs.

In 2010, we recorded long-lived asset impairment charges of $4.8 million in our DDS segment. As a result of realigning some of the AMRI U.S. operating activities, the Company evaluated the future economic benefit expected to be generated from the revised operating activities in this facility against the carrying value of the facility’s property and equipment and determined that these assets were impaired. We also recorded a long-lived asset impairment charge of $6.0 million in our LSM segment upon determining that the carrying value of certain assets at our AMRI India location used in the manufacturing of generic products was not recoverable based on projections of future revenues and cash flows expected to be derived from the use of these assets.

If long-lived assets are determined to be impaired in the future, we would be required to record a charge to our results of operations.

Agreements we have with our employees, customers, consultants and other third parties may not afford adequate protection for our valuable intellectual property, confidential information and other proprietary information.

Some of our most valuable assets include patents. In addition to patent protection, we also rely on trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of our customer’s information, such as trade secrets, proprietary information and other customer confidential information, as well as our own, we require our employees, consultants and advisors to execute confidentiality and proprietary information agreements. However, these agreements may not provide us with adequate protection against improper use or disclosure of confidential information and there may not be adequate remedies in the event of unauthorized use or disclosure. Furthermore, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities we conduct. In some situations, our confidentiality and proprietary information agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Although we require our employees and consultants to maintain the confidentiality of all proprietary information of their previous employers, these individuals, or we, may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. Finally, others may independently develop substantially equivalent proprietary information and techniques causing some technologies that we develop to be patented by other companies. Our failure to protect our proprietary information and techniques may inhibit our ability to compete effectively and our investment in those technologies may not yield the benefits we expected. In addition, we may be subject to claims that we are infringing on the intellectual property of others. We could incur significant costs defending such claims and if we are unsuccessful in defending these claims, we may be subject to liability for infringement. To the extent that we are unable to protect confidential customer information, we may encounter material harm to our reputation and to our business.

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Recent acquisitions and strategic investments have taken longer than expected to achieve profitability.

In recent years, we have engaged in a number of acquisitions and strategic investments. We have established contract research facilities in several international locations worldwide and have expanded certain of these facilities. Most recently, in 2010, we completed the acquisitions of AMRI UK, a chemical development and large scale manufacturing business in the United Kingdom, and AMRI Burlington, a formulation facility located in Burlington, Massachusetts. These acquisitions have not achieved profitability and each such acquisition has required further investment in order to provide a more stable operating platform for the future. In particular, due to a significant decrease in demand from a key customer at AMRI UK, and the issuance of the FDA warning letter to our AMRI Burlington location, we were required to record goodwill impairment charges at these locations in 2010. The overall economic slowdown in our key markets has also delayed the effective utilization of these acquired facilities. We expect that we will be required to make further investments in these acquired companies as we drive toward profitability and this may have a material adverse effect on our business and operations.

We may not be able to effectively manage our international operations.

There are significant risks associated with the establishment of foreign operations, including, but not limited to: geopolitical risks, foreign currency exchange rates and the impact of shifts in the U.S. and local economies on those rates, compliance with local laws and regulations, the protection of our intellectual property and that of our customers, the ability to integrate our corporate culture with local customs and cultures, and the ability to effectively and efficiently supply our international facilities with the required equipment and materials. If we are unable to effectively manage these risks, these locations may not produce the revenues, earnings, or strategic benefits that we anticipate, or we may be subject to fines or other regulatory actions if we do not comply with local laws and regulations, which could have a material adverse affect on our business.

We may not be able to recruit and retain the highly skilled employees we need.

Our future growth and profitability depends upon the research and efforts of our highly skilled employees, such as our scientists, and their ability to keep pace with changes in drug discovery and development technologies. We compete vigorously with pharmaceutical firms, biotechnology firms, contract research firms, and academic and research institutions to recruit scientists. If we cannot recruit and retain scientists and other highly skilled employees, we will not be able to continue our existing services and will not be able to expand the services we offer to our customers.

We may lose one or more of our key employees.

Our business is highly dependent on our senior management and scientific staff, including:

Dr. Thomas E. D’Ambra, our Chairman, Chief Executive Officer and President;
Mark T. Frost, our Senior Vice President, Administration, Chief Financial Officer and Treasurer;
Dr. Steven R. Hagen, our Vice President, Pharmaceutical Development and Manufacturing;
Lori M. Henderson, our Vice President, General Counsel and Secretary
Brian D. Russell, our Vice President, Human Resources; and
Dr. Bruce J. Sargent, our Senior Vice President, Drug Discovery;

The loss of any of our key employees, including our scientists, may have a material adverse effect on our business.

We may be held liable for harm caused by drugs that we develop and test.

We develop, test and manufacture drugs that are used by humans. If any of the drugs that we develop, test or manufacture harm people, we may be required to pay damages to those persons. Although we carry liability insurance, we may be required to pay damages in excess of the amounts of our insurance coverage. Damages awarded in a product liability action could be substantial and could have a material adverse effect on our financial condition.

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We may be liable for contamination or other harm caused by hazardous materials that we use.

Our manufacturing and research and development processes involve the use of hazardous or potentially hazardous materials and substances. We are subject to Federal, state and local laws and regulation governing the use, manufacture, handling, storage and disposal of such materials, including but not limited to radioactive compounds and certain waste products. Additionally, we are subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices and emissions and wastewater discharges. Although we believe that our activities currently comply with the standards prescribed by such laws and regulations, we cannot completely eliminate the risk of contamination or injury resulting from these materials. We may incur liability as a result of any contamination or injury. In addition, we cannot predict the extent of regulations that might result from any future legislative or administrative actions, therefore we could be required to incur significant costs to comply with environmental laws and regulations and these actions could restrict our operations in the future. Such expenses, liabilities or restrictions could have a material adverse effect on our operations and financial condition.

We completed an environmental remediation assessment associated with groundwater contamination at our Rensselaer, New York location. This contamination is associated with past practices at the facility prior to 1990, and prior to our investment or ownership of the facility. Ongoing costs associated with the remediation include biannual monitoring and reporting to the State of New York’s Department of Environmental Conservation. Under the remediation plan, we are expected to pay for monitoring and reporting until 2014. Under a 1999 agreement with the facility’s previous owner, our maximum liability under the remediation is $5.5 million. If the State of New York Department of Environmental Conservation finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us which could have a material adverse effect on our operations.

Our operations may be interrupted by the occurrence of a natural disaster or other catastrophic event at our primary facilities.

We depend on our laboratories and equipment for the continued operation of our business. Our research and development operations and all administrative functions are primarily conducted at our facilities in Albany and Rensselaer, New York. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events could still disrupt our operations. Even though we carry business interruption insurance policies, we may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies. Any natural disaster or catastrophic event at any of our facilities could have a significant negative impact on our operations.

Terrorist attacks or acts of war may seriously harm our business.

Terrorist attacks or acts of war may cause damage or disruption to our company, our employees, our facilities and our customers, which could significantly impact our revenues, costs and expenses and financial condition. The potential for terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could materially adversely affect our business, results of operations, and financial condition in ways that we currently cannot predict.

Domestic policy changes, including income tax and health care reform could reduce the prices pharmaceutical and biotechnology companies can charge for drugs they sell, including some of our potential products, which in turn, could reduce the amounts that they have available to retain our services.

We depend on contracts with pharmaceutical and biotechnology companies for a majority of our revenues. We therefore depend upon the ability of pharmaceutical and biotechnology companies to earn enough profit on the drugs they market to devote substantial resources to the research and development of new drugs. Additionally, we rely on our collaborative partners to obtain acceptable prices or an adequate level of reimbursement for our current and potential future products. Continued efforts of government and third-party payors to contain or reduce the cost of health care through various means, could affect our levels of revenues and earnings. In certain foreign markets, pricing and/or profitability of pharmaceutical products are subject to governmental control. Domestically, there have been and may continue to be proposals to implement similar governmental control. Future legislation may limit the prices pharmaceutical and

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biotechnology companies can charge for the drugs they market and cost control initiatives could affect the amounts that third-party payors agree to reimburse for those drugs. There is no assurance that our collaborative partners will be able to obtain acceptable prices for our products which would allow us to sell these products on a competitive and profitable basis. As a result, such laws and initiatives may have the effect of reducing the resources that pharmaceutical and biotechnology companies can devote to the research and development of new drugs. If pharmaceutical and biotechnology companies decrease the resources they devote to the research and development of new drugs, the amount of services that we perform, and therefore our revenues, could be reduced.

The ability of our stockholders to control our policies and effect a change of control of our company is limited, which may not be in every shareholder’s best interests.

There are provisions in our certificate of incorporation and bylaws which may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:

Our certificate of incorporation provides for three classes of directors with the term of office of one class expiring each year, commonly referred to as a “staggered board.” By preventing stockholders from voting on the election of more than one class of directors at any annual meeting of stockholders, this provision may have the effect of keeping the current members of our board of directors in control for a longer period of time than stockholders may desire.
Our certificate of incorporation authorizes our board of directors to issue shares of preferred stock without stockholder approval and to establish the preferences and rights of any preferred stock issued, which would allow the board to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or change in control.

Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which, in general, imposes restrictions upon acquirers of 15% or more of our stock.

We have adopted a Shareholder Rights Plan, the purpose of which is, among other things, to enhance the Board’s ability to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of us is made in the future. Under the terms of the Shareholder Rights Plan, the Board can in effect prevent a person or group from acquiring more than 15% of the outstanding shares of our Common Stock. Once a shareholder acquires more than 15% of our outstanding Common Stock without Board approval (the “acquiring person”), all other shareholders will have the right to purchase securities from us at a price less than their then fair market value. These subsequent purchases by other shareholders substantially reduce the value and influence of the shares of Common Stock owned by the acquiring person.

Our officers and directors have significant control over us and their interests as shareholders may differ from our other shareholders.

At February 29, 2012, our directors and officers beneficially owned or controlled approximately 16.0% of our outstanding common stock. Individually and in the aggregate, these stockholders significantly influence our management, affairs and all matters requiring stockholder approval. In particular, this concentration of ownership may have the effect of delaying, deferring or preventing an acquisition of us and may adversely affect the market price of our common stock.

Our stock price is volatile and could experience substantial further declines.

The market price of our common stock has historically experienced and may continue to experience volatility. Our quarterly operating results, changes in general conditions in the economy or the financial markets and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. In addition, the global economic and potential uncertainty have created significant additional volatility in the United States capital markets. This volatility and the recent market decline has affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance or their business prospects, and has adversely affected and may further affect the price of our common stock.

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Because we do not intend to pay dividends, our shareholders will benefit from an investment in our common stock only if it appreciates in value.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of our shareholders’ investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which shareholders purchased their shares.

We may experience significant increases in operational costs beyond our control.

Costs for certain items which are needed to run our business, such as energy and certain materials, have the potential to fluctuate. As these cost increases are often dependent on market conditions, and although we do our best to manage these price increases, we may experience increases in our costs due to the volatility of prices and market conditions. Increases in these costs could negatively impact our results of operations.

Delays in, or failure of, the approval of our customers’ regulatory submissions could impact our revenue and earnings.

The successful transition of clinical and preclinical candidates into long term commercial supply agreements is a key component of the LSM business strategy. If our customers do not receive approval of their regulatory submissions, this could have a significant negative impact on our revenue and earnings.

Our business may be adversely affected if we encounter complications in connection with our continued implementation and operation of information management software and infrastructure.

We have implemented a comprehensive enterprise resource planning (“ERP”) system to the majority of our locations to enhance operating efficiencies and provide more effective management of our business operations. Continuing an uninterrupted performance of our ERP system or other software or hardware is critical to the success of our business strategy. Any material failure of our ERP system or other software or hardware that interrupts or delays our operations could adversely impact our ability to do the following in a timely manner and have a material adverse effect on our operations:

report financial results;
accurately reflect inventory costs;
accept and process customer orders;
receive inventory and ship products;
invoice and collect receivables;
place purchase orders and pay invoices; and
accurately reflect all other business transactions related to the finance, order entry, purchasing, supply chain and human resource processes within the ERP system.

We are subject to foreign currency risks.

Our global business operations give rise to market risk exposure related to changes in foreign exchange rates, interest rates, commodity prices and other market factors. If we fail to effectively manage such risks, it could have a negative impact on our consolidated financial statements. For a further discussion of our foreign currency risks, please see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk”.

A reduction or delay in government funding of research and development may adversely affect our business.

A greater portion of our overall revenue is derived either from governmental sources directly, such as the U.S. National Institutes of Health (“NIH”) or clients at academic institutions, corporations and research laboratories whose funding is partially dependent on both the level and timing of funding from government sources, such as BARDA and similar domestic and international agencies. These direct and indirect sources of government funding can be difficult to forecast. Government funding of research and development is subject

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to the political process, which is inherently unpredictable. Our revenue may be adversely affected if our clients delay entering into contracts for our services as a result of uncertainties surrounding the approval of government budget proposals. A reduction in government funding for the NIH or other government research agencies could adversely affect our business and our financial results and there is no guarantee that NIH funding will be directed towards projects and studies that require use of our services. In addition, as we begin to do more business directly with the US government and its various agencies, we have become subject to many additional regulatory requirements with respect to billing, collections, record-keeping, security and other matters which have required us to devote resources to these efforts. While we use our best commercial efforts to comply with these additional regulatory requirements any failure to comply could have an adverse impact on our ability to maintain revenue from governmental sources or subject us to penalties or fines.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

The aggregate square footage of our operating facilities is approximately 1,174,000 square feet, of which 723,000 square feet are owned and 451,000 square feet are leased. Set forth below is information on our principal facilities:

   
Location   Square Feet   Primary Purpose
Albany, New York     277,000       Contract Manufacturing, Contract Research and
Administration
 
Rensselaer, New York     276,000       Contract Manufacturing  
Aurangabad, India     208,000       Contract Manufacturing  
Holywell, United Kingdom     68,000       Contract Manufacturing & Contract Research  
East Greenbush, New York     64,000       Contract Research  
Hyderabad, India     59,000       Contract Research  
Burlington, Massachusetts     57,000       Contract Manufacturing  
Singapore     51,000       Contract Research  
Bothell, Washington     44,000       Contract Research  
Budapest, Hungary     42,000       Contract Research  
Syracuse, New York     28,000       Contract Research  

Our Rensselaer, NY, Aurangabad, India, United Kingdom and Burlington, MA facilities are used in our Large-Scale Manufacturing (“LSM”) segment as reported in the consolidated financial statements. All other facilities are used in our Discovery/Development/Small Scale Manufacturing (“DDS”) segment, as reported in the consolidated financial statements.

We believe these facilities are generally in good condition and suitable for their purpose. We believe that the capacity associated with these facilities is adequate to meet our anticipated needs through 2012.

ITEM 3. LEGAL PROCEEDINGS.

The Company, from time to time, may be involved in various claims and legal proceedings arising in the ordinary course of business. Except as noted below, the Company is not currently a party to any such claims or proceedings which, if decided adversely to the Company, would either individually or in the aggregate have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

Allegra

The Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of Sanofi, has been involved in legal proceedings with several companies seeking to market or which are currently marketing generic versions of Allegra and Allegra-D. In accordance with the Company’s agreements with Sanofi, Sanofi bears the external legal fees and expenses for these legal proceedings, but in general, the Company must consent to any settlement or other arrangement with any third party. Under those same agreements, the Company will receive royalties from Sanofi on U.S. Patent No. 5,578,610 until its expiration in 2013 and

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royalties on U.S. Patent No. 5,750,703 until its expiration in 2015, unless those patents are earlier determined to be invalid. Similarly, the Company is entitled to receive royalties from Sanofi on certain foreign patents through 2015, unless those patents are earlier determined to be invalid.

United States Litigations

Beginning in 2001, Barr Laboratories, Inc., Impax Laboratories, Inc., Mylan Pharmaceuticals, Inc., Teva Pharmaceuticals USA, Dr. Reddy’s Laboratories, Ltd./Dr. Reddy’s Laboratories, Inc., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc., Sandoz Inc., Sun Pharma Global, Inc., Wockhardt, and Actavis Mid Atlantic LLC, and Aurolife Pharma LLC and Aurobindo Pharma Ltd. filed Abbreviated New Drug Applications (“ANDAs”) with the Food and Drug Administration (“FDA”) to produce and market generic versions of Allegra products.

In response to the filings described above, beginning in 2001, Aventis Pharmaceuticals (now Sanofi) filed patent infringement lawsuits against each of the above referenced companies. Each of the lawsuits was filed in the U.S. District Court in New Jersey and alleges infringement of one or more patents owned by Aventis Pharmaceuticals. In addition, beginning on November 14, 2006, Sanofi filed two patent infringement suits against Teva Pharmaceuticals USA, Barr Laboratories, Inc. and Barr Pharmaceuticals, Inc. in the Eastern District of Texas based on patents owned by Aventis. Those lawsuits were transferred to the U.S. District Court in New Jersey.

Further, beginning on March 5, 2004, the Company, along with Aventis Pharmaceuticals, filed suit in the U.S. District Court in New Jersey against a number of defendants asserting infringement of U.S. Patent Nos. 5,581,011 and 5,750,703, which are exclusively licensed to Aventis Pharmaceuticals and relate to Allegra and Allegra-D products. On September 9, 2009, the Company filed patent infringement lawsuits in the U.S. District Court in New Jersey against Dr. Reddy’s Laboratories, Ltd, Dr. Reddy’s Laboratories, Inc., and Sandoz, Inc. asserting infringement of U.S. Patent No. 7,390,906. That patent is licensed to Sanofi U.S. LLC and Sanofi U.S. LLC joined that lawsuit as a co-plaintiff with the Company.

On November 18, 2008, the Company, Aventis Pharmaceuticals, Sanofi, Teva Pharmaceuticals, and Barr Laboratories reached a settlement regarding the above-described patent infringement litigations relating to Teva Pharmaceuticals and Barr Laboratories (the “Teva Settlement”). As part of the Teva Settlement, the Company entered into an amendment to its licensing agreement with Sanofi to allow Sanofi to sublicense patents related to ALLEGRA® and ALLEGRA®D-12 to Teva Pharmaceuticals and Barr Laboratories in the United States. Subsequently, Teva Pharmaceuticals acquired Barr Laboratories. The Company received an upfront sublicense fee from Sanofi of $10 million, and Sanofi will pay royalties to the Company on the sale of products in the United States containing fexofenadine hydrochloride (the generic name for the active ingredient in ALLEGRA®) and products containing fexofenadine hydrochloride and pseudoephedrine hydrochloride (generic ALLEGRA®D-12) by Teva Pharmaceuticals through 2015, along with additional consideration. The Company received quarterly royalties through July 2010 for the branded Allegra D-12 equal to the royalties paid for the quarter ended June 30, 2009. Thereafter, the royalty rate has reverted to the rate in effect prior to the signing of the sub-license amendment and the Company will also receive a royalty on Teva’s sales of the generic Allegra D-12. The Company and Aventis Pharmaceuticals have also dismissed their claims against Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc. and Sandoz, Inc. without prejudice.

On March 19, 2010, the Company and Sanofi filed a motion for a preliminary injunction in the U.S. District Court in New Jersey seeking to enjoin Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. from commercial distribution of a Allegra D-24 product based in that product infringing U.S. Patent No. 7,390,906. On June 14, 2010, the Company and Sanofi were granted a preliminary injunction restraining Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. from commercial distribution of a D-24 product. On January 13, 2011, the same court issued a decision interpreting the scope of the claims of U.S. Patent No. 7,390,906. Based on the court’s January 13, 2011 interpretation of the scope of a claim term in U.S. Patent No. 7,390,906, the Company does not presently have evidence sufficient to obtain a favorable outcome on its infringement claim against Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. As a result, the Company, along with Sanofi, Dr. Reddy’s Laboratories, Ltd., and Dr. Reddy’s Laboratories, Inc., agreed to the court’s entry of an order on January 28, 2011, finding that there was no infringement of

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U.S. Patent No. 7,390,906 based on the Court’s January 13, 2011 claim interpretation. The court’s January 28, 2011 order also dissolved the preliminary injunction that was entered on June 14, 2010. The Company and Sanofi U.S. LLC have proceeded directly to the U.S. Court of Appeals for the Federal Circuit to appeal the January 13, 2011 decision.

The January 13, 2011, decision also included an interpretation of the scope of the claims of U.S. Patent No. 5,750,703, and based on that interpretation, the Company does not presently have evidence sufficient to obtain a favorable outcome on its infringement claim against Dr. Reddy’s Laboratories, Ltd., Dr. Reddy’s Laboratories, Inc., Amino Chemicals Ltd., Dipharma S.P.A., and Dipharma Francis Sr.l As a result, the Company, along with Sanofi, Dr. Reddy’s Laboratories, Ltd., Dr. Reddy’s Laboratories, Inc. Amino Chemicals Ltd., Dipharma S.P.A., and Dipharma Francis Sr.l agreed to the court’s entry of an order on March 28, 2011, finding that there was no infringement of U.S. Patent No. 5,750,703 based on the Court’s January 13, 2011 claim interpretation. The Company and Sanofi U.S. LLC have proceeded directly to the U.S. Court of Appeals for the Federal Circuit to appeal the January 13, 2011 decision.

In June 2011, the Company, Sanofi and Impax Laboratories, Inc. reached a settlement agreement of the above patent infringement litigation relating to Impax (“Impax Settlement”). In conjunction with the Impax Settlement, the Company and Sanofi agreed to amend their license agreement to allow Sanofi to sublicense patents related to ALLEGRA® and ALLEGRA®D-12 to Impax Laboratories, Inc. in the United States. In addition, the Company, Sanofi, Mylan Pharmaceuticals, Inc., and Alphapharm reached a settlement agreement of the above patent infringement litigation relating to Mylan and the below noted litigation in Australia against Mylan affiliate Alphapharm (“Mylan Settlement”). In conjunction with the Mylan Settlement, the Company and Sanofi agreed to amend their license agreement to allow Sanofi to sublicense patents related to ALLEGRA® and ALLEGRA®D-12 to Mylan Pharmaceuticals, Inc. in the United States.

International Litigation

In 2007, the Company filed patent infringement lawsuits in Australia against Alphapharm Pty Ltd., Arrow Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma Pharmaceuticals Limited based on Australian Patent No. 699,799. These matters were heard in a consolidated trial in November and December 2010. On February 17, 2011, the Court ruled that the defendants are not liable for infringement because the asserted claims of the Australian Patent No. 699,799 are invalid for lack of novelty and false suggestion. An appeal has been filed with regard to the ruling in the case against Arrow. The action against Alphapharm was settled as part of the Mylan Settlement, with Alphapharm receiving a sublicense to sell its products in Australia and New Zealand. Notwithstanding the court’s ruling of non-infringement, the Company continues to receive royalties on sales of the Allegra products in Australia, based on its rights under other patents.

At Risk Launches

Under applicable federal law, marketing of an FDA-approved generic version of Allegra may not commence until the earlier of a decision favorable to the generic challenger in the patent litigation or 30 months after the date the patent infringement lawsuit was filed. In general, the first generic filer is entitled to a 180-day marketing exclusivity period upon FDA approval. The launch of a generic product is considered an “at-risk” launch if the launch occurs while there is still on-going litigation. Of the remaining defendants in the pending United States litigation, Dr. Reddy’s Laboratories has engaged in an at-risk launch of a generic fexofenadine single-entity product.

ITEM 4. Mine Safety Disclosures

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.

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

   
Period   High   Low
Year ending December 31, 2011
                 
First Quarter   $ 6.37     $ 4.02  
Second Quarter   $ 5.55     $ 3.87  
Third Quarter   $ 5.16     $ 2.80  
Fourth Quarter   $ 3.65     $ 2.08  
Year ending December 31, 2010
                 
First Quarter   $ 9.50     $ 8.35  
Second Quarter   $ 8.86     $ 5.10  
Third Quarter   $ 6.90     $ 5.12  
Fourth Quarter   $ 6.93     $ 5.05  

Stock Performance Graph

The following graph provides a comparison, from December 31, 2006 through December 31, 2011, of the cumulative total stockholder return (assuming reinvestment of any dividends) among the Company, the NASDAQ Stock Market (U.S. Companies) Index (the “NASDAQ Index”) and the NASDAQ Pharmaceuticals Index (the “Pharmaceuticals Index”). The historical information set forth below is not necessarily indicative of future performance. Data for the NASDAQ Index and the Pharmaceuticals Index were provided by NASDAQ.

[GRAPHIC MISSING]

     
  Albany Molecular
Research, Inc
  NASDAQ Stock
Market
(U.S. Companies)
Index
  NASDAQ
Pharmaceuticals
Index
December 31, 2006     100.000       100.000       100.000  
December 31, 2007     136.174       108.469       105.168  
December 31, 2008     92.235       66.352       97.850  
December 31, 2009     85.985       95.375       109.949  
December 31, 2010     53.220       113.194       119.186  
December 31, 2011     27.746       113.805       127.714  

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(b)  Holders.

The number of record holders of our Common Stock as of February 29, 2012 was approximately 229. We believe that the number of beneficial owners of our Common Stock at that date was substantially greater than 229.

(c)  Dividends.

We have not declared any cash dividends on our Common Stock since our inception in 1991. We currently intend to retain our earnings for future growth and, therefore, do not anticipate paying cash dividends in the foreseeable future.

(d)  Equity Compensation Plan Information.

The following table provides information about the securities authorized for issuance under our equity compensation plans as of December 31, 2011:

     
Plan Category   (a)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
  (b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
  (c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
Equity compensation plans approved by security holders(1)     2,762,459     $ 7.58       1,685,725 (2) 
Equity compensation plans not approved by security holders                  
Total     2,762,459     $ 7.58       1,685,725  

(1) Consists of the Company’s 1998 Stock Option Plan, the Company’s 2008 Stock Option Plan and the Company’s Employee Stock Purchase Plan (“ESPP”). Does not include purchase rights accruing under the ESPP because the purchase price (and therefore the number of shares to be purchased) will not be determined until the end of the purchase period.
(2) Includes 1,267,439 shares available under the 2008 Stock Option Plan and 418,286 shares available under the ESPP.

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ITEM 6. SELECTED FINANCIAL DATA.

The selected financial data shown below for the fiscal years ended December 31, 2011, 2010 and 2009, and as of December 31, 2011 and 2010, have been derived from our audited consolidated financial statements included in this Form 10-K. The selected financial data set forth below for the fiscal years ended December 31, 2008 and 2007 and as of December 31, 2009, 2008 and 2007 have been derived from our audited consolidated financial statements for those years, which are not included in this Form 10-K. The information should be read in conjunction with the Company’s audited consolidated financial statements and related notes and other financial information included herein, including Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

         
  As of and for the Year Ending December 31,
     2011   2010   2009   2008   2007
     (in thousands, except per share data)
Consolidated Statement of Operations Data:
                                            
Contract revenue   $ 169,611     $ 163,228     $ 156,800     $ 195,455     $ 163,375  
Recurring royalties     35,034       34,838       34,867       28,305       27,056  
Milestone revenue     3,000             4,750       5,500       2,080  
Total revenue     207,645       198,066       196,417       229,260       192,511  
Cost of contract revenue     168,470       152,673       138,739       146,075       132,032  
Technology incentive award     3,557       3,484       3,594       2,901       2,784  
Research and development     7,939       11,090       14,547       13,129       12,821  
Selling, general and administrative     41,071       42,234       38,036       39,229       33,083  
Goodwill impairment     15,812       36,844       22,900              
Property and equipment impairment     4,674       10,848                    
Intangible asset impairment     856                          
Restructuring charges     1,271       3,090       329       1,833       273  
Arbitration charge     127       9,798                    
Total costs and expenses     243,777       270,061       218,145       203,167       180,993  
(Loss) income from operations     (36,132 )      (71,995 )      (21,728 )      26,093       11,518  
Interest (expense) income, net     (583 )      160       269       1,082       3,104  
Other (expense) income, net     77       (1,007 )      (593 )      715       (237 ) 
(Loss) income before income tax (benefit) expense     (36,638 )      (72,842 )      (22,052 )      27,890       14,385  
Income tax (benefit) expense     (4,342 )      (9,971 )      (5,357 )      7,330       5,449  
Net (loss) income   $ (32,296 )    $ (62,871 )    $ (16,695 )    $ 20,560     $ 8,936  
Basic (loss) earnings per share   $ (1.08 )    $ (2.05 )    $ (0.54 )    $ 0.66     $ 0.28  
Diluted (loss) earnings per share   $ (1.08 )    $ (2.05 )    $ (0.54 )    $ 0.65     $ 0.27  
Weighted average common shares outstanding, basic     29,961       30,657       31,062       31,389       32,351  
Weighted average common shares outstanding, diluted     29,961       30,657       31,062       31,612       32,626  
Consolidated Balance Sheet Data:
                                            
Cash, cash equivalents and investment securities   $ 20,198     $ 41,481     $ 111,058     $ 87,470     $ 107,699  
Property and equipment, net     149,729       163,212       166,746       167,502       158,028  
Working capital     62,584       79,409       149,730       140,693       138,889  
Total assets     263,067       325,106       373,692       390,684       386,654  
Long-term debt, excluding current installments     3,003       11,737       13,212       13,482       4,080  
Total stockholders’ equity     206,432       243,743       314,613       326,680       334,566  
Other Consolidated Data:
                                            
Capital expenditures   $ 10,837     $ 11,628     $ 15,172     $ 23,938     $ 17,747  

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

Overview

We are a global contract research and manufacturing organization that provides customers fully integrated drug discovery, development, and manufacturing services. We supply a broad range of services and technologies that support the discovery and development of pharmaceutical products and the manufacturing of active pharmaceutical ingredients (“API”) and drug product for existing and experimental new drugs. With locations in the United States, Europe, and Asia, we maintain geographic proximity and flexible cost models. We have also historically leveraged our drug-discovery expertise to execute on several internal drug discovery programs, which have progressed to the development candidate stage and in some cases into Phase I clinical development. We have successfully partnered certain programs and are actively seeking to out-license our remaining programs to strategic partners for further development.

We continue to integrate our research and manufacturing facilities worldwide, increasing our access to key global markets and enabling us to provide our customers with a flexible combination of high quality services and competitive cost structures to meet their individual outsourcing needs. Our service offerings range from early stage discovery through manufacturing and formulation across U.S., Europe and Asia. We believe that the ability to partner with a single provider is of significant benefit to our customers as we are able to provide them with a more efficient transition of experimental compounds through the research and development process, ultimately reducing the time and cost involved in bringing these compounds from concept to market. Compounds discovered and/or developed in our contract research facilities can then be more easily transitioned to production at our large-scale manufacturing facilities for use in clinical trials and, ultimately, commercial sales if the product meets regulatory approval.

Additionally, with the 2010 acquisition of our Burlington, MA facility, we now offer customers a fully integrated manufacturing process for sterile injectable drugs. This includes the development and manufacture of the API, the design of the criteria to formulate the API into an injectable drug product, and the manufacture of the final drug product. We continue to make investments to build and recover our formulation business, as we believe this type of business has significant potential in the drug product world driven by the growth in biologically based compounds which are formulated/manufactured on an aseptic basis.

In addition to providing our customers our hybrid services model for outsourcing, we now offer the option of insourcing. With our world class expertise in managing high performing groups of scientists, this option allows us to embed our scientists into the customer’s facility allowing the customer to cost effectively leverage their unused laboratory space.

In 2011, we made a decision to cease activities related to our internal proprietary compound discovery R&D programs. Although we halted our proprietary R&D activities, we continue to believe there are additional opportunities to partner our proprietary compounds or programs to create value, as we have seen a renewed commitment by pharmaceutical companies for innovation both internally and through licensing. Our goal is to partner these compounds or programs in return for a combination of up-front license fees, milestone payments and recurring royalty payments if any compound based on our intellectual property is successfully developed into new drugs and reach the market.

Our total revenue for 2011 was $207.6 million, including $169.6 million from our contract service business and $35.0 million from royalties on sales of Allegra®/Telfast. We used $1.5 million in cash from operations, and we used $10.8 million for capital expenditures on our facilities and equipment, primarily related to maintenance of existing facilities and international expansion. We recorded a net loss of $32.3 million in 2011, largely the result of a $15.8 million goodwill impairment charge, a $4.7 million long-lived asset impairment charge, a $1.3 million restructuring charge and a $0.9 million intangible impairment charge. As of December 31, 2011, we had $20.2 million in cash, cash equivalents and investments and $5.8 million in bank and other related debt.

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Results of Operations

Operating Segment Data

We have organized our sales, marketing and production activities into the Discovery/Development/Small Scale Manufacturing (“DDS”) and Large Scale Manufacturing (“LSM”) segments based on the criteria set forth in ASC 280, “Disclosures about Segments of an Enterprise and Related Information.” We rely on an internal management accounting system to report results of these segments. The accounting system includes revenue and cost information by segment. We make financial decisions and allocate resources based on the information we receive from this internal system. The DDS segment includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. The LSM segment includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates, sterile syringe and vial filling, and high potency and controlled substance manufacturing. API manufacturing is performed at our Rensselaer, NY, Wales, UK and Aurangabad, IN facilities.

Contract Revenue

Contract revenue consists primarily of fees earned under contracts with third-party customers. Our contract revenues for our DDS and LSM segments were as follows:

     
  Year Ended December 31,
     2011   2010   2009
     (in thousands)
DDS   $ 74,032     $ 83,308     $ 85,793  
LSM     95,579       79,921       71,007  
Total   $ 169,611     $ 163,229     $ 156,800  

DDS contract revenues decreased for the year ended December 31, 2011 from the same period in 2010 primarily due to lower contract revenue from our discovery services of $10.7 million, offset in part by an increase in our development and small-scale manufacturing services of $1.5 million. The decrease in discovery services contract revenue was primarily due to lower demand for our U.S. medicinal chemistry services, partially offset by higher demand for our discovery services at our Asia locations. The increases in contract revenue from development and small-scale manufacturing services were attributable to higher demand for our chemistry development services.

We currently expect DDS contract revenue for full year 2012 to remain flat from amounts recognized in 2011.

LSM contract revenue increased for the year ended December 31, 2011 from the same period in 2010 as a result of higher commercial and API development manufacturing shipments from our Rensselaer, NY facility, as well as increased intermediate manufacturing in our Aurangabad, India facility as compared to the same period in 2010.

We currently expect LSM contract revenue for full year 2012 to increase from amounts recognized in 2011, including an increase in revenues from our Burlington, MA facility during the second half of 2012.

DDS contract revenue for the year ended December 31, 2010 decreased 2.9% as compared to the same period in 2009. This result was primarily due to a decrease in contract revenue caused by lower demand from specialty pharma/biotech customers for our U.S. services, offset in part by the acquisition of AMRI UK along with higher demand for these services at our international locations, including an increased demand for our in vitro biology services worldwide. LSM contract revenue for the year ended December 31, 2010 increased 12.6% from the same period in 2009 primarily due to incremental revenues from the AMRI UK and AMRI Burlington acquisitions that took place in the first half of 2010. Additionally, sales of commercial products increased $7.0 million, primarily due to an increase in commercial sales to LSM’s largest customer, as such customers returned toward historical levels after reducing their purchases from us in 2009 in an effort to reduce their inventory levels. These increases were offset, in part, by a decrease of $7.9 million related to reduced demand for the production of clinical supply materials.

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Recurring Royalties

We earn royalties under our licensing agreement with Sanofi. Royalties were as follows:

   
Year Ended December 31,
2011
  2010   2009
(in thousands)
$35,034   $ 34,838     $ 34,867  

Recurring royalties are based on the worldwide sales of Allegra®/Telfast, as well as on sales of Sanofi’s over-the-counter (“OTC”) product and authorized generics. Recurring royalties slightly increased for the year ended December 31, 2011 as compared to the same period in 2010 primarily due to a significant increase in sales of prescription Allegra® in Japan, partially offset by a decrease in royalties recognized from the sale of Allegra® products in the U.S.

We currently expect full year 2012 recurring royalties to remain flat with amounts recognized in 2011. We are anticipating recurring royalties in the first half of 2012 to decrease from amounts recognized in the same period of 2011 due to the timing of the OTC product launch in the U.S. in 2011. We are anticipating recurring royalties to increase in the second half of 2012 from amounts recognized in the same period of 2011 as amounts in 2011 were impacted by prescription inventory reductions and marketing incentives associated with the OTC launch.

Recurring royalties remained flat for the year ended December 31, 2010 as compared to the same period in 2009.

The recurring royalties we receive on the sales of Allegra®/Telfast have historically provided a material portion of our revenues, earnings and operating cash flows. We continue to develop our business in an effort to supplement the revenues, earnings and operating cash flows that have historically been provided by Allegra®/Telfast royalties.

Milestone revenue

Milestone revenue is earned for achieving milestones included in licensing and research agreements with certain of our partners. Milestone revenues were as follows:

   
Year Ended December 31,
2011
  2010   2009
(in thousands)
$3,000   $     $ 4,750  

Milestone revenue of $3.0 million received during the year ended December 31, 2011 was recognized in conjunction with the Company’s license and research agreement with BMS and was specifically based on meeting a Phase II clinical trial milestone of an AMRI compound licensed exclusively to BMS.

No milestone revenue was recorded during the year ended December 31, 2010. During the year ended December 31, 2009, milestone revenue of $4.8 million was recognized in conjunction with the Company’s license and research agreement with BMS. $4.0 million was recognized as a result of the submission of a Clinical Trial Application and an additional $0.8 million was recognized for advancing a third compound into preclinical development.

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Cost of Contract Revenue

Cost of contract revenue consists primarily of compensation and associated fringe benefits for employees, as well as chemicals, depreciation and other indirect project related costs. Cost of contract revenue for our DDS and LSM segments were as follows:

     
  Year Ended December 31,
     2011   2010   2009
     (in thousands)
DDS   $ 72,758     $ 72,903     $ 72,867  
LSM     95,712       79,770       65,872  
Total   $ 168,470     $ 152,673     $ 138,739  
DDS Gross Margin     1.7 %      12.5 %      15.1 % 
LSM Gross Margin     (0.1%)       0.2 %      7.2 % 
Total Gross Margin     0.7 %      6.5 %      11.5 % 

DDS contract revenue gross margin percentages decreased for the year ended December 31, 2011 compared to the same period in 2010. This resulted from lower demand for our discovery services in relation to our fixed costs.

We currently expect DDS contract margins for 2012 to improve over amounts recognized in 2011 due to cost reduction actions implemented in the U.S. in 2011 along with the impact of the anticipated sale or closure of our Hungarian operations.

LSM’s contract revenue gross margin slightly decreased for the year ended December 31, 2011 compared to the same period in 2010. This decrease is primarily due to levels of fixed cost base at our Burlington, MA facility as compared to its revenues due to the disruption at the facility resulting from the FDA warning letter received in August 2010, along with unutilized capacity at our AMRI UK facility. These decreases were partially offset by an increase in margins for our U.S. API manufacturing services.

We currently expect LSM contract margins for 2012 to improve from amounts recognized in 2011 driven by higher revenues discussed above in relation to our fixed costs.

DDS contract revenue gross margin decreased 2.6% for the year ended December 31, 2010 from the same period in 2009. This decrease resulted from lower demand for our U.S services in relation to our fixed costs.

LSM’s contract revenue gross margin decreased 7.0% for the year ended December 31, 2010 from the year ended December 31, 2009. This decrease is primarily due to lower revenues at our Burlington facility in relation to its fixed cost base due to the pending resolution of its FDA warning letter, along with unutilized capacity at our AMRI UK facility.

Technology Incentive Award

We maintain a Technology Development Incentive Plan, the purpose of which is to stimulate and encourage novel innovative technology developments by our employees. This plan allows eligible participants to share in a percentage of the net revenue earned by us relating to patented technology with respect to which the eligible participant is named as an inventor or made a significant intellectual contribution. To date, the royalties from Allegra® are the main driver of the awards. Accordingly, as the creator of the technology, the award is currently payable primarily to Dr. Thomas D’Ambra, our Chief Executive Officer and President of the Company. The incentive awards were as follows:

   
Year Ended December 31,
2011
  2010   2009
(in thousands)
$3,557   $ 3,484     $ 3,594  

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We expect technology incentive award expense to generally fluctuate directionally and proportionately with fluctuations in Allegra® royalties in future periods. Technology incentive award expense for the years ended December 31, 2011 remained consistent as compared to 2010 and 2009, which reflects the relative consistency in royalty revenue.

Research and Development

Research and development (“R&D”) expense consists of compensation and benefits for scientific personnel for work performed on proprietary technology R&D projects, costs of chemicals, materials, outsourced activities and other out of pocket costs and overhead costs.

During the fourth quarter of 2011, the Company’s Board of Directors made a decision to cease activities related to its internal discovery research and development programs, excluding its generic program. Although we ceased our proprietary R&D activities, we continue to believe there are additional opportunities to partner our proprietary compounds in return for a combination of up-front license fees, milestone payments and recurring royalty payments if these compounds are successfully developed into new drugs and reach the market. In addition, R&D activities continue at our large-scale manufacturing facility related to the potential manufacture of new products, the development of processes for the manufacture of generic products with commercial potential, and the development of alternative manufacturing processes.

Research and development expenses were as follows:

   
Year Ended December 31,
2011
  2010   2009
(in thousands)
$7,939   $ 11,090     $ 14,547  

Research and development expenses for the year ended December 31, 2011 decreased 28% from the year ended December 31, 2010. This decrease is primarily due to an overall decrease in internal operating costs as we strategically managed our R&D investments and continued to narrow the focus of R&D spending on those programs with the highest licensing potential, as well as a decrease in clinical trial costs related to our oncology and obesity programs.

Based on our strategic decision to cease R&D operations, we currently expect 2012 R&D expense to reduce to approximately $1.0 million, with costs related to developing new niche generic products and improving process efficiencies in our manufacturing plants.

Research and development expenses decreased 23.8% for the year ended December 31, 2010 from the year ended December 31, 2009. This decrease was primarily due to lower compensation costs in 2010 caused by a reduction of research and development scientific resources and lower material costs, as we managed our costs by focusing on moving only our most advanced programs forward. Additionally, in 2009 we recognized an increase in process R&D related to both improving the manufacturing process for our generic API products as well as the manufacturing process for our oncology compound, which was in Phase I clinical trials.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses consist of compensation and related fringe benefits for sales, marketing, operational and administrative employees, professional service fees, marketing costs and costs related to facilities and information services. SG&A expenses were as follows:

   
Year Ended December 31,
2011
  2010   2009
(in thousands)
$41,071   $ 42,234     $ 38,036  

Selling, general and administrative expenses for the year ended December 31, 2011 decreased from the same period in 2010. This decrease is primarily attributable to nonrecurring acquisition costs and reduced AMRI Burlington remediation costs that occurred in 2010.

We currently expect SG&A expenses for 2012 to decrease due to the anticipated sale or closure of our Hungarian operations, as well as other cost saving actions implemented in the U.S. in 2011.

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Selling, general and administrative expenses increased for the year ended December 31, 2010 from the same period in 2009. The increase is primarily due to transaction costs associated with the AMRI UK and AMRI Burlington acquisitions in the first half of 2010, as well as incremental SG&A costs from these new operations. These increases were partially offset by cost savings from reorganization of our U.S. locations in May 2010 and our large-scale India operations in December 2009.

Goodwill Impairment

   
Year Ended December 31,
2011
  2010   2009
(in thousands)
$15,812   $ 36,844     $ 22,900  

During the fourth quarter of 2011, we recorded a goodwill impairment charge of $15.8 million in our DDS operating segment due to a change in the implied fair value of the segment’s goodwill to below its carrying value. The change in the fair value of the segment was primarily attributable to significantly lower than forecasted demand for contract services in the current year, which resulted in a decrease in management’s long-term estimates of operating results and cash flows for the segment.

We recorded a goodwill impairment charge of $36.8 million in our LSM operating segment due to a change in the implied fair value of the segment’s goodwill to below its carrying value during the fourth quarter of 2010. The change in the fair value of the segment was primarily attributable to the fact that in the fourth quarter of 2010 several events occurred in the LSM segment that significantly impacted our expected future performance for this segment. Our AMRI UK facility was notified of an unplanned elimination in demand for a key commercial product, which has historically represented a significant amount of annual revenues at the site. In addition, the FDA warning letter issued to our AMRI Burlington facility was expected to have both continued negative short-term financial impact during the remediation process, as well as delaying the planned integration of the AMRI Burlington business into our overall LSM platform and the forecasted resulting growth in the long term.

During the fourth quarter of 2009, we recorded a goodwill impairment charge of $22.9 million in our LSM operating segment due to a change in the implied fair value of the segment’s goodwill to below its carrying value. The change in the fair value of the segment was primarily attributable to the fact that in the fourth quarter of 2009 several issues occurred in the LSM segment that significantly impacted our expected future performance. Two phase III products that were expected to receive FDA approval were delayed, one by the FDA requiring more information and one by the customer in an effort to proactively collect more data before submitting to the FDA. It was expected throughout 2009 that commercial manufacturing would commence on both these products at the AMRI Rensselaer LSM facility beginning in 2010. In addition, the Company was notified of additional unexpected reductions in demand for product under the commercial supply agreement with its largest customer. These additional unplanned demand reductions in the fourth quarter of 2009 added an element of risk related to the Company’s ability to achieve the significant revenues expected from this contract that were reflected in the future projections for the segment.

Property and Equipment Impairment

   
Year Ended December 31,
2011
  2010   2009
(in thousands)
$4,674   $ 10,848     $  

In the fourth quarter of 2011, we recorded long-lived asset impairment charges of $4.7 million in our DDS segment associated with the Company’s decision to terminate its lease and exit one of its U.S. facilities as part of the overall initiative to reduce the Company’s workforce, right size capacity, and reduce operating costs.

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In 2010, we recorded long-lived asset impairment charges of $4.8 million in our DDS segment. As a result of realigning some of the AMRI U.S. operating activities, the Company evaluated the future economic benefit expected to be generated from the revised operating activities in this facility against the carrying value of the facility’s property and equipment and determined that these assets were impaired. Additionally, we recorded a long-lived asset impairment charge of $6.0 million in our LSM segment upon determining that the carrying value of certain assets at our AMRI India location used in the manufacturing of generic products was not recoverable based on projections of future revenues and cash flows expected to be derived from the use of these assets.

Intangible Impairment

   
Year Ended December 31,
2011
  2010   2009
(in thousands)
$856   $     $  

In the fourth quarter of 2011, we identified patent assets relating to technologies that we no longer expect to derive value from as a result of the Company’s decision to cease internal R&D activities. We recorded an intangible impairment charge of $0.9 million in our DDS segment in conjunction with this review of our patent portfolio.

Restructuring Charges

Restructuring charges are included under the caption “Restructuring charges” in the consolidated statement of operations for the years ended December 31, 2011, 2010 and 2009 and the restructuring liabilities are included in “Accounts payable and accrued expenses” and “Other long-term liabilities” on the consolidated balance sheet at December 31, 2011 and 2010.

The following table displays the restructuring activity and liability balances for and as of December 31, 2011:

         
  Balance at
January 1,
2011
  Charges/
(reversals)
  Paid
Amounts
  Foreign
Currency
Translation
Adjustments
  Balance at
December 31,
2011
Termination benefits and personnel realignment   $ 141     $ 1,282     $ (949 )    $ (18 )    $ 456  
Lease termination charges     1,932       (261 )      (543 )            1,128  
Other     120       250             (16 )      354  
Total   $ 2,193     $ 1,271     $ (1,492 )    $ (34 )    $ 1,938  

Termination benefits and personnel realignment costs relate to severance packages, outplacement services, and career counseling for employees affected by the restructuring. Lease termination charges relate to costs associated with exiting the facility, net of estimated sublease income.

Anticipated cash outflows during 2012 related to the below described restructuring is approximately $1.6 million.

The details of the restructuring activity displayed in the table above are as follows:

AMRI U.S.

In May 2010, we initiated a restructuring of our AMRI U.S. locations. As part of our strategy to increase global competitiveness and continue to be diligent in managing costs, we implemented cost reduction activities at our operations in the U.S. These cost reduction activities included a reduction in the U.S. workforce, as well as the suspension of operations at one of our research laboratory facilities in Rensselaer, New York. Employees and equipment from this facility were consolidated into other nearby Company operations. We recorded a restructuring charge of $3.2 million in 2010. This charge included lease termination charges of $2.2 million (net of estimated sublease income), termination benefits and personnel realignment costs of $0.8 million and facility and other costs of $0.2 million.

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Additionally, in March 2011, we reduced our workforce to right-size our U.S. operations, primarily focused on discovery chemistry services due to the shift in demand for these types of services to our lower cost operations in Asia. In connection with this reduction, we recorded a restructuring charge of $1.0 million for termination benefits. These restructuring activities were recorded within our DDS operating segment.

In December 2011, we initiated a restructuring plan at one of our U.S. locations which included actions to further reduce our workforce, right size capacity, and reduce operating costs. These actions were implemented to better align the business to current and expected market conditions and are expected to improve our overall cost competitiveness and increase cash flow generation. The workforce reduction primarily affected certain positions associated with our elimination of internal R&D activities. As a result of the workforce reduction, we will be terminating the lease of one of our U.S. facilities which will result in a reduction in annual operating expenses related to this facility. As a result of this restructuring, we recorded a restructuring charge of $0.3 million in the DDS operating segment.

International

In December 2009, we initiated a restructuring of its AMRI India locations which consisted of closing and consolidating its Mumbai administrative office into its Hyderabad location as part of the Company’s goal to streamline operations and eliminate duplicate administrative functions. The Company recorded a restructuring charge of approximately $0.4 million in the fourth quarter of 2009, including lease termination charges of $0.2 million, leasehold improvement abandonment charges of $0.1 million and administrative costs of less than $0.1 million. The AMRI India restructuring activity was recorded in our LSM operating segment.

Arbitration charge

   
Year Ended December 31,
2011
  2010   2009
(in thousands)
$127   $ 9,798     $  

On August 19, 2009, AMRI Rensselaer notified one of its suppliers that it was cancelling a purchase agreement between the parties pursuant to a hardship clause of the agreement. AMRI Rensselaer took the position that the cancellation was a valid and effective termination of the agreement under its terms while our supplier contended that the cancellation constituted repudiation of the contract for which they could recover damages. Our supplier commenced arbitration in September 2009 with International Centre for Dispute Resolution (“ICDR”) seeking damages for AMRI Rensselaer’s alleged wrongful repudiation of the agreement in the total amount of $9.3 million, consisting of $8.7 million as lost profit and $0.6 million as labor cost.

On October 13, 2010 the ICDR issued an arbitration award in favor of our supplier against AMRI Rensselaer. The arbitrator awarded our supplier damages of $8.7 million plus interest at the rate of 9% starting from August 19, 2009. AMRI accrued $9.6 million for the award and related interest expense in the quarter ended September 30, 2010.

On March 2, 2011, AMRI Rensselaer and our supplier entered into a Settlement and Supply agreement (“Agreement”) which served to settle the arbitral award and other legal proceedings related to the arbitral award that were pending. The Agreement required AMRI Rensselaer to pay $4.8 million to our supplier and provide a letter of credit to secure the remainder of the arbitral award plus accrued interest. The letter of credit will reduce quarterly based on certain volume purchase milestones. The Agreement also re-establishes the supply relationship between AMRI and our supplier through 2018 with mutually beneficial terms.

As the letter of credit is reduced, the Company reverses the allocated portion of the accrued charge through a reduction in the carrying cost of the associated inventory. The maximum amount to be reversed is $5.5 million through 2014. As of December 31, 2011, the remaining arbitration reserve is $4.1 million.

Arbitration charges of $0.1 million in 2011 represent accrued interest expense related to the award prior to the arbitration settlement.

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Interest (expense) income, net

     
  Year Ended December 31,
(in thousands)   2011   2010   2009
Interest expense   $ (714 )    $ (292 )    $ (377 ) 
Interest income     131       452       646  
Interest (expense) income, net   $ (583 )    $ 160     $ 269  

Interest expense increased for the year ended December 31, 2011 as compared with the same period in 2010 primarily due to borrowing costs associated with the renegotiation of the Company’s new credit agreement entered into in 2011.

Interest expense decreased for the year ended December 31, 2010 as compared with the same period in 2009 due to the decrease of interest rates on our outstanding debt.

Interest income decreased for the year ended December 31, 2011 as compared with the same period in 2010. This decrease was primarily due to the decrease in the average balances of interest bearing cash and investments held during the year.

Interest income decreased for the year ended December 31, 2010 as compared with the same period in 2009 also due to the decrease in the average balances of interest bearing cash and investments held during the year.

Other income (expense), net

   
Year Ended December 31,
2011
  2010   2009
(in thousands)
$77   $ (1,007 )    $ (593 ) 

Other income for the year ended December 31, 2011 includes income from purchase accounting adjustments in the first quarter of $0.3 million related to the 2010 AMRI UK and AMRI Burlington acquisitions and income related to the fluctuation in exchange rates associated with foreign currency translations. These amounts are offset in part by deferred financing amortization expense.

Other expense for the year ended December 31, 2010 increased as compared to the same period in 2009. This difference is primarily due to fluctuations in rates associated with foreign currency transactions.

Income tax benefit

   
Year Ended December 31,
2011
  2010   2009
(in thousands)
$(4,342)   $ (9,971 )    $ (5,357 ) 

Income tax benefit for the year ended December 31, 2011 was $4.3 million as compared to income tax benefit of $10.0 million for the same period in 2010. This decrease in income tax benefit is due to a decrease in pre-tax loss, as well as the composition of pre-tax losses in relation to the applicable tax rates at our various locations worldwide.

Income tax benefit for the year ended December 31, 2010 was $10.0 million as compared to income tax benefit of $5.4 million for the same period in 2009. This increase in income tax benefit is due to an increase in pre-tax loss, offset by a correction of prior year deferred tax assets, which resulted in additional income tax expense of $8.0 million.

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Liquidity and Capital Resources

We have historically funded our business through operating cash flows and proceeds from borrowings. During 2011, we used cash of $1.5 million for operating activities.

During 2011, cash provided by investing activities was $4.0 million, resulting primarily from net proceeds from the sale or maturities of marketable securities of $15.2 million offset in part by the use of $10.8 million for the acquisition of property and equipment. During 2011, we used $7.0 million for financing activities, relating primarily to payments made on our credit facilities.

Working capital, defined as current assets less current liabilities, was $62.6 million as of December 31, 2011, compared to $79.4 million as of December 31, 2010. This decrease includes a payment of $4.8 million associated with the Company’s settlement of the 2010 arbitration matter with a supplier and $10.8 million used for capital expenditures.

Total capital expenditures for the year ended December 31, 2011 were $10.8 million as compared to $11.6 million for the year ended December 31, 2010. Capital expenditures in 2011 were primarily related to maintenance of our existing facilities and international expansion of our existing facilities.

For 2012, we expect to incur $10.0 to $12.0 million in capital expenditures primarily relating to maintenance of our existing facilities and expansion at our existing international facilities.

In June 2011, we finalized the renegotiation of our credit agreement, which included repayment of $2.7 million of the outstanding line of credit. The remaining $7.0 million of the outstanding line of credit was converted into a term loan with a maturity date of June 2012 and quarterly repayments of $0.4 million. The line of credit also secures our outstanding letters of credit which totaled $6.8 million as of December 31, 2011.

The credit facility contains certain financial covenants, including minimum earnings before interest, taxes, depreciation and amortization and a minimum unrestricted cash and cash equivalents balance. Other covenants include, but are not limited to, limits on quarterly capital expenditures. Additionally, in connection with the new debt agreement, the Company provided security to the bank group in the form of a security interest in substantially all of the Company’s assets located in the United States.

As of September 30, 2011, we were not in compliance with one of the financial covenant requirements. As a result, the we received a waiver from the lenders and additionally amended the above credit agreement effective November 29, 2011. The amended credit agreement increased the effective interest rate, limited any further borrowings, required that we diligently seek refinancing of this debt agreement with a commitment for such to be obtained by March 31, 2012 and required the further repayment of $3.0 million in December 2011 and another $0.8 million of such obligations in the first quarter of 2012 with the remaining outstanding balance to be repaid in June 2012, on the loan’s maturity date. In addition, certain of the restrictive covenants were revised and as of such date we are only required to comply with certain cash maintenance requirements and to limit our capital expenditures. As of December 31, 2011, the Company was in compliance with the existing financial covenant requirements.

We are in the process of negotiating a 4-year credit agreement with a new bank which would serve to replace the current line of credit. While negotiations are proceeding in a positive manner, there is no assurance that we will be able to close this transaction on mutually acceptable terms. The new agreement will have covenants that require the Company to maintain minimum levels of cash, limit capital expenditures to historical amounts and require the Company to achieve a minimum fixed charge coverage ratio. If the Company is not able to finalize such new agreement, or if we fail to meet the terms of the new agreement, there could be a material and adverse effect on our business and operations. In the event that the current bank group demanded immediate repayment of the term loan and cash collateralization of the letters of credit prior to the negotiation of the new agreement, the Company would require additional financing in order to operate its ongoing business. The Company believes that such financing could be obtained from a variety of sources including borrowing from another lending institution; sale or securitization of assets; or sales by the Company of equity or debt securities.

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Working capital was $79.4 million at December 31, 2010, compared to $149.7 million as of December 31, 2009. This decrease is primarily due to cash of $46.3 used for the acquisitions of AMRI Burlington and AMRI UK, $11.6 million used for capital expenditures and $10.0 million used to repurchase shares of the Company’s common stock.

Total capital expenditures for the year ended December 31, 2010 were $11.6 million as compared to $15.2 million for the year ended December 31, 2009. Capital expenditures in 2010 were primarily related to international expansion and maintenance of our existing facilities.

During 2010, we used $45.1 million in cash for investing activities, resulting primarily from the use of $18.0 million for the acquisition of AMRI UK in February 2010 and $28.4 million for the acquisition of AMRI Burlington, net of cash acquired in June 2010, along with $11.6 million for the acquisition of property and equipment. These uses were offset in part by $13.9 million for net proceeds from investment securities. During 2010, we used $9.7 million for financing activities, consisting primarily of $10.0 million used to repurchase shares of the Company’s common stock in the open market pursuant to a stock repurchase plan approved by our Board of Directors in June 2010.

We expect that additional future capital expansion and acquisition activities, if any, could be funded with cash on hand, cash from operations, borrowings under our credit facility and/or the issuance of equity or debt securities. There can be no assurance that attractive acquisition opportunities will be available to us or will be available at prices and upon such other terms that are attractive to us. We regularly evaluate potential acquisitions of other businesses, products and product lines and may hold discussions regarding such potential acquisitions. As a general rule, we will publicly announce such acquisitions only after a definitive agreement has been signed. In addition, in order to meet our long-term liquidity needs or consummate future acquisitions, we may incur additional indebtedness or issue additional equity or debt securities, subject to market and other conditions. There can be no assurance that such additional financing will be available on terms acceptable to us or at all. The failure to raise the funds necessary to finance our future cash requirements or consummate future acquisitions could adversely affect our ability to pursue our strategy and could negatively affect our operations in future periods.

Off Balance Sheet Arrangements

We do not use special purpose entities or other off-balance sheet financing techniques that we believe have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital resources.

Contractual Obligations

The following table sets forth our long-term contractual obligations and commitments as of December 31, 2011:

Payments Due by Period (in thousands)

         
  Total   Under 1 Year   1 – 3 Years   4 – 5 Years   After 5 Years
Long-Term Debt (principal)   $ 5,842     $ 2,839     $ 609     $ 634     $ 1,760  
Operating Leases     33,874       5,780       10,475       7,595       10,024  
Purchase Commitments     22,906       22,044       862              
Pension Plan Contributions     16,840       1,643       3,304       3,383       8,510  

Related Party Transactions

Technology Development Incentive Plan

We have a Technology Development Incentive Plan to provide a method to stimulate and encourage novel innovative technology development. To be eligible to participate, the individual must be an employee and must be the inventor of, co-inventor of, or have made a significant intellectual contribution to novel technology that results in new revenues received by us. Eligible participants will share in awards based on a percentage of the licensing, royalty or milestone revenue received by us, as defined by the Plan.

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In 2011, 2010 and 2009 we awarded Technology Incentive Compensation primarily to Thomas D’Ambra, our Chairman, President and Chief Executive Officer and the inventor of the terfenadine carboxylic acid metabolite technology, which is covered by the Company’s patents relating to the active ingredient in Allegra. In 2011 and 2009, awards were also granted in relation to the milestone payment from BMS made pursuant to the licensing and research agreement between the Company and BMS. The amounts awarded and included in the consolidated statements of income for the years ended December 31, 2011, 2010 and 2009 are $3.6 million, $3.5 million and $3.6 million, respectively. Included in accrued compensation in the accompanying consolidated balance sheets at December 31, 2011 and 2010 are unpaid Technology Development Incentive Compensation awards of approximately $0.7 million and $0.8 million, respectively.

Telecommunication Services

A member of the Company’s board of directors is the Chief Executive Officer of one of the providers of telephone and internet services to the Company. This telecommunications company was paid approximately $0.2 million per year for services rendered to the Company in 2011, 2010 and 2009.

Critical Accounting Estimates

Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. All of these estimates reflect our best judgment and are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Under different assumptions or conditions, it is reasonably possible that the judgments and estimates described below could change, which may result in future impairments of inventories, goodwill, and long-lived assets, as well as increased pension liabilities, the establishment of valuation allowances on deferred tax assets and increased tax liabilities, among other effects. Also see Note 1, Summary of Significant Accounting Policies, in Part II, Item 8. “Financial Statements and Supplementary Data” of this report, which discusses the significant accounting policies that we have selected from acceptable alternatives.

Inventory

Inventory consists primarily of commercially available fine chemicals used as raw materials, work-in-process and finished goods in our large-scale manufacturing plant. Large-scale manufacturing inventories are valued on a first-in, first-out (“FIFO”) basis. Inventories are valued at the lower of cost or market. We regularly review inventories on hand and record a charge for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The charge for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories. Total inventories recorded on our consolidated balance sheet at December 31, 2011 and 2010 were $26.0 million and $27.1 million, respectively. We recorded charges to reduce obsolete inventory balances of $0.9 million, $1.4 million and $4.6 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Income Taxes

Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties and the need for valuation allowances. We review our tax positions quarterly and adjust the balances as new information becomes available. Our income tax rate is significantly affected by the tax rates on our international operations, each of which are subject to local country tax laws and regulations.

Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carry-forwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings with focus on our U.S. operations and available tax planning strategies. These sources of

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income inherently rely heavily on estimates. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. We use our historical experience and our short and long-range business forecasts to provide insight. Amounts recorded for deferred tax assets, net of valuation allowances, were $22.1 million and $22.6 million at December 31, 2011 and 2010, respectively. Such 2011 year-end amounts are expected to be fully recoverable within the applicable statutory expiration periods.

Goodwill

We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that the fair value of a reporting unit has fallen below its carrying amount. Factors we consider important that could result in an impairment include the following:

Significant underperformance relative to historical or projected future operating results;
Significant negative industry or economic trends; and
Market capitalization relative to net book value, as well as to the aggregate of reporting unit fair values.

Determining whether an impairment has occurred requires valuation of the respective reporting unit, which is estimated based on a variety of techniques. In applying this methodology, we rely on a number of factors and assumptions, including actual operating results, future business plans, economic projections, market data, and discount rates.

If this analysis indicates goodwill may be impaired, measuring the impairment requires a fair value estimate of each identified and previously unidentified tangible and intangible asset. In this case, we supplement the cash flow approach discussed above, including the use of independent appraisals, if deemed necessary.

Based upon the results of the valuation procedures performed at October 1, 2011, the carrying value of the DDS segment exceeded its fair value which was an impairment indicator. In order to assess the estimated amount of impairment the Company performed the second step of the goodwill impairment test. The second step involved an analysis reflecting the allocation of the fair value of the DDS segment as calculated in the first step to its assets and liabilities, including an assessment of whether there were any previously unidentified intangible assets in connection with DDS. Based on the results of these procedures, the Company recorded a goodwill impairment charge of $15.8 million for the year ended December 31, 2011 in the DDS segment. Total goodwill recorded on our consolidated balance sheet at December 31, 2011 was $0.

Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Factors we consider important that could trigger an impairment review include, among others, the following:

A significant change in the extent or manner in which a long-lived asset is being used;
A significant change in the business climate that could affect the value of a long-lived asset; and
A significant decrease in the market value of assets.

Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We derive the required undiscounted cash flow estimates from our historical experience, internal business plans and our understanding of current marketplace valuation estimates. To determine fair value, we use our internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available and independent appraisals, as appropriate.

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In the fourth quarter of 2011, we recorded long-lived asset impairment charges of $4.7 million in our DDS segment associated with the Company’s decision to terminate its lease and exit one of its U.S. facilities as part of the overall initiative to reduce the Company’s workforce, right size capacity, and reduce operating costs.

Pension and Postretirement Benefit Plans

We utilize actuarial models to measure pension and postretirement benefit obligations and related effects on operations. Three assumptions — discount rate, expected return on assets, and trends in healthcare costs — are important elements of plan expense and asset/liability measurement. We evaluate these critical assumptions at least annually. We periodically evaluate other assumptions involving demographic factors, such as retirement age, mortality and turnover, and update them to reflect our experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.

Accumulated and projected benefit obligations are expressed as the present value of future cash payments. We discount those cash payments using the weighted average of market-observed yields for high quality fixed income securities with maturities that correspond to the payment of benefits. Lower discount rates increase present values; higher discount rates decrease present values.

Our discount rates for our pension plan at December 31, 2011, 2010 and 2009 were 4.00%, 5.10% and 5.65%, respectively, reflecting market interest rates.

To determine the expected long-term rate of return on pension plan assets, we consider current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. In developing future return expectations for our pension plan’s assets, we evaluate general market trends as well as key elements of asset class returns such as expected earnings growth, yields and spreads across a number of potential scenarios. In 2011 and 2010, assets in our pension plan earned 4.9% and 11.2%, respectively. Based on our analysis of future expectations of asset performance, past return results, and our current and expected asset allocations, we have assumed an 8.0% long-term expected return on those assets.

Healthcare cost trend rates have a significant effect on the amounts reported for our postretirement welfare plan. Due to the fact that no retirees are currently covered by the Postretirement Welfare Plan, survey data is reviewed for industry averages. Based on this review, a trend of a 10% annual cost increase grading to an ultimate rate of 5% is within industry norms.

Loss Contingencies

Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will materially exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis that often depend on judgments about potential actions by third parties such as regulators. The Company enlists the technical expertise of its internal resources in evaluating current exposures and potential outcomes, and will utilize third party subject matter experts to supplement these assessments as circumstances dictate.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. This Accounting Standards Update (“ASU”) amends the FASB Accounting Standards Codification (“Codification”) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified

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to net income. ASU 2011-05 will be applied retrospectively. ASU 2011-05 was originally effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. However, ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”, deferred the changes of ASU 2011-05 relating to the presentation of reclassification adjustments and supercedes certain pending paragraphs of ASU 2011-05. Early adoption is permitted. This adoption will not have an impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (“IFRS”). The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early application is not permitted. The Company does not expect the adoption of ASU 2011-04 to have a material impact on its consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment.” ASU No. 2011-08 amends ASC 350, “Intangibles-Goodwill and Others,” to allow an initial qualitative assessment of relative events and circumstances to determine if fair value of a reporting unit is more likely than not less than its carrying value, prior to performing the two-step quantitative goodwill impairment test. ASU 2011-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company does not expect the adoption of ASU 2011-08 to have a material impact on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013 and will be applied retrospectively. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have market risk with respect to foreign currency exchange rates and interest rates. The market risk is the potential loss arising from adverse changes in these rates as discussed below.

The Company has facilities in Singapore, India, Hungary and the United Kingdom and therefore is subject to foreign currency risk. This risk is composed of both potential losses from the translation of foreign currency financial statements and the remeasurement of foreign currency transactions. The total net assets of non-U.S. operations denominated in non-functional currencies subject to potential loss amount to approximately $34.1 million. The potential loss in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounts to approximately $3.4 million. Furthermore, related to foreign currency transactions, the Company has exposure to non-functional currency balances totaling approximately $11.4 million. This amount includes, on an absolute basis, exposures to foreign currency assets and liabilities. On a net basis, the Company had approximately $11.4 million of foreign currency assets as of December 31, 2011. As currency rates change, these non-functional currency balances are revalued, and the corresponding adjustment is recorded in the consolidated statement of operations. A hypothetical change of 10% in currency rates could result in an adjustment to the consolidated statement of operations of approximately $1.1 million.

With respect to interest rates, the risk is composed of changes in future cash flows due to changes in interest rates on our variable rate $2.6 million line of credit and $3.3 million industrial development authority bonds. The potential loss in 2012 cash flows from a 10% adverse change in quoted interest rates would approximate fifteen thousand dollars.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Financial statements and notes thereto appear on pages F-1 to F-10 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures

As required by rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K, the Company’s management conducted an evaluation under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation the Company’s management has concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2011.

(b)  Management’s Annual Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that:

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and, that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, assessed as of December 31, 2011 the effectiveness of the Company’s internal control over financial reporting. In making this assessment, management used the criteria set forth in the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of this evaluation, management has concluded that the Company’s internal control over financial reporting as of December 31, 2011 was effective.

The Company’s independent registered public accounting firm has issued a report on the effectiveness of the Company’s internal control over financial reporting, as of December 31, 2011, which is included in Item 8 of this Annual Report on Form 10-K and incorporated herein by reference.

(c)  Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or Rule 15d-15 under the Exchange Act that occurred during the Company’s fiscal quarter ended December 31, 2011 that have materially affected, or are reasonably likely

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to materially affect, the Company’s internal control over financial reporting other than changes made in conjunction with certain efforts to remediate the previously identified material weakness in internal control over financial reporting described below.

(d)  Remediation Plan for Material Weakness in Internal Control Over Financial Reporting

With respect to the previously disclosed material weakness, as discussed in Item 9A of our annual report on Form 10-K for the year ended December 31, 2010, we designed our remediation efforts, as outlined below, to address the material weakness identified by management and to strengthen our internal control over financial reporting. In 2011, we implemented the following remediation steps to address the previously disclosed material weakness and to improve our internal control over financial reporting:

Improved tax accounting procedures for the calculation and reconciliation of deferred income tax assets and liabilities including validation of underlying supporting data; and
Enhanced the quarterly and annual review processes for significant and complex matters related to the tax provision by engaging external tax experts to support the Company’s financial closing and reporting process.

As of December 31, 2011, management has evaluated the remedial action, reviewed the associated controls and found the controls to be operating effectively.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information appearing under the captions “Directors and Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Ethics” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 6, 2012 is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information appearing under the captions “Executive Compensation — Summary Compensation, — Compensation Committee Interlocks and Insider Participation, and — Agreements with Named Executive Officers,” and “Information Regarding Directors — The Board of Directors and its Committees” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 6, 2012 is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information appearing under the caption “Principal and Management Stockholders” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 6, 2012 is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information appearing under the caption “Certain Transactions” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 6, 2012 is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information appearing under the caption “Audit Fees” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 6, 2012 is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)  (1)  Financial Statements.

The consolidated financial statements required by this item are submitted in a separate section beginning on page F-1 of this report.

(a)  (2)  Financial Statement Schedules

The following financial schedule of Albany Molecular Research, Inc. is included in this annual report on Form 10-K.

Schedules other than that which is listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the consolidated financial statements or related notes.

(a)  (3)  Exhibits

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EXHIBIT INDEX

 
Exhibit
No.
  Description
 2.1      Agreement, dated February 17, 2010, by and among the Company and the shareholders of Excelsyn Limited, for the sale and purchase of Excelsyn Limited and its subsidiary, Excelsyn Molecular Development Limited (incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, File No. 000-25323).
 2.2      Agreement, dated June 14, 2010, by and among the Company and the shareholders of Hyaluron, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, File No. 000-25323).
 3.1      Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).
 3.2      Amended and Restated By-Laws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).
 4.1      Specimen certificate for shares of Common Stock, $0.01 par value, of the Company (incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1, File No. 333-58795).
 4.2      Certificate of Designations, Preferences and Rights of a Series of Preferred Stock of Albany Molecular Research, Inc. classifying and designating the Series A Junior Participating Cumulative Preferred Stock (incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on September 19, 2002, File No. 000-25323).
 4.3      Shareholder Rights Agreement, dated as of September 18, 2002, between the Company and Mellon Investor Services LLC, as Rights Agent (incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on September 19, 2002, File No. 000-25323).
 4.4      Amendment to Rights Agreement, dated as of June 1, 2011, between Albany Molecular Research, Inc. and Mellon Investor Services LLC, as Rights Agent (incorporated herein by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 8-A/A filed on June 1, 2011. File no. 000-25323).
 10.1        Lease dated as of October 9, 1992, as amended, by and between the Company and Hoffman Enterprises (incorporated herein by reference to Exhibit 10.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1, File No. 333-58795).
 10.2*      1998 Stock Option and Incentive Plan of the Company (incorporated herein by reference to Exhibit 10.2 to Amendment No. 3 to the Company’s Registration Statement on Form S-1, File No. 333-58795).
 10.3*      Amended 1998 Employee Stock Purchase Plan of the Company, approved on June 1, 2011 (filed herein).
 10.4*      Amended 2008 Stock Option and Incentive Plan, approved on June 1, 2011 (filed herein).
 10.5*      Employment Agreement, dated August 5, 2008 between Albany Molecular Research, Inc. and Bruce J. Sargent, Ph.D. (filed herein).
10.6      Form of Indemnification Agreement between the Company and each of its directors (incorporated herein by reference to Exhibit 10.5 to Amendment No. 2 to the Company’s Registration Statement on Form S-1, File No. 333-58795).

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Exhibit
No.
  Description
10.7       License Agreement dated March 15, 1995 by and between the Company and Marion Merrell Dow Inc. (now Sanofi) (excluding certain portions which have been omitted as indicated based upon an order for confidential treatment, but which have been filed separately with the Commission) (incorporated herein by reference to Exhibit 10.7 to Amendment No. 3 to the Company’s Registration Statement on Form S-1, File No. 333-58795).
10.8*    Amendment to 1998 Stock Option and Incentive Plan of the Company (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, File No. 000-25323).
10.9*    Technology Development Incentive Plan (incorporated herein by reference to Exhibit 10.10 to Amendment No. 2 to the Company’s Registration Statement on Form S-1, File No. 333-58795).
10.10     Form of Employee Innovation, Proprietary Information and Post-Employment Activity Agreement between the Company and each of its executive officers (incorporated herein by reference to Exhibit 10.14 to Amendment No. 3 to the Company’s Registration Statement on Form S-1, File No. 333-58795).
 10.11*    Employment Agreement, dated January 31, 2011, between Albany Molecular Research, Inc. and Lori M. Henderson (filed herein).
10.12     Restated and Revised Lease Agreement, dated as of December 1, 1999, between the University at Albany Foundation and the Company (incorporated herein by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, File No. 000-25323).
 10.13*    Form of Restricted Stock Award Agreement under 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 17, 2005, File No. 000-25323).
 10.14*    Albany Molecular Research, Inc. Incentive Bonus Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2005, File No. 000-25323).
  10.15*     Form of Incentive Stock Option Agreement under 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 filed with the Securities and Exchange Commission on May 10, 2005, File No. 000-25323).
 10.16*     Form of Non-Qualified Stock Option Agreement under 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 filed with the Securities and Exchange Commission on May 10, 2005, File No. 000-25323).
10.17     Supply Agreement, dated as of August 31, 2005, between Organichem Corporation and Amersham Health AS, a wholly-owned subsidiary of GE Healthcare, Inc. (filed with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 filed with the Securities and Exchange Commission on November 4, 2005, File No. 000-25323).
10.18     License and Research Agreement, dated as of October 20, 2005, between Albany Molecular Research, Inc., AMR Technology, Inc. and Bristol-Myers Squibb Company (incorporated herein by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, File No. 000-25323).
 10.19*     Amended and Revised Technology Department Incentive Plan, dated October 13, 2003 (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006, File No. 0-25323).

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Exhibit
No.
  Description
  10.20*     Amended and Restated Employment Agreement, dated August 5, 2008, between Albany Molecular Research, Inc. and Thomas E. D’Ambra, Ph.D. (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, filed with the Securities and Exchange Commission on August 7, 2008, File No. 000-25323).
  10.21*      Amended and Restated Employment Agreement, dated August 5, 2008, between Albany Molecular Research, Inc. and Mark T. Frost (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, filed with the Securities and Exchange Commission on August 7, 2008, File No. 000-25323).
 10.22     Amendment to License Agreement Regarding Sublicensing, dated November 19, 2008, by and between Albany Molecular Research, Inc., AMR Technology, Inc. (formerly a subsidiary of AMRI, which has subsequently been merged into AMRI) and Sanofi U.S. LLC (filed with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) (incorporated herein by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, File No. 000-25323).
 10.22      Second Amendment to the August 31, 2005 Supply Agreement, dated January 9, 2009, by and between AMRI Rensselaer, Inc. (formerly Organichem Corporation) and GE Healthcare AS (formerly Amersham Healthcare AS) (filed with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) (incorporated herein by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, File No. 000-25323).
  10.23*     Employment Agreement, dated August 5, 2008, between Albany Molecular Research, Inc. and Steven R. Hagen, Ph.D. (incorporated herein by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, File No, 000-25323).
10.24     Research/Manufacturing Agreement between Schering Corporation and Albany Molecular Research, Inc. dated January 13, 2006 (filed with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) (incorporated herein by reference to Exhibit 10.1 to the Company’s Amended Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2010, filed with the Securities and Exchange Commission on February 17, 2011, File No. 000-25323).
10.25     Seventh Amendment dated July 14, 2010 to the Research/Manufacturing Agreement between Schering Corporation and Albany Molecular Research, Inc. dated January 13, 2006 (filed with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) (incorporated herein by reference to Exhibit 10.2 to the Company’s Amended Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2010, filed with the Securities and Exchange Commission on February 17, 2011, File No. 000-25323).
10.26     Amended and Restated Limited Waiver and Agreement, made as of April 15, 2011, by and among Albany Molecular Research, Inc. AMRI Rensselaer, Inc., AMRI Bothell Research Center, Inc., AMRI Burlington, Inc., certain Lenders as defined therein and Bank of America, N.A. as administrative agent for the Lenders (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, filed with the Securities and Exchange Commission on May 10, 2011, File No. 000-25323).

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Exhibit
No.
  Description
10.27     Amended and Restated Credit Agreement, dated as of June 3, 2011, among Albany Molecular Research, Inc., as the Borrower, AMRI Rensselaer Inc., AMRI Bothell Research Center, Inc., and AMRI Burlington, Inc., as Guarantors, Bank of America, N.A., as Administrative Agent and L/C Issuer and the other Lender party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 5, 2011, File No. 000-25323)
10.28     Waiver and First Amendment to the A&R Credit Agreement, dated as of December 1, 2011, by and among Albany Molecular Research, Inc., Bank of America, N.A. as administrative agent and L/C issuer, AMRI Rensselaer, Inc., AMRI Bothell Research Center, Inc. and AMRI Burlington, Inc. as guarantors, and the other parties thereto (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 5, 2011, File No. 000-25323).
 21.1      Subsidiaries of the Company (filed herein).
 23.1      Consent of KPMG LLP (filed herein).
 31.1      Rule 13a-14(a)/15d-14(a) certification (filed herein).
 31.2      Rule 13a-14(a)/15d-14(a) certification (filed herein).
 32.1      Section 1350 certification (furnished herein).(1)
 32.2      Section 1350 certification (furnished herein).(1)
 101.INS    XBRL Instance Document (furnished herein).(2)
 101.SCH    XBRL Taxonomy Extension Schema Document (furnished herein).(2)
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document (furnished herein).(2)
 101.DEF    XBRL Taxonomy Extension Definition Linkbase Document (furnished herein).(2)
101.LAB   XBRL Taxonomy Extension Label Linkbase Document (furnished herein).(2)
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document (furnished herein).(2)

* Denotes management contract of compensation plan or arrangement
(1) This certification is not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Exchange Act.
(2) XBRL (Extensible Business Reporting Language) information is furnished and not deemed filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 
Dated: March 15, 2012   Albany Molecular Research, Inc.
    

By:

/s/ Thomas E. D’Ambra

Thomas E. D’Ambra, Ph.D.
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

   
Signature   Title   Date
/s/ Thomas E. D’Ambra

Thomas E. D’Ambra, Ph.D.
  Chairman of the Board, President,
Chief Executive Officer and Director
(Principal Executive Officer)
  March 15, 2012
/s/ Mark T. Frost

Mark T. Frost
  Senior Vice President, Administration,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
  March 15, 2012
/s/ Paul S. Anderson

Paul S. Anderson, Ph.D.
  Director   March 15, 2012
/s/ Veronica G.H. Jordan

Veronica G.H. Jordan, Ph.D.
  Director   March 15, 2012
/s/ Gabriel Leung

Gabriel Leung
  Director   March 15, 2012
/s/ Kevin O’Connor

Kevin O’Connor
  Director   March 15, 2012
/s/ Arthur J. Roth

Arthur J. Roth
  Director   March 15, 2012
/s/ Una S. Ryan

Una S. Ryan, Ph.D., O.B.E.
  Director   March 15, 2012

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Albany Molecular Research, Inc.:

We have audited the accompanying consolidated balance sheets of Albany Molecular Research, Inc. and subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and comprehensive (loss) income, and cash flows for each of the years in the three-year period ended December 31, 2011. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule of valuation and qualifying accounts. We also have audited the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (Item 9A(b)). Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule, and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Albany Molecular Research, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, Albany Molecular Research, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ KPMG LLP
Albany, New York
March 15, 2012

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ALBANY MOLECULAR RESEARCH, INC.
  
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2011, 2010 and 2009
(Dollars in thousands, except per share amounts)

     
  Year Ended December 31,
     2011   2010   2009
Contract revenue   $ 169,611     $ 163,228     $ 156,800  
Recurring royalties     35,034       34,838       34,867  
Milestone revenue     3,000             4,750  
Total revenue     207,645       198,066       196,417  
Cost of contract revenue     168,470       152,673       138,739  
Technology incentive award     3,557       3,484       3,594  
Research and development     7,939       11,090       14,547  
Selling, general and administrative     41,071       42,234       38,036  
Goodwill impairment     15,812       36,844       22,900  
Property and equipment impairment     4,674       10,848        
Intangible asset impairment     856              
Restructuring charges     1,271       3,090       329  
Arbitration charge     127       9,798        
Total costs and expenses     243,777       270,061       218,145  
Loss from operations     (36,132 )      (71,995 )      (21,728 ) 
Interest expense     (714 )      (292 )      (377 ) 
Interest income     131       452       646  
Other income (expense), net     77       (1,007 )      (593 ) 
Loss before income tax benefit     (36,638 )      (72,842 )      (22,052 ) 
Income tax benefit     (4,342 )      (9,971 )      (5,357 ) 
Net loss   $ (32,296 )    $ (62,871 )    $ (16,695 ) 
Basic loss per share   $ (1.08 )    $ (2.05 )    $ (0.54 ) 
Diluted loss per share   $ (1.08 )    $ (2.05 )    $ (0.54 ) 

 
 
See Accompanying Notes to Consolidated Financial Statements.

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ALBANY MOLECULAR RESEARCH, INC.
  
CONSOLIDATED BALANCE SHEETS
December 31, 2011 and 2010
(In thousands, except per share amounts)

   
  December 31,
     2011   2010
Assets
                 
Current assets:
                 
Cash and cash equivalents   $ 19,984     $ 25,747  
Marketable securities     214       15,734  
Accounts receivable (net of allowance for doubtful accounts of $545 at December 31, 2011 and $557 at December 31, 2010)     30,437       32,766  
Royalty income receivable     6,819       7,416  
Income taxes receivable     3,407       7,638  
Inventory     26,004       27,102  
Prepaid expenses and other current assets     9,916       10,110  
Deferred income taxes     3,779       7,533  
Total current assets     100,560       134,046  
Property and equipment, net     149,796       163,212  
Goodwill           16,698  
Intangible assets and patents, net     2,976       3,942  
Equity investment in unconsolidated affiliates     956       956  
Deferred income taxes     7,373       596  
Other assets     1,406       5,656  
Total assets   $ 263,067     $ 325,106  
Liabilities and Stockholders’ Equity
                 
Current liabilities:
                 
Accounts payable and accrued expenses   $ 20,424     $ 24,718  
Deferred revenue and licensing fees     6,464       14,083  
Accrued compensation     2,751       3,679  
Arbitration reserve     4,082       9,798  
Accrued pension benefits     1,416       884  
Current installments of long-term debt     2,839       1,475  
Total current liabilities     37,976       54,637  
Long-term liabilities:
                 
Long-term debt, excluding current installments     3,003       11,737  
Deferred licensing fees     4,286       5,714  
Pension and postretirement benefits     9,047       6,408  
Deferred income taxes     733        
Other long-term liabilities     1,588       2,867  
Total liabilities     56,633       81,363  
Commitments and contingencies (Notes 13 and 16)
                 
Stockholders’ equity:
                 
Preferred stock, $0.01 par value, authorized 2,000 shares, none issued
or outstanding
           
Common stock, $0.01 par value, authorized 50,000 shares, 36,016 shares issued in 2011 and 35,667 shares issued in 2010     360       357  
Additional paid-in capital     206,074       203,964  
Retained earnings     78,954       111,250  
Accumulated other comprehensive loss, net     (12,066 )      (4,940 ) 
       273,322       310,631  
Less, treasury shares at cost, 5,411 shares in 2011 and 2010     (66,888 )      (66,888 ) 
Total stockholders’ equity     206,434       243,743  
Total liabilities and stockholders’ equity   $ 263,067     $ 325,106  

 
 
See Accompanying Notes to Consolidated Financial Statements.

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ALBANY MOLECULAR RESEARCH, INC.
  
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE (LOSS) INCOME
Years Ended December 31, 2011, 2010 and 2009
(In thousands)

                   
  Preferred
Stock
  Common Stock   Additional
Paid-in
Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income (Loss)
  Treasury Stock   Total   Comprehensive
Income (Loss)
     Number of Shares   Par
Value
  Number of Shares   Amount
Balances at January 1, 2009   $   —       35,278     $ 353     $ 199,020     $ 190,816     $ (6,621 )      (3,825 )    $ (56,888 )    $ 326,680           
Net loss                                         (16,695 )                                 (16,695 )    $ (16,695 ) 
Unrealized loss on investment securities, available-for-sale, net of taxes                                                  (10 )                        (10 )      (10 ) 
Pension and other postretirement benefits:
                                                                                         
Amortization of actuarial loss, net of taxes                                                  29                         29       29  
Current year actuarial gain, net of taxes                                                  16                         16       16  
Foreign currency translation gain                                                  1,944                         1,944       1,944  
Total other comprehensive income                                                  1,979                                      
Total comprehensive loss                                                                                    $ (14,716 ) 
Tax benefit from exercise of stock options                                5                                           5           
Share-based payment expense                                765                                           765           
Issuance of restricted stock              165       2       (2 )                                                    
Amortization of unearned compensation – restricted stock                                1,369                                           1,369           
Forfeiture of unearned compensation – restricted stock              (41 )      (1 )      1                                                     
Issuance of common stock in connection with stock option plan and ESPP              65       1       509                                           510        
Balances at December 31, 2009   $       35,467       355       201,667       174,121       (4,642 )      (3,825 )    $ (56,888 )      314,613           
Net loss                                         (62,871 )                                 (62,871 )      (62,871 ) 
Unrealized loss on investment securities, available-for-sale, net of taxes                                                  (49 )                        (49 )      (49 ) 
Pension and other postretirement benefits:
                                                                                         
Amortization of actuarial loss, net of taxes                                                  144                         144       144  
Current year actuarial loss, net of taxes                                                  (645 )                        (645 )      (645 ) 
Foreign currency translation gain                                                  252                         252       252  
Total other comprehensive loss                                                  (298 )                                     
Total comprehensive loss                                                                                    $ (63,169 ) 
Treasury stock purchases                                                           (1,586 )      (10,000 )      (10,000 )          
Share-based payment expense                                565                                           565           
Issuance of restricted stock              174       2       (2 )