10-Q 1 ipxl20150630_10q.htm FORM 10-Q ipxl20150630_10q.htm

 

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

 

Form 10-Q

(Mark One)

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

OR 

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

 

Commission file number: 001-34263

 

Impax Laboratories, Inc.

(Exact name of registrant as specified in its charter)

  

Delaware

 

65-0403311

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

  

 

  

30831 Huntwood Avenue, Hayward, CA

 

94544

(Address of principal executive offices)

 

(Zip Code)

 

                                   (510) 240-6000                                   

(Registrant’s telephone number, including area code)

 

                                                           Not Applicable                                                        

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No

 

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

Yes  No

 

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

 

Large accelerated filer

Accelerated filer

 

 

Non-accelerated filer  (Do not check if a smaller reporting company)

Smaller reporting company

 

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

 

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

 



 

 
 

 

 

Impax Laboratories, Inc.

 

INDEX 

 

 

PART I: FINANCIAL INFORMATION

 

 

 

Item 1:

Financial Statements (unaudited)

3

  

  

  

- Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

3

  

  

  

- Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014

 4

  

  

  

- Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014

5

 

  

 

- Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2015

6

   

- Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014

7

  

  

  

- Notes to Interim Consolidated Financial Statements

9

  

  

  

Item 2:

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

56

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

80

Item 4:

Controls and Procedures

81

  

  

  

PART II: OTHER INFORMATION

  

  

  

Item 1:

Legal Proceedings

82

Item 1A:

Risk Factors

82

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

84

Item 3:

Defaults Upon Senior Securities

85

Item 4:

Mine Safety Disclosures

85

Item 5:

Other Information

85

Item 6:

Exhibits

86

 

 

 

SIGNATURES

 87

 

 

 

EXHIBIT INDEX

 88

    

 
 

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS

 Impax Laboratories, Inc.

CONSOLIDATED BALANCE SHEETS

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

 (unaudited)

   

June 30,

2015

   

December 31,

2014

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 190,291     $ 214,873  

Short-term investments

    ---       199,983  

Accounts receivable, net

    241,720       146,490  

Inventory, net

    123,433       80,570  

Deferred income taxes

    84,157       54,825  

Prepaid expenses and other current assets

    63,416       33,710  

Total current assets

    703,017       730,451  
                 

Property, plant and equipment, net

    214,630       188,169  

Derivative asset

    147,000       ---  

Other assets

    69,809       64,455  

Deferred income taxes

    133       41,837  

Intangible assets, net

    740,453       26,711  

Goodwill

    157,267       27,574  

Total assets

  $ 2,032,309     $ 1,079,197  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 29,874     $ 31,976  

Accrued expenses

    154,139       110,470  

Accrued profit sharing and royalty expenses

    41,655       15,346  

Current portion of deferred revenue

    907       907  

Total current liabilities

    226,575       158,699  
                 

Long-term debt

    414,391       ---  

Derivative liability

    167,000       ---  

Deferred revenue

    2,949       3,403  

Deferred tax liability

    196,745       ---  

Other liabilities

    36,964       29,218  

Total liabilities

    1,044,624       191,320  

Commitments and contingencies (Notes 12 and 20)

               
                 

Stockholders’ equity:

               

Preferred stock, $0.01 par value, 2,000,000 shares authorized, no shares outstanding at June 30, 2015 and December 31, 2014

    ---       ---  

Common stock, $0.01 par value, 90,000,000 shares authorized and 72,031,480 and 71,470,802 shares issued at June 30, 2015 and December 31, 2014, respectively

    720       714  

Additional paid-in capital

    468,506       364,103  

Treasury stock - 243,729 shares

    (2,157

)

    (2,157

)

Accumulated other comprehensive loss

    (2,425

)

    (6,009

)

Retained earnings

    523,041       531,226  

Total stockholders’ equity

    987,685       887,877  

Total liabilities and stockholders’ equity

  $ 2,032,309     $ 1,079,197  

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

 

 
3

 

 

Impax Laboratories, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

2015

   

June 30,

2014

   

June 30,

2015

   

June 30,

2014

 

Revenues:

                               

Impax Generics Division revenues, net

  $ 174,679     $ 176,394     $ 303,420     $ 285,534  

Impax Specialty Pharma Division revenues, net

    39,503       11,727       53,858       21,305  

Total revenues

    214,182       188,121       357,278       306,839  

Cost of revenues

    129,331       78,349       213,193       139,445  

Gross profit

    84,851       109,772       144,085       167,394  
                                 

Operating expenses:

                               

Research and development

    16,995       21,252       31,957       42,993  

Patent litigation expense

    1,494       1,767       2,454       3,940  

Selling, general and administrative

    48,309       32,817       98,469       58,294  

Total operating expenses

    66,798       55,836       132,880       105,227  

Income from operations

    18,053       53,936       11,205       62,167  

Other income, net

    961       31       795       107  

Loss on debt extinguishment

    (16,903

)

    ---       (16,903

)

    ---  

Interest income

    294       365       578       753  

Interest expense

    (6,953

)

    93       (10,928

)

    28  

(Loss) income before income taxes

    (4,548

)

    54,425       (15,253

)

    63,055  

(Benefit) provision for income taxes

    (2,696

)

    19,354       (7,068

)

    21,559  

Net (loss) income

  $ (1,852

)

  $ 35,071     $ (8,185

)

  $ 41,496  

Net (loss) income per share:

                               

Basic

  $ (0.03

)

  $ 0.52     $ (0.12

)

  $ 0.61  

Diluted

  $ (0.03

)

  $ 0.50     $ (0.12

)

  $ 0.59  

Weighted average common shares outstanding:

                               

Basic

    69,338,789       68,095,159       69,154,357       67,899,894  

Diluted

    69,338,789       70,313,491       69,154,357       70,195,329  

 

 

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

 

 
4

 

 

Impax Laboratories, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands)

(unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

2015

   

June 30,

2014

   

June 30,

2015

   

June 30,

2014

 

Net (loss) income

  $ (1,852

)

  $ 35,071     $ (8,185

)

  $ 41,496  

Currency translation adjustments

    684       2,420       3,584       (15

)

Comprehensive (loss) income

  $ (1,168

)

  $ 37,491     $ (4,601

)

  $ 41,481  

           

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

 

 

 
5

 

 

Impax Laboratories, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(amounts in thousands)

(unaudited)

 

                                    Accumulated                  
                    Additional             Other                  
   

Common Stock

   

Paid-In

   

Treasury

    Comprehensive     Retained          

Stockholders’ Equity

 

Shares

   

Par Value

   

Capital

   

Stock

   

(Loss)

   

Earnings

   

Total

 

Balance at December 31, 2014

    71,228     $ 714     $ 364,103     $ (2,157 )   $ (6,009 )   $ 531,226     $ 887,877  

Sale of warrants

    ---       ---       88,320       ---       ---       ---       88,320  

Exercise of stock options, issuance of restricted stock and sale of common stock under ESPP

    560       6       (1,795 )     ---       ---       ---       (1,789 )

Share-based compensation expense

    ---       ---       13,559       ---       ---       ---       13,559  

Tax benefit related to exercise of stock options and restricted stock

    ---       ---       4,319       ---       ---       ---       4,319  

Currency translation adjustments

    ---       ---       ---       ---       3,584       ---       3,584  

Net loss

    ---       ---       ---       ---       ---       (8,185 )     (8,185 )

Balance at June 30, 2015

    71,788     $ 720     $ 468,506     $ (2,157 )   $ (2,425 )   $ 523,041     $ 987,685  

 

 

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

 

 
6

 

 

Impax Laboratories, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

   

Six Months Ended June 30,

 
   

2015

   

2014

 

Cash flows from operating activities:

               

Net (loss) income

  $ (8,185

)

  $ 41,496  

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

               

Depreciation and amortization

    30,714       16,303  

Loss on early extinguishment of debt

    16,903       ---  

Charge for licensing agreement

    ---       2,000  

Intangible asset impairment charge

    ---       2,876  

Provision for inventory reserves

    (6,597

)

    10,320  

Accretion of interest income on short-term investments

    (81

)

    (421

)

Deferred income taxes – net and uncertain tax positions

    (9,464

)

    (4,786

)

Tax impact related to the exercise of employee stock options and restricted stock

    (4,319

)

    (1,507

)

Deferred revenue

    (454

)

    (2,100

)

Accrued profit sharing and royalty expense

    62,193       23,582  

Payments of profit sharing and royalty expense

    (41,957

)

    (22,063

)

Share-based compensation expense

    13,559       9,520  

Changes in certain assets and liabilities:

               

Accounts receivable

    (37,638

)

    (50,903

)

Inventory

    (6,146

)

    (25,400

)

Prepaid expenses and other assets

    (19,774

)

    5,671  

Accounts payable and accrued expenses

    (20,108

)

    6,273  

Other liabilities

    (1,231

)

    1,559  

Net cash (used in) provided by operating activities

    (32,585

)

    12,420  
                 

Cash flows from investing activities:

               

Payment for acquisition, net of cash acquired

    (697,183

)

    ---  

Purchase of short-term investments

    ---       (235,388

)

Maturities of short-term investments

    200,064       210,442  

Purchases of property, plant and equipment

    (8,482

)

    (18,271

)

Proceeds from sale of assets

    4,000       ---  

Payments for licensing agreements and acquisitions

    (5,550

)

    (3,000

)

Net cash used in investing activities

    (507,151

)

    (46,217

)

                 

Cash flows from financing activities:

               

Proceeds from issuance of term loan, gross

    435,000       ---  
Repayment of term loan     (435,000 )        

Payment of deferred financing fees

    (36,440

)

    ---  

Proceeds from sale of convertible notes, net of issuance costs

    600,000       ---  

Purchase of bond hedge derivative asset

    (147,000

)

    ---  

Proceeds from sale of warrants

    88,320       ---  

Tax impact related to the exercise of employee stock options and restricted stock

    4,319       1,507  

Proceeds from exercise of stock options and ESPP

    5,383       7,660  

Net cash provided by financing activities

    514,582       9,167  
                 

Effect of exchange rate changes on cash and cash equivalents

    572       (843

)

                 

Net decrease in cash and cash equivalents

    (24,582

)

    (25,473

)

Cash and cash equivalents, beginning of period

    214,873       184,612  

Cash and cash equivalents, end of period

  $ 190,291     $ 159,139  

   

 
7

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

   

Six Months Ended

 

(in $000's)

 

June 30,
2015

   

June 30,

2014

 

Cash paid for interest

  $ 9,828     $ 16  

Cash paid for income taxes

  $ 24,422     $ 28,955  

  

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

 

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

 

 
8

 

 

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

1. THE COMPANY & BASIS OF PRESENTATION

 

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

 

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

 

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

 

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

 

Revised Operating and Reporting Structure

 

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

 

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

 

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

 

 

 
9

 

  

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

 

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

 

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

 

The preparation of financial statements in conformity with GAAP and the rules and regulations of the SEC requires the use of estimates and assumptions, based on complex judgments considered reasonable, which affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant judgments are employed in estimates used in determining values of tangible and intangible assets, legal contingencies, tax assets and tax liabilities, fair value of share-based compensation related to equity incentive awards issued to employees and directors, fair value of derivative assets and liabilities and estimates used in applying the Company’s revenue recognition policy including those related to accrued chargebacks, rebates, product returns, Medicare, Medicaid, and other government rebate programs, shelf-stock adjustments, and the timing and amount of deferred and recognized revenue and deferred and amortized product manufacturing costs related to alliance and collaboration agreements. Actual results may differ from estimated results.

 

 

 
10

 

 

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

 

Restructuring of Packaging and Distribution Operations

 

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

 

Update to Significant Accounting Policies

 

Derivatives

 

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

 

 
11

 

 

2. REVENUE RECOGNITION

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

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

 

Chargebacks

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

 

 

 
12

 

 

2. REVENUE RECOGNITION (continued)

 

Rebates

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

 

Distribution Service Fees

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

 

Returns

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

 

Shelf-Stock Adjustments

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

 

Medicaid and Other Government Pricing Programs

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

   

 

 
13

 

 

2. REVENUE RECOGNITION (continued) 

 

Cash Discounts

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

 

Rx Partner and OTC Partner

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

 

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

 

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

 

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

 

 

 
14

 

 

2. REVENUE RECOGNITION (continued)

 

Research Partner

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

 

Shipping and Handling Fees and Costs

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

 

 

 
15

 

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 

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

 

 

 
16

 

  

4. INVESTMENTS

 

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

 

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

 

(in $000’s)
December 31, 2014

 

Amortized

Cost

   

Gross

Unrecognized

Gains

   

Gross

Unrecognized

Losses

   

Fair

Value

 

Commercial paper

  $ 68,972     $ 17     $ --     $ 68,989  

Corporate bonds

    131,011       --       (101

)

    130,910  

Total short-term investments

  $ 199,983     $ 17     $ (101

)

  $ 199,899  

 

 

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

 

 

 
17

 

 

5. DERIVATIVES 

  

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

 

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

 

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

 

Derivative Asset

 

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

 

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

 

Common stock price

  $ 45.92  

Exercise price

  $ 63.35  

Risk-free interest rate

    2.06 %

Volatility

    39 %

Dividend yield

    0 %

Remaining contractual term (in years)

    7.0  

 

Derivative Liability

 

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

 

 

 
18

 

 

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

 

Common stock price

  $ 45.92  

Exercise price

  $ 63.35  

Risk-free interest rate

    2.06 %

Volatility

    35 %

Annual coupon rate

    2 %

Remaining contractual term (in years)

    7.0  

 

 

 
19

 

 

6. FAIR VALUE MEASUREMENT AND FINANCIAL INSTRUMENTS

 

 

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

 

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

 

 

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

 

 

 

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

 

 

 

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

 

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

 

   

As of June 30, 2015 (Unaudited)

 
                   

Fair Value Measurement Based on

 
   

Carrying Amount

   

Fair Value

   

Quoted Prices in Active Markets

(Level 1)

   

Significant Other Observable Inputs

(Level 2)

   

Significant Unobservable Inputs

(Level 3)

 

Assets

                                       

Bond hedge derivative asset

  $ 147,000     $ 147,000     $ -     $ 147,000     $ -  

Deferred compensation plan (1)

  $ 26,891     $ 26,891     $ -     $ 26,891     $ -  
                                         

Liabilities

                                       

2% convertible senior notes due June 2022

  $ 414,391     $ 600,000     $ 600,000     $ -     $ -  

Conversion option derivative liability

  $ 167,000     $ 167,000     $ -     $ 167,000     $ -  

Deferred compensation plan (1)

  $ 27,039     $ 27,039     $ -     $ 27,039     $ -  

 

 

 
20

 

 

   

As of December 31, 2014

 
                   

Fair Value Measurement Based on

 
   

Carrying Amount

   

Fair Value

   

Quoted Prices in Active Markets

(Level 1)

   

Significant Other Observable Inputs

(Level 2)

   

Significant Unobservable Inputs

(Level 3)

 

Assets

                                       

Short-term investments

  $ 199,983     $ 199,899     $ 199,899     $ -     $ -  

Deferred compensation plan (1)

  $ 29,241     $ 29,241     $ -     $ 29,241     $ -  
                                         

Liabilities

                                       

Deferred compensation plan (1)

  $ 25,837     $ 25,837     $ -     $ 25,837     $ -  

 

 

 

(1)

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

 

 

 
21

 

 

7. ACCOUNTS RECEIVABLE

 

The composition of accounts receivable, net is as follows:

 

(in $000’s)

 

June 30,

2015

   

December 31,

2014

 

Gross accounts receivable

  $ 584,082     $ 287,362  

Less: Rebate reserve

    (233,653

)

    (88,812

)

Less: Chargeback reserve

    (83,788

)

    (43,125

)

Less: Other deductions

    (24,921

)

    (8,935

)

Accounts receivable, net

  $ 241,720     $ 146,490  

    

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

 

(in $000’s)

Rebate reserve

 

June 30,

2015

   

December 31,

2014

 

Beginning balance

  $ 88,812     $ 88,449  

Acquired balances

    77,640       --  

Provision recorded during the period

    227,709       260,747  

Credits issued during the period

    (160,508

)

    (260,384

)

Ending balance

  $ 233,653     $ 88,812  

 

(in $000’s)

Chargeback reserve

 

June 30,

2015

   

December 31,

2014

 

Beginning balance

  $ 43,125     $ 37,066  

Acquired balances

    24,532       --  

Provision recorded during the period

    365,597       487,377  

Credits issued during the period

    (349,466

)

    (481,318

)

Ending balance

  $ 83,788     $ 43,125  

   

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

 

  

 
22

 

 

8. INVENTORY

 

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

 

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

 

(in $000’s)

 

June 30,

2015

   

December 31,

2014

 

Raw materials

  $ 59,232     $ 34,681  

Work in process

    5,360       2,447  

Finished goods

    74,833       55,102  

Total inventory

    139,425       92,230  

Less: Non-current inventory

    15,992       11,660  

Total inventory-current

  $ 123,433     $ 80,570  

   

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

 

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

 

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

   

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

 

 

 
23

 

 

9. PROPERTY, PLANT AND EQUIPMENT

 

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

 

(in $000’s)

 

June 30,

2015

   

December 31,

2014

 

Land

  $ 5,773     $ 5,773  

Buildings and improvements

    171,586       154,374  

Equipment

    138,963       122,184  

Office furniture and equipment

    14,861       12,623  

Construction-in-progress

    11,617       9,404  

Property, plant and equipment, gross

  $ 342,800     $ 304,358  
                 

Less: Accumulated depreciation

    (128,170

)

    (116,189

)

Property, plant and equipment, net

  $ 214,630     $ 188,169  

  

 

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

 

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

 

 

 
24

 

 

10. BUSINESS ACQUISITIONS

 

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

 

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

 

Consideration

 

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

 

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

 

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

 

(in $000’s)        

Accounts receivable(1)

  $ 57,585  

Inventory

    31,021  

Income tax receivable and other prepaid expenses

    11,690  

Deferred income taxes

    37,716  

Property, plant and equipment

    27,539  

Intangible assets

    725,100  

Assets held for sale

    4,000  

Goodwill

    129,693  

Other non-current assets

    7,362  

Total assets assumed

    1,031,706  
         

Current liabilities

    65,672  

Other non-current liabilities

    7,799  

Deferred tax liability

    261,052  

Total liabilities assumed

    334,523  
         

Cash paid, net of cash acquired

  $ 697,183  

 

 

(1)

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

 

 

 
25

 

 

Intangible Assets

 

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

 

(in $000’s)

 

Estimated Fair

Value

   

Weighted Average

Estimated Useful

Life (in years)

 

Currently marketed products

  $ 380,700       13  

Royalties and contract manufacturing relationships

    80,800       12  

In-process research and development

    263,600       n/a  

Total intangible assets

  $ 725,100       12  

 

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

 

Goodwill

 

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

 

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

 

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

 

 

 
26

 

 

Unaudited Pro Forma Results of Operations

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

    2015     2014  

(in $000’s)

                               

Total revenues

  $ 214,182     $ 243,904     $ 389,715     $ 417,971  

Net income (loss)

    5,349       36,425       (6,158 )     27,319  

 

 

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

 

The unaudited pro forma information reflects primarily the following adjustments:

 

 

Adjustments to amortization expense related to identifiable intangible assets acquired;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

  

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

 

 

 
27

 

 

11. GOODWILL AND INTANGIBLE ASSETS

 

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

 

Intangible assets consisted of the following:

 

(in $000’s)

June 30, 2015

 

Initial

Cost

   

Accumulated

Amortization

   

Impairment

   

Carrying

Value

 

Amortized intangible assets:

                               

Tower currently marketed products

  $ 380,700     $ (10,376

)

  $ ---     $ 370,324  

Tower in-process research and development

    263,600       ---       ---       263,600  

Tower royalties and contract manufacturing relationships

    80,800       (58 )     ---       80,742  

Zomig® product rights

    41,783       (33,022

)

    ---       8,761  

Tolmar product rights

    38,450       (15,348

)

    (16,032

)

    7,070  

Perrigo product rights

    1,500       (320

)

    ---       1,180  

Acquired generics product rights

    8,000       (774

)

    ---       7,226  

Other product rights

    1,550       ---       ---       1,550  

Total intangible assets

  $ 816,383     $ (59,898

)

  $ (16,032

)

  $ 740,453  

                                                        

 

(in $000’s)

December 31, 2014

 

Initial

Cost

   

Accumulated

Amortization

   

Impairment

   

Carrying

Value

 

Amortized intangible assets:

                               

Zomig® product rights

  $ 41,783     $ (31,561

)

  $ ---     $ 10,222  

Tolmar product rights

    33,450       (10,801

)

    (16,032

)

    6,617  

Perrigo product rights

    1,000       (297

)

    ---       703  

Ursodiol product rights

    3,000       (331

)

    ---       2,669  

Other product rights

    7,250       ---       (750

)

    6,500  

Total intangible assets

  $ 86,483     $ (42,990

)

  $ (16,782

)

  $ 26,711  

 

 

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

 

 

 
28

 

  

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

 

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

 

(in $000s)

 

Amortization

Expense

 

2015

  $ 20,681  

2016

    22,854  

2017

    23,882  

2018

    33,945  

2019

    38,196  

Thereafter

    335,745  

Totals

  $ 475,303  

 

 

 
29

 

 

12. ACCRUED EXPENSES, COMMITMENTS AND CONTINGENCIES

 

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

       

(in $000’s)

 

June 30,

2015

   

December 31,

2014

 

Payroll-related expenses

  $ 26,063     $ 33,812  

Product returns

    51,610       27,174  

Government rebates

    40,411       18,272  

Legal and professional fees

    11,169       9,497  

Income taxes payable

    1,296       40  

Physician detailing sales force fees

    2,057       2,336  

Litigation accrual

    12,750       12,750  

Other

    8,783       6,589  

Total accrued expenses

  $ 154,139     $ 110,470  

  

Product Returns

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

  

(in $000’s)

Returns Reserve

 

June 30,

2015

   

December 31,

2014

 

Beginning balance

  $ 27,174     $ 28,089  

Acquired balances

    18,949       --  

Provision related to sales recorded in the period

    23,340       12,016  

Credits issued during the period

    (17,853

)

    (12,931

)

Ending balance

  $ 51,610     $ 27,174  

 

Litigation Accrual

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

 

Taiwan Facility Construction

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

 

Purchase Order Commitments

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

 

 

 
30

 

 

13. INCOME TAXES

 

The Company calculates its interim income tax provision in accordance with FASB ASC Topics 270 and 740. At the end of each interim period, the Company makes an estimate of the annual United States domestic and foreign jurisdictions’ expected effective tax rates and applies these rates to its respective year-to-date taxable income or loss. The computation of the annual estimated effective tax rates at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year, projections of the proportion of income (or loss) earned and taxed in the United States, and the various state and local tax jurisdictions, as well as tax jurisdictions outside the United States, along with permanent differences, and the likelihood of deferred tax asset utilization. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired or additional information is obtained. The computation of the annual estimated effective tax rate includes modifications, which were projected for the year, for share-based compensation and state research and development credits, among others. In addition, the effect of changes in enacted tax laws, rates, or tax status is recognized in the interim period in which the respective change occurs.

 

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

 

  

 
31

 

  

14. DEBT

 

2% Convertible Senior Notes due June 2022

 

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

 

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

 

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

 

 

(i)

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

 

 

(ii)

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

 

 

(iii)

Upon the occurrence of corporate events specified in the Indenture.

 

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

 

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

 

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

 

 
32

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Closure of Credit Facility – Barclays $50.0 Million Revolver

 

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

 

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

 

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

  

Closure of Credit Facility – Wells Fargo $50.0 Million Revolver

 

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

  

New Revolving Credit Facility

 

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

 

 
33

 

 

15. ALLIANCE AND COLLABORATION AGREEMENTS

 

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

 

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

 

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

 

Clinical Milestone Events:

 

Designation of a development candidate. Following the designation of a development candidate, generally, IND-enabling animal studies for a new development candidate take 12 to 18 months to complete.

 

 

 

 

Initiation of a Phase I clinical trial. Generally, Phase I clinical trials take one to two years to complete.

 

 

 

 

Initiation or completion of a Phase II clinical trial. Generally, Phase II clinical trials take one to three years to complete.

 

 

 

 

Initiation or completion of a Phase III clinical trial. Generally, Phase III clinical trials take two to four years to complete.

 

 

 

 

Completion of a bioequivalence study. Generally, bioequivalence studies take three months to one year to complete.

  

Regulatory Milestone Events:

 

Filing or acceptance of regulatory applications for marketing approval such as a New Drug Application in the United States or Marketing Authorization Application in Europe. Generally, it takes six to 12 months to prepare and submit regulatory filings and approximately two months for a regulatory filing to be accepted for substantive review.

 

 

 

 

Marketing approval in a major market, such as the United States or Europe. Generally it takes one to three years after an application is submitted to obtain approval from the applicable regulatory agency.

 

 

 

 

Marketing approval in a major market, such as the United States or Europe for a new indication of an already-approved product. Generally it takes one to three years after an application for a new indication is submitted to obtain approval from the applicable regulatory agency.

 

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

 

 

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

 

 

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

 

 

 
34

 

 

15. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

 

License and Distribution Agreement with Shire

 

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

 

Development, Supply and Distribution Agreement with TOLMAR, Inc.

 

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

 

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

 

 

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

 

Strategic Alliance Agreement with Teva

 

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

 

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

 

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

 

OTC Partners Alliance Agreement

 

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

 

Joint Development Agreement with Valeant Pharmaceuticals International, Inc.

 

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

   

 

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

 

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

 

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

 

 

 
37

 

 

15. ALLIANCE AND COLLABORATION AGREEMENTS (continued)

 

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

 

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

 

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

 

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

 

Agreement with DURECT Corporation

 

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

   

Product Acquisition Agreement with Teva Pharmaceuticals USA, Inc.

 

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

 

 

 
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Master Development Agreement with RiconPharma LLC

 

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

 

Master Development Agreement with RiconPharma LLC

 

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

 

Product Agreement with Pfizer Inc.

 

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

 

License, Supply and Distribution Agreement with Micro Labs Limited

 

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

 

 

 
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16. SHARE-BASED COMPENSATION

 

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

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 

(in $000’s)

 

2015

   

2014

   

2015

   

2014

 

Manufacturing expenses

  $ 1,192     $ 597     $ 2,238     $ 1,492  

Research and development

    1,367       1,379       2,732       2,781  

Selling, general and administrative

    4,512       3,158       8,589       5,247  

Total

  $ 7,071     $ 5,134     $ 13,559     $ 9,520  

 

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

 

   

Number of

Shares
Under

Option

   

Weighted

Average
Exercise

Price
per Share

 

Outstanding at December 31, 2014

    3,042,180     $ 12.89  

Options granted

    398,850     $ 41.32  

Options exercised

    (375,508 )   $ 12.51  

Options forfeited

    ---     $ ---  

Outstanding at June 30, 2015

    3,065,522     $ 18.52  

Options exercisable at June 30, 2015

    2,281,325     $ 13.79  

  

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

 

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

 

Restricted Stock Awards

 

Number of

Restricted

Stock Awards

   

Weighted

Average

Grant Date

Fair Value

 

Non-vested at December 31, 2014

    2,327,176     $ 23.61  

Granted

    405,885     $ 42.80  

Vested

    (367,799 )   $ 21.93  

Forfeited

    (82,010 )   $ 26.96  

Non-vested at June 30, 2015

    2,283,252     $ 27.16  

 

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

 

 

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

  

  

 
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17. STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

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

 

Common Stock

 

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

 

(amount in millions)

       

Non-vested restricted stock grants(1)

    2.28  

Stock options outstanding(1)

    3.07  

Warrants outstanding (see below)

    9.47  

Total common shares reserved for issuance

    14.82  

 

 

(1)

See “Note 16 – Share-based Compensation.”

 

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

 

Warrants

 

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

 

 

 
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18. EARNINGS PER SHARE

 

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

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 

(in $000’s except share and per share amounts)

 

2015