COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2012

COMMITMENTS AND CONTINGENCIES [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 14 — COMMITMENTS AND CONTINGENCIES

Product Warranty Reserve

        The Company has an outstanding product warranty reserve which relates to a ten-year expiration guarantee on injectable radiation antidote products ("DTPA") sold to the United States Department of Health and Human Services in 2006. The Company is performing yearly stability studies for this product and, if the annual stability study does not support the ten-year product life, it will replace the product at no charge. The Company's supplier, Hameln Pharmaceuticals, will also share one-half of this cost if the product     does not meet the stability requirement. If the ongoing product testing confirms the ten-year stability for DTPA, the Company will not incur a replacement cost and this reserve will be eliminated with a corresponding reduction to cost of sales after the ten-year period.  All studies to date have confirmed the product's stability. This reserve balance was $1,299,000 at September 30, 2012 and December 31, 2011.

Payments Due under Strategic Business Agreements

The Company has entered into strategic business agreements for the development and marketing of finished dosage form pharmaceutical products with various pharmaceutical development companies.  Each strategic business agreement includes a future payment schedule for contingent milestone payments.  The Company will be responsible for contingent milestone payments to these strategic business partners based upon the occurrence of future events.  Each strategic business agreement defines the triggering event of its future payment schedule, such as meeting product development progress timelines, successful product testing and validation, successful clinical studies, various FDA and other regulatory approvals and other factors as negotiated in each agreement.  None of the contingent milestone payments is expected to be individually material to the Company.  These costs, when realized, will be reported as part of research and development expense in the Company's Condensed Consolidated Statement of Comprehensive Income.  As of September 30, 2012, the Company has agreements with strategic business partners for which it expects to pay the approximate dollar amounts listed below (in thousands):

Period of payment	Amount
Q4 2012	$	1,835
2013		3,733
2014 and beyond		998
Total	$	6,566

Business Combinations

        The Company entered into an agreement with H. Lundbeck A/S on December 22, 2011 to acquire its rights to the NDAs of three off-patent, branded injectable products (the "Lundbeck Agreement").  Pursuant to the terms of the underlying Asset Sale and Purchase Agreement, in addition to the $45.0 million paid in cash at closing, the Company is obligated to pay $15.0 million in additional consideration on the third anniversary of the closing date.  The initial $45.0 million and subsequent $15.0 million are subject to claw-back provisions should sales of the acquired products fail to reach the required levels.  The Company recorded the present value of the $15.0 million future payment as a long-term liability on its balance sheet as of December 31, 2011.  Interest is being accrued on this obligation at a rate of 9.0%, which was determined to be the Company's approximate cost of capital.

        Also in relation to the Lundbeck Agreement, the Company assumed minimum annual purchase obligations under a pharmaceutical manufacturing supply agreement covering two of the three acquired products.  The supply agreement commits the Company to purchase $12.9 million in product during the period from 2012 through 2015. The Company determined that its commitment under this contract required it to purchase more product than it anticipates being able to sell.  According, the Company recorded as part of purchase accounting a long-term liability of $2.5 million which equals the estimated present value of the unfavorable contract terms.

 

Legal Proceedings

On September 12, 2012, Fera Pharmaceuticals, LLC (the "Plaintiff") filed a civil complaint against Akorn and certain individual defendants (together, the "defendants") in the Supreme Court of New York (the "Fera lawsuit"). The complaint alleges, among other things, a breach of a manufacturing agreement and misappropriation of the plaintiff's trade secrets. On October 15, 2012, the case was removed to the Federal District Court for the Southern District of New York. A responsive pleading from the defendants is due by November 21, 2012. The Company believes that the Plaintiff's claims lack merit and the Company intends to vigorously defend this lawsuit; however, no assurance may be given regarding the ultimate outcome of this lawsuit.

The Company is also party to other proceedings and potential claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to the Fera lawsuit and other proceedings cannot be determined at this time. Despite the inherent uncertainties of litigation, the Company does not currently believe that the proceedings described herein will have a material adverse impact on the Company's financial condition, results of operations, or cash flows.